PHYSICIAN RELIANCE NETWORK INC, 10-K, 1999-03-26

PHYSICIAN RELIANCE NETWORK INC
10-K, 1999-03-26
SPECIALTY OUTPATIENT FACILITIES, NEC

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM 10-K

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

For the fiscal year ended December 31, 1998

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

Commission file number 0-24872

PHYSICIAN RELIANCE NETWORK, INC.
(Exact name of registrant as specified in its charter)

Texas 75-2495107
- ------------------------------------ ----------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

5420 LBJ Freeway, Suite 900
Dallas, Texas 75240
- ------------------------------------ ----------------------------------
(Address of principal executive (Zip Code)
offices)

Registrant's telephone number, including area code: (972) 392-8700

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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value per share
Series One Junior Preferred Stock Purchase Rights
- -------------------------------------------------------------------------------
(Title of class)

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

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

As of March 23, 1999, 51,800,001 shares of Common Stock were
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant as of such date was approximately $265,648,000
(based upon the closing sale price of the Common Stock on The Nasdaq Stock
Market's National Market on March 23, 1999 of $6.69 per share). For purposes of
this calculation, shares held by non-affiliates excludes only those shares
beneficially owned by officers, directors and shareholders beneficially owning
10% or more of the outstanding Common Stock.

<PAGE> 2

PART I

ITEM 1. BUSINESS

GENERAL

Physician Reliance Network, Inc. (the "Company") provides the
management services, facilities and equipment, administrative and technical
support, and ancillary services necessary for physicians to establish and
maintain a fully integrated network of outpatient oncology care. The Company
also provides management services, facilities and equipment, administrative and
technical support, and ancillary services to physicians who provide diagnostic
radiology services. As of December 31, 1998, the Company had operations in
Texas, Iowa, Oregon, Washington, Missouri, Maryland, Arkansas, New York,
Minnesota, Illinois, Florida, New Mexico and Oklahoma and provided its services
to 361 physicians. The Company's principal executive offices are located at 5420
LBJ Freeway, Suite 900, Dallas, Texas, 75240, and its telephone number at that
address is (972) 392-8700. The Company transacts business directly and
indirectly through its wholly owned subsidiaries, TOPS Pharmacy Services, Inc.
and PRN Research, Inc. Unless the context otherwise requires, references herein
to the Company include its subsidiaries.

The Company was incorporated under the laws of the State of Texas in
June 1993 and entered into a service agreement with Texas Oncology, P.A.
("TOPA") in October 1993. The terms of the TOPA service agreement require the
Company to provide TOPA with facilities, equipment, non-physician personnel, and
administrative, management, and non-medical advisory services, as well as
services relating to the purchasing and administering of pharmaceuticals and
supplies. For the years ended December 31, 1996, 1997, and 1998, approximately
80%, 70%, and 65%, respectively, of the Company's total revenues were derived
from services provided to TOPA. See "--Service Agreements."

Effective December 11, 1998, the Company entered into an Agreement and
Plan of Merger providing for the merger of a subsidiary of American Oncology
Resources, Inc. ("AOR"), a Delaware corporation, with the Company. Upon
consummation of the merger, the Company will become a wholly owned subsidiary of
AOR and the holders of the Company's common stock will receive 0.94 shares of
AOR common stock for each share of the Company's common stock held by them. The
effective date of the merger currently is expected to be in the second quarter
of 1999. The merger is expected to be accounted for as a pooling of interests
and to be a tax free exchange. The merger is subject to regulatory and
stockholder approval. AOR is a national cancer management company, which
provides comprehensive management services under long-term agreements to
oncology practices. AOR's affiliated physicians provide a broad range of medical
services to cancer patients, including medical oncology, gynecological oncology,
radiation oncology, stem cell transplantation, diagnostic radiology and clinical
research.

PHYSICIAN MANAGEMENT SERVICES

The Company's primary business is providing the management services,
equipment, and facilities necessary for the operation of a physician group
practice engaged in the diagnosis and treatment of cancer. The services provided
by the Company are concentrated in the following three areas:

FINANCIAL SERVICES. The Company provides the oncology groups with which
the Company contracts the capital necessary to develop and equip outpatient
cancer centers and physician offices. The Company provides the diagnostic
radiology groups with which it contracts the capital necessary to develop and
equip outpatient imaging facilities and physician offices. The Company provides
physician groups the billing and accounts receivable management services
necessary to deal with complex reimbursement requirements. The Company also
combines the purchasing power of numerous physicians with respect to medical
supplies, equipment, and pharmaceuticals.

CLINICAL SERVICES. The Company provides and manages the facilities used
by physicians. The Company also assists practices in recruiting additional
physicians, provides and trains the non-physician support staff necessary to
operate the Company's facilities, and provides the technical and ancillary
services required for outpatient treatment of oncology patients.

<PAGE> 3

MANAGEMENT EXPERTISE. As both public and private payors have taken a
more active role in the delivery of health care, the administrative burden on
physicians has increased. The Company provides the management expertise
necessary to comply with applicable laws and regulations. The Company also
assists in the scheduling of patients, the purchasing and management of medical
supplies and inventories, and the staffing of multiple health care delivery
sites.

CLINIC OPERATIONS - ONCOLOGY

The physician groups with which the Company contracts provide
outpatient medical services primarily to cancer patients. The Company provides
oncologists with two types of facilities: physician offices and cancer centers.
Through the use of the Company's facilities and equipment, physicians can offer
a wide array of services primarily for outpatient cancer treatment, including
bone marrow and stem cell transplantation, mammography, breast imaging,
diagnosis, nuclear medicine, ultrasound, x-ray, laboratory, pharmacy, and
patient education services. Physicians providing services at the Company's
facilities are employed by an affiliated physician group, not the Company, and
maintain full control over their medical practices. The Company is not engaged
in the practice of medicine.

PHYSICIAN OFFICES. At December 31, 1998, the Company provided
oncologists with 87 full-time physician offices located in 46 cities in thirteen
states. The physician's office is where a patient interacts most frequently with
an oncologist. A typical physician's office is staffed with two medical
oncologists and nine support personnel. The support personnel include nurses,
lab and radiology technicians, and patient service coordinators. Physician
offices also contain the equipment necessary to administer single agent
chemotherapy. By contrast, multi-agent and multi-modality chemotherapies are
generally performed in the Company's cancer centers. Additional services that
may be offered at a physician's office include routine diagnostic services,
patient evaluation and management services, and coordination of care and
ancillary services such as laboratory, x-ray, and pharmacy services.

CANCER CENTERS. At December 31, 1998, the Company operated 29 cancer
centers and had seven additional centers under construction. Each of the
Company's cancer centers is designed and equipped to provide substantially all
of the outpatient diagnostic and treatment programs necessary to treat a cancer
patient. Among the many services offered at a cancer center, in addition to
medical oncology and radiation therapy services, are diagnostic radiology,
patient education and support services, chemotherapy, pharmacy services, and
nutritional counseling. In addition, the typical cancer center has community
rooms, facilities for patient meetings and patient self-help programs,
counseling areas, and training facilities. Each of the Company's cancer centers
is equipped with a pharmacy, a laboratory and at least one linear accelerator
and a simulator which is used to plan radiation treatment. Most of the cancer
centers have infusion areas where chemotherapy lasting several hours can be
administered and infusion rooms where more complex chemotherapies, which
historically required hospitalization, can be administered.

A typical cancer center has two medical oncologists, one radiation
oncologist, and eight support personnel for each physician. The support
personnel include nurses, lab and radiology technicians, a physicist, a
pharmacist, and patient service coordinators. The Company's largest cancer
center is the Sammons Cancer Center located adjacent to Baylor University
Medical Center ("BUMC") in Dallas, Texas. The Sammons Cancer Center is staffed
by 15 medical oncologists, four stem cell transplanters, three gynecological
oncologists, and three radiation oncologists. Services offered at this center
that are not offered at most of the Company's other cancer centers include
gynecological oncology, outpatient bone marrow and stem cell transplantation,
and high dose chemotherapy with stem cell transplant support.

RETAIL PHARMACY SERVICES

At December 31, 1998, the Company operated 30 pharmacies and had seven
additional pharmacies under development. Each of the Company's pharmacies is
located within a physician's office or a cancer center. These pharmacies offer a
full range of cancer pharmaceuticals and supplies from a variety of
manufacturers. Each pharmacy is managed by a registered pharmacist and employs
additional support staff.

3
<PAGE> 4
The pharmacies are licensed as retail pharmacies. The Company's
pharmaceutical services include preparation of (i) chemotherapy products
administered in the Company's facilities; (ii) research medications; (iii)
chemotherapy-related retail prescriptions; and (iv) pharmaceuticals for
ambulatory infusion and home infusion. Clinical services provided by the
pharmacies include monitoring drug interactions; educating patients; providing
drug information to physicians, nurses, and patients; and conducting drug
utilization reviews.

CLINICAL RESEARCH

The Company manages clinical trials on behalf of pharmaceutical
companies and biotechnology companies. In general, the clinical trial programs
relate to research designed to focus on: (i) improving cancer survival rates;
(ii) studying therapies that may improve a patient's quality of life; (iii)
exploring ways to lower the costs of cancer treatment; and (iv) developing
innovative cancer treatments in conjunction with pharmaceutical and
biotechnology companies. The Company assists in a number of aspects in the
conduct of clinical trials including protocol development, data coordination,
institutional review board coordination, contract review and negotiation,
pharmacy services, and clinical facilities.

CLINIC OPERATIONS - RADIOLOGY

In November 1998, the Company entered into a service agreement with
ReFormed Radiology, P.A. ("ReFormed Radiology") to provide the group with
management services, facilities and equipment, administrative and technical
support, and ancillary services. ReFormed Radiology employs 34 diagnostic
radiologists and utilizes the Company's seven imaging centers to provide an
integrated network of diagnostic radiology services in Dallas, Texas. ReFormed
Radiology also has an exclusive contract with BUMC to provide all professional
radiology services at BUMC.

SERVICE AGREEMENTS

The Company provides services, facilities and equipment for physicians
under long-term service agreements (the "Service Agreements") with physician
groups (the "Affiliated Physician Groups"). Under the Service Agreements, the
Company is typically the sole and exclusive manager of all day-to-day business
functions of physicians employed by Affiliated Physician Groups, providing
facilities, equipment, supplies, support personnel, and management and financial
advisory services. Specifically, the Company, among other things, (i) prepares
annual financial statements; (ii) purchases inventories and supplies; (iii)
manages billing and collecting; (iv) supervises and maintains custody of files
and records; (v) performs clerical, accounting, and computer services functions;
(vi) advises on public relations and advertising; and (vii) assists in the
recruitment of physicians. The Service Agreements generally have 40 year initial
terms with automatic five-year extensions thereafter unless either party gives
notice to the other not to renew prior to the expiration of the term. The
Service Agreements are not terminable earlier by the Affiliated Physician
Groups, except in the event of the Company's bankruptcy or a material breach of
the Service Agreement.

In accordance with the terms of each Service Agreement, the Company is
paid a management fee by the Affiliated Physician Groups. This management fee is
equal to the direct expenses associated with operating the Affiliated Physician
Group, excluding physicians' salaries and benefits, plus an additional fee.
Direct expenses include rent, depreciation, amortization, pharmaceutical
expenses, medical supply expenses, and salaries and benefits of non-physician
employees who support the Affiliated Physician Groups. Approximately 94% of the
Service Agreements for the year ended December 31, 1998 provide that the
additional fee is a percentage, ranging from 25% to 35%, of the earnings before
interest and taxes of the Affiliated Physician Group. The remaining Service
Agreements for the year ended December 31, 1998 provide for an additional fee
that is a percent of revenue of the Affiliated Physician Group or is a
predetermined, fixed amount.

<PAGE> 5

approval by an operating board, the Company has advanced funds to an Affiliated
Physician Group to finance development of new markets, to support the addition
of physicians, and to support the development of new services. These advances
are funded with the Company's working capital and are repaid in accordance with
the terms of the instrument evidencing the advance. From time to time, the
Company and an Affiliated Physician Group may amend the Service Agreement to
change the management fee paid to the Company. These amendments generally occur
when an operating board determines to add facilities to be used by an Affiliated
Physician Group and provides for an appropriate increase in the Company's
management fee. Each Service Agreement provides a mechanism to adjust the
Company's management fee if a change in law results in a change in the
underlying financial arrangements between the Affiliated Physician Group and the
Company. If the operating board cannot agree to an appropriate adjustment, the
Service Agreement provides that the matter shall be submitted to binding
arbitration.

The Company does not enter into nominee shareholder arrangements with
Affiliated Physician Groups, nor does it have a "controlling financial interest"
in the Affiliated Physician Groups as defined by EITF 97-2, "Application of FASB
Statement No. 94 and APB No. 16 to Physician Practice Management Entities and
Certain Other Entities under Contractual Management Arrangement". For these
reasons, the Company does not consolidate the financial statements of the
Affiliated Physician Groups.

Effective June 30, 1997, the Company, through PRN Research, entered
into a comprehensive clinical development alliance (the "Ilex Agreement") with
Ilex(TM)Oncology, Inc. ("Ilex"). Ilex is a contract research organization
("CRO") that focuses exclusively on research of cancer-related pharmaceuticals.
Under the terms of the Ilex Agreement, the Company has agreed that its sites can
be used for trials managed or sponsored by Ilex, and Ilex has agreed to promote
the Company as a preferred vendor for clinical trial sites. The Company has also
agreed to promote Ilex as the preferred CRO for clinical trials; provide
scientific review services to Ilex to evaluate proposed clinical trials; and
assist in clinical trials design. In addition, the Company has the right of
first refusal to participate to the maximum extent possible in all trials
managed or sponsored by Ilex. As consideration for entering into the Ilex
Agreement, the Company received 312,188 shares of Ilex common stock in 1997. The
Company received 314,000 additional shares of Ilex common stock during 1998. The
Company will also receive 314,000 additional shares of Ilex common stock in 1999
and 2000. In addition, the Company will receive up to 1,256,000 additional
shares should Ilex meet certain operational financial targets. The Ilex
Agreement terminates on December 31, 2007.

COMPETITION

The business of providing management services to physicians is highly
competitive. The Company is aware of several competitors focusing exclusively on
the management of oncology practices. The Company is also aware of several
competitors focusing exclusively on the management of diagnostic radiology
practices. In addition, several other health care companies provide at least
some management services to oncologists or diagnostic radiologists. In addition,
there are numerous other companies, including hospitals, large medical group
practices, health maintenance organizations, and insurance companies, that are
expanding their presence in the physician management market. Some of the
Company's competitors have longer operating histories and significantly greater
resources than the Company.

The Affiliated Physician Groups, upon whose success the Company is
dependent, also face significant competition for providing medical and related
services and for the recruitment of physicians and non-physician personnel.
Hospitals, sole practitioners, single and multi-specialty medical groups, and
managed care organizations all compete with the Affiliated Physician Groups.

<PAGE> 6

GOVERNMENT REGULATION

As a participant in the health care industry, the Company's operations
and relationships are subject to extensive and increasing regulation by a number
of governmental entities at the federal, state, and local levels. The Company is
also subject to laws and regulations relating to business corporations in
general. The Company believes its operations are in material compliance with
applicable laws. Nevertheless, many aspects of the Company's business
operations, including the structure of the relationship between the Company and
the Affiliated Physician Groups, have not been the subject of state or federal
regulatory interpretation.

Approximately 35% of the revenues of the Affiliated Physician Groups is
derived from payments made by government-sponsored health care programs
(principally, Medicare and Medicaid). As a result, any change in government
reimbursement regulations, policies, practices, interpretations, or statutes
could adversely affect the operations of the Company. The federal Medicare
program is based on a system of reimbursement for physician services, known as
the resource based relative value scale schedule ("RBRVS"). The Company expects
that annual adjustments to RBRVS payment levels and other future changes in
Medicare reimbursement will continue to result in a reduction from historical
levels in the per-patient Medicare revenue received by the Affiliated Physician
Groups.

The laws of many states prohibit business corporations such as the
Company from practicing medicine, employing physicians to practice medicine, or
engaging in activities such as fee-splitting with physicians. The Company does
not employ physicians to practice medicine, does not determine the methodology
for computing physicians' salaries, does not represent to the public or its
clients that it offers medical services, and does not control the clinical
aspects of the practice of medicine by the physicians with whom it contracts.
Accordingly, the Company believes that it is not in violation of applicable
state laws relating to the practice of medicine and that its receipt of a
management fee for services provided to the Affiliated Physician Groups does not
violate laws prohibiting certain fee-splitting arrangements. The laws in most
states regarding fee splitting and the corporate practice of medicine 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 if challenged. In addition, expansion of the operations of the
Company to certain jurisdictions may require structural and organizational
modifications of the structure of the Company's relationships with physician
groups.

Certain provisions of the Social Security Act, commonly referred to as
the "Anti-kickback Statute," prohibit the offer, payment, solicitation, or
receipt of any form of remuneration in return for the referral of Medicare or
state health program patients or patient care opportunities, or in return for
the purchase, lease, or order of items or services that are covered by Medicare
or state health programs. The Anti-kickback Statute is broad in scope and has
been broadly interpreted by courts in many jurisdictions. Read literally, the
statute places at risk many legitimate business arrangements, potentially
subjecting such arrangements to lengthy, expensive investigations and
prosecutions initiated by federal and state governmental officials. The
applicability of the Anti-kickback Statute and other related state and federal
statutes to business relationships and transactions such as exist between the
Company and the Affiliated Physician Groups has not been subject to any
significant judicial or regulatory interpretation. The Company believes that its
receipt of payments from physician groups for services provided pursuant to the
Service Agreements does not violate the Anti-kickback Statute since the Company
does not receive remuneration for, nor is it in a position to make or influence,
the referrals of patients or services reimbursed under government programs to
the Affiliated Physician Groups. To the extent the Company is deemed to be
either a referral source or a separate provider under the Service Agreements and
to receive referrals from physicians, it could be subject to scrutiny and
prosecution for any violation of the Anti-kickback Statute. Violation of the
Anti-kickback Statute is a felony, punishable by fines of up to $25,000 per
violation, exclusion from participation in the Medicare or Medicaid programs,
and imprisonment for up to five years. In addition, the U.S. Department of
Health and Human Services may impose civil penalties excluding violators from
participation in Medicare or state health programs.

