PHYSICIANS RESOURCE GROUP INC, 10-Q, 1998-08-18

PHYSICIANS RESOURCE GROUP INC
10-Q, 1998-08-18
SPECIALTY OUTPATIENT FACILITIES, NEC

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<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Quarterly Period ended June 30, 1998

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

For the transition period from _________ to _________

Commission File No. 1-13778

PHYSICIANS RESOURCE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware 76-0456864
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

Three Lincoln Centre, 5430 LBJ Freeway, Suite 1540, Dallas, TX 75240
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code: (972) 982-8200

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 the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.

CLASS OUTSTANDING AT AUGUST 7, 1998
- ------------------------------ -------------------------------
Common Stock, $.01 par value 29,853,355 shares
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

INDEX

PART I. FINANCIAL INFORMATION
---------------------

PAGE
----

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997............................................ 1

Statements of Operations for the six months
ended June 30, 1998 and June 30, 1997 (unaudited)................ 2

Statements of Operations for the three months
ended June 30, 1998 and June 30, 1997 (unaudited)................ 3

Statements of Cash Flows for the six months
ended June 30, 1998 and June 30, 1997 (unaudited)................ 4

Condensed Notes to Financial Statements.......................... 5

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 11

PART II. OTHER INFORMATION
-----------------

Item 1. Legal Proceedings................................................ 17

Item 6. Exhibits and Reports on Form 8-K................................. 19

SIGNATURES................................................................ 26
- ----------

Exhibit 10.49............................................................. 27

Exhibit 11.1.............................................................. 34

Exhibit 27................................................................ 35
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
------ ------------------ -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 19,731 $ 15,056
Accounts receivable, net 30,475 29,517
Income tax receivable 4,406 6,682
Due from affiliates, net 42,393 41,187
Pharmaceuticals and supplies 5,992 5,719
Prepaid expenses and other 2,655 3,328
Assets held for disposition, net 1,600 10,473
Deferred taxes 4,801 4,801
------------------ -----------------
Total current assets 112,053 116,763

PROPERTY AND EQUIPMENT, net 54,024 57,989
INTANGIBLE ASSETS, net 300,283 350,538
ASSETS HELD FOR DISPOSITION, net 8,192 --
OTHER NONCURRENT ASSETS, net 8,402 8,696
------------------ -----------------
Total assets $ 482,954 $ 533,986
================== =================

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES:
Current portion of obligations to affiliates $ 4,528 $ 5,093
Current portion of long-term debt 16,736 15,631
Accounts payable and accrued expenses 24,203 23,779
------------------ -----------------

Total current liabilities 45,467 44,503

LONG-TERM DEBT, net of current portion 125,710 126,343
OBLIGATIONS TO AFFILIATES, net of current portion 20,058 21,559
DEFERRED TAXES 54,928 71,212
OTHER LONG-TERM LIABILITIES 3,710 2,904
------------------ -----------------
Total liabilities 249,873 266,521
------------------ -----------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized,
29,927,000 outstanding in 1998 and 1997 299 299
Preferred stock, $.01 par value, 10,000,000 shares authorized, 200,000
shares outstanding in 1998 and 1997 2 2

Additional paid-in capital 300,058 299,974
Treasury stock, at cost, 227,000 shares in 1998 and 1997 (3,183) (3,183)
Retained deficit (61,870) (27,402)
Note receivable from preferred stock sale (2,225) (2,225)
------------------ -----------------
Total stockholders' equity 233,081 267,465
------------------ -----------------

Total liabilities and stockholders' equity $ 482,954 $ 533,986
================== =================
</TABLE>

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

1
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------------------

1998 1997
---------------- --------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Management services $ 126,825 $ 132,092
Medical services and other 70,583 73,370
---------------- --------------
Total revenues 197,408 205,462
---------------- --------------

COSTS AND EXPENSES:
Salaries, wages and benefits 96,207 102,515
Pharmaceuticals and supplies 24,478 25,320
General and administrative 55,568 47,394
Depreciation and amortization 13,631 11,808
Interest expense, net 5,936 4,654
Asset valuation losses 51,165 --
Patent litigation defense costs 350 1,231
---------------- --------------
Total costs and expenses 247,335 192,922
---------------- --------------

INCOME (LOSS) BEFORE INCOME TAXES (49,927) 12,540
PROVISION (BENEFIT) FOR INCOME TAXES (15,459) 4,668
---------------- --------------
NET INCOME (LOSS) $ (34,468) $ 7,872
================ ==============

NET INCOME (LOSS) PER BASIC SHARE $ (1.16) $ .26
================ ==============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
USED IN BASIC SHARE CALCULATION 29,700 29,975
================ ==============

NET INCOME (LOSS) PER DILUTED SHARE $ (1.16) $ .26
================ ==============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
USED IN DILUTED SHARE CALCULATION 29,700 30,153
================ ==============
</TABLE>

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

2
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
-----------------------------------

1998 1997
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Management services $ 63,442 $ 68,930
Medical services and other 32,686 38,025
--------------- ---------------
Total revenues 96,128 106,955
--------------- ---------------

COSTS AND EXPENSES:
Salaries, wages and benefits 46,618 53,514
Pharmaceuticals and supplies 9,931 13,445
General and administrative 29,010 25,374
Depreciation and amortization 6,941 6,171
Interest expense, net 3,014 2,547
Asset valuation losses 51,165 --
Patent litigation defense costs 268 724
--------------- ---------------
Total costs and expenses 146,947 101,775
--------------- ---------------

INCOME (LOSS) BEFORE INCOME TAXES (50,819) 5,180
PROVISION (BENEFIT) FOR INCOME TAXES (15,972) 1,994
--------------- ---------------
NET INCOME (LOSS) $ (34,847) $ 3,186
=============== ===============

NET INCOME (LOSS) PER BASIC SHARE $ (1.17) $ .11
=============== ===============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
USED IN BASIC SHARE CALCULATION 29,700 30,041
=============== ===============

NET INCOME (LOSS) PER DILUTED SHARE $ (1.17) $ .11
=============== ===============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
USED IN DILUTED SHARE CALCULATION 29,700 30,176
=============== ===============
</TABLE>

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

3
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------------------------
1998 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................... $ (34,468) $ 7,872
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization...................................................... 13,631 12,116
Asset valuation losses............................................................. 51,165 --
Changes in deferred taxes.......................................................... (16,284) --
Gain on sale of practice........................................................... (944) --
Changes in assets and liabilities, net of effects of acquisitions and
disassociations:
Accounts payable and accrued expenses............................................ 1,424 (9,385)
Receivables, net and due from affiliates......................................... (8,128) (10,532)
Pharmaceuticals and supplies..................................................... (273) 150
Prepaid expenses and other....................................................... 855 (5,439)
-------------- ---------------
Net cash provided by (used in) operating activities............................. 6,978 (5,218)
-------------- ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of clinic operating assets, net of cash acquired.......................... -- (8,115)
Additions to property and equipment, net of effects of acquisitions................. (2,425) (6,462)
-------------- ---------------
Net cash used in investing activities........................................... (2,425) (14,577)
-------------- ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on long-term debt, net.......................................... 972 (604)
Net repayments on obligations to affiliates......................................... (2,066) (10,704)
Proceeds from exercise of stock options............................................. -- 236
Purchase of Treasury Stock.......................................................... -- (399)
Proceeds from sale of practice...................................................... 1,216 --
-------------- ---------------
Net cash used in financing activities........................................... 122 (11,471)
-------------- ---------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 4,675 (31,266)
CASH AND CASH EQUIVALENTS, beginning of period....................................... 15,056 53,418
-------------- ---------------
CASH AND CASH EQUIVALENTS, end of period............................................. $ 19,731 $ 22,152
============== ===============

SUPPLEMENTAL INFORMATION:
NONCASH TRANSACTIONS:
Sale of practice and related ASC in exchange for PRG common stock............... $ -- $ 2,500
============== ===============
Receivable from sale of stock................................................... $ -- $ 2,225
============== ===============
</TABLE>

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

4
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The interim condensed consolidated financial statements of Physicians
Resource Group, Inc. and subsidiaries ("PRG" or the "Company") included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. In the opinion of management, the
accompanying unaudited interim condensed consolidated financial statements
contain all adjustments, consisting only of those of a normal recurring nature,
necessary to present fairly the Company's results of operations and cash flows
for the periods presented. The results of operations for the periods presented
are not necessarily indicative of the results to be expected for the full year.

2. CURRENT OPERATING ENVIRONMENT

During the course of late 1996 and early 1997, the Company experienced
significant growth in the number of practices it was affiliated with,
particularly in connection with the acquisition of EyeCorp, Inc. ("EyeCorp"),
American Ophthalmic Incorporated ("AOI") and the ophthalmic division of EquiMed,
Inc. ("EquiMed"). This growth created substantial integration challenges for
PRG relative to its operating infrastructure, as well as to its financial
systems and cash management systems, especially transaction activity between the
individual practices and corporate accounting. Concurrently with these
substantial integration efforts, PRG experienced a significant stock price
decline, which caused the Company to convert its acquisition program from a
stock based to a cash and note based model and to reduce the size of the overall
program. Also, during the course of 1997, litigation relating to the EquiMed
acquisition, patent litigation relating to refractive procedures at certain of
the Company's affiliated practices and various disputes with certain of the
affiliated practices created further demands on corporate resources. Operating
income also began to decline. Cash decreased during 1997 as a result of these
events and an increase in the Company's due from affiliates balance.

In response to these events, the Company, during the latter half of 1997
and early 1998, re-evaluated its strategic position and initiated (1) a review
of its affiliated practice relationships in light of available resources, market
penetration and geographic coverage and (2) a comprehensive review of its due
from affiliates balances. These reviews resulted in a decision by the Company to
begin termination of its affiliations with approximately 44 eye care practices
and a conclusion that certain portions of its due from affiliates balance might
not be realized. This decision and conclusion resulted in the Company incurring
combined pre-tax charges of $76,706,000 during the third and fourth quarters of
1997. In connection with the Company's ongoing review of the disposition
process, the Company recorded additional reserves of $681,000 during the second
quarter of 1998.

In March of 1998, management and the Board of Directors of the Company
began pursuing a plan ("Restructure Plan") that would significantly restructure
the Company by, among other things, (1) lowering the service fees charged to the
affiliated practices; (2) reducing the level of services provided to the
practices; (3) shortening the term of the service agreements significantly; (4)
allowing the affiliated physicians to repurchase, for cash, the tangible assets
and re-employ the practice personnel; and (5) accelerating the payment by the
affiliated physicians/practices of their indebtedness amounts owed to the
Company.

5
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

The proposed Restructure Plan was included in the Company's Proxy Statement
related to the Company's 1998 Annual Stockholder's Meeting for submission to the
Company's stockholders for approval. Concurrent with the Company's efforts to
implement the Restructure Plan, Dr. David Meyer ("Meyer"), a physician
associated with one of the Company's affiliated practices, a former director of
the Company, and the Company's largest shareholder, initiated efforts to develop
a separate restructuring program which was presented to the Board of Directors
in July 1998.

On July 25, 1998, the Company and Meyer entered into a letter of intent
(the "LOI") related to a proposed restructuring of the Company's operations.
The LOI contemplates that the Company will enter into definitive agreements (the
"Definitive Agreements") prior to September 22, 1998, in form and substance
acceptable to the Company and Meyer that provide for the following (collectively
referred to as the "Complete Transaction"):

(i) Following execution of the Definitive Agreements and the
satisfaction of conditions precedent to be contained therein, the
commencement by Meyer and other persons or entities who join with
him (collectively the "Stock Buyers") of a cash tender offer to
purchase at least 10,000,000 and no more than 30,000,000 shares of
the Company's outstanding Common Stock at a price of $5.00 per
share.

(ii) The restructure of management service agreements and other
contractual relationships (collectively, the "Provider Contracts")
between PRG physicians and other providers affiliated with PRG
(collectively, the "Providers") to (a) reduce management fees
payable under the terms of the Provider Contracts, (b) limit the
services to be provided by PRG under the Provider Contracts and (c)
make other adjustments deemed by Meyer or a committee of Providers
selected by him to be appropriate and reasonable.

