<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                FORM 10-K/A NO. 2

(MARK ONE)

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

For the fiscal year ended                 December 31, 1998



                                       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:                           0-19442


                            OXFORD HEALTH PLANS, INC.

             (Exact name of registrant as specified in its charter)

          DELAWARE                                       06-1118515
(State or other jurisdiction of incorporation  (IRS Employer Identification No.)
 or organization)

800 CONNECTICUT AVENUE, NORWALK, CONNECTICUT                          06854
(Address of principal executive offices)                           (Zip Code)

                                 (203) 852-1442
              (Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $.01 Per Share

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                             Yes  X     No
                                 ---       ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K/A No. 2. [X]

As of March 1, 1999, there were 80,757,351 shares of common stock issued and
outstanding. The aggregate market value of such stock held by nonaffiliates, as
of that date, was $1,451,478,000.

                       DOCUMENTS INCORPORATED BY REFERENCE
  Portions of Registrant's definitive Proxy Statement to be filed pursuant to
                           Regulation 14A (Part III)
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                                     PART I

ITEM 1.   BUSINESS

GENERAL

    Oxford Health Plans, Inc. ("Oxford" or the "Company"), incorporated under
the laws of the State of Delaware on September 17, 1984, is a health care
company currently providing health benefit plans in New York, New Jersey,
Connecticut, Florida, New Hampshire and Pennsylvania. The Company's product line
includes its point-of-service plans, the Freedom Plan and the Liberty Plan,
traditional health maintenance organizations ("HMOs"), preferred provider
organizations ("PPOs"), Medicare plans and third-party administration of
employer-funded benefit plans ("self-funded health plans"). The Company's
principal executive offices are located at 800 Connecticut Avenue, Norwalk,
Connecticut 06854, and its telephone number is (203) 852-1442. Unless the
context otherwise requires, references to Oxford or the Company include its
subsidiaries.

    The Company currently offers its products through its HMO subsidiaries,
Oxford Health Plans (NY), Inc. ("Oxford NY"), Oxford Health Plans (NJ), Inc.
("Oxford NJ"), Oxford Health Plans (CT), Inc. ("Oxford CT") and Oxford Health
Plans (FL), Inc. ("Oxford FL"), and through Oxford Health Insurance, Inc.
("OHI"), the Company's health insurance subsidiary. OHI has been granted a
license to operate as an accident and health insurance company by the
Departments of Insurance of New York, New Jersey, Connecticut, New Hampshire,
Florida and Pennsylvania. The Company anticipates that it will have ceased doing
business in Pennsylvania, Florida and New Hampshire by the end of 1999. Oxford
also owns Oxford Health Plans (IL), Inc. ("Oxford IL") which is licensed by the
Illinois Department of Insurance as an accident and health insurance company
with authority to offer HMO products. However, Oxford ceased its Illinois
operation in the third quarter of 1998.

    The Company is not dependent on any single employer or group of employers,
as the largest employer group contributed less than 1% of total premiums earned
during 1998 and the ten largest employer groups contributed 7.7% of total
premiums earned during 1998. The Company's revenue under its contracts with the
federal Health Care Financing Administration ("HCFA") represented 21.9% of its
premium revenue earned during 1998.

RECENT DEVELOPMENTS

    Net Losses

    As more fully discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the Company incurred net losses
attributable to common stock of $291 million in 1997 and $624 million in 1998
and may incur additional losses in 1999, the extent of which cannot be predicted
at this time. As a result of its losses in 1997 and 1998, the Company has been
required to make capital contributions to certain of its HMO and insurance
subsidiaries and expects that additional capital contributions will be required
in 1999.

    Financings

    On February 6, 1998, the Company issued a $100 million senior secured
increasing rate note due February 6, 1999 ("Bridge Note") and on March 30, 1998,
issued an additional $100 million Bridge Note, pursuant to a Bridge Securities
Purchase Agreement, dated as of February 6, 1998, between the Company and an
affiliate of Donaldson, Lufkin & Jenrette Securities Corporation, as amended on
March 30, 1998 (the "Bridge Agreement"). The Company used the proceeds of the
Bridge Notes to make capital contributions to certain of its HMO subsidiaries,
to pay expenses in connection with the issuance and for general corporate
purposes. The Company retired the Bridge Notes with a portion of the proceeds of
the Financing referred to below.

    Pursuant to an Investment Agreement, dated as of February 23, 1998 (the
"Investment Agreement"), between the Company and TPG Oxford LLC (together with
the investors thereunder, the "Investors"), the Investors, on May 13, 1998,
purchased $350 million of ten-year redeemable Preferred Stock with Warrants to
acquire up to 22,530,000 shares of common stock. Simultaneously with the
consummation of the Investment Agreement, the Company issued $200 million
principal amount of 11% Senior Notes due May 15, 2005 (the "Senior Notes") and


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entered into a Term Loan Agreement pursuant to which the Company borrowed $150
million in the form of a senior secured term loan (the "Term Loan"). For
additional information regarding the Preferred Stock, the Warrants, the Senior
Notes and the Term Loan, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources". Also
simultaneously with the aforementioned transactions, Norman C. Payson, M.D., the
Company's Chief Executive Officer, purchased 644,330 shares of Oxford common
stock for an aggregate purchase price of $10 million. The investments under the
Investment Agreement and by Dr. Payson and the debt financings through the
Senior Notes and the Term Loan are herein collectively called the "Financing".

    Management Changes

    Norman C. Payson, M.D., became Chief Executive Officer of the Company on May
13, 1998. William M. Sullivan, formerly Chief Executive Officer, continues to
serve as President of the Company.

    In February 1998, Fred F. Nazem, a director of the Company, was elected
nonexecutive Chairman of the Board. Steven F. Wiggins, founder and former
Chairman of the Board, continues to serve as a director of the Company.

    In March 1998, Marvin P. Rich agreed to become Chief Administrative Officer
of the Company. Alan Muney, M.D., M.H.A. joined the Company as Chief Medical
Officer in April 1998, and Yon Y. Jorden became the Company's Chief Financial
Officer in June 1998.

    Pursuant to the terms of the Investment Agreement, Dr. Payson became a
director of the Company in May 1998 and TPG nominated David Bonderman, Jonathan
J. Coslet and James G. Coulter to the board in May 1998 and Kent J. Thiry in
August 1998. In addition, James Adamson did not stand for reelection to the
Board of Directors and, accordingly, ceased to be a director in August 1998.

    Status of Information Systems

    In September 1996, the Company converted a significant portion of its
business operations to a new computer operating system developed at Oxford over
several years. Unanticipated software and hardware problems arising from the
conversion created significant delays in the Company's claims payment function,
delayed billing functions and telephone service and adversely affected the
Company's claims payment and billing processes. For information regarding the
Company's plans with respect to its information systems, see "Business - Status
of Information Systems".

    Turnaround Plan

    During 1998, the Company recorded restructuring charges and write-downs of
strategic investments primarily associated with implementation of the Company's
plan ("Turnaround Plan") to attempt to restore the Company's profitability by
focusing on its core commercial and selected Medicare markets and disposing of
or restructuring noncore businesses, reducing administrative costs, reducing
payments to specialist physicians and other providers, completing and
operationalizing risk transfer and other alternative provider arrangements,
reducing unnecessary utilization of hospital and other services, increasing
commercial group premiums, improving service levels and strengthening
operations. The Company has focused its resources on employer group products in
the New York Metropolitan Tri-State area. The Company intends to attempt to
improve operating margins for these products over the next few years by, among
other things, strengthening commercial underwriting, reducing administrative and
any inappropriate medical costs and, where applicable, refining benefit plans
and increasing premiums.

    The Company has also focused on attempting to reduce losses in its
government programs by, among other things, transferring a substantial portion
of the medical cost risk associated with the provision of covered services to
its Medicare beneficiaries to certain health care provider entities in certain
counties, by withdrawing from participation in the Medicare program in other
counties and by withdrawing completely from the Medicaid business. In June 1998,
in coordination with HCFA, the Company voluntarily suspended marketing and most
enrollment of new members under its Medicare programs in order to provide the
Company with an opportunity to


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strengthen its operations and institute certain corrective actions required by
HCFA. In February 1999, the Company reinstated marketing to and enrollment of
Medicare beneficiaries. See "Business - Products - Medicare", "Business -
Products - Medicaid", "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations Restructuring Charges
and Write-downs of Strategic Investments".

    The Company also intends to continue to attempt to reduce losses in the New
York mandated individual HMO and point-of-service plans (the "New York Mandated
Plans"). The losses resulting from the New York Mandated Plans are primarily
attributable to the rapidly rising medical costs in these plans and insufficient
premium rates. See "Business - Products - New York Individual Plans" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

    In 1998, in furtherance of its Turnaround Plan, the Company focused efforts
on withdrawing from the Florida, Pennsylvania, New Hampshire and Illinois
markets. The Company sold its Pennsylvania subsidiary in January 1999, although
it continues to service certain insured PPO products sold through OHI in
Pennsylvania. The Company reinsured its Illinois health care obligations to
another health plan and ceased its Illinois operations in the third quarter of
1998. The Company has ceased offering its products in Florida and New Hampshire
and anticipates being completely out of these two markets by the end of 1999.
The Company has substantially scaled back its plans to offer dental plans and
has ceased to offer life insurance products. The Company has also concluded
several other initiatives, including the closing of its specialty care
management business and the sale of one health center, and is evaluating its
financial commitment to certain other ongoing initiatives. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Restructuring Charges and Write-downs of Strategic Investments".

    The Company is attempting to reduce its future expected costs associated
with payment for laboratory and radiology services and pharmacy benefits through
the negotiation of new contracts with network managers. In the second half of
1998, the Company entered into definitive agreements for laboratory and
radiology services and pharmacy benefit management that are structured to
provide significant savings compared to estimated cost increases for laboratory
and radiology services and pharmacy benefits for 1999. However, implementing
such contracts cannot be assured and may involve operational or unforeseen
difficulties, and there can be no assurance that these contracts will be
successful in reducing the Company's future costs associated with such services
and benefits.

    The Turnaround Plan also calls for significant reductions in administrative
costs on a per member per month basis and as a percentage of operating revenue
over the long term through such measures as increasing operating efficiencies
and reducing employment levels associated with scaled-back initiatives and
operations. The Company expects, however, that administrative costs will remain
high during the foreseeable future as the result of, among other things, costs
associated with strengthening the Company's operations, resolving historical
claim and member issues, ongoing regulatory investigations and inquiries and
litigation. There can be no assurance that the Company will be successful in
implementing the foregoing measures, in implementing medical cost control
measures and provider contracting initiatives, or in reducing administrative
costs and such steps could adversely affect the Company's provider network or
sales of its product. Moreover, the Company cannot predict the impact of adverse
publicity, legal and regulatory proceedings or other future events on the
Company's operations and financial results, including ongoing financial losses.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".

    Legal Proceedings

    See "Legal Proceedings" for a description of litigation and regulatory
investigations and examinations involving the Company and certain of its
directors, officers and employees.


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PRODUCTS

    Freedom Plan

    Oxford's Freedom Plan is a point-of-service ("POS") health care plan that
combines the benefits of Oxford's HMOs with some of the benefits of conventional
indemnity health insurance. Oxford's Freedom Plan gives members the option at
any time of using the network of providers under contract with Oxford's HMOs or
exercising their freedom to choose providers not under contract with Oxford,
although certain benefits are only available through network providers. The
Freedom Plan, first offered in January 1988 in New York, had approximately
1,318,100 members at December 31, 1998 compared with 1,333,500 at the end of
1997. As a percentage of total premiums earned, Freedom Plan premiums were 61.0%
in 1998, 59.2% in 1997 and 61.2% in 1996. The largest employer group offering
the Freedom Plan accounted for approximately 1.2% of Freedom Plan premiums
earned during 1998, and the ten largest employer groups offering the Freedom
Plan accounted for 9.2% of Freedom Plan premiums earned in 1998.

    Oxford has targeted small to medium-size employers (10 to 1,500 employees)
for this product. New York Freedom Plan enrollment accounts for almost 80% of
all Freedom Plan enrollment. In New York each Freedom Plan member receives two
forms of coverage - HMO coverage through Oxford NY and conventional insurance
through OHI. In New Jersey and Connecticut, each member receives Freedom Plan
coverage through one contract. For Freedom Plan coverage, employers receive one
monthly bill and have both the in-network and out-of-network coverage
administered by Oxford.

    HMOs

    Oxford currently offers HMO plans in New York, New Jersey and Connecticut.
The largest HMO commercial employer group accounted for 3.7% of total HMO
premiums earned during 1998, while the ten largest HMO groups accounted for
18.0% of total HMO premiums earned in 1998. Commercial HMO membership
approximated 260,700 members at December 31, 1998 compared with 270,400 members
at the end of 1997. As a percentage of total premiums earned, group commercial
HMO revenues were 11.8% in 1998, 11.1% in 1997 and 10.7% in 1996.

    Liberty Plan

    The Company introduced the Liberty Plan, a point-of-service health care
plan, in late 1993. This plan offers lower premiums than the standard Freedom
Plan by allowing member groups to choose from a smaller network of in-network
providers. The Company believes that the Liberty Plan provider network, while
smaller than the Freedom Plan network, is competitive in size and quality with
networks of certain other health plans in the New York metropolitan area.
Liberty Plan membership approximated 140,800 members at December 31, 1998
compared with 124,100 members at the end of 1997.

    Individual Plans

    In 1996, New York mandated that HMOs doing business in the community-rated
market in the state must provide POS and HMO coverage with mandated benefits to
individuals (the "New York Mandated Plans"). Oxford also continues to cover
individuals in the state under a grandfathered POS plan (together with the New
York Mandated Plans, the "New York Individual Plans"). The grandfathered plan is
closed to new membership. The Company offers individual HMO and various
individual indemnity plans in New Jersey (the "New Jersey Mandated Plans"). The
Company had approximately 68,700 members in the New York Individual Plans as of
December 31, 1998 as compared with 84,500 members as of December 31, 1997. The
Company had approximately 5,200 members in the New Jersey Mandated Plans as of
December 31, 1998 as compared with 7,900 members as of December 31, 1997.

    In March 1998, the Company filed with the New York State Insurance
Department ("NYSID") proposed rate increases of 50% and 64%, respectively, for
its New York mandated individual HMO and point-of-service plans as a result of
rapidly rising medical costs in those plans. The Company believes it experiences
significant selection bias in these plans which are chosen, on average, by
individuals who require more health care services


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than the average commercial population. In April 1998, the NYSID denied the
Company's rate increase request, but directed the Company to apply funds
allocated to the Company from the New York State Market Stabilization Pools
against rate relief in the individual and small group market. The Company
received approximately $6.4 million in August 1998 and another $6.4 million in
December 1998 from these pools. Although the Company anticipates that it will
receive refunds from these pools in 1999, there can be no assurance that such
payments will be received or, if received, will not be less than the payments
received in 1998. In addition, the NYSID is currently finalizing regulations
which will modify the methodology used to fund these pools. The proposed changes
to the operation of the pooling methodology will affect the distribution of
remaining 1997 and 1998 pool amounts. In the fourth quarter of 1998, the Company
established a $27.4 million reserve for premium deficiency losses in the New
York Individual Plans and the New Jersey Mandated Plans. The Company currently
intends to reduce the size of the provider network serving the New York
Individual Plans, subject to receipt of government approvals, in an effort to
better control medical costs and utilization to promote affordability for the
plans. The Company has filed with the NYSID to increase its rates for this
product by only 9.8% effective as of April 1, 1999. The Company expects that
operating results for the New York Individual Plans will continue to be
adversely affected by high medical costs and that losses will continue in the
absence of significant additional rate or regulatory relief. Further, there can
be no assurance that the Company will be successful in implementing the network
changes, cost and utilization controls or rate increases referred to above. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations".

    Preferred Provider Organizations

    The Company currently offers a PPO product in New Jersey and Pennsylvania
and a non-gatekeeper POS plan in New York. The current Pennsylvania PPO
membership is minimal. Applications for approval of PPO products have been filed
in both New York and Connecticut.

    Medicare

    The Company offers as Oxford Medicare Advantage a number of Medicare plans
to Medicare eligible individuals through its New York, New Jersey and
Connecticut HMO subsidiaries. Under Medicare contracts with HCFA, Oxford is paid
a fixed per member per month capitation amount by HCFA based upon a formula that
projects the medical expense of each Medicare member. The Company bears the risk
that the actual costs of health care services may exceed the per member per
month capitation amount received by the Company. Effective January 1, 1999,
federal legislation replaced the Medicare risk contract program with the
Medicare+Choice program (hereinafter referred to as "Medicare"). See "Business -
Government Regulation - Recent Regulatory Developments".

    Medicare contracts provide revenues that are generally higher per member
than those for non-Medicare members. Such risk contracts, however, also carry
certain risks such as higher comparative medical costs, government regulatory
and reporting requirements, the possibility of reduced or insufficient
government reimbursement in the future, and higher marketing and advertising
costs per member as the result of marketing to individuals rather than to
groups. The Company has developed a network of physicians and other providers to
serve its Medicare enrollees. In addition, in 1998 the Company finalized
agreements pursuant to which it has transferred a substantial portion of the
medical cost risk associated with the provision of covered services for Medicare
members to providers in some of its service areas where the Company had
experienced substantial losses, and the Company withdrew from certain areas
where agreements could not be completed. Under these risk transfer arrangements,
providers assume a substantial portion of the risk of increasing health care
costs. These arrangements may give rise to regulatory issues and, among other
risks and uncertainties involved in the successful implementation of these
contracts, the Company bears the risk of nonperformance or default by the
providers. The Company has experienced certain operational difficulties in the
implementation of these risk transfer arrangements, and the risk sharing
provider groups have not achieved acceptable performance levels on certain key
operating measures. See "Business - Physician Network - Risk Sharing Groups".

    At December 31, 1998, the Company had approximately 148,600 Medicare members
enrolled in its Medicare plans compared with 161,000 members at the end of 1997.
However, as the result of the Company's withdrawal from the Medicare program in
certain counties in New York, New Jersey, Pennsylvania and Connecticut, the
Company had approximately 110,400 Medicare members as of January 1, 1999.
Medicare premiums accounted


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for approximately 21.9% of total premiums earned for the year ended December 31,
1998 compared with 22.0% in 1997 and 19.8% in 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a description
of operating losses incurred in the Company's Medicare programs and "Legal
Proceedings" for a description of site visits by HCFA during 1998 and the
beginning of 1999.

    Medicaid

    As of January 1, 1998, Oxford offered a Medicaid Healthy Start plan to
individuals eligible for Medicaid benefits in New York, New Jersey, Metropolitan
Philadelphia and Connecticut. The Company received fixed monthly premiums per
member under risk contracts with the respective state agencies administering the
Medicaid program. At December 31, 1998, approximately 97,800 members were
enrolled in the Company's Medicaid plans compared with 189,600 members at the
end of 1997. Medicaid premiums accounted for approximately 5.3% of total
premiums earned for the year ended December 31, 1998 compared with 7.7% in 1997
and 8.3% in 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of operating losses
incurred in the Company's Medicaid programs. The Company withdrew from the
Medicaid program in Connecticut and New Jersey, effective April 1, 1998 and July
1, 1998, respectively. In November 1998, the Company completed an agreement to
assign its New York Medicaid contract and certain rights under its provider
agreements to a third party. In January 1999, the Company concluded the sale of
its Pennsylvania HMO subsidiary, including the Pennsylvania Medicaid business.
Accordingly, as of February 1, 1999, the Company had completed its withdrawal
from participation in all state Medicaid programs.