In 1991, in part to address concerns regarding the breadth of the
Anti-kickback Statute, the federal government published regulations that provide
exceptions, or "safe harbors," for transactions that will be deemed not to
violate the Anti-kickback Statute. Additional safe harbors were published in
1993 offering new protections under the Anti-kickback Statute to eight
activities, including referrals within group practices consisting of active
investors. Compliance with the safe harbors is not required; however, financial
relationships that do not fit within a safe harbor

<PAGE> 7

are subject to government scrutiny and potential prosecution under the broad
prohibition of the Anti-kickback Statute. Although the Company believes that its
operations are in material compliance with the Anti-kickback Statute, such
operations do not fit within any of the existing safe harbors in part because
the aggregate annual payment to the Company under the Service Agreements is not
established in advance but, rather, is based on a predetermined formula.

Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993 ("OBRA"). These
prohibitions commonly known as "Stark II" amended prior physician self-referral
legislation known as "Stark I" by dramatically enlarging the field of
physician-owned or physician-interested entities to which the referral
prohibitions apply. Effective January 1, 1995, Stark II prohibits a physician
from referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest,
or with which the physician has entered into a compensation arrangement. The
designated health services include diagnostic radiology services, radiation
therapy services, physical and occupational therapy services, durable medical
equipment and supplies, parenteral and enteral nutrients, equipment and
supplies, prosthetic and orthotic devices, orthotics, prosthetics, outpatient
prescription drugs, home health services, and inpatient and outpatient hospital
services. The penalties for violating Stark II include a prohibition on payment
by these government programs, civil penalties of as much as $15,000 for each
violative referral, and $100,000 for participation in a "circumvention scheme."
Proposed regulations implementing Stark II were published in January 1998 and
are not expected to become effective prior to 2000. Although it is not possible
to predict the final content of these regulations, to the extent that the
Company or any of its Affiliated Physician Groups is deemed to be subject to the
prohibitions contained in Stark II, the Company believes its activities fall
within the permissible activities currently defined in Stark II.

In performing administrative billing and collection services for the
Affiliated Physician Groups, the Company is subject to state and federal laws
that govern the submission of claims for reimbursement. These laws generally
prohibit an individual or entity from knowingly and willfully presenting a claim
(or causing a claim to be presented) for payment from Medicare, Medicaid, or
other third-party payors that is false or fraudulent. The standard for "knowing
and willful" often includes conduct that amounts to a reckless disregard for
whether accurate information is presented by claims processors. Penalties under
these statutes include substantial civil and criminal fines, exclusion from the
Medicare program, and imprisonment. One of the most prominent of these laws is
the federal False Claims Act, which may be enforced by the federal government
directly or by a qui tam plaintiff on the government's behalf. Under the False
Claims Act, both the government and the private plaintiff, if successful, are
permitted to recover substantial monetary penalties as well as an amount equal
to three times actual damages. In recent cases, some qui tam plaintiffs have
taken the position that violations of the Anti-kickback Statute and Stark II
should also be prosecuted as violations of the federal False Claims Act.
Although the Company believes that it has procedures to ensure the accurate
completion of claims forms and requests for payment, the laws and regulations
defining the parameters of proper Medicare or Medicaid billing are frequently
unclear and have not been subjected to extensive judicial or agency
interpretation. Billing errors can occur despite the Company's best efforts to
prevent or correct them, and no assurances can be given that the government will
regard such errors as inadvertent and not in violation of the False Claims Act
or related statutes.

<PAGE> 8

EXECUTIVE OFFICERS

The following table sets forth information concerning the executive
officers of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- ------------- -------------------------------------------------------------
<S> <C> <C>
John T. Casey 53 Chairman and Chief Executive Officer

O. Edwin French 52 President and Chief Operating Officer

Joseph S. Bailes, M.D. 42 Executive Vice President and National Medical Director

Michael N. Murdock 44 Executive Vice President and Chief Financial Officer

George P. McGinn, Jr. 43 Executive Vice President, General Counsel and Secretary
</TABLE>

JOHN T. CASEY has been Chairman of the Board and Chief Executive
Officer of the Company since October 1997. Mr. Casey has been active in
healthcare leadership roles for over 25 years. Mr. Casey served as president and
chief operating officer of American Medical International ("AMI") from 1991
until 1995, when that company was acquired by Tenet Healthcare. Prior to 1991,
Mr. Casey served as chief executive officer of several large regional healthcare
systems, including Samaritan Health Services in Phoenix, Methodist Health
Systems in Memphis, and Presbyterian/St. Luke's Medical Center in Denver. From
1995 until joining the Company, Mr. Casey was chairman and chief executive
officer of InteCare LLC ("InteCare"), an entrepreneurial venture.

O. EDWIN FRENCH has been President and Chief Operating Officer of the
Company since October 1997. From 1995 until joining the Company, Mr. French was
President of an international hospital consulting company focusing on improving
efficiency and reducing costs at hospitals. From 1992 through 1995, Mr. French
served as senior vice-president of AMI. Prior to 1992, Mr. French served in
executive management positions of several large regional healthcare systems,
including Samaritan Health Services in Phoenix, Methodist Health Systems in
Memphis, and Presbyterian/St. Luke's Medical Center in Denver.

JOSEPH S. BAILES, M.D. has been a director, Executive Vice President,
and National Medical Director of the Company since its formation in June 1993.
Since 1986, Dr. Bailes has been employed as a medical oncologist by TOPA. Dr.
Bailes received his medical degree from The University of Texas Southwestern
Medical School at Dallas in 1981 and is a board certified medical oncologist.
Dr. Bailes is also a director of Texas Regional Bancshares, Inc.

MICHAEL N. MURDOCK has been Executive Vice President and Chief
Financial Officer of the Company since June 1997. From 1995 to June 1997, Mr.
Murdock served as chief financial officer of InteCare. Prior to 1995, Mr.
Murdock held various positions with AMI.

GEORGE P. MCGINN, JR. has been Executive Vice President and General
Counsel of the Company since May 1995, and Secretary since May 1996. For 10
years prior to May 1995, Mr. McGinn was engaged in the private practice of law
with Bass, Berry & Sims PLC in Nashville, Tennessee.

EMPLOYEES

At December 31, 1998, the Company had approximately 2,700 employees.
The Company believes that its relations with its employees are good.

<PAGE> 9

ITEM 2. PROPERTIES

The Company's principal executive offices are located in approximately
66,000 square feet of space in Dallas, Texas, subject to a lease agreement that
expires in August 2001. The Company's financial services operations are located
in approximately 22,000 square feet of space in Dallas, Texas, subject to a
lease agreement that expires in January 2001.

At December 31, 1998, the Company operated 29 cancer centers and had
seven cancer centers under construction. The Company's cancer centers are either
free-standing or located adjacent to an acute care hospital. Of the 29 cancer
centers operated by the Company, 15 are owned by the Company and 14 are operated
pursuant to lease agreements. Each of the lease agreements for the cancer
centers are operating leases with a term of ten years, except for the Tyler
Cancer Center, which has a lease term of 15 years, and the Las Cruces Cancer
Center, which has a lease term expiring in December 1999. Of the 29 cancer
centers operated by the Company, eight were acquired as existing cancer centers
and 21 have been developed by the Company. The following table contains
information concerning the Company's cancer centers.

<TABLE>
<CAPTION>
SIZE OWNED/
LOCATION (SQUARE FEET) DATE OPENED LEASED
-------- ------------- ----------- ------
<S> <C> <C> <C>
Plano, Texas (1).................... 19,730 March 1988 Owned
Sherman, Texas (1).................. 24,541 October 1988 Owned
Paris, Texas (1).................... 21,800 November 1992 Owned
Longview, Texas (1)................. 24,800 May 1993 Owned
Odessa, Texas (1)................... 29,400 June 1994 Leased
Tyler, Texas (2).................... 18,400 August 1994 Leased
McAllen, Texas (1).................. 32,300 August 1994 Owned
Dallas, Texas (2)................... 89,600 August 1994 Leased
Arlington, Texas (2)................ 21,900 December 1994 Leased
Midland, Texas (2).................. 18,500 April 1995 Leased
Brownsville, Texas (1).............. 21,100 May 1995 Owned
Mesquite, Texas (1)................. 27,000 September 1995 Owned
Southwest Dallas, Texas (1)......... 28,000 September 1995 Owned
North Dallas, Texas (2)............. 51,100 October 1995 Leased
El Paso, Texas (1).................. 34,600 April 1996 Owned
Las Cruces, New Mexico (3)...... 7,200 April 1996 Leased
El Paso, Texas (1).................. 29,200 June 1996 Owned
Columbia, Missouri (1).............. 36,900 April 1997 Leased
Fort Worth, Texas (1)............... 22,500 April 1997 Owned
Abilene, Texas (1).................. 22,000 May 1997 Owned
Austin, Texas (1)................... 21,900 June 1997 Leased
Beaumont, Texas (2)................. 12,600 November 1997 Leased
</TABLE>

<PAGE> 10

<TABLE>
<CAPTION>
SIZE OWNED/
LOCATION (SQUARE FEET) DATE OPENED LEASED
-------- ------------- ----------- ------
<S> <C> <C> <C>
Chicago, Illinois (1)............... 18,900 January 1998 Leased
Denison, Texas (1).................. 12,000 June 1998 Owned
Maplewood, Minnesota (1)........... 13,900 June 1998 Owned
Eugene, Oregon (1).................. 33,600 June 1998 Owned
Harlingen, Texas (2)................ 12,400 August 1998 Leased
Webster, Texas (3).................. 8,900 November 1998 Leased
Ft. Lauderdale, Florida (2)......... 5,700 December 1998 Leased
</TABLE>

(1) A free-standing cancer center.

(2) A cancer center located within, or adjacent to, an acute care hospital.

(3) A cancer center that is currently located within, or adjacent to, an
acute care hospital. A free-standing facility in the area is currently
under development by the Company.

ITEM 3. LEGAL PROCEEDINGS

GENERAL. The provision of medical services and the conduct of clinical
trials by physician groups with which the Company contracts entail an inherent
risk of professional liability claims. The Company does not control the practice
of medicine by physicians or the compliance with certain regulatory and other
requirements directly applicable to physicians and physician groups. Because the
Company purchases and resells pharmaceutical products and related medical
supplies, it faces the risk of product liability claims. The Company from time
to time is a party to claims, suits, or complaints relating to services and
products provided by the Company or physicians to whom the Company provides
services. The Company maintains insurance coverage that it believes to be
adequate both as to risks and amounts. In addition, pursuant to the Service
Agreements, the Affiliated Physician Groups are required to maintain
comprehensive professional liability insurance. Successful malpractice claims
asserted against Affiliated Physician Groups or the Company could, however, have
a material adverse effect on the Company. The Company is not, and in 1998 was
not, subject to claims or legal actions which, upon resolution, the Company
believes could have a material adverse effect on the Company's financial
position, results of operations or liquidity.

<PAGE> 11

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the
fourth quarter of 1998.

PART II

ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's Common Stock is traded on The Nasdaq Stock Market's
National Market (the "Nasdaq National Market") under the symbol "PHYN." The
following table sets forth the range of high and low bid prices of the Common
Stock for each of the years ended December 31, 1998 and 1997, as reported on the
Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
------------ ------------
<S> <C> <C>
1997
First Quarter .................. $ 9.00 $ 5.06
Second Quarter ................. 10.69 5.00
Third Quarter .................. 11.44 7.81
Fourth Quarter ................. 12.88 9.25

1998
First Quarter .................. $15.00 $ 8.63
Second Quarter ................. 14.63 10.19
Third Quarter................... 12.50 7.50
Fourth Quarter.................. 13.63 8.00
</TABLE>

As of March 23, 1999, there were approximately 505 shareholders of
record and approximately 6,000 beneficial shareholders of the Common Stock. The
Company has never declared or paid any cash dividends on its Common Stock. The
payment of cash dividends in the future will depend on the Company's earnings,
financial condition, capital needs, and other factors deemed pertinent by the
Company's Board of Directors, including the limitations, if any, on the payment
of dividends under state law and then-existing credit agreements. It is the
present policy of the Company's Board of Directors to retain earnings, if any,
to finance the operations and expansion of the Company's business. In addition,
the Company's revolving credit facility does not currently permit the payment of
cash dividends.

All securities of the Company that were sold by the Company during the
nine month period ended September 30, 1998, without registration under the
Securities Act of 1933, as amended, were previously disclosed in the Company's
Quarterly Reports on Form 10-Q. During the quarter ended December 31, 1998, the
Company sold 57,484 shares of its common stock. These shares were sold in
connection with the Company entering into an affiliation with an oncology group.
The shares will be issued on December 31, 2003. No underwriter was involved in
the sale and no commission or similar fee was paid with respect thereto. This
sale was not registered under the Securities Act of 1933, as amended, in
reliance on Section 4(2) of such Act.

<PAGE> 12

ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following tables set forth selected consolidated financial data of
the Company, which should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
herein. The selected consolidated financial data for the year ended September
30, 1994, the three months ended December 31, 1994, and the years ended December
31, 1995, 1996, 1997 and 1998 have been derived from the consolidated financial
statements of the Company audited by Arthur Andersen LLP, independent public
accountants.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31, YEARS ENDED DECEMBER 31,
---------- -----------------------------------------------
1994 1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Management fees ............................ $ 55,970 $ 21,674 $ 129,222 $ 224,493 $ 291,208 $ 364,360
Other revenues ............................. 3,270 1,510 8,051 13,826 26,227 33,629
---------- ---------- ---------- ---------- ---------- ----------
Total revenues .......................... 59,240 23,184 137,273 238,319 317,435 397,989
Salaries and benefits ...................... 18,866 6,750 37,778 66,879 86,862 92,619
Pharmaceuticals and supplies ............... 15,996 5,674 33,605 70,822 105,758 149,989
General and administrative ................. 10,554 4,763 25,777 37,988 57,606 61,416
Provision for uncollectible accounts ....... 4,164 1,796 8,483 11,030 51,703 17,345
Depreciation and amortization .............. 2,487 1,253 7,653 15,894 21,017 25,176
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before interest, taxes, and
extraordinary item .................... 7,173 2,948 23,977 35,706 (5,511) 51,444
Interest expense ........................... 1,682 604 672 1,939 4,107 4,034
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item .................... 5,491 2,344 23,305 33,767 (9,618) 47,410
Income tax provision (benefit) ............. 3,128 929 9,190 13,271 (2,386) 17,657
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item .... 2,363 1,415 14,115 20,496 (7,232) 29,753
Extraordinary item ......................... (302)(1) -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) .......................... $ 2,061 $ 1,415 $ 14,115 $ 20,496 $ (7,232) $ 29,753
========== ========== ========== ========== ========== ==========
EARNINGS PER SHARE: (2)
Basic:
Per share income (loss) before ........... $ 0.12 $ 0.05 $ 0.35 $ 0.44 $ (0.14) $ 0.57
extraordinary item
Per share extraordinary item ............. $ (0.02) -- -- -- -- --
Per share net income (loss) .............. $ 0.10 $ 0.05 $ 0.35 $ 0.44 $ (0.14) $ 0.57

Diluted:
Per share income (loss) before
extraordinary item .................... $ 0.08 $ 0.04 $ 0.34 $ 0.43 $ (0.14) $ 0.56
Per share extraordinary item ............. $ (0.01) -- -- -- -- --
Per share net income (loss) .............. $ 0.07 $ 0.04 $ 0.34 $ 0.43 $ (0.14) $ 0.56

BALANCE SHEET DATA:
Working capital ............................. $ 19,484 $ 28,378 $ 52,626 $ 78,769 $ 78,721 $ 97,230
Total assets ................................ 85,923 98,886 204,633 355,341 400,634 468,499
Long-term debt and capital lease ............
obligations............................... 38,838 -- 26,973 14,121 49,661 61,334
Redeemable convertible preferred stock ...... 24,400 -- -- -- -- --
Stockholders' equity ........................ 5,995 80,622 145,734 294,776 290,304 335,411
</TABLE>

(1) Amount represents early retirement of debt as of March 1994 in connection
with consolidating substantially all of the Company's indebtedness under a
single credit facility. The amount is net of a deferred tax benefit of $156.

(2)
Per share data presented for periods prior to the year ended December 31,1996,
has been restated to reflect a two-for-one stock split effected in the form of a
100% stock dividend on June 10, 1996.

<PAGE> 13

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 Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.

OVERVIEW

The Company provides the management services, facilities and equipment,
administrative and technical support, and other services necessary to establish
and maintain a fully integrated network of outpatient oncology care. The Company
also provides management services, facilities and equipment, administrative and
technical support, and ancillary services to physicians who provide diagnostic
radiology services. The Company earns management fee revenues under its Service
Agreements with the Affiliated Physician Groups. Under the Service Agreements,
the Company receives a management fee ("Management Fee") for services rendered,
and the method of determining the Management Fee earned by the Company varies by
each Service Agreement. Substantially all of the Company's Management Fees have
been derived from Affiliated Physician Groups who specialize in the treatment of
cancer.