(iii) Entry by Most Providers (hereafter defined) into agreements with PRG
pursuant to which an amount will be agreed upon by Meyer (or a
committee appointed by him) and the Provider that specifies the
amount of affiliate receivables owed by the Provider to PRG (each a
"Provider Settlement Amount"). As used in the LOI, "Most Providers"
means Providers and Practices (hereafter defined) whose adjusted
gross income (as determined for federal income tax purposes) for the
year ended December 31, 1997 equals or exceeds 75% of the adjusted
gross income of all Providers and Practices.

(iv) The transfer by PRG to the ophthalmic and optometric practices
managed by PRG (the "Practices") of the operating assets used in the
operation of the Practices.

(v) Transfer by PRG to Providers and Practices from which PRG purchased
Ambulatory Surgery Centers (the "ASC's") of an interest in the ASC's
anticipated to be in the range of 25-33%.

Consummation of the transactions contemplated by the LOI is subject to a
number of conditions. Subsequent to the execution of the LOI with Meyer, the
members of the Company's Board of Directors withdrew their approval of the
Restructure Plan and the proposal was not submitted to the shareholders for
approval at the 1998 Annual Shareholders meeting held on July 31, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-1997 and 1998 Activity".

During the second quarter of 1998, the Company received notification from
certain practices of alleged breaches of the Service Agreements and requesting a
cure of the breaches within 60 days. In July 1998, 14 affiliated practices
attempted to unilaterally terminate their Service Agreements due to alleged
uncured defaults. In addition, some of those practices have also initiated
legal proceedings against the Company and certain of its subsidiaries. See Part
II, Other Information, Item 1, Legal Proceedings. The Company intends to
vigorously pursue the matters and enforce the Service Agreements. In connection
with these practices, the Company has recorded pre-tax charges of approximately
$47,000,000 relating to valuation of receivables ($4,326,000) and impairment of
intangible assets ($42,632,000) associated therewith. These practices provided
$30,470,000 of revenue and $4,564,000 of management service fees for the Company
in 1997.

6
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

In the third and fourth quarters of 1998, there are significant debt
service requirements on the Company's credit facility which cannot be funded
strictly from existing cash balances as of June 30, 1998. Management believes
that the Company's existing cash, cash flow from operations, income tax refunds
and cash generated from practice disassociations or other asset dispositions
will be sufficient to allow the Company to meet its planned obligations as they
become due and to remain in compliance with its debt agreement for the remainder
of 1998 and through the second quarter of 1999; provided, however, that the
Company is allowed, under the terms of the LOI, to successfully dispose of
assets and practices in a timely manner and to pursue collection of its
affiliate practice receivables on a timely basis.

3. REVENUE RECOGNITION AND RECEIVABLES

The Company manages its relationship with certain affiliated ophthalmic and
optometric practices under various types of service and management agreements.
The management service revenues earned under these agreements are based on
several different types of arrangements, including percentages of the medical
service revenues or earnings, flat fees and reimbursement of clinic expenses and
are presented as management service revenues on the accompanying consolidated
statements of operations.

Certain states in which the Company operates allow the corporate practice
of medicine. In those states, the Company's revenues are derived from medical
services performed. In addition, the Company owns, operates and manages ASC's
through various arrangements. Revenues derived from company-owned ASC's are
based on facility fees charged to patients and third-party payors for use of the
ASC's. Revenues from managed ASC's are derived from a percentage of earnings as
well as reimbursement of ASC's expenses. ASC's revenues are also net of
contractual adjustments. Revenues earned under these arrangements from majority-
owned ASC's are presented as medical service revenues on the accompanying
consolidated statements of operations; minority-owned ASC's are presented as
management service revenues.

Due from affiliates on the accompanying consolidated balance sheets include
management service receivables, receivables from the practices for certain
expenses paid on their behalf and certain other miscellaneous receivables from
the practices. The receivables due from certain practices are collateralized by
a security interest in the practices' receivables from third-party payors and
patients.

In the latter half of 1997 and early 1998, the Company conducted an in-
depth review of its due from affiliates balances, which resulted in certain
procedural changes relating to account collection and an increase in the
allowance related to these receivables to $11,322,000 as of December 31, 1997
and March 31, 1998. The Company continued to monitor its due from affiliate
balances during the quarter ended June 30, 1998. In conjunction with that
review, the Company recorded additional allowances against these receivables of
$7,852,000 in the second quarter of 1998. Included in this charge is $4,326,000
associated with certain practices which are parties to litigation with PRG, as
discussed in Note 2. Management believes the allowances provided to date are
adequate to provide for any amounts that are not realizable. However, the
Company continues to monitor its due from affiliates balances and there can be
no assurances that additional allowances will not be recorded in the future.

4. ASSETS HELD FOR DISPOSITION

As discussed in Note 2, during the latter half of 1997 and early 1998, the
Company made a decision to terminate its affiliation with approximately 44 eye
care practices through either sale or disposition, or, with respect to certain
smaller optometry practices, significant restructuring of their agreements. In
connection therewith, pre-tax allowances of approximately $66,065,000 have been
provided for losses to be incurred in this process. As of December 31, 1997,
the Company anticipated the sale and disposition process to be completed during
1998, and reclassified the net assets of these practices, including the related
intangible assets, into "Assets Held for Disposition" on the accompanying
consolidated balance sheets, net of such allowances. Due to restrictions
imposed upon the Company by the LOI, only those assets for which a definitive
sales agreement has been entered into, have been classified as current in the
accompanying balance sheet, as of June 30, 1998. The remaining net assets held
for disposition have been reclassified as long-term in the accompanying balance
sheet as of June 30, 1998. In spite of the

7
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

long-term classification of these assets, management intends to dispose of them
as permitted under the LOI and no assurances can be made that they will not be
disposed of within the next twelve months.

The following is a table which reflects the carrying value of the assets
and liabilities reclassified into "Assets Held for Disposition" as of June 30,
1998:

DESCRIPTION JUNE 30, 1998
----------- ---------------
(000'S)
---------------

Current assets............................................. $ 15,401
Property and equipment..................................... 10,618
Intangible and other non-current assets.................... 52,387
Liabilities assumed........................................ (16,650)
---------------
Net assets held for disposition............................ 61,756
Less Asset valuation allowances.......................... (51,964)
---------------
Assets held for disposition................................ 9,792
Less current portion..................................... (1,600)
---------------
Long-term assets held for disposition, net................. $ 8,192
===============

5. CREDIT FACILITY

On April 30, 1998, in response to the loan covenant violations under the
Company's $90,000,000 credit facility, the Company established a smaller
$14,000,000 credit facility with NationsBank, of which $14,000,000 had been
borrowed as of June 30, 1998. The credit facility is secured by a security
interest in all service agreements, accounts receivable and general intangibles
of the Company. In addition, the credit facility is partially guaranteed by one
current member of the Company's Board of Directors, and Meyer, the Company's
largest shareholder, and party to the LOI contemplated by the Company and
discussed more fully in Note 2. Guarantor fees through June 30, 1998 total
$780,000. The terms of the loan require the Company to reduce the principle
balance to $9,500,000 by September 30, 1998; the remaining principle matures on
December 31, 1998. Interest rates on borrowings are LIBOR plus 2.5%.

The loan covenant requires the Company to apply 75% of the gross proceeds
of asset dispositions of less than an aggregate of $1,000,000 to the permanent
reduction of the principle amount outstanding under the credit facility. In
compliance with loan covenants, in July 1998, the Company applied $281,228
against the outstanding principle balance. As of August 7, the unpaid principle
balance on the loan was $13,718,772.

On July 31, 1998, the Company received notification from NationsBank of an
acceleration of an affiliate practice loan, on which PRG is a guarantor,
resulting from loan covenant violations by PRG at December 31, 1997, which were
cured in the establishment of the new credit facility in April 1998, as
previously discussed. Non-payment of the accelerated loan carrying a principle
balance of approximately $1,100,000 would result in default under the affiliate
practice loan and would cause an event of default under the Company's loan
covenant. The practice has until October 10, 1998 to cure the default. The
Company intends to provide assistance necessary to allow the affiliated practice
to cure the default, including but not limited to providing assistance in
refinancing the loan with another institution. Currently the Company expects
the affiliate's default to be cured prior to October 10, 1998.

As a result of additional reserves made against affiliate receivables and
intangible assets associated with practice litigation and ongoing affiliate
receivable collectibility issues as discussed in Notes 2 and 3, the Company was
in breach of the financial covenants contained in the Company's amended credit
facility. However, the Company's bank lenders have provided a waiver with
respect to default.

8
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

At June 30, 1998, cash was $19,731,000, including practice operating funds
of approximately $14,551,000. In the third and fourth quarters of 1998, there
are significant debt service requirements on the Company's credit facility which
cannot be funded strictly from existing cash balances as of June 30, 1998.
Management believes that the Company's existing cash, cash generated from
operations, income tax refunds and cash generated from practice disassociations
or other asset dispositions will be sufficient to allow the Company to meet its
planned obligations as they become due and to remain in compliance with its debt
agreement for the remainder of 1998; provided, however, that the Company is
allowed, under the terms of the LOI, to successfully dispose of assets and
practices in a timely manner and to pursue collection of its affiliate practice
receivables on a timely basis.

6. INTANGIBLE ASSETS

Intangible assets consist of the value of the non-physician employee
workforce, goodwill associated with ASC's acquisitions, and management service
agreements. All intangibles are amortized over varying periods on a straight-
line basis. Workforce intangibles are amortized over seven years. Amounts paid
for ASC's acquisitions in excess of the net assets acquired are treated as
goodwill and are amortized over 40 years. Effective January 1, 1998, the Company
reduced its maximum period of amortization from 40 years to 25 remaining years
as the useful life for amortization of its management service agreements. This
change in accounting estimate was made to reflect a more conservative
amortization period for management service agreement intangible assets regarding
the use of amortization periods in excess of 25 years on a prospective basis.
During the first and second quarters of 1998, additional amortization of
approximately $1,700,000 was recognized.

In July 1998, the Company received notification from several of its
affiliated practices claiming termination of the service agreements and/or
initiating legal proceedings against the Company, as discussed more fully in
Note 2. During the second quarter of 1998, the Company recorded pre-tax
allowances of $42,632,000 against intangible assets associated with these
practices.

In connection with any significant restructuring of the Company's Provider
Contracts, as currently contemplated under the LOI, the Company will assess
whether a significant write-down of intangible assets is appropriate. The
Company, however, will not be in a position to determine appropriate amounts of
any such write-down until definitive agreements are reached with respect to a
restructuring.

7. COMMITMENTS AND CONTINGENCIES

The Company and certain of its officers and directors have been named in
six class action lawsuits, all pending in the U.S. District Court for the
Northern District of Texas. These class action lawsuits make various
allegations of violation of the federal securities laws (specifically Sections
10 and 20 of the Securities Exchange Act of 1934) including misrepresentations
and omissions of material facts in connection with purchases and sales of the
Company's securities. Damages are claimed but unspecified as to amount. The
Company has filed a motion requesting consolidation of these six lawsuits into
one action and intends to vigorously defend against the various claims alleged.

During 1996, the Company acquired a practice that is a party to litigation
regarding alleged infringement of three patents related to certain refractive
surgical procedures. The practice believes that its procedure does not infringe
the patented procedures. PRG is assisting in the defense of this litigation due
to the potential impact on certain other practices. The Company has incurred
$3,433,000 of legal expense related to this litigation through June 30, 1998 and
expects to incur additional costs associated with this litigation throughout
1998, but has not agreed to be responsible for any damage amounts that might be
awarded against the practices. Management of the Company believes that while
the outcome of this litigation will not have a material impact on its financial
condition or results of operations, the legal costs associated with this
litigation to date have had a material impact on the Company's results of
operations in 1997 and may continue to have a material impact during 1998.