    Self-Funded Health Plans

    Oxford's self-funded health plans have a flexible plan design similar to the
Company's fully-insured programs, yet retain the cash flow advantage of
self-funding for the employer. The employer self-insures health care expenses
and pays for health claims only as they are incurred. In exchange for
administration fees, Oxford provides claims processing and health care cost
containment services through its provider network and utilization management
programs. As of December 31, 1998, the Company was administering twenty-four
self-funded groups in New York, sixteen self-funded groups in New Jersey and two
self-funded groups in Connecticut.

    Other Investments

    In October 1997, the Company disposed of its interest in Health Partners,
Inc., a company established to provide management and administrative services to
physicians, medical groups and other providers of health care. In exchange, the
Company received 2,090,109 shares of common stock of FPA Medical Management,
Inc. ("FPAM"). FPAM filed for bankruptcy protection in July 1998. The Company
had several risk sharing agreements with entities owned or managed by FPAM, all
of which were terminated as of January 31, 1999. As of December 31, 1997, the
Company wrote down its investment in FPAM by $38.0 million. As a result, the
Company recognized a pretax gain of approximately $25.2 million ($20.5 million
after taxes, or $.26 per share). The Company wrote down its remaining investment
in FPAM to nominal value in the second quarter of 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview".

    In November 1995, Oxford acquired a 19% equity interest in St. Augustine
Health Care, Inc. ("St. Augustine"), a Florida health maintenance organization.
Oxford provided $14.3 million in equity and debt financing to St. Augustine. As
part of the Company's decision to focus on its core markets of the New York
Metropolitan Tri-State area, the Company reduced by $14.3 million the carrying
value of its investment in St. Augustine as of December 31, 1997 and disposed of
its fully reserved interest in St. Augustine in October 1998.

MARKETING AND SALES

    Oxford distributes its products through several different internal channels,
including direct sales representatives, business representatives, inbound
telemarketing representatives and executive account representatives as well as
through external insurance agents, brokers and consultants.


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    Internal Representatives

    The direct sales representatives sell the Company's traditional HMO
programs, the Freedom Plan, the Liberty Plan, the PPO plans and the self-funded
plans directly to employers. The direct sales force is organized into units in
each of the Company's regions. Separate regional sales executives are
responsible for each direct sales unit. The Company also maintains a Medicare
sales force that sells directly to Medicare beneficiaries. The Company's
marketing department develops television advertising, as well as direct mail
advertising, targeted print advertisements and internally generated marketing
publications for use by the direct sales force, the Medicare sales force and the
independent brokers and agents.

    The Company maintains regional executive account representatives who work
directly with employer groups exceeding 1,000 lives as well as accounts
maintained by noncommissioned consultants. The Company also maintains staff that
is responsible for business opportunities associated with inbound calls from
prospective members and group accounts. Account managers responsible for
servicing employer accounts sold directly or through a broker or agent are
employed on a regional basis. These account managers are the principal
administrative contact for employers and their benefit managers by, among other
things, conducting on-site employee meetings and by providing reporting and
troubleshooting services.

    Independent Insurance Agents and Brokers

    The primary distribution system for the group health insurance industry in
the Company's service areas has been independent insurance agents and brokers.
Oxford markets its commercial products through approximately 9,200 independent
insurance agents and brokers as of December 31, 1998 (compared with 7,300 at the
end of 1997) who are paid a commission on sales. The Company maintains regional
broker business unit representatives who work directly with the independent
agents and brokers. The independent insurance agents and brokers have been
responsible for a significant portion of Oxford's Freedom Plan and Liberty Plan
enrollment growth during their initial years, and the Company expects to
continue using independent insurance agents and brokers in its marketing system
in the future. The Company believes that the New York metropolitan market, in
particular, is influenced significantly by independent agents and brokers, and
that utilization of this distribution system is an integral part of a successful
marketing strategy in the region. However, no assurance can be given that the
Company will continue to be able to maintain as large a distribution system of
independent insurance agents and brokers as it has in the past.

PHYSICIAN NETWORK

    The Company's HMO and point-of-service health care programs are designed
around "primary care" physicians, who assume overall responsibility for the care
of members, and determine or recommend the nature and extent of services
provided to any given member. Primary care physicians provide preventive and
routine medical care and are also responsible for making referrals to contracted
specialist physicians, hospitals and other providers. Medical care provided
directly by primary care physicians includes the treatment of illnesses not
requiring referrals, as well as periodic physical examinations, routine
immunizations, maternity and well child care and other preventive health
services. Oxford also offers products that do not require referrals from primary
care physicians.

    Oxford maintains a network of more than 47,000 providers that are under
contract with the Company, with approximately 28,000 in New York, 12,000 in New
Jersey and 7,000 in Connecticut. The Company also maintains a small network of
providers to service its remaining Pennsylvania PPO business. The majority of
Oxford's physicians have contracted individually and directly with Oxford,
although Oxford also has contracts with hospitals, physician hospital
organizations, individual practice associations and physician groups.

    Risk Sharing Groups

    In an effort to control increasing medical costs in its Medicare programs,
the Company has entered into agreements pursuant to which it has transferred a
substantial portion of the medical cost risk associated with the provision of
covered services to providers in certain service areas where the Company had
been experiencing substantial losses. Under these risk transfer arrangements,
providers assume a substantial portion of the risk of



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increasing health care costs. The Company intends to pursue additional risk
transfer agreements in certain of its other Medicare service areas. These
arrangements give rise to regulatory issues and, among other risks and
uncertainties involved in the implementation and operation of these contracts,
the Company bears the risk of nonperformance or default by these providers. See
"Legal Proceedings" for a description of site visits by HCFA during 1998 and the
beginning of 1999.

    The Company entered into two risk sharing arrangements in the third quarter
of 1998, which became fully operational as of December 31, 1998. An agreement
with North Shore-Long Island Jewish Health Systems covers approximately 34,400
members in certain New York counties as of December 31, 1998. An agreement with
Heritage New Jersey Medical Group ("Heritage") covers all of the Company's
approximately 17,600 members in New Jersey as of December 31, 1998. The Company
and the risk sharing groups have experienced operational difficulties in
implementing these transactions, including difficulties in timely payment of
provider claims by the risk sharing groups. In addition, the New Jersey
Department of Health and Senior Services has granted only a conditional approval
of the New Jersey arrangement, and the New Jersey Department of Banking and
Insurance has indicated that its final approval of the arrangement will be
subject to the condition that certain aspects of the arrangement be modified.
These modifications must be acceptable to the Company, Heritage and the
regulatory authorities. The Company and the risk sharing groups have made
progress in resolving the operational difficulties referred to above and will
attempt to address the regulatory concerns raised; however, no assurance can be
given as to the outcome, and a failure of one of these arrangements could have a
material adverse effect on the Company's results of operations.

    In 1993, the Company introduced the Private Practice Partnership program
(the "Partnerships") to organize individual physicians into groups designed to
promote efficient, quality care. The payment structure for the Partnerships
involves a degree of risk sharing and certain incentive payments in an attempt
to promote cost-effective, quality care. In 1996, the Company formed a specialty
care management business to manage specialty medical costs in distinct
specialties for certain diagnostic conditions. As part of the Turnaround Plan,
in 1998 the Company assessed the cost to the Company of running these programs
as well as the effect of new government regulations on such programs. As a
result of this assessment, the Company closed its specialty care management
business and by March 1, 1999 had reduced the number of risk sharing
Partnerships to seven.

    Physician Compensation

    Exclusive of the above described Partnerships and risk sharing arrangements
for portions of the Company's Medicare program, certain other contractual
services described below and a small number of individual physicians, Oxford
currently compensates its participating physicians primarily based upon a fixed
fee schedule, under which physicians receive payment for specific procedures and
services. The Company's discounted, fee-for-service reimbursement program for
participating physicians was designed to achieve delivery of cost-effective,
quality health care by its physician network.

    The compensation arrangement under the Company's Medicare risk-sharing
arrangements is based on allocating a fixed percentage of the premium received
by the Company from HCFA on a per member per month basis without regard to the
amount or scope of services rendered. These arrangements are subject to
compliance with risk sharing regulations adopted by HCFA and the States of New
York and New Jersey, which require disclosure and reinsurance for specified
levels of risk sharing.

    Delays in payment of provider claims and claims payment errors by the
Company during the last two years have created a significant number of provider
complaints and a backlog in responding to such complaints. In addition, several
medical societies have filed notices of arbitration against the Company to
resolve claims related issues of member physicians. See "Legal Proceedings". The
Company is presently pursuing resolution of these issues but is unable to
predict whether these developments or adverse publicity concerning the Company
will have an adverse effect on its relations with its network providers, or
cause provider disenrollment. For a description of advances made by the Company
to certain network providers, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".


                                       9
<PAGE>   10
    Hospital Arrangements

    The Company has contracts with over 200 hospitals in its New York, New
Jersey and Connecticut service areas providing for inpatient and outpatient care
to the Company's members at prices usually discounted from the hospital's billed
charges. The Company believes that the rates in these contracts are generally
competitive and, in many cases, revenue received from the Company represents a
significant portion of the hospital's total revenue. Most of these contracts may
be terminated after a specified notice period or have remaining terms of less
than one year. In addition, there has been significant consolidation among
hospitals in the Company's service area, which tends to enhance the combined
entity's bargaining power with managed care payors. As a result, the Company has
the risk that certain hospitals may seek higher rates and in connection
therewith threaten to or, in fact, terminate their agreements with the Company.
The Company is in the process of renegotiating several major hospital
agreements. See "Cautionary Statement Regarding Forward - Looking Statements".

    Other Contracted Services

    The Company has entered into new long-term risk sharing contracts for
pharmacy benefits management and laboratory services, effective January 1, 1999,
and for radiology services which is expected to be effective April 15, 1999.
These agreements are structured to provide significant savings to the Company
compared to estimated cost increases for these services over the next several
years. However, implementing these contracts involves various risks and
operational challenges, and there can be no assurance that these contracts, if
implemented, will be successful in reducing the Company's future costs.
Moreover, cost savings under these contracts are achieved in certain instances
through fee reductions, more rigorous utilization review and reductions in the
size of the provider network, all of which may adversely affect member and
provider satisfaction with the Company's benefit plans. See "Cautionary
Statement Regarding Forward - Looking Statements".

CONTROL OF HEALTH CARE COSTS

    Oxford's medical review program attempts to measure and, in some cases,
influence inappropriate utilization of certain outpatient services, elective
surgeries and hospitalizations provided to Oxford members. Under the medical
review program, for many of Oxford's plans, physicians and members are obligated
to contact Oxford prior to providing or receiving specified treatments.
Utilizing standardized protocols on a procedure-specific basis, Oxford's staff
of registered nurses and physicians may review the proposed treatment for
consistency with established norms and standards.

    Oxford's outpatient cost control program is based on the primary care system
of health care coordination, which promotes consistency and continuity in the
delivery of health care. For most plans sold, each person who enrolls in an
Oxford plan must select a participating primary care physician who serves as the
manager of the member's total health care needs. Members generally see their
primary care physician for routine and preventive medical services. The primary
care physician either provides necessary services directly or authorizes
referrals for specialist physicians, diagnostic tests and hospitalizations.
Except in life-threatening situations, in order to receive the highest level of
benefits, all elective hospitalizations must be authorized in advance by a
member's primary care physician and must be delivered by providers who have
contracted with Oxford. For out-of-network services, the member must obtain
approval directly from Oxford in order to receive the highest level of benefits.

    In connection with its review of certain claims, the Company may compare the
services rendered by its participating physicians to an independently developed
pattern of treatment standards. This pattern of treatment analysis may allow the
Company to identify procedures that were not consistent with a patient's
diagnoses, as well as billing abuses and irregularities. Separate claims
auditing systems are utilized for certain hospital diagnosis related group
payments and other surgical payments. Oxford utilizes a hospital bill audit
program which has yielded savings with respect to hospital claims, through
pricing reviews, medical chart audits and on-site hospital reviews. Oxford's
claim auditing program includes a computer program that also seeks to identify
aberrant physician billing practices, and helps isolate specific physicians who
are not practicing and billing in a manner consistent with Oxford's health care
philosophy. In addition, the Company maintains management information systems
which help identify aberrant medical care costs. Not all cost control procedures
are applied to all claims, depending on the size and type of claim, existing
claim backlogs and other factors. In addition,


                                       10
<PAGE>   11
regulatory considerations, the threat of litigation or liability concerns,
operational and systems issues and arrangements with hospitals and physicians
may limit the Company's ability to apply all available cost control measures.
See "Legal Proceedings".

STATUS OF INFORMATION SYSTEMS

    In September 1996, the Company converted a significant part of its business
operations to a new computer operating system developed at Oxford. From
September 1996, most business functions at the Company were operated on the new
system, with the exception of the processing of claims, which continued to
operate on the previous system. Since the conversion, the Company must operate
both systems and reconcile the two systems on an ongoing basis by a process
known as "backbridging".

    Unanticipated software and hardware problems arising in connection with the
conversion resulted in significant delays in the Company's claims payments and
group and individual billing and adversely affected claims payment and billing
accuracy. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations". The Company implemented a number of systems and
operational improvements during 1996, 1997 and 1998 in an effort to improve
claims turnaround times and claims backlogs and claims and billing errors.
However, the backbridging process continues to create issues relating to
transfer of data, which continues to cause delays for certain claims, and there
have been delays in delivering all needed functionality under the new system.
Moreover, the Company's claims turnaround times and accuracy still need
improvement to reach acceptable levels. The Company is continuing to seek
improvements in the processes referred to above and to add needed functionality.

    The Company has undertaken a review of its information systems needs and
capabilities. As a result of this review, the Company has decided to continue
operations on its current claims processing systems and continue to work on
requisite modifications and enhancements.

    Although the Company made certain modifications and enhancements to attempt
to improve systems controls and processing efficiencies during 1998, the Company
continues to review its long-term information system strategy. The Company's
resources are currently focused on (i) Year 2000 readiness, (ii) making
requisite modifications and enhancements to the existing information systems and
(iii) establishing improved performance and management information.

    There can be no assurance that the Company will be successful in mitigating
the existing system problems that have resulted in payment delays and claims
processing errors. Moreover, operating and other issues can lead to data
problems that affect performance of important functions, including claims
payment and group and individual billing. There can also be no assurance that
the process of improving existing systems will not be delayed or that additional
systems issues will not arise in the future.

    For information as to the Company's "Year 2000" readiness, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "- Year 2000 Readiness".

QUALITY MANAGEMENT

    The majority of Oxford's physicians in its commercial and Medicare rosters
are board certified in their specialty (by passing certifying examinations in
the specialty as recognized by the American Board of Specialties) or become
board certified within five years of becoming eligible. Board certification is
one of the few objective measures of a physician's expertise. Additionally,
Oxford has a credentialing procedure that consists of: primary verification of
all credentials; query of the National Practitioner Data Bank, state medical
boards and admitting hospitals for malpractice history, disciplinary actions
and/or restrictions of hospital privileges; and on-site office evaluation to
determine compliance with Oxford standards. Oxford also periodically
recredentials all providers. The recredentialing review consists of repeating
the initial credentialing process as well as a review of the provider's practice
history with Oxford. This process also includes evaluating the results of
quality assurance reviews, complaints from members concerning the provider,
utilization patterns and the provider's compliance with Oxford's administrative
protocols.


                                       11
<PAGE>   12
    The Company's physician contracts require adherence to Oxford's Quality
Assurance and Utilization Review Programs. Oxford's Quality Management
Committees, which are composed of physicians from within Oxford's network of
providers, advise the Company's Chief Medical Officer concerning the development
of credentialing and other medical criteria. The committees also provide
oversight of Oxford's Quality Management and Utilization Management Programs
through peer review and ongoing review of performance indicators.

    The Company seeks to evaluate the quality and appropriateness of medical
services provided to its members by performing member and physician satisfaction
studies. The Company conducts on-site review of medical records at selected
physician offices facilitating retrieval of statistical information which allows
for problem resolution in the event of member or physician complaints and for
retrieval of data when conducting focused studies.

    In September 1998, the National Committee on Quality Assurance ("NCQA")
changed the status of the NCQA accreditation of the Company's principal health
care subsidiaries to provisional, primarily as a consequence of the
well-publicized systems, operational and financial difficulties experienced by
the Company and the results of an interim review conducted by NCQA staff. In
February 1999, NCQA conducted its regular periodic review of the Company's
accreditation which is scheduled to expire in May 1999. There can be no
assurance that the Company's accreditation will be renewed or that the Company
will achieve the same level of accreditation previously held. An adverse
decision by NCQA could adversely affect sales and renewals of commercial group
and other business.

RISK MANAGEMENT

    The Company limits, in part, the risk of catastrophic losses by maintaining
high deductible reinsurance coverage. The Company does not consider this
coverage to be material as the cost is not significant and the likelihood that
coverage will be applicable is low. The Company's operating subsidiaries also
maintain insolvency coverage as required by the states in which they do
business.

    The Company also maintains general liability, property, employee fidelity,
directors and officers, and professional liability insurance coverage in amounts
the Company deems prudent. The Company requires contracting physicians,
physician groups and hospitals to maintain professional liability and
malpractice insurance in an amount consistent with industry standards.

GOVERNMENT REGULATION

    The Company's HMO subsidiaries are subject to substantial federal and state
government regulation. The Company's New York domiciled insurance subsidiary,
OHI, is subject to regulation by the New York State Insurance Department. In
addition, OHI is currently subject to regulation as a foreign insurer by New
Jersey, Pennsylvania, New Hampshire, Florida and Connecticut.

    Federal Regulation

    One of the most significant applicable federal laws is the Health
Maintenance Organization Act of 1973, as amended (the "HMO Act"), and the rules
and regulations promulgated thereunder. The HMO Act governs federally qualified
HMOs and competitive medical plans ("CMPs"), and prescribes the manner in which
such HMOs and CMPs must be organized and operated in order to maintain federal
qualification and/or to be eligible to enter into Medicare contracts with the
federal government. Oxford NY, Oxford NJ and Oxford CT are qualified CMPs under
HCFA's requirements. In order to maintain this status, Oxford NY, Oxford NJ and
Oxford CT must remain in compliance with certain financial, reporting and
organizational requirements under applicable federal statutes and regulations in
addition to meeting the requirements established pursuant to applicable state
law.

    The Company's health plans that have Medicare contracts, Oxford NY, Oxford
NJ and Oxford CT, are subject to regulation by HCFA, a branch of the United
States Department of Health and Human Services. HCFA has the right to audit
health plans operating under Medicare contracts to determine each health plan's
compliance with HCFA's contracts and regulations and the quality of care being
rendered to the health plan's Medicare members. Health plans that offer a
Medicare product must also comply with requirements established by peer review


                                       12
<PAGE>   13
organizations ("PROs"), which are organizations under contract with HCFA to
monitor the quality of health care received by Medicare members. PRO
requirements relate to quality assurance and utilization review procedures. In
November 1998, prior to awarding Medicare contracts to health plans for calendar
year 1999, HCFA conducted audits of Medicare applicants, including the Company.
The Company's operations were found to be qualified to enter into the Medicare
contracts. For a description of a recent site examination by HCFA, see "Legal
Proceedings".

