<PAGE>

                                   FORM 10-Q


                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C.  20549

                            _______________________


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

For the quarterly period ended December 31, 1996

                                     OR

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

For the transition period from ______________ to ____________

Commission file number 0-14796


                          FHP INTERNATIONAL CORPORATION
                             a Delaware Corporation
                  I.R.S. Employer Identification No. 33-0072502

                   3120 Lake Center Drive, Santa Ana, CA  92704
              (Address of principal executive offices)  (Zip Code)

                                  (714) 825-6600
              (Registrant's telephone number, including area code)


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 ____.

The registrant had 41,719,977 shares of common stock, par value $0.05 per 
share, outstanding at February 11, 1997.



                    The Exhibit Index Appears on Page 21


                                       1

<PAGE>

                        PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         FHP INTERNATIONAL CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                                  (unaudited)

                                    ASSETS

<TABLE>
<CAPTION>

(amounts in thousands,                                     December 31,      June 30,
 except share data)                                            1996            1996
                                                           ------------    ------------
<S>                                                        <C>             <C>

Cash and cash equivalents                                   $  297,815      $  166,873
Short-term investments                                         226,598         187,919
Accounts receivable, net                                       165,367         141,537
Prepaid expenses and other
   current assets                                               27,488          33,736
Deferred income taxes                                           49,165          49,162
                                                            ----------      ----------

    Total current assets                                       766,433         579,227

Property and equipment, net                                    231,764         231,428
Assets held for sale (Note 6)                                   15,752          16,470
Long-term investments                                           49,985          36,470
Restricted investments                                          96,650          90,499
Goodwill and other intangibles,
    net                                                      1,013,510       1,028,374
Other assets, net                                               36,731          31,411
                                                            ----------      ----------

    Total assets                                            $2,210,825      $2,013,879
                                                            ----------      ----------
                                                            ----------      ----------
</TABLE>

----------
See accompanying Notes to Consolidated Financial Statements.


                                       2


<PAGE>

                         FHP INTERNATIONAL CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                                (unaudited)

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

(amounts in thousands,                                     December 31,      June 30,
 except share data)                                            1996            1996
                                                           ------------    ------------
<S>                                                        <C>             <C>

Current portion of long-term obligations                    $   19,104      $   30,097
Accounts payable                                                46,571          50,979
Medical claims payable                                         388,565         367,872
Accrued salaries and employee benefits                          62,299          71,986
Unearned premiums                                              207,930          24,713
Restructuring reserve (Note 6)                                                  14,615
Income taxes payable and other
 current liabilities                                            77,790          79,132
                                                            ----------      ----------

    Total current liabilities                                  802,259         639,394

Long-term obligations                                          100,195         104,184
Other liabilities                                               88,596         102,672
                                                            ----------      ----------

    Total liabilities                                          991,050         846,250
                                                            ----------      ----------
Commitments and contingencies (Note 4)

Stockholders' equity: (Note 7)
    Series A Convertible
         Preferred Stock, $0.05 par value;
         40,000,000 shares authorized (Note 3)                   1,052           1,052
    Common Stock, $0.05 par value;
         100,000,000 shares authorized;
         issued and outstanding 41,569,417
         and 40,789,528 shares at December 31, 
         1996 and June 30, 1996, respectively                    2,078           2,039
    Paid-in capital                                            953,756         938,478
    Unrealized holding losses on
         available-for-sale investments, net of
         tax effect of $562 at December 31,
         1996 and $1,602 at June 30, 1996                         (844)         (2,306)
    Retained earnings                                          263,733         228,366
                                                            ----------      ----------

    Total stockholders' equity                               1,219,775       1,167,629
                                                            ----------      ----------
Total liabilities and
    stockholders' equity                                    $2,210,825      $2,013,879
                                                            ----------      ----------
                                                            ----------      ----------
</TABLE>

----------
See accompanying Notes to Consolidated Financial Statements.


                                       3


<PAGE>

                        FHP INTERNATIONAL CORPORATION
                      CONSOLIDATED STATEMENTS OF INCOME
                               (unaudited)

<TABLE>
<CAPTION>

                                                                      For The
                                                                Three Months Ended
(amounts in thousands,                                              December 31,
 except per share data)                                        1996            1995
                                                           ------------    ------------
<S>                                                        <C>             <C>

Revenues                                                    $1,108,343      $1,015,746
                                                            ----------      ----------
Expenses:
    Primary health care                                        907,596         831,071
    Other health care                                           31,242          29,865
    General, administrative and
         marketing                                             129,961         127,751
    Provision for restructuring                                                  3,900
                                                            ----------      ----------

Total expenses                                               1,068,799         992,587
                                                            ----------      ----------

Operating income                                                39,544          23,159

Interest income                                                  9,152           9,163
Interest expense                                                (2,451)         (5,963)
                                                            ----------      ----------

Income before income taxes                                      46,245          26,359
Provision for income taxes                                      21,272          12,438
                                                            ----------      ----------

Net income                                                      24,973          13,921
Preferred Stock dividends                                        6,575           6,608
                                                            ----------      ----------
Net income attributable to
  Common Stock                                              $   18,398      $    7,313
                                                            ----------      ----------
                                                            ----------      ----------
Earnings per share 
  attributable to Common Stock (Note 2)                     $     0.44      $     0.18
                                                            ----------      ----------
                                                            ----------      ----------
Weighted average number of common
  shares and common share equivalents                           42,268          41,289
                                                            ----------      ----------
                                                            ----------      ----------

Fully diluted earnings per share (Note 2)                   $     0.42           -
                                                            ----------      ----------
                                                            ----------      ----------
Fully diluted weighted average number of
    common shares and common share equivalents                  59,293           -
                                                            ----------      ----------
                                                            ----------      ----------
</TABLE>

----------
See accompanying Notes to Consolidated Financial Statements.