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PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

On May 15, 1997, EquiMed initiated arbitration proceedings against the
Company and a wholly-owned subsidiary of the Company before the American
Arbitration Association, Philadelphia, Pennsylvania. EquiMed alleged breach of
contract, fraud, trespass and conversion based principally on the alleged
failure of the Company to cooperate with EquiMed in completing follow-on
acquisitions that could have resulted in the payment of additional consideration
to EquiMed, and the alleged failure by the Company to provide EquiMed with
access to EquiMed's accounting records. EquiMed has asserted entitlement to
damages in excess of $30,000,000 plus punitive damages, costs and attorneys'
fees. PRG intends to vigorously defend such claims and has asserted a
counterclaim against EquiMed for damages in excess of $45,000,000. The
arbitration hearing is currently scheduled to begin October 26, 1998.

On April 8, 1997, a lawsuit was filed against AOI and the Company by one of
its affiliated practices (as well as certain of the practitioners) acquired in
the AOI transaction. The plaintiffs allege breach of contract, breach of
fiduciary duty and imposition of constructive trust, civil conspiracy,
interference with prospective advantage and negligent misrepresentation arising
from a January 1996 series of agreements. The plaintiffs seek injunctive relief
and recovery of alleged actual and consequential damages in excess of
$50,000,000 and exemplary damages of $50,000,000. A settlement agreement in
principle has been reached between the parties and the parties are drafting
settlement documents. Under the proposed settlement agreement, the lawsuit
would be dismissed with prejudice, the arbitration proceeding would be
terminated, the parties would jointly release all claims, demands and causes of
action against one another and certain other contractual agreements would be
entered into. However, there can be no assurance that the settlement agreement,
as proposed, will be finalized.

During the course of 1997, one of the affiliated practices acquired in the
AOI transaction brought suit against the Company alleging breach of a promissory
note of approximately $6,000,000. The Company is vigorously defending this
action and has asserted a number of affirmative defenses, including illegality,
mutual mistake and scrivener's error.

An affiliated practice brought suit against the Company and certain other
individuals on November 19, 1997. The practice alleges failure to perform and
violations of the Federal Anti-Kickback Statute and the Texas Illegal
Remuneration Act. The Company is vigorously defending this action.

On July 23, 1997, an affiliated practice initiated arbitration proceedings
against the Company and some of its subsidiaries before the American Arbitration
Association, Dallas, Texas. The practice seeks to terminate the service
agreement and obtain damages. The arbitration hearing was concluded in July
1998. The parties are currently briefing post-hearing matters. It is expected
that the panel will reach a decision thirty days following submission of final
briefs.

On July 23, 1998, six affiliated practices brought suit against the Company
and certain of its subsidiaries alleging securities laws violations, fraud,
civil conspiracy, negligent misrepresentation and breach of contract. The
Company intends to vigorously defend such claims.

As indicated above with respect to the class action lawsuits, the patent
lawsuit, the EquiMed arbitration, the AOI acquisition disputes and the
affiliated practice disputes, the Company intends to defend each of the claims
vigorously and does not believe that, with the exception of the potential effect
of ongoing legal expenses, the actions will have a material adverse effect on
the financial condition or results of operations of the Company.

In the normal course of business, certain of the affiliated physician
groups have been named in lawsuits alleging medical malpractice. In the opinion
of the Company's management, the ultimate liability, if any, without considering
possible insurance recoveries, will not have a material impact on the Company's
financial position, results of operations or cash flows. Additionally, the
Company's affiliated physician groups and the Company are insured with respect
to medical malpractice risks on a claims-made basis.

The Company is also involved in certain other lawsuits in the normal course
of business. In the opinion of the Company's management, the ultimate liability,
if any, will not have a material impact on the Company's financial position or
results of operations.

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PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

General

PRG began operations in 1995 and is a provider of physician practice
management services to ophthalmic and optometric practices and one of the
nation's largest single-specialty physician practice management companies. PRG
develops integrated eye care delivery systems through affiliations with locally
prominent eye care practices in selected geographic markets across the United
States. PRG acquires the operating assets of these practices and develops the
practices into comprehensive eye care networks by providing management
expertise, marketing, information systems, capital resources and ancillary
services such as ASC's and optical dispensaries. As of August 7, 1998, PRG was
affiliated with 127 eye care practices that were staffed with 401
ophthalmologists and 180 optometrists at 342 locations in 22 states.

Company Growth

PRG was incorporated in 1993 but did not conduct any significant operations
until its initial public offering (the "IPO") and reorganization in June 1995
(the "Reorganization") at which time the Company began providing practice
management services to its initial 10 practices. No further acquisitions were
made during 1995. During 1996, however, the Company made a substantial number
of acquisitions beginning in February, including acquisitions accounted for as
poolings of interests as well as various purchase transactions. The Company
acquired both the assets of individual practices, as well as three large
physician practice management companies. In 1997, the Company continued to
acquire the assets of additional eye care practices, but concentrated on in-
market acquisitions. These in-market acquisitions were designed primarily to
expand existing PRG affiliated practices, as opposed to necessarily increasing
the number of practices with which PRG was affiliated. The Company also
restructured the terms of its agreements with certain practices during 1997
(primarily a number of smaller optometry practices), which resulted in either
the complete termination of any affiliation with these practices or the
elimination of any significant relationship. Additionally, during late 1997 and
early 1998, the Company made a decision to terminate its affiliations with a
number of other practices and to sell and/or dispose of the assets and
liabilities associated therewith. This decision and the effects resulting
therefrom are discussed in more detail below.

1997 and 1998 Activity

At various times during 1997, the Company acquired, in purchase
transactions, the assets of 27 eye care practices and three ASC's. Aggregate
consideration for these acquisitions was $37,790,000 in cash, promissory notes,
convertible promissory notes and common stock (valued at the market price on
date of issuance). In addition to these practice asset and ASC acquisitions,
the Company developed two ASC's in 1997. These acquisitions and development
projects collectively strengthened PRG's position in Louisiana, California,
Pennsylvania, Kentucky, Ohio, Texas, Arizona, Florida, Tennessee, Nevada, New
York and New Jersey. Seventeen of these 27 acquisitions were combined into
existing PRG practices.

As more fully discussed in Note 2 of Condensed Notes to Consolidated
Financial Statements, PRG initiated, during the latter half of 1997, a strategic
review of its assets, operations and available resources. As a result of such
review, the Company decided, during the third and fourth quarters of 1997, to
begin the process of terminating its affiliations with approximately 44
practices and to sell and/or dispose of certain of the assets and liabilities
associated therewith. In connection with such process, the Company recorded pre-
tax charges of approximately $65,384,000 in 1997 with respect to (1) the
anticipated future dispositions of these practice assets and liabilities, and
(2) the anticipated losses on the disposition of seven smaller optometry
practice affiliations effectively terminated in an agreement restructuring
process. In connection with the Company's ongoing review of the disposition
process, the Company recorded additional reserves of $681,000 during the second
quarter of 1998.

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PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

In March of 1998, management and the Board of Directors of the Company
began pursuing a plan that would significantly restructure the Company and that
would require physician acceptance and shareholder approval to be successful.
The proposed Restructure Plan was included in the Company's Proxy Statement
related to its 1998 Annual Meeting of Stockholders for submission to the
shareholders for approval. Concurrent with the Company's efforts to develop the
Restructure Plan, Meyer initiated efforts to develop a separate restructuring
program which was presented to the Board of Directors in July 1998.

On July 25, 1998, the Company and Meyer entered into the LOI related to a
proposed restructuring of the Company's operations. The LOI contemplates that
the Company will enter into Definitive Agreements prior to September 22, 1998,
in form and substance acceptable to the Company and Meyer that provide for the
following Complete Transaction:

(i) Following execution of the Definitive Agreements and the
satisfaction of conditions precedent to be contained therein, the
commencement by Meyer and Stock Buyers of a cash tender offer to
purchase at least 10,000,000 and no more than 30,000,000 shares of
the Company's outstanding Common Stock at a price of $5.00 per
share.

(ii) The restructure of Provider Contracts between PRG and the Providers
to (a) reduce management fees payable under the terms of the
Provider Contracts, (b) limit the services to be provided by PRG
under the Provider Contracts and (c) make other adjustments deemed
by Meyer or a committee of Providers selected by him to be
appropriate and reasonable.

(iii) Entry by Most Providers into agreements with PRG pursuant to which
an amount will be agreed upon by Meyer (or a committee appointed by
him) and the Provider as the Provider Settlement Amount.

(iv) The transfer by PRG to the Practices of the operating assets used in
the operation of the Practices.

(v) Transfer by PRG to Providers and Practices from which PRG purchased
the ASC's of an interest in the ASC's anticipated to be in the range
of 25-33%.

The LOI contemplates that in connection with consummation of the Complete
Transaction, each Provider that enters into a restructuring agreement with PRG
will receive a number of newly issued shares of PRG Common Stock equal to his
Provider Restructure Settlement Amount divided by $5.00 less any amount paid by
the Provider for PRG Common Stock in the proposed tender offer.

There can be no assurance that PRG will be able to successfully negotiate
and execute Definitive Agreements with Meyer or that the transactions
contemplated by the Definitive Agreements will be consummated. Execution of the
Definitive Agreements is subject to a number of conditions, including (i)
receipt by PRG of an opinion of an investment banking firm acceptable to PRG and
Meyer that the terms of the Complete Transaction are fair to the stockholders of
PRG from a financial point of view; (ii) receipt by Meyer of certain assurances
related to participation by others in the purchase of at least 5,000,000 shares
of PRG Common Stock in the tender offer; (iii) receipt by Meyer of financing
commitments for the tender offer in amounts and terms satisfactory to him; and
(iv) Meyer's satisfaction that in the event of an acceleration of PRG's
indebtedness related to its outstanding convertible subordinated debentures as
the result of the tender offer or any default in payment, the Company's existing
debenture holders will agree to a restructuring of their debt on terms
satisfactory to Meyer or the Company will be able to refinance such indebtedness
on terms satisfactory to Meyer. Conditions to consummation of the Complete
Transaction include receipt of requisite governmental and third party consents,
resolution of stockholder claims and litigation against PRG to the satisfaction
of Meyer and the resolution by Providers whose adjusted gross income (as
determined for federal income tax purposes) for the year ended December 31, 1997
equals or exceeds 90% of the adjusted gross income of all Providers for the year
ended December 31, 1997.

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PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

Meyer is a former director of PRG, the largest single stockholder and
controls one of the largest Practices managed by PRG (the "VRF"). PRG has
reflected on its June 30, 1998 balance sheet affiliate receivables, from VRF of
$2,078,000, against which allowances of $1,730,000 have been recorded at June
30, 1998. Certain elements of the receivables are disputed by Meyer and VRF.

The LOI provides that it may be terminated by PRG prior to December 31,
1998 under very limited circumstances. The LOI contains standstill provisions
restricting PRG's ability to discuss with others potentially conflicting
transactions during the term of the LOI, provides for the payment to a charity
selected by Meyer of a break up fee in the amount of $1,000,000 under certain
circumstances and contemplates that the Definitive Agreements will provide for
the payment of a break up fee to Meyer under certain circumstances in the amount
of $10,000,000 in the event similar standstill provisions therein are breached.

During the second quarter of 1998, the Company received notification from
certain practices of alleged breaches of the Service Agreements and requesting a
cure of the breaches within 60 days. In July 1998, 14 affiliated practices
attempted to unilaterally terminate their Service Agreements due to alleged
uncured defaults. In addition, several practices have also initiated legal
proceedings against the Company and certain of its subsidiaries. The Company
intends to vigorously pursue the matters and enforce the Service Agreements. In
connection with these practices, the Company has recorded pre-tax charges of
approximately $47,000,000 relating to receivables and intangible assets
associated therewith.

On August 3, 1998, the Company received a letter from the New York Stock
Exchange (the "NYSE") indicating that the NYSE believes that the Company falls
below the NYSE's continued listing criteria. The NYSE has provided the Company a
30-day period to make a submission supporting a recommendation for continued
listing of the PRG Common Stock on the NYSE. The Company intends to make such a
submission, but there can be no assurance that the submission will be
successful.

RESULTS OF OPERATIONS

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997

Revenues

Total revenues for the six months ended June 30, 1998 decreased $8,054,000
or 4% from the six months ended June 30, 1997. Both management service fees and
medical service fees dropped 4%, respectively. The decrease in revenues is the
result of the cessation of operations of affiliated practices and increases in
contractual allowances at the Company's remaining practices.

