BMJ MEDICAL MANAGEMENT INC, 10-KT, 1998-07-13

BMJ MEDICAL MANAGEMENT INC
10-KT, 1998-07-13
SPECIALTY OUTPATIENT FACILITIES, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(MARK ONE)

[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998
COMMISSION FILE NUMBER 001-13785
BMJ MEDICAL MANAGEMENT, INC.
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 65-0676079
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4800 NORTH FEDERAL HIGHWAY
SUITE 101E
BOCA RATON, FLORIDA 33431
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 391-1311

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

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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.001 par value Nasdaq National Market
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____________
The aggregate market value of the registrant's Common Stock, par value
$.001 per share, held by non-affiliates of the registrant, based upon the
closing price at June 22, 1998 was $60,353,946. For purposes of this disclosure,
shares of Common Stock held by persons who hold more than 5% of the outstanding
shares of Common Stock and shares held by officers and directors of the
registrant have been excluded because such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily conclusive
for other purposes.

Number of shares of Common Stock outstanding as of June 22, 1998:
17,672,135.

DOCUMENTS INCORPORATED BY REFERENCE.

None

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BMJ MEDICAL MANAGEMENT, INC.
FORM 10-K
TRANSITION PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS

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PAGE
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PART I
Item 1. BUSINESS...................................................................................... 1
Item 2. PROPERTIES.................................................................................... 24
Item 3. LEGAL PROCEEDINGS............................................................................. 24
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 25
PART II
Item 5 MARKET FOR REGISTRANT'S EQUITY AND RELATED
STOCKHOLDERS MATTERS........................................................................ 26
Item 6. SELECTED FINANCIAL INFORMATION................................................................ 27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 28
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................... 38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................... 39
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......... 69
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................ 69
Item 11. EXECUTIVE COMPENSATION........................................................................ 71
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................ 73
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................ 75
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................................................... 77
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FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS CONTAINED IN THIS REPORT, INCLUDING STATEMENTS REGARDING
THE ANTICIPATED DEVELOPMENT AND EXPANSION OF THE COMPANY'S BUSINESS, THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY, ITS DIRECTORS OR ITS OFFICERS,
PRIMARILY WITH RESPECT TO THE FUTURE OPERATING PERFORMANCE OF THE COMPANY AND
OTHER STATEMENTS CONTAINED HEREIN REGARDING MATTERS THAT ARE NOT HISTORICAL
FACTS ARE 'FORWARD-LOOKING' STATEMENTS. BECAUSE SUCH STATEMENTS INCLUDE RISKS
AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE POTENTIAL
INABILITY TO OBTAIN FINANCING UPON TERMS AND CONDITIONS FAVORABLE TO THE
COMPANY, THE POTENTIAL INABILITY TO AFFILIATE WITH PHYSICIAN PRACTICES, THE
POTENTIAL TERMINATION OF CONTRACTUAL RELATIONSHIPS, THE POTENTIAL INABILITY OF
THE COMPANY TO ESTABLISH ANCILLARY SERVICE FACILITIES, FLUCTUATIONS IN THE
VOLUME OF PROCEDURES PERFORMED BY THE PRACTICES' PHYSICIANS, CHANGES IN THE
REIMBURSEMENT RATES FOR THOSE SERVICES, UNCERTAINTY ABOUT THE ABILITY TO COLLECT
THE APPROPRIATE FEES FOR SERVICES PROVIDED OR ORDERED BY THE PRACTICES'
PHYSICIANS.

PART I

ITEM 1. BUSINESS

GENERAL

BMJ Medical Management, Inc., a Delaware corporation (together with its
subsidiaries, the 'Company' or 'BMJ') is principally a physician practice
management company (a 'PPM') that provides management services to physician
practices that focus on musculoskeletal care, which involves the medical and
surgical treatment of conditions relating to bones, muscles, joints and related
connective tissues. The broad spectrum of musculoskeletal care offered by the
physician practices ranges from acute procedures, such as spine or other complex
surgeries, to the treatment of chronic conditions, such as arthritis and back
pain. The management services provided by the Company include physician practice
and network development, marketing, payor contracting and financial,
administrative and clinical information management. As of March 31, 1998, the
Company had affiliated (the 'Affiliation Transactions') through management
services agreements (the 'Management Services Agreements') with 27 practices
(the 'Existing Practices' and, together with other practices with which the
Company may affiliate in the future, the 'Practices') comprising 124 physicians
practicing in Arizona, California, Florida, Pennsylvania, New Jersey, Nevada and
Texas and owned and operated one Independent Physician Association (the 'IPA')
which provides services to enrollees of health care plans and other specified
patient populations pursuant to agreements with health care plans (the 'IPA
Provider Agents') with 46 physicians in Arizona.

AFFILIATION TRANSACTIONS

In July 1996, the Company affiliated with its first Practice, Lehigh Valley
Bone, Muscle and Joint Group, LLC ('LVBMJ'), comprising five physicians. In
November 1996, the Company affiliated with South Texas Spinal Clinic, P.A.
('STSC') and Southern California Orthopedic Institute Medical Group ('SCOI').
The Company affiliated with Lauderdale Orthopedic Surgeons ('LOS') and Tri-City
Orthopedic Surgery Medical Group, Inc. ('Tri-City') in April 1997, Fishman &
Stashak, M.D.'s, P.A. (d/b/a Gold Coast Orthopaedics) ('Gold Coast') in June
1997 and Sun Valley Orthopedic Surgeons ('Sun Valley') in July 1997. In October
1997, the Company affiliated with Broward Institute of Orthopedic Specialties,
P.A. ('BIOS') and Orthopedic Surgery Associates, P.A. ('OSA'). The Company has
also facilitated the combination, where appropriate, of certain solo practices
into existing larger practices. The Company also assists the Practices in
recruiting new physicians into Existing Practices.

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The Company has divided the United States into the eastern, central and
western regions and expects to further divide the eastern region into the
southeast and the northeast regions in the near term. Set forth below is a
description of certain of the Affiliation Transactions that the Company had
entered into in each region as of March 31, 1998.

Eastern Region

Effective July 1, 1996, the Company entered into a Management Services
Agreement with LVBMJ in Bethlehem, Pennsylvania. Under the terms of the initial
Management Services Agreement between LVBMJ and the Company, the Company
received a fee equal to 50% of the net collected revenues of LVBMJ and became
responsible for all the clinic overhead expenses (medical support services).
Effective July 1, 1997, the Company and LVBMJ entered into an amended and
restated Management Services Agreement (the 'LVBMJ Management Services
Agreement'). Under the terms of the LVBMJ Management Services Agreement, the
Company is entitled to receive a fee equal to 10% of net collections received
for professional services by the Practice net of refunds paid ('Collections')
plus reimbursement of clinic overhead expenses and 66 2/3% of the cost savings
the Company is able to achieve through its purchasing power. As consideration to
LVBMJ for entering into the LVBMJ Management Services Agreement, the Company
issued an aggregate of 370,023 shares of Common Stock, options to purchase an
aggregate of 21,429 shares of Common Stock and additional consideration of
$320,000 to the physician owners of LVBMJ. Based on the Practice's actual
Collections for the twelve month period ended March 1998, the Company expects to
issue approximately 120,000 shares of Common Stock to the Practice as additional
consideration for the LVBMJ Management Services Agreement.

Effective April 1, 1997, the Company entered into a Management Services
Agreement (the 'LOS Management Services Agreement') with LOS located in Ft.
Lauderdale, Florida. As consideration to LOS for entering into the agreement,
the Company issued an aggregate of 329,259 shares of its Common Stock and paid
additional consideration of $512,514 to the LOS physicians. Under the terms of
the LOS Management Services Agreement, the Company is entitled to receive a fee
equal to (i) the aggregate of (A) 20% of net operating income (as defined in the
LOS Management Services Agreement) of the Practice plus reimbursement of
clinical overhead expenses, plus (B) 66 2/3% of the cost savings the Company is
able to achieve through its purchasing power. Notwithstanding the foregoing,
during the first seven years of the term of the LOS Management Services
Agreement, the Company is entitled to receive a guaranteed minimum annual
management fee of $400,000. The Company also purchased certain assets from LOS,
including the assumption of two leases, for an aggregate purchase price of
approximately $2.3 million (subject to adjustment based upon the Company's
actual collection of the purchased accounts receivable).

Effective June 1, 1997, the Company entered into a Management Services
Agreement (the 'Gold Coast Management Services Agreement') with Gold Coast
located in West Palm Beach, Florida, pursuant to which the Company issued
179,010 shares of Common Stock to the physician owners of Gold Coast. The
Company may be required to issue more shares of Common Stock to the Practice in
1998 based on the Practice's actual Collections for the twelve month period
ended August 1998. Under the terms of the Gold Coast Management Services
Agreement, the Company is entitled to receive a fee equal to the aggregate of
(i) 15% of the Collections of the Practice plus reimbursement of clinic overhead
expenses, plus (ii) 66 2/3% of the cost savings the Company is able to achieve
through its purchasing power. Notwithstanding the foregoing, during the first
six years of the term of the Gold Coast Management Services Agreement, the
Company is entitled to receive a guaranteed minimum annual management fee of
$500,000. In connection with the Gold Coast Affiliation Transaction, the Company
also entered into an Asset Purchase Agreement, effective as of June 1, 1997,
pursuant to which the Company purchased certain assets (including accounts
receivable) from Gold Coast for an aggregate purchase price of approximately
$3.0 million.

Effective August 1, 1997, the Company entered into a Management Services
Agreement (the 'BOS Management Services Agreement') with Broward Orthopedic
Specialists, Inc. ('BOS') located in Ft. Lauderdale, Florida, pursuant to which
the Company issued 446,977 shares of Common Stock to the physician owners of
BOS. The Company may be required to issue more shares of Common Stock to the
Practice in 1998 based on the Practice's actual Collections for the twelve month
period ended July 1998. Under the terms of the BOS Management Services
Agreement, the Company is entitled to receive a fee equal to the aggregate of
(i) 15% of the Collections of the Practice plus reimbursement of clinic overhead
expenses, plus (ii) 66 2/3% of the cost

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savings the Company is able to achieve through its purchasing power.
Notwithstanding the foregoing, during the first four years of the term of the
BOS Management Services Agreement, the Company is entitled to receive a
guaranteed minimum annual management fee of $810,000. In connection with the BOS
Affiliation Transaction, the Company also entered into Asset Purchase
Agreements, effective as of August 1, 1997, pursuant to which the Company
purchased certain assets (including accounts receivable) from BOS and the
physician owners of BOS for an aggregate purchase price of approximately $4.2
million.

Effective August 1, 1997, the Company entered into a Management Services
Agreement (the 'PM&R Management Services Agreement') with Physical Medicine and
Rehabilitation Associates, Inc. ('PM&R'), located in Delray Beach, Florida,
pursuant to which the Company issued 90,659 shares of Common Stock to the
physician owners of PM&R. Under the terms of the PM&R Management Services
Agreement, the Company is entitled to receive a fee equal to the aggregate of
(i) 10% of the Collections of the Practice plus reimbursement of clinic overhead
expenses, plus (ii) 66 2/3% of the cost savings the Company is able to achieve
through its purchasing power. Notwithstanding the foregoing, during the first
five years of the term of the PM&R Management Services Agreement, the Company is
entitled to receive a guaranteed minimum annual management fee of $136,000. In
connection with the PM&R Affiliation Transaction, the Company also entered into
an Asset Purchase Agreement, effective as of August 1, 1997, pursuant to which
the Company purchased certain assets (including accounts receivable) from PM&R
for an aggregate purchase price of $830,166.

In October 1997, the Company entered into a Management Services Agreement
(the 'OSA Management Services Agreement') with OSA located in Boca Raton,
Florida, pursuant to which the Company issued 44,364 shares of Common Stock to
the physician owners of OSA. The Company may be required to issue more shares of
Common Stock to OSA in 1998 and 1999 based on the Practice's actual Collections
for the twelve months ended August 1998 and August 1999. Under the terms of the
OSA Management Services Agreement, the Company is entitled to receive a fee
equal to the aggregate of (i) 12.5% of the Collections of the Practice plus
reimbursement of clinic overhead expenses, plus (ii) 66 2/3% of the cost savings
the Company is able to achieve through its purchasing power. Notwithstanding the
foregoing, during the first four years of the term of the OSA Management
Services Agreement, the Company is entitled to receive a guaranteed minimum
annual management fee of $799,000. In connection with the OSA Affiliation
Transaction, the Company also entered into an Asset Purchase Agreement,
effective as of September 1, 1997, pursuant to which the Company purchased
certain assets (including accounts receivable) from OSA for an aggregate
purchase price of approximately$6.8 million and issued 177,455 shares of Common
Stock to the physician owners of OSA.

In October 1997, the Company entered into a Management Services Agreement
(the 'BIOS Management Services Agreement') with BIOS located in Hollywood,
Florida. As consideration to BIOS for entering into the agreement, the Company
issued an aggregate of 182,312 shares of its Common Stock and paid additional
consideration of $24,000 to the BIOS physicians. The Company may be required to
issue more shares of Common Stock to BIOS in 1998 based on BIOS's actual
Collections for the twelve month period ended August 1998. Under the terms of
the BIOS Management Services Agreement, the Company is entitled to receive a fee
equal to the aggregate of (i) 15% of net operating income (as defined in the
BIOS Management Services Agreement) of the Practice plus reimbursement of
clinical overhead expenses, plus (ii) 66 2/3% of the cost savings the Company is
able to achieve through its purchasing power. The Company also purchased certain
assets from BIOS for an aggregate purchase price of approximately $2.8 million.

In September 1997, the Company entered into a Management Services Agreement
(the 'LOAS Management Services Agreement') with Lighthouse Orthopedic
Associates, P.A. ('LOAS') located in Lighthouse Point, Florida. As consideration
to LOAS for entering into the agreement, the Company issued an aggregate of
37,837 shares of its Common Stock to the LOAS physicians. The Company may be
required to issue more shares of Common Stock to the Practice in 1998 based on
the Practice's actual Collections for the twelve month period ended August 1998.
Under the terms of the LOAS Management Services Agreement, the Company is
entitled to receive a fee equal to the aggregate of (i) 12.5% of the Collections
of the Practice plus reimbursement of clinic overhead expenses, plus (ii)
66 2/3% of the cost savings the Company is able to achieve through its
purchasing power. Notwithstanding the foregoing, during the first four years of
the term of the LOAS Management Services Agreement, the Company is entitled to
receive a guaranteed minimum annual management fee of $535,000. In connection
with the LOAS Affiliation Transaction, the Company also entered into Asset
Purchase Agreements, effective as of September 1, 1997, pursuant to which the
Company purchased certain

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assets (including accounts receivable) from each of LOAS, certain affiliates of
LOAS and each of the physicians of LOAS, for an aggregate purchase price of
approximately $3.9 million and issued an aggregate of 156,383 shares of Common
Stock to the physician owners of LOAS.

In October 1997, the Company acquired all of the issued and outstanding
shares of common stock of Valley Sports Surgeons, Inc., a physician practice
management company located in Allentown, Pennsylvania ('VSI'), in exchange for
an aggregate of 359,464 shares of Common Stock. Pursuant to the terms of a
Management Services Agreement (the 'Valley Management Services Agreement'), VSI
currently manages Valley Sports & Arthritis Surgeons, P.C., an orthopedic
medical practice also located in Allentown, Pennsylvania ('VSAS'). The Company
is entitled to receive a fee equal to the aggregate of (i) 10% of the
Collections of the Practice plus reimbursement of clinic overhead expenses, plus
(ii) 66 2/3% of the cost savings the Company is able to achieve through its
purchasing power. Notwithstanding the foregoing, during the first five years of
the term of the Valley Management Services Agreement, the Company is entitled to
receive a guaranteed minimum annual management fee of $416,500. Prior to the
acquisition of the capital stock of VSI, the Company purchased substantially all
of the assets of VSAS used in connection with its medical practice (including
certain accounts receivable) for an aggregate purchase price of $897,727.

Effective November 1, 1997, the Company entered into a Management Services
Agreement (the 'New Jersey Management Services Agreement') with New Jersey
Orthopedic Associates, P.A., a New Jersey professional association ('NJOA'),
located in Freehold, New Jersey, pursuant to which the Company issued 67,859
shares of Common Stock and paid additional consideration of $411,680 to the
physician owners of NJOA. Under the terms of the New Jersey Management Services
Agreement, the Company is entitled to receive a fee equal to the aggregate of
(i) 10% of the Collections of the Practice plus reimbursement of clinic overhead
expenses, plus (ii) 66 2/3% of the cost savings the Company is able to achieve
through its purchasing power. Notwithstanding the foregoing, during the first
five years of the term of the New Jersey Management Services Agreement, the
Company is entitled to receive a guaranteed minimum annual management fee of
$240,840. In connection with the NJOA Affiliation Transaction, the Company
entered into an Asset Purchase Agreement, effective November 1, 1997, pursuant
to which the Company purchased certain assets from Orthopedic Associates of New
Jersey, an affiliate of NJOA, for a purchase price of $75,000. Additionally,
NJOA and the Company entered into a Stockholders Noncompetition Agreement and
the Company paid consideration of approximately $1.0 million to the physician
owners of NJOA.

Other Eastern Region Affiliations

Effective July 1, 1997, the Company entered into a Management Services
Agreement with Kramer & Maehrer, LLC, located in Bethlehem, Pennsylvania. In
order to enhance the Company's presence in the Ft. Lauderdale market, the
Company entered into Management Services Agreements with Jeffrey Beitler, M.D.,
P.A., located in Aventura, Florida, and Michael Abrahams, M.D., P.A., located in
Plantation, Florida, effective as of September 1, 1997 and August 1, 1997,
respectively. Under the terms of these Management Services Agreements, the
Company is entitled to receive a fee equal to the aggregate of (i) 10% (15% in
the case of Dr. Abrahams) of the Collections of the Practice plus reimbursement
of clinic overhead expenses, plus (ii) 66 2/3% of the cost savings the Company
is able to achieve through its purchasing power.

Central Region

The Company's initial Affiliation Transaction in the central region was
with STSC. The Company entered into a Management Services Agreement with STSC,
located in San Antonio, Texas, effective as of November 1, 1996, pursuant to
which the Company issued 768,929 shares of Common Stock and deferred
consideration of approximately $1.0 million. Pursuant to the STSC Management
Services Agreement, the Company is entitled to receive a management fee equal to
an aggregate of (i) 11 1/2% of Collections of the Practice (less certain lease
payments) plus reimbursement of clinic overhead expenses, plus (ii) 66 2/3% of
the cost savings the Company is able to achieve through its purchasing power.
The Company also entered into an asset purchase agreement with STSC, pursuant to
which the Company agreed to purchase certain assets (including accounts
receivable) and assume certain liabilities for a purchase price of (i)
approximately $1.7 million (subject to adjustment based upon the Company's
actual collection of the purchased accounts receivable), plus (ii) a future
payment of $446,327.

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Other Central Region Affiliations

Effective July 1, 1997, the Company entered into a Management Services
Agreement with Eradio Arrendondo, M.D., P.A., located in San Antonio, Texas.

Western Region

Effective November 1, 1996, the Company entered into a Management Services
Agreement (the 'SCOI Management Services Agreement') with SCOI, located in Van
Nuys, California, and, in connection therewith, the Company issued 2,857,140
shares of Common Stock to the physician owners and certain key employees of
SCOI. Under the SCOI Management Services Agreement, the Company is entitled to
receive a fee equal to the aggregate of (i) 10% of the Collections of the
Practice (if certain conditions are met) less certain equipment lease payments
plus reimbursement of clinic overhead expenses, plus (ii) 66 2/3% of the cost
savings the Company is able to achieve through its purchasing power.
Simultaneously with the execution and delivery of the SCOI Management Services
Agreement and pursuant to an Asset Purchase Agreement, the Company acquired
certain assets (including the outstanding accounts receivable), and assumed
certain liabilities, of SCOI for an aggregate purchase price of approximately
$5.9 million (which included approximately $4.4 million of value of accounts
receivable purchased).

In a subsequent transaction with the Center for Orthopedic Surgery, Inc.
('COSI'), an outpatient surgery center in Van Nuys, California owned by the SCOI
physicians, the Company issued 392,857 shares of Common Stock to the physician
owners of COSI as consideration for the execution of the Management Services
Agreement entered into between COSI and the Company (the 'COSI Management
Services Agreement').

The SCOI and COSI Management Services Agreements provided for the
recalculation of the number of shares issued to the physicians in connection
with the SCOI and COSI Affiliation Transactions, and such recalculations were
completed in November 1997. As a result of such recalculation provisions, the
Company issued approximately 887,000 additional shares of Common Stock to the
SCOI physicians. The result of the recalculation was an increase in general and
administrative expense of approximately $13.5 million in the three months ended
December 31, 1997.

To expand its network in the western region, effective April 1, 1997, the
Company entered into a Management Services Agreement (the 'Tri-City Management
Services Agreement') with Tri-City, located in Oceanside, California, pursuant
to which the Company issued 287,659 shares of Common Stock and paid $202,900 to
the physician owners of Tri-City. Under the terms of the Tri-City Management
Services Agreement, the Company is entitled to receive a fee equal to the
aggregate of (i) 10% of Collections of the Practice (less certain lease
payments) plus reimbursement of clinic overhead expenses, plus (ii) 66 2/3% of
the cost savings the Company is able to achieve through its purchasing power. In
connection with the Tri-City Affiliation Transaction, the Company also entered
into three Asset Purchase Agreements with Tri-City or affiliates thereof, all
effective as of April 1, 1997, pursuant to which the Company purchased certain
assets (including accounts receivable) from such parties for an aggregate
purchase price of $745,300 ($519,000 of which is subject to adjustment, based
upon the Company's actual collection of the purchased accounts receivable).

Effective July 1, 1997, the Company entered into a Management Services
Agreement (the 'Sun Valley Management Services Agreement') with Sun Valley
Orthopedic Surgeons, an Arizona general partnership ('Sun Valley'), located in
Sun City West, Arizona, pursuant to which the Company issued 112,719 shares of
Common Stock to the physician owners of Sun Valley. The Sun Valley Management
Services Agreement requires the Company to pay additional cash consideration to
the physician owners of Sun Valley if the current market value of the Company's
Common Stock is not at least equal to a specified price on the first anniversary
of such agreement. Under the terms of the Sun Valley Management Services
Agreement, the Company is entitled to receive a fee equal to the aggregate of
(i) 10% of the Collections of the Practice plus reimbursement of clinic overhead
expenses, plus (ii) 66 2/3% of the cost savings the Company is able to achieve
through its purchasing power. In connection with the Sun Valley Affiliation
Transaction, the Company also entered into an Asset Purchase Agreement,
effective as of July 1, 1997, pursuant to which the Company purchased certain
assets (including accounts receivable) from Sun Valley for an aggregate purchase
price of $355,750.

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Effective July 1, 1997, the Company entered into a Management Services
Agreement (the 'Stockdale Management Services Agreement') with Stockdale
Podiatry Group, Inc. ('Stockdale'), located in Bakersfield, California, pursuant
to which the Company issued 88,846 shares of Common Stock and paid additional
consideration of $300,435 to the physician owners of Stockdale. Under the terms
of the Stockdale Management Services Agreement, the Company is entitled to
receive a fee equal to the aggregate of (i) 10% of the Collections of the
Practice plus reimbursement of clinic overhead expenses, plus (ii) 66 2/3% of
the cost savings the Company is able to achieve through its purchasing power. In
connection with the Stockdale Affiliation Transaction, the Company also entered
into an Asset Purchase Agreement, effective as of August 1, 1997, pursuant to
which the Company purchased certain assets (including accounts receivable) from
Stockdale for an aggregate purchase price of $516,065.

Other Western Region Affiliations

Effective June 1, 1997 in order to enhance the Company's presence in the
Los Angeles market area, the Company entered into separate Management Services
Agreements with H. Leon Brooks, M.D. and Clive Segil, M.D., both located in Los
Angeles, California. In addition, effective July 1, 1997, in order to establish
a presence in the Lake Tahoe area, the Company entered into separate Management
Services Agreements with R.C. Watson, M.D., Inc., Swanson Orthopedic Medical
Corporation and Lake Tahoe Sports Medicine Center, all located in South Lake
Tahoe, California. In addition, effective July 1, 1997, the Company entered into
a Management Services Agreement with Robert O. Wilson, M.D. located in Sun City
West, Arizona. Effective July 1, 1997 the Company entered into a Management
Services Agreement with John Zimmerman, M.D. located in Bakersfield, California.
Under the terms of each of these Management Services Agreements, the Company is
entitled to receive a fee equal to the aggregate of (ii) 10% of the Collections
of the Practice plus reimbursement of clinic overhead expenses, plus (ii)
66 2/3% of the cost savings the Company is able to achieve through its
purchasing power.

In October 1997, the Company acquired its IPA, Orthopedic Management
Network, Inc., an Arizona corporation, in exchange for $63,000 in cash, the
assumption of approximately $1.0 million in accounts payable and accrued
liabilities and the issuance of 20,370 shares of Common Stock.

Effective March 1998, the Company entered into a Management Services
Agreement (the 'Lucas Management Services Agreement') with Rene Lucas, M.D.,
located in Sun City West, Arizona, pursuant to which the Company issued 19,403
shares of Common Stock and paid additional cash consideration of $102,824 to Dr.
Lucas for a total aggregate purchase price of approximately $280,000. Under the
terms of the Lucas Management Services Agreement, the Company is entitled to
receive a fee equal to the aggregate of (i) 10% of Collections of the Practice
plus reimbursement of clinic overhead expenses, plus (ii) 66 2/3% of the cost
savings the Company is able to achieve through its purchasing power. In
connection with the Lucas Management Services Agreement, the Company entered
into an Asset Purchase Agreement, effective January 1998, pursuant to which the
Company purchased certain assets (including accounts receivable) from Dr. Lucas.

Effective March 1, 1998, the Company acquired the assets of Stateline
Medical Center, LLP ('Stateline') located in Stateline and Zephyr Cove, Nevada,
for an aggregate purchase price of approximately $1.2 million. In connection
with this transaction, the Company entered into a Management Services Agreement
(the 'Stateline Management Services Agreement') with Lake Tahoe Orthopaedic
Institute, a Watson-Swanson Professional Corporation, pursuant to which the
Company is entitled to receive a fee equal to the net collections remaining
after payment of certain costs.

RECENT DEVELOPMENTS--OTHER AFFILIATIONS

Since March 31, 1998, the Company has affiliated with 4 other practices
comprising 14 additional physicians, for an aggregate purchase price of
approximately $8.2 million, including, without limitation, the purchase of
certain assets and certain transaction costs. The Company has entered into
Management Services Agreements with each practice, pursuant to which the Company
is entitled to receive a fee equal to the aggregate of (i) 10-15% of Collections
of the Practice plus reimbursement of clinic overhead expenses, plus (ii)
66 2/3% of the cost savings the Company is able to achieve through its
purchasing power. In connection with certain of these Affiliation Transactions,
the Company may be required to issue additional shares of Common Stock to the

6
<PAGE>
applicable Practice based on the Practice's actual cash collections for the
twelve month period ended March 1999.

BMJ OPERATIONS

Existing Practices. Since commencing operations in January 1996 through May
31, 1998, the Company had affiliated with 31 Existing Practices, comprising 136
physicians, in Arizona, California, Florida, Pennsylvania, New Jersey, Nevada
and Texas, and purchased and operated one IPA, comprising 46 physicians, in
Phoenix, Arizona. The Company also attempts, as appropriate, to facilitate the
combination of its smaller Practices into larger Existing Practices.
Furthermore, the Company assists in recruiting physicians into its Existing
Practices.

Affiliation Structure. Typically, once a Practice has agreed to affiliate
with the Company, the total consideration generally paid to a Practice's
physicians is based on a multiple of the Company's management fee plus the fair
market value of the Practice's assets, including furniture, fixtures and
equipment and, subject to legal limitations regarding Medicare and Medicaid
receivables and the estimated net realizable value of its accounts receivable.
The multiple of the Company's management fee is determined by reference to a
number of factors, including the geographic location of the Practice, the size
and specialty mix of the Practice, the Practice's competitive market position,
the Practice's historical financial performance and the potential for the
development of Ancillary Service Facilities. Historically, the total
consideration paid by the Company generally consisted of Common Stock, cash and
the assumption of certain liabilities (principally notes payable to financial
institutions secured by receivables of the Practice, which notes are repaid at
the time the Affiliation Transaction is consummated). In exchange for this
consideration, the Practice enters into a 40-year Management Services Agreement
with the Company.

The revenue to the Company from a Practice is typically based on a
specified percentage (typically 10% to 15%) of the Practice's revenues (rather
than on a percentage of the net operating income of the Practice) plus
reimbursement of the Practice's overhead expenses and two-thirds of the cost
savings the Company is able to achieve through its purchasing power. In
addition, the Company will be responsible for arranging the funding of Ancillary
Service Facilities when appropriate and will, subject to applicable laws, share
appropriately in the profits from such facilities.

Upon affiliating with a Practice, the Company assumes the management of
substantially all aspects of the Practice's operations other than the provision
of medical services. Pursuant to the Management Services Agreements, the Company
assists the Practices in the preparation of operating budgets and capital
project analyses, the coordination of group purchases of medical supplies and
insurance and the introduction of physician candidates. The Company provides the
full range of administrative services required for a Practice's day-to-day
non-medical operations, including management and monitoring of the Practice's
billing and collection, accounting, payroll, legal services, recordkeeping, cash
flow activity, physician recruiting, payor contracting and marketing.
Comprehensive administrative support should facilitate more effective billing
and collections, and, as the Company grows, economies of scale in effecting
purchases. In addition, the Company plans to integrate the Practices' management
information systems into a single system that will expand the financial and
clinical reporting capabilities of each of the Practices and facilitate the
analysis of data collected.

The Company believes that through its affiliation with Practices across
multiple markets it can achieve benefits in the aggregate purchasing of products
and services for the Practices. The Company believes that, in particular, it can
assist the Practices in reducing its purchasing expenses such as insurance,
medical equipment and clinical and administrative supplies. Pursuant to the
Management Services Agreements, the Company receives two-thirds of any such cost
savings.

Financial and Practice Management Systems. To date, the Company has
implemented an interconnected financial accounting system in the Practices. This
system allows the Company to analyze the financial aspects of the Practices from
a centralized location and ensure uniformity with respect to financial
classifications at the Practice level.

The Company typically receives daily cash receipts related to the
collection of patient accounts receivable and revenues. Historically, the
Company utilized these funds to pay the clinic overhead expenses (medical
support services) as they were incurred and paid to the Practice a physician
draw based upon a predetermined

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<PAGE>
percentage of estimated net collected revenue (based on billings for patient
services) for the prior month. Under this arrangement, to the extent that a
Practice is experiencing growth and a related increase in both monthly billings
and accounts receivable, the Company's short-term liquidity will be adversely
impacted due to the lag time between the billings for patient services, the
payment of physician draws and the receipt of actual cash collections by the
Company. Annually, the cash actually collected and paid as physician draw,
medical support services or management fee is reconciled with the Practice and
any over/under payments are settled. The Company continues this arrangement with
respect to historical affiliations with Practices. Currently, in certain
instances, the Company utilizes cash collections received from the Practices to
pay its management fee and the clinic overhead expenses with the remainder
thereof paid to the Practices.

The Company believes that the implementation of a uniform practice
management system will enable it to monitor the operations of the Practices in a
cost-effective manner, enhance utilization of the Practices, develop practice
protocols and provide the Company with a competitive advantage in negotiating
contracts with third party payors. The Company has selected and is in the
process of implementing such a system within the next 3 to 15 months.

The Company believes that the implementation of the practice management
system, together with the integrated financial accounting system, will enable it
to gather data that will be the foundation for a disease management and clinical
information system. The Company intends to capture, retain and use such
information in accordance with applicable legal and ethical requirements
regarding the confidentiality of medical records. The Company further believes
that such a system will facilitate the collection of clinical information such
as type of injuries reported, patient characteristics and diagnoses of injuries,
that will improve provider and patient access to resources and technology,
facilitate quantitative analysis of outcome quality and cost and eventually
allow for the development of curative and palliative regimens based on such
information. The Company intends to obtain the informed, written consent of each
patient for whom information will be included in the database. See
'--Confidentiality of Patient Records.'

Staffing and Facilities. The Company employs most of the Practices'
non-professional personnel. These nonprofessional personnel, along with
additional personnel at the Company's headquarters, manage the day-to-day
non-medical operations of each of the Practices, including, among other things,
secretarial, bookkeeping, scheduling and other routine services. Under the
Management Services Agreements, the Company must generally provide facilities
and equipment to the Practices and, to this end, the Company assumes the
Practice's existing leases for the facilities and equipment and purchases the
assets, or a leasehold interest in the assets, utilized by the Practice.

DEVELOPMENT OF ANCILLARY SERVICE FACILITIES

Within each market, the Company plans to establish Ancillary Service
Facilities including, ambulatory surgery centers, physical therapy facilities
and MRI centers and mobile units. In order to establish such facilities, the
Company has designated professionals within each market to locate sites,
identify acquisition opportunities and otherwise arrange for the provision of
the ancillary services. Additionally, the Company's regional management teams
are responsible for marketing the Ancillary Service Facilities to payors and
referral sources and staffing, operating and financial management of the
facilities.

On April 1, 1997, the Company entered into the COSI Management Services
Agreement with the physician owners of COSI in connection with an outpatient
surgery center in Van Nuys, California.

Effective April 1998, BMJ of Chandler, Inc., a wholly-owned subsidiary of
the Company, purchased the assets of Warner Medical Park Outpatient Surgery,
Inc. for $1.8 million. In addition, Surgical Associates of Bakersfield, Limited
Partnership (the 'Bakersfield Partnership') was formed on April 7, 1998 for the
purpose of acquiring an ambulatory surgery center in Bakersfield, California. At
that time, BMJ of Bakersfield, Inc., a wholly-owned subsidiary of the Company,
contributed $500,000 as its capital contribution to the Bakersfield Partnership
in exchange for a 50% general partnership interest in the Bakersfield
Partnership. Effective April 1998, the Bakersfield Partnership acquired all of
the assets of Kern Surgery Center, a California limited partnership, for $2.4
million.

8
<PAGE>
PAYOR MIX OF EXISTING PRACTICES

The Company's Practices derive revenue from a broad mix of third party
payors. This payor mix is a result of a number of underlying trends in the
patient base of musculoskeletal specialists. A significant portion of
reimbursement to physicians in musculoskeletal practices is derived from
workers' compensation insurance programs, which generally pay higher
reimbursements per procedure than health insurance payors and are generally not
subject to co-payments and deductibles. The Company believes that reimbursement
from workers' compensation payors will continue to represent a substantial
portion of practice revenues because of broader definitions of work-related
injuries, the shift of medical costs from health insurance payors to workers'
compensation payors, aging of the work force, and the requirement that employers
pay the total cost of medical treatment for work-related injuries.

The following table sets forth the payor mix of the Existing Practices for
the three months ended March 31, 1998 and for the year ended December 31, 1997:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Workers' compensation............................... 27% 23%
Medicare(1)......................................... 16% 13%
Private payors and managed care(2).................. 56% 64%
</TABLE>

- ------------------
(1) Includes 4% attributable to Medicaid.
(2) Includes managed care, substantially all of which is on a fee-for-service
basis.

Workers' Compensation. Workers' compensation is a state-mandated,
comprehensive insurance program that requires employers to fund medical
expenses, lost wages and other costs resulting from work-related injuries and
illnesses. Provider reimbursement methods vary on a state-by-state basis. A
majority of states have adopted fee schedules pursuant to which all health care
providers are uniformly reimbursed. The fee schedules are set by each state and
generally prescribe the maximum amounts that may be reimbursed for a designated
procedure. In most states without fee schedules, health care providers are
reimbursed based on usual, customary and reasonable fees charged in the state in
which the services are provided. In Florida (a state in which the Company does
business), state law mandates that all workers' compensation services be
provided under a managed care arrangement approved by Florida's Agency for
Healthcare Administration.

Medicare. The federal government has implemented, through the Medicare
program, the resource-based relative value scale ('RBRVS') payment methodology
for health care provider services. RBRVS is a fee schedule that, except for
certain geographical and other adjustments, pays similarly situated health care
providers the same amount for the same services. The RBRVS is subject to annual
increases or decreases at the discretion of Congress or the Federal Health Care
Financing Administration ('HCFA'). To date, the implementation of RBRVS has
reduced payment rates for certain of the procedures historically provided by the
Existing Practices. Furthermore, it is expected that HCFA will be required by
law to recalibrate the practice expense component of the RBRVS over the next
four years in a way that will have positive effects on payments to primary care
providers, but will decrease payments for most services provided by specialists,
including many services provided by the Existing Practices.

Managed Care Payors. An increasing portion of the net revenue of the
Existing Practices is derived from managed care payors which make payments under
discounted fee-for-service and capitation arrangements. Although rates paid by
managed care payors are generally lower than commercial indemnity rates, managed
care payors can provide access to large patient volumes. To date, the Company
has not entered into any contracts on behalf of the Managed Practices with
managed care payors; however, the Company intends to seek to negotiate both
discounted fee-for-service and capitated contracts on behalf of the Practices.
Discounted fee-for-service contracts involve negotiated rates for specified
procedures and services. Under capitated arrangements, providers deliver health
care services to managed care enrollees and typically bear all or a portion of
the risk that the cost of such services may exceed capitated payments.

Private Payors. Rates paid by private third party payors are based on
established health care provider and hospital charges and are generally higher
than Medicare payment rates. Recently, RBRVS types of payment

9
<PAGE>
systems have been adopted by certain private third party payors and may become a
predominant payment methodology. Wider implementation of such programs would
reduce payments from private third party payors, and could indirectly reduce
revenue to the Company.

CONTRACTUAL AGREEMENTS WITH THE PRACTICES

The Company has entered into Management Services Agreements and, in most
cases, Asset Purchase Agreements and Stockholder Noncompetition Agreements
(collectively, the 'Affiliation Agreements'), with each of the Existing
Practices, and intends to enter into Affiliation Agreements with each additional
Practice, to provide management, administrative and development services. The
following summary of the Affiliation Agreements is intended to be a general
summary of the form of the Affiliation Agreements. The actual terms of the
individual Affiliation Agreements, and other service agreements into which the
Company may enter in the future, may vary in certain respects from the
description below as a result of negotiations with the individual Practices and
the requirements of local regulations.

Management Services Agreement. Under the Management Services Agreement,
the Practices are solely responsible for all aspects of the practice of medicine
and the Company has the primary responsibility for the business and
administrative aspects of the Practices. Pursuant to the Management Services
Agreements, the Company provides or arranges for various management,
administrative and development services relating to the day-to-day non-medical
operations of the Practices. Pursuant to the Management Services Agreements, the
Company acts as the exclusive manager and administrator of non-medical services
relating to the operation of the Practices. Subject to matters for which the
Practices maintain responsibility or which are governed by the Operations
Committee (as defined herein) of the Practices, the Company (i) bills patients,
insurance companies and other third party payors and collects, on behalf of the
Practices, the fees for medical and other services rendered, including goods and
supplies sold by the Practices; (ii) provides or arranges for, as necessary,
clerical, accounting, purchasing, payroll, legal, bookkeeping and computer
services, personnel, information management, preparation of certain tax returns,
printing, postage and duplication services and medical transcribing services;
(iii) supervises and maintains custody of substantially all files and records
(medical records of the Practices remain the property of the Practices); (iv)
provides facilities and equipment for the Practices; (v) prepares, in
consultation with the Operations Committee and the Practices, all operating and
capital expenditure budgets; (vi) orders and purchases inventory and medical
supplies as reasonably requested by the Practices; (vii) implements, in
consultation with the Operations Committee and the Practices, national and local
public relations or advertising programs; (viii) provides financial and business
assistance in the negotiation, establishment, supervision and maintenance of
contracts and relationships with managed care and other similar providers and
payors; (ix) recruits physician employees and other medical professionals on
behalf of the Practices; and (x) ensures that all medical and technical
personnel have the licenses, credentials, approvals and other certifications
needed to perform their respective duties.

Under the Management Services Agreements, the Practices retain the
responsibility for, among other things, providing professional services to
patients in compliance with the ethical standards, laws and regulations to which
they are subject. In addition, the Practices maintain exclusive control of all
aspects of the practice of medicine and the delivery of medical services.

The revenue to the Company from a Practice is typically based on a
specified percentage (typically 10-15%) of the Practice's revenues (rather than
on a percentage of the net operating income of the Practice) plus reimbursement
of the Practice's overhead expenses and two-thirds of cost savings that the
Company is able to achieve through its purchasing power plus a percentage of the
profits from new ancillary services at the Practices. The Management Services
Agreements provide that each Practice will retain an amount equal to net
collections less the management fee earned by the Company, which includes the
authorized operating costs incurred. If the amount of such costs incurred and
paid by the Company exceeds the amount authorized, approval to reimburse the
Company for such excess must come from the Operations Committee. In addition,
the Company will be responsible for arranging the funding of Ancillary Service
Facilities when appropriate and will, subject to applicable laws, share
appropriately in the profits from such facilities.

Typically, each Management Services Agreement has an initial term of 40
years, with automatic extensions (unless at least six months' notice is given)
of additional five-year terms. The Management Services Agreement

10
<PAGE>
may be terminated by either party if the other party (a) files a petition in
bankruptcy or other similar events occur, or (b) defaults in any material
respect in the performance of any duty or obligation under the Management
Services Agreement, which default is not cured within a specified period after
receipt of notice thereof or (c) any of the representations and warranties made
by such party in the Management Services Agreement is materially untrue or
misleading and such party fails to correct such matter after receipt of written
notice thereof. The Company also has the right to terminate the Management
Services Agreement in the event that the Practice is excluded from participation
in the Medicaid or Medicare program for any reason. Either party may also
terminate the Management Services Agreement if such party determines that the
structure of the Management Services Agreement violates any state or federal
laws or regulations existing at such time and that an amendment to the
Management Services Agreement will be unable to correct such defect.

Upon termination of the Management Services Agreement, neither party is
obligated to the other party except as set forth below. In the event of such
termination, the Company is required to complete, within four months after the
termination date, the annual settlement of the respective obligations of the
Company and Practice for the period prior to the termination date. Furthermore,
following any such termination, the Company must sell to the Practice all of the
Company's interest in the assets that are located in the offices of the Practice
and used in connection with the medical practice. The purchase price for all of
such assets will be agreed upon by the parties; however, if an agreement is not
reached, the purchase price will be determined by an independent appraisal.
Under the Management Services Agreement, the Company is typically entitled to
receive all of the revenues collected by the Practice during the 90-day period
following termination of the agreement.

The Company has entered into a Management Services Agreement with STSC that
permits STSC and the individual physicians to rescind the Affiliation
Transaction on November 1, 2003. Management Services Agreements for eight other
Existing Practices comprising 30 physicians contain provisions that permit such
Existing Practices to rescind their Affiliation Transactions on their respective
seventh anniversaries.

Under the Management Services Agreement, the Practice agrees generally not
to, at any time prior to the second anniversary of the termination of the
Management Services Agreement, compete with the Company by providing services to
other medical groups similar to those provided by the Company under the
Management Services Agreement or by entering into a management relationship with
another provider of non-professional management services that provides such
services to multiple physician groups. The Company and the Practice agree not to
disclose to third parties any confidential information relating to the other
party.

Asset Purchase Agreement. Subject to the terms and conditions of an asset
purchase agreement (the 'Asset Purchase Agreement'), the Company typically
purchases from the Practice all of those assets used by the Practice in the
operation of the medical practice, including medical equipment, furniture, trade
fixtures, office equipment, supplies, and, subject to legal limitations
regarding Medicare and Medicaid receivables, outstanding accounts receivable.
Pursuant to an assignment and assumption agreement entered into as a condition
to the Asset Purchase Agreement, the Company also acquires a leasehold interest
in certain assets leased by the Practice, including offices and equipment. The
Company also assumes certain liabilities related to any leased equipment and
leased offices. The purchase price paid by the Company under the Asset Purchase
Agreement is customarily determined by the parties after an appraisal of the
assets being acquired. Under the Asset Purchase Agreement, the Practice agrees
to indemnify the Company for any losses resulting from the operation of such
medical practice prior to the effectiveness of the affiliation of such Practice
with the Company.

Stockholder Noncompetition Agreement. Under a non-competition agreement
(the 'Stockholder Non-competition Agreement'), each physician owner and employed
physician of the Practice typically agrees not to (i) compete directly or
indirectly with the Practice in the provision of medical services or with the
Company in the provision of practice management services for a period of two
years after termination of his affiliation with the Practice and within a 25
mile radius of any of the Practice's offices; or (ii) disclose any confidential
information of the Company or the Practice. Each physician further agrees to
indemnify the Company and the Practice for any damages they may suffer as a
result of the physician's failure to abide by the foregoing covenants. There can
be no assurance as to the enforceability of the Stockholder Noncompetition
Agreements.