    In 1996, HCFA promulgated regulations that prohibit HMOs with Medicare
contracts from including any direct or indirect payment to physicians or groups
as an inducement to reduce or limit medically necessary services to Medicare
beneficiaries. These regulations impose reinsurance, disclosure and other
requirements relating to physician incentive plans that place physicians
participating in a Medicare plan at substantial financial risk. In 1997, New
York and New Jersey implemented similar regulations applicable to the Company's
commercial members. The Company's ability to maintain compliance with these
rules and regulations depends, in part, on its receipt of timely and accurate
information from its providers.

    Other Federal laws which govern the Company's operations include the Federal
Health Insurance Portability and Accountability Act of 1996 ("HIPA") and the
Mental Health Parity Act of 1996 ("MHPA"). HIPA (i) ensures portability of
health insurance to individuals changing jobs or moving to individual coverage
by limiting application of preexisting condition exclusions, (ii) guarantees
availability of health insurance to employees in the small group market and
(iii) prevents exclusion of individuals from coverage under group plans based on
health status. The provisions of HIPA became effective beginning July 1, 1997.
Similar state law provisions in New York limit preexisting condition exclusions
for new group and individual enrollees who had continuous prior coverage and
require issuance of group coverage to small group employers. MHPA applies to
group health plans and health insurance issuers and became effective for plan
years beginning on or after January 1, 1998. MHPA prohibits group health plans
and health insurance issuers providing mental health benefits from imposing
lower aggregate annual or lifetime dollar-limits on mental health benefits than
any such limits for medical or surgical benefits. MHPA's requirements do not
apply to small employers who have between 2 and 50 employees or to any group
health plan whose costs increase one percent or more due to the application of
these requirements.

    The Company also administers self-funded plans that are governed by the
Employee Retirement Income Security Act of 1974 ("ERISA") and is subject to
requirements imposed on ERISA fiduciaries. The U.S. Department of Labor is
engaged in an ongoing ERISA enforcement program which may result in additional
constraints on how ERISA-governed benefit plans conduct their activities. There
have been recent legislative attempts to limit ERISA's preemptive effect on
state laws. If such limitations are enacted, they might increase the Company's
exposure under state law claims that relate to self-funded plans administered by
the Company and may permit greater state regulation of other aspects of those
business operations.

    State Regulation

    Oxford's HMO subsidiaries are licensed to operate as HMOs by the insurance
departments, and, in some cases, health departments, in the states in which they
operate. Applicable state statutes and regulations require Oxford's HMO
subsidiaries to file periodic reports with the relevant state agencies and
contain requirements relating to the operation of HMOs, the rates and benefits
applicable to products and financial condition and practices. In addition, state
regulations require the Company's HMO and insurance subsidiaries to maintain
restricted cash or available cash reserves and restrict their abilities to make
dividend payments, loans or other transfers of cash to the Company. For a
description of regulatory capital requirements, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources". State regulatory authorities exercise oversight regarding
the Company's HMOs' provider networks, medical care delivery and quality
assurance programs, form contracts, including risk sharing contracts, and
financial condition. The Company's HMOs are also subject to periodic examination
by the relevant state regulatory authorities. For a description of recent
examinations, see "Legal Proceedings".

    In 1997 and 1998, New Jersey, Connecticut and New York all implemented
significant pieces of legislation relating to managed care plans which contain
provisions relating, among other things, to consumer disclosure, utilization
review, removal of providers from the network, appeals processes for both
providers and members, mandatory benefits and products, state funding pools,
prompt payment and provider contract requirements.


                                       13
<PAGE>   14
    OHI is an accident and health insurance company licensed by the New York
State Insurance Department and licensed as a foreign insurer by the insurance
departments of New Jersey, Pennsylvania, New Hampshire, Florida and Connecticut.
Applicable state laws and regulations contain requirements relating to OHI's
financial condition, reserve requirements, premium rates, form contracts, and
the periodic filing of reports with the applicable insurance departments. OHI's
affairs and operations are also subject to periodic examination by the
applicable departments. For a description of recent examinations, see "Legal
Proceedings".

    Certain state regulations require that HMOs utilize standard "community
rates" in determining HMO premiums. Such community rates are generally revised
annually by the HMO and, in most cases, must be approved in advance by the
applicable state insurance department. The methodology employed in determining
premiums for the Company's Freedom Plan products utilizing an HMO must also be
approved in advance by the applicable state insurance department and combine the
relevant community rate with traditional indemnity insurance rating criteria.
The Company's ability to increase rates on its products is, in certain
instances, subject to prior approval of state insurance departments, which may
or may not be granted. For a description of certain regulatory issues relating
to the Company's rates, see "Legal Proceedings - State Insurance Departments".

    Applicable federal and state regulations also contain licensing and other
requirements relating to the offering of the Company's products in new markets
and offerings by the Company of new products, which may restrict the Company's
ability to expand its business. The failure of the Company's subsidiaries to
comply with existing laws and regulations or a significant change in such laws
or regulations could materially and adversely affect the operations, financial
condition and prospects of the Company.

    Applicable New York statutes and regulations require the prior approval of
the New York State Commissioner of Health and the New York State Superintendent
of Insurance for any change of control of Oxford NY or the Company and the prior
approval of the New York State Superintendent of Insurance for any change of
control of OHI or the Company. Similar laws in other states where the Company
does business require insurance department approval of any change in control of
the Company or the relevant subsidiary. For purposes of these statutes and
regulations, generally "control" means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
an entity. Control is presumed to exist when a person, group of persons or
entity acquires the power to vote 10% or more of the voting securities of
another entity. Therefore, prior approval is required for any person to acquire
the power to vote 10% or more of the voting securities of the Company.
Applications for approval of TPG's investment in the Company were filed with and
approved by the appropriate regulatory authorities in New York, New Jersey,
Connecticut, Pennsylvania, New Hampshire, Florida and Illinois prior to
completing the investment pursuant to the Investment Agreement. See "Business -
Recent Developments".

    Recent Regulatory Developments

    State and federal government authorities are continually considering changes
to laws and regulations applicable to Oxford's HMO and insurance subsidiaries.
In 1997, the Clinton Administration and Congressional leadership reached an
agreement on legislation aimed at balancing the federal budget, which includes
provisions for $115 billion in savings from Medicare programs over the next five
years, exclusive of the user fee described below. This agreement was enacted
into law as the Balanced Budget Act of 1997 (the "1997 Act"). The 1997 Act
changes the way health plans are compensated for Medicare members by eliminating
over five years amounts paid for graduate medical education and increasing the
blend of national cost factors applied in determining local reimbursement rates
over a six-year phase-in period. Both changes will have the effect of reducing
reimbursement in high cost metropolitan areas with a large number of teaching
hospitals, such as the Company's service areas. However, the legislation
includes provision for a minimum increase of 2% annually in Medicare
reimbursement for the next five years exclusive of the user fee described below.
The legislation also provides for expedited licensure of provider-sponsored
Medicare plans and a repeal in 1999 of the rule requiring health plans to have
one commercial enrollee for each Medicare enrollee. This legislation also
requires that health plans serving Medicare beneficiaries make medically
necessary care available 24 hours a day, provide emergency coverage a "prudent
lay person" would deem necessary and provide grievance and appeal procedures and
prohibits such plans from restricting providers' advice concerning medical care.
Effective January 1, 1999, HCFA issued Medicare regulations, the interim Quality
Improvement System for Managed Care, and supplemental policies to implement the
1997 Act and the Medicare program. The new regulations and


                                       14
<PAGE>   15
guidelines add requirements applicable to Medicare providers and enrollees in
the areas of provider contracting, quality assurance, utilization management,
grievances and appeals. These changes could have the effect of increasing
competition in the Medicare market and are expected to increase the Company's
costs of administering its Medicare plans.

    In 1998, the Company received a 2% increase in Medicare premiums, minus the
user fee assessment of 0.428% of the Company's gross monthly Medicare premium.
The user fee is applied to all Medicare contractors by HCFA to cover HCFA's
costs relating to beneficiary enrollment, dissemination of information and
certain counseling and assistance programs. On March 2, 1998, HCFA announced a
2% increase in premiums in 1999 for all Medicare plans in the Company's service
areas minus the user fee which is 0.355% for 1999. However, the user fee for
2000 has not been determined and may increase since the Clinton Administration
is seeking legislation authorizing it to collect additional funds. Under the
authority provided by the 1997 Act, HCFA has begun to collect hospital encounter
data from Medicare contractors. The data is being used to develop and implement
a new risk adjustment mechanism by January 1, 2000. On January 15, 1999, HCFA
gave advance notice to Medicare plans detailing the risk adjustment mechanism
("the "Mechanism"). Currently, HCFA intends to phase in the Mechanism over five
years as follows: 10% in 2000; 30% in 2001; 55% in 2002; 80% in 2003; and 100%
in 2004. Although the Mechanism will impact each Medicare plan differently, HCFA
projected that, overall, the Mechanism will reduce payments to Medicare plans by
7.6% or $11 billion over the five year phase-in period. Because of the phase-in
schedule and the minimum 2% increase, HCFA estimates that no Medicare plan will
receive a reduction in total payments in 2000 compared to 1999. On March 1,
1999, HCFA announced the county by county payment rates and the final details of
the Mechanism and other information necessary to ensure that Medicare plans may
recalculate their final county rates for 2000. As a result thereof, the Company
anticipates a 2% increase in Medicare premium rates in 1999. Although it is
likely that reimbursement rates will be adversely affected by the Mechanism and
the 1997 Act, the Company cannot predict the ultimate impact that the Mechanism
and the 1997 Act will have on its Medicare business and results of operations in
future periods. In addition, Congressional leaders have indicated an interest in
reviewing the impact of the Mechanism and the 1997 Act on Medicare plans and on
the success of the Medicare program in general. As result of this review,
Congress may further change the Mechanism and other Medicare payment
methodologies.

    President Clinton has proposed expanding Medicare coverage to individuals
between the ages of 55 and 64. There is significant opposition to his proposal,
and the Company cannot predict the outcome of the legislative process or the
impact of the proposal on the Company's results of operations. In addition,
long-term structural changes to the Medicare program are currently being
considered by Congress and the Administration in the aftermath of the failure of
the National Bipartisan Commission on the Future of Medicare to reach a
consensus on recommended changes to the Medicare program.

    Other recent enacted federal laws include the Women's Health and Cancer
Rights Act of 1998 ("WHCRA") and the Newborn's and Mothers' Health Protection
Act of 1996 ("NMHPA"). WHCRA became effective on October 21, 1998. This act
amended existing federal law (ERISA and the Public Health Service Act) to
require health insurance carriers of group and individual commercial policies
that cover mastectomies to cover reconstructive surgery or related services
following a mastectomy. Oxford already offers this benefit to its commercial
members in New York, New Jersey and Connecticut. NMHPA, which applies to group
and individual health plans and to health insurance issuers, became effective
for plan years beginning on or after January 1, 1998. Consistent with many state
law requirements, NMHPA prohibits group health plans and health insurance
issuers from restricting benefits for a mother's or newborn child's hospital
stay in connection with childbirth to less than 48 hours for a vaginal delivery
and to less than 96 hours for a cesarean section. Only limited authorization and
precertification requirements may be imposed for these mandatory minimum
hospital stays. Interim rules implementing the changes made by NMHPA went into
effect January 1, 1999.

    New York State has recently passed several pieces of legislation which
affect the Company's business. Effective January 22, 1998, New York implemented
prompt payment requirements which require health plans to pay clean claims
within 45 days of receipt and to pay interest on delayed claims at a rate of 12%
per annum commencing on the forty-sixth day after a clean claim is received by
the plan. See "Legal Proceedings - State Insurance Departments". Effective
January 1, 1998, New York passed legislation mandating coverage of chiropractic
benefits. Effective July 1, 1999, New York State will implement an independent
external appeal process for members who have been denied coverage of health care
services based on a determination by the


                                       15
<PAGE>   16
plan that the service is not medically necessary or such service is experimental
or investigational. The effect of this new regulation on the Company cannot be
predicted at this time. The graduate medical education and bad debt and charity
care assessments authorized by the New York Health Care Reform Act expires on
December 31, 1999. The New York legislature may reauthorize these assessments
during the 1999 legislative session. However, if such assessments are
reauthorized, the Company cannot predict whether these assessments will increase
or decrease from their prior levels.

    On January 21, 1999 the New Jersey State legislature passed prompt pay
legislation which requires insurers to pay all electronic claims within the
earlier of 30 days or the time prescribed by HCFA for Medicare plans. Paper
claims are required to be paid within 40 days of receipt. In addition, separate
legislation concerning prompt pay enforcement passed the New Jersey State
legislature in February 1999. This legislation, if enacted, will require health
plans to give providers, upon request, a monthly statement showing the paper
claims received from that provider during the previous nine months. This
legislation, if enacted, also will require the State to fine health plans
$10,000 for rejecting or not paying an unreasonably large or disproportionate
number of eligible claims and for not paying the previously described interest.
Legislation has also been proposed in New Jersey that would increase statutory
capital requirements and require health plans to contribute to a guaranty fund.
The Company cannot predict the impact that this legislation will have on its
operations or financial condition.

    Over the past several years there has been significant public controversy
surrounding alleged abuses by managed care plans and widely publicized instances
where care or payment for care has allegedly been inappropriately withheld or
delayed. This has led to significant public and political support for reform of
managed care regulation. The U.S. Congress and each of the states in which
Oxford operates are currently considering regulations or legislation relating to
mandatory benefits (such as mental health), provider compensation arrangements,
health plan liability to members who do not receive appropriate care, disclosure
and composition of physician networks, and Congress is considering significant
changes to the Medicare program, including changes which could significantly
reduce reimbursement to HMOs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". In recent years, bills have been
introduced in the legislature in New York, New Jersey and Connecticut including
some form of the so-called "Any Willing Provider" initiative which would require
HMOs, such as the Company's HMO subsidiaries, to allow any physician meeting
their credentialing criteria to join their physician network regardless of
geographic need, hospital admitting privileges and other important factors.
Certain of these bills have also included provisions relating to mandatory
disclosure of medical management policies and physician reimbursement
methodologies. Numerous other health care proposals have been introduced in the
U.S. Congress and in state legislatures. These include provisions which place
limitations on premium levels, impose health plan liability to members who do
not receive appropriate care, increase minimum capital and reserves and other
financial viability requirements, prohibit or limit capitated arrangements or
provider financial incentives, mandate benefits (including mandatory length of
stay with surgery or emergency room coverage) and limit the ability to manage
care. If enacted, certain of these proposals could have an adverse effect on the
Company.

    Recently enacted legislation and the proposed regulatory changes described
above, if enacted, could increase health care costs and administrative expenses
and reduce Medicare reimbursement rates and otherwise adversely affect the
Company's business, results of operations and financial condition. See
"Cautionary Statement Regarding Forward - Looking Statements - Government
Regulation - Reimbursement".

COMPETITION

    HMOs and health insurance companies operate in a highly competitive
environment. The Company has numerous competitors, including for-profit and
not-for-profit HMOs, PPOs, and indemnity insurance carriers, some of which have
substantially larger enrollments than the Company. The Company competes with
independent HMOs, such as Health Insurance Plan of New York, which have
significant enrollment in the New York metropolitan area. The Company also
competes with HMOs and managed care plans sponsored by large health insurance
companies, such as CIGNA Corporation, Aetna U.S. Healthcare Inc., UnitedHealth
Group and Blue Cross/Blue Shield. These competitors have large enrollment in the
Company's service areas and, in some cases, greater financial resources than the
Company. Aetna U.S. Healthcare, Inc. has announced an agreement to acquire the
health plan business of The Prudential Insurance Company, and additional
consolidation of competitors is likely. Additional competitors may enter the
Company's markets in the future. The Company


                                       16
<PAGE>   17
believes that the network of providers under contract with Oxford is an
important competitive factor. However, the cost of providing benefits is in many
instances the controlling factor in obtaining and retaining employer groups, and
certain of Oxford's competitors have set premium rates at levels below Oxford's
rates for comparable products. Oxford anticipates that premium pricing will
continue to be highly competitive. Recent developments concerning the Company
may also adversely affect the Company's ability to compete for commercial group
business and Medicare members.

    To address rising health care costs, some large employer groups have
consolidated their health benefits programs and have considered a variety of
health care options to encourage employees to use the most cost-effective form
of health care services. These options, which include traditional indemnity
insurance plans, HMOs, point-of-service plans, and PPO plans, may be provided by
third parties or may be self-funded by the employer. Point-of-service plans have
gained favor with some employer groups because they allow for the consolidation
of health benefit programs. The Company believes that employers will seek to
offer health plans, similar to the Company's Freedom and Liberty Plans, that
provide for "in plan" and "out-of-plan" options while encouraging members to use
the most cost-effective form of health care services through, among other
things, increased copayments, deductibles and coinsurance. Although the
Company's point-of-service products, the Freedom Plan and Liberty Plan, offer
this alternative to employers, there is no assurance that the Company will be
able to continue to compete effectively for the business of employer groups.

    The Company also competes with other health plans, including hospital
systems, to contract with physicians and other providers. Recent developments
concerning the Company may adversely affect its ability to compete for such
contracts.

EMPLOYEES

    At December 31, 1998, the Company had approximately 5,000 full-time
employees, none of whom is represented by a labor union.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

    Certain statements contained in "Business", "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", including statements concerning future results of operations or
financial position, future liquidity at the parent company, future health care
and administrative costs, future premium rates and yields for commercial and
Medicare business, the employer renewal process, future growth or reduction in
membership and membership composition, future health care benefits, future
provider network, future provider utilization rates, future medical loss ratio
levels, future claims payment, service performance and other operations matters,
future administrative loss ratio levels, the Company's information systems and
readiness for Year 2000, proposed efforts to control health care and
administrative costs, future dispositions of certain businesses and assets,
future provider payment and risk-sharing agreements with health care providers,
the Turnaround Plan, future enrollment levels, future government regulation and
relations and the impact of new laws and regulation, the future of the health
care industry, and the impact on the Company of recent events, legal proceedings
and regulatory investigations and examinations, and other statements contained
herein regarding matters that are not historical facts, are forward-looking
statements (as such term is defined in the Securities Exchange Act of 1934, as
amended). Because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed below.

    Net losses; restructuring charges and write-downs of strategic investments

    The Company incurred net losses attributable to common stock of $291 million
in 1997 and $624 million in 1998 and may incur additional losses in 1999, the
extent of which cannot be predicted at this time. As a result of losses at
certain of its HMO and insurance subsidiaries in 1997 and 1998, the Company has
had to make capital contributions to these subsidiaries and expects that
additional capital contributions will be required to be made by the Company in
1999. The Company has also made significant additions to its reserves for
medical claims and experienced significant levels of retroactive member and
group terminations as well as difficulties with collection of premium
receivables.


                                       17
<PAGE>   18
    A significant portion of the loss incurred by the Company in 1998 was
associated with restructuring charges and write-downs of strategic investments
(previously reported as unusual charges) relating to the Company's Turnaround
Plan. These restructuring charges and write-downs of strategic investments are
based on estimates of the anticipated costs to the Company of taking the actions
contemplated by the Turnaround Plan, including disposition of certain businesses
and assets. There can be no assurance that these estimates correctly reflect the
ultimate costs which the Company will incur in implementing the Turnaround Plan.