Costs and Expenses

Salaries, wages and benefits for the six-month period ended June 30, 1998
decreased $6,308,000 from the six-month period ended June 30, 1997. As a
percent of total revenues, these expenses remained relatively comparable from
period to period. The decrease in dollar amounts is attributable primarily to
the cessation of operations at affiliated practices and resultant reduced
personnel levels.

Pharmaceuticals and supplies for the six months ended June 30, 1998
decreased 3% as compared to the six months ended June 30, 1997. These expenses
as a percent of total revenue remained at 12% for both six-month periods. The
decreased dollar amount is due in part to a reclassification of expenses
associated with the managed care activities from pharmaceutical and supplies to
general and administrative expenses.

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<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

General and administrative expenses for the first half of 1998 increased
$8,174,000, or 17% over the first half of 1997. As a percent of total revenue,
general and administrative expenses increased 5%. The increase is due primarily
to significantly increased usage of leased laser equipment, higher expenses
associated with managed care, increased accounting and consulting fees and debt
guarantee fees.

Depreciation and amortization expense for the six months ended June 30,
1998 increased 15% over the six months ended June 30, 1997. Substantially all
of the increase is due to the reduction of useful lives for the intangible
assets associated with management service agreements from 40 to 25 years
prospectively, as adopted in January 1998.

Interest expense, net, for the first six months of 1998 increased 28% over
the first six months of 1997. The increase is due to higher levels of
outstanding debt and lower cash balances as compared to the same period in 1997.

Asset valuation reserves totaling $51,165,000 were recorded during the
second quarter of 1998 for increases in allowances against affiliate receivables
of $7,852,000, impairment of intangible assets of $42,632,000 and additional
charges associated with the disposal of affiliate practices of $681,000. See
Notes 2 and 3 of the Condensed Notes to the Financial Statements for a more
complete discussion of the issues surrounding these charges.

Patent litigation defense costs for the first half of 1998 decreased
$881,000 from the first half of 1997. This decrease is due to lessened activity
in the Pillar Point litigation as discussed in Part II, Legal Proceedings.

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997

Revenues

Total revenues for the three months ended June 30, 1998 decreased
$10,827,000, or 10% from the three months ended June 30, 1997. Management
service fees decreased 8% and medical service fees decreased 14%. The 10%
decrease in revenues is largely the result of the cessation of operations at
affiliated practices.

Cost and Expenses

Salaries, wages and benefits for the three-month period ended June 30, 1998
decreased $6,896,000 from the three-month period ended June 30, 1997. As a
percent of total revenue, these expenses decreased from 50% for the quarter
ended June 30, 1997 to 48% for the quarter ended June 30, 1998. The decrease is
attributable primarily to the cessation of operations at affiliated practices
and resultant reduced personnel levels.

Pharmaceuticals and supplies expenses for the three months ended June 30,
1998 decreased 26% as compared to the three months ended June 30, 1997. The
decrease as a percent of total revenue is 3% when compared to the comparable
quarter in 1997. The decrease is due in part to a reclassification of expenses
associated with the managed care activities from pharmaceuticals and supplies to
general and administrative expenses.

General and administrative expenses for the second quarter of 1998
increased $3,636,000, or 14% over the first half of 1997. As a percent of total
revenue, general and administrative expenses increased 6%. The increase is due
primarily to significantly increased usage of leased laser equipment, increased
expenses associated with managed care, increased accounting and consulting fees
and debt guarantee fees.

Depreciation and amortization expense for the three months ended June 30,
1998 increased 12% over the three months ended June 30, 1997. Substantially all
of this increase is due to the reduction of useful lives for the intangible
assets associated with management service agreements from 40 to 25 years
prospectively, as adopted in January 1998.

Interest expense, net, for the first three months of 1998 increased 18%
over the first three months of 1997. The increase is due to higher levels of
outstanding debt and lower cash balances as compared to the 1997 period.

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PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

Patent litigation defense costs for the first half of 1998 decreased
$456,000 from the first half of 1997. This decrease is due to lessened activity
in the Pillar Point litigation as discussed in Part II, Legal Proceedings.

LIQUIDITY AND CAPITAL RESOURCES

Cash, Working Capital and Debt

During the six months ended June 30, 1998, the Company continued to
implement strategic initiatives begun in 1997, as discussed in Note 2 of the
Condensed Notes to the Financial Statements. In spite of increases in trade and
affiliate accounts receivable, cash from operations was positive at $6,978,000
and was used to fund additions to property and equipment and net repayments on
obligations to affiliates. Accordingly, net cash flow was $4,675,000 for the
six months ended June 30, 1998.

On April 30, 1998, the Company established a $14,000,000 credit facility
with NationsBank, which is secured by a security interest in all service
agreements, accounts receivable and general intangibles and bears interest at
the rate of LIBOR plus 2.5%. As of June 30, 1998, $14,000,000 had been
borrowed under this credit facility, of which $4,500,000 is due by September 30,
1998 and the remaining balance is due by December 31, 1998. The loan covenant
requires the Company to apply 75% of the gross proceeds of asset dispositions of
less than an aggregate of $1,000,000 to the permanent reduction of the principle
amount outstanding under the credit facility. In compliance with loan
covenants, in July 1998, the Company applied $281,228 against the outstanding
principle balance. As of August 7, the unpaid principle balance on the loan was
$13,718,772. The Company is required to reduce the unpaid principle to
$9,500,000 on or prior to September 30, 1998. This payment requirement will
place a significant strain on the Company cash and working capital needs.

On July 31, 1998, the Company received notification from NationsBank of an
acceleration of an affiliate practice loan on which PRG is a guarantor resulting
from loan covenant violations by PRG at December 31, 1997, which were cured in
the establishment of the new credit facility in April 1998. Non-payment of the
accelerated loan carrying a balance of $1,100,000 would result in a default
under the affiliate practice loan and would cause an event of default under the
Company's loan covenant. The practice has until October 10, 1998 to cure the
default. The Company intends to provide assistance necessary to allow the
affiliated practice to cure the default, including but not limited to providing
assistance in refinancing the loan with another institution. Currently, the
Company expects the default to be cured prior to October 10, 1998.

As a result of additional reserves made against affiliate receivables and
intangible assets associated with practice litigation and ongoing affiliate
receivable collectibility issues, as discussed in Notes 2 and 3, the Company was
in breach of the financial covenants contained in the Company's amended credit
facility. However, the Company's bank lenders have provided a waiver with
respect to default.

At June 30, 1998, cash was $19,731,000, including practice operating funds
of approximately $14,551,000. In the third and fourth quarters of 1998, there
are significant debt service requirements on the Company's credit facility which
cannot be funded strictly from existing cash balances as of June 30, 1998.
Management believes that the Company's existing cash, cash generated from
operations, income tax refunds and cash generated from practice disassociations
or other asset dispositions will be sufficient to allow the Company to meet its
planned obligations as they become due and to remain in compliance with its debt
agreement for the remainder of 1998 and through the second quarter of 1999,
provided that the Company is allowed, under the terms of the LOI, to
successfully dispose of assets and practices in a timely manner and to pursue
collection of its affiliate practice receivables in a timely manner.

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PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

Certain statements in this Form 10-Q consist of forward-looking statements
that involve risks and uncertainties, including the Company's ability to
successfully service and integrate eye care providers, regulatory developments,
the ability to adapt to the managed care environment, dispose of certain assets
and practices in a timely and orderly manner, collect receivables and other
risks detailed from time to time in the reports filed by the Company with the
Securities and Exchange Commission, including Form 10-K dated December 31, 1997.

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PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

EquiMed Inc. v. Physicians Resource Group, Inc. and PRG Georgia, Inc.
On May 15, 1997, EquiMed, Inc. initiated arbitration proceedings against the
Company and a wholly-owned subsidiary of the Company before the American
Arbitration Association, Philadelphia, Pennsylvania, alleging breach of
contract, fraud, trespass, conversion and indemnity based principally on the
alleged failure of the Company to cooperate with EquiMed in completing follow on
acquisitions that could have resulted in the payment of additional consideration
to EquiMed and the alleged failure by the Company to provide EquiMed with access
to EquiMed's accounting records. EquiMed has asserted damage claims in excess of
$30,000,000 plus punitive damages, costs and attorneys' fees. PRG intends to
vigorously defend such claims and has asserted a counterclaim against EquiMed
for damages in excess of $45,000,000. The arbitration hearing is currently
scheduled to begin October 26, 1998.

Pillar Point Partners, Summit Partners, Inc. and VISX Partners, Inc. v.
David Dulaney and Anne Marie Dulaney, Ronald Barnet and Teri Lynn Barnet, Barnet
Dulaney Eye Center, P.L.L.C. and Sun Valley Acquisition Corp. Pillar Point
Partners, Summit Partners, Inc. and VISX Partners, Inc. initiated this patent
infringement suit against a PRG affiliated practice in the U.S. District Court
for the District of Arizona. The plaintiffs allege that the refractive procedure
performed by the physicians associated with this practice infringes certain
patents owned by the plaintiffs. The defendants have asserted defenses of
non-infringement and invalidity of the patents. The action was recently amended
to include a wholly-owned subsidiary of the Company. PRG has agreed to be
responsible for the payment of the practices attorneys fees and costs associated
with this action, but has not agreed to be responsible for any damage awards
that may be awarded against the practice. To the extent that PRG is involved in
the action, it intends to vigorously defend such claims.

The Company and certain of its officers and directors have been sued in six
class action suits that are pending in the United States District Court for the
Northern District of Texas, Dallas Division. Each suit alleges violations of
Sections 10 and 20 of the Securities Exchange Act of 1934 including,
misrepresentations and omissions of material facts in connection with purchase
and sale of the Company's securities. The plaintiffs seek compensatory damages,
legal interest and attorneys' fees. The Company has filed a motion requesting
that these six lawsuits be consolidated into one action and intends to
vigorously defend against the claims alleged in the suits. The suits are styled
as follows: (i) Howard Longman, On Behalf of Himself and All Others Similarly
Situated vs. Physicians Resource Group, Inc., and Emmett E. Moore (filed on
December 18, 1997); (ii) Jeffrey Schiller and Diversified Investment Holdings
LP, On Behalf of Themselves and All Others Similarly Situated vs. Physicians
Resource Group, Inc., Emmett E. Moore, Richard M. Owen, Richard J. D'Amico and
John N. Bingham (filed on December 23, 1997); (iii) Regina Peltz, On Behalf of
Herself and All Others Similarly Situated vs. Physicians Resource Group, Inc.,
and Emmett E. Moore (filed on December 29, 1997); (iv) Bob E. Hall, On Behalf of
Himself and All Others Similarly Situated vs. Physicians Resource Group, Inc.
and Emmett E. Moore (filed on February 3, 1998); (v) William G. Rutherford, On
Behalf of Himself and All Others Similarly Situated vs. Physicians Resource
Group, Inc. and Emmett E. Moore, Richard M. Owen, Richard J. D'Amico and John N.
Bingham (filed on February 3, 1998); and (vi) City of Philadelphia, by and
through its Board of Pensions and Retirement, On Behalf of Itself and All Others
Similarly Situated vs. Physicians Resource Group, Inc. and Emmett E. Moore,
Richard M. Owen, Richard J. D'Amico and John N. Bingham (filed on February 20,
1998).

Eye Care Austin, P.A., Tom R. Walter, M.D., Julia B. Sargent, M.D. and
Steven J. Dell, M.D. vs. American Ophthalmic, Inc., American Ophthalmic of
Texas, Inc. and Physicians Resource Group, Inc., Cause No. 97-03757, 98th
Judicial District Court of Travis County was filed on April 8, 1997. The
plaintiffs allege breach of contract, breach of fiduciary duty and imposition of
constructive trust, civil conspiracy, interference with prospective advantage
and negligent misrepresentation arising from a January 1996 series of
agreements. The plaintiffs seek injunctive relief and recovery of actual and
consequential damages in excess of $50,000,000 and exemplary damages of
$50,000,000. A settlement agreement has been reached, in principle, between the
parties and the parties are drafting settlement documents. Under the proposed
settlement agreement, the lawsuit would be dismissed with prejudice, the
arbitration proceeding would be terminated, the parties would jointly release
all claims, demands and causes of action against one

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PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

another and certain other contractual agreements would be entered into relating
to the development of an ASC. No assurance can be provided that the settlement
will be finalized.