11
<PAGE>
COMPETITION

The Company competes with many other entities to affiliate with
musculoskeletal practices. Several companies that have established operating
histories and greater resources than the Company are pursuing the acquisition of
the assets of both general and specialty practices and the management of such
practices. Other PPMs and some hospitals, clinics, health maintenance
organizations ('HMOs') and provider networks engage in activities similar to
those of the Company. There can be no assurance that the Company will be able to
compete effectively with such competitors, that additional competitors will not
enter the market, or that such competition will not make it more difficult to
affiliate with, and to enter into agreements to provide management services to,
medical practices on terms beneficial to the Company.

The Practices and the IPA compete with local musculoskeletal care service
providers as well as some managed care organizations. The Company believes that
changes in governmental and private reimbursement policies and other factors
have resulted in increased competition for consumers of medical services. The
Company believes that the cost, accessibility and quality of services provided
are the principal factors that affect competition. There can be no assurance
that the Practices or the IPA will be able to compete effectively in the markets
that they serve. The inability of the Practices or the IPA to compete
effectively would have a material adverse effect on the Company.

Further, the Practices and the IPA compete with other providers for
musculoskeletal managed care contracts. The Company believes that trends toward
managed care have resulted in increased competition for such contracts. Other
practices and management service organizations may have more experience than the
Practices, the IPA and the Company in obtaining such contracts. There can be no
assurance that the Company and the Practices will be able to successfully obtain
sufficient managed care contracts to compete effectively in the markets they
serve. The inability of the Practices to compete effectively for and obtain such
contracts could materially adversely affect the Company.

GOVERNMENT REGULATION AND SUPERVISION

The delivery of health care services is regulated at both the federal and
state level. The laws applicable to the Company are subject to evolving
interpretations, and therefore there can be no assurance that a review of the
Company's operations by federal or state judicial or regulatory authorities
would not result in a determination that the Company, the IPA or one of the
Practices has violated one or more provisions of federal or state law. Any such
determination could have a material adverse effect on the Company.

Federal Law

Among the significant federal laws that apply to the Company's activities
are those that prohibit: (a) the filing of false or improper claims with a
federally funded health program; (b) unlawful inducements for the referral of
business reimbursable under most federally funded health programs; (c) fraud in
regard to payment or service in any health program; and (d) the billing for the
provision of certain Medicare or Medicaid covered items or services where such
items or services were provided based upon a referral to the providing entity by
a physician who has, or whose immediate family member has, a financial
relationship with that entity that does not fall within an applicable exception.

False and Other Improper Claims. Under numerous federal laws, including
the Federal False Claims Act (the 'False Claims Act'), the federal government is
authorized to impose criminal, civil and administrative penalties on any health
care provider that files a false claim for reimbursement from a federally funded
health program (such as Medicare or Medicaid). The False Claims Act provides for
a civil penalty of not less than $5,000 and not more than $10,000 per false
claim and between two to three times the amount of damages depending on the
facts and circumstances. The Medicare civil monetary penalty is now ten thousand
dollars ($10,000) per false item or service claimed. Recently enacted federal
legislation also imposes federal criminal penalties on persons who file false or
fraudulent claims with private insurers. While the criminal statutes are
generally reserved for instances of fraud, the civil and administrative penalty
statutes are being applied by the government in an increasingly broad range of
circumstances. Civil sanctions may be imposed if the claimant knew or should
have known that billing was improper. The government also has taken the position
that claiming reimbursement for services that are substandard is a violation of
these false claims statutes if the claimant knew

12
<PAGE>
or should have known that the care was substandard or rendered under improper
circumstances. Private persons may bring civil actions to enforce the False
Claims Act. Under certain lower court decisions, claims derived from a violation
of the Anti-Kickback Statute (as defined herein) or the federal Self-Referral
Law (also known as the 'Stark Law') have been deemed to be, or may under certain
circumstances be construed to be, false claims.

The Stark Self-Referral Law. The Stark Law prohibits a physician from
referring a patient for certain designated health services reimbursable by
Medicare to an entity with which the physician (or the physician's immediate
family member) has a financial relationship, whether through ownership, debt or
compensation arrangements. In addition, a state cannot receive federal financial
participation payment under the Medicaid program for designated health services
furnished to an individual on the basis of a physician referral that would
result in a denial of payments under the Medicare program if Medicare covered
the services to the same extent and under the same terms and conditions as under
the state Medicaid plan. Designated health services means clinical laboratory
services, physical therapy services, occupational therapy services, radiology
(including magnetic resonance imaging, computerized axial tomography scans and
ultrasound services), radiation therapy services and supplies, durable medical
equipment and supplies, parenteral and enteral nutrients, equipment, and
supplies, prosthetics, orthotics, and prosthetic devices, home health services
and supplies, outpatient prescription drugs, and inpatient and outpatient
hospital services. Referrals for services other than designated health services
and the furnishing of physicians' services that do not involve any designated
health services are not subject to the Stark Law. The term 'referral' under the
Stark Law means more than merely recommending a vendor for designated health
services to a patient; referrals are defined to include the request or
establishment of a plan of care by a physician which includes the provision of
designated health services. Consequently, the ordering of designated health
services within a physician's medical group can constitute a referral within the
meaning of the Stark Law.

Further, unless an exception is met, both the health care entity that
furnishes the services and the physician who makes the referral are prohibited
from billing Medicare for services rendered to Medicare beneficiaries in
violation of the Stark Law. The Stark Law is a civil statute which does not
include criminal penalties. Violations of the Stark Law could result in
significant civil sanctions, including denial of payment, refunds of amounts
collected in violation of the statute and civil money penalties of up to fifteen
thousand dollars ($15,000) for each bill or claim for a service a person knows
or should know is a service for which payment may not be made. The Stark Law
also includes civil money penalties of up to one hundred thousand dollars
($100,000) for each arrangement or scheme which the physician or entity knows or
should know has a principal purpose of assuring referrals which, if directly
made, would violate the Stark Law proscription. Both penalty provisions also
provide for exclusion from the Medicare programs. The Stark Law also prohibits
federal financial participation in any payment by a state for services where
such payment would be prohibited by the Stark Law if rendered to a Medicare
beneficiary. The Stark Law also requires each entity that receives Medicare or
Medicaid payments for designated health services to report to HCFA (for
Medicare) or the state Medicaid agency all financial relationships with
referring physicians, with penalties of $10,000 per day for failing to report
such information appropriately, and requires group practices to provide an
attestation. Implementation of these reporting and attestation requirements has
been deferred pending adoption of regulations related to such requirements.

The Company currently does not directly provide any designated health
services as that term currently is defined under the Stark Law; however, one or
more of the Practices may provide designated health services within their
offices. Because the Company provides management services and managed care
contracting services to the Practices for a fee, there can be no assurance that
the Company will not be deemed to be providing designated health services within
each Practice. If the Company is held to be the provider of such designated
health services within each Practice, the Stark Law will require that the
arrangements between the Company and the physicians in each Practice that
provide designated health services be structured to meet a Stark Law exception.
Under this scenario, the physicians' ability to order designated health services
within the Practices and the ability of the Practices to bill Medicare or
Medicaid for such designated health services will be permissible only if the
financial arrangements under the Management Services Agreements or IPA Provider
Agreements entered into by the Company and the Practices meet certain exceptions
set forth in the Stark Law. The Company believes that the financial arrangements
under the Management Services Agreements or IPA Provider Agreements qualify for
applicable exceptions under the Stark Law; however, there can be no assurance
that a review by the courts or regulatory authorities would not result in a
contrary determination. Also, to the extent that

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<PAGE>
the Company in the future owns, manages or operates Ancillary Service Facilities
that provide designated health services, the Stark Law may require the
arrangements for the Company's acquisition of certain non-clinical assets of the
Practices and its Management Services Agreements or IPA Provider Agreements with
each Practice to be structured to meet Stark Law exceptions in order for the
physicians within each Practice to refer Medicare patients to the Ancillary
Service Facilities for designated health services.

It is also possible that, as a result of the Company's Management Services
Agreements and IPA Provider Agreements with the Practices, the physicians in the
Practices will be deemed to have indirect financial interests in Practices by
virtue of the physicians' ownership interests in the Company. Under such
interpretation of the Stark Law, the physicians' ability to order and bill for
designated health services provided within the Practices and the ability of the
Practices to bill Medicare or Medicaid for such designated health services will
be permissible only if an exception under the Stark Law is applicable. The
current Stark Law exception related to physicians' ownership interests in
entities to which they refer patients may be relevant to the physicians' ability
to make referrals for designated health services to any Ancillary Service
Facilities owned or managed by the Company in the future. The Company will not
be in a position to meet that exception related to investment interests until
the Company's stockholders' equity exceeds $75 million.

The Stark Law also governs the physicians' ability to refer patients for
designated health services within the Practices in light of the physicians'
ongoing compensation and ownership arrangements with such Practices. An
exception for in-office ancillary services requires that the Practices meet
certain structural and operational requirements on an ongoing basis in order to
bill for in-office ancillary designated health services rendered by employed or
contracted physicians.

A key feature of the in-office ancillary services exception is the Stark
Laws definition of a 'group practice.' On January 9, 1998, HCFA published
proposed regulations which, among other things, focus on the definition of
'group practice.' In the proposed regulations, among other things, HCFA has
provided or clarified that (i) a referral of a designated health service within
the group practice is a Stark-covered referral; (ii) generally, a group practice
must be a single legal entity, although professional corporations wholly-owned
by a single physician may own an interest in the entity; (iii) independent
contractors to the group practice are not group members, and therefore cannot
provide supervision services if application of the in-office ancillary services
exception is sought; (iv) the supervising group member generally must be in the
office suite; (v) distribution of income and allocation of expenses within the
group practice must be in accordance with methods that are determined prior to
the time the group practice has earned the income or incurred the costs and must
indicate that the group practice is a unified business, that is, the methods
must reflect centralized decision making, pooling of expenses and revenues, and
a distribution system that is not based on each satellite office operating as if
it were a separate enterprise; (vi) a group member's compensation cannot be
directly related to revenues generated by his or her own referrals, even if he
or she personally provided or supervised the referred service (although the
referring physician can share in overall profits related to such services);
(vii) the allocation of profits by sub-group is prohibited; (viii) the 'same
building' in which the unrelated service and the ancillary service must be
provided to comply with the requirements for application of the in-office
ancillary service exception excludes trailers and multiple addresses, or
buildings connected by tunnels or walkways; (ix) the group practice may have
more than one centralized facility for the provision of the group practice's
designated health services; (x) profits distribution within the group practice
cannot be based on reduced referrals (incentive plan payments); and (xi) with
regard to the requirement that a group physician provide to the group practice
substantially the full range of services that he or she routinely provides, only
the services provided in the discrete specialty area of services that the
physician provides for the group practice need be considered, even though the
physician might provide services in another area for another group practice on
different days. Although the proposed regulations do not yet have the effect of
law, they provide guidance as to HCFA's interpretation of the Stark Law.
Therefore, the Company will continue to review the new guidance provided by the
proposed regulations with the Practices to determine if any changes in the
Practices' operations may be appropriate. The Company cannot assure that the
Practices will implement such changes, if appropriate, or will implement them
correctly, or that the proposed regulations will not be interpreted to prohibit
relationships that the Company and the Practices believe comply with the Stark
Law, or that the final regulations or future regulations, statutory amendments,
or interpretations thereof, will not further modify requirements for compliance
with the Stark Law.

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In the recently enacted 1997 Budget Bill, Congress directed the Secretary
of the U.S. Department of Health and Human Services ('HHS') effective on or
about November 3, 1997, to issue advisory opinions as to whether a referral
relating to designated health services (other than clinical laboratory services)
is prohibited under the Stark Law. Regulations implementing the advisory opinion
process were adopted on January 9, 1998. An advisory opinion issued by the
Secretary is binding as to the Secretary and the party or parties requesting the
opinion. The Company has no present intention to seek an advisory opinion from
HHS, HCFA or any other governmental authority regarding its current operations,
arrangements with physicians or the referral activities of physicians in the
Practices.

Federal Anti-Kickback Statute. A federal law commonly known as the
'Anti-Kickback Statute' prohibits the offer, solicitation, payment or receipt of
anything of value (direct or indirect, overt or covert, in cash or in kind)
which is intended to induce business for which payment may be made under a
federal health care program. A 'federal health care program' is any plan or
program that provides health benefits, whether directly, through insurance, or
otherwise, which is funded directly, in whole or in part, by the United States
Government (e.g., Medicare, Medicaid, and CHAMPUS). Excluded from the definition
of federal health care program is the Federal Employee Health Benefits Program.
The type of remuneration covered by the Anti-Kickback Statute is very broad. It
includes not only kickbacks, bribes and rebates, but also proscribes any such
remuneration, whether made directly or indirectly, overtly or covertly, in cash
or in kind. Moreover, prohibited conduct includes not only remuneration intended
to induce referrals, but also remuneration intended to induce the purchasing,
leasing, arranging or ordering of any goods, facilities, services, or items paid
for by a federal health care program. The Anti-Kickback Statute has been
interpreted broadly by a number of courts to prohibit remuneration that is
offered or paid for otherwise legitimate purposes if one purpose of the payment
is to induce referrals. Even bona fide investment interests in a health care
provider may be questioned under the Anti-Kickback Statute if the government
concludes that the opportunity to invest was offered as an inducement for
referrals.

In part to address concerns regarding the implementation of the
Anti-Kickback Statute, in 1991 the federal government published regulations that
provide exceptions or 'safe harbors' for certain transactions that are deemed
not to violate the Anti-Kickback Statute. Among the safe harbors included in the
regulations are transactions involving the sale of physician practices,
management and personal services agreements and employee relationships. Congress
recently added a significant new statutory exception related to 'remuneration
between an organization and an individual or entity' if the organization is a
Medicare risk contracting organization or if the remuneration is provided
pursuant to a written agreement that places the individual or entity at
substantial financial risk for the cost or utilization of services. Regulations
implementing the foregoing statute have not yet been adopted, but are expected
to be enacted soon. The failure of an activity to qualify under a safe harbor
provision, while potentially leading to greater regulatory scrutiny, does not
render the activity automatically illegal under the Anti-Kickback Statute.
Conduct falling outside the safe harbors will be judged by government regulators
on a case-by-case basis based on the specific facts and circumstances.

Each offense under the Anti-Kickback Statute is classified as a felony and
is punishable by a criminal fine of up to twenty-five thousand dollars ($25,000)
and/or imprisonment of up to five (5) years; a civil money penalty of fifty
thousand dollars ($50,000) for each violation and/or civil damages of not more
than three times the total amount of remuneration offered, paid, solicited or
received may be imposed without regard to whether any portion of such
remuneration was for a lawful purpose. Both the offeror and the recipient of the
illegal remuneration are potentially liable. In addition, violators are subject
to civil exclusion from participation in the federal health care programs,
regardless of whether they also have been convicted under the criminal penalty
provisions or have been found liable under the civil monetary penalty provisions
of the Anti-Kickback Statute. Also, there is a risk that, in a civil lawsuit to
enforce a contract that contains a structure in violation of the Anti-Kickback
Statute, a court might conclude that the contract is unenforceable as against
public policy.

There are several aspects of the Company's relationships with the
physicians and the Practices to which the Anti-Kickback Statute may be relevant.
In some instances, for example, the government may construe some of the
Company's marketing and managed care contracting activities as arranging for the
referral of patients to the physicians with whom the Company has a Management
Services Agreement or IPA Provider Agreement. Further, any referral of patients
between physicians within the Practices and between the Practices could be
construed as a referral to which the Anti-Kickback Statute applies. Although
neither the investments in the Company by physicians nor the Management Services
Agreements or the IPA Provider Agreements between the

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Company and the Practices qualify for protection under the statutory exception
or the safe harbor regulations described above, the Company does not believe
that these activities fall within the type of activities the Anti-Kickback
Statute were intended to prohibit. The Company also does not believe that
referral activities within the Practices violate the Anti-Kickback Statute. A
determination that the Company has violated the Anti-Kickback Statute would have
a material adverse effect on the Company.

As a component of the recently enacted HIPAA, Congress directed the
Secretary of the U.S. Department of Health and Human Services to issue advisory
opinions regarding compliance with the Anti-Kickback Statute. The advisory
opinion mechanism is authorized for a trial period, beginning six months after
the date of enactment, August 21, 1996. Advisory opinions are available
concerning what constitutes prohibited remuneration within the meaning of the
Anti-Kickback Statute, whether an arrangement satisfies the statutory exceptions
to the Anti-Kickback Statute, whether an arrangement meets a safe harbor, what
constitutes an illegal inducement to reduce or limit services to individuals
entitled to benefits covered by the Anti-Kickback Statute, and whether an
activity constitutes grounds for the imposition of a civil or criminal penalty
under the applicable exclusion, civil money penalty and criminal provisions.
Advisory opinions, however, will not assess fair market value for any goods,
services or property or determine whether an individual is a bona fide employee
within the meaning of the Internal Revenue Code. The statutory language makes
clear that advisory opinions are available for both proposed and existing
arrangements. The failure of a party to seek an advisory opinion, however, may
not be introduced into evidence to prove that the party intended to violate the
Anti-Kickback Statute. The Company has not sought, and has no present intention
to seek an advisory opinion regarding any aspect of its current operations or
arrangements with physicians. An advisory opinion has been issued indicating
that the Chief Counsel of the Office of Inspector General of the U.S. Department
of Health and Human Services believes that certain percentage compensation
arrangements will not fit into any safe harbors and may involve prohibited
remuneration under the Anti-Kickback Statute. The Company will continue to
monitor advisory opinions and other relevant pronouncements, as well as
monitoring industry practice.

PIP Regulations. In December 1996, HCFA had issued final regulations (the
'PIP regulations') covering the use of physician incentive plans ('PIPs') by
federally qualified HMOs and competitive medical plans contracting with the
Medicare program and certain HMOs and health insuring organizations contracting
with the Medicaid program ('Organizations'), potentially including the Company.
The PIP regulations also apply to subcontracting arrangements entered into by
the Organizations. Any Organization that contracts with a physician group that
places the individual physician members of the group at substantial financial
risk for the provision of services that the group does not directly provide
(e.g., a primary care group takes risk but subcontracts with a specialty group
to provide certain services), must satisfy certain disclosure, survey and
stop-loss requirements. Under the PIP regulations, no specific payments, direct
or indirect may be made under the plan, to induce providers to reduce or limit
medically necessary services furnished to an enrollee ('Prohibited Payments').
Further, where there are no Prohibited Payments, but there is risk sharing among
participating providers related to utilization of Medicare or Medicaid services
by their patients, the regulations contain three groups of requirements: (i)
requirements for PIPs that place physicians at 'substantial financial risk';
(ii) disclosure requirements for all Organizations with PIPs; and (iii)
requirements related to subcontracting arrangements. In the case of substantial
financial risk (defined in the regulations according to several methods, but
essentially placement of more than 25% of the maximum payments anticipated under
a plan with less than 25,000 covered lives at risk based on the use or cost of
referral services), Organizations must conduct enrollee surveys and ensure that
all providers have specified stop-loss protection. The violation of the
requirements of the PIP regulations may result in a variety of sanctions,
including suspension of enrollment of new Medicaid or Medicare members, or a
civil monetary penalty of $25,000 for each determination of noncompliance. In
addition, because of increasing public concerns regarding PIPs, the PIP
regulations may become a model for additional federal or state legislation the
industry as a whole. Although the Company currently has no contracts that
require compliance with the PIP regulations, the new regulations, by limiting
the amount of risk that may be imposed upon physicians in certain arrangements,
could affect the ability of the Company to meaningfully reduce the costs of
providing services.

Antitrust. Because the Practices that affiliate with the Company remain
separate legal entities, they may be deemed competitors subject to a range of
antitrust laws that prohibit anti-competitive conduct, including price fixing,
concerted refusals to deal and divisions of markets. In particular, the
antitrust laws have been interpreted

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by the Federal Trade Commission ('FTC') and the United States Department of
Justice ('DOJ') to prohibit joint negotiation by competitors of price terms in
the absence of financial risk that is shared among the competitors, other
financial integration or substantial clinical integration among the competitors.
The Company intends to comply with such state and federal laws as may affect its
development of, and contracting for, integrated health care delivery networks
(and in particular its IPA) and will utilize the DOJ and FTC approved 'messenger
model'--which avoids joint price negotiations--for those agreements that do not
involve sufficient financial or clinical integration. Nevertheless, there can be
no assurance that a review of the Company's business by courts or regulatory
authorities will not result in a determination that could adversely affect the
operation of the Company and the Practices.

State Law

State Self-Referral Laws. A number of states have enacted self-referral
laws that are similar in purpose to the Stark Law but which impose different
restrictions on referrals than the Stark Law. These various state self-referral
laws have different requirements. Some states, for example, only prohibit
referrals when the physician's financial relationship with a health care
provider is based upon an investment interest. Other state laws apply only to a
limited number of designated health services or, alternatively, to all health
care services furnished by a provider. Some states do not prohibit referrals at
all, but require only that a patient be informed of the financial relationship
before the referral is made.

The following provides a brief review of the self-referral laws in each of
the states in which the Company does business:

Arizona law requires that physicians, when making referrals to an
entity they own that is not part of their group practice, disclose to
patients (i) that the physician has a direct financial interest in the
separate diagnostic or treatment agency or non-routine goods or services
that such patient is being prescribed, and (ii) that the prescribed
treatment, goods or services are available on a competitive basis from
other agencies.

California's principal self-referral law applies to all payors and
provides that it is unlawful to refer a person for certain defined
categories of services (including laboratory, physical therapy, physical
rehabilitation and diagnostic imaging) to an entity in which or with which
the referring person has a financial interest (broadly defined). Several
exceptions apply, including an exception for group practices and for
referrals to certain publicly traded entities. Any financial interest by a
physician in a health related facility providing the listed services must
be disclosed to the state as a condition of licensure. The California
self-referral statute also requires all physicians to make disclosure to
patients in the event of any referral to a service in which the physician
or his or her family has a significant beneficial interest (even if such
service is not one of the covered services affected by the self-referral
prohibition). In the context of a group practice, the patient disclosure
requirement may be met by providing a written disclosure to each patient or
posting a notice in a common area. Disclosure to the state of physician
referral interests is also a condition of payment under the California
Medi-Cal (Medicaid) program. California also has a separate self-referral
law with respect to care that is covered under workers' compensation
insurance, although the scope of the prohibition, the list of covered
services, and the exceptions provided are virtually identical to those
contained in the state's all-payor self-referral law summarized above.

Florida's Patient Self-Referral Act of 1992 prohibits health care
providers, including physicians, from referring a patient for the provision
of designated health care services, and in some circumstances any health
care services, to an entity in which the health care provider has an
investment interest, unless an exception, such as for referrals within a
group practice, applies.

New Jersey statutes and regulations contain a general prohibition
against self-referrals of a patient to any 'health care service' in which
the practitioner or his or her immediate family has a significant
beneficial interest. This self-referral prohibition is, however, subject to
certain exceptions, including an exception for referrals to a referring
physician's own 'medical office' for services billed directly by and in the
name of the referring physician. In general, the Company is aware that
significant portions of New Jersey regulations addressing the issues of
self-referral, anti-kickback, fee splitting and corporate practice of
medicine are currently in the process of being developed and revised by
appropriate agencies for possible publication as proposed rules.

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Nevada law prohibits a practitioner from referring a patient for a
service or for goods related to health care, to a health facility, medical
laboratory, diagnostic imaging or radiation oncology center or commercial
establishment in which the practitioner has a financial interest. Several
exceptions are available, including an exception for group practices and
investments by practitioners in corporations that have shareholder equity
of more than $100,000, regardless of whether the securities of the
corporation are publicly traded. Nevada law also contains a specific
provision applicable only to arrangements involving hospitals and related
entities, including a prohibition against certain rental arrangements
between a hospital or related entities and a physician or entity which
employs physicians. In addition, this provision requires a practitioner or
health facility that has a financial interest in a health facility or
service to disclose such interest prior to making a referral. The
disclosure requirement does not apply to arrangements that do not involve
hospitals or related entities.

In Pennsylvania, there is no comprehensive self-referral prohibition,
although Pennsylvania does require disclosure to patients where a financial
interest exists in the entity or with the person to which a referral is
made. For providers treating Medicaid patients, Pennsylvania Medicaid
regulations contain a limited self-referral ban, prohibiting, without
exceptions, referrals to an independent laboratory, pharmacy, radiology or
ancillary medical service in which the referring practitioner has an
ownership interest. Finally, Pennsylvania's workers' compensation statute
also prohibits the referral of workers' compensation patients from a
provider to a person or an entity with which the provider has a financial
relationship. The Pennsylvania's workers' compensation self-referral law
applies all of the exceptions, including the group practice exception,
applicable under the federal Stark Law.

Texas law does not have a specific self-referral law.

Failure to comply with the foregoing laws may result in loss of licensure,
which would be imposed against the physicians in the Practices, or other civil
or criminal penalties, which may be imposed against the physicians in the
Practices, or against the Company in its capacity as billing agent for the
physicians (pursuant to the Management Services Agreements) or in the event the
Company becomes or is deemed to be a provider of health care services subject to
the various self-referral laws, or if the Company becomes or is deemed to be in
a position to make or influence referrals to the Practices. In addition, any
determination that any Management Services Agreement violates any of the
foregoing laws may result in such agreement being unenforceable. Additional
risks under state self-referral laws could arise, however, to the extent that
the Company or the Practices undertake to own, manage or operate any Ancillary
Service Facilities to which the physicians within the Practices may wish to
refer patients.

State Anti-Kickback Laws. Many states have laws that prohibit payment of
kickbacks in return for the referral of patients. Some of these laws apply only
to services reimbursable under state Medicaid programs. However, a number of
these laws apply to all health care services in the state, regardless of the
source of payment for the service. Some state laws governing workers'
compensation and other insurance also include an anti-kickback prohibition.

The following provides a brief review of the anti-kickback laws of the
states in which the Company does business:

In Arizona, the state's Professions and Occupations statute declares
it unprofessional conduct for a physician to divide fees for professional
services with another health care provider or health care institution.
Arizona's Medicaid statute also includes a broad general anti-kickback
proscription.

California has a general, all-payor anti-kickback statute which
prohibits the offer or acceptance of any compensation by a licensed
provider as compensation or inducement for referring patients, clients or
customers. Significantly, however, this statute also provides that payments
for services other than the referral of patients based on a percentage of
gross revenue (or other similar type of contractual arrangement) is not
unlawful if the consideration is commensurate with the value of the
services furnished. Prohibitions against receiving remuneration for patient
referrals also exist elsewhere in the California statutes, including the
state Medicaid statute, the workers' compensation statute, and the
insurance code.

Florida's patient brokering law prohibits any person, including health
care providers, from offering or paying, soliciting or receiving, any
commission, bonus, rebate, kickback, or bribe, or from engaging in any

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split-fee arrangement, in return for referring patients. Exceptions include
payment arrangements that are not prohibited by the federal Anti-Kickback
law, and financial arrangements within a group practice. Florida law
contains a number of similar anti-kickback prohibitions. For example,
Florida law governing medical practice provides that licensed physicians
are subject to disciplinary action for these kinds of activities, and
Florida's Medicaid statute prohibits similar activities, but as applied to
items and services reimbursed by Medicaid.

New Jersey's professional licensure statutes and regulations prohibit
payment and the receipt of payments for referrals of patients and for
recommending purchasing or prescribing any medical product or other device
or appliance. In addition, under New Jersey's Medicaid statute, criminal
penalties are imposed for any provider or other person who solicits, offers
or receives any kickback, rebate or bribe in connection with the furnishing
of Medicaid items or services. In general, the Company is aware that
significant portions of New Jersey regulations addressing the issues of
self-referral, anti-kickback, fee splitting, and corporate practice of
medicine are currently in the process of being developed and revised by
appropriate agencies for possible publication as proposed rules.

Nevada law prohibits any arrangement involving immediate, delayed,
direct or indirect financial inducement to a provider of medical care to
induce the referral of a patient or group of patients to a health facility.
In addition, Nevada's professional licensure statute subjects a physician
to disciplinary action or denial of licensure if the physician directly or
indirectly receives from any person, corporation or other business
organization any fee, commission, rebate or other form of compensation
which is intended or tends to influence the physician's objective
evaluation or treatment of a patient. This statute also prohibits a
physician from dividing a fee with another physician unless the patient is
informed of the division of fees and the division of fees is made in
proportion to the services personally performed and the responsibility
assumed by each physician.

In Pennsylvania, the criminal code provides a general anti-kickback
prohibition, which defines the crime of insurance fraud to include a health
care provider's giving of anything of value in consideration of a referral
with respect to services subject to insurance benefits or claims.
Substantially similar anti-kickback prohibitions are also contained in
Pennsylvania's statute and regulations dealing with providers who
participate in the Pennsylvania Medicaid program or who are paid under the
state's workers' compensation program.

Texas anti-kickback law applies to remuneration or compensation for
referrals made between a licensed provider and an unlicensed person or
entity, but it permits any activity that complies with the federal anti-
Kickback Statute or any regulations promulgated thereunder. In addition,
the medical practice standards in Texas prohibit physicians from paying any
person for soliciting or securing referrals.

Failure to comply with the foregoing laws may result in loss of licensure,
which would be imposed against the physicians in the Practices, or other civil
or criminal penalties, which may be imposed against the physicians in the
Practices, or against the Company in its capacity as billing agent for the
physicians (pursuant to the Management Services Agreements) or in the event the
Company becomes or is deemed to be a provider of health care services subject to
the various anti-kickback laws, or if the Company becomes or is deemed to be in
a position to make or influence referrals to the Practices. In addition, any
determination that any Management Services Agreement violates any of the
foregoing laws may result in such Agreement being unenforceable. The laws in
most states regarding kickbacks have been subjected to limited judicial and
regulatory interpretation and therefore, no assurances can be given that the
Company's activities will be found to be in compliance. Noncompliance with such
laws could have a material adverse effect upon the Company and subject it and
the Practices' physicians to penalties and sanctions.

Fee-Splitting Laws. Many states prohibit a physician from splitting with a
referral source the fees generated from physician services. Other states have a
broader prohibition against any division of a physician's fees, regardless of
whether the other party is a referral source. Some states have laws that
specifically address payments for services rendered to physicians based on a
percentage of revenues from the physician's practice.

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The following provides a brief review of the fee-splitting laws in each of
the states where the Company does business:

Arizona does not explicitly prohibit the sharing of fees between
physicians and non-professionals (e.g., a management company). However, as
noted above, Arizona does declare it unprofessional conduct for a physician
to divide fees for professional services with another health care provider
or health care institution in return for a patient referral.

As noted above in the discussion of California's anti-kickback
provisions, California explicitly permits payment for services (other than
the referral of patients) based on a 'percentage of gross revenue or
similar type of contractual arrangement,' provided that the consideration
is commensurate with the value of the services furnished. However, even if
a contractual arrangement does not involve unlawful fee splitting, the
arrangement nonetheless could be deemed to constitute an arrangement
involving payment for referrals under the state anti-kickback laws.

On November 3, 1997, the State of Florida Board of Medicine ruled that
percentage-based management services fees violate Florida's prohibition on
fee splitting by licensed professionals. The Company has included such
percentage fees in all of its Management Services Agreements with
physicians in Florida. Thus, no assurance can be given that the Company's
Management Services Agreements based on such percentage fees will be
enforceable. If necessary, the Company will seek to restructure its
Management Services Agreements in Florida to comply with the order, but
such modifications, or the failure to obtain agreement on such
modifications, could have a material adverse effect on the Company.

New Jersey does not explicitly prohibit the sharing of fees between
physicians and nonprofessionals, but such fee sharing may be a factor in
the determination as to whether New Jersey's corporate practice of medicine
doctrine has been violated. In general, the Company is aware that
significant portions of New Jersey regulations addressing the issues of
self-referral, anti-kickback, fee splitting, and corporate practice of
medicine are currently in the process of being developed and revised by
appropriate agencies for possible publication as proposed rules.

Pennsylvania does not explicitly prohibit the sharing of fees between
physicians and nonprofessionals, but such fee sharing may be a factor in
the determination as to whether Pennsylvania's corporate practice of
medicine doctrine has been violated.

Nevada does not explicitly prohibit the sharing of fees between
physicians and non-professionals (e.g., a management company). However, as
noted above in the discussion of Nevada's anti-kickback provisions, Nevada
law states that it is grounds for initiating disciplinary action or denying
licensure if a physician divides a fee with another physician, unless the
patient is informed of the division of fees and the division of fees is
made in proportion to the services personally performed and the
responsibility assumed by each physician.

In Texas, judicial interpretation of the state's corporate practice of
medicine doctrine in Texas has suggested that payments of a percentage of
profits from a physician's medical practice to a management company is a
factor indicative of the corporate practice of medicine.

The Company is reimbursed by physicians in the Practices on whose behalf
the Company provides management services. There can be no certainty that, if
challenged, the Company and the Practices will be found to be in compliance with
each state's fee-splitting (or related corporate practice) laws. Failure to
comply with the foregoing laws may result in loss of licensure, which would be
imposed against the physicians in the Practices, or other civil or criminal
penalties, which may be imposed against the physicians in the Practices, or
against the Company in its capacity as agent for the physicians (pursuant to the
Management Services Agreements) or in the event the Company becomes or is deemed
to be a provider of health care services subject to the various fee-splitting
laws, or if the Company becomes or is deemed to be in a position to make or
influence referrals to the Practices. A determination in any state that the
Company is engaged in any unlawful fee-splitting arrangement could render any
Management Services Agreement or IPA Provider Agreement between the Company and
a Practice located in such state unenforceable or subject to modification in a
manner materially adverse to the Company.

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Corporate Practice of Medicine. The laws of many states prohibit business
corporations, including the Company, from employing physicians, exercising
control over the medical judgments or decisions of physicians and from engaging
in certain financial arrangements, such as fee-splitting with physicians. These
laws and their interpretations vary from state to state and are enforced by both
the courts and regulatory authorities, each with broad discretion. Some states
interpret the 'practice of medicine' broadly to include activities of
corporations such as the Company that have an indirect impact on the practice of
medicine, even where the physician rendering the medical services is not an
employee of the corporation and the corporation exercises no discretion with
respect to the diagnosis or treatment of a particular patient.

The following provides a brief review of the corporate practice of medicine
doctrine as applied in each of the states in which the Company does business:

Although Arizona case law dated 1967 suggests a long-standing
proscription against the practice of medicine by corporate entities, there
are no reported cases or Arizona Attorney General opinions of this
proscription in recent years. In addition, Arizona's professional
corporation statute permits up to forty-nine percent (49%) ownership of
professional medical corporations by non-physicians.

The prohibition on the corporate practice of medicine in California is
reflected both in statute and in case law. In California, a management
contract can be interpreted as unlawfully violating the prohibition on the
corporate practice of medicine if it concedes too much power to the
management company. Examples of such power would be the ability of the
management company to select office sites, require payment to the
management company of a substantial percentage of the practice's gross
income, require adherence to design specifications for practice offices,
require approval of goods and supplies used by the practice, or other
matters which singly or in combination may interfere with the ability of
the physician to exercise independent professional judgment. The Company
also is aware that the California Medical Association has developed
guidelines for physicians on the extent to which a management company can
exercise decision-making over a physician practice.

The Florida Board of Medicine has ruled that Florida law does not
prohibit licensed physicians from engaging in the practice of medicine as
employees of business entities, such as business corporations or limited
liability companies, as long as the physicians maintain control over
medical decision-making.

New Jersey regulations specify permitted practice forms for physicians
and provide examples of relationships a medical practice may enter into
with non-professional entities for space, equipment and management
services. These regulations require that the physicians retain control of
the professional medical aspects of the practice, as well as control over
fee schedules and certain other functions. In general, the Company is aware
that significant portions of New Jersey regulations addressing the issues
of self-referral, anti-kickback, fee splitting, and corporate practice of
medicine are currently in the process of being developed and revised by
appropriate agencies for possible publication as proposed rules.

Although there is no statutory prohibition concerning the corporate
practice of medicine in Nevada, a Nevada Attorney General opinion from 1977
provides that no corporation organized under Nevada's general corporation
law may lawfully engage in the practice of medicine, but one or more
licensed physicians may practice medicine in corporate form if they are
incorporated under Nevada's Professional Corporations and Associations Act.
The Professional Corporations and Associations Act authorizes Nevada
physicians to incorporate individually or in a group for the purpose of
practicing medicine; however, all of the incorporators and all of the
corporate officers and employees must be licensed Nevada physicians. In
addition, all of the stockholders must be licensed Nevada physicians.
Although the Company found no case law regarding management services
agreements with physicians, the Company believes Nevada will require the
physicians to maintain control of their practices.

Pennsylvania's corporate practice of medicine doctrine permits only
licensed professionals and entities owned solely by such professionals to
practice medicine, not business corporations or similar entities. Although
there are no regulations or case law regarding management services
agreements with professionals, the Company believes Pennsylvania will
require the professionals to maintain control of their practices.

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Texas' physician licensure statute contains a broad prohibition
against the 'aiding or abetting, directly or indirectly,' of the corporate
practice of medicine. Further, judicial interpretation in Texas of the
state's corporate practice doctrine has suggested that payments of a
percentage of profits from a physician's medical practice to a management
company is a factor indicative of the corporate practice of medicine.

The Company's practice management structure, which the Company believes is
consistent with standard practices for PPMs, uses an operations committee (the
'Operations Committee') composed of representatives from both the Company and
the Practice of six members, three of whom are designated by each of the Company
and the Practice. Among other things, the Operations Committee approves a
budget, medical group costs, costs and expenses that exceed the budget, the
acquisition and replacement of equipment and the integration of new
technologies. In addition, the Company's explicit approval is required for
implementation or acquisition of new technologies or medical equipment if the
costs of such equipment or technology exceeds 5% of the management fee. Company
approval is also required for all new offices and new ancillary services. If a
new medical office is not profitable, the Company may, in its sole discretion,
close the new office. Finally, a change in control of the Practice requires the
consent of the Company (not to be unreasonably withheld). While these provisions
in the Company's Management Services Agreements are designed to give the Company
control over certain business transactions by the Practices, which explicitly
retain their professional independence, the Management Services Agreements give
the Company either control over or require the agreement of the Company and the
Practices with respect to certain matters that might be viewed as indicia of the
corporate practice of medicine. While the Company is not given any control over
clinical care decisions, its control or substantial influence over other
decisions may be deemed to be great enough to constitute the corporate practice
of medicine.

The Company's intent is not to exercise any responsibility on behalf of the
Practices' physicians that interferes with the physicians' independent patient
care and professional judgments. However, as noted, the laws and legal doctrines
relating to the corporate practice of medicine have been subjected to only
limited judicial and regulatory interpretation and there can be no assurance
that, if challenged, the Company would be considered to be in compliance with
all such laws and doctrines. A determination in any state that the Company is
engaged in the corporate practice of medicine could render any Management
Services Agreement or IPA Provider Agreement between the Company and a Practice
located in such state unenforceable or subject to modification in a manner that
could have a material adverse effect on the Company.

The Company hires certain ancillary health personnel (nurses and
technicians) and leases their services back to the Practices in a manner that it
believes accords with applicable Medicare billing requirements. The Company's
ability to hire such ancillary personnel is subject to various state
regulations. The Company believes that its structure in this area is common
among PPMs. Should such state corporate practice laws be interpreted to prohibit
such hiring by the Company, the Company will be required to revise its
relationship with such ancillary personnel, and the relationship of the
ancillary personnel to the Practice would also have to be modified. Such
modification in the forgoing relationships could have a material adverse effect
on the Company.

Texas Staff Leasing Law. In Texas, it is unlawful to provide 'staff leasing
services' without a license issued by the State (the 'Staff Leasing Law'). The
Texas Staff Leasing Law requires any person offering such services to obtain a
license from the Texas Department of Licensing and Regulation. The Company
leases certain non-physician personnel to STSC as part of the management
services provided by the Company to STSC. On February 19, 1998, the Company was
issued the required license by the State of Texas.

Licensure and Certificate of Need Laws. Certain of the ancillary services
that the Company anticipates providing or managing on behalf of the Practices
are now or may in the future be subject to licensure or certificate of need laws
in various states. There can be no assurance that the Company or the Practices
will be able to obtain such licenses or certificates of need approval to the
extent required for the particular ancillary service. Failure to obtain such
licenses or certificates of need could have a material adverse effect on the
Company.

Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of health care providers. While these laws do not generally apply to
companies that provide management services to networks of physicians, they have
been construed in some states to apply to such companies and there can be no
assurance that regulatory authorities of the states in which the Company
operates would not apply these laws to require licensure of the Company's

22
<PAGE>
operations as an insurer, as an HMO or as a provider network. The Company
believes that its proposed operations are in compliance with these laws in the
states in which it currently does business, but there can be no assurance that
future interpretations of insurance and health care network laws by regulatory
authorities in these states or in the states into which the Company may expand
will not require licensure or a restructuring of some or all of the Company's
operations.

The National Association of Insurance Commissioners ('NAIC') in 1995
endorsed a policy proposing the state regulation of risk assumption by
physicians. The policy proposes prohibiting physicians from entering into
capitated payment or other risk sharing contracts except through HMOs or
insurance companies. Several states have adopted regulations implementing the
NAIC policy in some form. In states where such regulations have been adopted,
practices are precluded from entering into capitated contracts directly with
employers, individuals and benefit plans unless they qualify to do business as
HMOs or insurance companies. The Existing Practices currently provide services
under very few capitated payment contracts. The Company intends to limit the
number of capitated payments or other risk-sharing arrangements into which it
enters on its own behalf or on behalf of the Practices. The Company expects to
make such arrangements only with HMOs or insurance companies. In addition, in
December 1996, the NAIC issued a white paper entitled 'Regulation of Health Risk
Bearing Entities,' which sets forth issues to be considered by state insurance
regulators when considering new regulations, and encourages that a uniform body
of regulation be adopted by the states. Certain states have enacted statutes or
adopted regulations affecting risk assumption in the health care industry. In
some states, including California, these statutes and regulations subject any
physician or physician network engaged in risk-based contracting, even if
through HMOs and insurance companies, to applicable insurance laws and
regulations, which may include, among other things, laws and regulations
providing for minimum capital requirements and other safety and soundness
requirements. The Company believes that additional regulation at the state level
will be forthcoming in response to the NAIC initiatives.

The IPA that is owned by the Company operates as a specialty physician
network in Arizona, and contracts directly or indirectly with licensed HMOs or
insurance companies to arrange for the provision of specialty orthopedic
physician services on behalf of enrollees of the HMOs or insurance companies. In
return, the IPA accepts a fee from the relevant payor, which fee the IPA passes
along to the participating physician provider, less the IPA's fee (generally
13%) to compensate the IPA for its services. The two IPA Payor Agreements
currently in place with the IPA involve 'capitation' fees--a fixed per month per
enrollee fee for all designated orthopedic services. Arizona law does not permit
a provider network to enter into such agreement directly with enrollees, unions,
employers or other patient group on behalf of their members or employees, as
applicable; the direct acceptance of risk by such a network, under Arizona law,
would constitute the 'business of insurance' subject to licensure and regulation
by the Arizona Department of Insurance. However, where the capitation or other
risk-based payment is accepted by a provider network as a 'downstream' risk from
a licensed HMO or insurance company, the Arizona Department of Insurance has
indicated that such risk contracting would not subject the Company to licensure
or regulation by the Department. However, there can be no assurance that the
laws governing the business of insurance in Arizona will not be revised or
interpreted in a manner that would prohibit operation of the IPA under either
the IPA Payor Agreements or the IPA Provider Agreements, and in such event, the
Company would be required to modify or terminate its relationships with payors
or providers in Arizona. Such modification or termination could have a material
adverse effect on the Company.

FEDERAL AND STATE INITIATIVES

Fraud and Abuse. In the recently enacted 1997 Budget Bill and HIPAA,
Congress has responded to perceived fraud and abuse in the Medicare and Medicaid
programs. This legislation has fortified the government's enforcement authority
with increased resources and greater civil and criminal penalties for offenses.
It is anticipated that there will be further restrictive legislative and
regulatory measures to reduce fraud, waste and abuse in the Medicare and
Medicaid programs. There can be no assurance that any such legislation will not
have a material impact on the Company.

Health Care Reform. As a result of the continued escalation of health care
costs and the inability of many individuals to obtain insurance, numerous
proposals have been or may be introduced in Congress and state legislatures
relating to health care reform. There can be no assurance as to the ultimate
content, timing or effect

23
<PAGE>
of any health care reform legislation, nor is it possible at this time to
estimate the impact of potential legislation, which may be material, on the
Company.