    The Company's ability to control net losses depends, to a large extent, on
the success of its Turnaround Plan, which includes focusing on core commercial
and Medicare markets and disposing of or restructuring noncore businesses,
reducing administrative costs, reducing payments to health care providers,
completing and operationalizing risk transfer and other provider arrangements,
reducing unnecessary utilization of hospital and other services, increasing
commercial group premiums, improving service levels and strengthening
operations. There can be no assurance that the Turnaround Plan will be
implemented in the manner described herein, or that it will be successful or
that other efforts by the Company to control net losses will be successful.
Furthermore, despite the Company's efforts to the contrary, implementation of
the Turnaround Plan could adversely affect members and employer groups, or
physicians, hospitals and other health care providers and ultimately sales and
renewals of the Company's health plans. The Turnaround Plan also calls for
increasing commercial premiums to appropriately reflect the Company's healthcare
and administrative costs. There can be no assurance that the Company will be
successful in achieving appropriate premium increases or that recent or future
regulatory changes will not adversely affect its premium pricing. Moreover, the
Company cannot predict the impact of adverse publicity, legal and regulatory
proceedings or other future events on the Company's membership, operations and
financial results, including ongoing financial losses. Reductions in membership
associated with the above factors would adversely affect the Company's future
results.

    Inability to control, and unpredictability of, health care costs

    Oxford's future results of operations depend, in part, on its ability to
predict and maintain influence over health care costs (through, among other
things, appropriate benefit design, utilization review and case management
programs and risk-sharing and other payment arrangements with providers) while
providing members with coverage for the health care benefits provided under
their contracts. However, Oxford's ability to influence such costs may be
affected by various factors, including: new technologies and health care
practices, hospital costs, changes in demographics and trends, new legally
mandated benefits or practices, selection biases, increases in unit costs paid
to providers, major epidemics, catastrophes, inability to establish acceptable
compensation arrangements with providers, operational and regulatory issues
which could delay, prevent or impede those arrangements, and higher utilization
of medical services, including higher out-of-network utilization under point of
service plans. There can be no assurance that Oxford will be successful in
mitigating the effect of any or all of the above-listed or other factors.

    Medical costs payable in Oxford's financial statements include reserves for
incurred but not reported or paid claims ("IBNR") which are estimated by Oxford.
Oxford estimates the amount of such reserves primarily using standard actuarial
methodologies based upon historical data including the average interval between
the date services are rendered and the date claims are paid and between the date
services are rendered and the date claims are received by the Company, expected
medical cost inflation, seasonality patterns and changes in membership. The
estimates for submitted claims and IBNR are made on an accrual basis and
adjusted in future periods as required. Oxford believes that its reserves for
IBNR are adequate in order to satisfy its ultimate claim liability. However,
Oxford's prior rapid growth, delays in paying claims, paying or denying claims
in error and changing speed of payment affect the Company's ability to rely on
historical information in making IBNR reserve estimates. There can be no
assurances as to the ultimate accuracy of such estimates. Any adjustments to
such estimates could adversely affect Oxford's results of operations in future
periods.

    The effect of high administrative costs on results

    In 1999, the Company expects that results will continue to be adversely
affected by high administrative costs associated with the Company's efforts to
strengthen its operations and service levels and address systems issues,
including those related to Year 2000 readiness. Although a key element of the
Company's Turnaround Plan is a reduction in administrative expenses, no
assurance can be given that the Company will not continue to


                                       18
<PAGE>   19
experience significant service and systems infrastructure problems in 1999 and
beyond which could have a significant impact on administrative costs. Further,
the Company has been adversely affected by high administrative costs in
connection with increased levels of employee attrition over the last several
quarters, and the Company expects to continue to experience employee attrition
in 1999.

    Changes in laws and regulations could adversely impact operations, financial
condition and prospects

    The health care industry in general, and HMOs and health insurance companies
in particular, are subject to substantial federal and state government
regulation, including, but not limited to, regulation relating to cash reserves,
minimum net worth, licensing requirements, approval of policy language and
benefits, mandatory products and benefits, provider compensation arrangements,
member disclosure, premium rates and periodic examinations by state and federal
agencies. State regulations require the Company's HMO and insurance subsidiaries
to maintain restricted cash or available cash reserves and restrict their
ability to make dividend payments, loans or other transfers of cash to the
Company.

    In recent years, significant federal and state legislation affecting the
Company's business was enacted. For example, New York State implemented a
requirement that health plans pay interest on delayed payment of claims at a
rate of 12% per annum, effective January 1998, and that managed care members
have a right to an external appeal of certain final adverse determinations,
effective July 1999. In addition, Connecticut and New Jersey enacted legislation
in 1999 concerning prompt payment of claims, mental health parity and other
mandated benefits and practices. State and federal government authorities are
continually considering changes to laws and regulations applicable to Oxford and
are currently considering regulations relating to mandatory benefits and
products, defining medical necessity, provider compensation, health plan
liability to members who fail to receive appropriate care, disclosure and
composition of physician networks, all of which would apply to the Company. New
York State is currently considering regulation concerning the Health Care Reform
Act, individual and small group risk pools and subsidies and managed care
mandates and practices. In addition, Congress is considering significant changes
to Medicare legislation and has in the past considered, and may in the future
consider, proposals relating to health care reform. Changes in federal and state
laws or regulations, if enacted, could increase health care costs and
administrative expenses, and reductions could be made in Medicare reimbursement
rates. Oxford is unable to predict the ultimate impact on the Company of
recently enacted and future legislation and regulations, but such legislation
and regulations, particularly in New York where much of the Company's business
is located, could have a material adverse impact on the Company's operations,
financial condition and prospects.

    Premiums for Oxford's Medicare programs are determined through formulas
established by HCFA for Oxford's Medicare contracts. Federal legislation enacted
in 1997 provides for future adjustment of Medicare reimbursement by HCFA which
could reduce the reimbursement received by the Company. Premium reductions, or
premium rate increases in a particular region that are lower than the rate of
increase in health care service expenses for Oxford's Medicare members in such
region, could adversely affect Oxford's results of operations. Risk transfer
provider agreements entered into by Oxford could be adversely affected by
regulatory actions or by the failure of the providers to comply with the terms
of such agreements. Such agreements could also have an adverse effect on the
Company's membership or its relationship with its other providers. Oxford's
Medicare programs are subject to certain additional risks compared to commercial
programs, such as higher comparative medical costs and higher levels of
utilization. Oxford's Medicare programs are subject to higher marketing and
advertising costs associated with selling to individuals rather than to groups.
Further, there can be no assurance that the Company will be successful in
completing or operationalizing such risk transfer and other provider
arrangements. See "Business - Government Regulation" and "Legal Proceedings".

    Service and systems infrastructure problems

    The Company experienced rapid growth in its business and in its staff since
it began operations in 1986 through 1997. The Company has and will continue to
be affected by its ability to manage such growth effectively, including its
ability to continue to develop processes and systems to support its operations.
In September 1996, the Company converted a significant part of its business
operations to a new computer operating system. Unanticipated software and
hardware problems arising in connection with the conversion resulted in
significant delays in the Company's claims payments and group and individual
billing and adversely affected claims payment


                                       19
<PAGE>   20
and billing. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations". The Company does not intend to promote significant
membership or revenue growth in 1999 because the Company's priority in 1999 will
continue to be to attempt to strengthen its service and systems infrastructure,
reduce medical and administrative spending and increase premium rates. No
assurance can be given that the Company will not continue to experience
significant service and systems infrastructure problems, high levels of medical
and administrative spending and difficulties in obtaining premium rate increases
in 1999 and beyond. In addition, the Company has experienced attrition of its
Medicare and commercial business in 1998 and expects additional attrition. There
can be no assurance that the Company will be successful in the future in
promoting membership growth and will not continue to experience membership
attrition.

    Health care provider network

    The Company is subject to the risk of disruption in its health care provider
network, including termination by the physicians, hospitals and other health
care providers that comprise the network of their relationships with the
Company. Such a disruption could have a material adverse effect on the Company's
ability to market its products and service its membership. Furthermore, the
effect of mergers and consolidations of health care providers or potential
unionization of, or concerted action by, physicians in the Company's service
areas could enhance the providers' bargaining power with respect to demands for
higher reimbursement levels and changes to the Company's utilization review and
administrative procedures.

    Management of information systems

    There can be no assurance that the Company will be successful in mitigating
the existing system problems that have resulted in payment delays and claims
processing errors, in developing processes and systems to support its operations
and in improving its service levels. Moreover, operating and other issues can
lead to data problems that affect performance of important functions, including,
but not limited to, claims payment and group and individual billing. There can
also be no assurance that the process of improving existing systems, developing
processes and systems to support the Company's operations and improving service
levels will not be delayed or that additional systems issues will not arise in
the future. See "Status of Information Systems".

    Year 2000 readiness

    The Company's failure to timely resolve its own Year 2000 issues or the
failure of the Company's external vendors to resolve their Year 2000 issues
could have a material adverse effect on the Company's results of operations,
liquidity and financial condition. Further, the Company's estimates for the
future costs and timely and successful completion of its Year 2000 program are
subject to uncertainties that could cause actual results to differ from those
currently projected by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000 Readiness".

    Recent events and related publicity

    Certain events at the Company over the course of the last two years have
resulted in adverse publicity. Such events and related publicity may adversely
affect the Company's provider network, the employer renewal process and future
enrollment in the Company's health benefit plans.

    In addition, the managed care industry, in general, receives significant
negative publicity. This publicity has led to increased legislation, regulation
and review of industry practices. These factors may adversely affect the
Company's ability to market its products and services, may require it to change
its products and services and may increase the regulatory burdens under which
the Company operates, further increasing the costs of doing business and
adversely affecting the Company's results of operations.

    Collectibility of advances

    As part of its attempts to ameliorate delays in processing claims for
payment in 1997, the Company advanced approximately $276 million to providers
pending the Company's disposition of claims for payment. As of December 31,
1998, approximately $139.5 million, net of allowances, remained outstanding. See


                                       20
<PAGE>   21
"Management's Discussion Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources". The NYSID is requiring the Company
to obtain written acknowledgments of such advances from the recipients of the
advances, and the New Jersey Department of Banking and Insurance has required
the Company to provide collateral for repayment of the advances by setting aside
$15 million in trust at the parent company. If the Company is unable to receive
written acknowledgments or fails to provide such collateral there can be no
assurance that the insurance regulators will continue to recognize such advances
as admissible assets for regulatory purposes. If the insurance regulators do not
recognize such advances as admissible assets, the capital of certain of the
Company's regulated subsidiaries could be impaired. The Company may be required
to make additional capital contributions to compensate for any impairment.
Although the Company believes that the advances will be repaid, there can be no
assurance that this will occur.

    Concentration of business

    The Company's commercial and Medicare business is concentrated in New York,
New Jersey and Connecticut, with more than 80% of its tri-state premium revenues
received from New York business. As a result, changes in regulatory, market or
health care provider conditions in any of these states, particularly New York,
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company's revenue under
its contracts with HCFA represented 21.9% of its premiums earned during 1998.



                                       21
<PAGE>   22
ITEM 2.  PROPERTIES

    Summarized in the table below are the Company's lease commitments for office
space as of December 31, 1998.

<TABLE>
<CAPTION>
                                                                              EARLIEST                  CURRENT
                                                   TYPE OF                   TERMINATION                 SQUARE
                LOCATION                            SPACE                       DATE                      FEET
------------------------------------------ -------------------------   ------------------------   -------------------
<S>                                        <C>                         <C>                        <C>
       White Plains, NY                        Sales/Admin                   November-00                  363,000      (1)
       Trumbull, CT                            Administrative                October-04                   238,000
       Norwalk, CT                             HQ/Admin                      February-01                  182,000      (1)
       Edison, NJ                              Sales/Admin                   March-02                     127,000
       Nashua, NH                              Administrative                June-04                      127,000      (2)
       Hooksett, NH                            Administrative                November-02                  121,000
       Trumbull, CT                            Administrative                April-02                     115,000
       Milford, CT                             Administrative                January-99                    95,000
       Milford, CT                             Administrative                February-02                   89,000
       Hidden River, FL                        Administrative                January-04                    76,000
       Philadelphia,  PA                       Sales/Admin                   April-05                      58,000
       Nashua, NH                              Administrative                June-00                       53,000
       New York City                           Sales/Admin                   July-05                       43,000      (1)
       Woodbridge, NJ                          Administrative                November-07                   43,000      (2)
       Melville, Long Island, NY               Sales/Admin                   June-02                       39,000      (1)
       Edison, NJ                              Administrative                April-01                      36,000      (1)
       Rosemont, IL                            Sales/Admin                   April-05                      31,000
       Mullingar, Ireland                      Administrative                September-02                  22,000
       Chinatown, NYC                          Sales/Admin                   May-00                        13,000
       Chicago, IL                             Administrative                December-00                   13,000
       Sarasota, FL                            Administrative                March-98                      10,000
       Bronx, NY                               Clinical                      November-01                    8,000      (1)
       Rocky Hill, CT                          Sales/Admin                   April-99                       6,000
       Philadelphia,  PA                       Administrative                May-98                         5,000      (1)
       Queens, NY                              Clinical                      December-98                    4,000      (1)
                                                                                                  -------------------
                                                                                                        1,917,000
                                                                                                  ===================
</TABLE>


(1)  The Company expects that the square footage of these properties will be
     reduced in 1999 as a result of continued consolidation efforts pursuant to
     the Company's Turnaround Plan.
(2)  The Company expects that the square footage of these properties will be
     increased slightly in 1999 as a result of consolidations with respect to
     other properties pursuant to the Company's Turnaround Plan.

ITEM 3.  LEGAL PROCEEDINGS

    SECURITIES CLASS ACTION LITIGATION

    As previously reported by the Company, following the October 27, 1997
decline in the price per share of the Company's common stock, purported
securities class action lawsuits were filed on October 28, 29, and 30, 1997
against the Company and certain of its officers in the United States District
Courts for the Eastern District of New York, the Southern District of New York
and the District of Connecticut. Since that time, plaintiffs have filed
additional securities class actions (see below) against Oxford and certain of
its directors and officers in the United States District Courts for the Southern
District of New York, the Eastern District of New York, the Eastern District of
Arkansas, and the District of Connecticut.

    The complaints in these lawsuits purport to be class actions on behalf of
purchasers of Oxford's securities during varying periods beginning on February
6, 1996 through December 9, 1997. The complaints generally allege that
defendants violated Section 10(b) of the Securities Exchange Act of 1934
("Exchange Act") and


                                       22
<PAGE>   23
Rule 10b-5 thereunder by making false and misleading statements and by failing
to disclose certain allegedly material information regarding changes in Oxford's
computer system, and the Company's membership enrollment, revenues, medical
expenses, and ability to collect on its accounts receivable. Certain of the
complaints also assert claims against the individual defendants alleging
violations of Section 20(a) of the Exchange Act and claims against all of the
defendants for negligent misrepresentation. The complaints also allege that in
violation of Section 20A of the Exchange Act certain of the individual
defendants disposed of Oxford's common stock while the price of that stock was
artificially inflated by allegedly false and misleading statements and
omissions. The complaints seek unspecified damages, attorneys' and experts' fees
and costs, and such other relief as the court deems proper.

    The purported class actions commenced in the United States District Court
for the Southern District of New York are Metro Services, Inc., et al. v. Oxford
Health Plans, Inc., et al., No. 97 Civ. 08023 (filed Oct. 29, 1997); Worldco,
LLC, et al. v. Oxford Health Plans, Inc., et al., No. 97 Civ. 8494 (filed Nov.
14, 1997); Jerovsek, et al. v. Oxford Health Plans, Inc., et al., No. 97 Civ.
8882 (filed Dec. 2, 1997); North River Trading Co., LLC v. Oxford Health Plans,
Inc., et al., No. 97 Civ. 9372 (filed Dec. 22, 1997); National Industry Pension
Fund v. Oxford Health Plans, Inc., et al., No. 97 Civ. 9566 (filed Dec. 31,
1997); Scheinfeld v. Oxford Health Plans, Inc., et al., No. 98 Civ. 1399
(originally filed Dec. 31, 1997 in the United States District Court for the
District of Connecticut and transferred); Paskowitz v. Oxford Health Plans,
Inc., et al., No. 98 Civ. 1991 (filed March 19, 1998); and Sapirstein v. Oxford
Health Plans, Inc., et al., No. 98 Civ. 4137 (filed September 11, 1998).

    The purported class actions commenced in the United States District Court
for the Eastern District of New York are Koenig v. Oxford Health Plans, et al.,
No. 97 Civ. 6188 (filed Oct. 29, 1997); Wolper v. Oxford Health Plans, Inc., et
al., No. 97 Civ. 6299 (filed Oct. 29, 1997); Tawil v. Oxford Health Plans, Inc.,
et al., No. 97 Civ. 7289 (filed Dec. 11, 1997); Winters, et al. v. Oxford Health
Plans, Inc., et al., No. 97 Civ. 7449 (filed Dec. 18, 1997); and Krim v. Oxford
Health Plans, Inc., et al., No. 98 Civ. 4032 (filed September 5, 1998).

    The purported class actions commenced in the United States District Court
for the District of Connecticut are Heller v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02295 (filed Oct. 28, 1997); Fanning v. Oxford Health Plans, Inc., et
al., No. 397 CV 02300 (filed Oct. 29, 1997); Lowrie, IRA v. Oxford Health Plans,
Inc., et al., No. 397 CV 02299 (filed Oct. 29, 1997); Barton v. Oxford Health
Plans, Inc., et al., No. 397 CV 02306 (filed Oct. 30, 1997); Sager v. Oxford
Health Plans, Inc., et al., No. 397 CV 02310 (filed Oct. 30, 1997); Cohen v.
Oxford Health Plans, Inc., et al., No. 397 CV 02316 (filed Oct. 31, 1997);
Katzman v. Oxford Health Plans, Inc., et al., No. 397 CV 02317 (filed Oct. 31,
1997); Shapiro v. Oxford Health Plans, Inc., et al., No. 397 CV 02324 (filed
Oct. 31, 1997); Willis v. Oxford Health Plans, Inc., et al., No. 397 CV 02326
(filed Oct. 31, 1997); Saura v. Oxford Health Plans, Inc., et al., No. 397 CV
02329 (filed Nov. 3, 1997); Selig v. Oxford Health Plans, Inc., et al., No. 397
CV 02337 (filed Nov. 4, 1997); Brandes v. Oxford Health Plans, Inc., et al., No.
397 CV 02343 (filed Nov. 4, 1997); Ross v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02344 (filed Nov. 4, 1997); Sole v. Oxford Health Plans, Inc., et
al., No. 397 CV 02345 (filed Nov. 4, 1997); Henricks v. Wiggins, et al., No. 397
CV 02346 (filed Nov. 4 1997); Williams v. Oxford Health Plans, Inc., et al., No.
397 CV 02348 (filed Nov. 5, 1997); Direct Marketing Day in New York, Inc. v.
Oxford Health Plans, Inc., et al., No. 397 CV 02349 (filed Nov. 5, 1997); Howard
Vogel Retirement Plans, Inc., et al. v. Oxford Health Plans, Inc., et al., No.
397 CV 02325 (filed Oct. 31, 1997 and amended Dec. 17, 1997); Serbin v. Oxford
Health Plans, Inc., et al., No. 397 CV 02426 (filed Nov. 18, 1997); Hoffman v.
Oxford Health Plans, Inc., et al., No. 397 CV 02458 (filed Nov. 24, 1997);
Armstrong v. Oxford Health Plans, Inc., et al., No. 397 CV 02470 (filed Nov. 25,
1997); Roeder, et al. v. Oxford Health Plans, Inc., et al., No. 397 CV 02496
(filed Nov. 26, 1997); Braun v. Oxford Health Plans, Inc., et al., No. 397 CV
02510 (filed Dec. 1, 1997); Blauvelt, et al. v. Oxford Health Plans, Inc., et
al., No. 397 CV 02512 (filed Dec. 2, 1997); Hobler et al. v. Oxford Health
Plans, Inc., et al., No. 397 CV 02535 (filed Dec. 3, 1997); Bergman v. Oxford
Health Plans, Inc., et al., No. 397 CV 02564 (filed Dec. 8, 1997); Pasternak v.
Oxford Health Plans, Inc., et al., No. 397 CV 02567 (filed Dec. 8, 1997);
Perkins Partners I, Ltd. v. Oxford Health Plans, Inc., et al., No. 397 CV 02573
(filed Dec. 9, 1997); N.I.D.D., Ltd. v. Oxford Health Plans, Inc., et al., No.
397 CV 02584 (filed Dec. 9, 1997); Burch v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02585 (filed Dec. 9, 1997); Mark v. Oxford Health Plans, Inc., et
al., No. 397 CV 02594 (filed Dec. 11, 1997); Ross, et al. v. Oxford Health
Plans, Inc., et al., No. 397 CV 02613 (filed Dec. 12, 1997); Lerchbacker v.
Oxford Health Plans, Inc., et al., No. 397 CV 02670 (filed Dec. 22, 1997); State
Board of Administration of Florida v. Oxford Health Plans, Inc., et al., No. 397
CV 02709 (filed Dec. 29, 1997) (the complaint, although purportedly not brought
on behalf of a class of shareholders, invites


                                       23
<PAGE>   24
similarly situated persons to join as plaintiffs); and Ceisler v. Oxford Health
Plans, Inc., et al., No. 397 CV 02729 (filed Dec. 31, 1997).