Sahara-Lindell Surgery Centers, Inc. vs. American Surgery Centers of
Las Vegas, Inc., American Surgery Centers of Las Vegas Limited Partnership and
Does I through X was filed on October 22, 1997 in the District Court, Clark
County, Nevada for breach of a promissory note. Damages sought are in excess of
$7,000,000. The defendants are affiliates of the Company. The Company is
vigorously defending the suit and has asserted a number of affirmative defenses,
including illegality, mutual mistake and scrivener's error. Trial of the matter
is expected in late 1998 or early 1999, but no setting has been received.

RGB Eye Associates, P.A., Robert Burlingame, M.D., JW Eye Associates,
P.A., Jeffrey Whitman, M.D., Lawrence A. Shafron, M.D., P.A., Lawrence A.
Shafron, M.D., RC Eye Associates, P.A., Rudolf Churner, M.D., JMH Eye
Associates, P.A., John M. Haley, M.D., SAW Eye Associates, P.A., and Shelby A.
Wyll, M.D., vs. Physicians Resource Group, Inc., Texas PRG VII, Inc., Texas PRG
V, Inc., Texas PRG VI, Inc., Texas PRG XV, Inc., Texas PRG II, Inc., and Texas
PRG III, Inc., was filed on July 23,1998 in the U.S. District Court for the
Northern District of Texas, Dallas Division. The plaintiffs allege violations of
Section 10 of the Securities Exchange Act of 1934, Article 581-33 of the
Securities Act of the State of Texas, violations of Section 27.01 of the Texas
Business and Commerce Code, statutory and common law fraud, civil conspiracy,
negligent misrepresentation and breach of contract. The plaintiffs seek
declaratory judgement that (i) the agreements violate the Federal Anti-Kickback
Statute and (ii) plaintiffs have lawfully terminated the agreements. Plaintiffs
also seek unspecified damages. The Company intends to vigorously defend this
action.

W. Stephen Ku, M.D., Steven L. Elieff, M.D., WSI Eye Associates, P.A.
v. Physicians Resource Group, Inc., Emmett E. Moore, individually, Richard M.
Owen, individually, Richard J. D'Amico, individually, Mark P. Kingston,
individually and Michael Beck individually, was filed on November 19, 1997 in
the U.S. District Court of the Northern District of Texas. The plaintiffs allege
violations of the Federal Anti-Kickback Statute, Texas Health and Safety Code
ss.161.091 et seq., violation of the prohibition against the practice of
medicine by corporations under Texas state law, breach of the service agreement,
violation of ss.ss. 11 and 12(2) of the 1933 Securities Act, and violation of
the Texas Securities Act. Plaintiffs seek actual damages, rescission, punitive
damages and attorney's fees. The Company has filed a counterclaim. This matter
was originally filed in state court and has been removed to federal court. The
Company intends to vigorously defend this action.

Stuart J. Kaufman, M.D. and Stuart J. Kaufman, M.D. and Associates,
P.A., v. Physicians Resource Group, Inc. and PRG Florida I, Inc., is pending
before the American Arbitration Association, Dallas, Texas. The Demand for
Arbitration was made by plaintiffs on July 23, 1997. Plaintiffs seek termination
of the service agreement and damages in excess of $1,900,000. The arbitration
hearing was concluded in July 1998, post-hearing briefing will be completed
August 17, 1998, and a ruling is anticipated by September 17, 1998.

The Company is also involved in various other disputes or lawsuits,
certain of which are asserted by affiliated practices in relation to the service
agreements. In the opinion of the Company's management, the ultimate liability,
if any, will not have a material impact on the Company's financial position or
results of operations, nor will they result in material modification of the
service agreements.

18
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit
Number Description
------- -----------

2.1 -- Amended and Restated Agreement and Plan of Merger
by and among Physicians Resource Group, Inc., PRG
Acquisition Corporation and EyeCorp, Inc., dated
December 22, 1995.(2) (8)

2.2 -- Asset Purchase Agreement by and among EquiMed, Inc.,
PRG Georgia, and Physicians Resource Group, Inc.
dated October 7, 1996.(12) (8)

2.3 -- Agreement and Plan of Merger by and among American
Ophthalmic Incorporated, PRG Acquisition Corporation
and Physicians Resource Group, Inc. dated October 7,
1996.(12) (8)

2.4 -- Asset Purchase Agreement by and among Sun Valley
Acquisition Corporation, Barnet-Dulaney Eye Center,
P.L.L.C., Ronald W. Barnet, M.D., David D. Dulaney,
M.D., Robert B. Pinkert, O.D. and Scott A. Perkins,
M.D. dated November 29, 1995.(2) (8)

2.5 -- First Amendment to Asset Purchase Agreement by and
among Sun Valley Acquisition Corporation, Barnet-
Dulaney Eye Center, P.L.L.C., Ronald W. Barnet, M.D.,
David D. Dulaney, M.D., Robert B. Pinkert, O.D. and
Scott A. Perkins, M.D. dated February 14, 1996.(3)
(8)

2.6 -- Agreement and Plan of Merger by and among Physicians
Resource Group, Inc., Sun Valley Acquisition
Corporation, SVAC Acquisition Corporation, Daniel D.
Chambers, Michael R. Beck, John R. Hedrick and
Michael Yeary dated December 6, 1995.(2) (8)

2.7 -- Agreement and Plan of Reorganization by and among PRG
Nevada Acquisition Corporation II, Inc., Physicians
Resource Group, Inc., Shepard Eye Surgicenter, Ltd.,
John R. Shepherd, M.D. and Steven Hansen, M.D. dated
December 6, 1995.(2) (8)

2.8 -- Agreement and Plan of Reorganization by and among PRG
Nevada Acquisition Corporation III, Inc., Physicians
Resource Group, Inc., John R. Shepherd, M.D., Ltd.,
d/b/a Shepherd Eye Center, John R. Shepherd, M.D. and
Steven Hansen, M.D. dated December 6, 1995.(2)(8)

2.9 -- Asset Purchase Agreement by and among Sun Valley
Acquisition Corporation, Mann Berkeley Eye Center,
P.A., Paul Michael Mann, M.D. and Ralph G. Berkeley,
M.D. dated November 11, 1995.(2) (8)

2.10 -- First Amendment to Asset Purchase Agreement by and
among Sun Valley Acquisition Corporation, Mann
Berkeley Eye Center, P.A., Paul Michael Mann, M.D.
and Ralph G. Berkeley, M.D. dated February 14,
1996.(3) (8)

2.11 -- Agreement and Plan of Merger by and among Central
Florida Eye Associates, P.A., Ronald Case, M.D.,
Brian Renz, M.D., Teo Kulyk, M.D., Jay Mulaney, M.D.,
PRG FL Acquisition Corporation, and Physicians
Resource Group, Inc.(13) (8)

2.12 -- Agreement and Plan of Merger by and among G.C.R.
Investors, Ronald Case, M.D., Brian Renz, M.D., Jay
Mulaney, M.D., PRG FL Partnership I, and Physicians
Resource Group, Inc. (13) (8)

19
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

2.13 -- Agreement and Plan of Merger by and among Central
Florida Eye Associates, Partners, Ronald Case, M.D.,
Brian Renz, M.D., Teo Kulyk, M.D., Jay Mulaney, M.D.,
PRG FL Partnership II, and Physicians Resource Group,
Inc.(13) (8)

2.14 -- Agreement and Plan of Merger by and among South Texas
Retina Affiliates, Inc., SouthTexas Retina
Consultants, L.L.P., Charles H. Campbell, M.D., P.A.,
Charles H. Campbell, M.D., PRG TX Acquisition Corp. I
and Physicians Resource Group, Inc.(13) (8)

2.15 -- Agreement and Plan of Merger, dated August 13, 1996,
between PRG Ohio III, Inc., Physicians Resource
Group, Inc., Cincinnati Eye Institute, Inc., John S.
Cohen, M.D., James D. Faulkner, M.D., William J.
Faulkner, M.D., Robert C. Kersten, M.D., Richard S.
Kerstine, M.D., Robert H. Osher, M.D., Robert W.
Nash, M.D., Michael R. Petersen, M.D., Gary A.
Varley, M.D., Linda J. Greff, M.D., Robert J. Cionni,
M.D., Kevin T. Corcoran, O.D. and Corwin M. Smith,
M.D.(14) (8)

2.16 -- Agreement and Plan of Reorganization, dated August
13, 1996, between PRG HEA Acq. Corp., Physicians
Resource Group, Inc., Houston Eye Associates, P.A.,
Malcom L. Mazow, M.D., Robert H. Stewart, M.D.,
Robert B. Wilkins, M.D., Jeffrey D. Lanier, M.D.,
Michael A. Bloome, M.D., Paul C. Salmonsen, M.D.,
Richard L. Kimbrough, M.D., Jack T. Holladay, M.D.,
Jeffrey B. Arnoult, M.D., William H. Quayle, M.D.,
John D. Goosey, M.D., John M. Lim, M.D., Kathryn H.
Musgrove, M.D., Marsha F. Soechting, M.D. and Marc N.
Longo, M.D.(14) (8)

2.17 -- Asset Purchase Agreement, dated August 13, 1996,
between PRG Ohio III, Inc., Physicians Resource
Group, Inc. and CEI Realty Associates, Ltd.(14) (8)

2.18 -- Agreement and Plan of Merger, dated August 13, 1996,
between PRG IV Acq. Corp., Physicians Resource Group,
Inc., Gregory L. Henderson, M.D., P.A. and Gregory L.
Henderson, M.D.(14) (8)

2.19 -- Agreement and Plan of Merger, dated August 13, 1996,
between PRG IX Acq. Corp., Physicians Resource Group,
Inc., William Reynolds, M.D., P.A. and William
Reynolds, M.D.(14) (8)

2.20 -- Agreement and Plan of Merger, dated August 12, 1996,
between PRG II Acq. Corp., Physicians Resource Group,
Inc., Tampa Eye Clinic, P.A., J. Burns Creighton,
M.D., Ronald Seeley, M.D., Lewis Lauring, M.D.,
William Reynolds, M.D., David Leach, M.D., P.A. and
Timothy Lorenzen, M.D., P.A.(14) (8)

2.21 -- Agreement and Plan of Merger, dated August 13, 1996,
between PRG XI Acq. Corp., Physicians Resource Group,
Inc., Timothy Lorenzen, M.D., P.A. and Timothy
Lorenzen, M.D.(14) (8)

2.22 -- Agreement and Plan of Merger, dated August 13, 1996,
between PRG VII Acq. Corp., Physicians Resource
Group, Inc., Ronald Seeley, M.D., P.A. and Ronald
Seeley, M.D. (14)(8)

2.23 -- Agreement and Plan of Merger, dated August 13, 1996,
between PRG VI Acq. Corp., Physicians Resource Group,
Inc., J. Burns Creighton, M.D., P.A. and J. Burns
Creighton, M.D.(14) (8)

2.24 -- Agreement and Plan of Merger, dated August 13, 1996,
between PRG X Acq. Corp., Physicians Resource Group,
Inc., David Leach, M.D., P.A. and David Leach,
M.D.(14) (8)

20
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

2.25 -- Agreement and Plan of Merger, dated August 13, 1996,
between PRG VIII Acq. Corp., Physicians Resource
Group, Inc., Lewis Lauring, M.D., P.A. and Lewis
Lauring, M.D. (14)(8)

2.26 -- Asset Purchase Agreement, dated August 13, 1996,
between PRG Ohio, L.P., CEI Realty Associates, Ltd.
and Physicians Resource Group, Inc.(14) (8)