As of December 11, 1998, the Company entered into an Agreement and Plan
of Merger providing for the merger of a subsidiary of AOR with the Company. Upon
consummation of the merger, the Company will become a wholly owned subsidiary of
AOR and the holders of the Company's common stock will receive 0.94 shares of
AOR common stock for each share of the Company's common stock held by them. The
effective date of the merger currently is expected to be in the second quarter
of 1999. The merger is expected to be accounted for as a pooling of interests
and to be a tax free exchange. The merger is subject to regulatory and
stockholder approval. AOR is a national cancer management company, which
provides comprehensive management services under long-term agreements to
oncology practices. AOR's affiliated physicians provide a broad range of medical
services to cancer patients, including medical oncology, gynecological oncology,
radiation oncology, stem cell transplantation, diagnostic radiology and clinical
research.

The Company's most significant service agreement is with TOPA (the
"Texas Service Agreement"). The Management Fee under the Texas Service Agreement
is equal to 35% of the earnings of that practice before interest and taxes
("Earnings") plus direct expenses of the related practice locations. Direct
expenses include rent, depreciation, amortization, salaries and benefits of
non-physician employees, medical supply expense and pharmaceuticals. The Texas
Service Agreement represented approximately 80%, 70% and 65% of the Company's
total revenues for the years ended December 31, 1996, 1997 and 1998,
respectively. Approximately 94% and 93% of the Company's Management Fees earned
for each of the years ended December 31, 1998, and 1997, respectively, were
derived from Service Agreements in which the Management Fee is calculated based
on Earnings, and approximately 6% and 7%, respectively, were derived from
Service Agreements in which the Management Fee is calculated based on a
percentage of the medical practice revenues of the Affiliated Physician Groups
or a predetermined, fixed amount.

The following table summarizes the derivation of Management Fees for
the years ended December 31, 1996, 1997 and 1998 (in thousands):

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Medical Practice Revenues ......... $ 296,907 $ 387,391 $ 481,430
Amounts Retained by Physicians .... (72,414) (96,183) (117,070)
---------- ---------- ----------
Management Fees ................. $ 224,493 $ 291,208 $ 364,360
========== ========== ==========
</TABLE>

The Company does not enter into nominee shareholder arrangements with
the Affiliated Physician Groups, nor does it have a "controlling financial
interest" in the Affiliated Physician Groups as defined by EITF 97-2,
"Application of FASB Statement No. 94 and APB No. 16 to Physician Practice
Management Entities and Certain Other Entities under Contractual Management
Arrangement". For these reasons, the Company does not consolidate the financial
statements of the Affiliated Physician Groups.

<PAGE> 14

The following table sets forth the percentages of total revenue
represented by certain items reflected in the income statement. The information
that follows should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Management fees 94.2% 91.7% 91.6%
Other revenues 5.8 8.3 8.4
------ ------ ------
Total revenues 100.0 100.0 100.0
Salaries and benefits 28.1 27.4 23.3
Pharmaceutical and supplies 29.7 33.3 37.7
General and administrative 15.9 18.1 15.4
Provision for uncollectible accounts 4.6 16.3 4.4
Depreciation and amortization 6.7 6.6 6.3
------ ------ ------
Income (loss) before interest expense
and taxes 15.0 (1.7) 12.9
Interest expense 0.8 1.3 1.0
------ ------ ------
Income (loss) before income taxes 14.2 (3.0) 11.9
Income tax provision (benefit) 5.6 (0.7) 4.4
------ ------ ------
Net income (loss) 8.6% (2.3)% 7.5%
====== ====== ======
</TABLE>

YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997

MANAGEMENT FEES. Management Fees were $364,360,000 for the year ended
December 31, 1998, compared to $291,208,000 for the year ended December 31,
1997, representing an increase of $73,152,000, or 25.1%. The growth in
Management Fees is attributable to a $94,039,000 increase in Medical Practice
Revenues offset by an increase in Amounts Retained by Physicians of $20,887,000.
The largest component of the increase in Medical Practice Revenues is pharmacy
revenue, which directly correlates with the 41.8% increase in pharmaceutical and
supplies expense in 1998 compared to 1997. The increase in pharmacy revenue is
due to new higher priced pharmaceutical agents, new treatment modalities that
require a greater use of pharmaceutical agents, growth in patient volume in
existing practices, and new physicians. The growth in Medical Practice Revenues
during the year ended December 31, 1998 is also attributable to an increase in
the number of physicians by 42 from 319 to 361; and expansion of services
provided at existing locations. The increase over the prior year in the number
of physicians is comprised of 34 medical oncologists, five radiation
oncologists, and three other physicians.

Amounts Retained by Physicians were 24.3% of Medical Practice Revenues
for the year ended December 31, 1998, compared to 24.8% of Medical Practice
Revenues for the comparable period in 1997. Beginning January 1, 1997, the
Company has guaranteed that the Amounts Retained by Physicians will be at least
$5,195,000 under the terms of the Service Agreement with the Company's Minnesota
physician group provided that certain targets are met. Under this agreement, the
Company reduced its management fee in 1998 from the Minnesota physician group by
$714,000, and recorded management fee revenue from the Minnesota physician group
of $21,665,000. Without the reduction in its management fee, the Company would
have recorded revenue from the Minnesota physician group of $22,379,000.

<PAGE> 15

generated by the Affiliated Physician Groups for the year ended December 31,
1998, were from government agencies, primarily Medicare and Medicaid.

The Company anticipates that future Medical Practice Revenue increases
will continue to come from the impact of new higher priced pharmaceutical
agents, the expansion of services, and the addition of new physicians.

OTHER REVENUES. Other revenues for the year ended December 31, 1998,
were $33,629,000 compared to $26,227,000 for the year ended December 31, 1997,
representing an increase of $7,402,000, or 28.2%. Other revenues are primarily
derived from retail pharmacy operations located in certain of the Company's
cancer centers and larger physician offices, research activities performed by
the Company's affiliated physicians that are sponsored by pharmaceutical
companies, the Company's equity interest in Ilex, and interest income. The
increase in other revenues was primarily attributable to a $2,998,000 increase
in research revenues and a $2,907,000 increase in retail pharmacy revenue.

SALARIES AND BENEFITS. Salaries and benefits for the year ended
December 31, 1998, were $92,619,000 compared to $86,862,000 for the year ended
December 31, 1997, representing an increase of $5,757,000, or 6.6%. Salaries and
benefits include costs of non-physician clinical employees of Affiliated
Physician Groups paid by the Company pursuant to the terms of the Service
Agreements. The dollar increase in salaries and benefits was attributable to the
addition of clinical and nonclinical personnel required to support the increase
in the number of Affiliated Physician Groups managed by the Company offset, in
part, by reductions of personnel through the restructuring of corporate and
field office operations. The percentage of salaries and benefits to total
revenues was 23.3% for the year ended December 31, 1998, compared to 27.4% for
the comparable period in 1997. This decrease is attributable to the streamlining
of both clinical and corporate operations, restructuring of the Company's
benefits program provided to employees, and increase in Medical Practice
Revenues and Other Revenues where the increased revenues were greater than the
incremental increase in salary and benefits.

PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the year
ended December 31, 1998, were $149,989,000 compared to $105,758,000 for the year
ended December 31, 1997, representing an increase of $44,231,000, or 41.8%. The
percentage of pharmaceuticals and supplies to total revenues was 37.7% for the
year ended December 31, 1998, compared to 33.3% for the year ended December 31,
1997. Both the dollar and percentage increases in pharmaceuticals and supplies
are primarily attributable to (i) an increase in infusion services generated by
the Affiliated Physician Groups, both through the increased number of physicians
employed by the Affiliated Physician Groups and the enhancement of services
provided in physician offices, cancer centers, and retail pharmacies and (ii) an
increase in the use of higher cost pharmaceuticals. Management expects that
third-party payors will continue to negotiate the reimbursement rate for medical
services, pharmaceuticals (including chemotherapy drugs) and other supplies,
with the goal of lowering reimbursement and utilization rates, and that such
lower reimbursement and utilization rates as well as shifts in revenue mix may
continue to adversely impact the Company's margins with respect to such items.

GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
year ended December 31, 1998, were $61,416,000 compared to $57,606,000 for the
year ended December 31, 1997, representing an increase of $3,810,000, or 6.6%.
The percentage of general and administrative expenses to total revenues was
15.4% for the year ended December 31, 1998, compared with 18.1% for the year
ended December 31, 1997. In 1997, the Company recorded a nonrecurring charge of
approximately $3,133,000, consisting of $1,290,000 of litigation expenses and
$1,843,000 of other deferred costs. The litigation expenses related to settling
shareholder litigation and an antitrust lawsuit, both of which the Company
believes to be outside the normal course of business and nonrecurring. The
$1,843,000 of deferred costs consisted of $867,000 of deferred loan costs,
$387,000 of capitalized software costs, $339,000 allocated to obtaining a
noncompetition agreement from a former executive officer, and $250,000 of
miscellaneous costs. The deferred loan costs were incurred in 1994 in connection
with the Company entering into a revolving credit facility. In June 1997, the
Company amended the revolving credit facility and the Company determined that
the original deferred costs should be expensed rather than amortized over the
remaining term of the revolving credit facility. In addition, in June 1997, all
other deferred costs discussed above, which were previously capitalized, were
determined to no longer have any value and therefore, were expensed. In
addition, the Company incurred fees of $2,558,000 in 1997 for consulting
services designed to improve medical office operations.

<PAGE> 16

PROVISION FOR UNCOLLECTIBLE ACCOUNTS. The provision for uncollectible
accounts for the year ended December 31, 1998, was $17,345,000 compared to
$51,703,000 for the year ended December 31, 1997, representing a decrease of
$34,358,000. During 1997, the Company recorded approximately $37,841,000 in
additional provision for uncollectible accounts receivable. The additional
provision was for accounts receivable that the Company deemed to be
uncollectible as a result of an extensive review of its outstanding accounts
receivable and collection experiences utilizing reports and analysis not
previously available to the Company. The Company believes that the current
provision accurately reflects the collectibility of accounts receivable
outstanding at December 31, 1998.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
year ended December 31, 1998, was $25,176,000 compared to $21,017,000 for the
year ended December 31, 1997, representing an increase of $4,159,000, or 19.8%.
Depreciation increased as a result of the additional office and cancer center
locations that were opened or acquired by the Company since 1997. Amortization
increased as a result of the change (effective July 1, 1998) in the amortization
period of the Service Agreements to 25 years on a prospective basis and as a
result of the increase in costs incurred by the Company for physician groups
entering into new Service Agreements.

INTEREST EXPENSE. Interest expense for the year ended December 31,
1998, was $4,034,000 compared to $4,107,000 for the year ended December 31,
1997, representing a decrease of $73,000, or 1.8%. Interest expense arises as a
result of borrowings under the Company's revolving credit facility and amounts
owed to Affiliated Physician Groups as consideration, in part, for entering into
Service Agreements.

INCOME TAXES. The income tax provision for the year ended December 31,
1998, was $17,657,000 compared to an income tax benefit of $2,386,000 for the
year ended December 31, 1997, representing a increase of $20,043,000. Income
taxes were provided on the taxable income of the Company for federal and state
reporting purposes using an effective rate of approximately 37.2% in 1998 and
24.8% in 1997. The additional provision for uncollectible accounts recorded in
1997 was provided at the applicable federal rate.

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

MANAGEMENT FEES. Management Fees were $291,208,000 for the year ended
December 31, 1997, compared to $224,493,000 for the year ended December 31,
1996, representing an increase of $66,715,000, or 29.7%. The growth in
Management Fees is attributable to a $90,484,000 increase in Medical Practice
Revenues offset by an increase in Amounts Retained by Physicians of $23,769,000.
The largest component of the increase in Medical Practice Revenues is pharmacy
revenue, which is directly offset by a 49.3% increase in pharmaceutical and
supplies expense for the year end December 31, 1997 compared to the year ended
December 31, 1996. The increase in pharmacy revenue is due to new higher priced
pharmaceutical agents, new treatment modalities (that require a greater use of
pharmaceutical agents), growth in patient volume in existing practices, and new
physicians. The growth in Medical Practice Revenues during the year ended
December 31, 1997 is also attributable to an increase in the number of
physicians by 36 from 283 to 319; an increase in the number of service locations
from 106 to 121; and expansion of services provided at existing locations. The
increase over the comparable period of the prior year in the number of
physicians is comprised of 28 medical oncologists, six radiation oncologists,
and two other physicians.

In 1997, the Company opened three full-service cancer centers which
include radiation therapy services in Fort Worth, Texas (April 1997), Abilene,
Texas (June 1997), and Austin, Texas (June 1997). In addition, the Company began
providing radiation technical services through the operation of existing
radiation therapy facilities in Columbia, Missouri (April 1997), Eugene, Oregon
(June 1997), and Beaumont, Texas (November 1997). The radiation technical
services provided at the Eugene and Beaumont facilities are being provided
through joint ventures with hospitals in these markets where the Company acts as
the general partner.

Amounts Retained by Physicians were 24.8% of Medical Practice Revenues
for the year ended December 31, 1997, compared to 23.4% of Medical Practice
Revenues for the comparable period in 1996. Beginning January 1, 1997, the
Company has guaranteed that the Amounts Retained by Physicians will be at least
$5,195,000 under the terms of the Service Agreement with the Company's Minnesota
physician group provided that certain targets are met. Under this agreement, the
Company reduced its management fee in 1997 from the Minnesota physician group

<PAGE> 17

by $847,000, and recorded management fee revenue from the Minnesota physician
group of $17,000,000. Without the reduction in its management fee, the Company
would have recorded management revenue from the Minnesota physician group of
$17,847,000.

Management Fees derived from payors who have contracted with the
Affiliated Physician Groups to provide services on a discounted fee-for-service
basis accounted for approximately 45% of the Affiliated Physician Groups'
business during the year ended December 31, 1997. Approximately 35% of the
Medical Practice Revenues generated by the Affiliated Physician Groups for the
year ended December 31, 1997, were from government agencies, primarily Medicare
and Medicaid.

OTHER REVENUES. Other revenues for the year ended December 31, 1997,
were $26,227,000 compared to $13,826,000 for the year ended December 31, 1996,
representing an increase of $12,401,000, or 89.7%. Other revenues are primarily
derived from retail pharmacy operations located in certain of the Company's
cancer centers and larger physician offices, research activities performed by
the Company's affiliated physicians that are sponsored by pharmaceutical
companies, revenues attributable to the Company's 80% interest in Innovative
Medical Communications, Inc.("IMC"), the Company's equity interest in ILEX, and
interest income. The increase in other revenues was primarily attributable to a
$2,430,000 increase in research revenue, a $2,171,000 increase in IMC revenue, a
$1,716,000 increase in revenue related to ILEX and a $1,591,000 increase in
retail pharmacy revenue.

SALARIES AND BENEFITS. Salaries and benefits for the year ended
December 31, 1997, were $86,862,000 compared to $66,879,000 for the year ended
December 31, 1996, representing an increase of $19,983,000, or 29.9%. The dollar
increase in salaries and benefits was attributable to the addition of clinical
and nonclinical personnel required to support the increase in the number of
Affiliated Physician Groups managed by the Company. The percentage of salaries
and benefits to total revenues was 27.4% for the year ended December 31, 1997,
compared to 28.1% for the comparable period in 1996. This decrease is primarily
attributable to the increase in Other Revenues where the increased revenues were
greater than the incremental increase in salary and benefit expenses.

PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the year
ended December 31, 1997, were $105,758,000 compared to $70,822,000 for the year
ended December 31, 1996, representing an increase of $34,936,000, or 49.3%. The
dollar increase in pharmaceuticals and supplies is attributable to an increase
in infusion, radiation, and diagnostic services generated by the Affiliated
Physician Groups, both through the increased number of physicians and the
enhancement of services provided in physician offices and cancer centers. The
percentage of pharmaceuticals and supplies to total revenues was 33.3% for the
year ended December 31, 1997, compared to 29.7% for the year ended December 31,
1996. This increase was primarily the result of an increased number of medical
oncologists employed by Affiliated Physician Groups in 1997 as compared to 1996.
During 1996, the number of medical oncologists affiliated with the Company
increased by 61, and their operations are fully reflected in 1997 as compared to
1996. Revenues generated by medical oncologists have a greater percentage of
pharmaceutical expenses than revenues generated by other physicians, such as
radiation oncologists, since the primary form of treatment performed by the
medical oncologist is through infusion therapy.

GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
year ended December 31, 1997, were $57,606,000 compared to $37,988,000 for the
year ended December 31, 1996, representing an increase of $19,618,000, or 51.6%.
The percentage of general and administrative expenses to total revenues was
18.1% for the year ended December 31, 1997, compared with 15.9% for the year
ended December 31, 1996. In 1997, the Company recorded a nonrecurring charge of
approximately $3,133,000, consisting of $1,290,000 of litigation expenses and
$1,843,000 of other deferred costs. The litigation expenses related to settling
shareholder litigation and an antitrust lawsuit, both of which the Company
believes to be outside the normal course of business and nonrecurring. The
$1,843,000 of deferred costs consisted of $867,000 of deferred loan costs,
$387,000 of capitalized software costs, $339,000 allocated to obtaining a
noncompetition agreement from a former executive officer, and $250,000 of
miscellaneous costs. The deferred loan costs were incurred in 1994 in connection
with the Company entering into a revolving credit facility. In June 1997, the
Company significantly amended the revolving credit facility and the Company
determined that the original deferred costs should be expensed rather than
amortized over the remaining term of the revolving credit facility. In addition
in June 1997, all other deferred costs, discussed above, which were previously
capitalized, were determined to no longer have any value and therefore, were
expensed. In addition, the

<PAGE> 18

Company incurred fees of $2,558,000 in 1997 for consulting services designed to
improve medical office operations. The other increase in general and
administrative expenses resulted from increased lease costs, reference
laboratory services, temporary clerical work, telecommunications, and
maintenance and other occupancy costs to support the Company's additional
service locations.