                                       4

<PAGE>

                        FHP INTERNATIONAL CORPORATION
                      CONSOLIDATED STATEMENTS OF INCOME
                                (unaudited)

<TABLE>
<CAPTION>

                                                                      For The
                                                                 Six Months Ended
(amounts in thousands,                                              December 31,
 except per share data)                                        1996            1995
                                                           ------------    ------------
<S>                                                        <C>             <C>

Revenues                                                    $2,207,042      $2,020,379
                                                            ----------      ----------
Expenses:
    Primary health care                                      1,805,136       1,650,042
    Other health care                                           63,397          60,710
    General, administrative and
         marketing                                             261,971         252,877
    Provision for restructuring                                                  9,659
                                                            ----------      ----------

Total expenses                                               2,130,504       1,973,288
                                                            ----------      ----------

Operating income                                                76,538          47,091

Interest income                                                 18,251          18,299
Interest expense                                                (4,944)        (12,387)
                                                            ----------      ----------

Income before income taxes                                      89,845          53,003
Provision for income taxes                                      41,328          25,155
                                                            ----------      ----------

Net income                                                      48,517          27,848
Preferred Stock dividends                                       13,150          13,215
                                                            ----------      ----------
Net income attributable to
    Common Stock                                            $   35,367      $   14,633
                                                            ----------      ----------
                                                            ----------      ----------
Earnings per share 
    attributable to Common Stock (Note 2)                   $     0.84      $     0.36
                                                            ----------      ----------
                                                            ----------      ----------
Weighted average number of common
    shares and common share equivalents                         42,203          41,146
                                                            ----------      ----------
                                                            ----------      ----------

Fully diluted earnings per share (Note 2)                   $     0.82           -     
                                                            ----------      ----------
                                                            ----------      ----------
Fully diluted weighted average number of
    common shares and common share equivalents                  59,318           -
                                                            ----------      ----------
                                                            ----------      ----------
</TABLE>

----------
See accompanying Notes to Consolidated Financial Statements.


                                       5

<PAGE>

                         FHP INTERNATIONAL CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)

<TABLE>
<CAPTION>

                                                                      For The
                                                                 Six Months Ended
                                                                    December 31,
(amounts in thousands)                                         1996            1995
                                                           ------------    ------------
<S>                                                        <C>             <C>

OPERATING ACTIVITIES

     Net income                                              $  48,517       $  27,848
     Adjustments to reconcile                        
        net income to net cash                       
        provided by operating activities:            
        Provision for restructuring                                              9,659
        Depreciation and amortization                           35,941          36,714
        Increase in allowance for                    
            doubtful accounts                                    3,188           1,782
        Loss on disposal of assets                               2,968              48
        Gain on sale of available-for-sale           
            investments                                            (47)           (999)
        Loss on sale of available-for-sale           
            investments                                             52             258
        Effect on cash of changes in                 
            operating assets and liabilities:        
               Accounts receivable                             (27,018)         (9,441)
               Prepaid expenses and other            
                  current assets                                 6,248           3,784
               Other assets                                     (6,746)         (2,621)
               Accounts payable                                 (4,408)          1,687
               Medical claims payable                           20,693          28,975
               Accrued salaries and                  
                  employee benefits                             (9,687)            908
               Unearned premiums                               183,217           1,700
               Other liabilities                               (30,033)         (5,668)
                                                            ----------      ----------

Net cash provided by operating activities                      222,885          94,634
                                                            ----------      ----------
INVESTING ACTIVITIES

    Purchases of available-for-sale investments               (385,758)       (112,706)
    Proceeds from sales/maturities
         of available-for-sale investments                     329,910         154,216
    Purchases of property and equipment                        (27,113)        (28,747)
    Proceeds from sales of property and
         equipment                                               3,910           1,228
                                                            ----------      ----------

    Net cash (used in) provided by investing activities        (79,051)         13,991
                                                            ----------      ----------
</TABLE>


                                       6

<PAGE>

                          FHP INTERNATIONAL CORPORATION
                   CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                                  (unaudited)

<TABLE>
<CAPTION>


                                                                      For The
                                                                 Six Months Ended
                                                                    December 31,
(amounts in thousands)                                         1996            1995
                                                           ------------    ------------
<S>                                                        <C>             <C>

FINANCING ACTIVITIES

Payments on long-term obligations                              (15,059)        (45,088)
Exercise of stock options                                       14,457           1,753
Redemption of Series B Preferred Stock                                          (1,980)
Issuance of Common Stock through Employee
    Stock Purchase Plan                                            860           2,044
Cash dividends paid to preferred shareholders                  (13,150)        (13,215)
                                                            ----------      ----------

Net cash used in financing activities                          (12,892)        (56,486)
                                                            ----------      ----------

Increase in cash and cash equivalents                          130,942          52,139
Cash and cash equivalents at beginning of period               166,873         299,144
                                                            ----------      ----------

Cash and cash equivalents at end of period                  $  297,815      $  351,283
                                                            ----------      ----------
                                                            ----------      ----------

Supplemental cash flow information:
    Interest payments                                       $    4,270      $   10,603
    Income tax payments (net of refunds)                    $   34,597      $   27,072

</TABLE>

----------
See accompanying Notes to Consolidated Financial Statements.


                                       7

<PAGE>

                         FHP INTERNATIONAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

NOTE 1.  ORGANIZATION AND ACCOUNTING POLICIES

    FHP International Corporation (the "Company"), through its direct and 
indirect subsidiaries, delivers managed health care services and sells 
indemnity medical, group life, and workers' compensation insurance.  

    The accompanying unaudited interim Consolidated Financial Statements have 
been prepared pursuant to the rules and regulations of the Securities and 
Exchange Commission ("SEC") for reporting on Form 10-Q and do not include all 
of the information and footnote disclosures normally included in financial 
statements prepared in accordance with generally accepted accounting 
principles. Interim periods are viewed as an integral part of the annual 
period of the Company.  The accompanying unaudited interim Consolidated 
Financial Statements should be read in conjunction with the audited 
Consolidated Financial Statements and Notes to Consolidated Financial 
Statements contained in the Company's Annual Report on Form 10-K for the 
fiscal year ended June 30, 1996.  Certain reclassifications have been made in 
the Consolidated Financial Statements and Notes to conform to fiscal year 
1997 presentations.