Confidentiality of Patient Records. The confidentiality of patient records
and the circumstances under which such records may be released is subject to
substantial regulation under state and federal laws and regulations. To protect
patient confidentiality, data entries to the Company's databases delete any
patient identifiers, including name, address, hospital and physician. Further,
the Company obtains the informed, written consent of the patient to use or
disclose patient information where the Company believes that such consent is
necessary or appropriate. The Company believes that its procedures comply with
the laws and regulations regarding the collection of patient data in
substantially all jurisdictions, but regulations governing patient
confidentiality rights are evolving rapidly and are often difficult to apply.
Additional legislation governing the dissemination of medical record information
has been proposed at both the state and federal level. Furthermore, the Health
Insurance Portability and Accountability Act of 1996 requires the Secretary of
Health and Human Services to recommend legislation or promulgate regulations
governing privacy standards for individually identifiable health information and
creates a federal criminal offense for knowing disclosure or misuse of such
information. These statutes and regulations may require holders of such
information to implement security measures that may be of substantial cost to
the Company. There can be no assurance that changes to state or federal laws
would not materially restrict the ability of the Company to obtain patient
information originating from records. See '--Financial and Practice Management
Systems.'

EMPLOYEES

As of March 31, 1998, the Company had approximately 894 employees, of whom
35 are located at the Company's headquarters, 8 are located in the regional
offices and 851 are located at the Existing Practices. The Company believes that
its relations with its employees are satisfactory.

CORPORATE LIABILITY AND INSURANCE

The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. However, the Company does not influence or
control the practice of medicine by physicians or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
physicians and physician groups. As a result of the relationship between the
Company and the Practices, the Company may become subject to some medical
malpractice actions under various theories. There can be no assurance that
claims, suits or complaints relating to services and products provided by the
Practices will not be asserted against the Company in the future. The Company
maintains medical professional liability insurance and general liability
insurance for BMJ and certain of the Practices. In addition, pursuant to the
Management Services Agreements, the Practices are required to maintain
comprehensive professional liability insurance. The availability and cost of
such insurance has been affected by various factors, many of which are beyond
the control of the Company and the Practices. The cost of such insurance to the
Company and the Practices may have a material adverse effect on the Company. In
addition, successful malpractice or other claims asserted against the Practices
or the Company that exceed applicable policy limits would have a material
adverse effect on the Company.

ITEM 2. PROPERTIES

The Company has a five-year lease for its headquarters in Boca Raton,
Florida, which provides for annual lease payments of approximately $155,000.
This lease expires on March 31, 2003. In addition, the Company also has a lease
through November 2002, for its Western Region headquarters in Sherman Oaks,
California, which provides for annual lease payments of approximately $47,000.
In addition, in connection with the Affiliation Transactions, the Company
assumed leases for the facilities utilized by the respective Existing Practices
for aggregate annual lease payments of approximately $2.1 million as of March
31, 1998.

ITEM 3. LEGAL PROCEEDINGS

On August 15, 1997, an action entitled John Finlay v. Bone, Muscle & Joint,
Inc., was filed in the United States District Court for the Southern District of
Texas, whereby plaintiff asserted claims for breach of contract arising out of
an alleged employment agreement and alleged non-qualified stock option agreement
between

24
<PAGE>
plaintiff and the Company. Plaintiff's complaint sought compensatory damages of
approximately $135,000 pursuant to the alleged employment agreement as well as
16,071 shares of the Company's Common Stock pursuant to the alleged
non-qualified stock option agreement. On May 11, 1998, a Stipulation and Order
of Dismissal with Prejudice was entered in the United States District Court for
the Southern District of Texas pursuant to a settlement agreement dated as of
May 11, 1998 entered into by and between the Company and plaintiff.

On September 3, 1997, an action entitled Robert P. Lehmann, M.D., et al. v.
Bone, Muscle & Joint, Inc., et al., was filed. In this action, which is
currently pending in the United States District Court for the Southern District
of Texas, plaintiffs have asserted claims for breach of contract, common law
fraud and promissory estoppel arising out of an alleged restricted stock
purchase agreement between plaintiffs and the Company. Plaintiffs' amended
complaint seeks unspecified compensatory and exemplary damages as well as
specific performance for delivery of 117,860 shares of the Company's Common
Stock. The Company believes that each of the plaintiffs' claims is without
merit, and it intends to defend against the action vigorously.

The Company is subject to legal proceedings in the ordinary course of its
business. The Company does not believe that any such legal proceedings will have
a material adverse effect on the Company, although there can be no assurance to
this effect. In addition, the Company may become subject to certain pending
claims as the result of successor liability in connection with the assumption of
certain liabilities of the Practices; nevertheless, the Company believes that
the ultimate resolution of such additional claims will not have a material
adverse effect on the Company.

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

None.

25
<PAGE>
PART II

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

Dividend Policy

The Company has never paid or declared dividends on the Common Stock and
does not anticipate paying any dividends on the Common Stock in the foreseeable
future. Under certain loan agreements, the Company is prohibited from declaring
or paying any cash dividend or making distributions on the Company's Common
Stock, except pursuant to an employee repurchase plan or with the consent of its
lenders. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'

Price Range of Common Stock

The Company's Common Stock has traded on the Nasdaq National Market since
the Company's initial public offering (the 'IPO') on February 4, 1998. As of
June 22, 1998, there were approximately 200 holders of record of the Common
Stock. The Company believes the actual number of stockholders of the Common
Stock of the Company exceeds 300. The table below sets forth, for the periods
indicated, the high and low bid prices for the Company's Common Stock as
reported on the Nasdaq National Market. The closing price of the Common Stock as
reported on June 22, 1998 on the Nasdaq National Market was $4.75.

<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ----------------------------------------------------------------------------- ----- -----
<S> <C> <C>
Transition Period (February 4, 1998-
March 31, 1998)............................................................ $7.69 $6.31
First Quarter of Fiscal 1999
(through June 22, 1998).................................................... $8.75 $4.50
</TABLE>

Recent Sales of Unregistered Securities

The Company has sold certain of its securities in transactions exempt from
registration in reliance upon Section 4(2) of the Securities Act of 1933.

On March 31, 1998, the Company issued 3,118 shares of Common Stock to
Delphi Ventures III, L.P. for $.01 per share of Common Stock pursuant to the
exercise of certain warrants.

On March 14, 1998, the Company issued 19,403 shares of Common Stock to Rene
Lucas at a value of $7.38 per share of Common Stock in conjunction with a
Practice Affiliation.

On March 31, 1998, the Company issued 14,033 shares of Common Stock to
Delphi Ventures III, L.P. for $.01 per share of Common Stock pursuant to the
exercise of certain warrants.

On March 31, 1998, the Company issued 308 shares of Common Stock to Delphi
BioInvestments, III LP for $.01 per share of Common Stock pursuant to the
exercise of certain warrants.

On March 31, 1998, the Company converted its subordinated convertible
debentures into shares of Common Stock in the amount of 70,165; 1,263; 69,800;
1,629; 178,571; 178,571 and 71,429 to Delphi Ventures III, L.P., Delphi
BioInvestments, III LP, Oak Investment Partners VI LP, Oak IV Affiliates Fund,
H&Q Bone Muscle and Joint Investors, LP, H&Q Serv*IS and Naresh Nagpal,
respectively. See 'Management Discussion's and Analysis of Financial Condition
and Results of Operations.'

Change in Use of Proceeds

The Company registered 4,600,000 (including the overallotment option)
shares of Common Stock in connection with its IPO on a Registration Statement on
Form S-1 (Reg No. 333-35759), which went effective on February 4, 1998. In
addition, on March 4, 1998 the Underwriters exercised their overallotment option
and the Company issued an additional 600,000 shares of Common Stock. Total net
proceeds from the IPO were approximately $25.2 million. The IPO commenced on
February 4, 1998 at a price of $7.00 per share of Common Stock. The managing
underwriters were: Hambrecht & Quist, Raymond James & Associates, Inc. and Volpe

26
<PAGE>
Brown Whelan & Company, who received an underwriting discount of $.49 per share
of Common Stock. The data below reflects the use of proceeds from the IPO to the
date of this Transition Report on Form 10-K. All such proceeds were directly or
indirectly paid to others pursuant to Item 701(f)(4) of Regulation S-K:

<TABLE>
<S> <C>
Physician Notes............................................ $12,536,000
Subordinated Debt.......................................... 1,467,000
Secured Term Note.......................................... 2,500,000
Short-term Bridge Notes.................................... 3,375,000
Demand note to Company President........................... 1,000,000
-----------
$20,878,000
-----------
-----------
</TABLE>

In addition, certain additional proceeds were used for general working
capital purposes.

ITEM 6. SELECTED FINANCIAL INFORMATION

The following selected financial data with respect to the Company's
statements of operations for each of the years ended December 31, 1996 and 1997
and the three months ended March 31, 1998 and the balance sheets dated December
31, 1996 and 1997 and March 31, 1998, have been derived from the consolidated
financial statements of the Company which have been audited by Ernst & Young,
LLP, independent certified public accountants. The selected financial data
presented below for the three months ended March 31, 1997 is unaudited and was
prepared by management of the Company on the same basis as the audited financial
statements appearing elsewhere in this Transition Report on Form 10-K (the 'Form
10-K') and, in the opinion of management of the Company, include all adjustments
necessary to present fairly the information set forth therein. The results for
the three months ended March 31, 1998 are not necessarily indicative of the
results of a complete fiscal year or future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1997
----------------------- -----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
OPERATING DATA:
Practice revenues, net............................. $ 6,029 $ 64,676
Less: amounts retained by physician groups......... (2,912) (27,703)
-------- ----------
Management fee revenue............................. $ 3,117 $ 36,973
-------- ----------
-------- ----------
Net loss........................................... $(1,742) $ (31,573)
-------- ----------
-------- ----------
Net loss per common share.......................... $ (1.67) $ (4.97)
-------- ----------
-------- ----------
Weighted average number of common shares
outstanding--basic and diluted................... 1,043 6,351
-------- ----------
-------- ----------

DECEMBER 31,
-----------------------
1996
-----------------------
(IN THOUSANDS, EXCEPT
OTHER OPERATING DATA)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 1,439
Working capital.............................................................. 1,819
Total assets................................................................. 25,332
Long-term debt less current portion.......................................... 59
Total stockholders' equity................................................... 19,381

OTHER OPERATING DATA:
Number of practices.......................................................... 3
Number of physicians......................................................... 34

<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------

1997 1998
---------------------------- ----------------------------
(UNAUDITED)
<S> <C> <C>
OPERATING DATA:
Practice revenues, net............................. $ 8,656 $ 27,581

Less: amounts retained by physician groups......... (4,188) (12,892)

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

Management fee revenue............................. $ 4,468 $ 14,689

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

Net loss........................................... $ (1,191) $ (8,416)

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

Net loss per common share.......................... $ (.25) $ (.63)

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

Weighted average number of common shares
outstanding--basic and diluted................... 4,794 13,306

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

DECEMBER 31, MARCH 31,
1997 1998
---------------------------- ----------------------------
(in thousands, except other operating data)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 2,849 $ 9,483

Working capital.................................... 12,317 26,673

Total assets....................................... 84,153 93,220

Long-term debt less current portion................ 35,145 25,054

Total stockholders' equity......................... 34,088 56,087

OTHER OPERATING DATA:
Number of practices................................ 25 27

Number of physicians............................... 117 124

</TABLE>

27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the financial
statements and notes thereto of the Company included elsewhere in this Form
10-K. This Form 10-K contains forward-looking statements. Discussions containing
such forward-looking statements may be found in the material set forth below and
under 'Business,' as well as in this Form 10-K generally. Any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual events or results may differ materially from
those discussed in the forward-looking statements as a result of various factors
set forth in this Form 10-K generally.

OVERVIEW

The Company is principally a PPM that provides management services to the
Practices and the COSI ambulatory surgery center and also operates an IPA. The
Company focuses on musculoskeletal care, which involves the medical and surgical
treatment of conditions relating to bones, muscles, joints and related
connective tissues. The broad spectrum of musculoskeletal care offered by the
Practices ranges from acute procedures, such as spine or other complex
surgeries, to the treatment of chronic conditions, such as arthritis and back
pain. As of March 31, 1998, the Company had affiliated with 27 existing
Practices comprising 124 physicians practicing in Arizona, California, Florida,
Pennsylvania, New Jersey, Nevada and Texas by entering into Management Services
Agreements. The Company was incorporated in Delaware in January 1996 and
affiliated with its first Practice in July 1996. At December 31, 1996, the
Company had entered into Management Services Agreements with three Practices
comprising 34 physicians. During the year ended December 31, 1997, the Company
entered into additional Management Services Agreements with 22 Practices,
comprising 80 physicians and acquired the IPA with 42 physicians in Arizona.
During the three months ended March 31, 1998, the Company entered into
Management Services Agreements with 2 Practices comprising four physicians.
Additionally, the Company has added three physicians to the Existing Practices
since their initial affiliation. The Company has also facilitated the
combination, where appropriate, of certain solo practices into larger Existing
Practices. Through May 31, 1998, the Company has affiliated with a total of 31
practices comprising 136 physicians.

The total consideration generally paid to a Practice's physicians, once the
Practice has agreed to affiliate with the Company, is based on a multiple of the
Company's management fee plus the fair market value of the Practice's furniture,
fixtures and equipment and, subject to legal limitations regarding Medicare and
Medicaid receivables and the estimated net realizable value of its accounts
receivable. The consideration paid by the Company generally consists of the
Company's Common Stock, cash and the assumption of certain liabilities
(principally notes payable to financial institutions secured by receivables of
the Practice, which notes are repaid at the time the transaction is
consummated). In exchange for this consideration, the Practice enters into a
40-year Management Services Agreement with the Company.

Practice revenues, net represents the gross revenues of the affiliated
Practices, the IPA, and the COSI ambulatory surgery center reported at the
estimated realizable amounts from patients, third party payors and others for
services rendered, net of contractual and other adjustments. Contractual
adjustments typically result from the differences between the Practices'
established rates for services and the amounts paid by government sponsored
health care programs and other insurers. The Company estimates that
approximately 15%, 13%, 14% and 16% respectively, of practice revenues, net were
received under government sponsored health care programs (principally, the
Medicare and Medicaid programs) during the years ended December 31, 1996 and
1997, and the three months ended March 31, 1997 and 1998, respectively. The
Practices have numerous agreements with managed care and other organizations to
provide physician services based on negotiated fee schedules.

Laws and regulations governing Medicare and Medicaid programs are complex
and subject to interpretation. The Company believes that it is in compliance
with all applicable laws and regulations and is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing. While
no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory actions including fines, penalties and exclusion
from the Medicare and Medicaid programs. Management fee revenue primarily
represents practice revenues, net less amounts retained by the Practices
(consisting of amounts retained by the Practices, principally compensation and

28
<PAGE>
fees paid to physicians and other health care providers) which are paid to the
physicians pursuant to the Management Services Agreements. Under each Management
Services Agreement, the Company assumes responsibility for the management of the
non-medical operations of the Practice, employs substantially all of the
non-professional personnel utilized by the Practice and may provide the Practice
with the facilities and equipment used in its medical practice. The Company's
management fee revenue consists of four components: (i) a percentage of the
Practices' net collected revenues (generally ranging from 10% to 15%), plus (ii)
100% of the non-physician affiliated practice expenses (generally expected to
range from 45% to 55% of the Practices' net collected revenue), plus (iii)
66 2/3% of the cost savings the Company is able to achieve through its
purchasing power (generally related to medical malpractice insurance, property
and liability insurance, group benefits and certain major medical supplies) plus
(iv) a percentage of the profits from new ancillary services at the Practices.
The portion of the management fee revenue that represents a percentage of net
collected revenue is dependent upon the Practices' revenues which must be billed
and collected.

The Company's operating expenses consist primarily of the expenses incurred
in fulfilling its obligations under the Management Services Agreements. These
expenses include medical support services (principally clinic overhead expenses
that would have been incurred by the Practices, including non-professional
employee salaries, employee benefits, medical supplies, malpractice insurance
premiums, building and equipment rental and other expenses related to clinic
operations) and general and administrative expenses (personnel and
administrative expenses in connection with maintaining a corporate office
function that provides management, contracting, administrative, marketing and
development services to the Practices).

As the Company develops, acquires and operates additional Ancillary Service
Facilities such as ambulatory surgery centers, MRI diagnostic imaging centers
and rehabilitative therapy units, the mix and relationship of revenues and
operating expenses will differ from historical trends through March 31, 1998. It
is expected in the future that the revenues from these activities will become a
separate component of consolidated revenues in addition to management fee
revenue. It is also expected that the costs and expenses involved in the direct
operation of these facilities will be included in medical support services. The
impact of these activities on the mix of revenues and expenses cannot be
determined at this time.

The Company's future revenues and profitability are largely dependent upon
its ability to continue to affiliate with new Practices and develop Ancillary
Service Facilities. As a result of the Company's rapid growth, costs and
expenses exceeded management fee revenue due to the start-up nature of the
Company. The level of these costs and expenses are expected to continue to
increase as affiliations with additional Practices are achieved and the Company
adds to its management infrastructure.

On November 20, 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board reached a consensus concerning certain
matters relating to the physician practice management industry with respect to
the requirements which must be met to consolidate a managed professional
corporation and the accounting for business combinations involving professional
corporations. In accordance with the EITF's guidance, the Company will
discontinue use of the display method to report revenues from management
contracts in financial statements for periods ending after December 15, 1998.
Thus, after December 15, 1998, fees from management contracts will be reported
as a single line item in the Company's consolidated financial statements.

The Company changed its fiscal year from a calendar year to a year ending
on March 31, with such fiscal year change effective as of April 1, 1998.

29
<PAGE>
RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1997
----------------------- -----------------------
<S> <C> <C>
Practice revenues, net..................................................... 100.0% 100.0%
Less: amounts retained by physician groups................................. (48.3) (42.8)
---------- ----------
Management fee revenue..................................................... 51.7 57.2
Operating expenses and other expenses:
Medical support services................................................. 47.2 48.3
General and administrative............................................... 21.2 41.3
Depreciation and amortization............................................ 12.2 12.5
Interest expense......................................................... -- 3.9
---------- ----------
Total expenses........................................................ 80.6 106.0
---------- ----------
Net loss................................................................... (28.9)% (48.8)%
---------- ----------
---------- ----------
</TABLE>

Practice revenues, net. For the year ended December 31, 1996, practice
revenues, net was $6.0 million, arising from its initial affiliation transaction
on July 1, 1996 and two additional affiliation transactions on November 1, 1996
('the 1996 Affiliations'). For the year ended December 31, 1997, practice
revenue, net was $64.7 million, an increase of $58.7 million over 1996,
resulting from the Company's affiliation with 22 additional Practices comprising
80 physicians at various dates from April 1 through November 1, 1997. Also, in
October 1997, the Company acquired the IPA in a transaction accounted for as a
purchase.

Amounts retained by physician groups. Amounts retained by physician groups
for the year ended December 31, 1996 was $2.9 million, consisting of
compensation and fees paid to physicians and other health care providers by the
Practices pursuant to Management Services Agreements entered into on July 1,
1996 and November 1, 1996. For the year ended December 31, 1997, amounts
retained by physician groups was $27.7 million, an increase of $24.8 million
over 1996, resulting from the Company's affiliation with the additional 22
Practices pursuant to Management Services Agreements executed in 1997.

Management fee revenue. Management fee revenue for the year ended December
31, 1996 was $3.1 million as a result of the factors set forth above. For the
year ended December 31, 1997, management fee revenue was $37.0 million, an
increase of $33.9 million over 1996, as a result of the factors set forth above.

Medical support services. Medical support services, principally clinic
overhead expenses, was $2.8 million for the year ended December 31, 1996,
resulting from the 1996 Affiliations. For the year ended December 31, 1997,
medical support services was $31.2 million, an increase of $28.4 million of
1996, reflecting the effect of the 22 additional Management Services Agreements
executed in 1997.

General and administrative. General and administrative expenses for the
year ended December 31, 1996 was $1.3 million, reflecting the expenses incurred
in establishing a corporate office. These expenses consisted of labor costs,
group benefits, accounting, legal, rent and other expenses, substantially all of
which were incurred after July 1, 1996 (the date of the first Affiliation
Transaction). For the year ended December 31, 1997, general and administrative
expenses were $26.7 million, an increase of $25.4 million over 1996.
Approximately $4.9 million of the increase related to the Company's increased
development of corporate infrastructure to support the additional Affiliation
Transactions as well as the acquisition of the IPA in October 1996. The
remainder of the increase resulted primarily from equity-based and other
compensation expense related to physicians and employees and the expensing of
certain start-up costs. Approximately $13.5 million of the equity-based
compensation expense related to the recalculation provisions contained in the
SCOI and COSI Management Services Agreements and approximately $6.3 million of
the compensation expense related to

30
<PAGE>
employees, primarily related to the acceleration of the vesting of options
granted to certain employees. See Notes 3 and 7 in the Notes to Consolidated
Financial Statements. The Company also adopted the provisions of the Statement
of Position 'Reporting on the Cost of Start-Up Activities' which was promulgated
in February 1998, and, accordingly, included as expenses in 1997, $140,000 of
costs associated with the organization of the Company that were previously
capitalized.

While the Company expects that general and administrative expenses will
continue to increase as more Practices affiliate with the Company and the
Company continues to build its infrastructure, it also expects them to decline
as a percentage of both practice revenues, net and management fee revenue.

Depreciation and amortization. Depreciation and amortization for the year
ended December 31, 1996 was $737,000, substantially all of which was incurred
after July 1, 1996. The depreciation expense relates to acquired furniture,
fixtures and equipment and the amortization expense relates to Management
Services Agreements. For the year ended December 31, 1997, depreciation and
amortization was $8.1 million, an increase of $7.4 million over 1996, reflecting
the additional Affiliation Transactions entered into during 1997. The intangible
assets related to the Management Services Agreements are being amortized over
four years as a result of the vesting provisions contained in certain of the
Restricted Stock Agreements relating to Common Stock which was issued by the
Company to physicians in connection with the Affiliation Transactions. The
Company entered into amendments to substantially all of the Restricted Stock
Agreements as of April 1, 1998 to eliminate the vesting provisions related to
these shares of Common Stock. See 'Three Months Ended March 31, 1997 Compared to
the Three Months Ended March 31, 1998' for further discussion. Although the
Company's net unamortized balance of intangible assets acquired ($46.9 million
at December 31, 1997) is not considered to be impaired at December 31, 1997, any
future determination that a significant impairment has occurred would require
the write-off of the impaired portion of unamortized intangible assets, which
could have a material adverse effect on the Company's results of operations.

Interest expense. Interest expense for the year ended December 31, 1997 was
$2.6 million, resulting from borrowings related to the Affiliation Transactions.
The Company expects to continue to incur interest expense primarily as a result
of borrowings primarily related to anticipated future affiliations.

Net loss. The net loss for the year ended December 31, 1996 was $1.7
million, or $1.67 per share of Common Stock, as a result of the factors set
forth above. The net loss for the year ended December 31, 1997 was $31.6
million, or $4.97 per share of Common Stock as a result of the factors set forth
above.

THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998

The following table sets forth the percentages of the Practices' revenue
represented by certain items reflected in the Company's consolidated statements
of operations. As a result of the Company's limited period of existence and
affiliation with the Practices, the Company does not believe that comparisons
between periods and percentage relationships within the periods set forth below
are meaningful.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1997
-------------------------------
(UNAUDITED)
<S> <C>
Practice revenues, net............................................. 100.0%
Less: amounts retained by physician groups......................... (48.4)
------
Management fee revenue............................................. 51.6
Operating expenses and other expenses:
Medical support services......................................... 38.7
General and administrative....................................... 17.1
Depreciation and amortization.................................... 9.6
Interest expense................................................. --
------
Total expenses................................................ 65.4
------
Net loss........................................................... (13.8)
------
------

<S> <C>
Practice revenues, net............................................. 100.0%
Less: amounts retained by physician groups......................... (46.7)
------
Management fee revenue............................................. 53.3
Operating expenses and other expenses:
Medical support services......................................... 43.7
General and administrative....................................... 22.8
Depreciation and amortization.................................... 13.1
Interest expense................................................. 4.2
------
Total expenses................................................ 83.8
------
Net loss........................................................... (30.5)
------
------
</TABLE>

31
<PAGE>
Practices revenues, net. For the three months ended March 31, 1997,
practice revenues, net was $8.7 million compared to $27.6 million for the three
months ended March 31, 1998. The significant increase was the result of the
Company reflecting revenues from the 1996 Affiliations for the three months
ending March 31, 1997 compared to the Company reflecting revenues from a total
of 27 Affiliations for the three months ending March 31, 1998. Additionally, the
Company also reflected revenues from its IPA for the three months ending March
31, 1998.

Amounts retained by physician groups. For the three months ended March 31,
1997, amounts retained by physician groups was $4.2 million compared to $12.9
million for the three months ended March 31, 1998. The significant increase was
the result of the Company reflecting revenues from the 1996 Affiliations for the
three months ending March 31, 1997 compared to the Company reflecting revenues
from a total of 27 Affiliations for the three months ending March 31, 1998.

Management fee revenue. For the three months ended March 31, 1997,
management fee revenue was $4.5 million compared to $14.7 million for the three
months ended March 31, 1998. The $10.2 million increase was a result of the
factors set forth above.

Medical Support services. For the three months ended March 31, 1997,
medical support services, principally clinic overhead expenses, was $3.4 million
compared to $12.1 million for the three months ended March 31, 1998. The $8.7
million increase was a result of the factors set forth above.

General and administrative. General and administrative expenses for the
three months ended March 31, 1997 was $1.5 million, as compared to $6.3 million
for the three months ended March 31, 1998. Approximately $3.9 million of the
increase related primarily to (i) loan fees and debt payment penalties related
to borrowings to fund acquisitions and payoffs of debt with proceeds from the
IPO of Common Stock of the Company; (ii) equity-based compensation expense
related to stock options issued to physicians and employees; and (iii) the
expensing of certain start-up costs. The remaining increase primarily relates to
the Company's increased development of infrastructure to support additional
Affiliations.

Depreciation and amortization. Depreciation and amortization for the three
months ended March 31, 1997 was $832,000, as compared to $3.6 million for the
three months ended March 31, 1998. The depreciation expense relates to acquired
furniture, fixtures and equipment and the amortization expense relates to
Management Services Agreements. The increase related to the additional
Affiliation Transactions entered into during 1997 and the three months ended
March 31, 1998. The intangible assets related to the Management Services
Agreements were being amortized over four years as a result of the vesting
provisions contained in the Restricted Stock Agreements relating to Common Stock
which was issued by the Company to physicians in connection with the Affiliation
Transactions. As of April 1, 1998, the Company amended and restated
substantially all of its Restricted Stock Agreements to eliminate the vesting
provisions related to these shares of Common Stock. The Company revised the
estimated useful lives of its Management Services Agreements and is amortizing
the remaining balances of the Management Services Agreements over periods
ranging from 7 to 25 years. Consequently, the amortization expense related to
the Affiliated Practices will decrease in the future; however, the Company
expects that depreciation and amortization expense levels will continue to
increase as additional Practices affiliate with the Company. The depreciation
and amortization expense, based on amortization periods ranging from 7 to 25
years, is expected to remain relatively constant as a percentage of both
practice revenue and management fee revenue. Although the Company's net
unamortized balance of intangible assets acquired ($45.1 million at March 31,
1998) is not considered to be impaired at March 31, 1998, any future
determination that a significant impairment has occurred would require the
write-off of the impaired portion of unamortized intangible assets, which could
have a material adverse effect on the Company's results of operations.

Interest expense. No interest expense was recorded for the three months
ended March 31, 1997, compared to $1.2 million of interest expense for the three
months ended March 31, 1998. This increase related to borrowings related to the
Affiliation Transactions. The Company expects to continue to incur interest
expense primarily as a result of borrowings related to anticipated future
affiliations. In February and March 1998, the Company

32
<PAGE>
completed the sale of 4.6 million shares of Common Stock in the IPO at $7.00 per
share of Common Stock (including shares issued pursuant to the exercise of the
underwriters' overallotment option), raising approximately $25.2 million in net
proceeds after offering costs. See '--Liquidity and Capital Resources' for a
discussion of the use of proceeds. The Company expects to continue to incur
interest expense as it expects to obtain capital through borrowings to fund
Practice Affiliations.

Net loss. The net loss for the three months ended March 31, 1997 was $1.2
million, or $.25 per share of Common Stock, as a result of the factors set forth
above. The net loss for the three months ended March 31, 1998 was $8.4 million,
or $.63 per share of Common Stock as a result of the factors set forth above.

Impact of Year 2000. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any computer programs that have time-sensitive software may recognize a date
using '00' as the year 1900 rather than the year 2000. This could result in
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions in a timely manner. As
part of the Company's organization and development, the software purchased and
installed to date, as well as the software under evaluation for future purchase
and installation, is Year 2000 compliant. The Company is in the process of
initiating formal communication with all of the significant payors and
third-party insurers of its affiliated practices to determine the extent to
which the interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. There is no assurance the systems of other
companies on which the Company's systems rely or interface will be timely
converted and would not have an adverse effect on the Company's operations or
cash flows.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, December 31, 1997 and March 31, 1998, the Company had
$1.8 million, $12.3 million and $26.6 million, respectively, in working capital
and $1.4 million, $2.8 million and $9.5 million, respectively, in cash and cash
equivalents. The Company's principal sources of liquidity as of December 31,
1996, December 31, 1997 and March 31, 1998 consisted of cash and cash
equivalents of $1.4 million, $2.8 million and $9.5 million and accounts
receivable of $5.8 million, $23.2 million and $25.8 million, respectively.

The Company has financed its Affiliation Transactions, capital expenditures
and working capital needs since its inception through a combination of (i)
private placements of capital stock; (ii) borrowings from institutional lenders;
(iii) short-term borrowings from stockholders; and (iv) issuance of promissory
notes to certain physicians.

For the years ended December 31, 1996 and 1997, cash used in operations was
$1.0 million and $4.2 million, respectively, an increase of $3.2 million,
resulting primarily from net operating losses adjusted for non-cash expenses.
For the three months ended March 31, 1997 and March 31, 1998 cash used in
operations was $3.3 million and $6.9 million respectively, an increase of $3.6
million resulting primarily from net operating losses adjusted for non-cash
expenses.

Cash used in investing activities for the years ended December 31, 1996 and
1997 was $4.6 million and $28.4 million, respectively, an increase of $23.8
million, relating primarily to Affiliation Transactions resulting in increases
in intangible assets, accounts receivable and furniture, fixtures and equipment.
Cash used in investing activities for the three months ended March 31, 1997 and
1998, was $116,000 and $671,000, respectively, an increase of $555,000 relating
primarily to Affiliation Transactions resulting in increases in intangible
assets, accounts receivable, and furniture, fixtures and equipment.

Cash provided by financing activities for the years ended December 31, 1996
and 1997 was $7.1 million and $33.9 million, an increase of $26.8 million
respectively. For the year ended December 31, 1996, substantially all of the
cash provided resulted from proceeds from the issuance by the Company of two
series of preferred stock. For the year ended December 31, 1997, cash provided
by financing activities resulted primarily from $28.5 million in net borrowings
including $5.4 million from stockholders and $5.2 million in proceeds from the
issuance of three series of preferred stock. Cash provided by financing
activities for the three months ended March 31, 1997 and 1998 was $2.6 million
and $14.3 million, respectively, an increase of $11.7 million. For the three
months ended March 31, 1997, substantially all of the cash provided by financing
activities resulted from

33
<PAGE>
proceeds from the issuance of stockholder notes payable and a certain issuance
of preferred stock. For the three months ended March 31, 1998, substantially all
of the cash provided by financing activities resulted from the Company's IPO of
4.6 million shares at $7.00 per share, resulting in gross proceeds of $32.2
million. The Company utilized $7.3 million of cash proceeds from the IPO to pay
certain costs related to its IPO. The Company also paid off $2.0 million of
stockholder notes and $19.4 million of other borrowings during the three months
ended March 31, 1998.

In January 1997, the Company obtained short-term loans in the aggregate
amount of $999,999 from certain stockholders, including its President. In
connection with such loans, the Company issued warrants to such stockholders to
purchase an aggregate of 23,810 shares of Common Stock at an exercise price of
$4.20 per share which are immediately exercisable for a period of five years.
The fair value of the warrants based on the Black-Scholes valuation method is
$2.30 per share. In June 1997, such loans and related accrued interest were
converted into 188,072 shares of Series D Preferred Stock. Each share of Series
D Preferred Stock was converted into .7143 shares of Common Stock in connection
with the IPO. Also, in January 1997, the Company issued two promissory notes to
the Company's President totaling $867,000. The notes plus accrued interest were
converted to a single demand note in the amount of $991,000, which bears
interest at a rate of prime plus 3.5%.

From March 31, 1997 to March 31, 1998, the Company entered into a series of
credit agreements with its senior lender secured by the accounts receivable
acquired from each of the affiliated physician groups (the 'Senior Credit
Agreement'). Under the Senior Credit Agreement the Company could borrow up to an
aggregate limit of $23.0 million, subject to a borrowing base of 85% of eligible
accounts receivable. From March 31, 1997 through December 31, 1997, the rate of
interest on outstanding loans under the Senior Credit Agreement was the prime
rate plus 1.75% (10.25% at December 31, 1997). From December 31, 1997 and
thereafter, interest was at the prime rate. Such loans had original maturity
dates ranging from March 1999 to December 1999. The Senior Credit Agreement and
loans made in connection therewith required the Company to maintain a prescribed
level of tangible net worth and interest coverage and placed limitations on
indebtedness, liens and investments, and prohibited the payment of dividends. At
December 31, 1997 and March 31, 1998, $6.1 million and $7.9 million,
respectively, were outstanding under the Senior Credit Agreement, the maximum
allowable under the borrowing base restriction.

On June 30, 1997, the Company obtained a senior credit facility (the
'Senior Credit Facility') to fund practice affiliations with its senior lender
secured by a lien on substantially all of the assets of the Company. Under the
Senior Credit Facility, the Company could borrow up to $3.3 million for practice
affiliations, of which $3.3 million was outstanding as of December 31, 1997 and
March 31, 1998. Outstanding loans under the Senior Credit Facility bore interest
at the prime rate plus 3.5% (12% at December 31, 1997 and March 31, 1998).
Interest only was payable through March 31, 1998, at which time the loan
converted to a term loan repayable in 36 monthly installments. The Senior Credit
Facility contained various covenants including the right of the lender to
declare the loan due and payable upon the occurrence of a material adverse
change in the financial condition or business prospects of the Company. In
addition, in September 1997, the Company issued the senior lender a warrant to
purchase 28,570 shares of the Company's Common Stock for nominal cash
consideration. The warrant contained put rights which were exercised during the
three months ended March 31, 1998. The value of the put rights is being
amortized over the life of the related debt. Under the Senior Credit Facility,
$1.5 million of the Company's obligations were guaranteed by the Company's
President and certain other stockholders, and in connection therewith, the
Company issued warrants exercisable for a period of five years to the guarantors
of such obligations to purchase an aggregate of 9,525 shares of Common Stock for
nominal cash consideration. The fair value of the warrant based on the
Black-Scholes valuation method is $8.39 per share.

On August 1, 1997 and August 22, 1997, the Company entered into
subordinated loan agreements, with two different lenders, in the principal
amounts of $5.0 million ('Comdisco') and $1.5 million ('Cedar'), respectively.
On November 14, 1997, Comdisco provided an additional $1.0 million of financing
under an additional subordinated loan agreement (collectively, the 'Subordinated
Loan Agreements'). The Subordinated Loan Agreements were secured by liens on all
of the Company's tangible and intangible personal property. The loans had an
original maturity date of December 31, 2000, however, within 45 days subsequent
to the effective date of the IPO, the Company was obligated to prepay the loans
in full (amended with respect to Comdisco to June 30, 1998 and paid off within
the 45 days requirement with respect to Cedar). These Subordinated Loan
Agreements and the liens granted to Comdisco and Cedar were subordinated in all
respects to the current and

34
<PAGE>
future indebtedness of the Company under the Senior Credit Facility. The
Subordinated Loan Agreements initially provided for interest at 14% per annum,
which increased to 15% on January 1, 1998.

In connection with the Subordinated Loan Agreements, the Company issued
warrants to purchase up to 125,000 and 37,500 shares to Comdisco and Cedar,
respectively, of the Company's Series E Preferred Stock at a price per share
equal to $6.00. As the IPO was not effective by December 31, 1997, the warrants
increased to 133,000 and 40,000 to Comdisco and Cedar, respectively. These
warrants are immediately exercisable for a period of 10 years or 5 years,
respectively, from the effective date of the IPO. The fair value per warrant
based on the Black-Scholes valuation method is $3.77 per share. In addition,
pursuant to certain stock purchase agreements dated as of July 31, 1997 and
August 18, 1997, the Company issued 166,667 and 41,667 shares, respectively, of
Series E Preferred Stock to the lenders for an aggregate purchase price of $1.3
million. Each share of Series E Preferred Stock was converted into .7143 shares
of Common Stock in connection with the IPO. The Cedar loan was repaid in
February 1998.

In connection with the Subordinated Loan Agreement entered into on August
1, 1997 with Comdisco, the Company entered into a certain additional agreement
(the 'Master Lease Agreement') with Comdisco whereby Comdisco agreed to purchase
and lease certain equipment to the Company on the terms and conditions of the
Master Lease Agreement. In connection with the Master Lease Agreement, the
Company issued to Comdisco certain warrants to purchase up to 3,571 shares of
Common Stock of the Company at an exercise price per share of $8.40. In November
1997, the commitment under the Master Lease Agreement was increased from $1.0
million to $1.5 million and certain additional warrants were issued to purchase
7,143 shares of Common Stock of the Company at an exercise price per share of
$8.40. The current availability under the Master Lease Agreement is $1.5
million.

On September 9, 1997, the Company issued and sold $4.0 million in aggregate
principal amount of its subordinated convertible debentures due August 31, 2000
(the 'Debentures') pursuant to the Convertible Debenture Purchase Agreement,
dated as of September 9, 1997 (the 'Debenture Purchase Agreement'). The
Debentures were purchased by the Company's President, certain stockholders and
certain of the Company's underwriters. Pursuant to the terms of the Debenture
Purchase Agreement, the Debentures were subordinated in right of payment to all
indebtedness of the Company under the loans described above. Interest on the
Debentures was payable semi-annually at a rate of 6% per annum with the unpaid
principal amount due on August 31, 2000. The Debentures were converted into
Common Stock as of March 31, 1998.

On October 14, 1997, the Company obtained short-term financing in the form
of a secured term note from its senior lender, to fund practice affiliations in
an aggregate amount of $2.5 million. The note was secured by a lien on
substantially all of the assets of the Company. Outstanding loans bore interest
at the prime rate plus 3.5% (12% at December 31, 1997). Interest only was
payable through December 31, 1997 and the entire principal amount was originally
due and payable on January 1, 1999. The principal amounts and accrued interest
were repaid in February 1998. In connection with this loan agreement, the
Company paid to the lender a fee in the amount of $300,000 at the time of the
repayment of the loan.

On October 15, 1997, the Company obtained short-term bridge financing in
the aggregate amount of $3.4 million from certain stockholders, including its
President, to fund practice affiliations. In connection with these loans, the
Company issued warrants to such stockholders to purchase an aggregate of 48,215
shares of Common Stock at an exercise price of $0.01 per share which are
immediately exercisable for a period of 5 years. The fair value per warrant
based on the Black-Scholes valuation method is $8.39 per share. Outstanding
loans bore interest at the prime rate plus 3.5%. (12% at December 31, 1997). The
principal amounts and accrued interest were repaid in February 1998.

During October and November 1997, in connection with several practice
affiliations, the Company issued promissory notes that in the aggregate totalled
$12.9 million (the 'Physician Notes'). These outstanding promissory notes bore
interest ranging from 6% to 11%. Substantially all of the Physician Notes were
due and payable either on the date of the Company's completion of the IPO or at
various maturity dates ranging from January 2, 1998 to March 31, 1998. These
notes were repaid during the three months ending March 31, 1998, with the
exception of one Physician Note in the amount of $373,000.

35
<PAGE>
On October 15, 1997, the Company issued to its President a warrant to
purchase 23,214 shares of Common Stock at an exercise price of $.01 per share.
The warrant is exercisable for a period of five years. The fair value of the
warrant based on the Black-Scholes valuation method is $8.39 per share.

On January 2, 1998, the Company obtained short-term financing in the form
of a demand note from its President in the amount of $1.0 million to repay
certain of the Physician Notes. In connection with this loan, the Company issued
a warrant to the President to purchase 14,286 shares of Common Stock at an
exercise price of $0.01 per share. The demand note bore interest at 8% per
annum. The fair value of the warrants based on the Black-Scholes valuation
method is $8.39 per share. The total value of the warrants, $120,000, was
charged to expense in the three months ended March 31, 1998. The warrant is
immediately exercisable for a period of 5 years. This note was repaid in
February 1998.

On March 26, 1998 the Company obtained additional short-term financing in
the form of a secured term note from its senior lender in the aggregate amount
of $7.0 million to fund acquisitions and additional practice affiliations. The
note was secured by a lien on substantially all the assets of the Company. The
outstanding loans bore interest at the prime rate plus 4% (12.5% at March 31,
1998). Interest only was payable monthly and the entire principal amount was due
June 29, 1998. On April 9, 1998 the Company borrowed an additional $2.5 million
increasing this term note to $9.5 million.

Included in other assets in the accompanying consolidated balance sheet as
of December 31, 1997 and March 31, 1998 are deferred financing costs related to
warrants issued in connection with certain borrowings. Such costs are being
amortized over the applicable life of the related debt. Of these amounts
approximately $1.0 million was charged to expense in the three months ended
March 31, 1998 in connection with the completion of the IPO and the repayment or
conversion of indebtedness.

Under the terms of the Senior Credit Agreement, the Senior Credit Facility,
the Subordinated Loan Agreement and the Subordinated Convertible Debentures, the
Company is prohibited from declaring or paying any cash dividend or making any
distribution on any class of stock, except pursuant to an employee repurchase
plan or with the consent of the lender.

On February 9, 1998, the Company completed the IPO, and a portion of the
proceeds which were used to repay the following borrowings:

<TABLE>
<S> <C>
Promissory notes to physicians............................. $12,536,000
Subordinated debt.......................................... 1,467,000
Secured term note.......................................... 2,500,000
Short-term bridge notes.................................... 3,375,000
Demand note to Company President........................... 1,000,000
-----------
$20,878,000
-----------
-----------
</TABLE>

Certain additional proceeds were used for general corporate purposes.

In March 1998, the Company had commitments totaling $2.75 million for
construction of two ambulatory surgery centers, of which approximately $700,000
had been paid as of March 31, 1998. The Company also had contractual commitments
totaling approximately $1.3 million for information systems.

In April 1998, the Company issued in the aggregate amount of $2.3 million
of convertible promissory notes (the 'Convertible Notes') in conjunction with
three Practice Affiliations. The Convertible Notes bear interest at 5% and are
convertible into shares of Common Stock at a conversion rate of $8.75 on any
unpaid principal amounts at the option of the holder after one year from the
affiliation date subject to maturity over a period of four years.

On June 30, 1998 the Company refinanced its Senior Credit Agreement, Senior
Credit Facility and its Subordinated Loan Agreement with Comdisco with proceeds
from a $60.0 million credit facility consisting of a $10.0 million revolving
line of credit (the 'Revolving Loans'), $25.0 million term note (the 'Tranche B
Loan') and a $25.0 million acquisition line of credit which all amounts
outstanding at June 30, 2000 will convert to a term loan (the 'Tranche A Loan')
(collectively referred to as the "Credit Facility"). The Credit Facility is

<PAGE>
secured by substantially all of the assets of the Company and is supported by
guarantees of the subsidiaries of the Company.

Under the Revolving Loans, the Company may borrow up to $10.0 million
subject to a borrowing base equal to 80% of the product of eligible accounts
receivable multiplied by the collection rate (each as defined in the Credit
Facility). The Revolving Loans have a maturity of June 30, 2001 (the Revolving
Loans may be extended for two one-year terms at the discretion of the revolving
lender) and interest is payable quarterly and, at the option of the Company,
would equal (a) a function of the greater of 0.50% plus the Federal Funds Rate
or the prime lending rate plus a margin ranging from .0%-1.25% based on the
Company's leverage ratio or (b) the LIBOR rate plus a margin ranging from
1.75%-3.00% based on the Company's leverage ratio (each such rate the 'Interest
Rate').