    The purported class actions commenced in the United States District Court
for the Eastern District of Arkansas is Rudish v. Oxford Health Plans, Inc., et
al., No. LR-C-97-1053 (filed Dec. 29, 1997).

    The Company anticipates that additional class action complaints containing
similar allegations may be filed in the future.

    On January 6, 1998, certain plaintiffs filed an application with the
Judicial Panel on Multidistrict Litigation ("JPML") to transfer most of these
actions for consolidated or coordinated pretrial proceedings before Judge
Charles L. Brieant of the United States District Court for the Southern District
of New York. The Oxford defendants subsequently filed a similar application with
the JPML seeking the transfer of all of these actions for consolidated or
coordinated pretrial proceedings, together with the shareholder derivative
actions discussed below, before Judge Brieant. On April 28, 1998, the JPML
entered an order transferring substantially all of these actions for
consolidated or coordinated pretrial proceedings, together with the federal
shareholder derivative actions discussed below, before Judge Brieant.

    On July 15, 1998, Judge Brieant appointed the Public Employees Retirement
Associates of Colorado ("ColPERA"), three individual shareholders (the "Vogel
plaintiffs") and The PBHG Funds, Inc. ("PBHG"), as co-lead plaintiffs and
ColPERA's counsel (Grant & Eisenhofer), the Vogel plaintiffs' counsel (Milberg
Weiss Hynes Lerach & Bershad), and PBHG's counsel (Chitwood & Harley), as
co-lead counsel. ColPERA appealed this decision. On October 15, 1998 the United
States Court of Appeals for the Second Circuit dismissed the appeal.

    On October 2, 1998, the co-lead plaintiffs filed a consolidated amended
complaint ("Amended Complaint") in the securities class actions. The Amended
Complaint (which has since been further amended by stipulation) names as
defendants Oxford, Oxford Health Plans (NY), Inc., KPMG LLP (which was Oxford's
outside independent auditor during 1996 and 1997) and several current or former
Oxford directors and officers (Stephen F. Wiggins, William M. Sullivan, Andrew
B. Cassidy, Brendan R. Shanahan, Benjamin H. Safirstein, Robert M. Smoler,
Robert B. Milligan, David A. Finkel, Jeffery H. Boyd, and Thomas A. Travers).
The Amended Complaint purports to be brought on behalf of purchasers of Oxford's
common stock during the period from November 6, 1996 through December 9, 1997
("Class Period"), purchasers of Oxford call options or sellers of Oxford put
options during the Class Period and on behalf of persons who, during the Class
Period, purchased Oxford's securities contemporaneously with sales of Oxford's
securities by one or more of the individual defendants. The Amended Complaint
alleges that defendants violated Section 10(b) of the Exchange Act and Rule
10b-5 promulgated thereunder by making false and misleading statements and
failing to disclose certain allegedly material information regarding changes in
Oxford's computer system and the Company's membership, enrollment, revenues,
medical expenses and ability to collect on its accounts receivable. The Amended
Complaint also asserts claims against the individual defendants alleging
"controlling person" liability under Section 20(a) of the Exchange Act. The
Amended Complaint also alleges violations of Section 20A of the Exchange Act by
virtue of the individual defendants' sales of shares of Oxford's common stock
while the price of that common stock was allegedly artificially inflated by
allegedly false and misleading statements and omissions. The Amended Complaint
seeks unspecified damages, attorneys' and experts' fees and costs, and such
other relief as the court deems proper.

    On December 18, 1998, Oxford, the individual defendants and, separately,
KPMG LLP, moved to dismiss the Amended Complaint. On May 25, 1999 and June 8,
1999, Judge Brieant issued decisions denying the motions to dismiss. On June 10,
1999, KPMG LLP moved for reconsideration of the decision denying its motion to
dismiss. On July 9, 1999, Judge Brieant granted KPMG LLP's motion for
reconsideration, and on reconsideration adhered to the prior disposition.

    By order dated July 9, 1999, the Court approved a Case Management Plan
submitted by counsel for both plaintiffs and defendants, which Plan provides,
inter alia, that (1) discovery and briefing of class certification issues be
completed by December 10, 1999, (2) the parties shall attempt to complete all
merits discovery in the case by September 15, 2000, and (3) summary judgment
motions shall be filed by August 17, 2001.


                                       24
<PAGE>   25
    The State Board of Administration of Florida (the "SBAF") has stipulated,
and Judge Brieant has ordered, that in the action brought by it individually
(the "SBAF Action"), it will be bound by the dismissal of any claims it has that
are asserted in the Amended Complaint. In addition, the parties have stipulated,
and Judge Brieant has ordered, that SBAF may file an amended complaint ("Amended
SBAF Complaint") by September 23, 1999 and that Oxford has until November 25,
1999 to answer or move to dismiss the Amended SBAF Complaint. A stipulation
memorializing these agreements will be filed with the court shortly. The Amended
SBAF Complaint likely will assert claims similar to those asserted in the
Amended Complaint in the purported class actions (see above). The Amended SBAF
Complaint may also assert claims against all of the defendants alleging: (i)
violations of Section 18(a) of the Exchange Act, by virtue of alleged false and
misleading information disseminated in the 10-K report Oxford filed for the year
ended December 31, 1996; (ii) violations of the Florida Blue Sky laws; and (iii)
common law fraud and negligent misrepresentation. The Amended SBAF Complaint
likely will seek unspecified damages, attorneys' and experts' fees and costs,
and such other relief as the court deems proper. Defendants intend to move to
dismiss the SBAF Action, to the extent it includes claims not precluded by Judge
Brieant's decision on the motions to dismiss the Amended Complaint.

    The outcomes of these actions cannot be predicted at this time, although the
Company believes that it and the individual defendants have substantial defenses
to the claims asserted and intends to defend the actions vigorously.

    SHAREHOLDER DERIVATIVE LITIGATION

    As previously reported by the Company, in the months following the October
27, 1997 decline in the price per share of the Company's common stock, ten
purported shareholder derivative actions were commenced on behalf of the Company
in Connecticut Superior Court (the "Connecticut derivative actions") and in the
United States District Courts for the Southern District of New York and the
District of Connecticut (the "federal derivative actions") against the Company's
directors and certain of its officers (and the Company itself as a nominal
defendant).

    These derivative complaints generally alleged that defendants breached their
fiduciary obligations to the Company, mismanaged the Company and wasted its
assets in planning and implementing certain changes to Oxford's computer system,
by making misrepresentations concerning the status of those changes in Oxford's
computer system, by failing to design and to implement adequate financial
controls and information systems for the Company, and by making
misrepresentations concerning Oxford's membership enrollment, revenues, profits
and medical costs in Oxford's financial statements and other public
representations. The complaints further allege that certain of the defendants
breached their fiduciary obligations to the Company by disposing of Oxford
common stock while the price of that common stock was artificially inflated by
their alleged misstatements and omissions. The complaints seek unspecified
damages, attorneys' and experts' fees and costs and such other relief as the
court deems proper. None of the plaintiffs has made a demand on the Company's
Board of Directors that Oxford pursue the causes of action alleged in the
complaint. Each complaint alleges that plaintiff's duty to make such a demand
was excused by the directors' alleged conflict of interest with respect to the
matters alleged therein.

    The purported shareholder derivative actions commenced in Connecticut
Superior Court are Reich v. Wiggins, et al., No. CV 97-485145 (filed on or about
Dec. 12, 1997); Gorelkin v. Wiggins, et al., No. CV98-0163665 S (filed on or
about Dec. 24, 1997); and Kellmer v. Wiggins, et al., No. CV 98-0163664 S HAS
(filed on or about Jan. 28, 1998).

    The purported shareholder derivative actions commenced in the United States
District Court for the Southern District of New York are Roth v. Wiggins, et
al., No. 98 Civ. 0153 (filed Jan. 12, 1998); Plevy v. Wiggins, et al., No. 98
Civ. 0165 (filed Jan. 12, 1998); Mosson v. Wiggins, et al., No. 98 Civ. 0219
(filed Jan. 13, 1998); Boyd, et al. v. Wiggins, et al., No. 98 Civ. 0277 (filed
Jan. 16, 1998); and Glick v. Wiggins, et al., No. 98 Civ. 0345 (filed Jan. 21,
1998).

    The purported shareholder derivative actions commenced in the United States
District Court for the District of Connecticut are Mosson v. Wiggins, et al.,
No. 397 CV 02651 (filed Dec. 22, 1997), and Fisher, et al. v. Wiggins, et al.,
No. 397 CV 02742 (filed Dec. 31, 1997).


                                       25
<PAGE>   26
    In March 1998, Oxford and certain of the individual defendants moved to
dismiss or, alternatively, to stay the Connecticut derivative actions. Since
then, the parties to the Connecticut derivative actions have stipulated, under
certain conditions, to hold all pretrial proceedings in those actions in
abeyance during the pretrial proceedings in the federal derivative actions, and
to allow the plaintiffs in the Connecticut derivative actions to participate to
a limited extent in any discovery that is ultimately ordered in the federal
derivative actions. Stipulations memorializing this agreement have been entered
in the Connecticut derivative actions. On February 19, 1999, Judge Brieant
entered an order in the federal derivative actions permitting the plaintiffs in
the Connecticut derivative actions to participate to a limited extent in any
discovery that ultimately occurs in the federal derivative actions.

    In addition, on January 27, 1998, defendants filed an application with the
JPML to transfer the federal derivative actions for consolidated or coordinated
pretrial proceedings before Judge Charles L. Brieant of the Southern District of
New York. On April 28, 1998, the JPML entered an order transferring all of these
actions for consolidated or coordinated pretrial proceedings, together with the
securities class actions discussed above, before Judge Brieant.

    The parties to the federal derivative actions have agreed to suspend
discovery in those actions until the filing of a consolidated amended derivative
complaint in those actions and during the pendency of any motion to dismiss or
to stay the federal derivative actions or the securities class actions. A
stipulation memorializing this agreement, consolidating the federal derivative
actions under the caption In re Oxford Health Plans, Inc. Derivative Litigation,
MDL-1222-D, and appointing lead counsel for the federal derivative plaintiffs,
was entered and so ordered by Judge Brieant on September 26, 1998.

    On October 2, 1998, the federal derivative plaintiffs filed an amended
complaint. On January 29, 1999, the plaintiffs filed a second amended derivative
complaint (the "Amended Derivative Complaint"). The Amended Derivative Complaint
names as defendants certain of Oxford's directors and a former director (Stephen
F. Wiggins, James B. Adamson, Robert B. Milligan, Fred F. Nazem, Marcia J.
Radosevich, Benjamin H. Safirstein and Thomas A. Scully) and the Company's
former auditors KPMG LLP, together with the Company itself as a nominal
defendant. The Amended Derivative Complaint alleges that the individual
defendants breached their fiduciary obligations to the Company, mismanaged the
Company and wasted its assets in planning and implementing certain changes to
Oxford's computer system, by making misrepresentations concerning the status of
those changes to Oxford's computer system, by failing to design and implement
adequate financial controls and information systems for the Company and by
making misrepresentations concerning Oxford's membership, enrollment, revenues,
profits and medical costs in Oxford's financial statements and other public
representations. The Amended Derivative Complaint further alleges that certain
of the individual defendants breached their fiduciary obligations to the Company
by selling shares of Oxford common stock while the price of the common stock was
allegedly artificially inflated by their alleged misstatements and omissions.
The Amended Derivative Complaint seeks declaratory relief, unspecified damages,
attorneys' and experts' fees and costs and such other relief as the court deems
proper. No demand has been made upon the Company's Board of Directors that
Oxford pursue the causes of action alleged in the Amended Derivative Complaint.
The Amended Derivative Complaint alleges that the federal derivative plaintiffs'
duty to make such a demand was excused by the individual defendants' alleged
conflict of interest with respect to the matters alleged therein.

    On March 15, 1999, Oxford, the individual defendants and, separately, KPMG
LLP, moved to dismiss the Amended Derivative Complaint, and oral argument on
defendants' motion was heard on June 24, 1999. Pursuant to stipulations entered
into and filed by the parties, and so ordered by Judge Brieant, proceedings in
the federal derivative actions are stayed during the pendency of the motions to
dismiss those actions, unless any of the parties provides written notice of
their desire to terminate this stay, in which case defendants will have 60 days
from such notice to move to stay the federal derivative actions pending
resolution of the securities class actions (see above), and except that the
federal derivative plaintiffs (and the Connecticut derivative plaintiffs) will
be permitted to attend depositions that occur in the consolidated securities
class action, and to review documents that are produced in that action.

    Although the outcome of the federal and Connecticut derivative actions
cannot be predicted at this time, the Company believes that the defendants have
substantial defenses to the claims asserted in the complaints.

                                       26

<PAGE>   27
    STATE INSURANCE DEPARTMENTS

    On August 10, 1998, the New York State Insurance Department ("NYSID")
completed its triennial examination and market conduct examination of Oxford's
New York HMO and insurance subsidiaries. In the Reports on Examination (the
"Reports") the NYSID, based on information available through July 1998,
determined that certain assets on the December 31, 1997 balance sheets of the
Company's New York subsidiaries should not be admitted for statutory reporting
purposes and NYSID actuaries recorded additional reserves totaling approximately
$81.3 million for both subsidiaries on the balance sheet as determined by the
examiners. The Company contributed $152 million to the capital of its New York
HMO and insurance subsidiaries in satisfaction of the issues raised in the
Reports relating to the subsidiaries' financial statements, and maintaining such
subsidiaries' compliance with statutory capital requirements as of June 30,
1998. The Reports also made certain recommendations relating to financial
record-keeping, settlement of intercompany accounts and compliance with certain
NYSID regulations. The Company has agreed to address the recommendations in the
Reports. As previously reported, in December 1997, the Company made additions of
$164 million to the reserves of its New York subsidiaries at the direction of
the NYSID. The NYSID issued a Market Conduct Report identifying several alleged
violations of state law and NYSID regulations. On December 22, 1997, the NYSID
and Oxford entered into a stipulation under which Oxford promised to take
certain corrective measures and to pay restitution and a $3 million fine. The
stipulation provides that the NYSID will not impose any other fines for Oxford's
conduct up to November 1, 1997. The NYSID has directed the Company's New York
subsidiaries to obtain notes or other written evidence of agreements to repay
from each provider who has received an advance. The NYSID has continued to
review market conduct issues, including, among others, those relating to claims
processing and continues to express concern with the Company's claims turnaround
and performance. The Company has agreed to take certain other corrective actions
with respect to certain of these market conduct issues, but additional
corrective action may be required and such actions could adversely affect the
Company's results of operations.

    On January 5, 1999, March 29, 1999 and July 14, 1999, the Company agreed to
pay a fine of $40,900, $51,900 and $30,200 to the NYSID in connection with
certain alleged violations of New York's prompt payment law. On February 5,
1999, the NYSID proposed an additional fine of $77,800 for subsequent alleged
violations of the prompt payment law. Fines for similar alleged violations have
also been imposed on other health plans in New York.

    The NYSID has also raised certain issues relating to the Company's
methodology for determining premium rates for the Company's large group
business. On May 26, 1999, the NYSID issued rule interpretations in Circular
Letter 13, effective February 1, 2000, which requires the Company and competing
health plans to fully community-rate all HMO-based point-of-service ("POS")
products. This policy will impact the current methodology for determining
premium rates for the Company's large group business. In order to maintain a
substantially similar pricing methodology, the Company plans to offer its large
group Freedom Plan product through its health insurance subsidiary. The offering
is subject to NYSID approval of forms and rates and there can be no assurance
approval will be timely received. The approval process may also give rise to
regulatory issues, which could affect the terms of the products to be offered or
the terms of arrangements between the Company and healthcare providers.

    At this time, the Company cannot predict the outcome of continuing market
conduct reviews by the NYSID, enforcement of the New York prompt payment law or
recent changes in premium pricing practices.

    By letter dated June 15, 1999, the New Jersey Department of Health and
Senior Services (NJDHSS) notified Oxford that its review of complaints from
Oxford providers indicated that Oxford may be in violation of New Jersey's
Prompt Pay Statute and associated regulations, and that these alleged violations
could result in the imposition of a fine. Since that date Oxford has submitted
information to the NJDHSS regarding the alleged violations and will continue to
work with the Department to resolve these issues. At this time, Oxford cannot
predict the outcome of this matter.

    The New Jersey Department of Banking and Insurance ("NJDBI") is nearing
completion of its market conduct and financial examinations of the Company's New
Jersey HMO subsidiary. The market conduct examination relates to the
subsidiary's activities in 1997 and the first half of 1998 and is expected to
assert deficiencies

                                       27

<PAGE>   28
relating to, among others, claims processing and handling of complaints. The
NJDBI is likely to seek imposition of a fine in connection with completion of
the examination. In connection with the financial examination, the NJDBI is
requiring the Company to provide certain collateral for repayment of advances
made in 1997 to providers in respect of delayed claims by setting aside in trust
at the parent company funds equal to the admitted portions of the advances on
the New Jersey subsidiary's statutory financial statements. The Company is also
subject to ongoing examinations with respect to financial condition and market
conduct for its HMO and insurance subsidiaries in other states where it conducts
business. The outcome of these examinations cannot be predicted at this time.