PROVISION FOR UNCOLLECTIBLE ACCOUNTS. The provision for uncollectible
accounts for the year ended December 31, 1997, was $51,703,000 compared to
$11,030,000 for the year ended December 31, 1996, representing an increase of
$40,673,000. During 1997, the Company recorded approximately $37,841,000 in
additional provision for uncollectible accounts receivable. The additional
provision was for accounts receivable that the Company deemed to be
uncollectible as a result of an extensive review of its outstanding accounts
receivable and collection experiences utilizing reports and analysis not
previously available to the Company.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
year ended December 31, 1997, was $21,017,000 compared to $15,894,000 for the
year ended December 31, 1996, representing an increase of $5,123,000, or 32.2%.
Depreciation increased $4,352,000 as a result of the additional office and
cancer center locations that were opened by the Company since 1996. Amortization
increased $771,000 as a result of the increase in Service Agreement costs
incurred as consideration for the Affiliated Physician Groups entering into
Service Agreements. These costs are amortized over the term of the related
Service Agreements.

INTEREST EXPENSE. Interest expense for the year ended December 31,
1997, was $4,107,000 compared to $1,939,000 for the year ended December 31,
1996, representing an increase of $2,168,000, or 111.8%. The increase in
interest expense was attributable to increased amounts owed to Affiliated
Physician Groups as consideration, in part, for entering into Service
Agreements. In addition, the Company borrowed funds under its revolving credit
facility during 1997 to finance its capital expenditures, amounts paid to
Affiliated Physician Groups under the terms of the Service Agreements and the
related asset purchase agreements, and for working capital purposes. During
April 1996, the Company completed a public offering of common stock and used the
net proceeds of approximately $102,470,000 to finance such expenditures in 1996
and to repay amounts outstanding at that time under the revolving credit
facility.

INCOME TAXES. The income tax benefit for the year ended December 31,
1997, was $2,386,000 compared to an income tax provision of $13,271,000 for the
year ended December 31, 1996, representing a decrease of $15,657,000, or 118.0%.
Income taxes were provided on the taxable income of the Company for federal and
state reporting purposes using the applicable effective rate, approximately
24.8% in 1997 and 39.3% in 1996. The additional provision for uncollectible
accounts recorded in 1997 was provided at the applicable federal rate only.

<PAGE> 19

SUMMARY OF OPERATIONS BY QUARTER

The following table presents unaudited quarterly operating results for
each of the Company's last eight fiscal quarters. The Company believes that all
necessary adjustments, which are of a normal recurring nature, have been
included in the amounts stated below to present fairly the quarterly results
when read in conjunction with the Consolidated Financial Statements. Future
quarterly results may fluctuate depending on the addition of physicians,
physician offices, and cancer centers. Results of operations for any particular
quarter are not necessarily indicative of results of operations for a full year
or predictive of future periods.

<TABLE>
<CAPTION>
997 QUARTER ENDED 1998 QUARTER ENDED
--------------------------------------- --------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)

MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenues ................. $ 72,773 $ 72,714 $ 84,483 $ 87,465 $ 90,513 $ 97,294 $103,239 $106,943
Income (loss) before
income taxes ............... 8,426 (34,229) 7,832 8,353 10,765 12,067 12,081 12,497
Net income (loss) .............. 5,098 (22,383) 4,908 5,145 6,718 7,612 7,597 7,826

NET INCOME (LOSS) PER SHARE:
Net income (loss) per
common share:
Basic ................... $ 0.10 $ (0.44) $ 0.10 $ 0.10 $ 0.13 $ 0.14 $ 0.14 $ 0.15
Diluted ................. 0.10 (0.44) 0.10 0.10 0.13 0.14 0.14 0.15
Weighted average shares
outstanding:
Basic ................... 50,550 50,562 50,599 50,735 50,734 52,784 52,873 52,991
Diluted ................. 50,733 50,562 51,051 51,324 52,848 53,346 53,169 53,416

OPERATING DATA:
Medical practice revenues ...... $ 87,260 $ 91,986 $ 97,922 $110,223 $111,488 $118,122 $124,782 $127,038
Number of physicians, end of
period ..................... 289 310 319 319 337 340 351 361
Number of full time
physician offices, end of
period ..................... 64 66 68 74 79 82 86 87
Number of cancer
centers, end of period ..... 17 22 22 23 24 25 27 29
Number of states ............... 11 11 12 12 13 13 13 13
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically generated its cash flows from operations,
bank financings, and the sale of securities. The Company's primary cash
requirements are for construction of cancer centers, acquisition of equipment
for cancer centers and medical offices, financing receivables, and acquiring
assets from and entering into Service Agreements with Affiliated Physician
Groups.

Net cash provided by operations for the year ended December 31, 1998,
was $42,335,000. The Company has advanced to its Affiliated Physician Groups
amounts needed for working capital purposes primarily to assist with the
development of new markets. The advances decreased approximately $6,485,000 to
$8,827,000 at December 31, 1998, as compared to $15,312,000 at December 31,
1997. These advances bear interest at a market rate (7.75% at December 31,
1998), are not collateralized, and are repaid in accordance with the terms of
the instrument evidencing the advance.

<PAGE> 20

Net cash used in investing activities for the year ended December 31,
1998, was $57,267,000. During the year ended December 31, 1998, the Company paid
approximately $17,756,000 to Affiliated Physician Groups in connection with
entering into Service Agreements. Purchases of property and equipment during the
year ended December 31, 1998, were $35,849,000 and consisted of the construction
and equipping of cancer centers. These expenditures were funded through cash
flow provided by operations and through borrowings under the Company's Revolving
Credit Facility ("Revolver").

Net cash flows from financing activities for the year ended December
31, 1998, were $15,233,000. At December 31, 1998, borrowings under the Revolver
were $52,000,000, which were used to finance the Company's ongoing construction
and development activities, the acquisition of equipment, payments in connection
with Service Agreement transactions, and for working capital purposes.

The Revolver provides for maximum borrowings of $140,000,000. The
Company has the option of financing borrowings under the Revolver at either a
LIBOR-based rate (LIBOR plus .70% at December 31, 1998) or at Bank One Texas,
N.A.'s prime rate (7.75% at December 31, 1998). The Revolver contains covenants
that, among other things, require the Company to maintain certain financial
ratios and impose restrictions on the Company's ability to pay cash dividends,
sell assets, and redeem or repurchase the Company's securities. At December 31,
1998, $52,000,000 was outstanding under the Revolver, and $88,000,000 was
available for borrowing.

The Company expects that its principal use of funds in the foreseeable
future will be for the construction of cancer centers and the acquisition of
related equipment; the acquisition of medical practice assets; payments to
Affiliated Physician Groups as consideration for entering into Service
Agreements; repayment of notes issued in connection with the Service Agreement
transactions; debt repayments under the Revolver; and working capital. At
December 31, 1998, the Company had construction commitments of $7,300,000, which
are primarily for the construction of new cancer centers. The Company does not
have any material funding commitments under existing Service Agreements.

The Company's primary working capital requirement is to fund the growth
of revenues, which results in an increase in accounts receivable. Under the
terms of its Service Agreements, the Company purchases the accounts receivable
outstanding at the end of each month from the Affiliated Physician Groups, net
of estimated allowances. An estimated allowance is provided on the accounts
receivable based on historical collection rates. These allowances are reviewed
periodically and increased or decreased based on the estimated payment rates.
Any adjustment to the allowance based on payment patterns and/or bad debts
affects the future operations of the Affiliated Physician Groups and the
resulting management fee from the Affiliated Physician Groups. Therefore,
accounts receivable are a function of medical practice revenues (gross billings
less estimated contractual and other adjustments) rather than the management fee
earned by the Company.

The Company believes that the unused borrowing capacity under the
Revolver will be sufficient to meet its capital needs; and, therefore, the
Company does not anticipate raising capital through offerings of common stock to
the public in the near-term. The Company believes it has adequate access to
other forms of financing at reasonable terms to meet the capital requirements of
its construction and network development programs through 1999, including but
not limited to increasing the amount available for borrowing under the Revolver.
However, no assurance exists that such additional financing will be available in
the future or that, if available, it will be available on terms acceptable to
the Company. In addition, the Company will continue to construct facilities
under build-to-suit arrangements pursuant to long-term operating leases if the
implicit cost of construction is equal to or less than the cost for the Company
to construct its own facilities. The Company retains no financial or residual
interest in the leased facilities and has no obligation to advance funds for
development of leased facilities.

20
<PAGE> 21

YEAR 2000 ISSUE

The Year 2000 issue creates a significant challenge for the Company,
its employees, business partners and suppliers, involving the healthcare
industry and all its computer users. The challenge is to ensure that patient
care and business operations are not compromised as the Company enters the new
millennium. The issue is the anticipated possibility of failure of automated
devices that are used for storing and utilizing date-related information.
Specifically, the potential problem exists because of the widespread practice of
using two digits, not four, to represent the year in databases, applications,
embedded chips, hardware, etc. Logic using two-digit years can yield
inappropriate results if used in calculations that span centuries.

Program

The Company has divided its Year 2000 program into seven phases:
awareness, assessment, detailed analysis and planning, conversion process,
testing and validation, implementation and post implementation. The Company is
assessing its information technology software and hardware, medical equipment
and third party suppliers. The Company will also have contingency plans to
address any potention disruption of services.

Information Systems

The Company is dependent upon its computer systems to bill patients for
services rendered by the Affiliated Physician Groups and to accumulate and
report the related revenues and expenses of Affiliated Physician Groups. The
Company's principal patient accounting system is not currently capable of
processing Year 2000 transactions; however, the vendor has delivered an upgrade
to the software making the system operational for the Year 2000. The upgrade has
been tested and should be installed by the end of the second quarter of 1999.
The Company does not believe that the cost to make the current practice
management systems and other ancillary computer systems operational for the Year
2000 will be material. The Company is also currently installing at each
Affiliated Physician Group a new practice management system that is Year 2000
compatible, and the installation is expected to be fully installed and
operational before January 2000. In addition, the Company has installed a new
general ledger and accounts payable system that is Year 2000 compatible.

Medical Equipment

The Company has reviewed the Year 2000 readiness of the linear
accelerators and associated equipment used in cancer centers. The suppliers of
the medical equipment have certified that, with minor upgrades, these systems
will be Year 2000 compliant. These systems will be upgraded during the first and
second quarters of 1999. The Company is in the process of evaluating the Year
2000 compliance of other clinical equipment at this time and expects to complete
this process by mid-1999.

Costs

The total cost of the new practice management system, exclusive of
internal costs, in anticipated to be between $4 and $5 million. The Company does
not anticipate any other material costs will be incurred in connection with the
Company's Year 2000 program.

<PAGE> 22

FORWARD-LOOKING STATEMENTS/RISK FACTORS

This Form 10-K contains certain forward-looking statements regarding
the anticipated financial and operating results of the Company. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company is including the following cautionary statements identifying
important factors that could cause the Company's actual results to differ
materially from those projected in forward-looking statements made by, or on
behalf of, the Company. These factors, many of which are beyond the Company's
control, include the Company's dependence on fees and revenues generated by
physicians employed by the Affiliated Physician Groups, particularly TOPA; the
Company's ability to identify expansion opportunities; the Company's ability to
achieve operating efficiencies associated with integrating physician practices
and expanding the services offered by its Affiliated Physician Groups,
particularly TOPA; the Company's ability to obtain suitable financing to support
its expansion objectives; the Company's ability to effectively collect accounts
receivable; increases in the costs of pharmaceuticals; changes in governmental
regulation regarding the relationships between the Company and the Affiliated
Physician Groups; changes in payment for medical services, including Medicare
and Medicaid programs; the Company's ability to provide services on a
risk-sharing or capitated basis; competitive pressures affecting physician
practice management companies and physician groups with whom the Company
contracts; potential exposure to professional and product liability claims; and
risks associated with the proposed merger between the Company and AOR. The
Company undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk from exposure to changes in
interest rates based on its financing, investing and cash management activities.
The Company does not expect changes in interest rates to have a material effect
on income or cash flows in 1999, although there can be no assurances that
interest rates will not significantly change.

<PAGE> 23

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS PAGE
----
<S> <C>
Report of Independent Public Accountants 24

Consolidated Balance Sheets as of December 31, 1997 and 1998 25

Consolidated Statements of Income for the Years Ended 27
December 31, 1996, 1997, and 1998

Consolidated Statements of Stockholders' Equity for the 28
Years Ended December 31, 1996, 1997, and 1998

Consolidated Statements of Cash Flows for the 29
Years Ended December 31, 1996, 1997, and 1998

Notes to Consolidated Financial Statements 30

INDEX TO FINANCIAL STATEMENT SCHEDULE

Report of Independent Public Accountants 57

Schedule II - Reserves for Uncompensated Care 58
</TABLE>

For selected quarterly financial data, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Summary of Operations by
Quarter" on page 19 hereof.

<PAGE> 24

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Physician Reliance Network, Inc.:

We have audited the accompanying consolidated balance sheets of Physician
Reliance Network, Inc. (a Texas corporation) and subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
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 financial statements referred to above present fairly, in
all material respects, the financial position of Physician Reliance Network,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Dallas, Texas,
February 19, 1999

<PAGE> 25

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,772 $ 3,073
Investment in common stock, net of valuation allowance of
$1,131 and $(437) at December 31, 1997 and 1998, respectively 2,301 6,975
Accounts receivable, net of allowances of $49,818 and
$44,413 at December 31, 1997 and 1998, respectively 87,160 109,925
Due from related parties 15,312 8,827
Other receivables 2,855 6,181
Inventories 8,078 14,682
Prepaid expenses and other 1,445 737
Income tax receivable 8,815 2,369
Deferred income taxes 1,089 702
---------- ----------
Total current assets 129,827 153,471
Property and equipment:
Land 15,240 15,717
Buildings 62,084 67,123
Furniture and equipment 121,363 145,215
Construction-in-progress 472 6,081
---------- ----------
199,159 234,136
Less- Accumulated depreciation (46,676) (66,682)
---------- ----------
Net property and equipment 152,483 167,454

Investments in joint ventures 4,717 7,654
Service agreements, net of accumulated amortization of $4,959
and $9,440 at December 31, 1997 and 1998, respectively 104,773 128,541
Excess of purchase price over the fair value of net assets
acquired, net of accumulated amortization of $866 and $1,231
at December 31, 1997 and 1998, respectively 7,793 10,058
Other assets 1,041 1,321
========== ==========
Total assets $ 400,634 $ 468,499
========== ==========
</TABLE>

The accompanying notes are an integral part of these
consolidated balance sheets.

25
<PAGE> 26

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 24,380 $ 32,522
Accrued liabilities-
Salaries and benefits 7,969 5,737
Other 3,262 3,904
---------- ----------
11,231 9,641

Deferred revenue 1,904 1,553
Due to related parties 4,908 4,807
Current maturities of long-term debt 8,138 7,244
Current maturities of capital lease obligations 545 474
---------- ----------
Total current liabilities 51,106 56,241

Long-term debt, net of current maturities 42,009 60,379
Capital lease obligations, net of current maturities 377 55
Subordinated convertible promissory notes 7,275 900
Construction and retainage payable 275 282
Deferred income taxes 9,042 13,266
Minority interest 246 1,965
---------- ----------
Total liabilities 110,330 133,088
---------- ----------

Commitments and contingencies

Stockholders' equity:
Series A and B preferred stock, 10,000 shares authorized,
no shares issued or outstanding -- --
Series One Junior preferred stock, 500 shares authorized,
no shares issued or outstanding -- --
Common stock, no par value, $.01 stated value per
share, 150,000 shares authorized, 48,999 and 51,549 shares
issued at December 31, 1997 and 1998, respectively 490 515
Additional paid-in capital 240,543 256,293
Common stock to be issued, approximately 1,351 and 1,496
shares at December 31, 1997 and 1998, respectively 19,885 18,499
Accumulated other comprehensive income (696) 269
Retained earnings 30,082 59,835
---------- ----------
Total stockholders' equity 290,304 335,411
========== ==========
Total liabilities and stockholders' equity $ 400,634 $ 468,499
========== ==========
</TABLE>

The accompanying notes are an integral part of these
consolidated balance sheets.