Under the Tranche A Loans, the Company may borrow up to $25.0 million
through June 30, 2000 for qualified acquisitions and practice affiliations (as
defined in the Credit Facility). The Tranche A Loans are payable in quarterly
installments (assuming the entire amount is borrowed) of (a) $1.25 million
beginning September 30, 2000 through June 30, 2001; (b) $1.88 million from
September 30, 2001 through June 30, 2002 and (c) $3.1 million from September 30,
2002 through March 31, 2003 with the remaining unpaid balance due and payable on
June 30, 2003. Interest is payable quarterly at rates equal to the Interest
Rate.

The Tranche B Loan is payable $62,500 quarterly through June 30, 2001;
$312,000 quarterly from September 30, 2001 through June 30, 2003; $5.4 million
quarterly through March 31, 2004 with any unpaid balance due on June 30, 2004.
Interest on the Tranche B Loan is payable quarterly, varies, at the option of
the Company and would equal (a) a function of the greater of 0.50% plus the
Federal Funds Rate or the prime lending rate (8.5% at June 24, 1998) plus a
margin ranging from .75%-1.50%, based on the Company's leverage ratio (as
defined in the Credit Facility) or (b) the LIBOR rate (approximately 5.5% at
June 24, 1998) plus a margin ranging from 2.5%-3.25% based on the Company's
leverage ratio.

Under the terms of the Credit Facility, the Company may be required to make
mandatory annual prepayments beginning in 2002 in an amount equal to 50% of
Excess Cash Flow (as defined in the Credit Facility). The Company is also
required to meet certain covenants, including (a) the maintenance of certain
fixed charge, interest coverage and leverage ratios, (b) the maintenance of a
minimum level of EBITDA and tangible net worth (as defined in the Credit
Facility) and (c) limitations on capital expenditures. The Credit Facility also
prohibits, with certain exceptions, the Company from paying cash dividends.

After giving effect to the Credit Facility, the Company's indebtedness that
was refinanced has been classified as long term debt in the accompanying
financial statements. The Company expects to incur charges and expenses of
approximately $2.7 million in connection with the repayment and early
extinguishment of such debt, which will be recognized in the quarter ending June
30, 1998.

Under the terms of the Credit Facility the Company has the right to request
letters of credit in an aggregate amount not to exceed $2.0 million and with a
term not to exceed one year from the date of issuance.

In connection with the Credit Facility, the Company issued, pursuant to a
securities purchase agreement (the 'Purchase Agreement'), a new Series A
Redeemable Convertible Preferred Stock (the 'Series A') to an affiliate of its
agent bank in exchange for cash of $7.0 million. This Series A is convertible
into 1,473,684 shares of Common Stock. The Series A carries a 6% cumulative
dividend that is payable in cash. Pursuant to the Purchase Agreement, the
Company will issue an additional $3.0 million of Series C Redeemable Convertible
Preferred Stock (the 'Series C') for cash if, among other things, the Company is
able to obtain $18.0 million in annualized pro forma revenues from new Practice
Affiliations by July 31, 1998. The Series C, if issued, is substantially
identical to the Series A and is also convertible into Common Stock; the number
of shares of Common Stock to be issued upon conversion is subject to certain
future factors and accordingly, cannot be determined at this time. In addition,
pursuant to the Purchase Agreement, the investor obtained the right to nominate
one member to the Board of Directors of the Company and certain other rights.

Additionally, if the Company is unable to obtain $26.5 million in annual
pro forma revenues from new practice affiliations by September 8, 1998, as
defined in the Purchase Agreement, the Company may be required to issue up to an
aggregate of 1,051,449 additional warrants to purchase Common Stock (assuming
the Company does not issue the Series C). If the Company does not complete an
effective registration statement to cover the

37
<PAGE>

underlying shares of its Common Stock issued pursuant to the Purchase Agreement
by September 29, 1998, the Company will be required to issue additional warrants
to purchase Common Stock. The potential obligations for the warrants described
above are based on certain future targets and accordingly the actual amount of
warrants that may be issued pursuant to the Purchase Agreement cannot be
determined at this time.

The Series A and Series C are subject to redemption upon certain events
including, but not limited to, a change in control of the Company or seven years
from the date of the original issuance. However, as long as the Credit Facility
is in place the redemption by the holder of the Series A and Series C is
prohibited. If the Series A and Series C have not been converted five years
subsequent to the date of issuance, the holder will receive increased
participation on the Board of Directors, the dividend rate will increase to 12%
and the Company may be required to issue additional warrants to purchase Common
Stock.

The Series A and the Series C, if issued, are subject to anti-dilution
provisions which may ultimately decrease the conversion price resulting in the
issuance of additional shares of Common Stock upon the conversion of the Series
A and Series C.

The Company's affiliation and expansion programs will require substantial
capital resources. In addition, the operations and expansion of the Existing
Practices, including the addition of Ancillary Service Facilities, and the IPA
will require ongoing capital expenditures. The financing of future affiliations,
business expansion and ongoing operations is anticipated to be provided by a
combination of the Credit Facility, the Master Lease Agreement and cash flows
from operations. In addition, the Company's short term liquidity is also
affected by the amounts and timing of collections received on accounts
receivable balances. No assurance can be given that the collections will be
received on a timely basis or in amounts sufficient to meet the short term
liquidity needs of the Company. See 'Business--BMJ Operations--Financial and
Practice Management Systems.' The Company believes that the combination of the
Credit Facility, the Master Lease Agreement and cash flows from operations will
be sufficient to meet its currently anticipated operating and capital
expenditure requirements and working capital needs through March 1999. In order
to meet its affiliation and expansion goals as well as its long-term liquidity
needs, the Company expects to incur, from time to time, additional short-term
and long-term indebtedness and to issue additional debt and equity securities,
the availability and terms of which will depend upon market and other
conditions; and thus, no assurance can be given that such financing sources will
be available on terms acceptable to the Company.

REIMBURSEMENT RATES

The health care industry is experiencing a trend toward cost containment as
payors seek to improve lower reimbursement and utilization rates with providers.
Further reductions in payments to health care providers or other changes in
reimbursement for health care services could adversely affect the Practices with
which the Company is affiliated and adversely affect the Company's results of
operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<S> <C>
Report of Independent Certified Public Accountants............................................. 40

Consolidated Balance Sheets at December 31, 1996 and 1997 and March 31, 1998................... 41

Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1997 and for
the Three Months Ended March 31, 1997 (unaudited) and 1998................................... 42

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996 and 1997
and for the Three Months Ended March 31, 1998................................................ 43

Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1997 and for
the Three Months Ended March 31, 1997 (unaudited) and 1998................................... 44

Notes to Consolidated Financial Statements..................................................... 45
</TABLE>

39
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
BMJ Medical Management, Inc.

We have audited the accompanying consolidated balance sheets of BMJ Medical
Management, Inc. and subsidiaries (the Company) as of December 31, 1996,
December 31, 1997, and March 31, 1998, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the two years ended
December 31, 1997 and the three month period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of BMJ
Medical Management, Inc. and subsidiaries at December 31, 1996, December 31,
1997, and March 31, 1998, and the consolidated results of their operations and
their cash flows for the two years ended December 31, 1997 and the three month
period ended March 31, 1998, in conformity with generally accepted accounting
principles.

ERNST & YOUNG, LLP

West Palm Beach, Florida
June 12, 1998, except for
Note 10, as to which the date
is June 30, 1998

40
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 1,439,000 $ 2,849,000 $ 9,483,000
Accounts receivable............................................... 5,817,000 23,222,000 25,794,000
Prepaid expenses and other current assets......................... 29,000 157,000 539,000
Due from physician groups, net.................................... 426,000 721,000 2,250,000
----------- ----------- -----------
Total current assets........................................... 7,711,000 26,949,000 38,066,000
Furniture, fixtures and equipment, net.............................. 2,142,000 5,372,000 7,948,000
Management services agreements and other intangible assets, net of
accumulated amortization of $663,000 at December 31, 1996,
$8,023,000 at December 31, 1997, and $11,362,000 at March 31,
1998.............................................................. 15,447,000 46,878,000 45,064,000
Other assets........................................................ 32,000 4,954,000 2,142,000
----------- ----------- -----------
Total assets........................................................ $25,332,000 $84,153,000 $93,220,000
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 149,000 $ 2,079,000 $ 1,706,000
Accrued expenses.................................................. 366,000 4,050,000 6,858,000
Interest payable.................................................. -- 640,000 520,000
Accrued salaries and benefits..................................... 383,000 2,474,000 2,159,000
Due to physician groups, net...................................... 4,936,000 -- --
Shareholder notes payable......................................... 40,000 991,000 --
Current portion of long-term debt................................. 18,000 4,398,000 188,000
----------- ----------- -----------
Total current liabilities...................................... 5,892,000 14,632,000 11,431,000
Long-term debt, less current portion................................ 59,000 20,452,000 17,929,000
Short term debt expected to be refinanced........................... -- 14,693,000 7,125,000
Minority interest................................................... -- 288,000 648,000

Commitments and contingencies

Stockholders' equity:
Convertible preferred stock....................................... 30,000 42,000 --
Common stock, $0.001 par value--15,000,000 shares authorized,
4,787,000 shares issued and outstanding at December 31, 1996;
25,000,000 shares authorized, 9,179,000 shares issued and
outstanding at December 31, 1997; 35,000,000 shares authorized,
17,384,000 shares issued and outstanding at March 31, 1998..... 5,000 9,000 17,000
Additional paid-in capital........................................ 21,088,000 67,352,000 97,801,000
Accumulated deficit............................................... (1,742,000) (33,315,000) (41,731,000)
----------- ----------- -----------
Total stockholders' equity.......................................... 19,381,000 34,088,000 56,087,000
----------- ----------- -----------
Total liabilities and stockholders' equity.......................... $25,332,000 $84,153,000 $93,220,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

See accompanying notes.

41
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------------- ---------------------------
1996 1997 1997 1998
----------- ------------ ----------- ------------
(UNAUDITED)

<S> <C> <C> <C> <C>
Practice revenues, net.............................. $ 6,029,000 $ 64,676,000 $ 8,656,000 $ 27,581,000
Less: amounts retained by physician groups.......... (2,912,000) (27,703,000) (4,188,000) (12,892,000)
----------- ------------ ----------- ------------
Management fee revenue.............................. 3,117,000 36,973,000 4,468,000 14,689,000
Operating expenses:
Medical support services.......................... 2,844,000 31,215,000 3,352,000 12,053,000
General and administrative........................ 1,278,000 26,712,000 1,475,000 6,275,000
Depreciation and amortization..................... 737,000 8,068,000 832,000 3,615,000
----------- ------------ ----------- ------------
Total operating expenses............................ 4,859,000 65,995,000 5,659,000 21,943,000
----------- ------------ ----------- ------------
Operating loss...................................... (1,742,000) (29,022,000) (1,191,000) (7,254,000)
Other expenses:
Interest expense.................................. -- 2,551,000 -- 1,162,000
----------- ------------ ----------- ------------
Net loss............................................ $(1,742,000) $(31,573,000) $(1,191,000) $ (8,416,000)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Net loss per share--basic and diluted............... $ (1.67) $ (4.97) $ (.25) $ (.63)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Weighted average number of common shares
outstanding--basic and diluted.................... 1,043,000 6,351,000 4,794,000 13,306,000
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>

See accompanying notes.

42
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
NUMBER OF PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
SHARES STOCK STOCK STOCK STOCK STOCK
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception (January 16,
1996).................................. $ -- $ -- $ -- $ -- $ --
Initial issuance of convertible
preferred stock........................ 3,000,000 10,000 20,000 -- -- --
Issuance of common
stock.................................. 839,285 -- -- -- -- --
Issuance of common stock in connection
with practice affiliation agreements... 3,947,497 -- -- -- -- --
Net loss................................ -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1996............ 10,000 20,000 -- -- --
Issuance of convertible preferred
stock.................................. 1,184,740 -- -- 3,000 2,000 7,000
Issuance of common stock in connection
with practice affiliation agreements... 4,315,712 -- -- -- -- --
Issuance of common stock in exchange for
services............................... 69,643 -- -- -- -- --
Issuance of options to purchase common
stock.................................. -- -- -- -- --
Issuance of stock purchase warrants for
258,332 shares of common
stock.................................. -- -- -- -- --
Exercise of stock options............... 7,143
Net loss................................ -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1997............ 10,000 20,000 3,000 2,000 7,000
Conversion of preferred stock to common
stock.................................. 2,989,100 (10,000 ) (20,000) (3,000) (2,000) (7,000)
Conversion of convertible debentures.... 571,428 -- -- -- -- --
Issuance of common stock in connection
with practice affiliations............. 19,403 -- -- -- -- --
Issuance of options to purchase common
stock.................................. -- -- -- -- --
Issuance of stock purchase warrants for
150,586 shares of common
stock.................................. -- -- -- -- --
Exercise of stock options............... 24,603 -- -- -- -- --
Issuance of common stock
in connection with
initial public offering, net of
issuance
costs of $7,033,000.................... 4,600,000 -- -- -- -- --
Net loss................................ -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at March 31, 1998 $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at inception (January 16,
1996).................................. $ -- $ -- $ -- $ --
Initial issuance of convertible
preferred stock........................ -- 6,970,000 -- 7,000,000
Issuance of common
stock.................................. 1,000 11,000 -- 12,000
Issuance of common stock in connection
with practice affiliation agreements... 4,000 14,107,000 -- 14,111,000
Net loss................................ -- -- (1,742,000 ) (1,742,000)
------- ----------- ------------ -----------
Balance at December 31, 1996............ 5,000 21,088,000 (1,742,000 ) 19,381,000
Issuance of convertible preferred
stock.................................. -- 6,237,000 -- 6,249,000
Issuance of common stock in connection
with practice affiliation agreements... 4,000 33,490,000 -- 33,494,000
Issuance of common stock in exchange for
services............................... -- 292,000 -- 292,000
Issuance of options to purchase common
stock.................................. -- 4,665,000 -- 4,665,000
Issuance of stock purchase warrants for
258,332 shares of common
stock.................................. -- 1,580,000 -- 1,580,000
Exercise of stock options...............
Net loss................................ -- -- (31,573,000 ) (31,573,000)
------- ----------- ------------ -----------
Balance at December 31, 1997............ 9,000 67,352,000 (33,315,000 ) 34,088,000
Conversion of preferred stock to common
stock.................................. 3,000 39,000 --
Conversion of convertible debentures.... 1,000 3,999,000 -- 4,000,000
Issuance of common stock in connection
with practice affiliations............. -- 143,000 -- 143,000
Issuance of options to purchase common
stock.................................. -- 375,000 -- 375,000
Issuance of stock purchase warrants for
150,586 shares of common
stock.................................. -- 722,000 -- 722,000
Exercise of stock options............... -- 3,000 -- 3,000
Issuance of common stock
in connection with
initial public offering, net of
issuance
costs of $7,033,000.................... 4,000 25,168,000 -- 25,172,000
Net loss................................ -- -- (8,416,000 ) (8,416,000)
------- ----------- ------------ -----------
Balance at March 31, 1998 $17,000 $97,801,000 $(41,731,000) $56,087,000
------- ----------- ------------ -----------
------- ----------- ------------ -----------
</TABLE>

See accompanying notes.

43
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------- --------------------------
1996 1997 1997 1998
----------- ------------ ----------- -----------
(UNAUDITED)

<S> <C> <C> <C> <C>
Operating activities:
Net Loss........................................... $(1,742,000) $(31,573,000) $(1,191,000) $(8,416,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation.................................... 74,000 676,000 25,000 268,000
Amortization of management services agreements
and deferred financing
costs......................................... 663,000 8,084,000 807,000 4,310,000
Interest expense converted to preferred
stock......................................... -- 34,000 -- --
Equity-based compensation expense............... -- 17,567,000 -- 1,004,000
Changes in operating assets and liabilities:
Accounts receivable............................. (449,000) (4,700,000) (334,000) (2,525,000)
Due from physician groups....................... (426,000) (3,062,000) (2,811,000) (1,529,000)
Prepaid expenses and other current assets....... 2,000 177,000 (17,000) (355,000)
Accounts payable................................ 149,000 1,930,000 (81,000) (373,000)
Accrued expenses................................ 366,000 3,684,000 195,000 1,105,000
Accrued salaries and benefits................... 383,000 2,383,000 174,000 (315,000)
Interest payable................................ -- 640,000 -- (120,000)
----------- ------------ ----------- -----------
Net cash used in operating activities................ (980,000) (4,160,000) (3,233,000) (6,946,000)
Investing activities:
Purchases of furniture, fixtures and
equipment....................................... (697,000) (969,000) (109,000) (1,679,000)
Payments for management services
agreements...................................... (206,000) (10,123,000) -- (1,271,000)
Payments for deferred offering costs............... -- (3,186,000) -- --
Cash used for acquisition of non-cash
assets of affiliated practices.................. (3,707,000) (13,230,000) -- (175,000)
Payments for deposits and other assets............. (22,000) (848,000) (7,000) (732,000)
----------- ------------ ----------- -----------
Net cash used in investing activities.............. (4,632,000) (28,356,000) (116,000) (3,857,000)
Financing activities:
Proceeds from debt issuance........................ -- 41,664,000 -- 7,404,000
Payments on stockholder notes payable.............. -- (130,000) -- (2,000,000)
Proceeds from issuance of stockholder notes
payable......................................... 40,000 5,507,000 1,867,000 1,000,000
Proceeds from issuance of common stock............. 11,000 -- -- 28,353,000
Proceeds from issuance of preferred stock.......... 7,000,000 5,164,000 765,000 --
Proceeds from lines of credit...................... -- -- -- 1,752,000
Payments on borrowings............................. -- (18,567,000) -- (19,432,000)
Minority interest.................................. -- 288,000 -- 360,000
----------- ------------ ----------- -----------
Net cash provided by financing activities............ 7,051,000 33,926,000 2,632,000 17,437,000
----------- ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 1,439,000 1,410,000 (717,000) 6,634,000
Cash and cash equivalents at beginning
of period.......................................... -- 1,439,000 1,439,000 2,849,000
----------- ------------ ----------- -----------
Cash and cash equivalents at end of period........... $ 1,439,000 $ 2,849,000 $ 722,000 $ 9,483,000
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>

See accompanying notes.

44
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO MARCH 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1997 IS UNAUDITED)

1. ORGANIZATION

BMJ Medical Management, Inc. and its subsidiaries (the 'Company'), are
engaged in managing physician groups focusing exclusively on musculoskeletal
disease management, including ancillary services such as ambulatory surgery
centers, rehabilitative therapy and magnetic resonance imaging. The Company also
operates an Independent Physician Association (the 'IPA') that negotiates and
administers payor contracts for the delivery of healthcare services. The Company
manages physician groups under long-term management services agreements (the
'Management Services Agreements') with affiliated physician groups located in
various states. The Company may also acquire certain assets under Asset Purchase
Agreements, primarily accounts receivable and furniture, fixtures and equipment
from these groups. The cost of these assets is determined based on their
appraised or net realizable value. BMJ Medical Management, Inc. was incorporated
in Delaware in January 1996.

Under the Management Services Agreements, the Company provides a full range
of administrative services required for a physician group's day-to-day
nonmedical operations and employs substantially all of the nonmedical personnel
utilized by the group. The nonclinical services provided include, but are not
limited to, practice administration, practice support, data processing, business
office management including billing and collecting, marketing, accounting, the
provision of office space and equipment and the arrangement of group purchasing
discounts for medical and nonmedical supplies and services. The Company may also
assist the physician group in the recruitment of additional physicians and
negotiation of managed care contracts which must be approved by the group.

The terms of the Management Services Agreements are 40 years and
automatically renew for successive 5-year periods thereafter unless terminated
by one of the parties. As compensation for services provided by the Company, the
Company generally receives a percentage of the group's net collected revenues,
reimbursement of all nonmedical expenses of the practice incurred by the Company
in supporting the group, 66 2/3% of the cost savings the Company is able to
achieve through its purchasing power and a percentage of the profits from new
ancillary services.

The laws of many states, including some of the states in which the Company
presently has Management Services Agreements, prohibit business corporations
from practicing medicine or exercising control over the medical judgments or
decisions of physicians and from engaging in certain financial arrangements with
physicians. The Company intends that, pursuant to the Management Services
Agreements, it will not exercise any responsibility on behalf of affiliated
physicians that could be construed as affecting the practice of medicine.
Accordingly, the Company believes that its operations do not violate applicable
state laws relating to the corporate practice of medicine.

On December 23, 1997, the Board of Directors approved a five-for-seven
reverse stock split of the Company's common stock. All common share and per
share data presented herein give effect to such reverse stock split. Concurrent
with the consummation of the Company's initial public offering (the 'IPO'),
which occurred February 9, 1998, the Company's certificate of incorporation was
amended to increase the Company's authorized common stock from 25,000,000 shares
to 35,000,000 shares.

The Company changed its fiscal year end from December 31 to March 31,
effective March 1998. The financial statements presented include the transition
period consisting of the three months ended March 31, 1998.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Company does not consolidate the operating results and accounts of the
physician groups since it does not own or control the groups it manages. The
Company believes that the Management Services Agreements provide it with the
preponderance of the net profits of the medical services furnished by the
groups.

45
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Consequently, the Company presents physician groups' revenues, net, less amounts
retained by the physician groups as management fee revenue in the accompanying
consolidated financial statements ('display method').

The consolidated financial statements include the accounts of BMJ Medical
Management, Inc. and its subsidiaries as well as those entities controlled by
the Company. The minority interest held by third parties is separately stated.
In consolidation, all significant intercompany balances and transactions have
been eliminated.

Reclassification

Certain amounts presented in the consolidated statements of operations for
prior periods have been reclassified for comparative purposes.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. The Company's actual results in subsequent periods may differ
from the estimates and assumptions used in the preparation of the accompanying
consolidated financial statements.

Practice Revenues, Net

Practice revenues, net, represent the gross revenues earned from patients
by the physician groups and one ambulatory surgery center, net of contractual
and other adjustments and uncollectible amounts. Contractual adjustments
typically result from differences between the physician groups' established
rates for services and the amounts paid by government sponsored health care
programs and other insurers.

There are no material claims, disputes, or other unsettled matters that
exist to management's knowledge concerning third-party reimbursements. In
addition, management believes there are no retroactive adjustments that would be
material to the financial statements. The Company estimates that approximately
15% and 13% of practices revenues, net were received under government-sponsored
health care programs (principally, the Medicare and Medicaid programs) during
the years ended December 31, 1996 and 1997, respectively. The Company estimates
that approximately 14% and 16% of practice revenues, net, were received under
government sponsored health care programs (principally, the Medicare and
Medicaid programs) during the three months ended March 31, 1997 (unaudited) and
the three months ended March 31, 1998, respectively. The physician groups have
numerous agreements with managed care and other organizations to provide
physician services based on negotiated fee schedules.

Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future

46
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
government review and interpretation as well as significant regulatory action
including fines, penalties, and exclusion from the Medicare and Medicaid
programs.

Management Fee Revenue

Management fee revenue represents practice and ambulatory surgery center
net revenues less amounts retained by the physician groups.

The Company's management fee revenue is comprised of four components: (i)
percentage of the physician groups' net collected revenues (generally ranging
from 10%-15%), plus (ii) 100% of the non-physician affiliated practice expenses
(generally expected to range from 45%-55% of the physician groups' net collected
revenue), plus (iii) 66 2/3% of the cost savings the Company is able to achieve
through its purchasing power (generally related to medical malpractice
insurance, property and liability insurance, group benefits and certain major
medical supplies) plus (iv) a percentage of the profits from new ancillary
services of the practices. The portion of the management fee revenue that
represents a percentage of net collected revenues is dependent upon the
physician groups' revenues which must be billed and collected.

Management fee revenue included in the accompanying consolidated statements
of operations is comprised of the following:

YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------- --------------------------
1996 1997 1997 1998
---------- ----------- ----------- -----------
(UNAUDITED)

<S> <C> <C> <C> <C>
Component based upon percentage of physician groups'
net collected revenues............................... $1,079,000 $ 6,105,000 $ 912,000 $ 2,658,000
Reimbursement of non-physician affiliated practice
expenses............................................. 2,038,000 30,868,000 3,556,000 12,031,000
---------- ----------- ----------- -----------
Management fee revenue................................. $3,117,000 $36,973,000 $ 4,468,000 $14,689,000
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>

For the year ended December 31, 1996, three affiliated practices; Southern
California Orthopedic Institute Medical Group (SCOI), South Texas Spinal Clinic,
P.A. (STSC) and Lehigh Valley Bone, Muscle and Joint Group, LLC (LVBMJ)
comprised approximately 52%, 23%, and 25%, respectively, of management fee
revenue. For the year ended December 31, 1997, SCOI comprised approximately 29%
of management fee revenue. No other affiliated practices individually comprised
10% or more of management fee revenue.

For the three months ended March 31, 1998, SCOI comprised approximately 19%
of management fee revenue. No other affiliated practices individually comprised
10% or more of management fee revenue. For the three months ended March 31, 1997
(unaudited), two affiliated practices; SCOI and STSC comprised approximately 59%
and 32%, respectively, of management fee revenue.

Operating Expenses

Medical support services represent costs incurred by the Company relative
to the operations of the physician groups including non-physician personnel
salaries and benefits, medical supplies, malpractice insurance premiums,
building and equipment rental expense, general and administrative expenses,
supplies, maintenance and repairs, insurance, utilities and other indirect
expenses.

General and administrative expenses primarily represent the salaries of
corporate headquarters personnel, rent, travel, and other administrative
expenses. Additionally, for the year ended December 31, 1997, approximately
$13.5 million of non-cash equity based compensation related to the affiliations
with SCOI and the Center for Orthopedic Surgery Inc. (COSI) was included in
general and administrative expenses.

47
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Cash and Cash Equivalents

Cash in excess of daily requirements invested in short-term investments
with maturities of three months or less is considered to be cash equivalents for
financial statement purposes. Deposits in banks may exceed the amount of
insurance provided on such deposits. The Company performs reviews of the credit
worthiness of its depository banks. The Company has not experienced any losses
on its deposits of cash.

Accounts Receivable

Accounts receivable principally represent receivables related to the
medical groups for medical services provided by the physician groups. Risk of
collection is borne by the physician groups and any amounts advanced by the
Company for accounts receivable that are uncollected are reimbursed to the
Company by the physician groups.

Furniture, Fixtures and Equipment

Furniture, fixtures and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets which primarily range from three to seven
years. Routine maintenance and repairs which do not extend the life of the
assets are charged to expense as incurred and major renovations or improvements
are capitalized.

Management Services Agreements

Management Services Agreements include consideration (cash, common stock or
other consideration) paid to the physician groups for entering into Management
Services Agreements, legal and accounting fees and other similar transaction
costs. The Management Services Agreements are for a term of 40 years and eight
agreements are subject to rescission by the respective physician group on the
seventh anniversary. Under the original terms of the related Restricted Stock
Agreements, if a physician left the practice within four years the common stock
issued is returned to the applicable practice. Therefore, the Company amortized
the costs of entering into Management Services Agreements over four years. The
Company amended substantially all of its Restricted Stock Agreements during the
first quarter of 1998 to eliminate the four-year vesting provisions. As a
result, the Company has adjusted from the effective date of such amendments the
amortization of the Management Services Agreements to the new useful lives of
the agreements which will range from 7 to 25 years. Had these revisions and the
related Affiliation Transactions and Management Service Agreements been
reflected as of January 1, 1996, 1997 and 1998 in the accompanying financial
statements as of January 1, 1996 and January 1, 1997, amortization expense would
have decreased by approximately $6,551,000 and $491,000 for the years ended
December 31, 1996 and 1997, respectively. Amortization expense would have
decreased by approximately $574,000 and $2,200,000 for the three months ended
March 31, 1997 (unaudited) and the three months ended March 31, 1998,
respectively. Shares issued to physician practices that are subject to
performance criteria are accounted for as compensation.

The Company periodically reviews its intangible assets to assess
recoverability and a charge will be recognized in the consolidated statement of
operations if a permanent impairment is determined to have occurred.
Recoverability of intangibles is determined based on undiscounted future
operating cash flows from the related business unit or activity. The amount of
impairment, if any, would be measured based on discounted future operating cash
flows using a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of intangible assets will be affected if
estimated future operating cash flows are not achieved. The Company does not
believe that any impairment has occurred as of December 31, 1996, December 31,
1997 and March 31, 1998.

48
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Due from Physician Groups, net

Due from physician groups, net at December 31, 1996 consists of
non-interest bearing short-term advances due to the Company. The amount due to
physician groups at December 31, 1996, represents the net of (i) cash
consideration related to the Management Services Agreements that is payable by
the Company, without interest, at the earlier of the consummation of the IPO or
the one year anniversary of the execution of the Management Services Agreements;
(ii) amounts due to the physician groups related to the ongoing monthly
purchases of accounts receivable and (iii) amounts due from the physician groups
relating to the monthly management fees and reimbursement to the Company for
monthly medical support service costs. Amounts due from physician groups, net at
December 31, 1997 and March 31, 1998, represents the net of (i) amounts due to
the physician groups related to the ongoing monthly purchases of accounts
receivable and (ii) amounts due from the physician groups relating to the
monthly management fees and reimbursement to the Company for monthly medical
support service costs.

Accounting for Stock Based Compensation

In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation. SFAS No.123 allows either adoption of a fair value method of
accounting for stock-based compensation plans or a continuation of accounting
under Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock
Issued to Employees and related interpretations with supplemental disclosures.
The Company has chosen to account for all employee stock-based compensation
arrangements in accordance with APB Opinion No. 25 with related disclosures
under SFAS No. 123, which requires pro forma net income and earnings per share
disclosures as well as various other disclosures not required under APB No. 25
for companies adhering to APB No. 25. As a result, the Company recognized
compensation expense for stock options granted to employees with an exercise
price below the fair value of the shares on the date of grant.

Under the Company's stock option plans, the Company may also grant stock
options for a fixed number of shares to independent consultants and contractors
typically with an exercise price equal to the fair value of the shares on the
date of grant. The Company accounts for these stock option grants using the fair
value method of SFAS No. 123. The fair value for these options is estimated at
the date of grant using the Black-Scholes option pricing model and recognized as
compensation cost.

Loss Per Common Share

In February 1997, SFAS No. 128, Earnings Per Share, was issued. SFAS No.
128, which applies to entities with publicly held common stock, simplifies the
standards for computing earnings per share previously required in APB Opinion
No. 15, Earnings Per Share, and makes them comparable to international earnings
per share standards. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods.

On February 3, 1998, due to the issuance of SFAS No. 128, the Securities
and Exchange Commission (the 'SEC') revised its Staff Accounting Bulletin (SAB)
relative to the treatment of common shares and common equivalent shares issued
at prices below the estimated public offering price during the 12 months
immediately preceding the date of the initial filing of the registration
statement. The revised SAB recognizes only nominal issuances of common shares
and common equivalent shares as outstanding for all periods presented. The
Company has not issued any nominal shares during the periods presented in the
consolidated statements of operations. All earnings per share amounts for all
periods have been presented, and where necessary, restated to conform to the
SFAS No. 128 requirements.

49
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Basic net loss per share, is calculated using the weighted average number
of common shares outstanding during the respective periods. Potentially dilutive
securities are not included in the computation of net loss per share as their
effect is antidilutive.

Financial Instruments

The carrying amount of financial instruments including cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value as
of December 31, 1996, December 31, 1997 and March 31, 1998 due to the short
maturity of the instruments and reserves for potential losses, as applicable.
The carrying amounts of the Company's borrowings approximate their fair value
due to the recent issuance of such borrowings which represent current market
value.

3. PRACTICE AFFILIATIONS AND INVESTMENT IN SUBSIDIARIES

Effective July 1, 1996, the Company entered into an affiliation transaction
with LVBMJ, under which the Company would receive as a management fee 50% of the
net collected revenues of LVBMJ and would be responsible for all the clinic
overhead expenses (medical support services). In connection with this
transaction, on July 1, 1996, the Company issued 321,429 shares of common stock
recorded at $1.26 per share. This agreement was amended on July 1, 1997. Under
the terms of the Amended and Restated Management Services Agreement between
LVBMJ and the Company, effective July 1, 1997 (the LVBMJ Management Services
Agreement), the Company paid $320,000 in cash, issued an additional 48,594
shares of common stock (effective July 1, 1997) recorded at $7.56 per share
representing total stock consideration of $772,367 in connection with this
transaction. Effective July 1, 1997, the Company and LVBMJ amended and restated
their agreement to adjust the management fee to 10% of net collected revenues
plus reimbursement of clinic overhead expenses. The aggregate consideration of
$1,106,916, including transaction costs of $14,549, has been allocated as
follows: furniture, fixtures and equipment $50,000, and Management Services
Agreement--$1,056,916. The LVBMJ Management Services Agreement provided that the
Company may be required to issue shares of common stock as additional
consideration based on actual collections of the practice during the twelve
month period ended March 1998. As a result the Company expects to issue
approximately 120,000 shares based on such collections. The value of any
subsequently issued shares will increase the cost of the LVBMJ Management
Services Agreement.

On November 22, 1996, the Company entered into an Asset Purchase Agreement
with SCOI, a California general partnership, in exchange for $5,930,897 in cash
and a Management Services Agreement, effective November 1, 1996 (SCOI Management
Services Agreement), in exchange for the issuance of 2,857,140 shares of common
stock recorded at $3.78 per share. The number of shares issued in connection
with this transaction were subject to a recalculation effective November 1,
1997.

The SCOI Management Services Agreement calls for management fees to be
earned by the Company equal to 3 1/3% of the net collected revenues until
certain conditions are met at which time the management fee will increase to
6 2/3% of net collected revenues. At the time of filing of a preliminary
prospectus for the IPO of the Company's common stock with the SEC that becomes
effective within 90 days, the management fee will increase to 10% of the net
collected revenues. For the period from January 1, 1997 through March 31, 1997,
the Company recognized management fees under the SCOI Management Services
Agreement of 3 1/3% of net collected revenues. For the period from January 1,
1998 through February 9, 1998, the effective date of the IPO, the Company
recognized management fees of 6 2/3% of net collected revenues and from February
10, 1998 through March 31, 1998, recognized management fees of 10% of net
collected revenues. On April 1, 1997, the Company entered into a Management
Services Agreement with COSI, owned by the SCOI physicians, in exchange for
392,857 shares of common stock recorded at $3.78 per share, representing
consideration of $1,485,000. The number of shares issued in connection with this
transaction were also subject to recalculation during the fourth quarter of
1997. The aggregate consideration of $18,336,999, including transaction costs of
$121,102, has been

50
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. PRACTICE AFFILIATIONS AND INVESTMENT IN SUBSIDIARIES--(CONTINUED)
allocated as follows: net accounts receivable--$4,448,000, furniture, fixtures
and equipment--$1,441,920, supplies--$30,897, deposits--$10,080 and Management
Services Agreements--$12,406,102. In accordance with the recalculation
provisions, the Company issued additional shares of common stock to the SCOI
physicians for both the SCOI and COSI recalculation in the fourth quarter of
1997. These shares and 714,286 of the original 2,857,140 shares issued in
November 1996 in connection with the SCOI transaction represent consideration
based upon performance and have been accounted for as non-cash equity-based
compensation expense.

On December 23, 1996, the Company entered into an Asset Purchase Agreement
and a Management Services Agreement, effective November 1, 1996, (STSC
Management Services Agreement) with STSC in exchange for the issuance of 768,929
shares of common stock recorded at $3.78 per share, representing consideration
of $2,906,553 and cash of $3,065,990. The aggregate consideration of $6,014,009,
including transaction costs of $41,466 has been allocated as follows: net
accounts receivable--$1,703,826, furniture, fixtures and equipment--$425,000,
supplies--$21,328 and Management Services Agreement--$3,863,855.

Effective April 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Tri-City Management Services
Agreement) with Tri-City Orthopedic Surgery Medical Group, Inc., a California
corporation (Tri-City), and two of its affiliates in exchange for $948,200 in
cash, the issuance of 287,659 shares of common stock recorded at $3.78 per
share, representing consideration of $1,087,352. The aggregate consideration of
$2,088,861, including transaction costs of $53,309, has been allocated as
follows: net accounts receivable--$519,000, furniture, fixtures and
equipment--$167,590, Management Services Agreement--$1,402,271.

Effective April 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (LOS Management Services
Agreement) with Lauderdale Orthopaedic Surgeons, a Florida partnership, in
exchange for $2,698,359 in cash and the issuance of 329,259 shares of common
stock recorded at $3.78 per share, representing consideration of $1,244,598. The
aggregate consideration of $4,154,824, including transaction costs of $211,867,
has been allocated as follows: accounts receivable--$2,000,000, furniture,
fixtures and equipment--$103,915 Management Services Agreement--$2,050,909.

Effective June 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (GCO Management Services
Agreement) with Fishman and Stashak, M.D.'s, P.A. (GCO), a Florida professional
association, (d/b/a Gold Coast Orthopedics), Clive Segil, M.D. (Segil), a
California professional corporation, and H. Leon Brooks, M.D. (Brooks), a
California professional corporation, in exchange for an aggregate amount of
$3,769,172 in cash, the issuance of 281,789 shares of common stock recorded at
$6.93 per share, representing consideration of $1,952,796. The aggregate
consideration of $6,092,016, including transaction costs of $370,048, has been
allocated as follows: accounts receivable--$1,759,000, furniture, fixtures and
equipment--$194,150, supplies--$3,650 and Management Services
Agreement--$4,135,216. The GCO agreement provides that the Company may be
required to issue more shares of common stock as additional consideration during
1998. The total number of shares to be issued will depend on actual collections
of the practice for the twelve month period ended August 1998. The value of any
subsequently issued shares will be allocated to the Management Service
Agreements.

Effective July 1, 1997, the Company entered into three separate Asset
Purchase Agreements and Management Services Agreements with Swanson Orthopedic
Medical Corporation, a professional corporation, Randy C. Watson, M.D., a
professional corporation and Lake Tahoe Sports Medicine Center, a medical
corporation, all located in South Lake Tahoe, California, in exchange for an
aggregate amount of $986,000 in cash and the issuance of 107,648 shares of
common stock recorded at $7.56 per share, representing consideration of
$813,824. The aggregate consideration of $2,064,780, including transaction costs
of $264,956, has been allocated as follows: accounts receivable--$726,000,
furniture, fixtures and equipment--$67,200, supplies-$10,000, and Management
Services Agreement--$1,261,580.

51
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. PRACTICE AFFILIATIONS AND INVESTMENT IN SUBSIDIARIES--(CONTINUED)
Effective July 1, 1997, the Company entered into two separate Asset
Purchase Agreements and Management Services Agreements with Sun Valley
Orthopaedic Surgeons, an Arizona general partnership (Sun Valley) and Robert O.
Wilson, M.D., P.C., an Arizona professional corporation, both located in Sun
City, Arizona, in exchange for an aggregate amount of $616,125 in cash and the
issuance of 141,332 shares of common stock recorded at $7.56 per share,
representing consideration of $1,068,471. Sun Valley has the right to receive
additional consideration if the fair market value of the Company's common stock,
as determined on July 1, 1998, is less than $9.10. The additional consideration
would be determined by multiplying the per share dollar amount below $9.10 by
36,318 shares and would be payable in full in cash no later than July 31, 1998.
The aggregate consideration of $2,075,553, including transaction costs of
$121,478, has been allocated as follows: accounts receivable--$457,000,
furniture, fixtures and equipment--$67,500, supplies--$7,000, deposits--$4,564,
and Management Services Agreement--$1,539,489 (including the additional
consideration of $269,479).

Effective July 1, 1997, the Company entered into two separate Asset
Purchase Agreements and Management Services Agreements with Stockdale Podiatry
Group, Inc., a California professional corporation, and John C. Zimmerman,
D.P.M., both located in Bakersfield, California, in exchange for an aggregate
amount of $1,032,842 in cash, a contractual obligation to pay John C. Zimmerman,
M.D. $78,858 in cash at a future specified date and the issuance of 121,066
shares of common stock recorded at $7.56 per share, representing consideration
of $915,263. The aggregate consideration of $2,111,337, including transaction
costs of $84,374, has been allocated as follows: accounts receivable--$637,200,
furniture, fixtures and equipment--$85,207, supplies--$10,000, and Management
Services Agreement--$1,378,930.

Effective July 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Kramer Management Services
Agreement) with Kramer & Maehrer, L.L.C., a Pennsylvania limited liability
company, in exchange for $45,981 in cash and the issuance of 51,857 shares of
common stock recorded at $7.56 per share, representing consideration of
$392,040. The aggregate consideration of $441,047, including transaction costs
of $3,026, has been allocated as follows: furniture, fixtures and
equipment--$45,981, Management Services Agreement--$395,066.

Effective July 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (SAB Management Services
Agreement) with San Antonio Bone and Joint Clinic, P.A., a Texas professional
association, in exchange for an aggregate amount of $288,978 in cash and the
issuance of 27,306 shares of common stock recorded at $7.56 per share,
representing consideration of $206,437. The aggregate consideration of $557,236,
including transaction costs of $61,821, has been allocated as follows: accounts
receivable--$92,289, furniture, fixtures and equipment--$175,801,
supplies--$649, and Management Services Agreement--$288,497.

Effective August 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (P M & R Management Services
Agreement) with Physical Medicine and Rehabilitation Associates, Inc., a Florida
corporation, in exchange for $830,166 in cash and the issuance of 90,659 shares
of common stock recorded at $7.56 per share, representing consideration of
$685,384. The aggregate consideration of $1,651,063, including transaction costs
of $135,513, has been allocated as follows: accounts receivable-- $465,000,
furniture, fixtures and equipment--$165,000, deposits--$5,166, and Management
Services Agreement--$1,015,897.

Effective August 1, 1997, the Company entered into separate Asset Purchase
Agreements with Broward Orthopaedic Specialists, Inc., a Florida corporation
(Broward), Terence Matthews, M.D. P.A., Wylie Scott, M.D. P.A. and Mitchell S.
Seavey, M.D. and a Management Services Agreement with Broward (Broward
Management Services Agreement), in exchange for $3,938,996 in cash, a promissory
note issued to Dr. Seavey for $283,502 and the issuance of 446,977 shares of
common stock recorded at $7.56 per share, representing consideration of
$3,379,147. The aggregate consideration of $8,015,174, including transaction
costs of $413,529, has been allocated as follows: accounts
receivable--$1,685,000, furniture, fixtures and equipment--$420,000 and

52
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. PRACTICE AFFILIATIONS AND INVESTMENT IN SUBSIDIARIES--(CONTINUED)
Management Services Agreement--$5,910,174. The Broward Management Services
Agreement provides that the Company may be required to issue more shares of
common stock as additional consideration during 1998. The total number of shares
to be issued will depend on actual collections of the practice for the twelve
month period ended July 1998. The value of any subsequently issued shares will
increase the cost of the Broward Management Services Agreement.

Effective August 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Abrahams Management Services
Agreement) with Michael A. Abrahams, M.D. P.A., a Florida professional
association, in exchange for $620,004 in cash and the issuance of 68,131 shares
of common stock recorded at $7.56 per share, representing consideration of
$515,074. The aggregate consideration of $1,181,694, including transaction costs
of $46,616, has been allocated as follows: accounts receivable-- $285,000,
furniture, fixtures and equipment--$47,500, and Management Services
Agreement--$849,194.

Effective September 1, 1997, the Company entered into an Asset Purchase
Agreement and a Management Services Agreement (Beitler Management Services
Agreement) with Jeffrey Beitler, M.D. P.A., a Florida professional corporation,
in exchange for $275,000 in cash and the issuance of 26,066 shares of common
stock recorded at $8.40 per share, representing consideration of $218,952. The
aggregate consideration of $513,952, including transaction costs of $20,000, has
been allocated as follows: accounts receivable--$200,000, furniture, fixtures
and equipment--$35,000, and Management Services Agreement--$278,952.

In October 1997, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement (OSA Management Services Agreement) with
Orthopaedic Surgery Associates, P.A., a Florida professional corporation (OSA)
in exchange for $4,396,250 in cash, issuance of a promissory note for
$2,377,701, bearing interest at 8.5%, annually and the issuance of 221,819
shares of common stock recorded at $8.40 per share, representing consideration
of $1,863,276. The aggregate consideration of $9,149,979, including transaction
costs of $512,752, has been allocated as follows: accounts
receivable--$2,000,000, furniture, fixtures and equipment--$500,000, and
Management Services Agreement--$6,649,979. The OSA Management Services Agreement
provides that the Company may be required to issue more shares of common stock
as additional consideration during 1998 and 1999. The total number of shares to
be issued will depend on actual collections of the practice for the twelve month
periods ended August 1998 and 1999. The value of any subsequently issued shares
will increase the cost of the OSA Management Services Agreement.