    An agreement with the Heritage New Jersey Medical Group ("Heritage") covers
all of the Company's approximately 13,500 Medicare members in New Jersey as of
March 31, 1999. The NJDBI has recently advised the Company that the risk-sharing
aspects of the agreement with Heritage should be suspended pending NJDBI's
review of the need for additional regulation of risk-sharing arrangements. In
view of uncertainties in the regulatory environment and other considerations,
the Company, in July 1999, decided to wind down the network management agreement
with Heritage.

    The Company is also subject to ongoing examinations with respect to
financial condition and market conduct for its HMO and insurance subsidiaries in
other states where it conducts business. The outcome of these examinations
cannot be predicted at this time.

    NEW YORK STATE ATTORNEY GENERAL

    As previously reported, on November 6, 1997, the New York State Attorney
General served a subpoena duces tecum on the Company requiring the production of
various documents, records and materials "in regard to matters relating to the
practices of the Company and others in the offering, issuance, sale, promotion,
negotiation, advertisement, distribution or purchase of securities in or from
the State of New York." Since then, Oxford has produced a substantial number of
documents in response to the subpoena, and expects to produce additional
documents. In addition, some of Oxford's present and former directors and
officers have provided testimony to the Attorney General's staff.

    In addition, as previously reported, the Company entered into an Assurance
of Discontinuance, effective July 25, 1997, with the Attorney General under
which the Company agreed to pay interest at 9% per annum on provider clean
claims not paid by Oxford within 30 days on its New York commercial and Medicaid
lines of business until January 22, 1998. Since that time, the Company's
obligations to make prompt payments have been governed by applicable New York
law. In addition, contemporaneously, the Company agreed to pay varying interest
rates to providers in Connecticut, New Jersey, New Hampshire and Pennsylvania.

    The Company has subsequently responded to a number of inquiries by the
Attorney General with respect to Oxford's compliance with the Assurance of
Discontinuance. On February 2, 1998, the Attorney General served a subpoena
duces tecum on Oxford seeking production of certain documents relating to
complaints from providers and subscribers regarding nonpayment or untimely
payment of claims, interest paid under the Assurance, accounts payable, provider
claims processing, and suspended accounts payable. Oxford has produced documents
in response to the subpoena.

    The Attorney General recently served another subpoena duces tecum, dated
July 20, 1999, on Oxford. This subpoena was served on Oxford and other New York
health care plans as part of an investigation by the Attorney General. The
subpoena seeks production of certain documents relating to Oxford's utilization
review process. Utilization review is the review undertaken by a health care
plan to determine whether a requested health care service that has been, will be
or is being provided to an Oxford member is medically necessary. Oxford is in
the process of compiling its response to the subpoena.

    The Attorney General's Health Care Bureau also periodically inquires of the
Company with respect to hospital and provider payment issues and member
complaints.

    The Company intends to cooperate fully with the Attorney General's
inquiries, the outcome of which cannot be predicted at this time.

                                       28

<PAGE>   29
    SECURITIES AND EXCHANGE COMMISSION

    As previously reported, the Company received an informal request on December
9, 1997 from the Securities and Exchange Commission's Northeast Regional Office
seeking production of certain documents and information concerning a number of
subjects, including disclosures made in the Company's October 27, 1997 press
release announcing a loss in the third quarter. Oxford has produced documents
and has provided information in response to this informal request.

    The Commission has served the Company and certain of its current and former
officers and directors with several subpoenae duces tecum requesting documents
concerning a number of subjects, including, but not limited to, the Company's
public disclosure of internal and external audits, uncollectible premium
receivables, timing of and reserves with respect to payments to vendors, doctors
and hospitals, payments and advances to medical providers, adjustments related
to terminations of group and individual members and for nonpaying group and
individual members, computer system problems, agreements with the New York State
Attorney General, employment records of former employees, and the sale of Oxford
securities by officers and directors. Oxford and certain of its current and
former officers and directors have produced and are continuing to produce
documents in response to these subpoenae. Some of Oxford's present and former
directors, officers and employees have provided testimony to the Commission, and
others are expected to do so.

    Oxford intends to cooperate fully with the Commission and cannot predict the
outcome of the Commission's investigation at this time.

    HEALTH CARE FINANCING ADMINISTRATION

    From February 9, 1998 through February 13, 1998, HCFA conducted an enhanced
site visit at Oxford to assess Oxford's compliance with federal regulatory
requirements for HMO eligibility and Oxford's compliance with its obligations
under its contract with HCFA. During the visit, HCFA monitored, among other
things, Oxford's administrative and managerial arrangements, Oxford's quality
assurance program, Oxford's health services delivery program, and all aspects of
Oxford's implementation of its Medicare programs. On May 20, 1998, the Company
received a final report from HCFA and on June 10, 1998, the Company voluntarily
suspended marketing and most enrollment of new members under its Medicare
programs in New York, New Jersey, Connecticut and Pennsylvania. This action was
taken by the Company in order to provide the Company with an opportunity to
strengthen its operations and institute certain corrective actions required by
HCFA as a result of its visit. This action, however, did not apply to potential
enrollees of the Company's Medicare group accounts. On January 6, 1999, HCFA
notified the Company that it was satisfied that the necessary corrective actions
had been taken, permitting reinstitution of marketing and enrollment of
individual enrollees into the Company's Medicare programs. HCFA will continue to
monitor the Company's operations to ensure that the Company complies with its
corrective action plans and improves its operating performance in key areas,
including claims payment. In February 1999, the Company reinstituted marketing
to and enrollment of Medicare beneficiaries. However, there can be no assurance
that administrative or systems issues or the Company's current or future
provider arrangements will not result in adverse action by HCFA.

    ARBITRATION PROCEEDINGS

    As previously reported by the Company, on February 3, 1998, the New York
County Medical Society ("NYCMS") initiated an arbitration proceeding before the
American Arbitration Association ("AAA") in New York against Oxford alleging
breach of the written agreements between Oxford and some NYCMS physician members
and failure to adopt standards and practices consistent with the intent of those
agreements. The notice of intention to arbitrate was subsequently amended to
join thirteen additional New York medical associations as co-claimants. NYCMS
and the other claimants seek declaratory and injunctive relief requiring various
changes to Oxford's internal practices and policies, including practices in the
processing and payment of claims submitted by physicians. Oxford petitioned the
New York State Supreme Court for a permanent stay of this proceeding; this
petition was granted on August 12, 1999.

    Also, some individual physicians claiming that payments under their
contracts with Oxford were delayed have announced their intention to commence
arbitration proceedings against Oxford. Oxford has been served with

                                       29
<PAGE>   30
notices of intent to arbitrate on behalf of more than twenty individual
physicians. More than twenty arbitration proceedings have been filed by
individual physicians, one of which has been withdrawn. On or about September 9,
1998, the NYCMS announced that it was breaking off settlement negotiations with
Oxford, and that individual physicians would resume active arbitration against
Oxford.

    In November 1998, various individual physicians purported to amend their
demands for arbitration by adding a claim for punitive damages. These claims all
allege that Oxford's failure to develop the computer systems and personnel
necessary for the prompt and efficient processing of claims was reckless and
intentional, and that Oxford's failure to pay claims was arbitrary, capricious
and without good faith basis.

    In addition, on March 30, 1998, Oxford received a demand for arbitration
from two physicians purporting to commence a class action arbitration before the
AAA in Connecticut against Oxford alleging breach of contract and violation of
the Connecticut Unfair Insurance Practices Act.

    On May 14, 1999, Oxford filed a motion to dismiss the punitive damages claim
in one of the individual arbitration cases, Ritch v. Oxford, on the grounds
that, inter alia, that plaintiff had failed to allege any tort claim and that a
complaint for breach of contract will not support punitive damages. After
briefing and oral argument on this issue in the Ritch case, plaintiff was
permitted to amend his complaint on June 17, 1999 to add a cause of action for
fraud. Oxford subsequently renewed its motion to dismiss the punitive damages
claim, which motion was recently granted. The Company will seek to have the
decision with respect to the punitive damages motion followed in the other
individual arbitration cases.

    The outcome and settlement prospects of the various arbitration proceedings
cannot be predicted at this time although the Company believes that it has
substantial defenses to the claims asserted and intends to defend the
arbitrations vigorously.

     JEFFREY S. OPPENHEIM, M.D., ET AL. V. OXFORD HEALTH PLANS, INC., ET AL.,
INDEX NO. 97/109088

    As previously reported by the Company, on May 19, 1997, Oxford was served
with a purported "Class Action Complaint" filed in the New York State Supreme
Court, New York County by two physicians and a medical association of five
physicians. Plaintiffs alleged that Oxford (i) failed to make timely payments to
plaintiffs for claims submitted for health care services and (ii) improperly
withheld from plaintiffs a portion of plaintiffs' agreed compensation.
Plaintiffs alleged causes of action for common law fraud and deceit, negligent
misrepresentation, breach of fiduciary duty, breach of implied covenants and
breach of contract. The complaint sought an award of an unspecified amount of
compensatory and exemplary damages, an accounting, and equitable relief.

    On July 24, 1997, Oxford and plaintiffs reached a settlement in principle of
the class claims wherein Oxford agreed to pay, from September 1, 1997 to January
1, 2000, interest at certain specified rates to physicians who did not receive
payments from Oxford within certain specified time periods after submitting
"clean claims" (a term that was to be applied in a manner consistent with
certain industry guidelines). Moreover, Oxford agreed to provide to plaintiffs'
counsel, on a confidential basis, certain financial information that Oxford
believed would demonstrate that Oxford acted within its contractual rights in
making decisions on payments withheld from plaintiffs and members of the alleged
class. The settlement in principle provided that, if plaintiffs' counsel
reasonably does not agree with Oxford's belief in this regard, plaintiffs retain
the right to proceed individually (but not as a class) against Oxford by way of
arbitration. Oxford has supplied financial information to plaintiffs' counsel
and has exchanged draft settlement papers with plaintiffs' counsel.

    OTHER

    On May 18, 1998, a purported "Class Action Complaint" was brought against
Oxford and other un-named defendant plan administrators filed in the United
States District Court for the Eastern District of New York by four plaintiffs
who claim to be beneficiaries of defendants' health insurance plans seeking
declaratory and other relief from defendants for alleged wrongful denial of
insurance coverage for the drug Viagra. On September 8, 1998, Oxford moved to
dismiss the complaint based on plaintiffs' failure to exhaust their
administrative remedies; this motion was denied on August 23, 1999.

                                       30
<PAGE>   31
On October 26, 1998, Complete Medical Care, P.C. ("CMC"), United Medical Care,
P.C. ("UMC"), Comprehensive Health Care Corp. ("CHC") and Oscar Fukilman, M.D.
commenced actions in the Supreme Court of the State of New York for New York
County against Oxford and certain of its officers. The complaints in United
Medical Care, P.C. v. Oxford Health Plans, Inc. et al., Index No. 605176/98, and
Complete Medical Care, P.C. v. Oxford Health Plans, Inc. et al., Index No.
605178/98, generally allege that Oxford and the individual defendants: (i)
breached, and have announced their intention to breach, certain agreements with
CMC and UMC for the delivery of health care services to certain of Oxford's
members; (ii) breached an implied covenant of good faith and fair dealing with
UMC and CMC; (iii) fraudulently induced CMC and UMC to enter into their
respective agreements with Oxford; (iv) tortiously interfered with CMC's and
UMC's current and prospective contractual relations with certain physicians; and
(v) defamed CMC and UMC. The complaints each seek at least $165 million in
damages, at least $500 million in punitive damages, unspecified interest, costs
and disbursements, and such other relief as the court deems proper. The
complaint in the Complete Medical Care action also alleges that Oxford has
unjustly enriched itself by withholding from CMC certain funds to which CMC
claims it is entitled, and seeks the imposition of a constructive trust with
respect to those funds. The complaint in Oscar Fukilman, M.D. et al v. Oxford
Health Plans, Inc. et al., Index No. 604177/98, alleges that Oxford and certain
officers defamed, and conspired to defame, Dr. Fukilman and CHC, and seeks at
least $25 million in damages and unspecified costs and disbursements and such
other relief as the court deems proper.

    On January 8, 1999, defendants: (1) served an answer and counterclaims in
the Complete Medical Care case; (2) filed a motion to compel arbitration and
dismiss the United Medical Care complaint; and (3) moved to dismiss the Fukilman
v. Oxford complaint.

    Although the outcome of these actions cannot be predicted at this time, the
Company believes that it and the individual defendants have substantial defenses
to the claims asserted and intends to defend the actions vigorously.

    Oxford, like HMOs and health insurers generally, excludes certain health
care services from coverage under its POS, HMO, PPO and other plans. In the
ordinary course of business, the Company is subject to legal claims asserted by
its members for damages arising from decisions to restrict reimbursement for
certain treatments. The loss of even one such claim, if it were to result in a
significant punitive damage award, could have a material adverse effect on the
Company's financial condition or results of operations. In addition, the risk of
potential liability under punitive damages theories may significantly increase
the difficulty of obtaining reasonable settlements of coverage claims. The
financial and operational impact that such evolving theories of recovery may
have on the managed care industry generally, or Oxford in particular, is
presently unknown.

    In the ordinary course of its business, the Company also is subject to
claims and legal actions by members in connection with benefit coverage
determinations and alleged acts by network providers and by health care
providers and others.

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

    No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1998.

                                       31
<PAGE>   32

                                     PART II
<TABLE>
<CAPTION>
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

    The Company's common stock is traded in the over-the-counter market on the
Nasdaq National Market under the symbol "OXHP". The following table sets forth
the range of high and low sale prices for the common stock for the periods
indicated as reported on the Nasdaq National Market.

                                                                      1998                        1997
                                                             -----------------------        --------------------
                                                              HIGH            LOW              HIGH       LOW
<S>                                                          <C>            <C>             <C>           <C>
First Quarter...........................................     $22.00         $14.00          $67.13        $48.88
Second Quarter..........................................      19.50          14.50           75.75         55.25
Third Quarter ........................................        16.38           5.81           89.00         71.50
Fourth Quarter..........................................      15.81           7.00           79.00         13.75

</TABLE>

    As of March 1, 1999, there were 1,967 shareholders of record of the
Company's common stock.

    The Company has not paid any cash dividends on its common stock since its
formation and does not intend to pay any cash dividends on common stock in the
foreseeable future. Additionally, the Company's ability to declare and pay
dividends to its shareholders may be dependent on its ability to obtain cash
distributions from its operating subsidiaries. The ability to pay dividends is
also restricted by insurance and health regulations applicable to its
subsidiaries. See "Business - Government Regulation". Furthermore, the
Investment Agreement between the Company and TPG, and the other agreements and
instruments entered into in connection with the Financing, prohibit the Company
from paying cash dividends on its common stock.

    For a discussion of the sale of the redeemable Preferred Stock and Warrants
to purchase common stock of the Company pursuant to the Investment Agreement,
the sale of the Senior Notes and the sale of common stock to Norman C. Payson,
M.D. pursuant to his employment agreement, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".

                                       32

<PAGE>   33
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>

    The operating data and balance sheet information set forth below for each
year in the five-year period ended December 31, 1998 have been derived from the
consolidated financial statements of the Company. The information below is
qualified by reference to and should be read in conjunction with the audited
consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.


(In thousands, except per share amounts and
operating statistics)                                       1998            1997            1996           1995 (3)        1994 (3)
-----------------------------------------------------------------------------------------------------------------------------------

<S>                                                     <C>              <C>              <C>            <C>             <C>
Revenues and Earnings:
    Operating revenues                                   $ 4,630,166      $ 4,179,816      $ 3,032,569    $ 1,745,975     $  752,832
    Investment and other income, net                          89,245           71,448           42,620         19,711          7,479
    Net earnings (loss)                                     (596,792)        (291,288)          99,623         52,398         28,231
    Net earnings (loss) attributable to common shares       (624,460)        (291,200)          99,623         52,398         28,231

Financial Position:
    Working capital                                          209,443           85,790          451,957        103,448         71,731
    Total assets                                           1,637,750        1,390,101        1,356,397        611,149        331,084
    Long-term debt                                           350,000                -               -              -              -
    Redeemable preferred stock                               298,816                -               -              -              -
    Common shareholders' equity (deficit)                   (181,105)         349,216          598,170        220,033        132,394

Net Earnings (Loss) Per Common Share (1):
    Basic                                                  $   (7.79)      $    (3.70)       $    1.34      $    0.78      $    0.43
    Diluted                                                $   (7.79)      $    (3.70)       $    1.25      $    0.71      $    0.40
    Weighted-average number of Common shares
    outstanding:
        Basic                                                 80,120           78,635          74,285         67,450         65,410
        Diluted                                               80,120           78,635          79,662         73,344         70,554
Operating Statistics:
    Enrollment                                             1,881,400        2,008,100       1,535,500      1,007,700        513,000
    Fully insured member months                           23,081,900       21,584,700      15,604,400      9,338,610      4,101,863
    Self-funded member months                                765,500          602,900         474,200        514,200        524,000
    Medical loss ratio (2)                                     94.4%            94.0%           80.1%          77.5%          74.1%

-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Per share amounts and weighted-average number of common share amounts have
     been restated to reflect the two-for-one stock splits in 1996 and 1995.
(2)  Defined as health care services expense as a percentage of premiums earned.
(3)  In July 1995, the Company completed a merger with OakTree Health Plan, Inc.
     ("OakTree") whereby OakTree was merged into a subsidiary of the Company.
     The merger was accounted for as a pooling of interests and, accordingly,
     all prior period consolidated financial statements have been restated as if
     the merger took place at the beginning of such periods.

                                       33

<PAGE>   34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

OVERVIEW

    In 1998, the Company's revenues consisted primarily of commercial premiums
derived from its Freedom Plan and Liberty Plan, health maintenance organization
("HMO"), preferred provider organizations ("PPOs") and dental plan products,
reimbursements under government contracts relating to its Medicare+Choice
("Medicare") and Medicaid programs, third-party administration fee revenue for
its self-funded plan services (which is stated net of direct expenses such as
third-party reinsurance premiums) and investment income.

    Health care services expense primarily comprises payments to physicians,
hospitals and other health care providers under fully insured health care
business and includes an estimated amount for incurred but not reported or paid
claims ("IBNR"). The Company estimates IBNR expense based on a number of
factors, including prior claims experience. The actual expense for claims
attributable to any period may be more or less than the amount of IBNR reported.
The Company's results for the year ended December 31, 1998 were adversely
affected by additions to the Company's reserves for IBNR in the second and
fourth quarters. See "Liquidity and Capital Resources". The Company's results
for the year ended December 31, 1998 were also adversely affected by significant
restructuring charges and write-downs of strategic investments, as described
below.

    Since it began operations in 1986 and through 1997, the Company experienced
substantial growth in membership and revenues. The membership and revenue growth
has been accompanied by increases in the cost of providing health care in the
Company's service areas. The Company experienced declines in membership and
revenue during 1998 and such declines are expected to continue through 1999 and
beyond. The Company does not intend to promote significant membership or revenue
growth in 1999 because the Company through strategic initiatives has redirected
its efforts to establish profitability. See "Business - Recent Developments -
Turnaround Plan". Since the Company provides services on a prepaid basis, with
premium levels fixed for one-year periods, unexpected cost increases during the
annual contract period cannot be passed on to employer groups or members.