    The preparation of the Company's Consolidated Financial Statements in 
conformity with generally accepted accounting principles necessarily require 
management to make estimates and assumptions that affect the reported amounts 
of assets and liabilities and disclosure of contingent assets and liabilities 
at the balance sheet dates and the reported amounts of revenue and expense 
during the reporting periods.  Actual results could differ from these 
estimates and assumptions.

NOTE 2.  EARNINGS PER SHARE

    Primary earnings per share attributable to Common Stock for the three and 
six month periods ended December 31, 1996 and 1995 are computed by dividing 
net income attributable to Common Stock by the weighted average number of 
outstanding common shares and common share equivalents during the respective 
periods.  Common share equivalents include the effect of dilutive stock 
options calculated using the treasury stock method.

    Fully diluted earnings per share for the three and six month periods 
ended December 31, 1996 and 1995 assume the conversion of the Series A 
Cumulative Convertible Preferred Stock ("Series A Preferred Stock"), the 
elimination of the related Preferred Stock dividend requirement and market 
price as of the end of the quarter for dilutive Common Stock options.  Fully 
diluted earnings per share for the three and six month periods ended December 
31, 1995 were anti-dilutive.

NOTE 3.  PREFERRED STOCK

    The authorized capital stock of the Company includes 40,000,000 shares of 
Preferred Stock, par value $0.05 per share.  Preferred Stock is designated 
either Series A Preferred Stock or Series B Adjustable Rate Cumulative 
Preferred Stock ("Series B Preferred Stock"). At December 31, 1996 and June 
30, 1996 there was no Series B Preferred Stock outstanding.

                                       8

<PAGE>

    The issued and outstanding, and aggregate liquidation preference of the 
Company's Series A Preferred Stock is as follows:

                                             December 31, 1996   June 30, 1996
                                             -----------------  ---------------
Issued and outstanding                            21,039,795        21,040,307

Aggregate liquidation preference                $526,027,000      $526,033,000

NOTE 4.  COMMITMENTS AND CONTINGENCIES

    During the ordinary course of business, the Company and its subsidiaries 
have become a party to pending and threatened legal actions and proceedings, 
a significant number of which involve alleged claims of medical malpractice. 
Management is of the opinion, taking into account its insurance coverage and 
reserves that have been established, that the outcome of the currently known 
legal actions and proceedings will not, singly or in the aggregate, have a 
material effect on the consolidated financial position or results of 
operations or cash flows of the Company and its subsidiaries.

    On November 19, 1996, Memorial Health Services, a California nonprofit 
benefit corporation ("Memorial"), filed a Demand for Arbitration against FHP, 
Inc. ("FHP"), a subsidiary of the Company, with the American Arbitration 
Association (the "Demand").  The Demand alleges that the Company fraudulently 
and/or negligently misrepresented and failed to disclose certain information 
in connection with Memorial's purchase of a hospital in Fountain Valley, 
California from FHP and its entry into a Capitation Contract with FHP.  
Memorial alleges that it paid approximately $87 million for the hospital and 
the right to exclusively serve FHP senior and commercial member populations 
at such hospital and other Memorial facilities.  Memorial claims that but for 
FHP's alleged misrepresentations and nondisclosures, Memorial would not have 
purchased the hospital nor entered into the Capitation Contract without a 
material decrease in purchase price and an increase in the Capitation Fee for 
each FHP member served. Memorial's claims for relief include claims for 
compensatory damages in excess of $275 million, punitive damages in an amount 
to be determined, and rescission of the hospital purchase contract and 
Capitation Contract (together with compensatory and punitive damages up to 
the date of rescission), plus, in each case, attorneys fees and costs 
incurred in arbitration. By letter, dated November 2, 1996, Memorial also 
made a claim against FHP alleging that FHP failed to transfer certain assets 
to Memorial when Memorial purchased the hospital. Memorial alleges that the 
assets are worth approximately $1.3 million. The Company disputes the 
arbitrability of Memorial's claims and believes that Memorial's claims are 
without merit.  The Company intends to vigorously defend against such claims. 
Based on discussions to date with Memorial, management believes that 
resolution of the claims will not have a material adverse effect on the 
consolidated financial position or results of operations or cash flows of the 
Company.

NOTE 5.  OPM

    The Company's HMO subsidiaries have contracts with the United States 
Office of Personnel Management ("OPM") to provide or arrange managed health 
care services under the Federal Employees Health Benefits Program ("FEHBP") 
for federal employees, annuitants and their dependents. Periodically, the 
Company's HMO subsidiaries are subject to audits by the government to, among 
other things, verify that premiums charged under OPM contracts are 
established in compliance with community rating and other requirements under 
the FEHBP. Final reports from such audits may recommend that OPM seek 
monetary recoveries from the Company for amounts that may be substantial. 

                                      9

<PAGE>

    The Company increased reserves in the third quarter of fiscal year 1996, 
by recording a pretax charge of $45 million ($28.7 million, net of tax), to 
address a draft audit report arising from OPM audits for the years 1987 
through 1991 at certain of the Company's HMO subsidiaries and potential 
governmental claims for the years 1987 through 1991, which have been or may 
be asserted in relation to other of the Company's contracts with OPM and for 
possible other OPM claims through 1996. The addition to reserves resulted in 
a charge to net earnings of $0.68 per share.

    On October 7, 1996, the Company reached an agreement with The United 
States Department of Justice (the "DOJ") which resolved claims arising from 
the draft audit report covering the years 1987 to 1991. The DOJ had notified 
the Company that, based on the OPM draft audit report, the DOJ believed the 
Company may have violated the False Claims Act. The DOJ believed actual 
damages to be approximately $15 million, before consideration of interest or 
penalties.  The Company paid $12 million to the FEHBP Contingency Reserve 
Funds for the regions covered by the draft audit report.  The Company paid no 
fines or penalties as part of the agreement. Also, the DOJ released the 
Company from all claims under the contracts for the years covered by the 
draft audit report.