<PAGE> 27

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Management fees $ 224,493 $ 291,208 $ 364,360
Other revenues 13,826 26,227 33,629
---------- ---------- ----------
Total revenues 238,319 317,435 397,989
---------- ---------- ----------
Costs and expenses:
Salaries and benefits 66,879 86,862 92,619
Pharmaceuticals and supplies 70,822 105,758 149,989
General and administrative 37,988 57,606 61,416
Provision for uncollectible accounts 11,030 51,703 17,345
Depreciation and amortization 15,894 21,017 25,176
Interest expense 1,939 4,107 4,034
---------- ---------- ----------
Total costs and expenses 204,552 327,053 350,579
---------- ---------- ----------
Income (loss) before taxes 33,767 (9,618) 47,410
Provision (benefit) for income taxes:
Current 12,213 (5,425) 13,650
Deferred 1,058 3,039 4,007
---------- ---------- ----------
Total provision (benefit) for income taxes 13,271 (2,386) 17,657
---------- ---------- ----------
Net income (loss) 20,496 (7,232) 29,753
---------- ---------- ----------

Other comprehensive income (loss), net of tax -- (696) 965
========== ========== ==========
Comprehensive income (loss) $ 20,496 $ (7,928) $ 30,718
========== ========== ==========

Net income (loss) per common share
Basic $ 0.44 $ (0.14) $ 0.57
========== ========== ==========
Diluted $ 0.43 $ (0.14) $ 0.56
========== ========== ==========

Weighted average shares outstanding
Basic 46,643 50,635 52,504
========== ========== ==========
Diluted 47,433 50,635 53,351
========== ========== ==========
</TABLE>

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

<PAGE> 28

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands)

<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL COMMON OTHER
PAID-IN STOCK TO COMPREHENSIVE RETAINED SUBSCRIPTION
SHARES AMOUNT CAPITAL BE ISSUED INCOME EARNINGS RECEIVABLE TOTAL
--------- --------- --------- --------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 41,708 $ 417 $ 121,885 $ 6,814 $ -- $ 16,818 $ (200) $ 145,734

Issuance of
common stock 5,923 59 108,139 (1,602) -- -- -- 106,596

Common stock to
be issued -- -- -- 21,750 -- -- -- 21,750

Net income -- -- -- -- -- 20,496 -- 20,496

Payment on
common stock
subscribed -- -- -- -- -- -- 200 200
--------- --------- --------- --------- --------- --------- --------- ---------

Balance,
December 31, 1996 47,631 476 230,024 26,962 -- 37,314 -- 294,776

Issuance of
common stock 1,368 14 10,519 (9,341) -- -- -- 1,192

Common stock to
be issued -- -- -- 2,264 -- -- -- 2,264

Net loss -- -- -- -- -- (7,232) -- (7,232)

Valuation
adjustment -
investment in
common stock -- -- -- -- (696) -- -- (696)
--------- --------- --------- --------- --------- --------- --------- ---------

Balance,
December 31, 1997 48,999 490 240,543 19,885 (696) 30,082 -- 290,304

Issuance of
common stock 2,550 25 15,750 (5,577) -- -- -- 10,198

Common stock to
be issued -- -- -- 4,191 -- -- -- 4,191

Net income -- -- -- -- -- 29,753 -- 29,753

Valuation
adjustment -
investment in
common stock -- -- -- -- 965 -- -- 965
--------- --------- --------- --------- --------- --------- --------- ---------

Balance,
December 31, 1998 51,549 $ 515 $ 256,293 $ 18,499 $ 269 $ 59,835 $ -- $ 335,411
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>

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

<PAGE> 29

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 20,496 $ (7,232) $ 29,753
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation and amortization 15,894 21,017 25,176
Deferred income taxes 1,058 3,039 4,007
Writedown of accounts receivable and certain assets -- 40,655 --
Undistributed earnings of investments -- (437) (540)
Gain on sale of investment in ambulatory surgery center -- (511) --
Amortization of deferred revenues -- (1,716) (3,523)
Changes in operating assets and liabilities-
Increase in accounts receivable, net (44,743) (32,905) (22,765)
(Increase) decrease in other receivables (5,860) (16,498) 3,187
Increase in inventories and prepaid expenses (294) (3,975) (5,896)
Increase in accounts payable and accrued liabilities 12,501 6,420 6,552
Increase (decrease) in due to related party 4,955 (1,152) 6,384
---------- ---------- ----------
Net cash provided by operating activities 4,007 6,705 42,335
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (58,203) (27,582) (35,849)
Construction and retainage (6,966) (265) 7
Service agreements (21,131) (9,593) (17,756)
Investments -- (4,058) (1,944)
Proceeds received from sale of investment in ambulatory
surgery center -- 1,950 --
Other (2,774) 203 (1,725)
---------- ---------- ----------
Net cash used in investing activities (89,074) (39,345) (57,267)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term borrowings 36,000 32,000 20,000
Payments on long-term borrowings (58,329) (4,698) (6,463)
Long-term debt issuance costs -- (333) --
Issuance of common stock 102,470 764 1,696
Proceeds from subscription receivable 200 -- --
---------- ---------- ----------
Net cash provided by financing activities 80,341 27,733 15,233
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (4,726) (4,907) 301
Cash and cash equivalents, beginning of period 12,405 7,679 2,772
========== ========== ==========
Cash and cash equivalents, end of period $ 7,679 $ 2,772 $ 3,073
========== ========== ==========

Cash paid during the period:
Interest, net of amount capitalized $ 1,561 $ 3,248 $ 4,005
Income taxes $ 7,355 $ 2,951 $ 11,050
</TABLE>

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

<PAGE> 30

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share information)

1. ORGANIZATION:

General

As of December 31, 1998, the Company had operations in Texas, Iowa,
Oregon, Washington, Missouri, Maryland, Arkansas, New York, Minnesota, Illinois,
Florida, New Mexico and Oklahoma and provided its services to 361 physicians.

Effective December 11, 1998, the Company entered into an Agreement and
Plan of Merger, providing for the merger of a subsidiary of American Oncology
Resources, Inc.("AOR"), a Delaware corporation, with the Company. Upon
consummation of the merger, the Company will become a wholly owned subsidiary of
AOR and the holders of the Company's common stock will receive 0.94 shares of
AOR common stock for each share of the Company's common stock held by them. The
effective date of the merger currently is expected to be in the second quarter
of 1999. The merger is expected to be accounted for as a pooling of interests
and to be a tax free exchange. The merger is subject to regulatory and
shareholder approval. AOR is a national cancer management company, which
provides comprehensive management services under long-term agreements to
oncology practices. AOR's affiliated physicians provide a broad range of
medical services to cancer patients, including medical oncology gynecological
oncology, radiation oncology, stem cell transplantation, diagnostic radiology
and clinical research.

Service Agreements

In accordance with the terms of each Service Agreement, the Company is
paid a management fee by the Affiliated Physician Groups. This management fee is
equal to the direct expenses associated with operating the Affiliated Physician
Group, excluding physicians' salaries and benefits, plus an additional fee.
Direct expenses include rent, depreciation, amortization, pharmaceutical
expenses, medical supply expenses, salaries and benefits of non-physician
employees who support the Affiliated Physician Groups. Approximately 94% of the
Service Agreements for the year ended December 31, 1998 provide that the
additional fee is a percentage, ranging from 25% to 35%, of the earnings before
interest and taxes of the Affiliated Physician Group. The remaining Service

<PAGE> 31

Agreements for the year ended December 31, 1998 provide for an additional fee
that is a percent of revenue of the Affiliated Physician Group or is a
predetermined, fixed amount.

Each Service Agreement provides for the formation of an operating
board, with equal representation from the Company and the Affiliated Physician
Group. The operating board meets periodically, approves certain items having a
significant impact on the Affiliated Physician Group, and advises the Company on
the management, administrative policies, and development of the group's medical
practice and related facilities. The two most significant items reviewed and
approved by an operating board are the annual budget for an Affiliated Physician
Group and the addition of facilities or services offered by an Affiliated
Physician Group. From time to time, after approval by an operating board, the
Company has advanced funds to an Affiliated Physician Group to finance
development of new markets, to support the addition of physicians, and to
support the development of new services. These advances are funded with the
Company's working capital and are repaid in accordance with the terms of the
instrument evidencing the advance. From time to time, the Company and an
Affiliated Physician Group may amend the Service Agreement to change the
management fee paid to the Company. These amendments generally occur when an
operating board determines to add facilities to be used by an Affiliated
Physician Group and provide for an appropriate increase in the Company's
management fee. Each Service Agreement provides a mechanism to adjust the
Company's management fee if a change in law results in a change in the
underlying financial arrangements between the Affiliated Physician Group and the
Company. If the operating board cannot agree to an appropriate adjustment, the
Service Agreement provides that the matter shall be submitted to binding
arbitration.

Effective June 30, 1997, the Company, through PRN Research, entered
into a comprehensive clinical development alliance (the "Ilex Agreement") with
Ilex(TM)Oncology, Inc. ("Ilex"). Ilex is a contract research organization
("CRO") that focuses exclusively on research of cancer-related pharmaceuticals.
Under the terms of the Ilex Agreement, the Company has agreed that its sites can
be used for trials managed or sponsored by Ilex, and Ilex has agreed to promote
the Company as a preferred vendor for clinical trial sites. The Company has also
agreed to promote Ilex as the preferred CRO for clinical trials; provide
scientific review services to Ilex to evaluate proposed clinical trials; and
assist in clinical trials design. In addition, the Company has the right of
first refusal to participate to the maximum extent possible in all trials
managed or sponsored by Ilex. As consideration for entering into the Ilex
Agreement, the Company received 312 shares of Ilex common stock in 1997. The
Company received 314 additional shares of Ilex common stock during 1998. The
Company will also receive 314 additional shares of Ilex common stock in 1999 and
2000. In addition, the Company will receive up to 1,256 additional shares should
Ilex meet certain operational financial targets. The Ilex Agreement terminates
on December 31, 2007.

The Company's most significant Service Agreement is with Texas
Oncology, P.A. ("TOPA"), and it accounted for approximately 80%, 70%, and 65% of
the Company's total revenues for the years ended December 31, 1996, 1997, and
1998, respectively.

<PAGE> 32

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The consolidated financial statements include the accounts of PRN and
its subsidiaries for the years ended December 31, 1996, 1997, and 1998. All
significant intercompany transactions have been eliminated. Certain prior period
amounts have been reclassified to conform to the current year presentation.

Use of Estimates in the Preparation of Financial Statements

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. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original
maturities of three months or less to be cash and cash equivalents.

Accounts Receivable

Accounts receivable represents receivables from patients and other
third-party payors for medical services provided by the Affiliated Physician
Groups. Generally, under the terms of the Service Agreements, the Company
purchases the accounts receivable outstanding at the end of each month from the
Affiliated Physician Groups, net of estimated allowances. An estimated allowance
is provided on the accounts receivable based on historical collection rates.
These allowances are reviewed periodically and increased or decreased based on
the estimated payment rates. Any adjustment to the allowance based on payment
patterns and/or bad debts affects the future operations of the Affiliated
Physician Groups and the resulting management fee from the Affiliated Physician
Groups. Therefore, accounts receivables are a function of medical practice
revenues (gross billings less estimated contractual and other adjustments,
"Medical Practice Revenues") rather than the management fee earned by the
Company.

Accounts receivable are stated net of an allowance for uncollectibles,
which is charged to operations or to the Affiliated Physician Group under
Service Agreements, as appropriate, based on an evaluation of potential losses.

Due from and to Related Parties

The Company has advanced to certain of its Affiliated Physician Groups,
primarily TOPA, amounts needed for working capital purposes primarily to assist
with the development of new markets to support the addition of physicians, and
to support the development of new services. The advances bear interest at a
market rate negotiated by the Company and the Affiliated Physician Groups, which
approximates the prime lending rate (7.75% at December 31, 1998). These advances
are unsecured and are repaid in accordance with the terms of the instrument
evidencing the advance. Amounts payable to related parties represent current
payments to Affiliated Physician Groups for services rendered under Service
Agreements.

Inventories

Inventories consist of pharmaceuticals and medical supplies and are
carried at the lower of cost or market on a first-in, first-out basis.

<PAGE> 33

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over estimated useful lives, generally 25 years
for buildings and ranging from 3 to 10 years for furniture and equipment.
Depreciation expense was $13,090, $17,442, and $21,352 for the years ended
December 31, 1996, 1997, and 1998, respectively. Maintenance costs and repairs
are expensed as incurred. Interest costs incurred during the construction of
major capital additions (primarily cancer centers) are capitalized. The Company
capitalized interest costs of approximately $392 for the year ended December 31,
1998. No interest cost was capitalized for the years ended December 31, 1996 and
1997.

Service Agreements and Excess of Purchase Price Over the Fair Values of Net
Assets Acquired

The Company pays certain Affiliated Physician Groups for entering into
a Service Agreement and such amounts are reflected in the accompanying
consolidated balance sheets. Effective July 1, 1998, the Company changed its
amortization period of current and future Service Agreements from 30 to 40 years
to 25 years on a prospective basis. This change was made to be consistent with
other companies in the Company's industry which have made this change and to
address opinions expressed by certain financial regulatory bodies. This change
did not have a material impact on the Company's 1998 results of operations.

The Company has acquired certain businesses and paid amounts in excess
of the fair value of the net assets received. The amounts recorded for excess of
purchase price over the fair value of net assets acquired are being amortized on
a straight-line basis over 20 years and are reflected as excess of purchase
price over the fair value of net assets acquired in the accompanying
consolidated balance sheets.

Construction and Retainage Payable

Construction and retainage payable are reflected as long-term
liabilities since these costs are expected to be financed with long-term debt.

Management Fees

<PAGE> 34

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table summarizes the derivation of Management Fees for
the years ended December 31, 1996, 1997, and 1998.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Medical Practice Revenues .............. $ 296,907 $ 387,391 $ 481,430
Amounts Retained by Physicians ......... (72,414) (96,183) (117,070)
---------- ---------- ----------
Management Fees ...................... $ 224,493 $ 291,208 $ 364,360
========== ========== ==========
</TABLE>

Medical Practice Revenues include amounts expected to be collected from
government-sponsored health care programs (principally Medicare and Medicaid).
Approximately 35% and 45% of Medical Practice Revenues represented services
rendered under such government-sponsored health care programs and discounted fee
for service payors, respectively, for the years ended December 31, 1996, 1997,
and 1998. Revenue under certain third-party payor agreements is subject to audit
and retroactive adjustments. No material claims, disputes, or other unsettled
matters exist to management's knowledge concerning third-party reimbursements.
The Affiliated Physician Groups have no significant capitation revenues.

Income Taxes

The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred taxes arise
primarily from the recognition of revenues and expenses in different periods for
income tax and financial reporting purposes.

Net Income (Loss) Per Common Share

Effective December 15, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share." Under SFAS No. 128, basic earnings per share is calculated
by dividing net income by the weighted average number of shares of common stock
outstanding during the period. Common stock to be issued at a future date to
Affiliated Physician Groups is treated as outstanding in determining basic
earnings per share. In addition, diluted earnings per share are calculated using
the weighted average number of shares of common stock and common stock
equivalents. Per share amounts and weighted average number of shares outstanding
for the year ended December 31, 1996, have been restated to conform to the
requirements of SFAS No. 128.

Per share data presented for the year ended December 31, 1996, has been
restated to reflect a two-for-one stock split effected in the form of a 100%
stock dividend on June 10, 1996.

New Accounting Standards

During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires presentation of total nonowner changes in equity
for all periods presented. The required disclosure is included in the
accompanying consolidated statements of income. Accumulated other comprehensive
income consists of the valuation adjustment (net of tax) relating to investments
in common stock and is presented in the accompanying consolidated statement of
stockholders' equity.

During 1998, the Company also adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS No. 131 requires
reporting of summarized financial results for operating segments and establishes
standards for related disclosures about products and services, geographic areas
and major customers.

<PAGE> 35

The Company's sole business is providing comprehensive management
services, facilities and equipment, administrative and technical support and
ancillary services necessary for physicians to establish and maintain a fully
integrated network of outpatient cancer care. The physicians affiliated with the
Company provide all aspects of care related to the diagnosis and outpatient
treatment of cancer, including comprehensive oncology services (including
primarily medical, radiation, and gynecological services), diagnostic radiology
services, retail pharmacy services and clinical research.

For each of the years ended December 31, 1996, 1997 and 1998, oncology
related services contributed to substantially all of the Company's revenues and
profitability and represented a significant portion of the Company's assets and
long-lived assets (consisting primarily of property and equipment and service
agreements).

Financial Instruments

The Company discloses the estimated fair values of its financial
instruments in accordance with SFAS No. 107, "Disclosure about Fair Value of
Financial Instruments." Cash and cash equivalents, accounts receivable, accounts
payable, and accrued liabilities are reflected in the accompanying consolidated
balance sheets at fair value because of the short-term maturity of those
instruments. Investment in common stock is recorded at fair market value. The
fair value of long-term debt at December 31, 1998, was $69,354 compared to its
carrying value of $69,052 and at December 31, 1997, was $59,422 compared to its
carrying value of $58,344. The fair value of long-term debt was determined by
using the Company's incremental borrowing rate under the Company's revolving
credit facility (the "Revolver") at December 31, 1998 (6.0%) and December 31,
1997 (7.0%).

Long-Lived Assets

On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and Assets to be Disposed Of." Under SFAS
No. 121, the amounts recorded by the Company for property and equipment, Service
Agreements, and other assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If this review indicates that the carrying amounts of an asset
may not be recoverable, as determined based on the undiscounted cash flows of
the operations acquired over the remaining amortization period, the carrying
value of the asset is reduced to fair value. Among the factors that the Company
will continually evaluate are unfavorable changes in each of the geographic
markets in which the Company has entered into Service Agreements, including the
relative market share of the Affiliated Physician Group, the competitive
environment, current period and forecasted operating and cash flow levels from
the Company's Service Agreements, and legal and regulatory factors governing
reimbursement and the practice of medicine.

<PAGE> 36

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Supplemental Cash Flow Information

During 1998, the Company acquired $9,864 in assets net of assumed
liabilities in exchange for the notes payable of $5,671 and commitments to issue
common stock of $4,193 in connection with the execution of Service Agreements.

During 1997, the Company acquired $14,231 in assets net of assumed
liabilities in exchange for common stock of $470, notes payable of $1,909,
subordinated convertible promissory notes of $9,400, and commitments to issue
common stock of $2,452 in connection with the execution of Service Agreements.
The Company also acquired $921 in equipment through the assumption of the
related capital lease obligations. In addition, the Company acquired $3,432 in
common stock of Ilex as consideration for entering into an agreement and
provided a valuation allowance for the investment in common stock of $1,131, net
of applicable income taxes of $435. See Note 3-Investment in Common Stock.

3. INVESTMENT IN COMMON STOCK:

On June 30, 1997, one of the Company's subsidiaries, PRN Research,
Inc., entered into a comprehensive clinical development alliance with Ilex, a
drug development company focused exclusively on cancer. Under the terms of the
agreement, the Company will refer all contract research business to Ilex. As
part of the agreements, Ilex issued to the Company 312 shares and 314 shares of
Ilex common stock in 1997 and 1998, respectively. In addition, Ilex will issue
314 shares of Ilex common stock to the Company in each of 1999 and 2000. Ilex
will also issue up to 1,256 additional shares of Ilex common stock through 2000
contingent upon the performance of Ilex's contract clinical research business
and other conditions. The Ilex agreement expires in 2007.