In October 1997, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement (LOM Management Services Agreement) with
Lighthouse Orthopaedic Management Group, Inc (LOM), a Florida corporation, in
exchange for the issuance of promissory notes for $3,899,930, bearing interest
at 8.5% annually and the issuance of 194,220 shares of common stock recorded at
$8.40 per share, representing consideration of $1,631,448. The aggregate
consideration of $5,808,421, including transaction costs of $277,043, has been
allocated as follows: accounts receivable--$1,300,000 furniture, fixtures, and
equipment--$250,000, and Management Services Agreement--$4,258,421. The LOM
Management Services Agreement provides that the Company may be required to issue
more shares of common stock as additional consideration during 1998. The total
number of shares to be issued will depend on actual collections of the practice
for the twelve month period ended August 1998. The value of any subsequently
issued shares will increase the cost of the LOM Management Services Agreement.

In October 1997, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement (BIOS Management Services Agreement) with Broward
Institute of Orthopaedic Specialties, P.A., a Florida professional association
(BIOS), in exchange for $119,311 in cash, the issuance of promissory notes for
$3,466,252, bearing interest at 8% annually, and the issuance of 182,312 shares
of common stock recorded at $8.40 per share, representing consideration of
$1,531,422. The aggregate consideration of $5,076,985, including transaction
costs of $24,000, has been allocated as follows: advances--$800,000, furniture,
fixtures, and equipment--$281,197, supplies--$61,189, deposits--$37,966 and
Management Services Agreement--

53
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. PRACTICE AFFILIATIONS AND INVESTMENT IN SUBSIDIARIES--(CONTINUED)
$3,896,633. The BIOS Management Services Agreement provides that the Company may
be required to issue more shares of common stock as additional consideration
during 1998. The total number of shares to be issued will depend on actual
collections of the practice for the twelve month period ended August 1998. The
value of any subsequently issued shares will increase the cost of the BIOS
Management Services Agreement.

In October 1997, the Company entered into a Management Services Agreement
(Valley Management Services Agreement) with Valley Sports & Arthritis Surgeons,
P. C., a Pennsylvania professional corporation (Valley), in exchange for a
promissory note of $897,727, bearing interest at 8.5% annually and the issuance
of 359,464 shares of common stock recorded at $8.40 per share, representing
consideration of $3,019,501. The aggregate consideration of $3,917,228 has been
allocated as follows: accounts receivable--$630,000, furniture, fixtures, and
equipment--$120,833, supplies--$35,000, and Management Services
Agreement--$3,131,395.

In October 1997, the Company acquired Orthopaedic Management Network, Inc.,
an Arizona corporation, in exchange for $63,000 in cash, the assumption of
$1,010,306 accounts payable and accrued liabilities and the issuance of 20,370
shares of common stock recorded at $8.40 per share, representing consideration
of $171,108. The aggregate purchase price of $1,244,414 has been allocated to
certain assets and liabilities including goodwill--$665,845.

Effective November 1, 1997, the Company entered into a Management Services
Agreement with New Jersey Orthopedic Associates, P.A., a New Jersey professional
association. Additionally, the Company entered into an Asset Purchase Agreement
with Orthopedic Associates of New Jersey, a New Jersey professional association.
The aggregate consideration consisted of $1,029,194 in cash, issuance of a
promissory note for $411,680, bearing interest at 8.0%, and the issuance of
67,859 shares of common stock recorded at $8.40 per share, representing
consideration of $570,012. The aggregate consideration of $2,010,886 has been
allocated as follows: furniture, fixtures and equipment--$75,000, and Management
Services Agreement--$1,935,886.

In March 1998, the Company entered into a Management Services Agreement
with Rene Lucas, M.D. in exchange for $102,824 in cash and the issuance of
19,403 shares of common stock recorded at $7.38 per share, representing
consideration of $143,194. A portion of the aggregate consideration of $284,286
including transaction costs of $38,365, has been allocated to Management
Services Agreement--$237,486 with the remainder allocated primarily to fixed
assets and accounts receivable.

In March 1998, the Company entered into a Management Services Agreement
with Stateline Medical Center, LLP, located in Stateline and Zephyr Cove,
Nevada, in exchange for $1,237,938 in cash. The aggregate consideration of
$1,258,926, including transaction costs of $20,988, has been allocated to
Management Services Agreement--$1,147,797 with the remaining purchase price
allocated primarily to fixed assets, accounts receivable and other assets.

In April 1998, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement with Seaview Orthopaedic & Medical Associates, a
New Jersey general partnership ('Seaview'), in exchange for $3,804,959 in cash
and the issuance of convertible promissory notes for $1,543,000, bearing
interest at 5% and convertible to shares of common stock at a conversion rate of
$8.75 on the unpaid principal amounts. The aggregate consideration of
$5,470,959, including transaction costs of $123,000, has been allocated to
Management Service Agreements--$4,945,959 with the remaining purchase price
allocated primarily to fixed assets. The total number of shares to be issued
will depend on actual collections of the practice for the twelve month period
ended March 1999. The value of any subsequently issued shares will increase the
cost of the Seaview Management Services Agreement.

In April 1998, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement with Community Orthopedics and Pain Management, a
Florida corporation ('Community'), in exchange for $611,250 in cash and the
issuance of a convertible promissory note for $603,750, bearing interest at 5%
and convertible to shares of common stock at a conversion rate of $8.75 on the
unpaid principal amount. The aggregate consideration of $1,235,000, including
transaction costs of $20,000, has been allocated to Management

54
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. PRACTICE AFFILIATIONS AND INVESTMENT IN SUBSIDIARIES--(CONTINUED)
Service Agreement--$230,950 with the remaining purchase price allocated
primarily to the fixed assets and accounts receivable.

In April 1998, the Company entered into an Asset Purchase Agreement and a
Management Services Agreement with Steven P. Hirsh, D.P.M., P.A., a Florida
professional association ('Hirsch'), in exchange for $159,500 in cash and the
issuance of a convertible promissory note for $129,500, bearing interest at 5%
and convertible to shares of common stock at a conversion rate of $8.75 on the
unpaid principal amount. The aggregate consideration of $301,950, including
transaction costs of $12,950, has been allocated to Management Service
Agreement--$230,950 with the remaining purchase price allocated primarily to
fixed assets and acounts receivable.

In April 1998, the Company entered into a Management Services Agreement
with Douglas A. Bobb, D.O., in exchange for the issuance of 157,071 shares of
common stock recorded at $7.38 per share, representing consideration of
$1,158,399. All of the consideration has been allocated to the Management
Services Agreement.

During April 1998, BMJ of Chandler, Inc., a wholly-owned subsidiary of the
Company, purchased the assets of Warner Medical Park Outpatient Surgery, Inc.,
for $1,800,000. In April 1998, Surgical Associates of Bakersfield, Limited
Partnership, a limited partnership controlled by the Company, acquired all of
the assets of Kern Surgery Center, a California limited partnership, for
$2,400,000. These transactions have been accounted for using the purchase method
of accounting. Accordingly, the aggregate purchase price has been allocated as
follows: accounts receivable $177,000, furniture and fixtures $261,000, goodwill
and other intangibles $3,531,000, with the remaining purchase price allocated
primarily to other assets. The Company is depreciating the related assets
acquired over their estimated useful lives, ranging from three to seven.
Goodwill is being amortized over its estimated remaining life of 25 years.

The Management Services Agreements are subject to termination in the event
of (i) bankruptcy of the Company or the medical practice; (ii) default in any
material respect in the performance of either parties' obligations under the
Management Services Agreement; (iii) representations and warranties made by
either party are untrue or misleading in any material respect; (iv) the medical
practice is excluded from the Medicare or Medicaid programs; or (v) either party
determines that the structure of the Management Services Agreement violates any
state or federal laws or regulations existing at such time and that an amendment
to the Management Services Agreement will be unable to correct such defect. Upon
termination of the Management Services Agreement, the transaction will be
unwound with the assets (other than accounts receivable) acquired by the Company
being returned to the physician group and the purchase price paid, therefore,
being returned to the Company.

The STSC Management Services Agreement permits STSC and individual
physicians to rescind the Affiliation Transaction on November 1, 2003. In the
event of a rescission of the transaction, the transaction will be unwound, with
the assets (other than the accounts receivable) acquired by the Company being
returned to STSC, and the purchase price paid therefore being returned to the
Company. In addition, the physician owners and the employed physicians, if any,
who received common stock of the Company in connection with the transaction will
be required to return 50% of such capital stock to the Company. In addition, the
Management Services Agreements for eight other practices comprising 30
physicians contain provisions that permit the practices to rescind their
Affiliation Transaction on their respective seventh (sixth in one instance)
anniversaries.

55
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. PRACTICE AFFILIATIONS AND INVESTMENT IN SUBSIDIARIES--(CONTINUED)
The cost to enter into the Management Services Agreements and acquire the
assets, including transaction costs, was as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cost of acquiring the Management Services
Agreements.................................... $16,110,000 $54,233,000 $55,618,000
Accounts receivable............................. 6,152,000 18,907,000 18,954,000
Furniture, fixtures and equipment............... 1,867,000 4,719,000 4,803,000
Advances........................................ -- 800,000 800,000
Other........................................... 62,000 237,000 264,000
----------- ----------- -----------
Total........................................... $24,191,000 $78,896,000 $80,439,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

4. FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Office, computer, and telephone equipment....... $ 999,000 $ 3,162,000 $ 3,368,000
Medical equipment............................... 659,000 1,717,000 3,156,000
Furniture and fixtures.......................... 558,000 1,121,000 1,217,000
Construction-in-progress, ambulatory surgery
centers....................................... -- 125,000 1,225,000
Less: accumulated depreciation.................. 74,000 750,000 1,018,000
----------- ----------- -----------
Furniture, fixtures and equipment, net.......... $ 2,142,000 $ 5,372,000 $ 7,948,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
5. LEASES

The Company, as part of the MSA, is obligated under certain lease
agreements for offices and certain equipment which have terms ranging from three
to ten years and are considered reimbursable to the Company under the terms of
the MSA. In some circumstances, these lease arrangements are with entities owned
or controlled by physician stockholders. Future minimum payments under
noncancelable leases with lease terms in excess of one year at March 31, 1998,
are summarized as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
<S> <C>
1999................................................... $ 2,100,000
2000................................................... 1,559,000
2001................................................... 1,349,000
2002................................................... 1,091,000
2003................................................... 744,000
Thereafter............................................. 4,419,000
----------------
Total minimum lease obligations........................ $ 11,262,000
----------------
----------------
</TABLE>

Rent expense for the years ended December 31, 1996 and 1997 under all
operating leases was approximately $602,000 and $1,926,000, respectively.

Rent expense for the three months ended March 31, 1997 (unaudited) and the
three months ended March 31, 1998 under all operating leases was approximately
$90,000 and $1,191,000 respectively.

The Company has assumed leases between affiliated medical practices and
entities controlled by equity owners in the related practices. Amounts charged
to expense for these leases were $193,000 and $1,226,000 for

56
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. LEASES--(CONTINUED)
the years ended December 31, 1996 and 1997, respectively. Amounts charged to
expense for these leases were $70,000 and $239,000 for the three months ended
March 31, 1997 (unaudited) and March 31, 1998, respectively. The commitments
under these leases are included above.

On August 1, 1997, in connection with a $5,000,000 loan (see Note 9) the
Company entered into an agreement (the Master Lease Agreement) with a lender
pursuant to which the lender agreed to purchase and lease certain equipment to
the Company on the terms and conditions contained in the Master Lease Agreement.
No transactions have occurred with respect to the Master Lease Agreement. In
connection with the Master Lease Agreement, the Company issued to the lender a
warrant to purchase up to 5,000 shares of the Company's Series E Preferred Stock
at a price per share equal to $6.00. This warrant is exercisable for a period of
7 years. The fair value per share for this warrant based on the Black-Scholes
valuation method is $4.29 using the assumptions described in Note 6 and the
actual life of the warrant. In November 1997, the Master Lease Agreement was
increased to $1,500,000 and an additional 10,000 warrants were issued for the
purchase of Series E Preferred Stock at a price per share equal to $6.00. The
fair value per share for this warrant based on the Black-Scholes valuation
method is $4.29 using the assumptions described in Note 6 and the actual life of
the warrant.

6. STOCK OPTION PLAN

On May 6, 1996, and subsequently amended on May 30 and December 31, 1997,
the Company's Board of Directors approved the 1996 Stock Option Plan (the Option
Plan), which provides for the granting of options to purchase up to 2,000,000
shares of the Company's common stock. Both incentive stock options and
nonqualified stock options may be issued under the provisions of the Option
Plan. Employees of the Company and any future subsidiaries, members of the Board
of Directors, independent consultants and contractors and the physicians
employed by the medical groups with which the Company is affiliated through the
MSAs are eligible to participate in the Option Plan, which will terminate no
later than May 6, 2006. The granting and vesting of options under the Option
Plan are authorized by the Company's Board of Directors or a committee of the
Board of Directors. Under the terms of the Option Plan, incentive stock options
vest pro rata over four years, except for options covering 10,715 shares which
vested at the completion of the IPO, have an exercise price of $0.49 per share,
and expire ten years from the date of grant. None of the incentive stock options
were exercisable as of December 31, 1996. During 1997, the Company granted stock
options to employees at exercise prices ranging from $0.01 to $4.90 per share.
In accordance with the provisions of the option plan, the options vest over a
four year period. During August and December 1997, the Company modified the
vesting terms of all the options such that these options vested immediately.
Total compensation expense related to the granting of options and acceleration
of the vesting for the year ended December 31, 1997 based on a fair value
ranging from $3.78 to $8.40 per share amounted to $4,665,000. Pro forma
information regarding net income and earnings per share has been determined as
if the Company had accounted for its employee stock options under the fair value
method of SFAS No. 123. The fair value for these options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 1996, 1997 and 1998; risk-free interest rate of
6%; dividend yield of 0%; volatility factor of the expected market price of the
Company's common stock of .68; and a weighted-average expected option life of
four years.

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.

57
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. STOCK OPTION PLAN--(CONTINUED)
Information regarding these option plans is as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding at inception...................................... -- $ --
Granted............................................................ 110,715 0.27
Exercised.......................................................... -- --
Canceled........................................................... -- --
---------
Options outstanding at December 31, 1996.............................. 110,715
Granted............................................................ 1,139,830 1.48
Exercised.......................................................... (7,143) 0.01
Canceled........................................................... (96,429) 0.55
---------
Options outstanding at December 31, 1997.............................. 1,146,973
Granted............................................................ 307,430 4.11
Exercised.......................................................... (7,143) 0.49
Canceled........................................................... -- --
---------
Options outstanding at March 31, 1998.............................. 1,447,260
---------
---------
Exercisable at December 31, 1996...................................... --
---------
Exercisable at December 31, 1997...................................... 1,146,973
---------
---------
Exercisable at March 31, 1998......................................... 1,268,261
---------
---------

Reserved for future option grants at March 31, 1998................... 552,740
---------
---------
Weighted average fair value of options granted during 1996............ $ 2.20
----------------
----------------
Weighted average fair value of options granted during 1997............ $ 4.76
----------------
----------------
Weighted average fair value of options granted during 1998............ $ 6.25
----------------
----------------
</TABLE>

The following table sets forth information about stock options outstanding
at March 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
NUMBER OUTSTANDING REMAINING AVERAGE NUMBER EXERCISABLE
RANGE OF AS OF CONTRACTUAL EXERCISE AS OF
EXERCISE PRICES MARCH 31, 1998 LIFE PRICE MARCH 31, 1998
- ---------------------------- ------------------ ----------- -------- ------------------
<S> <C> <C> <C> <C>
$0.01....................... 200,715 9.1 $ 0.01 200,715
$0.35-$0.84................. 798,572 8.7 $ 0.63 798,572
$2.35-$7.19................. 447,973 9.7 $ 5.47 268,974
------------------ ------------------
$0.01-$7.19................. 1,447,260 9.1 $ 2.04 1,268,261
------------------ ------------------
------------------ ------------------
</TABLE>

The pro forma effects of adopting SFAS No. 123's fair value based method
for the year ended December 31, 1996 and March 31, 1997 (unaudited) was not
materially different from the corresponding APB Opinion No. 25 intrinsic value
methodology because the options granted in 1996 and the three months ending
March 31, 1997 were primarily issued near the period end and the fair value of
the Company's stock was $3.78 as of December 31, 1996 and March 31, 1997.
Accordingly, pro forma stock-based compensation in 1996 and the three months
ending March 31, 1997 is substantially less than would result from a full year's
compensation expense amortization and a higher valuation of the common stock.
The effects of applying SFAS No. 123 during the years ended December 31, 1996
and 1997 and three months ended March 31, 1997 (unaudited) and March 31, 1998
are not likely to be representative of the effects on pro forma net income for
future years because the vesting of options will cause additional incremental
expense to be recognized in future periods. The Company's

58
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. STOCK OPTION PLAN--(CONTINUED)
pro forma information for the year ended December 31, 1997 and three months
ended March 31, 1998 are as follows:

<TABLE>
<CAPTION>
1997 1998
------------ -----------
<S> <C> <C>
Pro forma net loss............................................. $(32,030,000) $(8,828,000)
------------ -----------
------------ -----------
Pro forma net loss per share................................... $ (5.04) $ (.66)
------------ -----------
------------ -----------
</TABLE>

Additionally, the FASB has added to its agenda a project regarding certain
APB No. 25 issues, including such things as incorporating the SFAS No. 123 grant
date definition into APB No. 25, re-addressing the criteria under broad-based
plans qualifying for noncompensatory accounting and defining what constitutes
employees. The resolution of these issues could result in modification in the
Company's accounting for stock-based compensation arrangements.

Shares of common stock reserved for future issuance at March 31, 1998 is as
follows:

<TABLE>
<S> <C>
Options................................................................ 1,447,260
Warrants............................................................... 391,458
---------
1,838,718
---------
---------
</TABLE>

7. STOCKHOLDERS' EQUITY

Stockholders' equity consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Convertible preferred stock--Series A, $0.01 par value-- 999,999
shares authorized, issued and outstanding....................... $ 10,000 $ 10,000 $ --
Convertible preferred stock--Series B, $0.01 par value-- 2,000,001
shares authorized, issued and outstanding....................... 20,000 20,000 --
Convertible preferred stock--Series C, $0.01 par value-- 254,999
shares authorized, issued and outstanding....................... -- 3,000 --
Convertible preferred stock--Series D, $0.01 par value-- 189,000
shares authorized, 188,072 shares issued and outstanding........ -- 2,000 --
Convertible preferred stock--Series E, $0.01 par value-- 1,300,025
shares authorized, 741,669 shares issued and outstanding........ -- 7,000 --
Convertible preferred stock--Series A-1, B-1, D-1 and E-1, $0.01
par value--4,489,025 shares authorized; none issued and
outstanding..................................................... -- -- --
Common stock, $0.001 par value--15,000,000 shares authorized,
4,787,000 shares issued and outstanding at December 31, 1996;
25,000,000 shares authorized, 9,179,000 shares issued and
outstanding at December 31, 1997; 35,000,000 shares authorized,
17,384,000 shares issued and outstanding at March 31, 1998...... 5,000 9,000 17,000
Additional paid-in capital........................................ 21,088,000 67,352,000 97,801,000
Accumulated deficit............................................... (1,742,000) (33,315,000) (41,731,000)
------------ ------------ ------------
$ 19,381,000 $ 34,088,000 $ 56,087,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

59
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. STOCKHOLDERS' EQUITY--(CONTINUED)
On May 6, 1996, the Company issued 839,285 shares of $.001 par value common
stock for cash consideration of $0.01 per share, which resulted in proceeds to
the Company of approximately $12,000.

On May 6, 1996, the Company issued 999,999 shares of Series A convertible
preferred stock with a par value of $0.01 for $1.00 per share, which resulted in
proceeds to the Company of $999,999. On November 12, 1996, the Company issued
2,000,001 shares of Series B convertible preferred stock with a par value of
$0.01 for $3.00 per share, which resulted in proceeds to the Company of
$6,000,003.

On January 29, 1997 and March 12, 1997, the Company raised approximately
$765,000 in connection with the issuance of an aggregate of 254,999 shares of
Series C convertible preferred stock, with a par value of $0.01 per share.

On June 19, 1997, the Company issued 188,072 shares of Series D convertible
preferred stock with a par value of $0.01 for $5.50 per share as repayment of a
$1,000,000 loan plus accrued interest that had been made to the Company by
certain stockholders on January 14, 1997. In connection with the original loan,
the stockholders received warrants to purchase 23,810 shares of the Company's
common stock at a price of $4.20 per share, exercisable through January 14,
2002, resulting in deferred financing costs of approximately $2,400 based on the
Black-Scholes valuation method. The unamortized portion of this amount was
charged to interest expense when the loan was converted.

On June 19, July 31 and August 18, 1997, the Company issued an aggregate of
741,669 shares of Series E convertible preferred stock with a par value of $0.01
for $6.00 per share in exchange for $4,450,000.

All classes of convertible preferred stock have the right to share in any
dividends declared and paid or set aside for the common stock of the Company,
pro rata, in accordance with the number of shares of common stock into which
such shares of preferred stock are then convertible; liquidation preference of
the original issuance price per share; and voting rights equal to the number of
shares of common stock into which the preferred stock is then convertible. All
classes of preferred shares were converted into common shares at a ratio of 7:5
upon the occurrence of the IPO. The holders of the convertible preferred stock
were not entitled to payment of any accrued but unpaid dividends. As more fully
described in Note 9, certain of the Company's debt agreements prohibit the
Company from declaring or paying dividends.

The Company is a party to a stockholders agreement dated as of November 22,
1996 (the Stockholders Agreement), with its President, certain stockholders and
the SCOI physicians. Under the Stockholders Agreement, the stockholders agreed
to vote their shares to appoint to the Company's board of directors certain
designees of such stockholders. The stockholders (other than the SCOI
physicians) also have the right of first refusal with respect to issuances of
the Company's capital stock or securities convertible into capital stock and are
subject to various restrictions on transfers of the Company's securities. Under
the terms of the Stockholders Agreement, 500,000 shares of the common stock that
the Company's President acquired for cash on May 6, 1996, are subject to vesting
over a 40-month period subject to acceleration in certain circumstances. In the
event of the termination of the President's employment with the Company for any
reason, the Company has the right to repurchase from the President all of the
shares of unvested stock at a purchase price equal to $0.01 per share. The
Stockholders Agreement terminated at the completion of the IPO.

On September 16, 1997, the Company filed a registration statement relating
to its common stock with the Securities and Exchange Commission. This
registration statement became effective on February 4, 1998 and the Company
issued 4,000,000 shares of common stock to the public at a price of $7.00 per
share. The offering was completed on February 9, 1998. On March 4, 1998, the
underwriters exercised their overallotment option and the Company issued an
additional 600,000 shares of common stock at a price of $7.00 per share. Costs
of the offering reduced the net proceeds by $7,033,000. Concurrent with this
offering, the Company's certificate of incorporation was amended to increase the
Company's authorized common stock from 25,000,000 shares to 35,000,000 shares.

See Note 10 for additional equity transactions.

60
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

8. INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes. Deferred income tax assets and liabilities are determined based
upon differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amount
of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's net deferred
tax assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
-------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Amortization of intangible assets................ $188,000 $ 6,000,000 $ 6,900,000
Accrued expenses................................. 174,000 278,000 882,000
Stock option deduction for books................. -- 1,802,000 2,200,000
NOL carry-forward................................ 319,000 3,719,000 5,400,000
-------- ----------- -----------
Deferred tax assets.............................. 681,000 11,799,000 15,382,000
Less valuation allowance......................... (670,000) (11,558,000) 15,094,000
-------- ----------- -----------
Total deferred tax assets........................ 11,000 241,000 288,000
Deferred tax liabilities:
Depreciation..................................... (11,000) (241,000) (288,000)
-------- ----------- -----------
Total deferred tax liabilities..................... -- (241,000) (288,000)
-------- ----------- -----------
Total net deferred taxes........................... $ 0 $ 0 $ 0
-------- ----------- -----------
-------- ----------- -----------
</TABLE>

SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, management
has determined that a $670,000 and $11,558,000 and $15,094,000 valuation
allowance at December 31, 1996 and 1997, and March 31, 1998, respectively, is
necessary to reduce the deferred tax assets to the amount that will more than
likely be realized. The change in the valuation allowance for the two years
ended December 31, 1997 was $670,000 and $10,880,000, respectively, and the
change in the valuation allowance for the three months ended March 31, 1998 was
$3,536,000.

At December 31, 1996 and 1997 and March 31, 1998, the Company has available
net operating loss carryforwards of $826,000, $9,631,000 and $14,093,000
respectively, which expire in the years 2011 through 2013. The Company has had
two ownership changes as defined by the Internal Revenue Code Section 382 and as
such, net operating loss carryforwards of approximately $11,608,000 at March 31,
1998, are limited to a utilization restriction of approximately $4,500,000 per
year.

The reconciliation of income tax computed at the U.S. federal statutory
rate to income tax expense is as follows:

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------- ---------------------
1996 1997 1997 1998
------ ------ ----------- ------
(UNAUDITED)

<S> <C> <C> <C> <C>
Tax at U.S. statutory rate......................... (34.0%) (34.0%) (34.0%) (34.0%)
State taxes, net of federal........................ (4.6%) (4.1%) (4.6%) (4.6%)
Non-deductible items............................... 0.2% 3.6% 0.1% .2%
Change in valuation allowance...................... 38.4% 34.5% 38.5% 42.0%
Other.............................................. 0.0% 0.0% 0.0% (3.6%)
------ ------ ----------- ------
0.0% 0.0% 0.0% 0.0%
------ ------ ----------- ------
------ ------ ----------- ------
</TABLE>

61
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. BORROWINGS

Borrowings consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Borrowing under senior revolving lines of credit........... $ -- $ 6,113,000 $ 7,865,000
Secured term note due June 29, 1998, plus interest at prime
plus 4% (12.5% at March 31, 1998)........................ -- -- 6,992,000
Senior secured term note, payable in monthly installments
of $90,000 through December 31, 2000, plus interest at
prime plus 3.5% (12% at December 31, 1997 and March 31,
1998).................................................... -- 3,250,000 3,250,000
Secured term note due January 1, 1999, plus interest at
prime plus 3.5% (12% at December 31, 1997)............... -- 2,500,000 --
Subordinated debt, payable in monthly installments of
$257,000 through December 31, 2000, including interest at
14% until January 1, 1998, increasing to 15%
thereafter............................................... -- 7,332,000 5,729,000
Subordinated convertible debentures, due August 31, 2000,
plus interest, payable semiannually at 6%................ -- 4,000,000 --
Promissory notes to physicians due at various dates ranging
from, January 2, 1998 to January 31, 1999, plus interest
at rates ranging from 6% to 11%.......................... 12,909,000 373,000
Shareholder notes payable.................................. 40,000 4,366,000 991,000
Other...................................................... 77,000 64,000 42,000
------------ ------------ ------------
117,000 40,534,000 25,242,000
Less current portion....................................... 58,000 5,389,000 188,000
------------ ------------ ------------
$ 59,000 $ 35,145,000 $ 25,054,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

In January 1997, the Company obtained short-term loans in the aggregate
amount of $999,999 from certain stockholders, including its President. In
connection with such loans, the Company issued warrants to such stockholders to
purchase an aggregate of 23,810 shares of Common Stock at an exercise price of
$4.20 per share which are immediately exercisable for a period of five years.
The fair value of the warrants based on the Black-Scholes valuation method is
$2.30 per share using the assumptions described in Note 6 and the actual life of
the warrant. In June 1997, such loans and related accrued interest were
converted into 188,072 shares of Series D Preferred Stock. Also, in January
1997, the Company issued two promissory notes to the Company's President
totaling $867,000. The notes plus accrued interest were converted to a single
note in the amount of $991,000 which bears interest at a rate of prime plus 3.5%
and is due on demand.

From March 1997 to March 31, 1998, the Company entered into a series of
credit agreements with its senior lender secured by the accounts receivable
acquired from each of the affiliated physician groups. The Company may borrow up
to an aggregate limit of $23,000,000, subject to a borrowing base of 85% of
eligible accounts receivable. Outstanding loans bear interest at the prime rate
plus 1.75% (10.25% at December 31, 1997 and March 31, 1998) and mature at
various dates ranging from March 1999 to December 1999. The credit agreements
and term loans with its senior lender require the Company to maintain a
prescribed level of tangible net worth and interest coverage and place
limitations on indebtedness, liens and investments, and prohibit the payment of
dividends. At December 31, 1997 and March 31, 1998, amounts outstanding under
these agreements were $6,113,000 and $7,865,000, respectively, the maximum
allowable under the borrowing base restriction.

On June 30, 1997, the Company obtained a senior credit facility to fund
practice affiliations with its senior lender secured by a lien on substantially
all of the assets of the Company. The Company may borrow up to

62
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. BORROWINGS--(CONTINUED)
$3,250,000 for practice affiliations, of which $3,250,000 was outstanding as of
March 31, 1998 and December 31, 1997. The loan bears interest at the prime rate
plus 3.5% (12% at March 31, 1998 and December 31, 1997). Interest only is
payable through March 31, 1998, at which time the loan converts to a term loan
repayable in 36 monthly installments. The credit facility contains various
covenants including the right of the lender to declare the loan due and payable
upon the occurrence of a material adverse change in the financial condition or
business prospects of the Company. In addition, in September 1997, the Company
issued the senior lender a warrant to purchase 28,570 shares of the Company's
common stock for nominal cash consideration. The warrant contains put rights
which were exercised during the three month period ended March 31, 1998. The
value of the put rights is being amortized over the life of the related debt.
Under this facility, $1,500,000 of the Company's obligations are guaranteed by
the Company's President and other stockholders, and in connection therewith the
Company issued warrants to purchase an aggregate of 9,525 shares of common stock
for nominal cash consideration which are exercisable for a period of five years.
The fair value of the warrant based on the Black-Scholes valuation method is
$8.39 per share using the assumptions described in Note 6 and the actual life of
the warrants.

On August 1, 1997 and August 22, 1997, the Company entered into
subordinated loan agreements, with two different lenders, in the principal
amounts of $5,000,000 ('Comdisco') and $1,500,000 ('Cedar'). On November 14,
1997, Comdisco provided an additional $1 million of financing under an
additional subordinated loan agreement. The loans are secured by liens on all of
the Company's tangible and intangible personal property. The loans mature on
December 31, 2000, however, within the 45 days subsequent to the effective date
of the IPO (amended in the case of Comdisco to June 30, 1998 and paid off within
45 day requirement in the case of Cedar), the Company is obligated to prepay the
loans in full. These loans and the liens granted to the respective lenders are
subordinated in all respects to the current and future indebtedness of the
Company under the senior credit facility described above. The loans initially
provided for interest at 14% per annum, which increased to 15% on January 1,
1998.

In connection with the Comdisco and Cedar loans the Company issued warrants
to purchase up to 125,000 and 37,500 shares, respectively, of the Company's
Series E Preferred Stock at a price per share equal to $6.00. As the IPO was not
effective by December 31, 1997, the warrants increased to 133,000 and 40,000,
respectively. These warrants are immediately exercisable for a period of 10
years or 5 years, respectively, from the effective date of the IPO. The fair
value per warrant based on the Black-Scholes valuation method is $3.77 per share
using the assumptions described in Note 6 and the actual life of the warrant. In
addition, pursuant to stock purchase agreements dated as of July 31, 1997 and
August 18, 1997, the Company issued 166,667 and 41,667 shares, respectively, of
Series E Preferred Stock to the lenders for an aggregate purchase price of
$1,250,000. The Cedar loan was repaid in February 1998.

On September 9, 1997, the Company issued and sold $4,000,000 in aggregate
principal amount of its subordinated convertible debentures due August 31, 2000
(the 'Debentures') pursuant to the Convertible Debenture Purchase Agreement,
dated as of September 9, 1997 (the 'Debenture Purchase Agreement'). The
Debentures were purchased by the Company's President, certain stockholders and
certain of the Company's underwriters. The Debentures bore interest at 6% per
annum and the unpaid principal amount of the Debentures was due on August 31,
2000. The Debentures were converted into 571,428 shares of Common Stock as of
March 31, 1998. As an inducement conversion of such debentures, the Company
issued 136,000 warrants with an exercise price of $7.00 per share. The fair
value per warrant based on the Black-Scholes valuation method using the
assumption described in Note 6 resulted in expenses of $604,000 which is
included in the accompanying consolidated statement of operations for the three
month period ended March 31, 1998.

63
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. BORROWINGS--(CONTINUED)
due and payable on January 1, 1999. In connection with this loan agreement, the
Company paid to the lender a fee in the amount of $300,000 when the loan was
repaid in February 1998.

On October 15, 1997, the Company obtained short-term bridge financing in
the aggregate amount of $3,375,000 from certain stockholders, including its
President, to fund practice affiliations. In connection with these loans, the
Company issued warrants to such stockholders to purchase an aggregate of 48,215
shares of Common Stock at an exercise price of $0.01 per share which are
immediately exercisable for a period of 5 years. The fair value per warrant
based on the Black-Scholes valuation method is $8.39 per share using the
assumptions described in Note 6 and the actual life of the warrant. The loan
bore interest at the prime rate plus 3.5% (12% at December 31, 1997). The
principal amounts and accrued interest were repaid in February 1998.

During October and November 1997, in connection with several practice
affiliations, the Company issued promissory notes that in the aggregate total
$12,909,000 (Physician Notes). These outstanding promissory notes bear interest
ranging from 6% to 11%. Substantially all of these promissory notes were due and
payable either on the date of the Company's completion of the IPO or at various
maturity dates ranging from January 2, 1998 to March 31, 1998. These notes were
repaid in the three months ended March 1998 with the exception of a single note
in the amount of $373,000.

On October 15, 1997, the Company issued to its President a warrant to
purchase 23,214 shares of common stock at an exercise price of $.01 per share.
The warrant is exercisable for a period of five years. The fair value of the
warrant based on the Black-Scholes valuation method is $8.39 per share using the
assumptions described in Note 6 and the actual life of the warrant.

On January 2, 1998, the Company obtained short-term financing in the form
of a demand note from its President in the amount of $1,000,000 to repay certain
of the Physician Notes. In connection with this loan, the Company issued a
warrant to the President to purchase 14,286 shares of common stock at an
exercise price of $0.01 per share. The demand notes bore interest at 8% per
annum. The fair value of the warrants based on the Black-Scholes valuation
method is $8.39 per share using the assumptions described in Note 6 and the
actual life of the warrant. The total value of the warrants, $120,000, was
charged to expense in the three months ended March 31, 1998. The warrant is
immediately exercisable for a period of 5 years. This note was repaid in
February 1998.

On March 26, 1998 the Company obtained additional short-term financing in
the form of a secured term note from its senior lender in the aggregate amount
of $6,992,000 to fund acquisitions and additional practice affiliations. The
note is secured by a lien on substantially all the assets of the Company.
Outstanding loans bear interest at the prime rate plus 4% (12.5% at March 31,
1998). Interest only is payable monthly and the entire principal amount is due
June 29, 1998. On April 9, 1998 the Company borrowed an additional $2,500,000,
increasing this term note to $9,492,000.

Included in other assets in the accompanying consolidated balance sheets as
of December 31, 1997 and March 31, 1998 are deferred financing costs related to
warrants issued in connection with certain borrowings. Such costs are being
amortized over the applicable life of the related debt.

Under the terms of all the credit agreements and credit facilities with the
senior lender, the subordinated loan agreements and the subordinated convertible
debentures, the Company is prohibited from declaring or paying any cash dividend
or making any distribution on any class of stock, except pursuant to an employee
repurchase plan or with the consent of the lender.

64
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. BORROWINGS--(CONTINUED)
On February 9, 1998, the Company completed the IPO (see Note 7), a portion
of the proceeds of which were used to repay the following borrowings:

<TABLE>
<S> <C>
Promissory notes to physicians................................................. $12,536,000
Subordinated debt.............................................................. 1,467,000
Secured term note.............................................................. 2,500,000
Short-term bridge notes........................................................ 3,375,000
Demand note to President....................................................... 1,000,000
-----------
$20,878,000
-----------
-----------
</TABLE>

In April 1998, the Company issued in the aggregate amount of $2,276,000 of
convertible promissory notes (Convertible Notes) in connection with the Seaview,
Hirsch and Community practice affiliations. The Convertible Notes bear interest
at 5% and are convertible into shares of common stock at a rate of $8.75 per
share on any unpaid principal amounts at the option of the holder after one year
from the affiliation date subject to four year vesting.

See Note 10 for subsequent refinancing of indebtedness.

10. SUBSEQUENT EVENT--CREDIT FACILITY AND ISSUANCE OF PREFERRED STOCK

On June 30, 1998 the Company refinanced its existing senior and
subordinated secured notes and its credit agreements with its senior lender and
Comdisco with proceeds from a $60,000,000 credit facility consisting of a
$10,000,000 revolving line of credit ('Revolving Loans'), a $25,000,000 term
note ('Tranche B Loan') and a $25,000,000 acquisition line of credit which all
amounts outstanding at June 30 , 2000 will convert to a term loan ('Tranche A
Loan') (collectively referred to as the 'Credit Facility').

Under the Revolving Loans, the Company may borrow up to $10,000,000 for
working capital and general corporate purposes and to finance start-up costs
relating to certain ancillary service facilities (as defined in the Credit
Facility). The Revolving Loans are subject to a borrowing base equal to 80% of
the product of eligible accounts receivable multiplied by the collection rate
(each as defined in the Credit Facility). The Revolving Loans mature on June 30,
2001 and interest is payable quarterly and, at the option of the Company, would
equal (a) a function of the greater of 0.50% plus the Federal Funds Rate or the
prime lending rate plus a margin ranging from 0.00%-1.25% based on the Company's
leverage ratio or (b) the LIBOR rate plus a margin ranging from 1.75%-3.00%
based on the Company's leverage ratio.

Under the Tranche A Loans, the Company may borrow up to $25,000,000 through
June 30, 2000 for qualified acquisitions and practice affiliations (as defined
in the Credit Facility). The Tranche A Loans are payable in quarterly
installments (assuming the entire amount is borrowed) of (a) $1,250,000
beginning September 30, 2000 through June 30, 2001; (b) $1,875,000 from
September 30, 2001 through June 30, 2002 and (c) $3,125,000 from September 30,
2002 through March 31, 2003 with the remaining unpaid balance due and payable on
June 30, 2003. Interest is payable quarterly and at rates equal to the Revolving
Loans.

Under the Tranche B Loan, the Company may borrow $25,000,000 for the sole
purpose of refinancing existing indebtedness (as defined in the Credit
Facility). The Tranche B Loan is payable $62,500 quarterly through June 30,
2001; $312,000 quarterly from September 30, 2001 through June 30, 2003;
$5,438,000 quarterly through March 31, 2004 with any unpaid balance due on June
30, 2004. Interest on the Tranche B Loan is payable quarterly and at the option
of the Company, and would equal (a) a function of the greater of 0.50% plus the
Federal Funds Rate or the prime lending rate (8.5% at June 24, 1998) plus a
margin ranging from .75%-1.50%, based on the Company's leverage ratio (as
defined in the Credit Facility) or (b) the LIBOR rate (approximately 5.5% at
June 24, 1998) plus a margin ranging from 2.50%-3.25% based on the Company's
leverage ratio.

65
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. SUBSEQUENT EVENT--CREDIT FACILITY AND ISSUANCE OF PREFERRED
STOCK--(CONTINUED)

Under the terms of the Credit Facility, the Company may be required to make
mandatory annual prepayments beginning in 2001 in an amount equal to 50% of
Excess Cash Flow (as defined in the Credit Facility). The Company is also
required to meet certain covenants, including (a) the maintenance of certain
fixed charge, interest coverage maximum funded indebtedness and leverage ratios,
(b) the maintenance of a minimum level of EBITDA and tangible net worth (as
defined in the Credit Facility) and (c) limitation on capital expenditures. The
Credit Facility also prohibits, with certain exceptions, the Company from paying
cash dividends. Additionally, under the terms of the Credit Facility the Company
is restricted from issuing subordinated debt, sales of Company assets, and
change in control of the Company.

Under the terms of the Credit Facility the Company has the right to request
letters of credit in an aggregate amount not to exceed $2,000,000 and due within
one year from the date of issuance.

The Credit Facility is secured by substantially all of the assets of the
Company and is supported by guarantees of the subsidiaries of the Company.

After giving effect to the Credit Facility, $7,125,000 of the amounts
currently due under the existing credit agreements have been excluded from
current liabilities since the refinancing resulted in this amount being
outstanding for an uninterrupted period extending beyond one year from the
balance sheet date. The Company expects to incur charges and expenses of
approximately $2,700,000 in connection with the repayment and early
extinguishment of debt which will be recognized in the quarter ending June 30,
1998.

The aggregate principal maturities of long-term debt remaining for the next
five years assuming that the Company fully utilized the Credit Facility
including the Revolving Loans Tranche A and Tranche B are as follows: 1999,
$188,000; 2000, $252,000; 2001, $4,002,000; 2002, $17,875,000; 2003, $12,498,000
and $25,185,000 thereafter.

In connection with the Credit Facility, the Company issued pursuant to a
Securities Purchase Agreement (the 'Purchase Agreement') a new Series A
Redeemable Convertible Preferred Stock (the 'Series A') ($0.01 par value) to an
affiliate of its agent bank in exchange for cash of $7,000,000. This Series A is
convertible into 1,473,684 shares of Common Stock. The Series A carries a 6%
cumulative dividend that is payable in cash. Pursuant to the Purchase Agreement,
the Company will issue an additional $3 million of Series C Redeemable
Convertible Preferred Stock (the 'Series C') for cash if, among other things,
the Company is able to obtain $18 million in annualized pro forma revenues from
new practice affiliations by July 31, 1998, as defined in the Purchase
Agreement. The Series C, if issued, is substantially identical to the Series A
and is also convertible into Common Stock; the number of shares of Common Stock
to be issued upon conversion is subject to certain future factors and
accordingly cannot be determined at this time. In addition, pursuant to the
Purchase Agreement, the investor obtained the right to nominate one member to
the Board of Directors of the Company and certain other rights.

In connection with the Credit Facility and the Purchase Agreement, the
Company issued an aggregate of 446,451 warrants to purchase Common Stock with
exercise prices ranging from $0.01-$9.00 per share with a weighted average
exercise price of $3.53 per share. The fair values per warrant based on the
Black-Scholes valuation method range from $3.26-$4.75 per share and the related
debt discount for certain of the warrants will be amortized over the life of the
Credit Facility. Certain of the warrants contain put rights, which become
effective upon the earlier of: (1) change of control or (2) June 30, 2005. In
addition, certain of the warrants are subject to anti-dilution provisions
which may ultimately increase the number of warrants issuable upon exercise to 2
% of the Company's fully-diluted Common Stock, resulting in additional financing
expense.

Additionally, if the Company is unable to obtain $26,475,000 in annual pro
forma revenues from new practice affiliations by September 8, 1998, as defined
in the Purchase Agreement, the Company may required to issue up to an aggregate
of 1,051,449 additional warrants to purchase Common Stock (assuming the Company
does not issue the Series C). If the Company does not complete an effective
registration statement to cover the

66
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. SUBSEQUENT EVENT--CREDIT FACILITY AND ISSUANCE OF PREFERRED
STOCK--(CONTINUED)

underlying common shares for the Convertible Preferred Stock by September 29,
1998, the Company will be required to issue additional warrants to purchase
Common Stock. The potential obligations for warrants and common shares cannot be
determined at this time.

The Series A and Series C are subject to redemption upon certain events
including, but not limited to, change in control and seven years from the date
of the original issuance. However, as long as the Credit Facility is in place
the redemption by the holder of the Series A and Series C is prohibited. If the
Series A and Series C have not been converted five years subsequent to the date
of issuance, the holder will receive increased Board of Directors'
participation, the dividend rate will increase to 12%, and the Company may be
required to issue additional warrants to purchase Common Stock.

The Preferred Stock is subject to anti-dilution provisions which may
ultimately decrease the conversion price resulting in the issuance of additional
shares of Common Stock upon the conversion of the Series A and Series C.

11. COMMITMENTS AND CONTINGENCIES

The Company has an employment agreement dated as of May 6, 1996, as
amended, with the President (the Employment Agreement). Base compensation under
the Employment Agreement is $300,000 per year, subject to increase by the Board
of Directors. In addition, the Board of Directors may award an annual bonus to
the President in an amount of up to 30% of his base salary based on the
attainment of certain benchmarks. The Company may terminate the President's
employment at any time and for any reason; provided that if his employment is
terminated without cause (as defined in such agreement) or as a result of his
becoming permanently disabled, the Company must pay the President a severance
amount determined in accordance with a formula contained in the agreement.