    OPM has opened two additional audits for years as far back as 1990 at two 
of the Company's other HMO subsidiaries.  In October 1996, OPM sent a draft 
audit report to the Company for these two additional audits.  The draft 
report alleges certain defects in the Company's rating practices.  The 
Company has responded to the draft report and is awaiting further response 
from OPM.  Based on management's understanding of the government's current 
interpretation of the community rating standard requirements, management 
currently believes it has established adequate reserves to settle any claims 
that have arisen or may arise from present or future FEHBP rate audits for 
years between and including 1987 through 1996, or that amounts in excess of 
reserves, if any, necessary to settle any such claims would not be such as to 
have a material adverse effect on the consolidated financial position or 
results of operations or cash flows of the Company.

NOTE 6.  RESTRUCTURING CHARGE

    In June 1995, the Company's Board of Directors approved a restructuring 
plan involving the discontinuance of services and programs that did not meet 
the Company's strategic and economic return objectives, including: 1) a 
reduction in workforce; 2) the creation of a subsidiary physician practice 
management company, Talbert Medical Management Corporation ("Talbert"); and 
3) the sale of the Company's two acute care hospitals and other nonproductive 
real estate. Talbert began operations as a subsidiary of the Company on 
January 1, 1996. Talbert operates in all of FHP's formerly Company operated 
medical facilities in California, Utah, Arizona, New Mexico and Nevada. The 
restructuring plan was substantially completed in fiscal year 1996.

    Restructuring charges in fiscal years 1995 and 1996 were based on the 
Company's estimates and were refined throughout fiscal year 1996. The Company 
believes it has made adequate provision for matters such as final settlement 
of purchase price adjustments and health care services contracts related to 
the sales of the hospitals and other facilities. During the six months ended 
December 31, 1996, there was no significant change in the aggregate in 
estimates with respect to accruals previously established. 

                                      10
<PAGE>

NOTE 7.  AGREEMENT AND PLAN OF REORGANIZATION

    On August 4, 1996, the Company entered into an Agreement and Plan of 
Reorganization, as amended and restated, (the "Merger Agreement"), by and 
among the Company and PacifiCare Health Systems, Inc., et. al. 
("PacifiCare"). Pursuant to the Merger Agreement, a new holding company that 
has been formed by PacifiCare will acquire all of the outstanding stock of 
the Company. The transaction is expected to close in February, 1997 (the 
"Effective Time").  See Management's Discussion and Analysis of Financial 
Condition and Results of Operations.

    Pursuant to the Merger Agreement, holders of the Company's Common Stock 
will receive consideration through a combination of $17.50 in cash and a mix 
of shares of Class A Common Stock and Class B Common Stock of PacifiCare, 
plus rights to purchase stock of Talbert. The consideration at the date of 
the Merger Agreement equated to $35.00 per share without attributing value to 
the Talbert Rights. The number of PacifiCare shares to be delivered in the 
merger is based on the price of PacifiCare stock during the twenty day 
trading period prior to the Company's stockholders' meeting which was held on 
December 31, 1996.  Each outstanding share of the Company's Series A Preferred 
Stock will be converted into the right to receive  $14.113 in cash and 0.50 
shares of PacifiCare Preferred Stock.

    As soon after the Effective Time as legally possible, the shares of the 
Company's Common and Preferred Stock will receive rights to purchase, in the 
aggregate, all of the Company's approximate 92% holding in Talbert (the 
"Talbert Rights").  The Talbert Rights will be exercisable for a period of 30 
days upon SEC approval of Talbert's S-1 registration statement filed in 
December, 1996, as subsequently amended.

    The Company and Talbert entered into a Real Estate and Equipment Master 
Transfer Agreement (the "Master Lease Agreement") to provide for the lease, 
sublease or assignment by Talbert of facilities and equipment used by Talbert 
that are either owned or leased by the Company. The Master Lease Agreement, 
as amended, provides that the parties will enter into individual leases with 
respect to the real estate and equipment subject to the Master Lease 
Agreement. The Master Lease Agreement, as amended, also provides for an 
original term of the individual leases ending December 31, 2005, with certain 
exceptions. Talbert has a right of first offer to purchase the furniture, 
fixtures and equipment subject to the Master Lease Agreement. The Master 
Lease Agreement represents approximately $95 million net book value of the 
Company's assets at December 31, 1996.  The Master Lease Agreement accounted 
for as an operating lease and currently eliminates within the Company's 
Consolidated Financial Statements.

    Talbert has entered into new capitated provider agreements (the "New 
Agreements") with FHP for the continued provision of health care and related 
services to FHP members.  The New Agreements will become effective at the 
Effective Time.  The New Agreements extend for ten-year terms except in Utah, 
which extends for a 15-year term.  The capitated rates contained in the New 
Agreements will be mutually re-negotiated after a period of one year.

    PacifiCare has informed the Company that it has entered into a credit 
agreement with Bank of America as Agent, and a syndicate of financial 
institutions for an aggregate amount of $1.5 billion to finance the cash 
portion of the transaction. The closing of the transaction is subject to 
customary closing conditions, including regulatory approvals.  (See also 
Management's Discussion and Analysis of Financial Condition and Results of 
Operations - Proposed Acquisition of the Company by PacifiCare and the form 
S-4 SEC registration statement, as amended, filed by PacifiCare in November, 
1996.) 

                                      11

<PAGE>

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

    FHP International Corporation and its subsidiaries (the "Company") is a 
federally qualified health maintenance organization, deriving almost all of 
its revenues from premiums received for health care services to approximately 
1.9 million HMO members.  The Company operates in three business segments: 1) 
the Company's contract model operations (the "HMO"); 2) a physician practice 
management company, Talbert Medical Management Corporation and related 
entities (collectively, "Talbert"), operating since January 1, 1996, in 
almost all of the Company's owned and operated medical centers; and 3) the 
Company's group life, health and accident and workers' compensation insurance 
and related products (collectively, the "Insurance Group").