The Company accounts for its investment in common stock in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with SFAS No. 115, the Company's investment in common
stock is considered available-for-sale. Available-for-sale securities represent
those securities that do not meet the classification of held-to-maturity, are
not actively traded, and are carried at fair value. Unrealized gains and losses
on these securities are excluded from earnings and are reported as a separate
component of stockholders' equity (under the caption "Accumulated Other
Comprehensive Income"), net of applicable taxes, until realized.

The fair value of the shares received is recorded as investment in
common stock and deferred revenue as of the dates of the issuance. The deferred
revenue is amortized into income over a twelve-month period and is reflected in
other revenues in the accompanying consolidated statements of income.

As of December 31, 1998, a valuation allowance credit of $437 was
recorded as a result of an increase in the market value of Ilex common stock. In
accordance with the provisions of SFAS No. 115, the valuation allowance is shown
as a reduction to stockholders' equity, net of applicable income taxes of $168.

<PAGE> 37

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

4. INVESTMENTS IN JOINT VENTURES:

Investments in joint ventures at December 31, 1997 and 1998, consist of
the following:

<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Oregon Cancer Center, Ltd. $ 4,494 $ 6,435
Physicians' Education Resource, Inc. -- 993
Real estate partnership 223 226
---------- ----------
$ 4,717 $ 7,654
========== ==========
</TABLE>

The Company accounts for its investments in partnerships using the
equity method of accounting. The results of operations of the joint ventures are
not material of the Company's overall financial position or results of
operations.

5. LONG-TERM DEBT AND SUBORDINATED CONVERTIBLE PROMISSORY NOTES:

Long-term debt and subordinated convertible promissory notes consist of
the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
DESCRIPTION 1997 1998
- ------------------------------------------------------------------------------ -------- --------
<S> <C> <C>
Credit facility bearing interest at prime (8.5% and 7.75% at December 31, 1997
and 1998, respectively) or LIBOR (5.3% and 5.1% at December 31, 1997 and
1998, respectively) plus 0.9% and 0.7% at December 31, 1997 and
1998 respectively, maturing in 2002 $ 32,000 $ 52,000
Notes payable bearing interest at rates ranging from 5.3%
to 10%, maturing between 1999 to 2005 16,022 15,623
Subordinated convertible promissory notes bearing interest at
rates ranging from 6% to prime plus 1%, maturing between
1998 and 2002 9,400 900
-------- --------
Total 57,422 68,523
Less-current maturities (8,138) (7,244)
-------- --------
Long-term debt $ 49,284 $ 61,279
======== ========
</TABLE>

Effective June 11, 1997, the Company amended the Revolver. The
amendment, among other things, increased the amounts available for borrowing
under the Revolver from $90,000 to $140,000 and reduced the interest rate
charged on borrowings. The Revolver matures June 11, 2002. The Revolver contains
covenants that, among other things, require the Company to maintain certain
financial ratios and imposes restrictions on the Company's ability to incur
future indebtedness, pay dividends, sell assets, or redeem or repurchase Company
securities. At December 31, 1998, the Company was in compliance with the
Revolver covenants and had $88,000 available under the Revolver for borrowing.
The Revolver is secured by the capital stock of the Company's wholly owned
subsidiaries, PRN Research, Inc. and TOPS Pharmacy, Inc. The notes payable and
the subordinated convertible promissory notes are unsecured.

<PAGE> 38

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

As of December 31, 1998, the maturities of long-term debt and
subordinated convertible promissory notes are as follows:

<TABLE>
<CAPTION>
Subordinated
Long-Term Convertible
Debt Promissory Notes Total
-------------- ---------------- --------------
<S> <C> <C> <C>
1999 $ 7,244 $ -- $ 7,244
2000 4,683 -- 4,683
2001 1,679 -- 1,679
2002 52,880 900 53,780
2003 946 -- 946
Thereafter 191 -- 191
============== ============== ==============
$ 67,623 $ 900 $ 68,523
============== ============== ==============
</TABLE>

6. LEASES:

Future minimum lease payments under capital leases together with the
present value of the net minimum lease payments as of December 31, 1998 are as
follows:

<TABLE>
<S> <C>
1999 $ 486
2000 46
2001 13
-------
Total minimum lease payments 545
Less: Amount representing interest (16)
=======
Present value of minimum lease payments $ 529
=======
</TABLE>

The Company leases certain facilities and equipment under operating
leases. Generally, real estate leases are for primary terms of three to five
years for medical offices and ten to 20 years for leased cancer centers with
options to renew for additional periods, and equipment leases are for terms of
one to four years.

Future commitments under noncancelable operating leases as of December
31, 1998 are as follows:

<TABLE>
<S> <C> <C>
1999 $ 14,271
2000 12,521
2001 10,886
2002 9,098
2003 8,371
Thereafter 30,122
--------
$ 85,269
</TABLE>

Rent expense was $11,252, $15,609, and $18,222 for the years ended
December 31, 1996, 1997, and 1998, respectively.

<PAGE> 39

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

7. COMMITMENTS AND CONTINGENCIES:

The Company enters into commitments with various construction companies
and equipment vendors in connection with the development of cancer centers. As
of December 31, 1998, the Company's commitments were approximately $7,300.

The provision of medical services and the conduct of clinical trials by
the Affiliated Physician Groups entail an inherent risk of professional
liability claims. The Company does not control the practice of medicine by
physicians or the compliance with certain regulatory and other requirements
directly applicable to physicians and physician groups. Because the Company
purchases and resells pharmaceutical products and related medical supplies, it
faces the risk of product liability claims. The Company from time to time is a
party to claims, suits, or complaints relating to services and products provided
by the Company or physicians to whom the Company provides services. The Company
maintains insurance coverage that it believes to be adequate both as to risks
and amounts. In addition, pursuant to the Service Agreements, the Affiliated
Physician Groups are required to maintain comprehensive professional liability
insurance. Successful malpractice claims asserted against Affiliated Physician
Groups or the Company could, however, have a material adverse effect on the
Company.

In March 1996, Methodist Hospitals of Dallas ("Methodist") filed a
lawsuit in the District Court of Dallas County, Texas against the Company and
TOPA asserting various claims, including claims of monopolization, conspiracy to
monopolize, attempted monopolization, unfair competition, and tortious
interference with actual and prospective contractual relationships. In May 1998,
the Company, TOPA, and Methodist settled this lawsuit. Under the terms of the
settlement, Methodist released the Company and TOPA from any liability, and the
lawsuit, including all claims related thereto, was dismissed with prejudice. As
part of the settlement, the Company and TOPA agreed to limit the expansion of
certain facilities and the number of physicians in Dallas County. The Company
believes that such limitations will not materially adversely affect the
Company's results of operations or growth plans.

In September 1996 and October 1996, the Company was named as defendant
in various lawsuits representing a class of all persons who purchased and still
owned shares of the Company's common stock from the period of January 2, 1996
through October 28, 1996. In general, these lawsuits asserted that the Company
failed to disclose that it had engaged in certain improper accounting practices,
that the relationship between the Company and certain of the Affiliated
Physician Groups violated federal and state law, and that certain of the
Affiliated Physician Groups have charged the Medicare program amounts in excess
of the cost of delivering certain services. In December 1997, the Company
reached an agreement to settle these lawsuits for $1,975. In January and
February 1998, these cases were dismissed with prejudice, and all members of the
settlement class became barred from prosecuting, pursuing, or litigating any
claims asserted in these cases.

Beginning January 1, 1997, the Company has guaranteed that the Amounts
Retained by Physicians will be at least $5,195 under the terms of the Service
Agreement with the Company's Minnesota physician group provided that certain
targets are met. Under this agreement, the Company reduced its management fee is
1998 from the Minnesota physician group by $714, and recorded management fee
revenue from the Minnesota physician group of $21,665. Without the reduction in
its management fee, the Company would have recorded revenue from the Minnesota
physician group of $22,379. The guaranty provisions of the service agreement
expire in 2001.

<PAGE> 40

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

8. INCOME TAXES:

The provision (benefit) for income taxes for the years ended December
31, 1996, 1997, and 1998, consisted of the following:

<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 10,869 $ (6,690) $ 11,985
State 1,344 1,265 1,665
Deferred:
Federal 876 2,726 3,539
State 182 313 468
-------- -------- --------
Total $ 13,271 $ (2,386) $ 17,657
======== ======== ========
</TABLE>

A reconciliation between reported income tax expense and the amount
computed by applying the statutory Federal income tax rate of 35% for the years
ended December 31, 1996, 1997, and 1998, is as follows:

<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Computed tax expense (benefit) $ 11,481 $ (3,270) $ 16,120
State taxes 1,526 1,578 2,133
Federal deduction for state taxes (534) (552) (725)
Incremental federal tax rate 338 (96) 474
Other, net 460 (46) (345)
-------- -------- --------
Total $ 13,271 $ (2,386) $ 17,657
======== ======== ========
</TABLE>

The components of deferred income tax expense for the years ended
December 31, 1996, 1997, and 1998, are as follows:

<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts $ (37) $ (10) $ 13
Expenses incurred in connection with the
reorganization (132) -- --
Property and equipment 568 2,161 2,117
Management service agreement and other
asset amortization 804 1,034 1,890
Accrued vacation (145) (146) (13)
======== ======== ========
Total $ 1,058 $ 3,039 $ 4,007
======== ======== ========
</TABLE>

<PAGE> 41

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The tax effects of temporary differences that give rise to the deferred
tax assets and liabilities at December 31, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Deferred tax assets-
Accrued vacation $ 654 $ 667
Valuation adjustment-investment in common stock 435 --
Other assets -- 35
---------- ----------
Total deferred tax assets 1,089 702

Deferred tax liabilities-
Property and equipment (7,248) (9,365)
Management service agreements and other assets (1,987) (3,877)
Valuation adjustment - investment in common stock -- (168)
Reorganization expenses and other 193 144
---------- ----------
Total deferred tax liabilities (9,042) (13,266)
========== ==========
Net deferred tax liabilities $ (7,953) $ (12,564)
========== ==========
</TABLE>

9. EARNINGS PER SHARE:

The following is a reconciliation of the components of earnings per
share for the years ended December 31, 1996, 1997, and 1998:

<TABLE>
<CAPTION>
Year Ended December 31, 1996 -- PER SHARE
INCOME SHARES AMOUNT
-------- -------- --------
<S> <C> <C> <C>
Basic earnings per share
Income available to common stockholders $ 20,496 46,643 $ 0.44

Effect of dilutive securities
Stock options -- 790 (0.01)

-------- -------- --------
Diluted earnings per share $ 20,496 47,433 $ 0.43
======== ======== ========

Year Ended December 31, 1997 -

Basic and diluted earnings (loss) per share
Income available to common stockholders $ (7,232) 50,635 $ (0.14)
======== ======== ========

Year Ended December 31, 1998 -

Basic earnings per share
Income available to common stockholders $ 29,753 52,504 $ 0.57

Effect of dilutive securities
Stock options -- 386 --

Convertible subordinated notes 128 461 (0.01)
-------- -------- --------

Diluted earnings per share $ 29,881 53,351 $ 0.56
======== ======== ========
</TABLE>

<PAGE> 42

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

For the year ended December 31, 1996, 823 shares related to stock
options were not included in the computation of diluted earnings per share
because the option exercise price was greater than the average market price of
the common shares.

Because the Company reported a loss for the year ended December 31,
1997, no additional securities or related adjustments to income were made for
the common stock equivalents related to stock options or the subordinated
convertible promissory notes since the effect would be antidilutive. If stock
options had been included in the computation of diluted earnings per share, the
number of shares would have increased by 379. If the subordinated convertible
promissory notes had been included in the computation of diluted earnings per
share, the number of shares would have increased by 1,218 and the net loss would
have been reduced by $394.

10. PROFIT SHARING PLAN:

Employees of the Company and of the Affiliated Physician Groups
participate in an affiliated service group 401-K and profit sharing and savings
plan (the "Plan"). All employees are eligible to participate in the Plan at the
time of employment if they have reached the age of 20 and 1/2 years. Employees
vest in the employer contribution portion of their account at the rate of 20%
for each year that they meet the Plan's service requirements.

The Plan allows for an employer match of contributions made by plan
participants. For the years ended December 31, 1996 and 1997, the Company
elected to match 50% of employee contributions, the total match not to exceed 6%
of the participant's salary subject to the salary ceiling rules imposed by the
Internal Revenue Service. In 1998 the Company elected to match 50% of employee
contributions, the total match not to exceed 3% of the participant's salary
subject to the salary ceiling rules imposed by the Internal Revenue Service. The
Company's contribution amounted to $744, $1,835, and $1,563 for the years ended
December 31, 1996, 1997, and 1998, respectively.

11. STOCK OPTION PLANS:

In November 1993, the Company established a stock option plan for
employees ("Employee Option Plan") whereby the Company may issue to officers and
key employee's options to purchase up to 5,000 shares of the Company's common
stock.

Substantially all of the options that were issued in 1994 vested in May
1996 and expire in May 1999. Substantially all subsequent issuances of options
vest over periods between three and five years beginning one year from the date
of grant and expire in ten years, except in the case of a "change in control" as
defined in the Employee Option Plan when all options become immediately vested.
Prior to the Company's initial public offering the Board of Directors
considered, among other things, available operating results of the Company,
comparable public companies' price/earnings ratios, the illiquidity of the
underlying security, and prior transactions in the common stock in establishing
the fair market value of the common stock at the dates of grant.

On November 13, 1996, the Compensation Committee of the Board of
Directors repriced all options outstanding under the Employee Option Plan
granted after the date of the Company's initial public offering, other than
options held by the Chief Executive Officer and President and the Executive Vice
President-Medical Director. Options issued at that date under the Employee
Option Plan totaled 1,114 shares and had exercise prices ranging between $9.125
and $26.125 per share. The option exercise prices were amended to be equal to
the fair market value of the common stock at the close of business on November
13, 1996, or $6.5625 per share.

In April 1994, the Company established a stock option plan for outside
directors (the "Director Option Plan") whereby the Company may issue to outside
directors options to purchase up to 637 shares of the Company's common stock. On
September 22, 1994, the Company granted options to purchase an aggregate of 115
shares of common stock to three outside directors, at an exercise price of
$4.315 per share. In May 1995, the Company granted options to purchase 5 shares
of common stock to one outside director at an exercise price of $9.38 per share.

<PAGE> 43

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In May 1996, the Company granted options to purchase an aggregate of 20
shares of common stock to four outside directors at an exercise price of $22.31
per share. In May 1997, the Company granted options to purchase an aggregate of
15 shares of common stock to three outside directors at an exercise price of
$8.25 per share. In May 1998, the Company granted options to purchase an
aggregate of 91 shares of common stock to five outside directors at an exercise
price of $12.50 per share. Options issued under the Director Option Plan vest
and are exercisable one year from the date of grant.

The Company also granted in April 1994 options ("1994 Director
Options") to purchase an aggregate of 76 shares of common stock to three
directors at an exercise price of $2.355 per share, which options vested one
year following the date of grant. These options were not granted pursuant to the
Director Option Plan.

The following table summarizes the combined activity under the Employee
Option Plan, the Director Option Plan, and the 1994 Director Options.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1997 1998
---------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE SHARES EXERCISE PRICE SHARES
------------ -------------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period 1,338 $ 8.75 1,535 $ 6.79 3,019 $ 9.32

Options granted 1,288 10.43 1,991 10.48 922 9.88
Options exercised (136) 3.11 (210) 3.63 (340) 7.21
Options canceled (955) 14.97 (297) 5.45 (337) 7.64

------- -------
========
Outstanding, end of period 1,535 $ 6.79 3,019 $ 9.32 3,264 $ 9.87
======= ======= ========

Exercisable, end of period 480 490 732

Available for grant, end of period 1,228 113 1,353
Weighted average fair value of
options granted $ 4.62 $ 6.30 $ 9.90
</TABLE>

<PAGE> 44

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Significant option groups outstanding at December 31, 1998, and related
weighted average price and life are as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------- ------------------------------------------
SHARES NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
- ------------------ -------------------- ----------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
$ 2.36-7.63 537 7.46 $ 6.25 231 $ 5.43
8.00-9.38 543 8.89 8.49 85 8.93
9.50-9.94 358 8.75 9.61 51 9.87
10.50 1,105 8.75 10.50 214 10.50
11.50-11.88 468 8.88 11.76 88 11.81
12.19-17.75 238 8.53 14.18 48 17.75
22.31 15 7.35 22.31 15 22.31
-------------- ------------- ----------- ----------- ---------- -----------

$ 2.36-22.31 3,264 8.56 $ 9.87 732 $ 9.55
</TABLE>

The Company continues to account for stock based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," as allowed by SFAS No. 123. Had compensation cost for those plans
been determined consistent with SFAS No. 123, the Company's net income (loss)
and per share amounts would have been reduced (increased) to the following pro
forma amounts:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported $ 20,496 $ (7,232) $ 29,753
Pro forma 19,257 (8,995) 26,663

Earnings (loss) per common share Basic:
As reported $ 0.44 $ (0.14) $ 0.57
Pro forma 0.41 (0.18) 0.51

Diluted:
As reported $ 0.43 $ (0.14) $ 0.56
Pro forma 0.41 (0.18) 0.50
</TABLE>

For disclosure purposes, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for grants in the years ended
December 31, 1996, 1997, and 1998: expected volatility of 57 percent for the
year ended December 31, 1996, 67 percent for the years ended December 31, 1997
and 1998; risk-free interest rates ranging from 4.37 to 7.60 percent; and
expected lives of 2.8, 5.0, and 6.0 years for immediate, 4-year, and 5-year
vesting options, respectively.