On August 15, 1997, an action entitled John Finlay v. Bone, Muscle & Joint,
Inc., was filed in the United States District Court or the Southern District of
Texas, whereby plaintiff asserted claims for breach of contract arising out of
an alleged employment agreement and alleged non-qualified stock option agreement
between plaintiff and the Company. Plaintiff's complaint sought compensatory
damages of approximately $135,000 pursuant to the alleged employment agreement
as well as 16,071 shares of the Company's Common Stock pursuant to the alleged
non-qualified stock option agreement. On May 11, 1998, a Stipulation and Order
of Dismissal with Prejudice was entered in the United States District Court for
the Southern District of Texas pursuant to a settlement agreement dated as of
May 11, 1998. The Company has recorded an accrual for this matter as of March
31, 1998.

On September 3, 1997, an action entitled Robert P. Lehmann, M.D., et al. v.
Bone, Muscle & Joint, Inc., et al., was filed. In this action, which is
currently pending in the United States District Court for the Southern District
of Texas, plaintiffs have asserted claims for breach of contract, common law
fraud and promissory estoppel arising out of an alleged restricted stock
purchase agreement between plaintiffs and the Company, Plaintiffs' amended
complaint seeks unspecified compensatory and exemplary damages as well as
specific performance for delivery of 117,860 shares of the Company's Common
Stock. The Company intends to defend against the action vigorously.

The Company and its affiliated physician practices are insured with respect
to medical malpractice risks on either an occurrence-rate or a claims-made
basis. Management is not aware of any claims against it or its affiliated
physicians which might have a material impact on the Company's financial
position or results of operations. Management of the company intends to renew
the existing claims-made policies annually and expects to be able to obtain such
coverage. When coverage is not renewed, management intends to purchase an
extended reporting period endorsement to provide professional liability coverage
for losses incurred prior to, but reported subsequent to, the termination of the
claims-made policies.

67
<PAGE>
BMJ MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company is subject to legal proceedings in the ordinary course of its
business including certain claims resulting from the result of successor
liability in connection with the assumption of certain liabilities of the
physician practices. The Company does not believe that any of such legal
proceedings, after consideration of professional and other liability insurance
and amounts provided in the accompanying consolidated balance sheet as of March
31, 1998, will have a material adverse effect on the Company's financial
position, results of operations or cash flows.

In March 1998, the Company had commitments totaling $2,750,000 of which
$200,000 had been funded for construction of two ambulatory surgery centers. The
Company also had purchase commitments totaling $1,300,000 for its management
information systems.

12. RETIREMENT PLAN

The Company has a qualified contributory savings plan covering
substantially all the employees as allowed under Section 401(k) of the Internal
Revenue Code which was implemented in October 1997. The plan permits participant
contributions, subject to certain limitations, and the Company may make
discretionary contributions based on the participants' contribution. The Company
made approximately $75,000 of matching contributions to the plan during the
three months ended March 31, 1998.

13. SUPPLEMENTAL CASH FLOW INFORMATION

Significant non-cash financing and investing activities for the year ended
December 31, 1996, are summarized as follows:

o The value of stock issued upon execution of Management Services
Agreements was $14,111,000.

o Non-cash transactions from practice affiliations including accounts
receivable, Management Services Agreements and due to/from
physicians amounted to $4,905,000.

o Equipment acquired under capital lease obligations amounted to
$77,000.

o Interest paid amounted to $9,000.

Significant non-cash financing and investing activities for the year ended
December 31, 1997, are summarized as follows:

o The value of stock issued upon execution of Management Services
Agreements was $23,292,000.

o Notes issued upon execution of Management Services Agreements was
$8,109,000.

o Non-cash transactions from practice affiliations including accounts
receivable, Management Services Agreements and due to/from
physicians amounted to $4,885,000.

o Short-term loans converted to preferred stock amounted to
$1,000,000.

o Deferred financing costs related to the issuance of warrants
amounted to $1,580,000.

o Common stock issued in payment of accrued salaries amounted to
$292,000.

o Interest paid amounted to $583,000.

Significant non-cash financing and investing activities for the three
months ended March 31, 1998, are summarized as follows:

o The value of stock issued upon execution of Management Services
Agreements was $143,000

o Interest paid amounted to $1,103,000

68
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Naresh Nagpal, M.D.............................. 48 President, Chief Executive Officer and Director
David H. Fater.................................. 51 Executive Vice President, Chief Financial
Officer and Director
David K. Ellwanger.............................. 41 Senior Vice President of Operations
Sheldon Lutz.................................... 54 Senior Vice President of Corporate Development
Neil F. Luria................................... 30 General Counsel and Secretary
Georges Daou(2)................................. 37 Director
Stewart G. Eidelson, M.D........................ 48 Director
James M. Fox, M.D(1)............................ 55 Director
Ann H. Lamont(1)................................ 41 Director
Donald J. Lothrop(2)............................ 38 Director
</TABLE>

- ------------------
(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

The Company's Board of Directors is classified into three classes which
consist of, as nearly as practicable, an equal number of directors. The members
of each class serve staggered three-year terms. Messrs. Eidelson and Fox are
Class I directors, Mr. Fater and Ms. Lamont are Class II directors and Messrs.
Nagpal, Daou and Lothrop are Class III directors. Nominees for director will be
divided among the three classes upon their election or appointment. The terms of
Class I, Class II and Class III directors expire at the annual meeting of
stockholders to be held in 1999, 2000 and 2001, respectively.

Naresh Nagpal, M.D. became President and Chief Executive Officer and a
director in March 1996. From September 1993 to August 1996, Dr. Nagpal served on
the board of directors of InPhyNet Medical Management Inc. ('IMMI'), a PPM. From
September 1993 to August 1995, Dr. Nagpal was the Senior Executive Vice
President and Chief Operating Officer of IMMI. From January 1985 to August 1993,
Dr. Nagpal was President of Acute Care Specialists, Inc. and its related
companies which are PPMs that provide services to several hospitals and
physicians. Dr. Nagpal was the Chairman of the Department of Emergency Medicine
at Barberton Citizens Hospital in Barberton, Ohio from January to June of 1992
and Chairman of the Department of Emergency Medicine at Audobon Regional Medical
Center in Louisville, Kentucky from July to December of 1992.

David H. Fater became Executive Vice President and Chief Financial Officer
in February 1997 and a director in April 1997. From June 1995 to January 1997,
Mr. Fater was the Executive Vice President and Chief Financial Officer of
Community Care of America, Inc. From January 1993 to April 1995, Mr. Fater was
the Executive Vice President and Chief Financial Officer of Coastal Physician
Group, Inc., a PPM. Prior to that, Mr. Fater was a partner at Ernst & Young,
LLP.

David 'Deke' K. Ellwanger became Senior Vice President of Operations in
July 1997. From July 1994 to July 1997, Mr. Ellwanger was the Vice President of
Managed Care for MedPartners/InPhyNet Medical Management Inc., a PPM. From
August 1985 to June 1994, Mr. Ellwanger worked for Aetna Health Plans/PARTNERS
National Health Plans managing various HMO's and HMO acquisitions.

69
<PAGE>
Sheldon Lutz became Senior Vice President of Corporate Development in
November 1997. From February 1992 until 1997, Mr. Lutz was the Vice President of
Development for Columbia/HCA Healthcare Corporation responsible for acquisitions
and joint ventures and development of a marketwide joint venture model.

Neil F. Luria became General Counsel in February 1998 and Secretary in
April 1998. From September 1992 to February 1998, Mr. Luria was an attorney with
Jones, Day, Reavis & Pogue.

Georges Daou became a director in September 1997. Mr. Daou is a founder of
DAOU Systems, Inc., a computer consulting company, and has served as Chairman of
the Board and Chief Executive Officer of such company since 1987. Mr. Daou sits
on the boards of various healthcare and community organizations, including the
College of Healthcare Management Executives and the Healthcare Information
Managers Association.

Stewart G. Eidelson, M.D. became a director in October 1997. Dr. Eidelson
is a shareholder of, and since 1990 has been an orthopedic surgeon at, OSA.

James M. Fox, M.D. became a director in November 1996. Dr. Fox was a
founding partner of, and since 1992 has been an orthopedic surgeon at, SCOI.

Ann H. Lamont became a director in May 1996. Ms. Lamont is a managing
member of each of the general partner of Oak Investment Partners VI, Limited
Partnership ('Oak Partners') and Oak VI Affiliates Fund, Limited Partnership
('Oak VI'). Since September 1983, Ms. Lamont has been a general partner or
managing member of the general partner of four other venture capital
partnerships affiliated with Oak Partners and Oak VI. Ms. Lamont currently
serves as a director on the board of ViroPharma, Incorporated.

Donald J. Lothrop became a director in May 1996. Since July 1994, Mr.
Lothrop has been a General Partner of Delphi Ventures, a privately held venture
capital firm. From January 1991 to July 1994, Mr. Lothrop was a Partner at
Marquette Venture Partners, Inc., a privately held venture capital partnership.
Mr. Lothrop currently serves as a director on the boards of Accordant Health
Services, Inc., Affiliated Research Centers, Inc., EXOGEN, Inc., Kelson
Physician Partners, Inc., Pacific Dental Benefits, Presidium Inc. and PriCare,
Inc.

NATIONAL PHYSICIAN ADVISORY BOARD

The Company has established a National Physician Advisory Board (the
'Advisory Board') which provides oversight of certain matters including
responsibility for all patient care and clinical issues. The Advisory Board also
has responsibility for providing guidance to the Company regarding the
development of its disease management system and protocols as well as all
professional issues. The Advisory Board consists of eight musculoskeletal
physicians from various parts of the country, including physicians who are not
affiliated with the Company.

The eight members of the Advisory Board are:

<TABLE>
<CAPTION>
PHYSICIAN PRACTICE
- ------------------------------------------------------------------------- --------
<S> <C>
Kalman Blumberg, M.D..................................................... BOS
James Esch, M.D.......................................................... Tri-City
Lanny Johnson, M.D....................................................... Retired
Gilbert R. Meadows, M.D.................................................. STSC
Ranjan Sachdev, M.D...................................................... LVBMJ
Martin Silverstein, M.D.................................................. LOS
Arthur Vasen M.D......................................................... Seaview
Donald Wiss, M.D......................................................... SCOI
</TABLE>

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

In connection with the initial public offering of Common Stock of the
Company, the Initial Statement of Beneficial Ownership of Securities on Form 3
for each of the following members of the Board of Directors was not filed in a
timely manner due to an administrative oversight: Dr. Eidelson, Dr. Fox, Ms.
Lamont and Mr. Lothrop. In addition, the Statement of Changes of Beneficial
Ownership of Securities on Form 4 (the 'Form 4') for each of the following
members of the Board of Directors was not filed in a timely manner due to an
administrative oversight: Dr. Eidelson and Dr. Nagpal. Form 4s for Dr. Eidelson
and Dr. Nagpal were filed to report the purchase of 15,000 shares of Common
Stock and 3,200 shares of Common Stock, respectively.

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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information concerning the
compensation paid by the Company to the President and Chief Executive Officer of
the Company during the fiscal year ended December 31, 1996 (the only executive
officer of the Company during such year) and to the President and Chief
Executive Officer and the Executive Vice President and Chief Financial Officer
of the Company during the fiscal year ended December 31, 1997. In addition,
certain information is provided on an annualized basis for the fiscal year ended
March 31, 1998 for the President and Chief Executive Officer, the Executive Vice
President and Chief Financial Officer and the Senior Vice President of
Operations.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- ------------
OTHER SECURITIES ALL
FISCAL ANNUAL UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
- ------------------------------------ ------ -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Naresh Nagpal, M.D.................. 1996 $225,000 $67,500 -- -- --
President and Chief Executive 1997 300,000 90,000 -- -- --
Officer *1998 300,000

David H. Fater...................... 1997 194,615 50,000 -- -- --
Executive Vice President and Chief *1998 218,307 49,000 -- -- --
Financial Officer

David K. Ellwanger.................. *1998 136,769 22,000 -- -- --
Senior Vice President of
Operations
</TABLE>

- ------------------
* Reflects information for the twelve months ended March 31, 1998. In addition,
no additional executive officers are listed in the table above because no such
officer received compensation of $100,000 during the periods indicated.

OPTION GRANTS

There were no options granted to Naresh Nagpal M.D., the President and
Chief Executive Officer during the fiscal years ended December 31, 1996 and
1997, but options to purchase 100,000 shares of Common Stock at an exercise
price of $0.49 per share were granted to David H. Fater, the Executive Vice
President and Chief Financial Officer, during the fiscal year ended December 31,
1997. On May 27, 1998, Dr. Nagpal received options to purchase 75,000 shares of
Common Stock at an exercise price of $.01 per share pursuant to the terms and
conditions of Dr. Nagpal's employment agreement. In addition, on May 27, 1998,
Stewart Eidelson, M.D., a Director of the Company, received options to purchase
75,000 shares of Common Stock at an exercise price of $5.125 per share.

STOCK OPTION PLAN

In order to attract and motivate employees, consultants and directors to
use their best efforts on behalf of the Company, the Company may, pursuant to
its Option Plan, grant to its employees, consultants, and directors options to
purchase an aggregate of 2,000,000 shares of Common Stock (subject to adjustment
in certain circumstances). If any options expire or are canceled or terminated
without being exercised, the Company may, in accordance with the terms of the
Option Plan, grant additional options with respect to those shares of Common
Stock underlying the unexercised portion of such expired, canceled or terminated
options.

The Option Plan may be administered by the Board of Directors or by a
committee of the Board of the Directors (the 'Committee,' and references to the
Committee shall mean the Board of Directors, if a committee is not appointed).
Grants of Common Stock may consist of (i) options intended to qualify as
incentive stock options ('ISOs') or (ii) nonqualified stock options that are not
intended so to qualify ('NSOs'). Except as set forth below, the term of any such
option is ten years. Options may be granted to any employees (including

71
<PAGE>
officers and directors) of the Company, members of the Board of Directors who
are not employees, and consultants and advisers who perform services to the
Company or any of its subsidiaries.

The option price of any ISO granted under the Option Plan will not be less
than the fair market value of the underlying shares of Common Stock on the date
of grant; provided that the price of an ISO granted to a person who owns more
than 10% of the total combined voting power of all classes of stock of the
Company must be at least equal to 110% of the fair market value of Common Stock
on the date of grant and, in such case, the ISO's term may not exceed five
years. The option price of an NSO will be determined by the Committee in its
sole discretion, and may be greater than, equal to or less than the fair market
value of the underlying shares of Common Stock on the date of grant; provided
that, subsequent to the initial public offering of the Company's Common Stock,
the price of the underlying shares may not be less than fair market value. A
grantee may pay the option price (i) in cash, (ii) by delivering shares of
Common Stock already owned by the grantee or vested options held by the grantee,
which, in either case, have a fair market value on the date of exercise equal to
the option price or (iii) by any combination of (i) and (ii) above. With respect
to any options, the Committee may impose such vesting and other conditions as
the Committee may deem appropriate, all of which terms and conditions must be
set forth in an option agreement between the Company and the grantee. Options
may be exercised by the grantee at any time during his employment or retention
by the Company or any subsidiary thereof and within a specified period after
termination of the grantee's employment or retention.

In the event of a change of control (as defined in the Option Plan), all
grantees will be afforded an opportunity to exercise the portion of their
respective options that are then vested and exercisable. Thereafter, any
unexercised and any unvested portion of all outstanding options will be
automatically terminated.

All options issued under the Option Plan will be granted subject to any
applicable federal, state and local withholding requirements. At the time of
exercise, the grantee must remit to the Company an amount sufficient to satisfy
the total amount of any such taxes required to be withheld by the Company with
respect to such exercised options.

The Board of Directors may amend or terminate the Option Plan at any time;
provided that, under certain circumstances the approval of the stockholders of
the Company may be required. As of March 31, 1998, the Company has granted
options under the Option Plan to purchase an aggregate of 1,550,832 shares of
Common Stock, of which 14,286 have been exercised, 96,429 have been canceled and
184,643 were issued to physicians. The Option Plan will terminate on May 6,
2006, unless earlier terminated by the Board of Directors or extended by the
Board of Directors with the approval of the stockholders.

EMPLOYMENT AGREEMENT

The Company has entered into an employment agreement dated as of May 6,
1996, as amended, with Dr. Nagpal (the 'Nagpal Employment Agreement'). Base
compensation under the Nagpal Employment Agreement is $300,000 per year, subject
to increase by the Board of Directors. In addition, the Board of Directors may
award an annual bonus to Dr. Nagpal in an amount of up to 30% of his base salary
based on the attainment of certain benchmarks. The Company may terminate Dr.
Nagpal's employment at any time and for any reason; provided that, if his
employment is terminated without cause (as defined in such agreement) or as a
result of his becoming permanently disabled, the Company must pay Dr. Nagpal a
severance amount determined in accordance with a formula contained in the
agreement.

Under the Nagpal Employment Agreement, Dr. Nagpal is prohibited from
directly or indirectly competing with the Company during the term of his
employment with the Company and for an additional year thereafter or as long as
the Company is making severance payments to him. However, there can be no
assurance as to the enforceability of such Agreement. The restraint on
competition by Dr. Nagpal is geographically limited to any state in the United
States in which the Company or any of its subsidiaries conducts business or
specifically plans to conduct business at the time of the termination of his
employment with the Company. Under the terms of the Nagpal Employment Agreement,
Dr. Nagpal acknowledges that any proprietary information (as defined in such
agreement) that he may develop is the sole property of the Company and agrees
not to disclose to, or use for the benefit of, any person or entity (other than
the Company) any of such proprietary information whether or not developed by
him.

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<PAGE>
DIRECTOR COMPENSATION

The non-employee directors currently receive $10,000 annual compensation
for their service on the Board of Directors, $2,000 for each meeting attended in
person and $1,000 for each meeting attended telephonically and are reimbursed
for their out-of-pocket expenses. Under the Company's Option Plan, non-employee
directors are eligible to receive option grants. For the transition period ended
March 31, 1998, one meeting for the Board of Directors was held and at least 75%
of the members of the Board of Directors attended such meeting.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board of Directors currently includes a Compensation Committee composed
of two directors, Ms. Lamont and Dr. Fox, an Audit Committee composed of two
directors, Messrs. Daou and Lothrop and a Finance Committee composed of two
Directors, Dr. Eidelson and Dr. Fox. The Compensation Committee determines
compensation for executive officers of the Company and administers the Company's
Option Plan. The Audit Committee reviews the scope and results of audits and
internal accounting controls and all other tasks performed by the independent
public accountants of the Company.

Prior to the establishment of the Compensation Committee in February 1997,
the Board of Directors determined the compensation payable to the Company's
executive officers. Stock options have been granted to employees of the Company
and, at the end of fiscal 1997, the Board of Directors approved an incentive
bonus for Dr. Nagpal and Mr. Fater.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of May 31, 1998
regarding the beneficial ownership of the Common Stock of the Company with
respect to (i) each person known by the Company to own beneficially more than 5%
of the outstanding shares of Common Stock; (ii) each of the Company's directors;
and (iii) all directors and officers as a group. Unless otherwise indicated, the
address for each stockholder is c/o BMJ Medical Management, Inc., 4800 North
Federal Highway, Suite 101E, Boca Raton, Florida 33431.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------------------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
Delphi Ventures III, L.P.(2).......................... 1,384,079 7.8%
3000 Sand Hill Road, Building One, Suite 135,
Menlo Park, California 94025
Oak Investment Partners VI, L.P.(3)................... 1,384,079 7.8
One Gorham Island
Westport, Connecticut 06880
Naresh Nagpal, M.D.(4)................................ 1,997,499 11.1
David H. Fater(5)..................................... 100,200 *
Georges Daou(6)....................................... 35,714 *
Stewart G. Eidelson, M.D(7)........................... 101,339 *
James M. Fox, M.D.(8)................................. 469,004 2.6
Ann H. Lamont(3)(9)................................... 1,384,079 7.8
Donald J. Lothrop(2)(10).............................. 1,384,079 7.8
David Ellwanger(11)................................... 89,285 *
Sheldon Lutz(12)...................................... 64,500 *
All officers and directors as a group (9
persons)(13)........................................ 5,625,699 30.7
</TABLE>

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

* Less than one percent.

(1) Applicable percentage of ownership is based on 17,672,135 shares of Common
Stock outstanding as of May 31, 1998. Beneficial ownership is determined in
accordance with the rules of the Commission and includes voting and
investment power with respect to securities. Securities subject to options
or warrants currently exercisable or exercisable within 60 days of May 31,
1998 are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options or warrants, but are not
deemed
(Footnotes continued on next page)

73
<PAGE>
(Footnotes continued from previous page)
outstanding for purposes of computing the percentage ownership of any other
person. Except for shares held jointly with a person's spouse or subject to
applicable community property laws, or as indicated in the footnotes to
this table, each stockholder identified in the table possesses sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by such stockholder.

(2) Includes (i) 24,036 shares of Common Stock owned by Delphi BioInvestments
and (ii) warrants to purchase 24,495 shares of Common Stock owned by the
stockholder and warrants to purchase 441 shares of Common Stock owned by
Delphi BioInvestments.

(3) Includes (i) 30,622 shares of Common Stock owned by Oak VI and (ii)
warrants to purchase 41,432 shares of Common Stock.

(4) Includes (i) 182,145 shares of Common Stock reserved for issuance upon
exercise of presently exercisable stock options and (ii) warrants to
purchase 79,896 shares of Common Stock. Dr. Nagpal's shares of Common Stock
are held in two trusts for his children, the Prianker Nagpal Family Trust
and the Zubin Nagpal Family Trust. Dr. Nagpal is the grantor of each trust
and Dr. Nagpal's wife is the sole trustee of each trust.

(5) Includes (i) 66,965 shares of Common Stock reserved for issuance upon
exercise of presently exercisable options and (ii) 200 shares of Common
Stock held by Mr. Fater's spouse.

(6) Consists of 35,714 shares of Common Stock reserved for issuance upon
exercise of presently exercisable options.

(7) Includes (i) 10,020 shares of Common Stock issued pursuant to a Management
Services Agreement and (ii) 35,714 shares of Common Stock reserved for
issuance upon exercise of presently exercisable stock options.

(8) Includes warrants to purchase 5,357 shares of Common Stock and presently
exercisable options to purchase 35,714 shares of Common Stock owned by the
stockholder.

(9) Ms. Lamont, a director of the Company, is a managing member of each of the
general partners of Oak Investment and Oak VI. As such, Ms. Lamont may be
deemed to have an indirect pecuniary interest (within the meaning of Rule
16a-1 under the Exchange Act), in an indeterminate portion of the shares
beneficially owned by Oak Investment and Oak VI. All of the shares
indicated as owned by Ms. Lamont are owned beneficially by Oak Investment
and Oak VI and are included because of the affiliation of Ms. Lamont with
each of the partnerships. Ms. Lamont disclaims beneficial ownership of
these shares to the extent permitted under Rule 13d-3 under the Exchange
Act.

(10) Mr. Lothrop, a director of the Company, is a General Partner of Delphi
Ventures. As such, Mr. Lothrop may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act), in an
indeterminate portion of the shares beneficially owned by Delphi Ventures
and Delphi BioInvestments. All of the shares indicated as owned by Mr.
Lothrop are owned beneficially by Delphi Ventures and Delphi BioInvestments
and are included because of the affiliation of Mr. Lothrop with each of the
partnerships. Mr. Lothrop disclaims beneficial ownership of these shares to
the extent permitted under Rule 13d-3 under the Exchange Act.

(11) Consists of 89,285 shares of Common Stock reserved for issuance upon
exercise of presently exercisable options.

(12) Includes 62,500 shares of Common Stock reserved for issuance upon exercise
of presently exercisable stock options.

(13) Includes beneficial ownership of an aggregate of 2,768,158 shares of Common
Stock and warrants to purchase Common Stock attributable to the affiliation
of Ms. Lamont and Mr. Lothrop with the entities described in footnotes (9)
and (10) above.

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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

With respect to certain of the following transactions: (i) Ann Lamont, a
Director of the Company, is a managing member of each of the general partners of
Oak Investment and Oak VI, (ii) Donald Lothrop, a Director of the Company is a
General Partner of Delphi Ventures and (iii) Naresh Nagpal, M.D. is a Director,
the President and Chief Executive Officer of the Company.

In connection with its initial capitalization, the Company sold shares of
Common Stock and Series A Convertible Preferred Stock (the 'Series A Preferred
Stock') to each of the following persons and entities at a per share purchase
price of $0.014 and $1.00, respectively: (a) Oak Investment purchased 104,700
and 325,733 shares of Common Stock and Series A Preferred Stock, respectively;
(b) Oak VI purchased 2,445 and 7,600 shares of Common Stock and Series A
Preferred Stock, respectively; (c) Delphi Ventures purchased 105,250 and 327,438
shares of Common Stock and Series A Preferred Stock, respectively; (d) Delphi
BioInvestments III, L.P. ('Delphi BioInvestments') purchased 1,895 and 5,895
shares of Common Stock and Series A Preferred Stock, respectively; (e) Dr.
Nagpal purchased 607,145 and 333,333 shares of Common Stock and Series A
Preferred Stock, respectively and (f) Scheer & Co. purchased 17,855 shares of
Common Stock. Upon consummation of the Company's IPO, each outstanding share of
Series A Preferred Stock automatically converted into .7143 shares of Common
Stock.

During the period beginning November 1996 and ending in March 1997, the
Company raised additional working capital funds by issuing additional shares of
preferred stock. On November 12, 1996, the Company issued an aggregate of
2,000,001 shares of Series B Convertible Preferred Stock, $0.01 par value (the
'Series B Preferred Stock'), to the following persons and entities in the
following amounts: Oak Partners, 651,467 shares; Oak VI, 15,200 shares; Delphi
Ventures, 654,877 shares; Delphi BioInvestments, 11,790 shares; and Dr. Nagpal,
666,667 shares. The investors paid an aggregate purchase price of approximately
$6.0 million for the Series B Preferred Stock. In connection with the IPO, each
outstanding share of Series B Preferred Stock automatically converted into .7143
shares of Common Stock. An additional $764,997 was raised by the Company from
the issuance of an aggregate of 254,999 shares of Series C Convertible Preferred
Stock, $0.01 par value (the 'Series C Preferred Stock'), on January 22, 1997 and
March 12, 1997 to certain of the SCOI physicians (including Dr. Fox, one of the
Company's directors), key employees and legal counsel of SCOI, an employee of
the Company, CGJR Health Care Private Equities, L.P., CGJR II, L.P. and CGJR/MF
III, L.P. In connection with the IPO, each outstanding share of Series C
Preferred Stock automatically converted into .7143 shares of Common Stock. On
January 14, 1997, the Company obtained short-term loans in the aggregate amount
of $999,999 from Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI
and Dr. Nagpal. In connection with such loans, the Company issued warrants to
the lenders to purchase an aggregate of 23,810 shares of Common Stock, which
warrants may be exercised at any time, in whole or in part, prior to January 14,
2002 at an exercise price of $4.20 per share. The Company borrowed an additional
$866,667 (of which $130,000 has been repaid) from Dr. Nagpal on January 10, 1997
and January 14, 1997. Each of the foregoing loans bears interest at 14% per
annum. On June 19, 1997, pursuant to a letter agreement, the Company issued an
aggregate of 188,072 shares of Series D Convertible Preferred Stock, $0.01 par
value (the 'Series D Preferred Stock'), to Oak VI, Oak Partners, Delphi
Ventures, Delphi BioInvestments, and Dr. Nagpal in exchange for the cancellation
of promissory notes in the aggregate principal amount of $999,999, plus accrued
interest, previously issued by the Company to secure loans made by such
investors to the Company. In connection with the IPO, each outstanding share of
Series D Preferred Stock automatically converted into .7143 shares of Common
Stock.

On June 19, 1997, pursuant to a letter agreement, the Company issued an
aggregate of 533,335 shares of Series E Convertible Preferred Stock, $0.01 par
value (the 'Series E Preferred Stock'), to Oak VI, Oak Partners, Delphi
Ventures, Delphi BioInvestments, Dr. Nagpal, CGJR Health Care, CGJR II, and
CGJR/MF. The investors paid an aggregate purchase price of approximately $3.2
million for the Series E Preferred Stock. In connection with the IPO, each
outstanding share of Series E Preferred Stock automatically converted into .7143
shares of Common Stock.

On June 30, 1997, the Company issued a secured term note in the aggregate
principal amount of approximately $3.3 million to HCFP Funding (the 'June HCFP
Note'), which bears interest at the Base Rate (defined as the prime rate
designated by Fleet National Bank of Connecticut plus 3.5%) (the 'Fleet Base
Rate'), subject to increase upon the occurrence of an event of default, with
interest payable on the last business day of each month for the first six months
commencing July 31, 1997 through December 31, 1997. Commencing on January 31,
1998, the Company is required to make 36 equal monthly installments of
principal, plus accrued

75
<PAGE>
interest at the Base Rate. On March 26, 1998, the Company issued an additional
term note in the aggregate principal amount of $6,992,000 to HCFP Funding (the
'March Note'), which bears interest at the Fleet Base Rate plus 3.0%. The March
Note was subsequently amended and increased to approximately $9.5 million on
April 9, 1998. The June HCFP Note and March Note are secured by a lien on
substantially all of the assets of the Company and $1.5 million of the Company's
obligations under the June HCFP Note are guaranteed by Dr. Nagpal, Delphi
Ventures III, L.P., Delphi BioInvestments III, L.P., Oak Investment Partners VI,
L.P. and Oak VI Affiliates Fund, L.P. In connection with such guarantees, the
Company issued warrants to purchase an aggregate of 9,525 shares of Common Stock
to such guarantors. In connection with the HCFP Note, the Company issued
warrants to purchase 28,570 shares (subject to increase) of Common Stock to HCFP
Funding at an exercise price of $0.01 per share (the 'HCFP Warrants'). The HCFP
Warrants contained put rights which give the holder the right to receive
payment, based on a minimum put price of $14.00 per share, for the value of such
warrants at January 15, 1998. On March 26, 1998, such put rights were settled
for an aggregate of $550,000.

On September 9, 1997, the Company issued and sold $4.0 million in aggregate
principal amount of the Convertible Debentures pursuant to the Debenture
Purchase Agreement. The Convertible Debentures were purchased by Dr. Nagpal,
Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI and Health Care
Services-BMJ, LLC and H&Q Serv*is Ventures, L.P., affiliates of Hambrecht &
Quist, LLC. Pursuant to the terms of the Debenture Purchase Agreement, the
Convertible Debentures were subordinated in right of payment to all indebtedness
owing by the Company to HCFP Funding, the Comdisco Loan and the Galtney Loan.

On March 31, 1998, the Convertible Debentures were converted by the holders
thereof into 571,428 shares of Common Stock. In connection with such conversion,
Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI, Health
Care Services-BMJ, LLC and H&Q Serv*is Ventures, L.P. received 71,429, 70,165,
1,263, 69,800, 1,629, 178,571 and 178,571 shares of Common Stock, respectively.
As an inducement to such conversion the Company issued warrants convertible into
136,000 shares of Common Stock at $7.00 per share as set forth below:

<TABLE>
<S> <C>
Dr. Nagpal........................................................ 17,000 shares
Delphi Ventures................................................... 16,699 shares
Delphi BioInvestments............................................. 301 shares
Oak Partners...................................................... 16,612 shares
Oak VI............................................................ 388 shares
Health Care Services-BMJ, LLC..................................... 42,500 shares
H&Q Serv*is Ventures, L.P......................................... 42,500 shares
-------
Total........................................................ 136,000 shares
</TABLE>

On October 15, 1997, the Company issued promissory notes (the 'October
Notes') in the aggregate principal amount of approximately $3.4 million to Dr.
Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak IV and Dr. Fox
(collectively, the 'October Note Holders'). The October Notes bore interest at
the Fleet Base Rate, subject to increase upon the occurrence of an event of
default. The entire principal sum was originally due and payable on January 1,
1999. In connection with the October Notes, the Company issued warrants to
purchase 48,215 shares of Common Stock to the October Note Holders. The warrants
may be exercised at any time, in whole or in part, at an exercise price of $0.01
per share and expire on October 15, 2002. The warrants contain customary
antidilution provisions. The October Notes were repaid out of the proceeds of
the IPO.

On November 21, 1997, the Company issued warrants to purchase 23,214 shares
of Common Stock to Dr. Nagpal at an exercise price of $0.01 per share.

On January 2, 1998, the Company obtained short-term financing in the form
of a demand note from Dr. Nagpal in the amount of $1.0 million to repay certain
of the Physician Notes. In connection with this loan, the Company issued
warrants to Dr. Nagpal to purchase 14,286 shares of Common Stock at an exercise
price of $0.01 per share. The demand note bore interest at 8% per annum. The
loan was repaid out of the proceeds of the IPO.

Through June 1998, the Company entered into agreements with Daou Systems,
Inc. ('Daou') for certain network planning services pursuant to which the
Company paid Daou $80,000. Georges Daou, the Chief Executive Officer of Daou is
a member of the Board of Directors of the Company.

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

The following documents are filed as part of this Form 10-K:

1. Financial Statements:

A list of the Consolidated Financial Statements, related notes and Report
of Independent Certified Public Accountants is set forth in Item 8 of this
report on Form 10-K.

2. Reports filed on Form 8-K:

The Company filed a Current Report on Form 8-K on May 22, 1998.

3. Financial Statement Schedules:

All schedules are omitted because they are inapplicable or the requested
information is shown in the Consolidated Financial Statements or related notes.

4. Index to Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<C> <C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of the Registrant incorporated by reference to
Exhibit 3.1 of BMJ's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No.
001-13785).
3.2 -- By-laws of the Registrant. Incorporated by reference to Exhibit 3.2 to BMJ's Registration Statement
on Form S-1 (Registration No. 333-35759).
4.1 -- Bone, Muscle and Joint, Inc. 1996 Stock Option Plan. Incorporated by reference to Exhibit 4.1 to
BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
10.1 -- Stock Purchase Agreement dated as of May 6, 1996 among the Company, Dr. Nagpal, Oak VI, Oak Partners,
Delphi Ventures and Delphi BioInvestments. Incorporated by reference to Exhibit 10.1 to BMJ's
Registration Statement on Form S-1 (Registration No. 333-35759).
10.2 -- Stock Purchase Agreement dated November 12, 1996 among the Company, Dr. Nagpal, Oak VI, Oak Partners,
Delphi Ventures, and Delphi BioInvestments. Incorporated by reference to Exhibit 10.2 to BMJ's
Registration Statement on Form S-1 (Registration No. 333-35759).
10.3 -- Stock Purchase Agreement dated January 29, 1997 among the Company, certain physicians affiliated with
SCOI, Glenn Cozen and the Saphier and Heller Law Corporation Retirement Trust. Incorporated by
reference to Exhibit 10.3 to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
10.4 -- Stock Purchase Agreement dated March 12, 1997, among the Company, Andrea Seratte, CGJR Health Care,
CGJR II and CGJR/MF. Incorporated by reference to Exhibit 10.4 to BMJ's Registration Statement on
Form S-1 (Registration No. 333-35759).
10.5 -- Stock Purchase Agreement dated June 19, 1997, among the Company, Dr. Nagpal, Oak VI, Oak Partners,
Delphi Ventures, Delphi BioInvestments, CGJR Health Care, CGJR II and CGJR/MF. Incorporated by
reference to Exhibit 10.5 to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
10.6 -- Stock Purchase Agreement dated July 31, 1997, between the Company and HIS Ventures, LLC. Incorporated
by reference to Exhibit 10.6 to BMJ's Registration Statement on Form S-1 (Registration No.
333-35759).
10.7 -- Stock Purchase Agreement dated August 18, 1997, between the Company and Comdisco. Incorporated by
reference to Exhibit 10.7 to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
10.8 -- Second Term Note dated June 30, 1997, issued by the Company to HCFP Funding. Incorporated by
reference to Exhibit 10.8 to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
</TABLE>

77
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.9 -- Form of Loan and Security Agreement dated March 28, 1997, between the Company and HCFP Funding.
Incorporated by reference to Exhibit 10.9 to BMJ's Registration Statement on Form S-1 (Registration
No. 333-35759).

10.10 -- Subordinated Loan and Security Agreement dated as of August 1, 1997, as amended, between the Company
and Comdisco. Incorporated by reference to Exhibit 10.10 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).

10.11 -- Master Lease Agreement dated August 1, 1997 between Comdisco and the Company. Incorporated by
reference to Exhibit 10.11 to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).

10.12 -- Subordinated Loan and Security Agreement dated as of August 22, 1997 between the Company and Galtney.
Incorporated by reference to Exhibit 10.12 to BMJ's Registration Statement on Form S-1 (Registration
No. 333-35759).

10.13 -- Convertible Debenture Purchase Agreement dated as of September 9, 1997 among the Company, Dr. Nagpal,
Delphi Ventures, Delphi BioInvestments, Oak VI, Oak Partners, Health Care Services--BMJ, LLC and HGQ
Serv*is Ventures, L.P. Incorporated by reference to Exhibit 10.13 to BMJ's Registration Statement on
Form S-1 (Registration No. 333-35759).

10.14 -- 8% Promissory Note in the aggregate principal amount of $700,000 issued by the Company and payable to
the order of Dr. Nagpal, dated January 10, 1997. Incorporated by reference to Exhibit 10.14 to BMJ's
Registration Statement on Form S-1 (Registration No. 333-35759).

10.15 -- 8% Promissory Note in the aggregate principal amount of $167,000 issued by the Company and payable to
the order of Dr. Nagpal, dated January 10, 1997. Incorporated by reference to Exhibit 10.15 to BMJ's
Registration Statement on Form S-1 (Registration No. 333-35759).

10.16 -- Second Amended and Restated Stockholders Agreement, dated as of November 22, 1996, among the Company,
Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners, Oak VI, Scheer and the stockholders
named therein. Incorporated by reference to Exhibit 10.16 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).

10.17 -- Employment Agreement between the Company and Dr. Nagpal, dated May 6, 1996. Incorporated by reference
to Exhibit 10.17 to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).

10.18 -- Management Services Agreement, effective as of November 1, 1996, as amended, between the Company and
SCOI. Incorporated by reference to Exhibit 10.29 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).

10.19 -- Asset Purchase Agreement, effective as of November 1, 1996, between the Company and SCOI.
Incorporated by reference to Exhibit 10.30 to BMJ's Registration Statement on Form S-1 (Registration
No. 333-35759).

10.20 -- Restricted Stock Agreement, effective as of November 1, 1996, as amended, among the Company, SCOI,
certain physicians affiliated with SCOI, Delphi Ventures, Delphi BioInvestments, Oak VI and Oak
Partners. Incorporated by reference to Exhibit 10.31 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).

10.21 -- Stockholder Non-Competition Agreement, effective November 1, 1996, among the Company, SCOI and
certain physicians affiliated with SCOI. Incorporated by reference to Exhibit 10.32 to BMJ's
Registration Statement on Form S-1 (Registration No. 333-35759).

10.22 -- Amendatory Agreement dated as of July 3, 1997, between the Company and Gold Coast. Incorporated by
reference to Exhibit 10.45 to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
</TABLE>

78
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.23 -- Note Purchase Agreement dated as of October 15, 1997, among the Company, Dr. Nagpal, Dr. Fox, Delphi
Ventures, Delphi Bio Investments, Oak Partners and Oak VI. Incorporated by reference to Exhibit 10.46
to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
10.24 -- Agreement and Plan of Reorganization and Merger dated as of October 6, 1997, among the Company, OMNI
Acquisition Corporation, Orthopedic Management Network, Inc. and the shareholders' representative
named therein. Incorporated by reference to Exhibit 10.60 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).
10.25 -- Tri-Party Agreement dated as of December 31, 1996, between the Company and SCOI. Incorporated by
reference to Exhibit 10.61 to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
10.26 -- Stock Purchase Agreement dated as of August 3, 1997, among the Company, VSI and the stockholders
listed therein. Incorporated by reference to Exhibit 10.66 to BMJ's Registration Statement on Form
S-1 (Registration No. 333-35759).
10.27 -- Registration Rights Agreement dated as of August 1, 1997, among the Company, Comdisco and Galtney.
Incorporated by reference to Exhibit 10.67 to BMJ's Registration Statement on Form S-1 (Registration
No. 333-35759).
10.28 -- Registration Rights Agreement dated as of September 9, 1997, among the Company, Health Care
Services-BMJ, LLC and H&Q Serv*is Ventures L.P. Incorporated by reference to Exhibit 10.68 to BMJ's
Registration Statement on Form S-1 (Registration No. 333-35759).
10.29 -- Registration Rights Agreement dated as of September 15, 1997, between the Company and Healthcare
Financial Partners, Inc. Incorporated by reference to Exhibit 10.69 to BMJ's Registration Statement
on Form S-1 (Registration No. 333-35759).
10.30 -- Third Amended and Restate Registration Rights Agreement dated as of September 30, 1997, among the
Company, Dr. Nagpal, Delphi Ventures III, L.P., Delphi BioInvestments III, L.P., Oak Investment
Partners VI, Limited Partnership, Oak VI Affiliated Fund, Limited Partnership, L.P., CGJR Health Care
Services Private Equities, L.P., CGJR II, L.P., CGJR/MF III, L.P. and HIS Ventures, LLC. Incorporated
by reference to Exhibit 10.70 to BMJ's Registration Statement on Form S-1 (Registration No.
333-35759).
10.31 -- Form of Management Services Agreement.
21.1 -- List of Subsidiaries.
23.1 -- Consent of Ernst & Young LLP
24.1 -- Power of Attorney
27.1 -- Financial Data Schedule.
</TABLE>

79
<PAGE>
SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS TRANSITION REPORT ON
FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.

BMJ MEDICAL MANAGEMENT, INC.

<TABLE>
<S> <C>
July 13, 1998 By: /s/ NARESH NAGPAL
Naresh Nagpal
President and Chief Executive Officer
</TABLE>

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
TRANSITION REPORT ON FORM 10-K HAS BEEN SIGNED ON THE 29TH DAY OF JUNE, 1998, BY
THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES
INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE TITLE
- ------------------------------------------ -------------------------------------------

<S> <C>
/s/ NARESH NAGPAL, M.D. President, Chief Executive Officer and
- ------------------------------------------ Director (Principal Executive Officer)
Naresh Nagpal, M.D.

* Executive Vice President, Chief
- ------------------------------------------ Financial Officer and Director (Principal
David H. Fater Financial and Accounting Officer)

* Director
- ------------------------------------------
Georges Daou

* Director
- ------------------------------------------
Stewart G. Eidelson, M.D.

* Director
- ------------------------------------------
James M. Fox, M.D.

* Director
- ------------------------------------------
Ann H. Lamont

* Director
- ------------------------------------------
Donald J. Lothrop
</TABLE>

* The undersigned, by signing his name hereto, does sign and execute this
Transition Report on Form 10-K pursuant to the Powers of Attorney executed by
the above-named officers and directors of the Company and filed with the
Securities and Exchange Commission on behalf of such officers and directors.