PROPOSED ACQUISITION OF THE COMPANY BY PACIFICARE

    On August 4, 1996, the Company entered into an Agreement and Plan of 
Reorganization (the "Merger Agreement") with PacifiCare Health Systems, Inc. 
("PacifiCare"), N-T Holdings, Inc. ("PacifiCare Holding"), Neptune Merger 
Corp. ("PacifiCare Merger Sub") and Tree Acquisition Corp. ("Company Merger 
Sub"). Consummation of the transaction (the "Effective Time") is expected to 
occur in February, 1997.  The Merger Agreement, as amended and restated, 
provides for, among other things, an acquisition transaction involving 
PacifiCare and the Company by means of the merger of PacifiCare Merger Sub 
with and into PacifiCare and the merger of the Company Merger Sub with and 
into the Company (collectively, the "Mergers").  As a result, PacifiCare and 
the Company will become wholly-owned subsidiaries of PacifiCare Holding. At 
the Effective Time: (i) each outstanding share of PacifiCare Class A Common 
Stock will be converted into the right to receive one share of PacifiCare 
Holding Class A Common Stock; (ii) each share of PacifiCare Class B Common 
Stock will be converted into the right to receive one share of PacifiCare 
Holding Class B Common Stock; (iii) each outstanding share of Company Common 
Stock will be converted into the right to receive $17.50 in cash and a mix of 
PacifiCare Holding Class A Common Stock and PacifiCare Holding Class B Common 
Stock; and (iv) each outstanding share of Company Series A Cumulative 
Convertible Preferred Stock ("Series A Preferred") will be converted into the 
right to receive  $14.113 in cash and 0.50 shares of PacifiCare Holding 
Preferred Stock. The Mergers, approved by the respective stockholders of the 
Company and PacifiCare at their separate meetings on December 31, 1996, are 
subject to customary closing conditions, including state regulatory 
approvals.  See also the S-4 registration statement, as amended, submitted to 
the Securities and Exchange Commission jointly by the Company and PacifiCare 
in November, 1996.

    At the Effective Time, each outstanding share of Company Common Stock and 
Series A Preferred will be converted, in part, into rights to purchase a 
proportionate share (on an as-if-converted basis) of all of the Company's 
approximate 92% holding in Talbert (the "Talbert Rights").  The Talbert 
Rights will be exercisable during a subscription period of 30 days, 
commencing upon SEC approval (the "Talbert Effective Time") of Talbert's S-1 
registration statement filed in December, 1996, as subsequently amended. The 
subscription period will expire on the thirtieth day after the Talbert 
Effective Time or such other time as the exercise of the Rights is legally 
permissible.

                                      12
<PAGE>

    The Company and Talbert entered into a Real Estate and Equipment Master 
Transfer Agreement (the "Master Lease Agreement") to provide for the lease, 
sublease or assignment by Talbert of facilities and equipment used by Talbert 
that are either owned or leased by the Company. The Master Lease Agreement, 
as amended, provides that the parties will enter into individual leases with 
respect to the real estate and equipment subject to the Master Lease 
Agreement. The Master Lease Agreement, as amended, also provides for an 
original term of the individual leases ending December 31, 2005, with certain 
exceptions. Talbert has a right of first offer to purchase the furniture, 
fixtures and equipment subject to the Master Lease Agreement. The Agreement 
represents approximately $95 million net book value of the Company's assets 
at December 31, 1996.

    Talbert has entered into new capitated provider agreements (the "New 
Agreements") with FHP for the continued provision of health care and related 
services to FHP members.  The New Agreements will become effective at the 
Effective Time.  The New Agreements extend for ten-year terms except in Utah, 
which extends for a 15-year term.  The capitated rates contained in the New 
Agreements will be mutually re-negotiated after a period of one year.

    The Company's competitors may have used the announcement of the Merger 
Agreement as an opportunity to encourage employer groups currently enrolled 
with the Company to enroll their employees in other plans.  Provider groups 
currently affiliated with the Company also may be encouraged to seek other 
affiliations. Recently, the Company has begun to experience the loss of 
employees due to the potential transaction. In the event that the transaction 
is delayed or not completed, losses of significant numbers of members, 
providers and/or employees are likely to have a material adverse impact on 
the Company's future results of operations in certain geographic areas.

             THREE MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THE
                     THREE MONTHS ENDED DECEMBER 31, 1995

REVENUE AND MEMBERSHIP

    The Company generates substantially all of its revenue from premiums 
received for health care services provided to the HMO members of its 
wholly-owned subsidiaries.  Revenue for the three month period ended December 
31, 1996, totaled $1,108 million, increasing 9.1% over revenue of $1,016 
million for the same period in the previous fiscal year.  Total HMO 
membership grew 6.2% to approximately 1,939,000 at December 31, 1996, from 
approximately 1,825,000 at December 31, 1995. During fiscal year 1996, the 
Company experienced modest membership growth, due primarily to intense 
competition in all its key markets. This trend continued into the first half 
of fiscal year 1997 and may continue throughout the balance of fiscal year 
1997.  In addition, during the three month period ended December 31, 1996, 
the Company experienced a small decline in its commercial membership, 
probably due to the pending merger with PacifiCare.

    From December 31, 1995, to December 31, 1996, total commercial membership 
increased by 86,000 or 6.0% from approximately 1,439,000 to approximately 
1,525,000.  The Company generates approximately half of its HMO revenue from 
sales to the commercial market.  The Company's ability to increase its 
commercial membership and commercial premium rates during the second quarter 
of fiscal year 1997 was adversely impacted by intense competition in all the 
Company's major markets, particularly in California, and by the pending 
merger with PacifiCare.  Downward pressure on commercial premium rates in 
California has eased in recent months; however, overall commercial premium 
rates are expected to remain relatively flat in fiscal year 1997 over fiscal 
year 1996.  A substantial portion of the Company's HMO commercial premium 
rate increases becomes effective in January of each year.