<PAGE> 45

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

12. STOCKHOLDERS' EQUITY:

In June 1997, the Company adopted a Shareholders Rights Plan. Holders
of the Company's common stock as of June 16, 1997, received preferred stock
purchase rights (the "Rights") as a dividend at the rate of one Right for each
share of common stock. The Rights expire on June 2, 2007. Each Right entitles
the holder to purchase one one-hundredth of a share of a new Series One Junior
Preferred Stock at an exercise price of $60.00 per Right, subject to adjustment.
Each Right becomes exercisable only upon a person's or group's acquisition of,
or commencement of a tender or exchange offer for, 18% or more of the Company's
common stock or in the event that the Company's board of directors determines
that a shareholder of the Company holding at least 10% of the Company's
outstanding common stock is an "adverse person," as defined, or in the event of
certain mergers or asset sales involving more than 50% of the Company's assets
or earning power. If exercisable, each Right allows the holder to purchase
either securities of the Company or securities of the acquiring company,
depending upon the form of the transaction, having a value of twice the exercise
price of the Rights. The Rights are redeemable by the Company's board of
directors at $0.001 per Right for a period of ten business days following the
time that the Rights become exercisable. The Rights also are generally
exchangeable by the board of directors at an exchange ratio of one share of
common stock per Right at any time after the Rights have become exercisable and
prior to the acquisition by any person or group of 50% or more of the Company's
common stock. On December 11, 1998, the Board of Directors of the Company
amended the shareholders Rights Plan to exclude the proposed merger with AOR as
an event that would allow the Rights to become exercisable.

The Company has reserved 5,106 shares of common stock for issuance upon
exercise of stock options. The terms of the Revolver restrict the Company's
ability to declare, pay, or issue dividends or other distributions with respect
to its capital stock, except for stock dividends.

In connection with entering into Service Agreements and purchasing the
assets of Affiliated Physician Groups, the Company has committed to issue shares
of common stock at specified future dates. Common stock to be issued is shown as
a separate component in stockholders' equity. The number of shares of future
common stock to be issued as of December 31, 1998 is as follows:

<PAGE> 46

13. RELATED PARTY TRANSACTIONS:

The Company and TOPA are parties to a Service Agreement pursuant to
which the Company provides TOPA with facilities, equipment, non-physician
personnel, and administrative, management, and non-medical advisory services, as
well as services relating to the purchasing and administering of supplies. In
1998, TOPA paid PRN an aggregate of approximately $271,200 pursuant to the TOPA
Service Agreement. Dr. Jones, a director of the Company, and Dr. Bailes, an
Executive Vice President and a director of the Company, are employed by TOPA.
TOPA beneficially owns approximately 17.4% of the Company's outstanding common
stock. At December 31, 1998, TOPA was indebted to the Company in the aggregate
amount of approximately $11,400. This indebtedness was incurred when the Company
advanced working capital to TOPA for various uses, including the development of
new markets and physician salaries and bonuses. This indebtedness bears interest
at a rate negotiated by the Company and TOPA that approximates the prime lending
rate (7.75% at December 31, 1998). Effective November 1, 1998, the Company and
TOPA entered into a Second Amended and Restated Service Agreement. In
consideration for entering into the amended agreement, the Company paid TOPA
$1,500 and is obligated to pay TOPA $7,500 on April 15, 1999.

The Company leases facilities from affiliates of Baylor University
Medical Center ("BUMC"). Additionally, affiliates of BUMC provide the Company
various services, including telecommunications and maintenance services, Mr.
Powell, a director of the Company, is president and chief executive officer of
BUMC. In 1998, payments by the Company to BUMC totaled an aggregate of
approximately $3,900 for these services.

The Company and Minnesota Oncology Hematology, P.A. ("MOHPA") entered
into a Service Agreement effective July 1, 1996. Dr. Schwartz, a director of
PRN, is president and medical director of MOHPA. Pursuant to the service
agreement with MOHPA, the Company provides MOHPA with offices, facilities,
equipment, non-physician personnel, and administrative, management, and
non-medical advisory services, as well as services relating to the purchasing
and administering of supplies. During 1998, MOHPA paid the Company an aggregate
of approximately $21,665 pursuant to its Service Agreement.

As part of the consideration for MOHPA entering into the Service
Agreement, the Company is required to make quarterly payments of $464 to MOHPA
through July 1, 2000. During 1998, the Company paid MOHPA an aggregate of $1,856
pursuant to such quarterly payments. In addition, the Company is required to
issue a prescribed number of shares of the Company's common stock to MOHPA on
July 1 of each year through July 1, 2001. During 1998, the Company issued 107
shares of common stock to MOHPA pursuant to such yearly issuances.

<PAGE> 47

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

Not applicable

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS

The following table sets forth certain information regarding the
directors of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ------- --------------------------------------
<S> <C> <C>
John T. Casey 53 Chairman of the Board and
Chief Executive Officer
Joseph S. Bailes, M.D. 42 Executive Vice President and Director
Nancy G. Brinker 52 Director
J. Taylor Crandall 45 Director
Robert W. Daly 47 Director
Stephen E. Jones, M.D. 57 Director
Terrence J. Mulligan 53 Director
Boone Powell, Jr. 62 Director
Burton S. Schwartz, M.D. 57 Director
</TABLE>

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

John T. Casey has been Chairman of the Board and Chief Executive
Officer of the Company since October 1997. Mr. Casey has been active in health
care leadership roles for over 25 years. Mr. Casey served as president and chief
operating officer of American Medical International from 1991 until 1995, when
that company was acquired by Tenet Healthcare Corporation. Prior to 1991, Mr.
Casey served as chief executive officer of several large regional healthcare
systems, including Samaritan Health Services in Phoenix, Arizona; Methodist
Health Systems in Memphis, Tennessee; and Presbyterian/St. Luke's Medical Center
in Denver, Colorado. From 1995 until joining the company, Mr. Casey was chairman
and chief executive officer of InteCare LLC, an entrepreneurial venture. Mr.
Casey currently serves as a director of MedQuist Inc.

Joseph S. Bailes, M.D. has been a Director, Executive Vice President
and National Medical Director of the Company since its formation in June 1993.
Since 1986, Dr. Bailes has been employed as a medical oncologist by TOPA. Dr.
Bailes received his medical degree from the University of Texas Southwestern
Medical School at Dallas in 1981 and is a board certified medical oncologist.
Dr. Bailes is a director of Ilex Oncology, Inc.

Nancy G. Brinker has been a Director of the Company since September
1994. Ms. Brinker is the founder of the Susan G. Komen Breast Cancer Foundation,
one of the leading sponsors of breast cancer research and awareness programs in
the nation. Since February 1995, Ms. Brinker has been chief executive officer of
In Your Corner, Inc., a provider of health and wellness products and services.
Ms. Brinker served as an independent pharmaceutical consultant from 1992 to
1994. Ms. Brinker currently serves as a director of The Meditrust Companies.

<PAGE> 48

J. Taylor Crandall has been a Director of the Company since May 1998.
Mr. Crandall served as vice president and chief financial officer of Keystone,
Inc., an investment company, from October 1986 until October 1998 and has served
as vice president and chief operating officer of Keystone, Inc. since October
1998. Mr. Crandall is a director of a number of business organizations,
including Sunterra Corporation, Washington Mutual, Inc., Specialty Foods, Inc.,
Bell & Howell Operating Company, Grove Worldwide LLC and Quaker State
Corporation.

Robert W. Daly has been a Director of the Company since October 1993.
Mr. Daly has been a managing director of MedEquity Investors, LLC, a health care
venture capital firm, since December 1997. Mr. Daly served as a managing
director of TA Associates, a venture capital firm, from January 1994 until
October 1997. Mr. Daly was a general partner of TA Associates from July 1984 to
December 1993.

Stephen E. Jones, M.D. has been a Director of the Company since
November 1998. Dr. Jones received his medical degree from Case Western Reserve
School of Medicine and post-doctoral training and education at Stanford
University. Dr. Jones is a member of the American Society of Clinical Oncology
and the American Society of Hematology. Dr. Jones is a board certified medical
oncologist and internist. Dr. Jones was a founding partner of TOPA and has been
a practicing physician with TOPA since 1986. He was a professor of Medicine at
the University of Arizona College of Medicine from 1978 through 1985.

Terrence J. Mulligan has been a Director of the Company since May 1998.
Mr. Mulligan served in various capacities for Baxter International, Inc., a
manufacturer and marketer of health care products and services, from 1971 until
his retirement in 1996, including as group vice president - health systems from
1994 to 1996, group vice president -multi-hospital systems from 1993 to 1994,
and senior vice president - corporate sales and marketing from 1988 to 1993. Mr.
Mulligan is a director of MedQuist Inc. and Physician Dynamics Inc.

Boone Powell, Jr. has been a Director of the Company since September
1994. Mr. Powell has been the president and chief executive officer of Baylor
Health Care System and BUMC since 1980. Mr. Powell serves as an active member of
Voluntary Hospitals of America. He is a director of Abbott Laboratories and
Comerica Bank - Texas and is a fellow of the American College of Health Care
Executives.

Burton S. Schwartz, M.D. has been a Director of the Company since May
1998. Dr. Schwartz has served as the president and medical director of Minnesota
Oncology Hematology, P.A., a medical oncology practice and affiliated physician
group of the Company, since February 1995. Dr. Schwartz served as president and
medical director of Oncologic Consultants, P.A., a medical oncology practice,
from April 1992 until February 1995. Dr. Schwartz received his medical degree
from Meharry Medical College in 1968 and is a board certified medical
oncologist.

Mr. Powell was elected as a director of the Company in September 1994
pursuant to an agreement between BUMC and the Company. Under such agreement, the
Company is required to use its best efforts to cause Mr. Powell to be
recommended to the shareholders for the election of the Board of Directors until
July 31, 1999, provided BUMC and its affiliates own at least 50% of the shares
of Common Stock initially issued to BUMC in 1994 (at least 1,529,284 shares of
Common Stock). During such period, TOPA has agreed to vote its shares in favor
of Mr. Powell in an election of directors. Dr. Jones was nominated for and
elected as a director of the Company in November 1998 pursuant to an agreement
with the Company that for so long as TOPA owns more than 10% of the Company's
common stock, a representative of TOPA reasonably acceptable to the Company will
be nominated for election to the Company's Board of Director.

Pursuant to General Instruction G (3), certain information concerning
the executive officers of the Company is included in Part I of this Form 10-K
under the caption "Executive Officers."

<PAGE> 49

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's directors, the
Company's executive officers, and persons who beneficially own more than ten
percent of the Common Stock to file reports of ownership and changes in
ownership with the SEC. Such directors, officers, and greater than ten percent
shareholders are required to furnish the Company with copies of all Section
16(a) forms they file.

Based solely on the Company's review of the copies of such forms
furnished to the Company, or written representations from certain reporting
persons, the Company believes that during 1998 its officers, directors, and
greater than ten percent beneficial owners were in compliance with all
applicable filing requirements except that TOPA filed six late reports relating
to an aggregate of eight transactions, and Messrs. Crandall, Mulligan and
Schwartz each filed a late Form 3.

<PAGE> 50

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the total compensation paid by the
Company to the Chief Executive Officer and each of the executive officers of the
Company (the "Named Executive Officers"). The Company has employment agreements
with certain of its executive officers.

<TABLE>
<CAPTION>
Annual Compensation
------------------------- Long-Term Compensation All Other
Name and Principal Position Year Salary($) Bonus($) Securities Underlying Options(#) Compensation($)
- -------------------------------- -------- ---------- ----------- -------------------------------- ---------------
<S> <C> <C> <C> <C> <C>
John T. Casey
Chief Executive Officer 1998 355,770 -- 120,000 5,000(3)
1997(1) 67,308 50,000(2) 700,000 1,615(3)

O. Edwin French
President and
Chief Operating Officer 1998 276,920 -- 60,000 5,000(3)
1997(1) 59,169 -- 350,000 3,421(3)

Joseph S. Bailes, M.D.
Executive Vice President and
National Medical Director 1998 248,072 -- 21,000 4,719(3)
1997 225,000 -- 160,000
1996 224,900 25,000

George P. McGinn, Jr.
Executive Vice President
General Counsel, 1998 228,083 -- 15,000 5,000(3)
and Secretary 1997 205,000 -- 130,000 4,750(3)
1996 203,973 29,166 120,000(4) 4,750(3)

Michael N. Murdock
Executive Vice President and
Chief Financial Officer 1998 251,937 -- 17,000 5,000(3)
1997(5) 139,432 -- 250,000 4,750(3)
</TABLE>

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

(1) Mr. Casey and Mr. French commenced employment with the Company in October
1997.

(2) Paid by the Company upon commencement of employment.

(3) Contribution by the Company under the Company's 401 (k) plan.

(4) Reflects the number of shares subject to options granted in 1995 and
repriced in November 1996.

(5) Mr. Murdock commenced employment with the Company in June 1997.

<PAGE> 51

OPTION GRANTS TABLE

The following table provides information as to options granted to the
Named Executive Officers by the Company during 1998. No separate stock
appreciation rights ("SARs") have ever been granted by the Company.

<TABLE>
<CAPTION>
Potential Realizable
Number of Percent of Value at Assumed Annual
Securities Total Options Rates of Stock Price
Underlying Granted to Exercise Appreciation for Option
Options Employees Price Expiration Term($)
Name Granted (#) In 1998 ($/Sh) Date 5% 10%
- -------------------- ------------- ----------- ------------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
John T. Casey 120,000(1) 14.8% 8.38 9/15/08 632,416 1,602,667

O. Edwin French 60,000(2) 7.4% 8.38 9/15/08 316,208 801,334

Joseph S. Bailes, M.D. 21,000(2) 2.6% 8.38 9/15/08 110,673 280,467

George P. McGinn, Jr. 15,000(2) 1.9% 8.38 9/15/08 79,052 200,333

Michael N. Murdock 17,000(2) 2.1% 8.38 9/15/08 89,592 227,045
</TABLE>

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

(1) The option vests and becomes exercisable ratably over five years from the
date of grant.

(2) The option vests and becomes exercisable ratably over three years from the
date of grant.

AGGREGATED YEAR-END OPTION VALUE TABLE

The following table provides information as to options exercised by the
Named Executive Officers during 1998 and options issued by the Company that were
held by the Named Executive Officers as of December 31, 1998. None of the Named
Executive Officers has held or exercised SARs.

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at December 31, at December 31,
1998(#) 1998($)(1)
Shares Acquired Value ------------------------------ --------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- --------------- ----------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John T. Casey 50,000 128,125 125,000 645,000 328,125 1,947,525

O. Edwin French 87,500 322,500 114,844 629,231

Joseph S. Bailes, M.D. 125,488 161,000 496,693 506,208

George P. McGinn, Jr. 20,000 131,230 102,500 142,500 567,153 591,473

Michael N. Murdock 30,000 167,969 25,000 212,000 65,625 937,540
</TABLE>

(1) The aggregate dollar value of the unexercised options held at fiscal
year end are calculated as the difference between the fair market value
of the Common Stock on December 31, 1998 ($13.13 per share as reported
on the Nasdaq National Market) and the exercise price of the stock
options (ranging from $6.56 per share to $17.75 per share).

<PAGE> 52

COMPENSATION OF DIRECTORS

Directors who are employees of the Company do not receive additional
compensation for serving as a director of the Company. Non-employee directors of
the Company are entitled to a retainer equal to $1,000 per quarter; $1,000 for
each board meeting attended in person; $500 for each board meeting in which the
director participates by telephone; and $500 for each committee meeting attended
in person. All directors are entitled to reimbursement for their actual
out-of-pocket expenses incurred in connection with attending meetings. In
addition, non-employee directors participate in the Company's 1994 Stock Option
Plan for Outside Directors (the "Director Option Plan"). In accordance with the
terms of the Director Option Plan, each outside director receives an option to
purchase 38,232 shares of Common Stock upon his or her initial election to the
Board of Directors and annual grants of options to purchase 5,096 shares upon
his or her re-election to the Board of Directors. Options issued under the
Director Option Plan have an exercise price per share equal to the closing price
of the Common Stock on the Nasdaq Stock Market on the day prior to the date of
grant and become exercisable in full on the first anniversary of the date of
grant.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with each of its
executive officers. Generally, the employment agreements establish the
executive's base salary and contain a noncompetition agreement for a period of
one year following termination. The employment agreement can be terminated at
any time by the Company for "cause," as defined in the employment agreement, and
by the employee upon 60 days written notice. Each agreement can also be
terminated if the employee is disabled or unable to perform his or her assigned
duties for a period of 90 consecutive days. In the event the employee is
terminated by the Company without cause, or in the event that the employee
terminates his or her employment within 180 days of a "change of control," the
Company will continue to pay the employee a salary for the duration of the
agreement. A "change of control" occurs for purposes of the employment
agreements if (i) a person, entity, or group (as defined in Section 13(d) (3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") other than
the Company, a wholly-owned subsidiary of the Company, any employee benefit plan
of the Company or any of its subsidiaries, or TOPA becomes the beneficial owner
of the Company's securities having 25% or more of the combined voting power of
the then outstanding securities of the Company that may be cast for the election
of directors of the Company (other than as a result of an issuance of securities
initiated by the Company in the ordinary course of business); (ii) if a cash
tender or exchange offer, merger, or other business combination, sale of all or
substantially all of the assets of the Company, or other capital reorganization
results in the transfer or exchange of more than 25% of the voting shares of the
Company; or (iii) if the Company sells all or substantially all of its assets to
another entity that is not a subsidiary of the Company. The term of each
employment agreement will automatically be extended for a period of two years
upon a "change of control." The employment agreements with Messrs., Casey,
McGinn and Murdock were amended on January 15, 1999 to extend from one to three
years the non competition provisions of the employment agreements and to provide
that the term of each employment agreement be automatically extended for a
period of three years upon a "change of control."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 1998, the Company's Compensation Committee was composed of Ms.
Brinker and Messrs. Daly, Mulligan and Powell, none of whom at any time has been
an officer or employee of the Company.