                                       34

<PAGE>   35
         The following table provides certain statement of operations data
expressed as a percentage of total revenues and the medical loss ratio for the
years indicated:
<TABLE>
<CAPTION>
                                                                                   1998          1997            1996
----------------------------------------------------------------------------------------------------------------------------

<S>                                                                                <C>           <C>             <C>
Revenues:
    Premiums earned                                                                    97.7%          98.0%           98.3%
    Third-party administration, net                                                     0.4%           0.3%            0.3%
    Investment and other income, net                                                    1.9%           1.7%            1.4%
----------------------------------------------------------------------------------------------------------------------------
      Total revenues                                                                  100.0%         100.0%          100.0%
----------------------------------------------------------------------------------------------------------------------------

Expenses:
    Health care services                                                               92.2%          92.1%           78.8%
    Marketing, general and administrative                                              16.4%          17.3%           15.5%
    Interest and other financing costs                                                  1.2%           0.3%               -
    Restructuring charges                                                               2.4%              -               -
    Write-downs of strategic investments                                                0.8%           1.0%               -
----------------------------------------------------------------------------------------------------------------------------
      Total expenses                                                                  113.0%         110.7%           94.3%
----------------------------------------------------------------------------------------------------------------------------

Operating earnings (loss)                                                            (13.0%)        (10.7%)            5.7%

Income (loss) from affiliate                                                               -           0.6%          (0.1%)
----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes                                                  (13.0%)        (10.1%)            5.6%
Income tax expense (benefit)                                                          (0.4%)         (3.3%)            2.4%
----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                                                  (12.6%)         (6.8%)            3.2%
Less preferred dividends and amortization                                             (0.6%)              -               -
============================================================================================================================
Net earnings (loss) attributable to common shares                                    (13.2%)         (6.8%)            3.2%
============================================================================================================================

Medical loss ratio                                                                     94.4%          94.0%           80.1%
============================================================================================================================
</TABLE>

    The medical loss ratio for 1998 and 1997 reflects significant additions to
the Company's reserves recorded in each year. A portion of the reserve additions
in 1997 and 1998 represent revisions to estimates for claims incurred in prior
years. Accordingly, the medical loss ratios on an incurred basis would be
different from those shown above.

RESTRUCTURING CHARGES AND WRITE-DOWNS OF STRATEGIC INVESTMENTS

    The Company recorded restructuring charges totaling $123.5 million ($114.8
million after income taxes, or $1.43 per share) in the first half of 1998. These
charges resulted from the Company's actions to better align its organization and
cost structure as part of the Company's Turnaround Plan. These charges included
estimated costs related to: (i) the disposition or closure of noncore
businesses; (ii) write-down of certain property and equipment; (iii) severance
and related costs; and (iv) costs of operations consolidation, including long
term lease commitments. These reserves are generally classified in the Company's
balance sheet as accounts payable and accrued expenses with the exception of
property and equipment, which have been written-down to their estimated net
realizable values. These reserve charges and their activity for 1998 are
summarized in the table below:

                                       35
<PAGE>   36

<TABLE>
<CAPTION>
                                                                                                                    Ending
                                           Restructuring                     Noncash           Changes in         Restructuring
(In thousands)                               Charges       Cash Used        Activity           Estimate            Reserves
---------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>              <C>                <C>                <C>
Provisions for loss on noncore businesses   $  55,700      $  (9,827)       $ (18,725)         $ (13,343)         $  13,805
Write-down of property and equipment           29,272           --            (28,267)            (1,005)            --
Severance and related costs                    24,800         (4,246)         (11,200)              --                9,354
Costs of consolidating operations              13,728           (548)            --                4,505             17,685
=============================================================================================================================
                                            $ 123,500       $ (14,621)       $ (58,192)         $  (9,843)        $  40,844
=============================================================================================================================

</TABLE>

    The changes in estimate totaling $9.8 million were a result of, among other
things, the receipt of proceeds from the sale of the Pennsylvania business at an
amount higher than anticipated in the Turnaround Plan, accelerated closing of
HMO and insurance operations in New Hampshire, Florida and Illinois which
resulted in a decrease in premium deficiency reserves and the completion of
Medicare risk transfer arrangements sooner than expected. These changes in
estimate totaling $9.8 million were recognized as a credit to restructuring
charges in the fourth quarter of 1998 and reduced the net loss by $.12 per
share.

    Provisions for loss on noncore business

    As part of its Turnaround Plan, the Company decided to withdraw from noncore
markets by selling or closing its HMO and insurance businesses in Pennsylvania,
Illinois, Florida and New Hampshire. Total premium revenue for these businesses
in 1998 was approximately $170.4 million, with operating losses totaling
approximately $37.0 million. In addition, the Company decided to close its
specialty management initiatives and to sell or close certain other health care
services operations and investments in noncore businesses. Restructuring
reserves were established relating to estimated losses associated with premium
deficiencies in the HMO and insurance subsidiaries to be sold or closed, the net
book value of noncore investments was reduced to their estimated recoverable
value, and accruals were recorded for incremental disposition and closing costs
associated with the Turnaround Plan. The Company estimated the net recovery of
its investments in these entities by evaluating the assets and operations for
impairment. This evaluation included an assessment of asset recoverability for
these entities, premium deficiency analysis assuming timely exit of these
noncore markets and the establishment of premium deficiency reserves, estimated
incremental disposition and closing costs including professional services and
anticipated proceeds related to the disposition of assets. In determining the
estimated fair values, the Company reviewed detailed asset listings for each
location to be vacated. Based upon the asset classification, acquisition date
and anticipated net proceeds, if any, upon disposition, as determined by the
Company, the assets were written down to estimated fair value. The fair values
were determined based on the best information available in the circumstances,
including prior experience in disposing of similar assets and discussions with
potential purchasers of the assets. The Company expects to dispose of all of the
property and equipment throughout 1999. The Company calculates premium
deficiency reserves based upon expected premium revenue, medical expense and
administrative expense levels and remaining contractual obligations using the
Company's historical experience. Of the $55.7 million originally recorded as
provision for loss on noncore businesses, approximately $25.2 million related to
premium deficiency reserves, approximately $27.9 million related to asset
valuation write-downs and reserves, approximately $2.2 million related to
accounting fees to be incurred for final statutory audits and legal fees to be
incurred in connection with preparation of agreements for sale or disposition of
assets and brokerage costs and approximately $.4 million related to defined
severance arrangements for employees of these entities. Approximately 250
employees in the noncore businesses have been terminated since June 30, 1998. As
of December 31, 1998, the remaining reserve for severance related to individuals
who were no longer employed with the Company.

    During the second half of 1998, the Company entered into an agreement to
sell its Pennsylvania subsidiary to a third party for $7.1 million in cash plus
a subordinated capital surplus note of $2.5 million and transferred its
membership in Illinois to a third party. Oxford Specialty Management, Inc., the
subsidiary through which the Company operated its specialty care management
initiative, ceased operations as of December 31, 1998. The Company concluded the
sale of one of its three health centers in third quarter of 1998 and expects to
sell or close

                                       36
<PAGE>   37
the remaining two health centers by the end of 1999. The Company
is also currently evaluating its telephone nurse triage service and expects that
this service will be substantially restructured by the end of 1999. In 1996 and
1997, the Company invested in several specialty care businesses as noncore
investments. Although the Company will continue to attempt to dispose of these
noncore investments, to date it has been unsuccessful in completing satisfactory
transactions.

    Cash expenses charged against the reserves amounted to $9.8 million. These
payments include net payments of $8.9 million related to disposition of the HMO
and insurance businesses in the noncore markets, payments of $2.9 million
related to premium deficiencies, severance, professional fees and other
incremental exit costs. These payments were partially offset by proceeds of $2.0
million related to the sale of the health center in the third quarter of 1998.

    Noncash charges against the reserve of $18.7 million relate to the specific
write-off of assets of the HMO and insurance businesses in the noncore markets
of $1.3 million, specialty care management initiative of $7.2 million, the
health centers and telephone nurse triage service of $4.5 million and write-off
of noncore investments in businesses of $5.7 million.

    Due to recoveries greater than anticipated, primarily the sale of the
Pennsylvania subsidiary for $9.6 million and the early shut-down of other
operations, the Company has revised its estimate of the remaining costs
associated with the final disposition or closure of these operations and
investments, and accordingly a total of $13.3 million of reserves were reversed
as a reduction of restructuring charges in the fourth quarter of 1998. The
change in estimate of $13.3 million was comprised primarily of a $7.3 million
reduction in the estimated liability established relative to the sale of the
Pennsylvania subsidiary due to the receipt of sale proceeds in excess of
anticipated proceeds, and a reduction in the premium deficiency reserve due to
the earlier than anticipated exit from that state. In addition, a $1.3 million
reduction in other asset valuation reserves, a $4.3 million reduction in premium
deficiency reserves, and a $.4 million reduction of accounting and legal fee
reserves were recorded relative to other noncore businesses. The remaining
liability at December 31, 1998 represents premium deficiency reserves for
operations in Illinois and Florida and full valuation allowances for the
investments in the remaining two health centers and the telephone nurse triage
service. The ending restructuring reserve at December 31, 1998 included premium
deficiency reserves totaling approximately $3.5 million, approximately $9.2
million of asset valuation reserves and approximately $1.1 million related to
other closing costs. The Company expects to complete the closure, disposal or
restructure of these noncore businesses and investments during 1999.

    Write-down of property and equipment

    In connection with the Company's attempts to reduce administrative costs
under the Turnaround Plan, the Company decided to consolidate operations and
reduce its occupied square footage from approximately 2,000,000 square feet
under lease to approximately 1,200,000 square feet. The Company attempts to
dispose of property and equipment as it vacates the facilities. The original
estimate for write-down of property and equipment recorded in the second quarter
of 1998 included provisions for the estimated losses related to vacating certain
facilities in connection with the Company's Turnaround Plan. The initial charge
included an estimated provision for loss related to leasehold improvements
($12.5 million), office furniture ($11.8 million), computers and office
equipment ($4.0 million) and software ($1.0 million). In determining the
estimated fair values, the Company reviewed detailed asset listings for each
location to be vacated. Based upon the asset classification, acquisition date
and anticipated net proceeds, if any, upon disposition, as determined by the
Company, the assets were written down to their estimated fair value. The fair
values were determined based on the best information available in the
circumstances, including prior experience in disposing of similar assets and
discussions with potential purchasers of the assets. The Company expects to
dispose of all of the property and equipment throughout 1999. Additionally, the
Company anticipated and experienced a reduction in workforce of over 1,000
employees as a result of this consolidation and its administrative expense
reduction plan. A write-down of approximately $29.3 million, against
approximately $37.1 million of net book value, was established for the estimated
unrecoverable book value of furniture and equipment and leasehold improvements
no longer in use or to be disposed of as a result of these steps. The Company
expects to complete the disposition or sale of these assets by the end of the
fourth quarter of 1999. Depreciation on these assets was suspended as of

                                       37
<PAGE>   38
June 30, 1998. The effect of this write-down was to reduce depreciation expense
by approximately $6.3 million for the second half of 1998.

    Severance and related costs

    The Company's Turnaround Plan contemplated significant changes in the
Company's senior management and, in connection therewith, fifteen members of
senior management were replaced and certain members of the former management
team were granted severance arrangements. As a result, the Company recorded
restructuring charges related to severance costs of $20.8 million in the first
quarter of 1998 and an additional $4.0 million in the second quarter of 1998 for
the former executives and managers. The noncash charges of approximately $11.2
million are attributable to the accelerated vesting of stock options of one
former executive. The December 31, 1998 balance represents contracted amounts
payable through the first half of 2001. The costs associated with the reduction
in workforce of over 1,000 employees were charged as incurred to marketing,
general and administrative expense during 1998. Severance arrangements with
these former employees did not carryover to future fiscal periods. As of
December 31, 1998, the entire reserve related to individuals who were no longer
employed with the Company.

    Costs of consolidating operations

    In connection with the consolidating of operations to reduce its occupied
square footage, restructuring charges totaling approximately $13.7 million were
recorded in the first half of 1998 for estimated costs associated with future
rental obligations (net of estimated sublease revenues), commissions, legal
costs, penalties and other expenses relating to disposition of excess space. The
Company will vacate its leased space located in Philadelphia, Pennsylvania;
Edison, New Jersey; Chicago, Illinois; Sarasota, Florida; and one of two
facilities in Milford, CT. In addition, the amount of leased space located in
Norwalk, Connecticut; New York, New York and White Plains, New York will be
significantly reduced. The Company recorded an additional restructuring charge
of approximately $4.5 million in the fourth quarter as a change in estimate as
the Company's experience in negotiating subleases and lease cancellations
through the fourth quarter indicates that costs will exceed previous estimates.
The remaining restructuring reserve for 1998 of $17.7 million is comprised of
the following estimated costs associated with the disposition of excess space:

<TABLE>
<CAPTION>
<S>                                                            <C>

               Gross future minimum rentals                    $ 26.1 million

               Sublease income                                 $(14.0) million

               Lease termination penalties                     $ 2.5 million

               Build-out costs                                 $ 1.5 million

               Brokers commissions                             $ 1.4 million

               Professional fees and other                     $ 0.2 million

</TABLE>

    Oxford has estimated future savings as a result of operations consolidation
of approximately $90 million, including $29 million in depreciation.

    The Company's relevant lease obligations extend to July 2005, but the
Company expects that a significant portion of these expenses will be incurred
prior to January 1, 2000.

    Write-downs of strategic investments and gain on Health Partners

    The Company disposed of its 47% interest in Health Partners, Inc. ("Health
Partners") in October 1997, and received 2,090,109 shares of common stock of FPA
Medical Management, Inc. ("FPAM") stock with a market value of approximately
$76.4. million, resulting in a pretax gain of approximately $63.1 million. As of
December 31, 1997, the market value of the FPAM stock had dropped to
approximately $38.4 million. At year-end 1997, the Company wrote down its
investment in FPAM by $38.0 million, thereby reducing the 1997 pretax gain on
the sale of Health Partners to approximately $25.2 million ($20.5 million after
taxes, or $.26 per share).

                                       38
<PAGE>   39
    During the second quarter of 1998, the Company sold 540,000 shares of FPAM
and recognized a loss of $8.1 million. In July 1998, FPAM filed for protection
under Chapter 11 of the U.S. Bankruptcy Code and the market value per share of
its common stock fell below one dollar. The Company wrote down its remaining
investment in FPAM to nominal value and recognized a loss in the second quarter
of 1998 of $30.2 million. The total 1998 recognized loss and write-down of $38.3
million, or $.49 per share, has been recognized as write-downs of strategic
investments in the accompanying financial statements.

    The 1997 charges resulted from a reduction in the level of future investment
in expansion markets and, accordingly, the Company wrote down its investments in
its Florida and Illinois subsidiaries and one affiliate. These write-downs have
been shown as write-downs of strategic investments in the accompanying financial
statements and are summarized as follows:

<TABLE>
<CAPTION>

(In thousands)
-------------------------------------------------------------------------------
<S>                                                           <C>

Compass PPA, Incorporated                                     $ 23,427
Riscorp Health Plans, Inc.                                       3,894
St. Augustine Health Care, Inc.                                 14,297
===============================================================================
    Total                                                     $ 41,618
===============================================================================
</TABLE>

    Certain nonrecurring items that were previously classified as write-downs of
strategic investments and restructuring charges in the second quarter of 1998
have been reclassified to operating and income tax captions in the 1998
statement of operations. A reclassification of write-downs of strategic
investments aggregating approximately $73.5 million was made related to charges
taken in the second quarter for strengthening medical claim reserves,
establishing reserves for losses on provider advances, and certain other asset
impairment losses. A reclassification of restructuring charges aggregating $18.8
million was made related to the write-down of government program account
receivables and accruals of certain litigation defense costs and other expenses.
In addition, restructuring charges of $51.0 million relating to premium
deficiency reserves for government contracts have been reclassified to health
care services expense. These reclassifications do not affect the reported net
loss for the second quarter or for the full year of 1998, but do have the effect
of increasing the second quarter medical loss ratio and administrative loss
ratio from the levels previously reported and full year ratios are also slightly
higher. In addition, a reclassification of restructuring charges approximating
$6.0 million was made related to certain deferred tax assets, which changes are
now included in the 1998 statement of operations as income tax expense. This
reclassification has no effect on the reported net loss for the second quarter
or the full year of 1998.

<TABLE>
<CAPTION>

                                                                                        Before                  After
Quarter ended June 30, 1998 (Dollars in thousands)                                 Reclassification       Reclassification
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                    <C>

Total revenues                                                                      $  1,191,112               $  1,191,112
Health care services expenses                                                          1,188,265                  1,307,214
Marketing, general and administrative expenses                                           203,659                    227,968
Restructuring charges                                                                    174,266                     98,500
Write-downs of strategic investments                                                     111,790                     38,341
Income tax expense                                                                             -                      5,957
Medical loss ratio                                                                        102.8%                     113.1%
Administrative loss ratio                                                                  17.6%                      19.6%

</TABLE>

    Software and hardware problems experienced in the conversion of a portion of
the Company's computer system in September 1996 resulted in significant delays
in the Company's billing of group and individual customers and have adversely
affected the Company's premium billing. The Company's revenues were adversely
affected by adjustments of approximately $218.2 million in 1998 and $173.5
million in 1997 related to estimates for terminations of group and individual
members and for nonpaying group and individual members. In 1998, approximately
$135.6 million of these adjustments related to termination of members,
approximately $65.2 million of these adjustments related to nonpaying members,
and approximately $17.4 million of these adjustments related to other manual
billing adjustments posted during the year. A similar breakout for 1997 is not
available since, prior to January 1, 1998, source documents for the adjustments
did not specify whether the adjustment related to group and member terminations,
nonpaying members or other manual billing adjustments.

                                       39
<PAGE>   40
Retroactive terminations occur when a group notifies Oxford that an employee is
no longer eligible for coverage and there is a lag between the effective date of
the termination and the receipt or posting of the notice of termination by
Oxford. Reserves for retroactivity in 1998 and 1997 are estimated based on
historical experience and are affected by the time it takes to process
enrollment and termination forms. Retroactivity can also arise when employer
groups terminate coverage without providing notice to Oxford. The Company has
taken steps to attempt to improve billing timeliness, reduce billing errors,
reduce lags in recording enrollment and disenrollment notifications, and improve
the Company's collection processes and is attempting to make requisite
improvements in management information systems concerning the value and aging of
outstanding accounts receivable. The Company continues to experience significant
levels of retroactive member and group terminations impacting revenue. In
addition, the Company continues to show significant aged receivable balances
from certain large group customers which remain uncollected. The Company
believes it has made adequate provision in its estimates for group and
individual member terminations and for nonpaying group and individual members as
of December 31, 1998. Adjustments to the estimates may be necessary, however,
and any such adjustments would be included in the results of operations for the
period in which such adjustments were made.

    As a consequence of the charges described in the previous paragraphs,
comparisons of operating results for 1996, 1997 and 1998 may not be meaningful.