                                     13

<PAGE>

    Senior membership grew by 28,000 or 7.3% to approximately 414,000 at 
December 31, 1996, from approximately 386,000 at December 31, 1995.  Almost 
all of the Company's senior HMO revenue is generated from premiums paid to 
the Company by the federal government's Health Care Financing Administration 
("HCFA"). Revenue per senior member is substantially higher than revenue per 
commercial plan member because senior members use substantially more health 
care services.  The Company receives senior premium rate increases from HCFA 
on January 1 of each year and these rate increases vary geographically.  The 
Company received an average 5.7% rate increase for calendar year 1997.

    During fiscal year 1996 and the first half of fiscal year 1997, the 
Company experienced a decline in its membership, both senior and commercial, 
at certain medical facilities operated by Talbert.  For the Company, the 
decline has been more than offset by enrollment gains in the Company's HMO 
operations.

COST OF HEALTH CARE

    Health care costs increased by $78 million or 9.1% to $939 million for 
the three months ended December 31, 1996, from $861 million for the three 
months ended December 31, 1995, due to operational growth and cost increases. 
Health care costs as a percentage of revenue improved slightly to 84.7% from 
84.8% for the same period in the prior year.

    During the last three years and the first half of fiscal year 1997, 
certain medical centers in California now operated by Talbert have 
experienced high operating costs relative to declining enrollment.  The 
decline has created excess capacity and, therefore, higher health care costs 
as a percentage of revenue.  Talbert began reducing costs in fiscal year 
1996, continuing into fiscal 1997, by reducing administrative overhead and 
excess staffing.

GENERAL, ADMINISTRATIVE AND MARKETING COSTS

    General, administrative and marketing ("G & A") expenses increased by $2 
million or 1.6% to $130 million for the three month period ended December 31, 
1996, from $128 million for the three month period ended December 31, 1995.  
G & A expenses for the three month period ended December 31, 1996, decreased 
as a percentage of revenue to 11.7% from 12.6% for the same period in the 
prior fiscal year, primarily due to workforce reductions that took place 
during fiscal year 1996, and to recent employee losses associated with the 
pending merger with PacifiCare.

INTEREST INCOME

    Net interest income was $7 million for the three month period ended 
December 31, 1996, as compared to $3 million for the three month period ended 
December 31, 1995.  Net interest income increased year-over-year primarily 
because of lower debt levels.

                                     14

<PAGE>

              SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THE
                       SIX MONTHS ENDED DECEMBER 31, 1995

REVENUE AND MEMBERSHIP

    Revenue for the six month period ended December 31, 1996, totaled $2,207 
million, increasing 9.3% over revenue of $2,020 million for the same period 
in the previous fiscal year.  The Company's ability to increase its 
commercial membership and commercial premium rates during the first half of 
fiscal year 1997 has been adversely impacted by intense competition in all 
the Company's major markets and by the pending merger with PacifiCare.  
Senior membership growth has continued steadily, increasing at a 7.3% growth 
rate (annualized) during the first half of fiscal year 1997.

COST OF HEALTH CARE

    Health care costs increased by $158 million or 9.2% to $1,869 million for 
the six month period ended December 31, 1996, from $1,711 million for the 
comparable six month period ended December 31, 1995.  Health care costs as a 
percentage of revenue remained flat at 84.7% for both six month periods.  

GENERAL, ADMINISTRATIVE AND MARKETING COSTS

    General, administrative and marketing ("G & A") expenses increased by $9 
million or 3.6% to $262 million for the six month period ended December 31, 
1996, from $253 million for the same period in the previous year, primarily 
due to cost increases.  G & A expenses for the six month period ended 
December 31, 1996, decreased as a percentage of revenue to 11.9% from 12.5% 
for the same period in the prior fiscal year, primarily due to workforce 
reductions in fiscal year 1996, other cost control measures and recent 
employee losses associated with the pending merger with PacifiCare.

INTEREST INCOME

    Net interest income was $13 million for the six month period ended 
December 31, 1996, as compared to $6 million for the six month period ended 
December 31, 1995.  Net interest income increased year-over-year primarily 
due to lower debt levels.

OPM AUDITS

    The Company's HMO subsidiaries have contracts with the United States 
Office of Personnel Management ("OPM") to provide or arrange managed health 
care services under the Federal Employees Health Benefits Program ("FEHBP") 
for federal employees, annuitants and their dependents.  These contracts with 
OPM and applicable government regulations establish premium rating 
requirements for the FEHBP.  Periodically, the Company's HMO subsidiaries are 
subject to audits by the government to, among other things, verify that 
premiums charged under OPM contracts are established in compliance with 
community rating and other requirements under the FEHBP.  In the third 
quarter of fiscal year 1996, the Company increased reserves by recording a 
pretax charge of $45 million ($28.7 million net of tax), in anticipation of 
negotiations to address existing and potential governmental claims arising 
from OPM audits for the years 1987 through 1996, as discussed below.  The 
Company's reserves reflect management's recognition that FEHBP rate audits 
and claims based thereon are being handled differently by the government than 
in the past and reflect the extent of business the Company's subsidiaries 
have conducted with OPM over many years.

                                     15

<PAGE>

    In October 1996, the Company reached an agreement with the government to 
resolve claims arising from the draft audit report covering the years 1987 
through 1991 at certain of the Company's HMO subsidiaries. The United States 
Department of Justice had notified the Company that, based on the OPM draft 
audit report, the government believed the Company may have violated the False 
Claims Act and that it believed the government's actual damages to be 
approximately $15 million before consideration of any interest or penalties.  
The agreement caused the Company to pay $12 million, which amount was 
allocated by OPM to FEHBP Contingency Reserve Funds for the regions covered 
by the Company's contracts. The Company did not pay any fine or penalty under 
the agreement.  Under the terms of the agreement, the government released the 
Company from all claims under the subject contracts for the years covered by 
the draft audit report.