2.27 -- Share Exchange Agreement by and among PRG Florida
XII, Inc., Melbourne Eye Associates of Brevard, Inc.,
Melbourne Eye Associates, P.A., William Broussard,
Trustee U.T.D. March 24, 1980, Michael F. Corcoran,
M.D., Trustee U.T.D. September 26, 1988, Andrew
Zorbis, M.D., Ralph Paylor, M.D., L. Neal Freeman,
M.D., and Kaukwok Frederick Ho, M.D., Trustee U.T.D.
November 24, 1989 and Physicians Resource Group,
Inc.(15) (8)

3.1 -- Second Restated Certificate of Incorporation of
Physicians Resource Group, Inc.(10)

3.2 -- Certificate of Designations, Preferences, Rights and
Limitations of Class A Preferred Stock of Physicians
Resource Group, Inc.(1)

3.3 -- Third Amended and Restated Bylaws of Physicians
Resource Group, Inc.(5)

4.1 -- Form of Warrant Certificate.(1)

4.2 -- Form of certificate evidencing ownership of common
stock of Physicians Resource Group, Inc.(1)

4.3 -- Rights Agreement dated as of April 19, 1996 between
Physicians Resource Group, Inc. and Chemical Mellon
Shareholder Services.(9)

10.1 -- Physicians Resource Group, Inc. Amended and Restated
1995 Stock Option Plan.(5) (7)

10.2 -- Physicians Resource Group, Inc. 1995 Health Care
Professionals Stock Option Plan.(1)

10.3 -- Employment Agreement between Physicians Resource
Group, Inc. and Gregory L. Solomon.(1) (7)

10.4 -- Employment Agreement between Physicians Resource
Group, Inc. and Emmett E. Moore.(19) (7)

10.5 -- Employment Agreement between Physicians Resource
Group, Inc. and Richard M. Owen.(19) (7)

10.6 -- Form of Indemnification Agreement for certain
Directors.(1)

10.7 -- Form of Service Agreement by and between Physicians
Resource Group, Inc., Physicians Resource Group
Subsidiary, Inc. and TPZ, Inc. d/b/a/ Eye Care of
Medina, Inc.(1)

10.8 -- Form of Service Agreement by and between Physicians
Resource Group, Inc., its wholly-owned subsidiary and
The Eye Clinic of Texas.(1)

10.9 -- Form of Service Agreement by and between Physicians
Resource Group, Inc., its wholly-owned subsidiary and
David M. Schneider, M.D., Inc.(1)

10.10 -- Form of Service Agreement by and between Physicians
Resource Group, Inc., its wholly-owned subsidiary and
Texas Eye Institute Assoc.(1)

21
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

10.11 -- Form of Service Agreement by and between Physicians
Resource Group Subsidiary, Inc., its wholly-owned
subsidiary and McDonald Eye Associates, P.A.(1)

10.12 -- Form of Service Agreement by and between Physicians
Resource Group, Inc., its wholly-owned subsidiary and
Michael A. Minadeo, M.D., P.A.(1)

10.13 -- Form of Service Agreement by and between Physicians
Resource Group, Inc., its wholly-owned subsidiary and
Southern Nevada Eye Clinic, Inc., Kenneth C.
Westfield, M.D., Ltd. and Nevada Institute of
Ambulatory Surgery, Inc.(1)

10.14 -- Form of Service Agreement by and between Physicians
Resource Group, Inc., its wholly-owned subsidiary and
Eye Clinic, P.C.(1)

10.15 -- Form of Service Agreement by and between Superior Eye
Care, Inc. and Charles D. Fritch, M.D., Inc.(1)

10.16 -- Form of Service Agreement by and among Pacific Vision
Services, Inc. and Loma Linda Ophthalmology Medical
Group, Inc., Inland Eye Institute Medical Group, Inc.
and T.E.S.C., Inc.(1)

10.17 -- First Amendment to Service Agreement by and among
Physicians Resource Group, Inc., as successor by
merger to Pacific Vision Services, Inc., Loma Linda
Ophthalmology Medical Group, Inc., Inland Eye
Institute Medical Group, Inc. and T.E.S.C., Inc.
dated August 9, 1995.(4)

10.18 -- Subscription Agreement, dated March 31, 1995, between
Notre Capital Ventures, Ltd. and Physicians Resource
Group, Inc.(1)

10.19 -- Form of Registration Rights Agreement.(1)

10.20 -- Form of Registration Rights Agreement.(1)

10.21 -- Form of Registration Rights and Stockholders
Agreement.(1)

10.22 -- Form of Registration Rights Agreement dated as of
March 7, 1996, by and among Physicians Resource
Group, Inc. and the former stockholders of EyeCorp,
Inc.(5)

10.23 -- Form of Option Agreement between Physicians Resource
Group, Inc. James A. Price, M.D., Ben F. House, M.D.,
Bruce E. Herron, M.D. and Mark R. Bateman, M.D.(1)

10.24 -- Separation and Mutual Release Agreement between
Gregory Solomon and Physicians Resource Group, Inc.
(6) (7)

10.25 -- Loan Agreement dated as of January 8, 1996, between
PRG and NationsBank of Tennessee, N.A.(2)

10.26 -- Subordination Agreement dated as of December 28,
1995, by and among NationsBank, EyeCorp, Eyecare
Resource, Inc., the EyePA, Inc. and PRG.(2)

10.27 -- Reimbursement Agreement dated as of December 28,
1995, between EyeCorp and PRG.(2)

22
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

10.28 -- Service Agreement dated as of February 23, 1994, by
and between EyeCorp, Inc., the Vitreoretinal
Foundation and David Meyer, M.D., John E. Linn, M.D.,
John D. Armstrong, M.D., John L. Elfervig, M.D. and
Thomas A. Browning, M.D.(5) (8)

10.29 -- Amendment to Service Agreement, dated March 8, 1996,
by and between the Vitreoretinal Foundation, David
Meyer, M.D., John E. Linn, M.D., John D. Armstrong,
M.D., John L. Elfervig, M.D. and Thomas A. Browning,
M.D. and EyeCorp, Inc.(5)

10.30 -- Second Amendment to Service Agreement dated as of
February 23, 1994, by and between EyeCorp, Inc., the
Vitreoretinal Foundation and David Meyer, M.D., John
E. Linn, M.D., John D. Armstrong, M.D., John L.
Elfervig, M.D. and Thomas A. Browning, M.D.(5)

10.31 -- Loan and Security Agreement dated as of December
28, 1995, among EyeCorp, Inc., EyeCare Resource,
Inc., The EyePA, Inc. and NationsBank of Tennessee,
N.A.(5)

10.32 -- Form of Indenture dated as of December 11, 1996,
between Physicians Resource Group, Inc. and U.S.
Trust Company of New York, N.A. (10)

10.33 -- Form of Registration Rights Agreement, dated as of
December 6, 1996, between Physicians Resource Group,
Inc., and Smith Barney, Inc., Alex Brown & Sons
Incorporated, Soloman Brothers, Dillon Reed & Co.,
Inc. and Volpe Welty & Company.(10)

10.34 -- Form of Purchase Agreement dated as of December 6,
1996.(10)

10.35 -- Loan Agreement for $90,000,000 Revolving Credit Loan,
dated March 14, 1997, between Physicians Resource
Group, Inc. and NationsBank of Tennessee, N.A., Agent
for the Banks Signatory hereto.(16)

10.36 -- Physicians Resource Group, Inc. Employee Stock
Purchase Plan.(11)

10.37 -- Employment Agreement between Physicians Resource
Group, Inc. and Mark Kingston.(7) (16)

10.38 -- Employment Agreement between Physicians Resource
Group, Inc. and Richard D'Amico.(7) (16)

10.39 -- Employment Agreement between Physicians Resource
Group, Inc. and Jonathan Bond.(7) (16)

10.40 -- Employment Agreement between Physicians Resource
Group, Inc. and Daniel Chambers.(7) (16)

10.41 -- Employment Agreement between Physicians Resource
Group, Inc. and Richard Gilleland.(7)

10.42 -- Employment Agreement between Physicians Resource
Group, Inc. and Peter Dorflinger.(7)

10.43 -- Employment Agreement between Physicians Resource
Group, Inc. and Pamela Westbrook.(7)

10.44 -- First Amendment to Loan Agreement, dated June 27,
1997, between Physicians Resource Group, Inc. and
NationsBank of Tennessee, N.A., Agent for the Bank's
Signatory thereto.(21)

10.45 -- Physicians Resource Group, Inc. 401(k) Plan.(18)

23
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

10.46 -- Amendment to the Physicians Resource Group, Inc.
Employee Stock Purchase Plan. (20)

10.47 -- Loan Agreement for $20,000,000 Revolving Credit Loan
dated November 1997, between Physicians Resource
Group, Inc. and NationsBank of Tennessee, N.A. (21)

10.48 -- First Amendment to First Amended and Restated Loan
Agreement dated as of April 30, 1998, between
Physicians Resource Group, Inc. and NationsBank of
Tennessee, N.A. (23)

10.49 -- Letter of Intent dated July 25, 1998 executed by
David Meyer and the Company (22)

11.1 -- Computation of Earnings per Share. (22)

24.1 -- Power of Attorney (contained on the signature page of
this report).

27.0 -- Financial Data Schedule. (22)

24
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

(1) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 33-91440) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (No. 333-00230) and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated February 14, 1996, and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q for the quarter ending June 30, 1995, and incorporated herein
by reference.
(5) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ending December 31, 1995, and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q for the quarter ending September 30, 1995, and incorporated
herein by reference.
(7) Management contract or compensatory plan or arrangement, which is being
identified as such pursuant to Item 14(a)3 of Form 10-K.
(8) Schedules and similar attachments to this Exhibit have not been filed
herewith, but the nature of their contents is described in the body of
this Exhibit. The Company agrees to furnish a copy of any such omitted
schedules and attachments to the Securities & Exchange Commission upon
request.
(9) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 333-3852) and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (No. 333-19185) and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 333-15547) and incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated October 7, 1996 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated June 30, 1996, and incorporated herein by reference.
(14) Previously filed as an amendment to the Company's Current Report on
Form 8-K, dated August 30, 1996, and incorporated herein by reference.
(15) Previously filed as an amendment to the Company's Current Report on
Form 8-K, dated October 19, 1996, and incorporated herein by reference.
(16) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ending December 31, 1996, and incorporated herein by
reference.
(17) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated May 15, 1997, and incorporated herein by reference.
(18) Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q for the quarter ending March 31, 1997, and incorporated
herein by reference.
(19) Previously filed as an exhibit to the Company's current report on Form
8-K dated November 5, 1996 and filed September 3, 1997, and
incorporated herein by reference.
(20) Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q for the quarter ending June 30, 1997, and incorporated herein
by reference.
(21) Previously filed as an exhibit to the Company's Form 10-K for the year
ending December 31, 1997, and incorporated herein by reference.
(22) Filed herewith.
(b) Reports on Form 8-K.
(23) Previously filed as an exhibit to the Company's quarterly report on
Form 10-Q for the quarter ending March 31, 1998, and incorporated
herein by reference.

25
<PAGE>

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements 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.

PHYSICIANS RESOURCE GROUP, INC.