By: /s/ NARESH NAGPAL, M.D.
---------------------------
Naresh Nagpal, M.D.,
Attorney-in-Fact

80
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
<C> <C> <S> <C>
3.1 -- Amended and Restated Certificate of Incorporation of the Registrant incorporated by
reference to Exhibit 3.1 of BMJ's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (File No. 001-13785).
3.2 -- By-laws of the Registrant. Incorporated by reference to Exhibit 3.2 to BMJ's
Registration Statement on Form S-1 (Registration No. 333-35759).
4.1 -- Bone, Muscle and Joint, Inc. 1996 Stock Option Plan. Incorporated by reference to
Exhibit 4.1 to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
10.1 -- Stock Purchase Agreement dated as of May 6, 1996 among the Company, Dr. Nagpal, Oak
VI, Oak Partners, Delphi Ventures and Delphi BioInvestments. Incorporated by reference
to Exhibit 10.1 to BMJ's Registration Statement on Form S-1 (Registration No.
333-35759).
10.2 -- Stock Purchase Agreement dated November 12, 1996 among the Company, Dr. Nagpal, Oak
VI, Oak Partners, Delphi Ventures, and Delphi BioInvestments. Incorporated by
reference to Exhibit 10.2 to BMJ's Registration Statement on Form S-1 (Registration
No. 333-35759).
10.3 -- Stock Purchase Agreement dated January 29, 1997 among the Company, certain physicians
affiliated with SCOI, Glenn Cozen and the Saphier and Heller Law Corporation
Retirement Trust. Incorporated by reference to Exhibit 10.3 to BMJ's Registration
Statement on Form S-1 (Registration No. 333-35759).
10.4 -- Stock Purchase Agreement dated March 12, 1997, among the Company, Andrea Seratte, CGJR
Health Care, CGJR II and CGJR/MF. Incorporated by reference to Exhibit 10.4 to BMJ's
Registration Statement on Form S-1 (Registration No. 333-35759).
10.5 -- Stock Purchase Agreement dated June 19, 1997, among the Company, Dr. Nagpal, Oak VI,
Oak Partners, Delphi Ventures, Delphi BioInvestments, CGJR Health Care, CGJR II and
CGJR/MF. Incorporated by reference to Exhibit 10.5 to BMJ's Registration Statement on
Form S-1 (Registration No. 333-35759).
10.6 -- Stock Purchase Agreement dated July 31, 1997, between the Company and HIS Ventures,
LLC. Incorporated by reference to Exhibit 10.6 to BMJ's Registration Statement on Form
S-1 (Registration No. 333-35759).
10.7 -- Stock Purchase Agreement dated August 18, 1997, between the Company and Comdisco.
Incorporated by reference to Exhibit 10.7 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).
10.8 -- Second Term Note dated June 30, 1997, issued by the Company to HCFP Funding.
Incorporated by reference to Exhibit 10.8 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).
10.9 -- Form of Loan and Security Agreement dated March 28, 1997, between the Company and HCFP
Funding. Incorporated by reference to Exhibit 10.9 to BMJ's Registration Statement on
Form S-1 (Registration No. 333-35759).
10.10 -- Subordinated Loan and Security Agreement dated as of August 1, 1997, as amended,
between the Company and Comdisco. Incorporated by reference to Exhibit 10.10 to BMJ's
Registration Statement on Form S-1 (Registration No. 333-35759).
10.11 -- Master Lease Agreement dated August 1, 1997 between Comdisco and the Company.
Incorporated by reference to Exhibit 10.11 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
10.12 -- Subordinated Loan and Security Agreement dated as of August 22, 1997 between the
Company and Galtney. Incorporated by reference to Exhibit 10.12 to BMJ's Registration
Statement on Form S-1 (Registration No. 333-35759).
10.13 -- Convertible Debenture Purchase Agreement dated as of September 9, 1997 among the
Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak VI, Oak Partners,
Health Care Services--BMJ, LLC and HGQ Serv*is Ventures, L.P. Incorporated by
reference to Exhibit 10.13 to BMJ's Registration Statement on Form S-1 (Registration
No. 333-35759).
10.14 -- 8% Promissory Note in the aggregate principal amount of $700,000 issued by the Company
and payable to the order of Dr. Nagpal, dated January 10, 1997. Incorporated by
reference to Exhibit 10.14 to BMJ's Registration Statement on Form S-1 (Registration
No. 333-35759).
10.15 -- 8% Promissory Note in the aggregate principal amount of $167,000 issued by the Company
and payable to the order of Dr. Nagpal, dated January 10, 1997. Incorporated by
reference to Exhibit 10.15 to BMJ's Registration Statement on Form S-1 (Registration
No. 333-35759).
10.16 -- Second Amended and Restated Stockholders Agreement, dated as of November 22, 1996,
among the Company, Dr. Nagpal, Delphi Ventures, Delphi BioInvestments, Oak Partners,
Oak VI, Scheer and the stockholders named therein. Incorporated by reference to
Exhibit 10.16 to BMJ's Registration Statement on Form S-1 (Registration No.
333-35759).
10.17 -- Employment Agreement between the Company and Dr. Nagpal, dated May 6, 1996.
Incorporated by reference to Exhibit 10.17 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).
10.18 -- Management Services Agreement, effective as of November 1, 1996, as amended, between
the Company and SCOI. Incorporated by reference to Exhibit 10.29 to BMJ's Registration
Statement on Form S-1 (Registration No. 333-35759).
10.19 -- Asset Purchase Agreement, effective as of November 1, 1996, between the Company and
SCOI. Incorporated by reference to Exhibit 10.30 to BMJ's Registration Statement on
Form S-1 (Registration No. 333-35759).
10.20 -- Restricted Stock Agreement, effective as of November 1, 1996, as amended, among the
Company, SCOI, certain physicians affiliated with SCOI, Delphi Ventures, Delphi
BioInvestments, Oak VI and Oak Partners. Incorporated by reference to Exhibit 10.31 to
BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
10.21 -- Stockholder Non-Competition Agreement, effective November 1, 1996, among the Company,
SCOI and certain physicians affiliated with SCOI. Incorporated by reference to Exhibit
10.32 to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
10.22 -- Amendatory Agreement dated as of July 3, 1997, between the Company and Gold Coast.
Incorporated by reference to Exhibit 10.45 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).
10.23 -- Note Purchase Agreement dated as of October 15, 1997, among the Company, Dr. Nagpal,
Dr. Fox, Delphi Ventures, Delphi Bio Investments, Oak Partners and Oak VI.
Incorporated by reference to Exhibit 10.46 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).
10.24 -- Agreement and Plan of Reorganization and Merger dated as of October 6, 1997, among the
Company, OMNI Acquisition Corporation, Orthopedic Management Network, Inc. and the
shareholders' representative named therein. Incorporated by reference to Exhibit 10.60
to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
10.25 -- Tri-Party Agreement dated as of December 31, 1996, between the Company and SCOI.
Incorporated by reference to Exhibit 10.61 to BMJ's Registration Statement on Form S-1
(Registration No. 333-35759).
10.26 -- Stock Purchase Agreement dated as of August 3, 1997, among the Company, VSI and the
stockholders listed therein. Incorporated by reference to Exhibit 10.66 to BMJ's
Registration Statement on Form S-1 (Registration No. 333-35759).
10.27 -- Registration Rights Agreement dated as of August 1, 1997, among the Company, Comdisco
and Galtney. Incorporated by reference to Exhibit 10.67 to BMJ's Registration
Statement on Form S-1 (Registration No. 333-35759).
10.28 -- Registration Rights Agreement dated as of September 9, 1997, among the Company, Health
Care Services-BMJ, LLC and H&Q Serv*is Ventures L.P. Incorporated by reference to
Exhibit 10.68 to BMJ's Registration Statement on Form S-1 (Registration No.
333-35759).
10.29 -- Registration Rights Agreement dated as of September 15, 1997, between the Company and
Healthcare Financial Partners, Inc. Incorporated by reference to Exhibit 10.69 to
BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
10.30 -- Third Amended and Restate Registration Rights Agreement dated as of September 30,
1997, among the Company, Dr. Nagpal, Delphi Ventures III, L.P., Delphi BioInvestments
III, L.P., Oak Investment Partners VI, Limited Partnership, Oak VI Affiliated Fund,
Limited Partnership, L.P., CGJR Health Care Services Private Equities, L.P., CGJR II,
L.P., CGJR/MF III, L.P. and HIS Ventures, LLC. Incorporated by reference to Exhibit
10.70 to BMJ's Registration Statement on Form S-1 (Registration No. 333-35759).
10.31 -- Form of Management Services Agreement
21.1 -- List of Subsidiaries.
23.1 -- Consent of Ernst & Young LLP
24.1 -- Power of Attorney
27.1 -- Financial Data Schedule.
</TABLE>

<PAGE>

THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is
entered into as of ___________, 1998 (the "Effective Date") by and between
_____________ , a _____________ (the "Medical Group"), and BMJ Medical
Management, Inc., a Delaware corporation (the "Management Company").

RECITALS
--------

A. The Medical Group is engaged in the business of providing
musculoskeletal medical and surgical services and related medical and ancillary
services to the general public (the "Medical Practice"). The Medical Group
desires to devote its time and effort towards its clinical practice and delivery
of patient care and desires to delegate certain administrative and managerial
functions related to the Medical Group's practice.

B. The Management Company is a corporation engaged in the
business of providing management, administrative, financial, information
technology, and related services to Medical Groups and professional medical
organizations.

C. The Management Company and the Medical Group desire to
enter into this Agreement, pursuant to which the Management Company will provide
certain management, administrative, and other services to the Medical Group.

NOW, THEREFORE, the Medical Group and the Management Company
hereby agree as follows:

AGREEMENT
---------

ARTICLE I

RELATIONSHIP OF THE PARTIES

1.1 Retention.
---------

The Medical Group retains the Management Company to provide all of the
management and related services identified or referenced in Section 3 and as
otherwise required by the Medical Group (collectively, the "Management
Services"), and the Management Company accepts such retention and will provide
the Management Services.

1.2 Exclusivity.
-----------

During the term of this Agreement, the Management Company will
exclusively provide all management and administrative services utilized by the
Medical Group; provided, however, that the Medical Group may, at its sole
discretion and cost, enter into contracts for accounting, legal, consulting, or
other professional or advisory services. Such services will be in addition to,
and not in replacement of, the services provided by the Management Company to
the Medical Group.

1.3 Relationship of Parties.
-----------------------

The Management Company and the Medical Group intend to act and perform
as independent contractors, and this Agreement is not intended to create any
partnership, joint venture, or employment relationship between the parties.
<PAGE>

1.4 No Referral Obligation.
----------------------

The parties agree that the benefits to the Medical Group hereunder do
not require, are not payment for, and are not in any way contingent upon the
admission, referral or any other arrangement for the provision of any item or
service offered by the Management Company to any of the Medical Group's patients
in any facility or laboratory controlled, managed or operated by the Management
Company.

1.5 Internal Management of the Medical Group.
----------------------------------------

The Medical Group and its members are responsible for matters involving
the internal management, control, or finances of the Medical Group, including
the allocation of the Medical Group's income among the Medical Group Physicians,
tax planning, and investment planning.

1.6 No Practice of Medicine; No Interference with Professional Judgment.
-------------------------------------------------------------------

Notwithstanding the authority granted to the Management Company under
this Agreement, the parties agree that the Medical Group will retain the
authority to direct the medical, professional and ethical aspect of the Medical
Practice. The Management Company will neither exercise control over nor
interfere with the physician-patient relationship, which will be maintained
strictly between the Medical Group Physicians and their patients. The Medical
Group retains full authority over and control of all aspects of its business and
affairs that may not legally be carried on by persons other than natural persons
who are duly licensed to practice medicine or surgery in the State of _________.
To the extent any act or services required of the Management Company by this
Agreement should be construed or deemed, by any governmental authority, agency
or court, to constitute the practice of medicine, the right to perform such act
or service by the Management Company will be deemed waived and unenforceable.

ARTICLE II

OPERATIONS COMMITTEE

2.1 Purpose of the Operations Committee.
-----------------------------------

The Management Company and the Medical Group will establish a committee
(the "Operations Committee") responsible for directing the Management Company in
connection with the development of certain specific management and
administrative policies for the overall operation of the Medical Group. Any
Medical Group Physician or designees of the Management Company may attend
meetings of the Operations Committee. The business of the Operations Committee
will be conducted in accordance with the policies and procedures described in
Section 2.4 hereof.

2.2 Authoritative Functions of the Operations Committee.
---------------------------------------------------

The Operations Committee will have the authority to bind the Management
Company and the Medical Group with respect to the following functions:

(a) Approve the annual budgets for: (i) billings and
Collections; (ii) Medical Group Costs; (iii) Capital Expenditures to be made by
the Management Company in fulfillment of its obligations hereunder; (iv)
Operating Costs (which, in the absence of approval by the Operations Committee,
will be increased by five percent (5.0%) over the total amount approved for the
preceding period);

(b) Approve costs and expenses that exceed the Operating Costs
budget.

2
<PAGE>
(c) Establish parameters and criteria with respect to the
establishment and maintenance of relationships with institutional providers and
payors and managed care contracts (except with respect to the establishment of
professional fees).

(d) Establish parameters and criteria with respect to certain
activities performed by the Management Company such as billing, claims
submission and collections of fees.

(e)Approve the acquisition, replacement, relocation, or other
disposition of Equipment, approve the integration of new technologies into the
Medical Practice as contemplated by Section 3.11, and approve the renovation and
expansion of any Medical Group office.

(f) Approve the closure or relocation of any Medical Group
office..")"

(g) Approve New Ancillary Services, New Physicians, and New
Medical Offices.

(h) Establish parameters and criteria for off-site storage of
files and records of the Medical Group.

(i) Any other functions that are described in this Agreement
or otherwise assigned by the parties that explicitly grant the Operations
Committee authority to bind the parties.

2.3 Advisory Functions of the Operations Committee.
----------------------------------------------

The Operations Committee will review, evaluate and make recommendations
to the Medical Group and the Management Company with respect to the following
matters:

(a) Identification of Medical Group subspecialties required
for the efficient operation of the Medical Group.

(b) Advice regarding all Medical Personnel employment and
recruitment contracts to be utilized by the Medical Group.

(d) Development of community outreach programs.

(e) Establishment of fees for professional services and
ancillary services rendered by the Medical Group in accordance with Section
3.15.

(f) Access and quality issues pertaining to ancillary
services.

(g) Insurance limits and insurance coverage of the Medical
Group and the Management Company, as related to Medical Group operations and
activities.

(h) Development of quality assurance and utilization
management programs.

(i) Any matters arising in connection with the operations of
the Medical Group that are not specifically addressed in this Agreement and as
to which the Management Company or the Medical Group requests consideration by
the Operations Committee.

The recommendations of the Operations Committee with respect to the matters
described in this Section 2.3 are non-binding and are intended for the advice
and guidance of the Management Company and the

3
<PAGE>

Medical Group. The Management Company and the Medical Group will take such
recommendations into account in good faith in carrying out their respective
obligations.

2.4 Committee Policies and Procedures.
---------------------------------

(a) On Schedule 2.4, the parties have named the committee
members and the Medical Group has designated a Medical Group Physician to act as
Chairman of the Operations Committee, and the Management Company has designated
a person to act as Vice Chairman. The Chairman, if present, will preside at all
meetings of the Operations Committee. In the absence of the Chairman, the Vice
Chairman will preside. Each party may substitute or change its Chairman or Vice
Chairman, as the case may be, at any time upon notice to the other party.

(b) Unless otherwise agreed to by the parties, the Operations
Committee will meet at least once per month. The Operations Committee may hold
meetings without call or formal notice at such times and places as the Chairman
and Vice Chairman may from time to time determine. A meeting of the Operations
Committee also may be called by at least three (3) Medical Group Physicians upon
at least three (3) days' written notice to the Chairman and Vice Chairman. Such
notice requirement will be deemed waived with respect to any member of the
Operations Committee who attends such meeting. The Vice Chairman will keep
minutes of all formal actions taken by the Operations Committee.

(c) All attendees are entitled to participate in the
discussions at any meeting of the Operations Committee, however, in all matters
that come before the Operations Committee, the Management Company will have one
vote, which will be exercised by the Vice Chairman or his/her designee, and the
Medical Group will have one vote, which will be exercised by the Chairman or
his/her designee. The affirmative vote of the Chairman (or his/her designee) and
the Vice Chairman (or his/her designee) is required for the Operations Committee
to act. The Operations Committee may act by written consent without a meeting,
provided that both the Chairman and the Vice Chairman must sign any written
consent.

ARTICLE III

MANAGEMENT SERVICES

3.1 Management Services Generally.
-----------------------------

(a) The Management Company will be the sole and exclusive
manager and administrator of all day-to-day business functions for the Medical
Group. The Management Company will provide all of the management and
administrative services reasonably required by the Medical Group in connection
with the provision of Medical Group Services and the operation of the Medical
Practice.

(b)The Management Company may enter into arrangements with
outside services and suppliers as the Management Company reasonably deems
necessary in connection with the provision of the Management Services. To the
extent permitted by applicable law, such arrangements will be in the name of the
Management Company.

3.2 Premises.
--------

(a) As of the Effective Date, the Medical Group leases
premises and provides Medical Group Services at the location(s) set forth on
Schedule 3.2. The Management Company will provide

4
<PAGE>

management services with respect to such premises including without limitation,
negotiation of leases, arranging for necessary repairs, maintenance and
improvements, and other reasonably necessary or appropriate services related to
the Medical Group's use of the premises. The closing or relocation of any
offices of the Medical Group will be subject to the approval of the Operations
Committee.

3.3 Equipment.
---------

The Management Company will make available to the Medical Group the
furniture, furnishings, trade fixtures, office equipment, and diagnostic and
therapeutic medical equipment reasonably required by the Medical Group as
determined by the Operations Committee (collectively, the "Equipment"). The
Management Company will acquire (or lease), at its cost, the Equipment, and will
retain ownership of (or the leasehold interest with respect to) the Equipment;
provided, however, that the costs of such Equipment will be charged back to the
Medical Group on a depreciated basis over a five-year period and will be
included in Operating Costs. As used herein, the term Equipment does not include
medical equipment, furniture, furnishings, trade fixtures, and office equipment
that is (i) used in connection with a New Ancillary Service or (ii) owned by the
Medical Group after the Effective Date. If the Management Company replaces any
Equipment (whether owned or leased by the Management Company), the replacement
Equipment will be of substantially similar value and quality to the Equipment
being replaced.

3.4 Administration, Finance and Accounting.
--------------------------------------

The Management Company will provide all administrative, financial, and
accounting functions necessary for the operation of the Medical Practice.

3.5 Billing and Collection.
----------------------

(a) Ownership of all accounts receivable (other than those
accrued as of the Effective Date) and other rights to payment arising from the
provision by the Medical Group of Medical Group Services and related services to
the general public during the Term (the "Accounts") will at all times remain the
sole and exclusive property of the Medical Group. The Medical Group appoints the
Management Company as its true and lawful attorney-in-fact for the purposes
described in this section for the term of this Agreement. The Management Company
will create and maintain a depository account in the name of Medical Group with
a banking institution selected by the Management Company (the "Medical Group
Collections Account"). The Medical Group authorizes the Management Company to
make withdrawals from the Medical Group Collections Account, including
withdrawals for payment of the Management Fee. If necessary, additional accounts
in the names of the Medical Group Physicians may be created for the purpose of
collecting payments in compliance with Medicare and Medicaid law. The Medical
Group grants the Management Company, as its attorney-in-fact, the right to (i)
bill patients and third party payors in the Medical Group's name; (ii) collect
accounts receivable resulting from such billing; (iii) receive payments and
prepayments from the Medical Group's patients, and any and all other third party
payors (including but not limited to insurers, self-insured employers and
government programs); (iv) take possession of, endorse in the name of the
Medical Group, and deposit into the Medical Group Collections Account any and
all checks, insurance payments, cash, cash equivalents and other instruments
received for Medical Group Services; (v) make payments for accounts payable on
behalf of the Medical Group, including payment of the Management Fee; and (vi)
initiate with the consent of the Medical Group, which consent may be withheld by
the Medical Group in its sole and absolute discretion, legal proceedings in the
name of the Medical Group to collect any Accounts and monies owed to the Medical
Group, to enforce the rights of the Medical Group as a creditor under any
contract or in connection with the rendering of any service, and to contest
adjustments and denials by governmental agencies (or their fiscal
intermediaries) as third-party payors. The Medical Group will immediately
forward to the Management Company for deposit into the Medical Group Collections
Account all checks and other payments received by the Medical Group or by any of
its partners, equity owners or employees from any patient or third party payor
for Medical Group Services rendered during the Term.

5
<PAGE>
(b) From time to time at the Management Company's request, the
Medical Group will make available to the Management Company one or more
authorized of the Medical Group to sign any letters, checks, instruments or
other documents on behalf of the Medical Group as may be necessary for the
Management Company to take the actions specified in this Section 3.5 and to
perform its duties under this Agreement.

(c)The Management Company will submit all bills and manage
the billing process on a timely basis in accordance with the terms of this
Agreement and applicable law; provided that the Medical Group meets its
obligations regarding billing and patient encounter information described in
Section 7.3.

(d) The Medical Group hereby grants the Management Company a
security interest in its Accounts to secure all of the Medical Group's
obligations under this Agreement. The Medical Group will execute a financing
statement (the "Financing Statement") for the benefit of the Management Company
necessary for the Management Company to perfect its interest therein. The
Management Company will have the right to grant to any lender (the "Lender") a
lien and security interest in and with respect to the Accounts, together with
all books, records, computer information and other general intangibles relating
thereto (collectively, the "Collateral"), as security for the obligations of the
Management Company to the Lender. The Medical Group acknowledges that the Lender
is a third party beneficiary of the benefits granted to the Management Company
under this Section 3.5(d). The Medical Group will cooperate with the Lender as
reasonably requested by the Lender if the Lender seeks to enforce its rights and
remedies under its agreement with the Management Company, including granting the
Lender access, to the extent permitted by law, to all books and records
associated with the Collateral. Neither the Management Company nor the Lender
will be required to give the Medical Group any notice in connection with any
loan or related financing arrangements affecting the Accounts or other
Collateral.

3.6 Administrative Personnel.
------------------------

The Management Company will retain and provide certain non-medical
personnel necessary for the conduct of the Medical operations (collectively,
"Administrative Personnel"), such as administration, accounting, billing and
collection, and clinic support. The Management Company will determine and pay
the salaries and fringe benefits of the Administrative Personnel, and will
provide other personnel services related to the Administrative Personnel. The
Management Company retains the right to hire and terminate any and all
Administrative Personnel.

3.7 Technical Personnel; Leased Employees.
-------------------------------------

(a) The Management Company will provide to the Medical Group
as leased employees, such Technical Personnel (as defined below) as may
reasonably be necessary for the conduct of the Medical Practice. Technical
Personnel will be leased to the Medical Group through a leased employee
agreement substantially in the form attached hereto as Exhibit A. The Medical
Group will be responsible for all services rendered by Technical Personnel.

(b) For purposes of this Agreement, "Technical Personnel"
means nurses, medical assistants, x-ray technicians, other technicians, and
other personnel who perform diagnostic tests or other services that are covered
by Medicare or by other third party payors when performed by an employee of a
Medical Group under a Medical Group Physician's supervision and whose services
are billable under the name of the supervising physician.

(c) The Medical Group will exercise, such supervision and
control over the activities of the Technical Personnel as may be necessary for
the Technical Personnel to be considered leased employees under the Medicare
program and under applicable law and to enable a Medical Group Physician to bill
for the services of the Technical Personnel.

6
<PAGE>

3.8 Medical Personnel Recruiting.
----------------------------

The Management Company will, upon request by the Operations Committee,
assist the Medical Group in recruiting Medical Personnel. "Medical Personnel"
means (i) physicians (including fellows and residents, if any) providing
professional medical services who are employees or independent contractors of
the Medical Group (sometimes referred to herein as "Medical Group Physicians")
and (ii) physician assistants or extenders, nurse practitioners, and other
health care professionals who provide services that are billable to patients or
third party payors under the name of such health care professional (as
distinguished from services that are billable under the name of the supervising
physician). Expenses incurred in recruiting Medical Personnel will be Medical
Group Costs.

3.9 Inventory and Supplies.
----------------------

The Management Company will order and purchase inventory and supplies
on behalf of the Medical Group, and such other ordinary or appropriate materials
as the Medical Group reasonably deems to be necessary for the Medical Group to
carry out its Medical Group Services. The Management Company will make
reasonable efforts to ensure that adequate inventory and supplies are at all
times available in the Medical Group's office. The Medical Group will remain
ultimately responsible for supervising and owning the medical supplies necessary
for the Medical Practice.

3.10 Taxes.
-----

The Management Company will provide the Medical Group with access to
all information necessary for the Medical Group to prepare its tax returns. The
Management Company will have no responsibility for the payment of the Medical
Group's taxes or the preparation of any income tax returns for the Medical Group
or any Medical Group Physician.

3.11 Information Systems Management.
------------------------------

(a) The Management Company will provide management information
systems software to the Medical Group. The software provided by the Management
Company will provide general ledger, practice management and disease management
programs. The Medical Group will be responsible for the payment of annual or
other additional license fees (if any), maintenance and support fees as required
to maintain the software, and all telecommunications costs associated with the
software and its connection (i) within the Medical Group's facilities and (ii)
to the Management Company. Connectivity and hardware expenses, if any, will be
depreciated back to the Medical Group over three years and included in Operating
Costs. Maintenance and support services for hardware or software may not be
terminated without the approval of the Operations Committee.

(b) Subject to the approval of the Operations Committee, the
Management Company will promote the integration of new technologies into the
professional practice of the Medical Group.

3.12 Community Outreach and Education Programs.
-----------------------------------------

The Management Company will develop and implement community outreach
programs designed to educate the patient population regarding health and
wellness issues, the Medical Group, the availability of its medical services,
and the Medical Group's participation in various managed care programs. The
Medical Group agrees, and will cause Medical Group Physicians to agree, that the
Management Company may use the names, business address, business telephone
number, and available services of the Medical Group and Medical Group Physicians
in such materials.

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<PAGE>

3.13 Insurance.
---------

(a) During the Term, the Management Company will, to the
extent permitted by applicable law, procure and maintain for the benefit of
itself and the Medical Group comprehensive professional liability insurance
providing for (a) general liability coverage and (b) medical malpractice
coverage with limits of not less than $__________ per claim and with aggregate
policy limits of not less than $____________ (or such higher amounts as may be
necessary to comply with any regulatory requirement) covering the Medical Group
and each of the Medical Personnel, including coverage for claims made after the
Effective Date relating to events or occurrences at any time prior thereto. The
parties hereto acknowledge that the Management Company is procuring the
malpractice insurance referenced herein to ensure that the Management Company
has protection if it is sued as a result of an act or omission of an employee of
the Medical Group. The Management Company will pay the premiums for such general
and medical malpractice liability coverage, which payments will be Operating
Costs under this Agreement, subject to recoupment by the Management Company
under Section 4.2 hereof. The Management Company will be designated as an
additional insured under all such insurance policies. If the Management Company
procures comprehensive professional liability insurance having the features
described in this Section 3.13 at a cost comparable to the malpractice insurance
covering the Medical Group and the Medical Personnel as of the Effective Date,
the Medical Group and the Medical Personnel will accept coverage under the
insurance so procured by the Management Company. If either (i) applicable law
does not permit the Management Company to procure and maintain comprehensive
professional liability insurance covering the Medical Group and the Medical
Personnel or (ii) the Management Company is unable to procure comprehensive
professional liability insurance having the features described in this Section
3.13 at a cost comparable to the malpractice insurance covering the Medical
Group and the Medical Personnel as of the Effective Date, the Medical Group
hereby covenants to procure and maintain such insurance for the benefit of
itself and the Management Company throughout the term of this Agreement.

(b) The Management Company may, at its option, obtain a
$500,000 life insurance policy for each Medical Group Physician. The Medical
Group will, and will cause each Medical Group Physician to, cooperate with the
Management Company in the procurement of such policies. The Management Company
will be designated as the beneficiary under any such policies. The premiums for
such policies will be paid by the Management Company and will not be included as
Operating Costs or otherwise charged to the Medical Group.

(c) The Medical Group will maintain appropriate levels of
insurance coverage for the premises, equipment, and other assets used in
connection with the Medical Practice. The Operations Committee will determine
the appropriate level and types of coverages, as well as appropriate insurance
carriers.

3.14 Files and Records.
-----------------

(a) Patient medical records will at all times be and remain
the property of the Medical Group and will be kept at a location that is readily
accessible for patient care. To the extent permitted by applicable law, the
Management Company will supervise, manage and maintain custody of all files and
records relating to the operation of the business of the Medical Group. In
accordance with applicable law, the Management Company will preserve the
confidentiality of patient medical records and use information contained in such
records only for the limited purposes necessary to perform the Management
Services. In no event will a breach of such confidentiality be deemed a default
under this Agreement if the Management Company acted reasonably and in good
faith to protect such confidentiality.

(b) All books and records relating to the business operation
of the Medical Practice that are not patient medical records ("Business
Records") will at all times be the property of the Management Company. The
Management Company will maintain custody of the Business Records, and the

8
<PAGE>

Management Company will provide the Medical Group, upon its written request,
with copies of any of the Business Records relating to the Management Services
performed by the Management Company.

(c) Following the termination of this Agreement, the Medical
Group will allow (to the extent permitted by law) the Management Company to
review and copy the patient medical records and any other pertinent information
regarding the Medical Group during the Term. Prior to accessing such patient
medical records, the Management Company will obtain any required patient
authorization. Following the termination of this Agreement, the Management
Company will provide, upon the Medical Group's written request, photocopies of
the Business Records to the Medical Group.

3.15 Managed Care Contracts.
----------------------

(a) Subject to the Management Company's compliance with
applicable law and upon the request of the Medical Group, the Management Company
will advise the Medical Group with respect to, and negotiate and administer, all
contractual arrangements with third parties for the Medical Group's provision of
Medical Group Services. No contract or arrangement regarding the provision of or
payment for Medical Group Services will be entered into unless the parameters
and criteria established by the Operations Committee are met.

(b) If the Management Company is not then managing a physician
practice group other than the Medical Group in the same market area, the
Operations Committee will make recommendations to the Medical Group regarding
the fees to be charged for Medical Group Services. If the Management Company is
then managing another physician practice group in the same market, the
Management Company will advise and consult with the Medical Group regarding the
fees for Medical Group Services only to the extent that it will be legally
permissible. In such instance, the Medical Group will be solely responsible for
establishing the fees for Medical Group Services and the Management Company will
have no authority whatsoever with respect to the establishment of such fees. In
consulting with the Medical Group, the Management Company may not disclose to
the Medical Group or use as a basis for its recommendations to the Medical Group
any fee or pricing information for any other medical practice in a market area
overlapping in whole or in part with the Medical Group's market area and may not
engage in any conduct or activity which might be construed to constitute price
fixing or collusion.

(c) The Management Company will assist the Medical Group in
developing and implementing utilization management programs, and protocols for
practice management, disease management and delivery of care.

3.16 Budgets.
-------

The Management Company will prepare, for the review and approval of the
Operations Committee, annual operating budgets (the "Budgets") reflecting in
reasonable detail projected billings, Collections, Medical Group Costs, and
Operating Costs (all as hereinafter defined). The Medical Group and the
Management Company agree that the Budget(s) attached hereto as Schedule 3.16 is
(are) the Budget(s) for the Medical Group with respect to the time period(s) set
forth thereon. All Budgets will be on a calendar year basis. The Management
Company will prepare and submit to the Operations Committee all subsequent
Budgets on or before December 15 of the year immediately preceding the calendar
year for which such Budget is applicable.

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<PAGE>

ARTICLE IV

COSTS, COMPENSATION, AND OTHER PAYMENTS

4.1 Consideration.
-------------

In consideration of the Medical Group's entering into this Agreement,
the Management Company will pay the Medical Group and to each person identified
on Schedule 4.1 the consideration set forth on Schedule 4.1, the allocation of
which has been determined and apportioned by the Medical Group.

4.2 Management Fee and Compensation of the Medical Group.
----------------------------------------------------

(a) Calculation of Management Fee. The compensation payable by
the Medical Group to the Management Company for the provision of Management
Services under this Agreement (the "Management Fee") will be equal to the sum of
(i) an amount equal to [10-15%] of Collections plus (ii) the total amount of the
Operating Costs plus (iii) an amount equal to sixty-six and two-thirds percent
(66 2/3%) of the Professional Practice Cost Savings (which will be calculated as
described in Exhibit B ) plus (iv) a transition fee of $60,000 per Medical Group
Physician for reimbursement of integration costs incurred during the first month
of the Term, which is payable in amounts no less than $5,000 per month for the
first twelve months of this Agreement plus (v) $500 per Medical Group Physician
per month for payroll services and accounts payable services if requested by the
Medical Group and if the Management Company agrees to provide such services.
Notwithstanding the preceding language of this Section 4.2, the minimum
Management Fee for the first five years of this Agreement will be [85% of
projected Management Fee] per year.

(b) Monthly Payment. On each Payment Date (as hereinafter
defined) during the Term, the Management Company will distribute to the Medical
Group an amount equal to the gross amount of Collections received during the
previous calendar month, less the amount of the Management Fee payable for such
month (the "Medical Group Payment"). The Management Company shall no more often
than quarterly, reconcile the actual Collections, Management Company Costs and
Medical Group Costs since the preceding reconciliation against the Medical Group
Payments and Management Fees paid during such period. Any adjustments resulting
from any such reconciliations will be added to or subtracted from, as
applicable, the next Medical Group Payment.

(c) Medical Group Compensation -- Monthly Draw. On each Draw
Date (as defined below) during the Term hereof, the Management Company shall
distribute to the Medical Group an amount equal to the gross amount of
Collections received during the previous calendar month, less the amount of the
Management Fee payable for such month.

(d) Annual Settlement. On or before January 31 of each year
during the Term, the Management Company shall calculate the amount of the
Management Fee earned by the Management Company for the previous calendar year.
If the total of the Management Fee amounts received by the Management Company
during the previous calendar year exceeds the amount of the Management Fee thus
determined, the Management Company shall pay to the Medical Group, on or before
February 15, an amount equal to such excess. If the Management Fee thus
determined exceeds the total of the Management Fee amounts received by the
Management Company during such year, the Management Company may retain from
current Collections an amount equal to such excess.

(e) For purposes of this Agreement --

(i) "Collections" means, for any applicable period,
all cash or cash equivalents received during such period for Medical
Group Services, including amounts received

10
<PAGE>

for services rendered prior to the date of this Agreement, and
including any capitation payments received during such period, less any
refunds paid during such period.

(ii) "Draw Date" means the fifth business day after
the last day of each calendar month during the term.

(iii) "Medical Group Services" means the following
services rendered by, through, or on behalf of the Medical Group: all
professional services rendered by or under the supervision of any of
the Medical Personnel (including professional services rendered in
connection with New Ancillary Services); all diagnostic radiology
services rendered by or under the supervision of any of the Medical
Personnel; all diagnostic tests and other services rendered by
Technical Personnel; all other ancillary services (other than New
Ancillary Services); all prosthetics, prosthetic devices, orthotics,
braces, splints, appliances, and other items and supplies that are
billable to patients or to third party payors; and depositions, record
review services, court appearances, independent medical exams, and
athletic team services.

(iv) "Payment Date" means, the fifth business day
after the last day of each calendar month during the Term.

(v) Collections and Medical Group Services do not
include any of the following: New Ancillary Services (excluding
professional services rendered by Medical Personnel in connection
therewith, which professional services are included under Section
4.2(d)(iii) above); interest income; sublease income, if any; royalties
payable to any Medical Group Physician for medical inventions; proceeds
from the sale of any capital assets of the Medical Group; or income
from investments.

4.3 Medical Group Costs.
-------------------

Except as otherwise provided in this Agreement, the Medical Group is
responsible for paying all of the costs specified in this Section 4.3 (the
"Medical Group Costs"). All Medical Group Costs will be incurred in the name of
the Medical Group, and not in the name of the Management Company, and will be
paid from an account of the Medical Group and not from any bank account of the
Management Company. At the Medical Group's request and expense, the Management
Company may coordinate the payment of Medical Group Costs. The Medical Group
Costs are as follows:

(a) compensation of, including any applicable fringe benefits,
all Medical Personnel, including, but not limited to, payroll taxes, workers'
compensation, health insurance (including drug coverage), dental insurance,
disability insurance, life insurance, 401(k) retirement plan, business buy-out
disability insurance and continuing education;

(b) the cost of any items which are not required to be
provided by the Management Company under this Agreement and/or which were
ordered, purchased, or incurred by the Medical Group directly, including but not
limited to the cost of accounting, legal, consulting, or other professional or
advisory services, business meetings, and business taxes.

4.4 Management Company Costs.
------------------------

(a) The Management Company will pay all Operating Costs and
all Excluded Costs (collectively, the "Management Company Costs"). All
Management Company Costs will be incurred in the name of the Management Company,
and not in the name of the Medical Group, except as specifically approved by the
Medical Group. Management Company Costs will not include any costs or expenses
incurred prior to the Effective Date.

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<PAGE>

(b) For purposes of this Agreement, "Operating Costs" means
all costs and expenses incurred in connection with the provision of the
Management Services, other than costs and expenses defined as Medical Group
Costs and any Excluded Costs (as hereinafter defined). If the Medical Group and
the Management Company mutually determine that an expenditure not included in
the Operating Cost budget needs to be incurred in connection with the provision
of Management Services hereunder, such expenditure will be included in Operating
Costs for purposes of this Agreement. "Excluded Costs" means all of the
following costs and expenses incurred in connection with the provision of the
Management Services hereunder:

(i) New Medical Office Start-Up Costs; and

(ii) corporate overhead of the Management Company
("Corporate Overhead") except to the extent that all of the following
conditions are satisfied:

(A) The Corporate Overhead is incurred in
lieu of an expense that would otherwise be part of Operating Costs;

(B) The amount of such Corporate Overhead
does not exceed the amount of the Operating Costs being eliminated; and

(C) The Corporate Overhead is allocated to
the Medical Group and to all other medical groups utilizing such Corporate
Overhead on a pro rata basis.

Any Corporate Overhead that satisfies the conditions set forth in Section
4.4(c)(ii) will be considered Operating Costs.

4.5 New Medical Office Start-Up Costs.
---------------------------------

(a) Upon the approval of the Operations Committee, a medical
office (other than those listed on Schedule 3.2) may be opened (a "New Medical
Office"). The Management Company will create a separate division for purposes of
accounting for the income, costs, profits, and losses of any New Medical Office
("New Medical Office Division"). The Management Company will pay, to the extent
provided herein, all costs associated with the establishment of such New Medical
Office other than Medical Group Costs ("New Medical Office Start-Up Costs").

(b) Beginning on the day the New Medical Office is first
opened for the treatment of patients, the billings, collections, costs and
expenses relating to any New Medical Office will be included in the computation
of Collections and the Management Fee.

(c)If the New Medical Office is profitable (as determined by
the Management Company) as of the end of the New Medical Office Start-Up Period,
at all times thereafter such New Medical Office will be treated as any other
office of the Medical Group. The Management Company, in its sole discretion, may
permanently close any New Medical Office if, as of the end of the New Medical
Office Start-Up Period, the Management Company determines that New Medical
Office is not profitable.

(d) Beginning with the month immediately following the
expiration of the New Medical Start-Up Period, the Management Company will be
entitled to recoup [, out of the profits from the New Medical Office Division,]
all of the New Medical Office Start-Up Costs previously paid by the Management
Company in sixty (60) equal monthly installments of principal, plus interest on
the unrecouped portion of such costs at the actual rate paid by the Management
Company to its senior lender.

(e) All Equipment utilized at any New Medical Office will be
acquired by the Management Company, and will be charged back to the Medical
Group on a depreciated basis over a five-year period and will be included in
Operating Costs.

12
<PAGE>

(f) For purposes of this Agreement, "New Medical Office
Start-Up Period" means the period commencing on the date that any costs are
incurred in connection with the establishment of a New Medical Office and ending
on the last day of the twelfth full calendar month after the New Medical Office
first opened for the treatment of patients.

4.6 New Ancillary Services.
----------------------

(a) For purposes of this Agreement, "New Ancillary Services"
means the technical component (but not the professional component) of the
following: (i) physical therapy, (ii) magnetic resonance imaging and/or other
imaging services (except diagnostic radiology); (iii) orthotics; (iv) new
orthopedic technologies; and (v) other revenue-producing services generally
recognized as ancillary services, but excluding outpatient surgery and any
services provided on a regular basis by the Medical Group immediately prior to
the Effective Date. New Ancillary Services do not include the sale or provision
of (or services rendered in connection with) prosthetics, prosthetic devices,
braces, splints, bone densitometry, appliances, crutches, casts, or any other
supplies or similar items which are billable to patients or payors, all of which
are to be included in the scope of Medical Group Services.

(b) New Ancillary Services may be established only upon
approval of the Operations Committee. Such approval will be memorialized in a
written agreement executed by the parties (or in a written amendment to this
Agreement). The Management Company will agree to provide all of the Management
Services in connection with such New Ancillary Service, and will be compensated
as described in Section 4.7 below, except as otherwise agreed by the parties.
The Medical Group will not provide any New Ancillary Services other than through
this Agreement.

4.7 New Ancillary Services Costs.
----------------------------

(a) Any agreement by the parties to establish a New Ancillary
Service will (unless otherwise agreed by the parties) incorporate the following:

(i) The Management Company will create a separate
division ("New Ancillary Division") for purposes of accounting for the
income, costs, profits, and losses of any New Ancillary Service.

(ii) Profits and/or losses of any New Ancillary
Division will be divided equally between the Medical Group and the
Management Company, and all distributions to the Medical Group and to
the Management Company will be made in equal amounts to each from
available cash (after payment of all currently due obligations incurred
in connection with such New Ancillary Division, including, without
limitation, any principal and interest amounts then due and payable
under Section 4.7(a)(iv) below, and after retention of reasonable
reserves) derived from the operation of such New Ancillary Division.

(iii) All diagnostic and therapeutic equipment
utilized in connection with any New Ancillary Service ("New Ancillary
Service Medical Equipment") will be acquired or leased by the
Management Company and will be charged back to the Medical Group on a
depreciated basis over a five-year period and will be included in
Operating Costs.

(iv) The Management Company will pay all of the
Ancillary Service Start-Up Costs. Beginning with the month immediately
following the expiration of the Ancillary Service Start-Up Period, the
Management Company will be entitled to recoup all of the Ancillary
Service Start-Up Costs previously paid by the Management Company in
sixty (60) equal monthly installments of principal, plus interest on
the unrecouped portion of such costs at the actual rate paid by the
Management Company to its senior lender.

13
<PAGE>

(v) The Management Company will provide, in
connection with any New Ancillary Service, a full range of management
services for a management fee equal to five percent (5%) of the
collections from the New Ancillary Service(s). Such management fee will
not be included in the calculation used to determine whether the
minimum Management Fee has been paid under Section 4.2.

(vi) The billings, collections, costs and expenses
relating to any New Ancillary Service will not be included in the
computations of Medical Group Compensation, the Management Fee,
Management Company Costs, New Medical Office Start-Up Costs, or Medical
Group Costs.

(b) For purposes of this Section 4.7, "Ancillary Service
Start-Up Period" means the period commencing on the date that any costs are
incurred in connection with the establishment of the New Ancillary Service and
ending on the earlier to occur of (i) the last day of the first period of two
(2) consecutive calendar months for which the New Ancillary Service shows a
profit (as determined by the Management Company) or (ii) the last day of the
twelfth month after the establishment of such New Ancillary Service.

(c) For purposes of this Section 4.7, "Ancillary Service
Start-Up Costs" means the total of all of the following costs incurred in
connection with the establishment of a New Ancillary Service during the
Ancillary Service Start-Up Period (whether such costs would otherwise be
considered Management Company Costs or Medical Group Costs):

(i) All costs of acquiring furniture, fixtures, and
office equipment;

(ii) All initial occupancy costs, if any, including
but not limited to prepaid rent, and tenant improvements;

(iii) All costs related to the acquisition of
materials and supplies related to the provision of such New Ancillary
Service; and

(iv) All ongoing costs directly related to the New
Ancillary Service, including but not limited to personnel (other than
the Medical Personnel) and related benefits, the cost of operating any
equipment utilized in providing the service, supplies, insurance, rent,
repairs and maintenance, outside services, telephone, taxes, utilities,
storage and other ordinary ongoing expenses of providing the New
Ancillary Service. If personnel are providing non-medical services to
the Medical Group in connection with Medical Group Services and New
Ancillary Services, the Management Company will allocate the costs of
such personnel.

4.8 New Physician Compensation Costs.
--------------------------------

(a) Notwithstanding anything contained herein to the contrary,
during the period beginning on the date a New Physician becomes affiliated with
or employed by the Medical Group and ending on the Physician Breakeven Date, the
Management Company will be responsible for the payment of all compensation paid
to a New Physician (the "New Physician Compensation"). In consideration for
paying the New Physician Compensation, the Management Company will receive
sixty-six and two-thirds percent (66-2/3%) (such amount being referred to herein
as the "New Physician Net Collections") of all collections generated by such New
Physician for those Medical Group Services performed by such New Physician. The
remaining thirty three and one-third percent (33 1/3%) of the New Physician's
collections will belong to the Medical Group. The New Physician's collections
will not be included in determining the Medical Group's Collections. From and
after the Physician Breakeven Date, the New Physician Compensation will become a
Medical Group Cost, and all of the New Physician's collections will be
considered Collections of the Medical Group.

14
<PAGE>

(b) "New Physician" means, any physician who, at any time
after the Effective Date, has been approved by the Operations Committee and
becomes affiliated with or employed by the Medical Group. A physician will not
be a New Physician for purposes of this Agreement if such physician has entered
into an affiliation arrangement with the Management Company (or an affiliate
thereof) and is placed into the Medical Group for the convenience of the Medical
Group or the Management Company. The Operations Committee will make the final
determination as to whether a physician is a New Physician.

(c) "Physician Breakeven Date" means, with respect to any New
Physician, the date that all New Physician Net Collections (from the date the
New Physician became affiliated with or employed by the Medical Group) first
equal or exceed (i) the aggregate amount of New Physician Compensation paid to
such New Physician through such date plus (ii) the aggregate amount of that
portion of the Medical Group Costs and Management Company Costs associated with
such New Physician and/or the Medical Group Services provided by such New
Physician through such date.