    OPM has opened two additional audits for years as far back as 1990 at two 
of the Company's other HMO subsidiaries.  In October 1996, OPM sent a draft 
audit report with respect to a subsidiary acquired as part of the Company's 
purchase of TakeCare, Inc. ("TakeCare") in June, 1994, alleging certain 
defects in the subsidiary's rating practices for the years 1990 through 1994, 
and requesting that the Company comment on the draft findings.  The Company 
has responded to the draft report and is awaiting further response from OPM.

    It is likely the final TakeCare audit report will recommend that OPM seek 
a monetary recovery from the Company and that such recommended recovery will 
be for a substantial amount.  Based on positions taken by the government with 
respect to the 1987-1991 draft audit report discussed above, management 
believes that the other open audit and other possible future audits may 
allege defective rating practices and result in claims for adjustments from 
OPM.  Management cannot determine if such claims will result in further 
referrals to the Department of Justice and further False Claims Act claims.

    Based on management's understanding of the government's current 
interpretation of the community rating standard requirements, management 
currently believes it has established adequate reserves to settle any claims 
that may arise from present or future FEHBP rate audits for years between and 
including 1987 through 1996, or that amounts in excess of reserves, if any, 
necessary to settle any such claims would not be such as to have a material 
adverse effect on the consolidated financial position or results of 
operations or cash flows of the Company.  In addition, the Company's 
management currently does not believe the OPM audits will have a material 
effect on future relations with OPM.

    The preceding two paragraphs in this subsection headed "OPM Audits" 
consist of forward looking statements.  The actual outcome of any OPM audits, 
claims for adjustments and/or False Claims Act claims, the manner in which 
and amounts for which any such claims will be resolved, and the adequacy of 
reserves may differ materially from management's current expectation.  
Factors that could cause the resolution of these matters to differ materially 
from management's current expectation include the presentation by the 
government of new interpretations of FEHBP requirements, the presentation of 
new data relating to the determination of applicable rate changes or in the 
manner in which the government seeks to apply the False Claims Act to such 
situations, and/or a change in the government's position toward negotiated 
settlements of OPM audits and/or False Claims Act claims.

                                     16

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

    The Company's consolidated cash, cash equivalents and short-term 
investments increased by $169 million to $524 million at December 31, 1996, 
from $355 million at June 30, 1996, due primarily to the early receipt from 
HCFA of $186 million for January, 1997, health care services to senior 
members.  The other material source of cash during the first half of fiscal 
year 1997 was $37 million from operations (net of the early receipt of HCFA 
premiums).  Uses of cash during the period included $27 million for capital 
expenditures, $13 million for Preferred Stock dividends, and $15 million of 
debt repayment.

    In September, 1993, the Company issued $100 million of ten-year Senior 
Notes (the "Notes") which carry interest at 7%.  In March, 1994, the Company 
entered into a $350 million Credit Agreement.  The Credit Agreement, as 
amended, provides for a $200 million Revolving Credit Loan and a $150 million 
Term Loan. The Company borrows at rates based on LIBOR rate borrowings which 
currently approximate 5.9%. The Term  Loan is repayable at the rate of $15 
million every six months, with the final repayment due March 31, 2000.  The 
Credit Agreement contains financial and other covenants, including 
limitations on indebtedness, liens, dividends, sale and lease-back 
transactions, and certain other transactions.  As of December 31, 1996, 
borrowings of $19 million were outstanding under the Credit Agreement.

    The Company's ability to make a payment on, or repayment of, its 
obligations under the Credit Agreement, the Notes and its Preferred Stock is 
significantly dependent upon the receipt of funds by the Company from the 
Company's direct and indirect subsidiaries. These subsidiary payments 
represent: (a) fees for management services rendered by the Company to the 
subsidiaries; and (b) cash dividends by the subsidiaries to the Company.  
Nearly all of the subsidiaries are subject to HMO regulations or insurance 
regulations (the "Regulated Subsidiaries").  Each of the Regulated 
Subsidiaries must meet or exceed various fiscal standards imposed by HMO 
regulations or insurance regulations.  These fiscal standards may, from time 
to time, impact the amount of funds paid by one or more of the Regulated 
Subsidiaries to the Company.  The Company believes the payments referred to 
above by the Regulated Subsidiaries, together with other financing sources, 
including the Credit Agreement, should be sufficient to enable the Company to 
meet its payment obligations under the Notes, the Credit Agreement and the 
Company's Preferred Stock.  The Company believes that cash flow from 
operations, the Credit Agreement and existing cash balances will be 
sufficient to continue to fund operations and capital expenditures for the 
foreseeable future.  

    Under the Merger Agreement, PacifiCare agreed to acquire all of the 
outstanding Common and Preferred Stock of the Company.  At the Effective Time 
of the PacifiCare transaction, each outstanding share of Company Common Stock 
and Series A Preferred will be converted in part into rights to purchase a 
proportionate share (on an as-if-converted basis) of all of the Company's 
holdings in Talbert (the "Rights"). The Rights will be delivered promptly 
after the Talbert Effective Time and will be exercisable for 30 days after 
the Talbert Effective Time. On or before the Talbert Effective Time, Talbert 
will be capitalized to a net worth of approximately $60 million.

    The Company currently expects that PacifiCare will assume the Company's 
obligation under the Notes.  It is expected that outstanding balances under 
the Company's Credit Agreement will be paid in full and the Credit Agreement 
terminated upon consummation of the merger. In addition, all of the preceding 
statements about the Company's expectations or intentions are subject to 
changes that might result from the acquisition of the Company by PacifiCare.

                                     17

<PAGE>

EFFECTS OF REGULATORY CHANGES AND INFLATION

    Effective January 1, 1996, the Company received an average premium rate 
increase from HCFA of approximately 5.1% for its senior HMO members.  
Effective January 1, 1997, the Company received an average 5.7% rate increase 
for calendar year 1997.  The Company evaluates the effects of HCFA premium 
adjustments on its liquidity and capital resources, and incorporates the 
actual and anticipated impact of such adjustments into its planning process.