<PAGE> 53

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information with respect to the
beneficial ownership of the Company's common stock as of December 31, 1998
(except as otherwise indicated in the footnotes), respectively by (i) each owner
of more than 5% of the common stock, (ii) each director of the Company, (iii)
each executive officer of the Company, and (iv) all executive officers and
directors of the Company as a group. Except as otherwise indicated below, each
of the entities and persons named in the table has sole voting and investment
power with respect to all shares of common stock beneficially owned. For
purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date which such person has
the right to acquire within 60 days after such date. For purposes of computing
the percentage of outstanding shares held by each person or group of persons
named below on a given date, any security which such person or persons has the
right to acquire within 60 days after such date is deemed to be outstanding for
the purpose of computing the percentage ownership of such person or persons, but
is not deemed to be outstanding for the purpose of computing their percentage
ownership of any other person.

<TABLE>
<CAPTION>
Number of Shares Number of options currently
(including options in exercisable or exercisable
Name column 3) Percentage within 60 days
---- --------- ---------- --------------
<S> <C> <C> <C>
John T. Casey (1)(2) 135,000 * 125,000
Joseph S. Bailes, M.D. (1)(2) 285,502(3) * 144,238
O. Edwin French(1) 96,500 * 87,500
Michael N. Murdock (1) 25,000 * 25,000
George P. McGinn, Jr.(1) 158,000 * 137,500
Nancy G. Brinker (2) 55,270 * 48,520
Robert W. Daly (2) 47,466(4) * 45,872
Boone Powell, Jr. (2) 59,288(5) * 39,288
J. Taylor Crandall (2) 2,802,500(6) 5.4% -
201 Main Street
Fort Worth, TX 76102
Terrence J. Mulligan (2) 5,000 *
Burton S. Schwartz, M.D. (2) 9,274 *
Stephen E. Jones, M.D. (2) 99,000 *
FW Physicians Investors, L.P. 3,296,000(7) 6.4%
201 Main Street
Fort Worth, TX 766102
Kaufmann Fund, Inc 3,731,800(8) 7.2%
140 East 45th Street
43 Floor
New York, NY 10017
Texas Oncology, P.A. 8,966,831(9) 17.4%
Two Lincoln Centre
Suite 900
5420 LBJ Freeway
Dallas, TX 75240
All executive officers and directors 12,744,631(10) 24.3% 652,918
as a group (12 persons)
</TABLE>

<PAGE> 54

* Less than one percent.

(1) Named Executive Officer.

(2) Director.

(3) Includes 10,000 shares subject to options granted by TOPA. See Note 9.

(4) Includes 1,594 shares representing Mr. Daly's pro rata ownership of a
partnership.

(5) Does not include 2,548,568 shares beneficially owned by Baylor University
Medical Center ("BUMC"), for which Mr. Powell serves as president and chief
executive officer, as to which Mr. Powell disclaims beneficial ownership.

(6) All shares are beneficially owned by FW Physicians Investors, L.P., and
investment limited partnership ("FW Physicians"). Mr. Crandall serves as
the president of Group 31, Inc. ("Group 31"), the general partner of FW
Physicians. See Note 7.

(7) Includes 2,802,500 shares beneficially owned by FW Physicians and 493,500
shares beneficially owned by Keystone, Inc., an investment company
("Keystone"). Based upon information set forth in a Schedule 13D/A filed on
January 11, 1999 with the SEC by FW Physicians, Group 31, Mr. Crandall,
Keystone, and Robert M. Bass, who serves as president of Keystone
(collectively referred to herein as the "FW Investors"). Mr. Crandall
serves as vice president and chief financial officer of Keystone. See Note
6.

(8) Based solely upon information set forth to Amendment 1 to Schedule 13G
filed on January 29, 1998 with the SEC by the Kaufmann Fund, Inc., a mutual
fund.

(9) Does not include 2,022,602 shares beneficially owned by persons currently
and formerly employed by TOPA, which shares TOPA has options to purchase
upon the occurrence of certain events, including termination of employment.
These options expire with respect to 866,750 of such shares in 1999 and the
balance of such shares in 2000. Includes 2,089,488 shares subject to
options granted by TOPA to certain persons, including Dr. Bailes. See Note
3.

(10) Includes shares beneficially owned by TOPA. Does not include shares
beneficially owned by BUMC.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company and TOPA are parties to a Service Agreement pursuant to
which PRN provides TOPA with facilities, equipment, non-physician personnel, and
administrative, management, and non-medical advisory services, as well as
services relating to the purchasing and administering of supplies. In 1998, TOPA
paid PRN an aggregate of approximately $271.2 million pursuant to the TOPA
Service Agreement with the Company. Dr. Jones, a director of the Company, and
Dr. Bailes, an Executive Vice President of the Company, are employed by TOPA.
TOPA beneficially owns approximately 17.4% of the outstanding Company common
stock. At December 31, 1998, TOPA was indebted to PRN in the aggregate amount of
approximately $11.4 million. This indebtedness was incurred in 1996 and 1997
when PRN advanced working capital to TOPA for various uses, including the
development of new markets and physician salaries and bonuses. This indebtedness
bears interest at a rate negotiated by PRN and TOPA that approximates the
published prime lending rate. Effective November 1, 1998, PRN and TOPA entered
into a Second Amended and Restated Service Agreement. In consideration for
entering into the amended agreement, PRN paid TOPA $1.5 million and is obligated
to pay TOPA $7.5 million on April 15, 1999.

The Company leases facilities from affiliates of BUMC. Additionally,
affiliates of BUMC provide the Company various services, including
telecommunications and maintenance services, Mr. Powell, a director of the
Company, is president and chief executive officer of BUMC. In 1998, payments by
the Company to BUMC totaled an aggregate of approximately $3.9 million for these
services.

PRN and Minnesota Oncology Hematology, P.A. ("MOHPA") entered into a
Service Agreement effective July 1, 1996. Dr. Schwartz, a director of the
Company, is president and medical director of MOHPA. Pursuant to the Service
Agreement with MOHPA, the Company provides MOHPA with offices, facilities,
equipment, non-physician personnel, and administrative, management, and
non-medical advisory services, as well as services relating to the purchasing
and administering of supplies. During 1998, MOHPA paid the Company an aggregate
of approximately $21.7 million pursuant to their Service Agreement.

<PAGE> 55

As part of the consideration for MOHPA entering into a Service
Agreement, the Company is required to make quarterly payments of $463,996 to
MOHPA through July 1, 2000. During 1998, the Company paid MOHPA an aggregate of
$1,855,984 pursuant to such quarterly payments. In addition, the Company is
required to issue a prescribed number of shares of the Company's common stock to
MOHPA on July 1 of each year through July 1, 2001. During 1998, the Company
issued 107,152 shares of common stock to MOHPA pursuant to such yearly
issuances.

PART IV

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

(a) 1. Financial Statements: See Item 8.

2. Financial Statement Schedules: See Item 8.

3. Exhibits: See Index to Exhibits, pages 59 through 61.

(b) The Company filed a current Report on Form 8-K on December 15, 1998 to
announce, pursuant to Item 5, that it had entered into an Agreement and
Plan of Merger pursuant to which a newly formed wholly-owned subsidiary
of AOR would merge with and into the Company.

The Company filed a Current Report on Form 8-K on December 21 1998 to
announce, pursuant to Item 5, that it had entered into an Amended and
Restated Service Agreement with TOPA.

<PAGE> 56

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

PHYSICIAN RELIANCE NETWORK, INC.

Dated: March 24, 1999 By: /s/ John T. Casey
------------------------------------------
John T. Casey, Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John T. Casey Chairman of the Board March 24, 1999
- ------------------------------------------- and Chief Executive Officer
John T. Casey (Principal Executive Officer)

/s/ Joseph S. Bailes, M.D. Director March 24, 1999
- -------------------------------------------
Joseph S. Bailes, M.D.

/s/ Nancy G. Brinker Director March 24, 1999
- -------------------------------------------
Nancy G. Brinker

/s/ J. Taylor Crandall Director March 24, 1999
- -------------------------------------------
J. Taylor Crandall

Director March __, 1999
- -------------------------------------------
Robert W. Daly

/s/ Stephen E. Jones, M.D. Director March 24, 1999
- -------------------------------------------
Stephen E. Jones, M.D.

/s/ Terrence J. Mulligan Director March 24, 1999
- -------------------------------------------
Terrence J. Mulligan

/s/ Boone Powell, Jr. Director March 24, 1999
- -------------------------------------------
Boone Powell, Jr.

Director March __, 1999
- -------------------------------------------
Burton S. Schwartz, M.D.

/s/ Michael N. Murdock Executive Vice President and Chief March 24, 1999
- ------------------------------------------- Financial Officer (Principal
Michael N. Murdock Financial and Accounting Officer)
</TABLE>

<PAGE> 57

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Physician Reliance Network, Inc.:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Physician Reliance Network, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon dated
February 19, 1999. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule listed in the
index to financial statement schedule is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

Dallas, Texas
February 19, 1999

<PAGE> 58

SCHEDULE II

PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES

RESERVES FOR UNCOMPENSATED CARE

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS REDUCTIONS, BALANCE AT
BEGINNING CHARGED TO NET OF END OF
OF PERIOD INCOME RECOVERIES PERIOD
------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 $49,818 28,909 (34,314) $ 44,413
------------- -------------- ------------ --------------

Year ended December 31, 1997 $19,797 62,426 (32,405) $ 49,818
------------- -------------- ------------ --------------

Year ended December 31, 1996 $13,321 18,370 (11,894) $ 19,797
------------- -------------- ------------ --------------
</TABLE>

(1) Represents reserves for uncompensated care related to accounts receivable
purchased from Affiliated Physician Groups under the Service Agreements.
Under the terms of the Service Agreements, the Affiliated Physician Groups
share in the additions and reductions to the reserve for uncompensated
care. This statement reflects total changes in the reserve (both the
Company and the Affiliated Physician Groups).

<PAGE> 59

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
2.1 -- Agreement and Plan of Merger, dated December 11,
1998, among the Registrant, American Oncology
Resources, Inc. and Diagnostic Acquisition, Inc. (1)

2.2 -- Company Stock Option Agreement dated December 11,
1998 between American Oncology Resources, Inc. and
the Registrant (1)

2.3 -- AOR Stock Option Agreement dated December 11, 1998
between American Oncology Resources, Inc. and the
Registrant (1)

3.1 -- Articles of Incorporation of Registrant. (2)

3.2 -- Bylaws of the Registrant. (3)

4.1 -- See Exhibits 3.1 and 3.2 for provisions of the
Articles of Incorporation and Bylaws defining rights
of the holders of the Common Stock of the Registrant.

4.2 -- Form of Stock Certificate for the Common Stock of the
Registrant. (3)

4.3 -- Rights Agreement, dated as of June 2, 1997, between
Physician Reliance Network, Inc. and Harris Trust and
Savings Bank, as Rights Agent, which includes as
exhibits the Form of Rights Certificate and the
Summary of Rights Agreements. (4)

4.4 -- Amendment No. 1 to the Rights Agreement, dated as of
December 11, 1998, between the Registrant and Harris
Trust and Savings Bank, as Rights Agent. (5)

10.1 -- Restated Security Agreement, dated as of October 1,
1993, by Texas Oncology, P.A. in favor of Registrant.
(3)

10.2 -- Amended and Restated Credit Agreement, dated as of
June 11, 1997, among Physician Reliance Network,
Inc., as Borrower, Bank One, Texas, N.A., NationsBank
of Texas, N.A., Banque Paribas, Cooperatieve Centrale
Raiffeisen-Boerenteenbank B.A., The Fuji Bank
Limited, Mellon Bank, N.A., PNC Bank, National
Association and Suntrust Bank, Central Florida, N.A.
(and the other Lenders, if any, from time to time
party thereto) as Lenders. (6)

10.3 -- Consent, Waiver and Second Amendment to the Amended
and Restated Credit Agreement, dated as of June 30,
1998, among Physician Reliance Network, Inc., as
Borrower, Bank One, Texas, N.A., NationsBank of
Texas, N.A., Banque Paribas, Cooperatieve Centrale
Raiffeisen-Boerenteenbank B.A., The Fuji Bank
Limited, Mellon Bank, N.A., PNC Bank, National
Association and Suntrust Bank, Central Florida, N.A.
(and the other Lenders, if any, from time to time
party thereto) as Lenders. (7)

10.4 -- Third Amendment to the Amended and Restated Credit
Agreement, dated as of August 26, 1998, among
Physician Reliance Network, Inc., as Borrower, Bank
One, Texas, N.A., NationsBank of Texas, N.A., Banque
Paribas, Cooperatieve Centrale
Raiffeisen-Boerenteenbank B.A., The Fuji Bank
Limited, Mellon Bank, N.A., PNC Bank, National
Association and Suntrust Bank, Central Florida, N.A.
(and the other Lenders, if any, from time to time
party thereto) as Lenders. (7)

10.5 -- Registration Rights Agreement, dated as of October 8,
1993, by and among the Registrant, Texas Oncology,
P.A., and certain investors. (3)

10.6 -- Stockholders' Rights Agreement, dated as of September
16, 1994, by and among the Registrant, Texas
Oncology, P.A., and Baylor University Medical Center.
(3)

10.7 -- Lease Agreement, dated as of August 1, 1994, by and
between Baylor Health Care System, as landlord, and
the Registrant, as tenant. (3)
</TABLE>

<PAGE> 60

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
10.8 -- Office Sublease Agreement, dated April 23, 1996,
between Santa Fe International Corporation, as
Landlord, and the Registrant, as Tenant. (8)

10.9 -- Second Amended and Restated Service Agreement,
effective as of November 1, 1998, by and between the
Registrant and Texas Oncology, P.A. (9)

10.10 -- Service Agreement, dated June 30, 1997, by and
between Ilex(TM)Oncology, Inc. and PRN Research, Inc.
(Incorporated by reference to Exhibit 10.4 to Ilex
Oncology, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997). (10)

EXECUTIVE COMPENSATION PLANS AND MANAGEMENT CONTRACTS

10.22 -- 1993 Stock Option Plan, as amended. (11)

10.23 -- 1994 Stock Option Plan for Outside Directors. (3)

10.24 -- Form of Employment Agreement entered into by the
Registrant with Messrs. Casey, French, Murdock, and
McGinn and with Dr. Bailes. (12)

10.25 -- Form of Stock Option Agreement entered into by the
Registrant with Dr. Bailes and Mr. Daly. (13)

10.26 -- Form of Amendment to the Employment Agreements with
Messrs. Casey, McGinn and Murdock.

21 -- Subsidiaries of the Registrant.

23 -- Consent of Arthur Andersen LLP.

27.1 -- Financial Data Schedule, Year Ended December 31,
1998.
</TABLE>

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

(1) Incorporated by reference to the Registrant's Current Report on Form
8-K, dated December 15, 1998.

(2) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996.

(3) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-84436).

(4) Incorporated by reference to the Registrant's Current Report on Form
8-K, dated June 5, 1997.

(5) Incorporated by reference to the Registrant's Registration Statement
on Form 8-A/A dated December 23, 1998.

(6) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.

(7) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.

(8) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996.

(9) Incorporated by reference to the Registrant's Current Report on Form
8-K, dated December 21, 1998.

(10) Confidential treatment has been requested by Ilex(TM)Oncology, Inc.
with respect to certain portions of the Exhibit.

(11) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 333-65171).

(12) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.

(13) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-90996).

<PAGE> 1

EXHIBIT 10.26

January 15, 1999

[Name]
[Address]
Dallas, Texas [zip]

Dear [Name]:

This letter will serve as an amendment to your Employment Agreement dated
___________, 19___. First, Section 1 is amended to provide that the term of the
Agreement shall automatically extend for a period of three (3) years after a
"Change of Control" as that term is defined in your Employment Agreement. For
example, if a Change of Control occurs on March 30, 1999, the Expiration Date of
your Employment Agreement shall be March 30, 2002. Second, the term of the
Noncompetition provisions contained in Sections 7.b.i, ii and iii are extended
to a period of three (3) years.

If you are in agreement with the above amendments to your Employment Agreement,
please so indicate by signing in the appropriate space below and returning this
letter to me.

Sincerely,

[Officer]
[Title]

AGREED TO AND ACCEPTED:

-------------------------------------
[Name]

Date:
-------------------------------

<PAGE> 1

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<CAPTION>
STATE OF INCORPORATION OR
NAME ORGANIZATION
- -------------------------------------- -------------------------------
<S> <C>
TOPS Pharmacy Services, Inc. Texas
PRN Research, Inc. Texas
Physician Reliance Investments, LLC Delaware
PRN Physician Reliance, LLC Texas
Physician Reliance, LP Texas
</TABLE>

<PAGE> 1
EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT

As independent public accountants, we hereby consent to the incorporation
of our report included in the Form 10-K, into the Company's previously filed
Registration Statements Filed No. 33-80955, 33-06983 and 333-65171.

ARTHUR ANDERSEN LLP

Dallas, Texas,
March 24, 1999

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,073
<SECURITIES> 6,975
<RECEIVABLES> 169,346
<ALLOWANCES> 44,413
<INVENTORY> 14,682
<CURRENT-ASSETS> 153,471
<PP&E> 234,136
<DEPRECIATION> 66,682
<TOTAL-ASSETS> 468,499
<CURRENT-LIABILITIES> 56,241
<BONDS> 0
0
0
<COMMON> 515
<OTHER-SE> 334,896
<TOTAL-LIABILITY-AND-EQUITY> 468,499
<SALES> 364,360
<TOTAL-REVENUES> 397,989
<CGS> 285,129
<TOTAL-COSTS> 285,129
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17,345
<INTEREST-EXPENSE> 4,034
<INCOME-PRETAX> 47,410
<INCOME-TAX> 17,657
<INCOME-CONTINUING> 29,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,753
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.56

</TABLE>