4.9 Outpatient Surgery Centers.
--------------------------

If the parties agree to establish an outpatient surgery center or
similar venture, the Management Company will form a limited partnership or
limited liability company as the joint venture vehicle. In the usual case, the
Management Company will own 50% of the joint venture entity and the remaining
50% will be sold to Medical Group Physicians or other persons. The Management
Company will retain a management fee of 5% of collections from the surgery
center and the net profits from the surgery center will be divided in accordance
with the ownership percentages of the parties.

4.10 Review and Audit of Books and Records.
-------------------------------------

Each of the parties will have the right, during ordinary business hours
and upon reasonable notice, to review and make copies of, or to audit through a
qualified certified public accountant approved by the other party (which
approval will not be unreasonably withheld), the books and records of the other
party relating to the billing, collection, and disbursement of fees, and the
determination of costs, under this Agreement. Any such review or audit will be
performed at the cost of the requesting party. All documents and other
information obtained in the course of such review or audit will be held in
strict confidence.

4.11 Start-Up Period.
---------------

The parties acknowledge and agree that, in order to facilitate the
transition of responsibilities hereunder, certain requirements and procedures
agreed to under this Agreement may be implemented, in whole or in part and at
any time during the period commencing on the Effective Date and ending 90 days
thereafter (subject to extension by agreement of the Operations Committee),
rather than being fully implemented immediately on the Effective Date.
Accordingly, the parties further agree that the Management Fee applicable to
such period of time will be estimated, subject to adjustments. The parties
intend that no material financial advantage or disadvantage will accrue to
either party as a result of implementing such requirements and procedures over
the course of such start-up period rather than immediately on the Effective
Date.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE MEDICAL GROUP

The Medical Group hereby represents and warrants to the
Management Company, as of the Effective Date, as follows:

15
<PAGE>

5.1 Organization; Good Standing; Qualification and Power.
----------------------------------------------------

The Medical Group is a professional corporation duly organized, validly
existing, and in good standing under the laws of ______________________. The
Medical Group has all requisite power and authority to own, lease, and operate
its properties, to carry on its business as now being conducted and as proposed
to be conducted, to enter into this Agreement, to perform its obligations
hereunder, and to consummate the transactions contemplated hereby. The Medical
Group has delivered to the Management Company a true and correct copy of its
articles of incorporation, its bylaws, and its shareholder agreement (or other
similar agreements) (collectively, the "Governance Documents"), in effect on the
date hereof. The Medical Group will deliver certified copies of such Governance
Documents to the Management Company upon the execution of this Agreement.

5.2 Equity Investments.
------------------

Except as set forth on Schedule 5.2, the Medical Group currently has no
subsidiaries, nor does the Medical Group currently own any capital stock or
other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture, or other entity.

5.3 Authority.
---------

The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of the Medical Group. This
Agreement and the Financing Statement have been duly and validly executed and
delivered by the Medical Group and constitute the legal, valid and binding
obligations of the Medical Group enforceable in accordance with their respective
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally. Neither the execution, delivery or performance of this
Agreement by the Medical Group nor the consummation by the Medical Group of the
transactions contemplated hereby, nor compliance by the Medical Group with any
provision hereof will conflict with or result in a breach of any provision of
the Governance Documents, cause a default (with due notice, lapse of time or
both), or give rise to any right of termination, cancellation or acceleration,
under any of the terms, conditions or provisions of any note, bond, lease,
mortgage, indenture, license or other instrument, obligation or agreement to
which the Medical Group is a party or by which the Medical Group or any of its
properties or assets may be bound (with respect to which defaults or other
rights all requisite waivers or consents will have been obtained at or prior to
the date hereof) or violate any law, statute, rule or regulation or order, writ,
judgment, injunction or decree of any court, administrative agency or
governmental body applicable to the Medical Group or any of its properties or
assets or the Medical Practice. Except as provided on Schedule 5.3, no permit,
authorization, consent or approval of or by, or any notification of or filing
with, any person (governmental or private) is required in connection with the
execution, delivery or performance by the Medical Group of this Agreement or the
consummation of the transactions contemplated hereby.

5.4 Financial Information.
---------------------

Schedule 5.4 contains the Medical Group's internal statement of assets,
liabilities and stockholders' equity of the Medical Practice at _____________,
199__ (the "Balance Sheet"; and the date thereof being referred to as the
"Balance Sheet Date"), and the related internal statements of revenue and
expenses for the ________-month period then ended (including the notes thereto
and other financial information included therein) (collectively, the "Internal
Financial Statements"), and (b) the compiled financial statements of the Medical
Group for the periods ended December 31, 1997, December 31, 1996, and December
31, 1995 (the "Review Financial Statements"). The Internal Financial Statements
and the Review Financial Statements (i) are in accordance with the books and
records of the Medical Practice, (ii)

16
<PAGE>

are complete and correct in all material respects and fairly present the
financial position of the Medical Practice as of the dates thereof.

5.5 Absence of Undisclosed Liabilities.
----------------------------------

Except as set forth on Schedule 5.5, as of the Balance Sheet Date, the
Medical Practice did not have any material liability of any nature (matured or
unmatured, fixed or contingent, known or unknown) which was not provided for or
disclosed on the Balance Sheet, all liability reserves established by the
Medical Practice on the Balance Sheet were adequate and there were no loss
contingencies (as such term is used in Statement of Financial Accounting
Standards No. 5 issued by the Financial Accounting Standards Board in March
1975) which were not adequately provided for or disclosed on the Balance Sheet.

5.6 Absence of Changes.
------------------

Except as set forth on Schedule 5.6, since the Balance Sheet Date, the
Medical Practice has been operated in the ordinary course and consistent with
past practice and there has not been:

(a) any material adverse change in the condition (financial or
otherwise), assets (including, without limitation, levels of working capital and
the components thereof), liabilities, operations, results of operations,
earnings, business or prospects of the Medical Practice;

(b) any damage, destruction or loss (whether or not covered by
insurance) in an aggregate amount exceeding $25,000 affecting any asset or
property of the Medical Practice;

(c) any obligation or liability (whether absolute, accrued,
contingent or otherwise and whether due or to become due) created or incurred,
or any transaction, contract or commitment entered into, by the Medical Practice
other than such items created or incurred in the ordinary course of the Medical
Practice and consistent with past practice;

(d) any payment, discharge or satisfaction of any claim, lien,
encumbrance, liability or obligation by the Medical Practice outside the
ordinary course of the Medical Practice (whether absolute, accrued, contingent
or otherwise and whether due or to become due);

(e) any license, sale, transfer, pledge, mortgage or other
disposition of any tangible or intangible asset of the Medical Practice except
in the ordinary course of the Medical Practice and consistent with past
practice;

(f) any write-off as uncollectible of any accounts receivable
in connection with the Medical Practice or any portion thereof in excess of
$5,000 in the aggregate exclusive of all normal contractual adjustments from
third party payors;

(g) except for all normal contractual adjustments from third
party payors, any account receivable in connection with the Medical Practice in
an amount greater than $10,000 which (i) has become delinquent in its payment by
more than 90 days, (ii) has had asserted against it any claim, refusal to pay or
right of set-off, (iii) an account debtor has refused to pay for any reason or
with respect to which such account debtor has become insolvent or bankrupt or
(iv) has been pledged to any third party;

(h) any cancellation of any debts or claims of, or any
amendment, termination or waiver of any rights of material value to, the Medical
Practice;

(i) any general uniform increase in the compensation of
employees of the Medical Group or the Medical Practice (including, without
limitation, any increase pursuant to any bonus, pension, profit-sharing,
deferred compensation arrangement or other plan or commitment) or any increase
in

<PAGE>

compensation payable to any officer, employee, consultant or agent thereof, or
the entering into of any employment contract with any officer or employee, or
the making of any loan to, or the engagement in any transaction with, any
officer of the Medical Group or the Medical Practice;

(j) any change in the accounting methods or practices followed
in connection with the Medical Practice or any change in depreciation or
amortization policies or rates theretofore adopted;

(k) any agreement or commitment relating to the sale of any
material fixed assets of the Medical Practice;

(l) any other transaction relating to the Medical Practice
other than in the ordinary course of business of the Medical Practice and
consistent with past practice; or

(m) any agreement or understanding, whether in writing or
otherwise, for the Medical Practice to take any of the actions specified in
items (a) through (l) above.

5.7 Tax Matters.
-----------

(a) Except as set forth on Schedule 5.7, (i) all Taxes (as
hereinafter defined) relating to the Medical Practice required to be paid by the
Medical Group through the date hereof have been paid and all returns,
declarations of estimated Tax, Tax reports, information returns and statements
required to be filed by the Medical Group in connection with the Medical
Practice prior to the date hereof (other than those for which extensions will
have been granted prior to the date hereof) relating to any Taxes with respect
to any income, properties or operations of the Medical Group prior to the date
hereof (collectively, "Returns") have been duly filed; (ii) as of the time of
filing, the Returns correctly reflected in all material respects (and, as to any
Returns not filed as of the date hereof, will correctly reflect in all material
respects) the facts regarding the income, business, assets, operations,
activities and status of the Medical Practice and any other information required
to be shown therein; (iii) all Taxes relating to the operations of the Medical
Practice that have been shown as due and payable by the Medical Group on the
Returns have been timely paid and filed or adequate provisions made to the books
and records of the Medical Practice; (iv) in connection with the Medical
Practice (x) the Medical Group has made provision on the Balance Sheet for all
Taxes payable by the Medical Group for any periods that end on or before the
Balance Sheet Date for which no Returns have yet been filed and for any periods
that begin on or before the Balance Sheet Date and end after the Balance Sheet
Date to the extent such Taxes are attributable to the portion of any such period
ending on the Balance Sheet Date and (y) provision has been made for all Taxes
payable by the Medical Group for any periods that end on or before the date
hereof for which no Returns have then been filed and for any periods that begin
on or before the date hereof and end after such date to the extent such Taxes
are attributable to the portion of any such period ending on such date; (v) no
tax liens have been filed with respect to any of the assets of the Medical
Practice, and there are no pending tax audits of any Returns relating to the
Medical Practice; and (vi) no deficiency or addition to Taxes, interest or
penalties applicable to the Medical Group for any Taxes relating to the
operation of the Medical Practice has been proposed, asserted or assessed in
writing (or any member of any affiliated or combined group of which the Medical
Group or any previous operator of the Medical Practice was a member for which
the Medical Group could be liable).

(b) The Medical Group is not a foreign person within the
meaning of ss.1.1445-2(b) of the Regulations under Section 1445 of the Internal
Revenue Code of 1986, as amended (the "Code").

(c) The Medical Group has provided the Management Company with
true and complete copies of all Federal, state and foreign Returns of the
Medical Group for the calendar years ending December 31, 1997 and 1996.

18
<PAGE>

(d) For purposes of this Agreement, "Tax" means any of the
Taxes and "Taxes" means, with respect to any person or entity, (i) all Federal,
state, local and foreign income taxes (including any tax on or based upon net
income, or gross income, or income as specially defined, or earnings, or
profits, or selected items of income, earnings or profits) and all Federal,
state, local and foreign gross receipts, sales, use, ad valorem, transfer,
franchise, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property or windfall profits taxes, alternative or add-on
minimum taxes, customs duties or other Federal, state, local and foreign taxes,
fees, assessments or charges of any kind whatsoever, together with any interest
and any penalties, additions to tax or additional amounts imposed by any taxing
authority (domestic or foreign) on such person or entity and (ii) any liability
for the payment of any amount of the type described in the immediately preceding
clause (i) as a result of being a "transferee" (within the meaning of Section
6901 of the Code or any other applicable law) of another person or entity or a
member of an affiliated or combined group.

5.8 Litigation, Etc.
---------------

Except as set forth on Schedule 5.8, there are no (a) actions, suits,
claims, investigations or legal or administrative or arbitration proceedings
pending or, to the best knowledge of the Medical Group, threatened against the
Medical Group or any of its Medical Personnel or in connection with the Medical
Practice, whether at law or in equity, or before or by any Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality or (b) judgments, decrees, injunctions or orders of any court,
governmental department, commission, agency, instrumentality or arbitrator
against the Medical Group, his respective assets or affecting the Medical
Practice. The Medical Group has delivered to the Management Company all
documents and correspondence relating to matters referred to in said Schedule
5.8.

5.9 Compliance; Governmental Authorizations.
---------------------------------------

The Medical Group and the Medical Practice have complied in all
material respects with all applicable material Federal, state, local or foreign
laws, ordinances, regulations and orders. The Medical Group has all Federal,
state, local and foreign governmental licenses and permits, and medical staff
privileges necessary in the conduct of the Medical Practice, the lack of which
would have a material adverse effect on the Medical Group's ability to operate
the Medical Practice after the date hereof on substantially the same basis as
presently operated, such licenses and permits are in full force and effect, the
Medical Group has not received any notice indicating that any violations are or
have been recorded in respect of any thereof, and no proceeding is pending or,
to the best knowledge of the Medical Group, threatened to revoke or limit any
thereof. To the best knowledge of the Medical Group, none of such licenses,
permits and privileges will be affected in any material respect by the
transactions contemplated hereby. Neither the Medical Group nor any of the
Medical Personnel employed by the Medical Group is now or in the last four years
has been the subject of or involved in any investigation by any Federal, state
or local regulatory agency related to its or his Medicare, Medicaid or other
third party payor billing practices.

5.10 Labor Relations; Employees.
--------------------------

(a) Schedule 5.10 contains a true and complete list of the
persons employed by the Medical Group as of the date hereof (the "Employees").
Except as set forth on Schedule 5.10, (a) the Medical Group and the Medical
Practice are not delinquent in payments to any of the Employees for any wages,
salaries, commissions, bonuses or other compensation for any services performed
by them to the date hereof or amounts required to be reimbursed to the
Employees; (b) upon termination of the employment of any of the Employees,
neither the Medical Group, the Medical Practice nor the Management Company will
by reason of anything done prior to the date hereof, or by reason of the
consummation of the transactions contemplated hereby, be liable for any excise
taxes pursuant to Section

19
<PAGE>

4980B of the Code or to any of the Employees for severance pay or any other
payments; (c) there is no unfair labor practice complaint against the Medical
Group or in connection with the Medical Practice pending before the National
Labor Relations Board or any comparable state, local or foreign agency; (d)
there is no labor strike, dispute, slowdown or stoppage actually pending or, to
the best knowledge of the Medical Group, threatened against or involving the
Medical Group or Medical Practice; (e) there is no collective bargaining
agreement covering any of the Employees; (f) there is not pending any Equal
Employment Opportunity or other employment-related claim against the Medical
Group; and (g) to the best knowledge of the Medical Group, no Employee or
consultant is in violation of any (i) employment agreement, arrangement or
policy between such person and any previous employer (private or governmental)
or (ii) agreement restricting or prohibiting the use of any information or
materials used or being used by such person in connection with such person's
employment by or association with the Medical Group or the Medical Practice.

(b) Any Employee Pension Benefit Plan (as defined in section
3(2) of the Employee Retirement Income Security Act of 1974, as amended) meets
the qualification requirements of Section 401 of the Internal Revenue Code of
1986, as amended.

5.11 Insurance.
---------

Schedule 5.11 contains a list of all policies of professional liability
(medical malpractice), general liability, theft, fidelity, fire, product
liability, errors and omissions, health and other property and casualty forms of
insurance held by the Medical Group covering the assets, properties or
operations of the Medical Group and the Medical Practice (specifying the
insurer, amount of coverage, type of insurance, policy number and any pending
claims thereunder). All such policies of insurance are valid and enforceable
policies and are outstanding and duly in force and all premiums with respect
thereto are currently paid. Neither the Medical Group nor its predecessor in
interest has, during the last five fiscal years, been denied or had revoked or
rescinded any policy of insurance relating to the assets, properties or
operations of the Medical Group or the Medical Practice.

5.12 Burdensome Restrictions.
-----------------------

Except as set forth on Schedule 5.12, neither the Medical Group nor the
Medical Practice is bound by any oral or written agreement or contract,
restrictive covenants, or covenants not to compete that prohibit or restrict the
Medical Group or any of its Medical Personnel from conducting the Medical
Practice (or any material part thereof) or from pursuing any New Ancillary
Service.

5.13 Managed Care Contracts.
----------------------

Schedule 5.13 contains a list of all managed care contracts and all
provider agreements under which the Medical Group has agreed to provide Medical
Group Services to patients. Except as disclosed on Schedule 5.13, the Medical
Group is not subject to any most favored nations pricing or similar provisions.
Other than the Management Company, the Medical Group has not authorized any
person to enter into contracts on its behalf.

5.14 Disclosure.
----------

Neither this Agreement (including the Exhibits and Schedules attached
thereto) nor any other document, certificate or written statement furnished to
the Management Company by or on behalf of the Medical Group in connection with
the transactions contemplated hereby contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained herein and therein not misleading. Except as set forth on Schedule
5.14, there have been no events or transactions, or information which has come
to the attention of the Medical Group, which, as they relate

20
<PAGE>

directly to the Medical Group or the Medical Practice, could reasonably be
expected to have a material adverse effect on the business, operations, affairs,
prospects or condition of the Medical Group and the Medical Practice.

ARTICLE VI
REPRESENTATIONS AND WARRANTIES
OF THE MANAGEMENT COMPANY

The Management Company represents and warrants to the Medical
Group, as of the Effective Date, as follows:

6.1 Organization, Good Standing and Power.
-------------------------------------

The Management Company (a) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and (b)
has all requisite corporate power and authority to own, lease and operate its
properties, to carry on its business as now being conducted, to execute and
deliver this Agreement, to perform its obligations hereunder, and to consummate
the transactions contemplated hereby.

6.2 Authority.
---------

The execution, delivery and performance of this Agreement, and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action on the part of the Management
Company. This Agreement has been duly and validly executed and delivered by the
Management Company, and this Agreement is the valid and binding obligation of
the Management Company, enforceable in accordance with its terms, except as
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the rights of creditors generally. Neither
the execution, delivery or performance of this Agreement, nor the consummation
by the Management Company of the transactions contemplated hereby, nor
compliance by the Management Company with any provision hereof or thereof, will
(a) conflict with or result in a breach of any provisions of the Certificate of
Incorporation or the Bylaws of the Management Company, (b) cause a default (with
due notice, lapse of time or both), or give rise to any right of termination,
cancellation or acceleration, under any of the terms, conditions or provisions
of any material note, bond, lease, mortgage, indenture, license or other
instrument, obligation or agreement to which the Management Company is a party
or by which it or any of its properties or assets is or may be bound (with
respect to which defaults or other rights all requisite waivers or consents will
have been obtained at or prior to the date hereof) or (c) violate any law,
statute, rule or regulation or order, writ, judgment, injunction or decree of
any court, administrative agency or governmental body applicable to the
Management Company or any of its properties or assets. Except as set forth on
Schedule 6.2, to the best of the Management Company's knowledge, no permit,
authorization, consent or approval of or by, or any notification of or filing
with, any person (governmental or private) is required in connection with the
execution, delivery or performance by the Management Company of this Agreement
or the consummation by the Management Company of the transactions contemplated
hereby.

6.3 Public Filings.
--------------

The Management Company has made available to the Medical Group each
registration statement, report, proxy statement or information statement
prepared by the Management Company since December 31, 1997, including its
prospectus dated February 4, 1998, and the Management Company's Annual Report on
Form 10-K for the year ended December 31, 1997, in the form (including exhibits,
annexes and any amendments thereto) filed with the Securities and Exchange
Commission (the "SEC") (collectively these

21
<PAGE>

reports, including any such reports filed subsequent to the date hereof, the
"Company Reports"). As of their respective dates, the Company Reports did not,
and any Company Reports filed with the SEC subsequent to the date hereof will
not, contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not misleading.
Each of the consolidated balance sheets included in or incorporated by reference
into the Company Reports (including the related notes and schedules) fairly
presents, or will fairly present, the consolidated financial position of the
Management Company and its subsidiaries as of its date and each of the
consolidated statements of income and of cash flows included in or incorporated
by reference into the Company Reports (including any related notes and
schedules) fairly presents, or will fairly present, the results of operations,
retained earnings and changes in financial position, as the case may be, of the
Management Company and its subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to notes and normal year-end
audit adjustments that will not be material in amount or effect), in each case
in accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein.

ARTICLE VII
OBLIGATIONS OF THE MEDICAL GROUP

The Medical Group will perform the following obligations
during the Term:

7.1 Medical Personnel.
-----------------

The Medical Group will notify the Management Company, upon execution of
this Agreement, of the identities of all Medical Personnel. The Medical Group
will enter into employment agreements or contracts with all Medical Personnel.
All of the Medical Group's employment contracts will include a provision that
binds such Medical Personnel to the applicable provisions of this Agreement. The
Management Company reserves the right to review and approve all new employment
contracts before such contracts are used by the Medical Group. The Medical Group
will promptly provide the Management Company with all executed employment
agreements and any amendments thereto. All Medical Personnel will possess all
necessary and appropriate licenses to provide Medical Group Services and will
meet and maintain the credentialing standards established from time to time by
the Management Company or any third party payor with which the Medical Group has
an agreement to provide Medical Group Services (including without limitation
meeting all applicable continuing medical education requirements). All Medical
Group Physicians must hold staff privileges at one or more hospitals [designated
by the Management Company as participating hospitals]. The Medical Group will,
and will cause all of its Medical Group Physicians to, be participating
providers and accept assignment under Medicare.

7.2 Compliance with Laws.
--------------------

The Medical Group and the Medical Personnel will provide professional
services to patients in compliance at all times with those ethical standards,
laws and regulations to which they are subject, including, without limitation,
Medicaid and Medicare regulations. The Medical Group will monitor the quality of
medical care practiced by Medical Groups and other health care personnel
associated with the Medical Group. If any medical malpractice actions are filed
or any disciplinary or other actions are initiated against the Medical Group or
any Medical Personnel by any payor, patient, state or Federal regulatory agency
or any other person or entity, the Medical Group will immediately inform the
Management Company of such action and its underlying facts and circumstances.

7.3 Billing and Encounter Information.
---------------------------------

The Medical Group and Medical Personnel will provide timely, complete,
accurate and correct patient encounter and any other information requested by
the Management Company for the purpose of

<PAGE>

submitting bills, resolving disputes and any other business purpose deemed
appropriate by the Operations Committee. The Medical Group's Medical Personnel
will be responsible for providing accurate billing information with the
appropriate current CPT4 coding with respect to the fee tickets prepared by such
Medical Personnel. Such information may include, but not be limited to the name
of the patient, the date of service, the nature and extent of services provided
and any supporting medical information, necessary to obtain payment or
reimbursement for services.

7.4 Use of Facility.
---------------

The term "Facility" means (i) any medical office or laboratory
controlled, managed or operated by the Management Company or (ii) any hospital
at which any Medical Personnel practices medicine or maintains admitting
privileges. The Medical Group will use and occupy any Facility (as defined in
clause (i) above) exclusively for the practice of medicine, and in accordance
with all applicable Federal, state and local rules, ordinances and standards of
medical care. The medical practice(s) conducted at any Facility (as defined in
clause (i) above) will be conducted solely by Medical Personnel associated with
the Medical Group, and no other medical group or medical practitioner will be
permitted to use or occupy any such Facility without the Management Company's
prior written consent, which will not be unreasonably withheld or delayed.

7.5 Physician's Choice of Products, Physicians and Facilities.
---------------------------------------------------------

The Medical Group will have the exclusive control over the choice of
vendors and products utilized with respect to all prosthetics, prosthetic
devices, orthotics, braces, splints, appliances, medical supplies and
allografts. The Medical Group will have exclusive control over the choice of
specific medical groups and facilities to be utilized by the Medical Group with
respect to radiology, anesthesiology, hospitals, physical therapy, MRI, and
other medical professionals and facilities.

7.6 Insurability.
------------

The Medical Group will cooperate with the Management Company in (i)
ensuring that its Medical Personnel are insurable under commercially available
malpractice insurance policies or (ii) instituting proceedings to terminate
within two business days any Medical Personnel who is not insurable or who loses
his or her malpractice insurance eligibility. The Medical Group will notify the
Management Company in writing of any change in the insurance status of any
Medical Personnel within two days after the Medical Group receives notice of any
such change. The Medical Group will require all Medical Personnel to participate
in an on-going risk management program.

7.7 Purchasing.
----------

The Medical Group will use its best efforts to take advantage of
procurement savings for supplies and other materials needed for the provision of
Medical Group Services available through the Management Company's preferred
purchaser arrangements with various vendors. The Management Company will make
available lists of such vendors, available products, and pricing. The procedure
for calculating the Professional Practice Cost Savings is set forth on Exhibit
B.

7.8 Medical Personnel Hiring.
------------------------

The Medical Group will have the ultimate control over and
responsibility for the hiring, compensation, supervision, evaluation and
termination of its Medical Personnel; provided, however, that at the request of
the Medical Group, the Management Company will consult with the Medical Group
regarding such matters.

23
<PAGE>

7.9 Change of Control.
-----------------

During the Term of this Agreement, the Medical Group will not enter
into any transaction (or series of transactions undertaken pursuant to a common
plan) involving the admission of new partners or stockholders, the transfer of
ownership interests, or the reorganization or restructuring of the Medical
Group, if any such transaction(s) would transfer a more than 25% of the
ownership interest in the Medical Group, without the Management Company's prior
written consent, which will not be unreasonably withheld.

7.10 Non-Competition.
---------------

In consideration of the Management Company's obligations and the
consideration to be received hereunder, and in consideration of and as an
inducement to the Management Company to consummate the transactions contemplated
by this Agreement, the Medical Group hereby (a) agrees to the non-competition
covenants attached hereto as Schedule 7.10 and (b) agrees to require each of the
Medical Group Physicians to covenant not to compete with the Management Company,
which covenant will be substantially similar to those covenants of the Medical
Group set forth on Schedule 7.10.

ARTICLE VIII
INDEMNIFICATION

8.1 Indemnification by Medical Group.
--------------------------------

The Medical Group will indemnify, hold harmless and defend the
Management Company, its officers, directors, shareholders, employees, agents and
independent contractors from and against any and all liabilities, losses,
damages, claims, causes of action and expenses (including reasonable attorneys'
fees and expenses), whether or not covered by insurance, caused or asserted to
have been caused, directly or indirectly, by or as a result of (i) the
performance of Medical Group Services, including without limitation the
performance of such services prior to the Effective Date, (ii) any other acts or
omissions of the Medical Group and its Medical Personnel, including without
limitation any such acts or omissions that occurred prior to the Effective Date,
or (iii) any breach of any term this Agreement (including without limitation,
representations and warranties made herein and covenants undertaken hereby) by
the Medical Group and/or the Medical Personnel and/or their respective agents
and/or subcontractors (other than the Management Company).

8.2 Indemnification by Management Company.
-------------------------------------

The Management Company will indemnify, hold harmless and defend the
Medical Group, its partners, members, officers, directors, stockholders,
employees, agents and independent contractors from and against any and all
liabilities, losses, damages, claims, causes of action and expenses (including
reasonable attorneys' fees and expenses), whether or not covered by insurance,
caused or asserted to have been caused, directly or indirectly, by or as a
result of (i) the performance of Management Services, (ii) any other acts or
omissions of the Management Company and its employees or (iii) any breach of or
failure to perform any obligation under this Agreement (including without
limitation, representations and warranties made herein and covenants undertaken
hereby) by the Management Company and/or its agents, employees and/or
subcontractors (other than the Medical Group).

24
<PAGE>

ARTICLE IX
TERMINATION

9.1 Termination by Medical Group.
----------------------------

The Medical Group may terminate this Agreement effective immediately by
giving written notice of termination to the Management Company (a) in the event
of the filing of a petition in voluntary bankruptcy or an assignment for the
benefit of creditors by the Management Company or upon other action taken or
suffered, voluntarily or involuntarily, under any Federal or state law for the
benefit of debtors by the Management Company, except for the filing of a
petition in involuntary bankruptcy against the Management Company which is
dismissed within ninety (90) days thereafter (a "Bankruptcy Event"), (b) if the
Management Company defaults in any material respect in the performance of any
duty or obligation imposed upon it by this Agreement and the Management Company
has not taken reasonable action commencing curing of such default within thirty
(30) days after written notice thereof has been given to the Management Company
by the Medical Group or the Management Company does not thereafter diligently
prosecute such action to completion; or (c) if any of the representations and
warranties made by the Management Company in Article VI is untrue or misleading
in any material respect, provided that the Medical Group has previously given
written notice to the Management Company describing in reasonable detail the
nature of the item in question and the Management Company has not cured such
matter within thirty (30) days of such notice.

9.2 Termination by Management Company.
---------------------------------

The Management Company may terminate this Agreement effective
immediately by giving written notice of termination to the Medical Group (a) in
the event of a Bankruptcy Event relating to the Medical Group, (b) if Medical
Group defaults in any material respect in the performance of any duty or
obligation imposed upon it by this Agreement and the Medical Group has not taken
reasonable action commencing curing of such default within thirty (30) days
after written notice thereof has been given to the Medical Group by the
Management Company or the Medical Group does not thereafter diligently prosecute
such action to completion, (c) if any of the representations and warranties made
by the Medical Group in Article V is untrue or misleading in any material
respect, provided that the Management Company will have previously given written
notice to the Medical Group describing in reasonable detail the nature of the
item in question and the Medical Group will not have cured such matter within
thirty (30) days of such notice, or (d) if the Medical Group is (or a material
number of Medical Personnel are) excluded from the Medicaid or Medicare program
for any reason.

9.3 Termination by Medical Group or Management Company.
--------------------------------------------------

The Medical Group and the Management Company will each have the right
to terminate this Agreement effective immediately by giving written notice of
termination to the other party upon reoccurrence of any of the events described
in Section 12.14 of this Agreement.

9.4 Effect of Termination.
---------------------

(a) Upon the termination of this Agreement in accordance with
the terms hereof, each party will pay in full and satisfy any and all
outstanding obligations of the parties accruing through the effective date of
termination, including those obligations set forth in this section.

(b) Upon the termination of this Agreement, the Management Fee
described in Section 4.2 will be reconciled on or before the end of the fourth
month following the termination date, rather than the date specified in Section
4.2(b), and the computation made under such Section will be made with

25
<PAGE>

respect to the portion of the year ending on the termination date (if the
termination date is other than December 31). In making such computation, all
Collections during the three-month period following termination will be
included.

(c) (i) The Medical Group acknowledges that the Management
Company has entered into this Agreement in contemplation that the Management
Company will accrue benefits from this Agreement over the course of many years.
The Medical Group and the Management Company also agree that if this Agreement
is terminated during the first ten years of the Term, the Management Company
will suffer substantial monetary damages and losses, the amount of which will be
extremely difficult or impossible to determine. Accordingly, the parties agree
to the liquidated damages and termination fee provisions set forth in this
Section 9.4(c) if this Agreement is terminated during the first ten years of the
Term.

(ii) In the event of any termination of this Agreement by
either the Medical Group or the Management Company at any time during the first
five years of the Term, the Medical Group will pay to the Management Company, as
liquidated damages and a termination fee, a sum equal to five times the minimum
Management Fee described in Section 4.2(a), which sum the parties hereby agree
is reasonable (the "Liquidated Damages Amount"). In the event of any termination
of this Agreement by either the Medical Group or the Management Company at any
time after the fifth anniversary of the Effective Date but prior to the tenth
anniversary of the Effective Date, the Medical Group will pay to the Management
Company, as liquidated damages and a termination fee, a sum equal to 50% of the
Liquidated Damages Amount. Any sum payable pursuant to the terms of this Section
9.4(c) will be paid in full, in cash, not later than sixty days following the
date upon which notice of termination is given.

(iii) The agreement of the parties to a liquidated damages
or a termination fee in the event of termination of this Agreement during the
first ten years of the Term is not intended to restrict or limit any damages to
which either party otherwise may be entitled in the event of termination after
the first ten years, but prior to the expiration, of the Term. Whether or not
either party may be entitled to damages in any such event will be determined
without reference to or consideration of this Section 9.4(c).

ARTICLE X
NON-DISCLOSURE OF CONFIDENTIAL INFORMATION

10.1 Non-Disclosure.
--------------

(a) Neither the Management Company nor the Medical Group, nor
their respective employees, stockholders, consultants or agents may, at any time
after the execution and delivery hereof, directly or indirectly disclose any
Confidential or Proprietary Information relating to the other party hereto to
any person, firm, corporation, association or other entity, nor will either
party, or their respective employees, stockholders, consultants or agents make
use of any of such Confidential or Proprietary Information for its or their own
purposes or for the benefit of any person, firm, corporation or other entity
except the parties hereto or any subsidiary or affiliate thereof. The foregoing
obligation will not apply to any information which a party hereto can establish
to have (a) become publicly known without breach of this Agreement by it or
them, (b) to have been given to such party by a third party who is not obligated
to maintain the confidentiality of such information, or (c) is disclosed to a
third party with the prior written consent of the other party hereto.

(b) For purposes of this Article X, the term "Confidential or
Proprietary Information" means all information known to a party hereto, or to
any of its employees, stockholders, officers, directors or consultants, which
relates to this Agreement, patient medical and billing records, trade secrets,
books and records, supplies, pricing and cost information, marketing plans,
strategies and forecasts. Nothing

<PAGE>

contained herein will prevent a party hereto from furnishing Confidential or
Proprietary Information pursuant to a direct order of a court of competent
jurisdiction.

ARTICLE XI

TERM

Subject to such start-up procedures as the parties may agree upon for
purposes of facilitating the transition of responsibilities required by this
Agreement, the performance of services under this Agreement will commence as of
__________, 1998 and will expire on the fortieth anniversary of the Effective
Date unless terminated earlier pursuant to the terms hereof (the "Base Term").
The Base Term of this Agreement will be automatically extended for successive
five-year terms (each extension, together with the Base Term, the "Term") unless
either party delivers written notice to the other party of its intent to not
extend the Term of this Agreement. Such notice must be delivered not less than
six (6) months nor more than nine (9) months prior to the expiration of the
then-current Term.

ARTICLE XII
MISCELLANEOUS

12.1 Assignment.
----------

Neither the Management Company nor the Medical Group will have the
right to assign their respective rights and delegate their respective
obligations hereunder without the prior written consent of the other party;
provided, however, the Medical Group's consent will not be required in
connection with any assignment by the Management Company arising out of or in
connection with a sale of all or substantially all of the stock or assets of the
Management Company or the merger, consolidation, or reorganization of the
Management Company.

12.2 Notices.
-------

All notices, requests, consents and other communications hereunder will
be in writing and will be deemed sufficient if personally delivered, telecopied
(with original sent by mail), sent by nationally-recognized overnight courier,
or by registered or certified mail, return receipt requested and postage
prepaid, addressed as follows:

if to the Management Company, to:

BMJ Medical Management, Inc.
4800 North Federal Highway, Suite 104D
Boca Raton, Florida 33431
Attention: Neil F. Luria, General Counsel
Telecopier: (561) 391-1389

with a copy to:

Jones, Day, Reavis & Pogue
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114-1190
Attention: Charles W. Hardin, Jr., Esq.
Telecopier: (216) 579-0212

27
<PAGE>

if to the Medical Group, to:

_________________________

Telecopier: ( ) - ;

with a copy to:

_________________________

Attention: ______________

Telecopier:______________

or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication will be deemed to have been received (a) in the case of
personal delivery and telecopier, on the date of such delivery, (b) in the case
of nationally-recognized overnight courier, on the next business day after the
date when sent, and (c) in the case of mailing, on the third business day
following the day on which the piece of mail containing such communication is
posted.

12.3 Benefits of Agreement.
---------------------

This Agreement will bind and inure to the benefit of any successors to
or permitted assigns of the Management Company and the Medical Group.

12.4 Severability.
------------

The parties intend and desire that the provisions of this Agreement be
enforced to the fullest extent permissible under the laws and public policies
applied in each jurisdiction in which enforcement is sought. Accordingly, if any
particular provision of this Agreement is adjudicated by a court of competent
jurisdiction to be invalid, prohibited or unenforceable for any reason, such
provision, as to such jurisdiction, will be ineffective, without invalidating
the remaining provisions of this Agreement or affecting the validity or
enforceability of this Agreement or affecting the validity or enforceability of
such provision in any other jurisdiction. Notwithstanding the foregoing, if such
provision could be more narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, it will, as to such jurisdiction, be so
narrowly drawn, without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.

12.5 Governing Law.
-------------

This Agreement will be governed by and construed and enforced in
accordance with the laws of the State of Delaware without giving effect to the
laws and principles thereof, or of any other jurisdiction, which would direct
the application of the laws of another jurisdiction.

28
<PAGE>

12.6 Headings.
--------

Section headings are used for convenience only and will in no way
affect the construction of this Agreement.

12.7 Entire Agreement; Amendments.
----------------------------

This Agreement and the exhibits and schedules hereto contain the entire
understanding of the parties with respect to its subject matter, and neither
this Agreement nor any part of it may in any way be altered, amended, extended,
waived, discharged or terminated except by a written agreement signed by all of
the parties against whom enforcement is sought.

12.8 Attorneys' Fees.
---------------

If a dispute or controversy arises out of or relating to this
Agreement, the prevailing party will be entitled to recover from the other party
all reasonable costs and expenses, including attorneys' fees and accountants'
fees, incurred in connection with such dispute or controversy to the extent
permitted by law.

12.9 Counterparts.
------------

This Agreement may be executed in counterparts, and each such
counterpart will be deemed to be an original instrument, but all such
counterparts together will constitute but one agreement.

12.10 Waivers.
-------

Any party to this Agreement may, by written notice to the other party,
waive any provision of this Agreement. The waiver by any party of a breach of
any provision of this Agreement will not operate or be construed as a waiver of
any subsequent breach.

12.11 Survival of Termination.
-----------------------

Notwithstanding anything contained herein to the contrary, Sections
3.14, 7.10, 8.1, 8.2, 12.2, 12.3, 12.4, 12.5, 12.7, 12.8, 12.11, and Articles IX
and X will survive any expiration or termination of this Agreement.

12.12 Force Majeure.
-------------

The Management Company will not be liable to the Medical Group for
failure to perform any of the services required herein in the event of strikes,
lock-outs, calamities, acts of God, unavailability of supplies, changes in
applicable law or regulations or other events over which the Management Company
has no control for so long as such events continue and for a reasonable time
thereafter.

12.13 Legend on Securities.
--------------------

During the Term of this Agreement, any certificate or similar evidence
representing an equity interest in the Medical Group issued by the Medical Group
will bear the following legend:

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS
ON TRANSFER CONTAINED IN THE MANAGEMENT SERVICES AGREEMENT EFFECTIVE AS OF
___________________, 1998, BETWEEN ________________ AND BMJ MEDICAL MANAGEMENT,
INC., A DELAWARE CORPORATION."

29
<PAGE>
12.14 Change in Law.
-------------

If any state or Federal laws or regulations, now existing or enacted or
promulgated after the date hereof, are interpreted by judicial decision, a
regulatory agency or legal counsel of both parties in such a manner as to
indicate that the structure of this Agreement may be in violation of such laws
or regulations, the Medical Group and the Management Company will amend this
Agreement as necessary to avoid such violation. To the maximum extent possible,
any such amendment will preserve the underlying economic and financial
arrangements between the Medical Group and the Management Company. If an
amendment is not possible, either party will have the right to terminate this
Agreement. Any dispute between the parties hereto arising under this Section
12.14 with respect to whether this Agreement violates any state or Federal laws
or regulations or whether an amendment is possible will be jointly submitted by
the parties and finally settled by binding arbitration in Delaware, pursuant to
the arbitration rules of the National Health Lawyers Association Alternative
Dispute Resolution Service. Arbitration will take place before one arbitrator
appointed in accordance with such rules. The governing law of the arbitration
will be the law set forth in Section 12.5. Any decision rendered by the
arbitrator will clearly set forth the factual and legal basis for such decision.
The decision rendered by the arbitrator will be non-appealable and enforceable
in any court having jurisdiction thereof. The administrative costs of the
arbitration and the arbitrator fees will be equally borne by the parties. Each
party will pay its own legal costs and fees in connection with such arbitration.

BMJ MEDICAL MANAGEMENT, INC.

By:____________________________
Name:
Title:

[MEDICAL GROUP]

By:____________________________
Name:
Title:

Acknowledged and Accepted by the
Medical Group Physicians

-------------------------------
Name:

<PAGE>

-------------------------------
Name:

<PAGE>
EXHIBIT 21.1

*LIST OF SUBSIDIARIES

<TABLE>
<CAPTION>
JURISDICTION OF
NAME % OF OWNERSHIP BY THE COMPANY INCORPORATION
- ------------------------------------------------------------------ ----------------------------- ---------------
<S> <C> <C>
BMJ Capital Corp.................................................. 100% Delaware
BMJ of Bethlehem, Inc............................................. 100% Delaware
BMJ of Chandler, Inc.............................................. 100% Delaware
BMJ IPA of Florida, Inc........................................... 100% Delaware
BMJ of Glendale, Inc.............................................. 100% Delaware
BMJ of Bakersfield, Inc........................................... 100% Delaware
BMJ of Lake Tahoe, Inc............................................ 100% Delaware
BMJ of North Broward, Inc......................................... 100% Delaware
BMJ of San Antonio, Inc........................................... 100% Delaware
BMJ of Santa Barbara, Inc......................................... 100% Delaware
Surgical Associates of Bakersfield Limited Partnership............ 50% California
Surgical Associates of Lake Tahoe, Limited Partnership............ 50% Nevada
Surgical Associates of North Broward, Limited Partnership......... 50% Florida
Orthopedic Management Network, Inc................................ 100% Arizona
Valley Sports Surgeons, Inc....................................... 100% Delaware
</TABLE>

- ------------------
* As of March 31, 1998

<PAGE>
Exhibit 23.1

Consent of Independent Certified Public Accountants

We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-46565) pertaining to the 1996 Stock Option Plan of BMJ Medical
Management, Inc. and subsidiaries of our report dated June 12, 1998, except for
Note 10, as to which the date is June 30, 1998, with respect to the consolidated
financial statements of BMJ Medical Management, Inc. and subsidiaries included
in the Annual Report (Form 10-K) for the three month period ended March 31,
1998.

/s/ Ernst & Young LLP

West Palm Beach, Florida
July 8, 1998

<PAGE>
EXHIBIT 24.1

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and
officers of BMJ Medical Management, Inc., a Delaware corporation, hereby
constitutes and appoints Naresh Nagpal, M.D., David H. Fater, Neil F. Luria and
Charles W. Hardin, Jr., and each of them, as the true and lawful attorney or
attorneys-in-fact, with full power of substitution and revocation, for each of
the undersigned and in the name, place and stead of each of the undersigned, to
sign on behalf of each of the undersigned a Transition Report on Form 10-K for
the transition period ended March 31, 1998 pursuant to Section 13 of the
Securities Exchange Act of 1934 and to sign any and all amendments to such
Annual Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, including, without limitation, a Form 12b-25,
with the Securities and Exchange Commission, granting to said attorney or
attorneys-in-fact, and each of them, full power and authority to do so and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all that said
attorney or attorneys-in-fact or any of them or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.

This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original with respect to the person executing it.

Executed as of this 25 day of June 1998.

<TABLE>
<S> <C>
/s/ NARESH NAGPAL /s/ JAMES M. FOX
- ---------------------------------------------------- ----------------------------------------------------
Naresh Nagpal, M.D. James M. Fox, M.D.
President, Chief Executive Director
Officer and Director
(Principal Executive Officer)

/s/ DAVID H. FATER /s/ ANN H. LAMONT
- ---------------------------------------------------- ----------------------------------------------------
David H. Fater Ann H. Lamont
Executive Vice President, Director
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)

/s/ GEORGES DAOU /s/ DONALD J. LOTHROP
- ---------------------------------------------------- ----------------------------------------------------
Georges Daou Donald J. Lothrop
Director Director

/s/ STEWART G. EIDELSON
- ----------------------------------------------------
Stewart G. Eidelson, M.D.
Director
</TABLE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,483
<SECURITIES> 0
<RECEIVABLES> 25,794
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,066
<PP&E> 8,946
<DEPRECIATION> 1,017
<TOTAL-ASSETS> 93,220
<CURRENT-LIABILITIES> 11,431
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 56,070
<TOTAL-LIABILITY-AND-EQUITY> 93,220
<SALES> 27,581
<TOTAL-REVENUES> 27,581
<CGS> 0
<TOTAL-COSTS> 21,943
<OTHER-EXPENSES> 21,943
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,162
<INCOME-PRETAX> (8,416)
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<EPS-PRIMARY> (.63)
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</TABLE>