Dated: August 18, 1998 By: /s/ Peter G. Dorflinger
--------------------------------------
Peter G. Dorflinger
President, Chief Operating Officer

Dated: August 18, 1998 By: /s/ Pamela B. Westbrook
--------------------------------------
Pamela B. Westbrook
Chief Financial Officer

<PAGE>

EXHIBIT 10.49
-------------

DAVID MEYER
825 RIDGE LAKE BLVD.
MEMPHIS, TENNESSEE 38120

July 25, 1998

Mr. Richard A. Gilleland
Chairman and Chief Executive Officer
Physicians Resource Group, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1540
Dallas, Texas 75240

Dear Mr. Gilleland:

This letter of intent ("LOI") is entered into between Physicians Resource
Group, Inc. ("PRG") and David Meyer ("MEYER"), on behalf of himself and other
providers and investors who may choose to join him, and summarizes the principal
terms and conditions of a proposed restructure of PRG, which will involve, among
other things, (1) the acquisition of at least 10,000,000 shares of the
outstanding stock of PRG (which may be increased to the extent necessary, up to
30,000,000 shares, so that all stockholders who wish to sell will have the
opportunity to do so) (the "STOCK ACQUISITION COMPONENT") for cash at a price of
$5.00 ("STOCK PURCHASE PRICE") by Stock Buyers (hereafter defined), (2) the
restructure and renegotiation of the management service agreements and other
contractual relationships ("PROVIDER CONTRACTS") with the physicians and other
providers affiliated with PRG (the "PROVIDERS"), (3) the resolution and
settlement of various accounts payable and receivable between PRG and several of
the Providers (the "ACCOUNT RESOLUTION"), (4) the transfer of operating assets
("PRACTICE ASSETS") of the ophthalmic and optometric practices affiliated with
PRG (the "PRACTICES") from PRG back to the Practices and (5) the transfer of an
interest in the ambulatory surgery centers in which PRG owns an interest
("ASCS") back to the Practices from which they were acquired (all of the
transactions reflected in (1)-(5) preceding are collectively called the
"COMPLETE TRANSACTION", and the transactions reflected in (2)-(5) preceding are
collectively called the "PROVIDER RESTRUCTURE"). The consideration flowing back
and forth between and among PRG, the Providers and the Practices in connection
with the proposals made herein are interdependent and reflect our recognition
that (a) there are numerous disputes about various issues between PRG, on the
one hand, and many Providers and Practices, on the other hand, and (b) Meyer and
other persons or entities who may join with Meyer, including some Providers and
investors who are not Providers, are willing to commit to and fund the Stock
Acquisition Component at the Stock Purchase Price only if PRG agrees to complete
the Provider Restructure (Meyer and any other persons and entities who join with
Meyer in committing to and funding the Stock Acquisition Component being herein
called the "STOCK BUYERS"). Promptly after the execution of this LOI, Meyer's
counsel will commence drafting definitive agreements implementing the terms
summarized in this LOI, which must be acceptable in form and substance to PRG
and Meyer (definitive agreements which are acceptable to and executed by PRG and
Meyer are herein called the "DEFINITIVE AGREEMENTS").

The board of directors of PRG ("PRG BOARD") has authorized the execution of
this LOI by the Chief Executive Officer for the purpose of moving into the stage
of negotiating Definitive Agreements. Meyer and the other providers have no
desire to conclude a transaction unless a majority of the members of the PRG
Board believe in good faith that the stockholders and the bondholders of PRG are
treated fairly.

27
<PAGE>

A. BASIC TRANSACTIONS
----------------------

Based on the information currently known to Meyer, and subject to the terms and
conditions hereof and in the Definitive Agreements, it is anticipated that the
Definitive Agreements will include the following terms:

1. STOCK ACQUISITION COMPONENT. Promptly after the Definitive Agreements
are executed and the applicable conditions herein and therein have been
satisfied, the Stock Buyers would make the necessary filings, give the necessary
notices and take the appropriate steps to comply with federal and state
securities laws and commence a cash tender offer to purchase (the "TENDER
OFFER") at least 10,000,000 shares of the outstanding common stock of PRG ("PRG
STOCK"), with an option reserved to purchase more than 10,000,000 shares if
tendered, for a price of $5.00 per share. Providers will be encouraged to retain
any PRG Stock owned by them and not to tender it in the Tender Offer. It is
anticipated that, in connection with the various elements of the Provider
Restructure summarized in Sections A.2-A.5 below, a specific dollar amount (the
"PROVIDER RESTRUCTURE SETTLEMENT AMOUNT") will be agreed upon between Meyer (or
a committee selected by him) and each Provider which are "owed" by such Provider
for the elements of the Provider Restructure summarized in Sections A.2-A.5,
and, in addition to the transfer of the Practice Assets (and, in some cases, an
ASC interest) to such Provider contemplated by the Provider Restructure, such
Provider will be issued a number of new, presently unissued, common stock of PRG
at a price of $5.00 per share in amount equal to his Provider Restructure
Settlement Amount minus the amount paid for the stock acquired by such Provider
in the Tender Offer.

2. PROVIDER CONTRACTS RESTRUCTURE. The Service Agreement of each
Provider and/or Practice will be modified to (1) reduce the management fee, (2)
reduce the term, (3) limit the services to be provided by PRG and (4) make
other adjustments deemed in good faith by Meyer (or a committee of Providers
selected by Meyer) to be appropriate and reasonable.

3. ACCOUNT RESOLUTION. Resolution and settlement satisfactory to Meyer
(or a committee of Providers selected by Meyer) shall have been reached between
PRG and Most Providers (as used herein, "MOST PROVIDERS" means Providers and
Practices whose Adjusted Gross Income (as defined in the Internal Revenue Code)
for the year ended December 31, 1997 equals or exceeds 75% of the total Adjusted
Gross Income of all Providers and Practices. The amount agreed upon in the
resolution and settlement will be included as part of the Provider Restructure
Settlement Amount for each Provider.

4. TRANSFER OF PRACTICE ASSETS. As part of the consideration for the
Complete Transaction, PRG will transfer to the Providers their Practice Assets
assuming that each Provider has satisfied his Provider Restructure Settlement
Amount by purchasing stock in the Tender Offer and/or purchasing newly issued
stock of PRG, no additional amount will be owed to PRG.

5. TRANSFER OF INTERESTS IN ASCS. As part of the consideration for the
Complete Transaction, Providers and Practices who transferred all or an interest
in an ASC to PRG in the past will receive a transfer by PRG of a percentage
(anticipated to be between 25-33% to be determined by Meyer, in consultation
with selected Providers) interest in such ASC.

B. CONDITIONS PRECEDENT TO DEFINITIVE AGREEMENT EXECUTION
----------------------------------------------------------

1. DEFINITIVE AGREEMENTS. The Definitive Agreements must be satisfactory
in form and substance to Meyer and PRG, and, prior to execution, PRG must
receive the opinion of Goldman Sachs & Co. or another investment bank acceptable
to PRG and Meyer, that the Complete Transaction is fair to the stockholders of
PRG from a financial point of view.

2. CONDITIONS TO EXECUTION OF DEFINITIVE AGREEMENTS. Meyer does not
intend to execute any Definitive Agreements unless and until:

a. PROVIDER RESTRUCTURE. Meyer has received affirmation in
writing from Most Providers that they approve the Provider Restructure
and will execute documents reasonably acceptable to them implementing
the Provider Restructure.

28
<PAGE>

b. STOCK ACQUISITION COMPONENT.

i. TENDER COMMITMENTS. Meyer has received affirmation
from a number of Providers acceptable to Meyer that they do
not intend to and will not tender any of their PRG Stock in
the Tender Offer.

ii. STOCK BUYER PARTICIPATION. Meyer has received
commitments acceptable to him from Providers and/or other
persons and entities to purchase at least 5,000,000 shares
of PRG stock.

iii. FINANCING TENDER OFFER. Meyer has received
commitments for financing the Tender Offer in amounts and on
terms acceptable to him and the other Stock Buyers.

iv. DEBENTURES. Meyer is satisfied that (1) the
outstanding debentures of PRG are not in default and that
the consummation of the Complete Transactions will not
activate a right of the debenture-holders to accelerate the
maturity of the debentures or to demand that PRG repurchase
or redeem the debentures, or, alternatively, (2) if, in the
judgment of Meyer, the debentures are in default or there is
a substantial risk that the consummation of the Complete
Transactions WILL activate a right of the debenture-holders
to accelerate the maturity of the debentures or to demand
that PRG repurchase or redeem the debentures, Meyer has
commitments and/or assurances satisfactory to him (a) that
the existing debenture-holders will agree to an acceptable
restructure or (b) for refinancing the debentures on
acceptable terms.

c. DUE DILIGENCE. Meyer's continued interest in this
transaction is dependent upon the satisfactory completion, to Meyer's
sole and absolute satisfaction, of a due diligence investigation to be
conducted by the Stock Buyers and their representatives. PRG will
provide Meyer and other Stock Buyers and their representatives full
access, at all reasonable times, and in a manner so as not to
unreasonably interfere with the normal business operations of PRG, to
all premises, properties, personnel, books, records, contracts and
documents of or pertaining to PRG.

d. BOARD APPROVAL. The board of directors of PRG ("PRG BOARD")
shall have approved the execution of the Definitive Agreements and the
consummation of the Complete Transaction and shall have agreed to
recommend the approval of the consummation of the Provider Restructure
to the stockholders at a special meeting to be held with respect
thereto after completion of the Tender Offer.

C. DEFINITIVE AGREEMENTS
-------------------------

Among other things, the Definitive Agreements will include the following:

1. REPRESENTATIONS AND COVENANTS. PRG would make comprehensive
representations and warranties to the Stock Buyers, and would provide
comprehensive covenants, indemnities and other protections for the benefit of
the Stock Buyers.

2. CONDITIONS.

a. COMMENCEMENT OF TENDER OFFER. The commencement and
completion of the Tender Offer by the Stock Buyers will be subject to
the satisfaction of various conditions, including the execution of the
Definitive Agreements containing binding agreements by PRG and Most
Providers which implement the Provider Restructure.

b. CONSUMMATION OF COMPLETE TRANSACTION. The consummation of
the Complete Transaction will be subject to the satisfaction of
various conditions, including:

29
<PAGE>

i. THIRD PARTY CONSENTS. The receipt of all consents
of third parties, including lenders, debentureholders,
suppliers, customers, representatives, lessors and licensors
as may be required for the consummation of the Complete
Transaction.

ii. GOVERNMENT FILINGS AND APPROVALS. The receipt of
all consents or approvals of governmental agencies as may be
required for the consummation of the Complete Transaction,
including, if necessary, approval (or termination of the
waiting period) under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.

iii. NO MATERIAL CHANGES. The absence of any event or
prospective change in laws or regulations which, in Meyer's
judgment, would materially and adversely affect the
business, assets or financial position or performance of
PRG.

iv. ABSENCE OF LITIGATION OR CLAIMS.

(1) GENERAL LITIGATION. (a) The absence of
any action, suit, or proceeding pending before any
court or quasi-judicial or administrative agency
of any federal, state, local, or foreign
jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree,
ruling, or charge would (i) prevent consummation
of any of the transactions contemplated by the
Definitive Agreements, or (ii) cause any of the
transactions contemplated by the Definitive
Agreements to be rescinded following consummation,
(b) no such injunction, judgment, order, decree,
ruling, or charge shall be in effect, and (c) no
written notice of the initiation of any such
action, suit or proceeding shall have been
received by PRG.

(2) STOCKHOLDER LITIGATION. All stockholder
litigation and known claims against PRG shall have
been resolved to the satisfaction of Meyer.

(3) PROVIDER LITIGATION AND CLAIMS.
Providers whose aggregate Adjusted Gross Income
for the year ended December 31, 1997 equals or
exceeds 90% of the Adjusted Gross Income of all
Providers for the same period shall have resolved,
settled and released all claims against PRG, and
PRG shall have resolved, settled and released all
claims against them.

E. MISCELLANEOUS.
------------------

1. Expenses. If Definitive Agreements are executed, Meyer will be
entitled to be reimbursed by PRG, and PRG agrees to promptly reimburse Meyer
from time to time upon request by Meyer, for costs and expenses (including
legal, financial, advisory and accounting fees and expenses) incurred by him on
behalf of the providers and investors who chose to join him in connection with
developing and entering into this LOI, negotiating and entering into the
Definitive Agreements and consummating (or attempting to consummate) the
Complete Transaction, but PRG shall have no responsibility therefor if
Definitive Agreements are not executed.

2. Non-Binding Letter of Intent. This LOI is not, and your acceptance
hereof does not constitute, an agreement by either of us or anyone else to
consummate the transactions contemplated hereby or any agreement to enter into a
formal written agreement with respect to the transactions contemplated hereby.
It is understood that this LOI is merely a statement of intent and, while the
parties hereto agree in principle to the contents hereof and intend to proceed
promptly and in good faith to work out the arrangements with respect to
consummating the transactions contemplated hereby, any legal obligations between
the parties hereto shall be only as are set forth in the Definitive Agreements
if and when executed by the parties, except that the provisions of this Section
E are intended to be binding and enforceable obligations of the parties hereto.
PRG may not, however, terminate this LOI prior to December 31, 1998, except
pursuant to Section E.3.