    The Company has been experiencing significant downward pressures on 
commercial HMO premium rates, due to intense competition and counter-
inflationary measures by large commercial employers attempting to hold their 
costs down.  The Company has experienced competitive pressures in both its 
commercial and senior markets in California and this is continuing into 
fiscal year 1997.  These downward pressures may continue throughout fiscal 
year 1997.  There can be no assurances that the Company will be able to 
obtain premium rate increases in the commercial sector in the short term.

    In recent years health care costs have been rising at a rate higher than 
that for consumer goods as a whole, as a result of inflation, new technology 
and medical advances.  The Company believes that internal cost control 
measures and financial risk-sharing arrangements with its contract medical 
providers help to mitigate the effects of inflation on its operations; 
however, there can be no assurance that the Company's efforts to reduce the 
impact of the increasing cost of health care will be as successful in the 
future as they have been in the past.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 
1995

    The statements in this Management's Discussion and Analysis of Financial 
Condition and Results of Operations concerning future events, activities, 
conditions and any and all statements that are not historical facts are 
forward-looking statements.  Actual results may differ materially from those 
projected. Forward-looking statements involve risks and uncertainties.  The 
Company's ability to expand has been and may continue to be affected by 
increasing competition, product choices and competitors in the Company's 
service areas. There has been recent discussion in the public arena that HCFA 
may reduce premiums paid to HMOs relative to Medicare rates, effective for 
years beyond 1997; also, many commercial employer groups want minimal premium 
increases or even decreases.  Both issues may affect the Company's ability to 
increase revenue.  In addition, it is often difficult to contract with 
physicians and this affects the Company's ability to control health care 
costs.  There are numerous external factors including but not limited to 
government regulation, natural disasters, health care reform, new technology, 
epidemics and hospital costs which affect the Company.  A change in any one 
or a combination thereof could affect the Company's future financial 
performance.  Also, the Company's past performance is not necessarily 
evidence of or an indication of the Company's future financial performance.

                                     18

<PAGE>
                          PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

    Information relating to certain litigation, Commitments and 
Contingencies, as set forth in Note 4 and OPM as set forth in Note 5, of 
Notes to Consolidated Financial Statements in Part I of this report is 
incorporated herein by this reference.

ITEM 2.  CHANGES IN SECURITIES.

         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

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

         At the Annual Meeting of Stockholders of the Company held on 
         December 31, 1996, the holders of the Registrant's common stock 
         voted on each of the matters listed below. In addition, the holders 
         of the Registrant's Series A Preferred Stock voted on the Amendment 
         to the Company's Certificate of Incorporation listed in item (b) 
         below.

         (a)  The Amended and Restated Agreement and Plan of Reorganization 
              (the "Reorganization Agreement"), dated as of November 11, 
              1996 by and among the Registrant, PacifiCare Health Systems, 
              Inc., N-T Holdings, Inc., Neptune Merger Corp., and Tree 
              Acquisition Corp. and the transactions contemplated thereby.


         (b)  An Amendment to the Registrant's Certificate of Incorporation 
              as described in the Registrant's proxy statement dated 
              November 21, 1996 (the "Amendment").

         (c)  Election of three members to the Registrant's Board of Directors 
              to serve three year terms ending in 1999.

         (d)  The ratification of the appointment of Deloitte & Touche LLP as 
              independent auditors of the Registrant for the fiscal year 
              ending June 30, 1997.

         The stockholders approved the Reorganization Agreement by a vote of 
         33,220,538 for, 515,292 against, 30,742 abstaining, and 3,630,760 
         broker non-votes. The Amendment was approved by the common 
         stockholders by a vote of 31,230,282 for, 2,478,863 against, 96,329 
         abstaining, and 3,591,858 broker non-votes. The Amendment was approved 
         by the holders of the Registrant's Series A Preferred Stock by a vote 
         of 15,721,014 for, 244,885 against and 89,891 abstaining.

         The stockholders elected Jack R. Anderson as director by a vote of 
         36,864,178 for and 533,154 authority withheld. The stockholders 
         elected Burke F. Gumbiner by a vote of 36,780,945 for and 616,387 
         authority withheld. The stockholders elected Warner Heineman by a 
         vote of 36,754,734 for and 642,598 authority withheld. The 
         stockholders approved the ratification of the appointment of 
         Deloitte & Touche LLP by a vote of 37,121,015 for, 187,475 against, 
         and 88,842 abstaining.

ITEM 5.  OTHER INFORMATION.

         On December 11, 1996, the Registrant entered into Amendment No. 3 to 
         that certain Stock Purchase Agreement (the "Agreement"), dated as of 
         March 15, 1996, as amended, by and among the Registrant, Talbert 
         Medical Management Corporation, Talbert Health Services Corporation, 
         Talbert Medical Management Holdings Corporation and certain 
         management investors. Amendment No. 3 to the Agreement is filed as 
         Exhibit 10.1 to this Form 10-Q.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

    (a)  Exhibits.  See Index to Exhibits at page 21 of this report.

    (b)  Reports on Form 8-K.

         None
                                     19
<PAGE>


                                 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.


                   FHP INTERNATIONAL CORPORATION


Dated:   February 13, 1997                By: /s/ KENNETH S. ORD
                                             ---------------------------------
                                             Senior Vice President and
                                             Chief (Principal) Financial Officer




                                     20

<PAGE>

                              INDEX TO EXHIBITS

<TABLE>
<CAPTION>

Exhibit
Number
-------
<S>       <C>

  4.1     Registrant agrees to furnish to the Commission upon request a copy of each 
          instrument with respect to issues of long-term debt of the Registrant, the
          authorized principal amount of which does not exceed 10% of total assets of
          Registrant.

  10.1    Amendment No. 3 to the Stock Purchase Agreement, dated March 15, 1996, by 
          and among the Registrant, Talbert Medical Management Corporation, Talbert 
          Health Services Corporation, Talbert Medical Management Holdings Corporation, 
          and certain management investors.

  11.1    Statement re:  Computation of Earnings Per Share.

  27.1    Financial Data Schedule.

</TABLE>




                                     21