3. Termination by PRG. If (i) the Definitive Agreements have not been
executed by 11:59 p.m., on September 21, 1998, or if the Complete Transaction
has not been consummated by 11:59 p.m., on November 23, 1998,

30
<PAGE>

and (ii) the PRG Board has concluded in good faith that (A) the likelihood of
executing Definitive Agreements and consummating the Complete Transaction on
terms acceptable to the PRG Board is remote, and (B) the immediate cash needs of
PRG are such that sales of assets are necessary to preserve PRG (and there has
not been adequate response from Meyer and other Providers with respect to
accounts payable owed by them to PRG), and (iii) the PRG Board has notified
Meyer to such effect and given Meyer and a small group of Providers selected by
Meyer an opportunity to appear before the PRG Board to discuss the situation,
then, unless Meyer advances sufficient funds to cure the immediate cash needs,
at the option of either PRG or Meyer, this LOI may be terminated, and neither
party shall have any further obligation hereunder, except that PRG shall be
obligated to pay the breakup fee pursuant to Section E.6., if applicable, and
costs and expenses pursuant to Section E.1.

4. Notice of Other Offers. PRG will provide Meyer written notice if and
when it or any member of the PRG Board, officer of PRG or investment banker
retained by PRG or the PRG Board ("PRG REPRESENTATIVES") receives any offer(s)
from or on behalf of any potential buyer related to the potential sale of the
stock or any of the assets of PRG or the potential merger of PRG and/or any of
its subsidiaries with a third party (or a friendly tender for a significant part
of the stock of PRG by a third party) (any of the foregoing types of
transactions or a combination thereof being herein called a "Conflicting
Transaction"), Meyer will have the unilateral right to terminate this LOI and
the Definitive Agreements at any time on or after PRG receives any such offer(s)
if PRG or a PRG Representative provides non-public information to any such
offeror(s) unless it is an offer for the sale of assets permitted by the terms
of this LOI. The Definitive Agreements will contain a provision similar to the
foregoing sentence.

5. Standstill. Except as hereinafter provided, so long as this LOI is in
force, PRG agrees that it and its directors, officers, employees and affiliates
will not: (i) initiate discussions or exchanges of information with any
potential buyer related to a Conflicting Transaction nor enter into any
expression of interest, letter of intent, agreement in principle or definitive
agreement with respect to a Conflicting Transaction; or (ii), if contacted by a
potential buyer or merger candidate with respect to a Conflicting Transaction,
exchange information with such potential buyer or merger candidate nor enter
into any expression of interest, letter of intent, agreement in principle or
definitive agreement with respect thereto. NOTWITHSTANDING THE FOREGOING,
HOWEVER:

a. If PRG or any PRG Representative receives one or more
unsolicited expressions of interest or offers that contemplate(s) an
acquisition of substantially all of the stock or assets of PRG or
merger, consolidation or other combination with PRG and/or
substantially all of the subsidiaries of PRG, PRG reserves the right,
if the PRG Board believes, in good faith, based on the written advice
of a law firm of regional or national stature, it is necessary to do
so in order to satisfy the fiduciary duties and obligations of the
directors under applicable law, to consider each such expression of
interest or offer, provide information to the interested person or
offeror, negotiate with the interested person or offeror and enter
into an agreement for a Conflicting Transaction. The Definitive
Agreements will contain a provision similar to the foregoing sentence.

b. PRG may make sales of individual assets so long as any
single sale does not exceed $500,000 and the aggregate of all sales
while this LOI is in effect does not exceed $5,000,000; provided that,
in any event, the foregoing clause of this Section E.5.b. does not
permit PRG to, and PRG shall not exchange information with a potential
buyer or repurchaser of any Practice(s) or ASC(s) nor enter into any
expression of interest, letter of intent, agreement in principle or
definitive agreement to sell any Practice(s) or ASC(s) unless (i) the
PRG Board makes a determination that there is a cash emergency or
threat of default on a material obligation, in which case the Chief
Executive Officer of PRG shall notify Meyer and discuss the matter
with Meyer and a small group of Providers selected by Meyer, and, if
Meyer in good faith deems it necessary, convene a teleconference of
the other PRG Board members, for a full discussion of the issues, and
(ii) after such discussion(s), Meyer and PRG mutually consent to the
actions requested by PRG to solve such emergency or threat of default.

In any event, however, the elements of the Provider Restructure contemplated by
this LOI are unique and peculiar to the Complete Transaction contemplated
hereby, and no inference should be drawn that any Provider will be willing to
agree to the Provider Restructure terms with any other buyer or merger partner.

6. BREAK-UP FEE

a. PRIOR TO EXECUTION OF DEFINITIVE AGREEMENTS.

<PAGE>

i. Any of the following shall be deemed to be a
"BREAK-UP FEE TRIGGER EVENT":

(1) Prior to December 31, 1998, (i) PRG or a
PRG Representative initiates discussions or
exchanges of information with any potential buyer
related to a Conflicting Transaction or (ii) PRG
or a subsidiary, or a PRG Representative on behalf
or for the benefit of PRG or a subsidiary, enters
into any expression of interest, letter of intent,
agreement in principle or definitive agreement
with respect to a Conflicting Transaction, unless
it is permitted by Section E.5.b.

(2) Prior to December 31, 1998, (i) PRG or a
PRG Representative receives one or more
unsolicited expressions of interest or offers that
contemplate(s) an acquisition of substantially all
of the stock or assets of PRG or merger,
consolidation or other combination with PRG and/or
substantially all of the subsidiaries of PRG, and
(ii) PRG or a PRG Representative exchanges
information with the potential buyer before the
PRG Board has made the determination that permits
PRG to exchange the information pursuant to
Section E.5.a.

(3) Prior to December 31, 1998, (i) PRG or a
PRG Representative receives one or more
unsolicited expressions of interest or offers that
contemplate(s) an acquisition of substantially all
of the stock or assets of PRG or merger,
consolidation or other combination with PRG and/or
substantially all of the subsidiaries of PRG (or a
friendly tender for a significant part of the
stock of PRG by a third party), and (ii) after the
PRG Board has made the determination that permits
PRG to exchange the information pursuant to
Section E.5.a., PRG or a subsidiary, or a PRG
Representative on behalf of or for the benefit of
PRG or a subsidiary, enters into any expression of
interest, letter of intent, agreement in principle
or definitive agreement with respect to such
acquisition, merger, consolidation or other
combination.

ii. If a Break-up Fee Trigger Event occurs, then,
immediately after a demand by Meyer therefor, PRG will pay
the sum of $1,000,000 to a non-profit medical institution of
national stature designated by Meyer.

b. After Execution of Definitive Agreements. The Definitive
Agreements will contain a provision similar to Section E.6.b., except
that the amount payable by PRG shall be the sum of $10,000,000, which
shall be payable to Meyer for distribution among himself and other
providers and investors who have committed to become Stock Buyers.

7. CONDUCT OF BUSINESS. Prior to a termination of this LOI, PRG shall,
and shall cause its subsidiaries to, operate their business in the ordinary
course and refrain from any extraordinary transactions except to the extent
contemplated and permitted by Section E.4. The Definitive Agreements will
contain a provision similar to the foregoing sentence.

8. GOVERNING LAW. This LOI will be governed by and construed in
accordance with the substantive laws of the State of Texas.

9. BINDING ARBITRATION. In the event of a dispute arising out of or
relating to this LOI, or relating to any claim or cause of action which may
arise or be asserted under any federal, state, local or foreign statutory,
regulatory or common law, including, without limitation, claims with respect to
breach of contract, tort, obligation of good faith and fair dealing and
fiduciary duties, then, upon notice by any party to the other parties (an
"ARBITRATION NOTICE") and to American Arbitration Association ("AAA"), 13455
Noel Road, 1750 Two Galleria Tower, Dallas, Texas 75240 [telephone (972) 702-
8222); facsimile (972) 490-9008), the controversy or dispute shall be submitted
to a sole arbitrator who is independent and impartial, for binding arbitration
in Dallas, Texas, in accordance with AAA's Commercial Arbitration Rules (the
"RULES") as modified or supplemented hereby. The parties agree that they will
faithfully observe this LOI and

32
<PAGE>

the Rules and that they will abide by and perform any award rendered by the
arbitrator. The arbitration shall be governed by the Federal Arbitration Act, 9
U.S.C. Section 1-16 (or by the same principles enunciated by such Act in the
event it may not be technically applicable). The award or judgment of the
arbitrator shall be final and binding on all parties and judgment upon the award
or judgment of the arbitrator may be entered and enforced by any court having
jurisdiction. If any party becomes the subject of a bankruptcy, receivership or
other similar proceeding under the laws of the United States of America, any
state or commonwealth or any other nation or political subdivision thereof,
then, to the extent permitted or not prohibited by applicable law, any factual
or substantive legal issues arising in or during the pendency of any such
proceeding shall be subject to all of the foregoing mandatory mediation and
arbitration provisions and shall be resolved in accordance therewith. The fees
and expenses of the arbitrator will be shared equitably (as determined by the
arbitrator) by all parties engaged in the dispute or controversy.

10. COUNTERPARTS. This letter may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this letter
and all of which, when taken together, will be deemed to constitute one and the
same agreement.

11. ENTIRE AGREEMENT. This LOI sets forth the entire understanding of the
parties hereto and supersedes all prior contracts, agreements, arrangements,
communications, discussions, representations and warranties, whether oral or
written, between the parties with respect to the subject matter hereof.

If the foregoing reflects your understanding, please so indicate by signing
below and returning a copy of this LOI to me. If you have not signed this LOI
and faxed a copy to my attorney, Mr. Linton E. Barbee (to both 214-855-8200 and
972-239-4351), and to me (to both 901-682-9711 and 901-767-1352) on or before
5:00 p.m.,

Pacific Daylight Time, on Monday, July 27, 1998, I may, at my sole option, at
any time thereafter withdraw and terminate this LOI and the offers made hereby.

Very truly yours,

/s/ DAVID MEYER (facsimile signature authorized by David Meyer)
- ------------------------
David Meyer

ACCEPTED AND AGREED TO BY:

PHYSICIANS RESOURCE GROUP, INC.

By: /s/ Richard Gilleland
-------------------------------------------------
Richard Gilleland
Chairman, President & Chief Executive Officer

<PAGE>

EXHIBIT 11.1

PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES

COMPUTATION OF EARNINGS PER COMMON SHARE

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------
1998 1997
----------------- -------------------
<S> <C> <C>
INCOME (LOSS) PER SHARE
Net income (loss) $ (34,468) $ 7,872
================= ===================
Weighted average number of common shares outstanding used in basic share
calculation 29,700 29,975

Net income (loss) per basic share $ (1.16) $ .26
----------------- -------------------
Weighted average number of common and common equivalent shares outstanding
used in diluted calculation 29,700 30,153
================= ===================

NET INCOME (LOSS) PER DILUTED SHARE $ (1.16) $ .26
================= ===================

</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOUND ON PAGES 1 AND 2 OF THE COMPANY'S FORM 10-Q FOR THE SIX MONTHS ENDED JUNE
30, 1998.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 19,731
<SECURITIES> 0
<RECEIVABLES> 100,347
<ALLOWANCES> 27,479
<INVENTORY> 5,992
<CURRENT-ASSETS> 112,053
<PP&E> 88,158
<DEPRECIATION> 34,134
<TOTAL-ASSETS> 482,954
<CURRENT-LIABILITIES> 45,467
<BONDS> 125,000
0
2
<COMMON> 299
<OTHER-SE> 232,780
<TOTAL-LIABILITY-AND-EQUITY> 482,954
<SALES> 0
<TOTAL-REVENUES> 197,408
<CGS> 0
<TOTAL-COSTS> 247,335
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,936
<INCOME-PRETAX> (49,927)
<INCOME-TAX> (15,459)
<INCOME-CONTINUING> (34,486)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,486)
<EPS-PRIMARY> (1.16)
<EPS-DILUTED> (1.16)

</TABLE>