    The Company's results of operations are dependent, in part, on its ability
to predict and maintain effective control over health care costs (through, among
other things, appropriate benefit design, utilization review and case management
programs and its risk sharing agreements with providers) while providing members
with coverage for the health care benefits provided under their contracts.
Factors such as new technologies and health care practices, hospital costs,
changes in demographics and trends, selection biases, increases in unit costs
paid to providers, major epidemics, catastrophes, inability to establish
acceptable compensation agreements with providers, higher utilization of medical
services, including higher out-of-network utilization under point of service
plans, operational and regulatory issues and numerous other factors may affect
the Company's ability to control such costs. The Company attempts to use its
medical cost containment capabilities, such as claim auditing systems and
utilization review protocols, with a view to reducing the rate of growth in
health care service expense. The Company's Turnaround Plan also contemplates
attempting to implement new medical management policies aimed at reducing costs
in various lines of business, principally through utilization management of
hospital services. There can be no assurance that the Company will be successful
in mitigating the effect of any or all of the above-listed or other factors. In
addition, the Company's relationship with many of its contracted providers were
adversely affected by the Company's computer systems and related claims payment
problems which could impede the Company's efforts to obtain favorable
arrangements with some of these providers going forward. Accordingly, past
financial performance is not necessarily a reliable indicator of future
performance, and investors should not use historical performance to anticipate
results of future period trends. The Company continues to reconcile delayed
claims and claims previously paid or denied in error and pay down backlogged
claims. Information gained as the process continues may result in future changes
to the Company's estimates of its medical costs and expected cost trends.

    The Company may continue to report losses in 1999 as the result of high
medical costs and high administrative costs. The Company's Turnaround Plan
contemplates steps to better control medical and administrative spending and
increase premium rates and discontinue unprofitable businesses, but there can be
no assurance that it will be successful. Results of operations will be adversely
affected if such steps cannot be successfully implemented or if there are delays
in such implementation. In addition, the Company may decide to increase certain
administrative costs to attempt to improve service levels. The Company's ability
to control administrative costs could be adversely affected by a continuation of
the high level of employee attrition that the Company has experienced over the
last several quarters.

                                       40

<PAGE>   41
RESULTS OF OPERATIONS

    Year Ended December 31, 1998 Compared with Year Ended December 31, 1997

    Total revenues for the year ended December 31, 1998 were $4.7 billion, up
11.0% from $4.3 billion in the prior year. The net loss attributable to common
stock for 1998 totaled $624.4 million, or $7.79 per share, compared with a net
loss of $291.3 million, or $3.70 per share, for 1997. Results of operations for
the year 1998 were adversely affected by significantly higher medical costs in
the Company's commercial group business, Medicare, Medicaid and New York
Individual Plans as well as approximately $113.7 million of restructuring
charges, a $31.8 million premium deficiency reserve for losses on government
contracts and $38.3 million of write-downs of strategic investments. Results for
1998 were also adversely affected by interest and financing expense of $57.1
million relating primarily to debt issuance costs and interest on claims for
medical services. Results of operations for 1997 were adversely affected by a
pretax charge of approximately $173.5 million relating to accounts receivable
write-offs and additions to accounts receivable reserves, write-downs of
strategic investments of approximately $41.6 million relating to write-downs of
certain investments and a pretax charge of approximately $327.0 million relating
to increased reserves for medical costs payable. See "Liquidity and Capital
Resources" and "Overview".
<TABLE>
<CAPTION>

    The following tables show plan revenues earned and membership by product:

                                                                                                                    Percent
(Dollars In thousands)                                                               1998             1997          Change
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>              <C>            <C>
REVENUES:
    Freedom Plan                                                                      $2,813,712       $2,468,259      14.0%
    HMOs                                                                                 542,835          463,428      17.1%
    --------------------------------------------------------------------------------------------------------------
      Commercial                                                                       3,356,547        2,931,687      14.5%
    --------------------------------------------------------------------------------------------------------------
    Medicare                                                                           1,010,831          916,126      10.3%
    Medicaid                                                                             244,950          319,411     (23.3%)
    --------------------------------------------------------------------------------------------------------------
      Government programs                                                              1,255,781        1,235,537       1.6%
    --------------------------------------------------------------------------------------------------------------
        Total premium revenues                                                         4,612,328        4,167,224      10.7%
    Third-party administration, net                                                       17,838           12,592      41.7%
    Investment and other income                                                           89,245           71,448      24.9%
    --------------------------------------------------------------------------------------------------------------
    Total revenues                                                                    $4,719,411       $4,251,264      11.0%
    ==============================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                       As of December 31,           Percent
                                                                                -------------------------------
                                                                                     1998             1997           Change
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>              <C>           <C>
MEMBERSHIP:
    Freedom Plan                                                                       1,318,100        1,333,500     (1.2%)
    HMOs                                                                                 260,700          270,400     (3.6%)
    --------------------------------------------------------------------------------------------------------------
      Commercial                                                                       1,578,800        1,603,900     (1.6%)
    --------------------------------------------------------------------------------------------------------------
    Medicare                                                                             148,600          161,000     (7.7%)
    Medicaid                                                                              97,800          189,600    (48.4%)
    --------------------------------------------------------------------------------------------------------------
      Government programs                                                                246,400          350,600    (29.7%)
    --------------------------------------------------------------------------------------------------------------
        Total fully insured                                                            1,825,200        1,954,500     (6.6%)
    Third-party administration                                                            56,200           53,600      4.9%
    --------------------------------------------------------------------------------------------------------------
      Total membership                                                                 1,881,400        2,008,100     (6.3%)
    ===============================================================================================================
</TABLE>

    Total commercial premiums earned for the year ended December 31, 1998
increased 14.5% to $3.4 billion compared with $2.9 billion in the prior year.
This increase is primarily attributable to a 11.2% increase in member months in
the Company's commercial health care programs, including a 10.8% member months
increase in the Freedom Plan. Commercial premium revenue was adversely affected
by adjustments of $173.5 million in 1997 and $218.2 million in 1998 related to
estimates for termination of group and individual members and for nonpaying
group and individual members. See "Overview". Average premium yields of
commercial programs were 2.9% higher in 1998, net of such adjustments, when
compared with 1997. Medical costs incurred in 1998 in

                                       41
<PAGE>   42
the Company's core commercial business were higher than estimates used in
establishing rates for groups sold and renewing in late 1997 and early 1998. As
a consequence, premium rates were insufficient and the Company incurred losses.
The Company has attempted to increase its premium rates based on current
estimates of medical costs. Renewals and new enrollments in the Company's core
commercial group business for January 1, 1999 received an average price increase
estimated at 9.8%. The Company recently filed with the NYSID for a 9.8% rate
increase for the New York Individual Plans, effective April 1, 1999. The
Company's commercial revenue in 1999 will be adversely affected by the Company's
disposition or withdrawal from noncore commercial markets in Pennsylvania,
Illinois, Florida and New Hampshire. In addition, the Company experienced
attrition of commercial members in its core commercial markets in 1998 and
expects such attrition to continue in 1999, adversely affecting revenue.

    Premiums earned from government programs increased 1.6% to $1.26 billion in
1998 compared with $1.24 billion in 1997. The overall increase was attributable
to an 8.3% increase in member months of Medicare programs offset, in part, by a
28.0% decline in member months of Medicaid programs due primarily to the
withdrawal from the Connecticut and New Jersey Medicaid markets during 1998.
Additionally, the Company's New York Medicaid contract was assigned to a third
party in January 1999, and the Company's Pennsylvania subsidiary, including its
Pennsylvania Medicaid business, was sold in January 1999. As of February 1,
1999, the Company had no Medicaid members and will have limited Medicaid revenue
in 1999. The Company expects its Medicare revenue to be significantly lower in
1999 as the result of withdrawals from Medicare in certain counties as well as
net losses in membership due to changes in provider arrangements and benefit
plans in other counties. Reimbursement levels for the Company's 1999 Medicare
business are expected to be 1.6% higher than 1998 (net of the applicable HCFA
user fee). The Company believes that future Medicare premiums may be adversely
affected by the implementation of risk adjustment mechanisms recently announced
by HCFA. See "Business - Government Regulations - Recent Regulatory
Developments".

    Net investment and other income for the year ended December 31, 1998
increased 24.9% to $89.2 million from $71.4 million in the prior year primarily
due to higher investment income as a result of an increase in average invested
balances in 1998 resulting from the Company's May 1998 Financing. Investment
income also benefited from the movement from low yield municipal bonds and
equity securities to high quality government and corporate fixed income
investments. This increase in interest income during 1998 more than offset a
$10.6 million decrease in net capital gains from 1997. In addition, the Company
recognized income of approximately $5.1 million in the second quarter of 1998
related to the sale of its New Jersey Medicaid business. See "Liquidity and
Capital Resources".

    Health care services expense stated as a percentage of premium revenues (the
"medical loss ratio") was 94.4% for the year 1998 compared with 94.0% for the
year 1997. Overall per member per month revenue in 1998 was $199.82, however,
overall per member per month health care services expenses increased 4.0% to
$188.61 in 1998 from $181.38 in 1997. Software and hardware problems experienced
in the conversion of a portion of the Company's computer system in September
1996 resulted in significant delays in the Company's payment of provider claims
and adversely affected payment accuracy during 1997. Medical costs for 1997
reflect additions to the Company's reserves for IBNR in the third quarter of
1997 aggregating $88 million and in the fourth quarter of 1997 aggregating $239
million. Of the total 1997 reserve additions of $327 million, approximately $90
million related to incurred costs for periods prior to 1997. These reserve
additions represent revisions to estimates of the Company's incurred medical
costs based on information gained in the process of reviewing and reconciling
previously delayed claims and claims paid or denied in error. These revised
estimates resulted from significant increases in medical costs in prior periods
in the Company's commercial, Medicare, Medicaid and New York Individual Plans
which exceeded prior estimates. Health care services expense for 1998 and 1997
also included provisions of $25 million and $10 million, respectively, related
to valuation reserves established in respect of provider advances.

    As part of its Turnaround Plan, the Company decided to restructure its
current Medicare arrangements and/or withdraw from Medicare in the counties
where the Medicare business was not profitable and to withdraw from the Medicaid
business entirely. Premium deficiency reserves totaling $51.0 million were
established in the second quarter of 1998 and charged to health care services
expense. Based on the Company's decision to restructure or withdraw from these
businesses by the end of 1998, the reserves were determined by estimating the
premium deficiency for the remainder of 1998.

                                       42
<PAGE>   43
    The Company entered into an agreement to dispose of its remaining Medicaid
business in the fourth quarter of 1998, completed two Medicare risk transfer
agreements late in the third quarter of 1998 and notified HCFA in the fourth
quarter of 1998 of its intention to withdraw from Medicare in certain counties
effective January 1, 1999. Under the two risk sharing arrangements the Company
has transferred a substantial portion of the medical cost risk associated with
the provision of medical services to certain of the Company's Medicare members
to a network management company in one case and an integrated health care system
in the other. These risk transfer agreements have five year terms and provide
for delegation of certain claims payment and utilization management functions,
subject to oversight by the Company. The providers agree to provide or arrange
for providing all covered health care services for this membership in return for
payment by the Company of a fixed per member per month payment based on a
percentage of premium received by the Company. In the event the providers fail
to fulfill their obligations under the risk transfer agreements, the Company
remains primarily liable to pay the cost of covered services. Losses in these
programs amounted to $31.8 million in the second half of 1998 and were charged
against the reserves established in the second quarter of 1998. As a result of
the Company's early completion of this portion of its Turnaround Plan, the
remaining reserve balance of $19.2 million was reversed as a reduction of health
care services expense in the fourth quarter of 1998, which reduced the net loss
by $.24 per share.

     As part of the Turnaround Plan, the Company decided that it was not in a
position to make the investment in noncore markets required to achieve
normalized operating results. Accordingly, the Company decided to withdraw from
certain states, namely Pennsylvania, New Hampshire, Florida and Illinois, and
focus on its core businesses of commercial and Medicare membership in New York,
New Jersey and Connecticut. The Company was prohibited by the various state
regulators from simply canceling the outstanding policies and immediately
withdrawing from these noncore markets. As a result, the Company was required to
continue to service the outstanding policies. Using these assumptions, the
premium deficiency reserve aggregating $25.2 million was established for the
noncore businesses in accordance with SFAS 5 and the AICPA Healthcare Audit
Guide.

    The Company recognizes premium deficiency reserves based upon expected
premium revenue, medical expense and administrative expense levels and remaining
contractual obligations using the Company's historical experience. The Company
evaluated the necessity for premium deficiency reserves in periods prior to 1998
and concluded that no reserves were required since, at that time, the Company
was projecting marginal profits or immaterial losses on these businesses based
on normalized premiums and medical and administrative expense levels. The
projections that had previously shown marginal profits or immaterial losses on
these businesses contemplated growth in the underlying business to support
administrative expense levels, premium increases, reductions in medical costs
resulting from improved medical management, systems and operational improvements
and revised provider contracts.

    Results in the fourth quarter of 1998 were affected by the establishment of
an additional $49 million in medical claims reserves for disputed claims, a $27
million provision for anticipated losses on individual products and net accruals
of $30 million for certain other medical expense liabilities, partially offset
by favorable medical reserve adjustments of $92 million arising from recent
claims experience which showed better than expected medical costs during 1998,
principally in the Company's Medicare business. The establishment of an
additional $49 million in claims reserves for disputed claims was made based on
experience in reconciling provider accounts receivables as part of a settlement
process designed to assist in the recovery of advances. These settlements are
not associated with specific dates of service. The $27 million provision for
losses on individual products reflects the expected premium deficiency arising
from the Company's decision to seek an approximately 9% increase in premium on
its New York individual products, instead of seeking a higher increase which
would involve uncertainties associated with the requirement of a public rate
hearing. Net accruals of $30 million, primarily for 1998, were made for New York
hospital bad debt and charity care, demographic pool charges and graduate
medical education charges based on internal assessments and reconciliation of
liabilities under these programs.

    The Company's paid and received claims data and revised estimates showed
significant increases in medical costs in 1996, 1997 and 1998 for the Company's
commercial, Medicare, Medicaid and New York Individual Plans. These increases
resulted primarily from higher expenses for hospital and specialist physician
services and increases in per member per month pharmacy costs. Results for 1998
continued to reflect high costs in these areas and the Company expects further
increases in 1999. The Company's Turnaround Plan was designed to


                                       43
<PAGE>   44
address the operating losses incurred in these lines of business, but there can
be no assurance that the Turnaround Plan will succeed. Moreover, improvement of
results in the New York Mandated Plans will require increases in rates or
additional cost control measures which require NYSID approval. The Company
expects to continue to experience losses in these plans. The Company believes it
has made adequate provision for medical costs as of December 31, 1998. There can
be no assurance that additional reserve additions will not be necessary as the
Company continues to review and reconcile delayed claims and claims paid or
denied in error. Moreover, the Company's claims payment and accuracy still
require improvement to meet acceptable standards. Additions to reserves could
also result as a consequence of regulatory examinations, and such additions also
would be included in the results of operations for the period in which such
adjustments are made. See "Liquidity and Capital Resources".

    Marketing, general and administrative expenses increased 4.7% to $772.0
million during the year 1998 compared with $737.4 million during the year 1997.
The increase in 1998 was primarily attributable to a $20.0 million rise in
payroll and benefits due to higher average staffing levels through the first
half of 1998 and an $8.0 million increase in consulting fees primarily related
to enhancements to management information systems offset, in part, by
significantly lower marketing expenses for advertising and member acquisition.
Marketing, general and administrative expenses as a percent of operating revenue
were 16.7% during 1998 compared with 17.6% during 1997. Marketing, general and
administrative expenses included $35.2 million in 1998 and $15.0 million in 1997
related to provisions for uncollectible notes and accounts receivable. The
increase in 1998 was primarily a result of increases in termination of nonpaying
commercial members and groups, the exiting of noncore markets and the exiting
and restructuring of Medicaid and Medicare programs, which make it more
difficult for the Company to collect amounts due on notes and accounts
receivable. The Company's Turnaround Plan calls for significant reductions in
administrative costs, but there can be no assurance the Company will be
successful in reducing such costs, and the Company expects that results for 1999
will continue to be adversely affected by high administrative costs. Moreover,
the Company may decide to increase certain administrative costs to attempt to
improve service levels. Administrative costs in future periods may also be
adversely affected by costs associated with responding to regulatory inquiries,
investigations and defending pending securities class actions, shareholder
derivative and other litigation, including fees and disbursements of counsel and
other experts, to the extent such costs are not reimbursed under existing
policies of insurance and exceed existing accruals. There can be no assurance
that ultimate costs will not exceed those estimates. See "Legal Proceedings".
The Company's ability to control administrative costs could also be adversely
affected by a continuation of the high level of employee attrition which the
Company has experienced over the last several quarters.

    Effective January 1, 1997, the New York Health Care Reform Act of 1996 (the
"New York Act") requires that the Company make payments to state funding pools
to finance hospital bad debt and charity care, graduate medical education and
other state programs under the New York Act. Previously, hospital bad debt and
charity care and graduate medical education were financed by surcharges on
payments to hospitals for inpatient services. In 1998 and 1997 the Company
expensed a total of $76.4 million and $72.5 million, respectively, for graduate
medical education, and the Company expensed a total of $54.8 million and $23.9
million, respectively, for hospital bad debt and charity care. Because these
payment obligations have not been offset by corresponding reductions in payments
to hospitals and others, the Company believes its costs have increased. It is
not possible to determine the precise impact, however, due to changes made in
the Company's hospital contracts and the effect of overall changes in hospital
costs during the period.

    The Company incurred interest and other financing charges of $41.6 million
in 1998 related to the issuance of $200 million in bridge financing in the first
quarter of 1998 and $350 million of long-term debt in May 1998. Interest expense
on capital leases entered into in 1998 aggregated $1.4 million. No such interest
was incurred in 1997. Interest expense on delayed claims totaled $14.1 million
in 1998, compared with $11.1 million in 1997. Interest payments have been made
in accordance with the Company's interest payment policy and applicable law. The
Company's future results will continue to reflect interest payments by the
Company on delayed claims as well as interest expense on outstanding
indebtedness incurred in 1998. See "Business - Recent Developments -
Financings".

    During the second quarter of 1998, the Company incurred a net loss of $507.6
million. At that time, the Company evaluated the deferred tax assets arising
from the net loss and established a full valuation allowance


                                       44
<PAGE>   45
pending the results of its Turnaround Plan. Subsequent to the second quarter of
1998, the Company performed detailed analyses to assess the realizability of the
Company's deferred tax assets. These analyses included an evaluation of the
results of operations for 1998 and prior periods, the progress to date in its
Turnaround Plan and projections of future results of operations, including the
estimated impact of the Turnaround Plan. Based on these analyses, the Company
does not currently believe it is more likely than not that all of its deferred
tax assets will be fully realizable, and the Company continues to carry a
valuation allowance of $282.6 million in order to reflect deferred tax assets
related to net operating loss carryforwards and other net tax deductible
temporary differences at their currently estimated realizable value. The Company
will continue to evaluate the realizability of its net deferred tax assets in
future periods and will make adjustments to the valuation allowance when facts
and circumstances indicate that a change is necessary. The amounts of future
taxable income necessary during the carryforward period to utilize the
unreserved net deferred tax assets is approximately $320 million.

    As of December 31, 1998, the Company has federal net operating loss
carryforwards of approximately $600 million, which will begin to expire in 2012.


                                       45
<PAGE>   46
    Year Ended December 31, 1997 Compared with Year Ended December 31, 1996

    The following tables show plan revenues earned and membership by product:
<TABLE>
<CAPTION>
                                                                                                                     Percent
(Dollars In thousands)                                                                 1997             1996          Change
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>              <C>             <C>
REVENUES:
    Freedom Plan                                                                     $2,468,259       $1,849,167      33.5%
    HMOs                                                                                463,428          322,288      43.8%
    -------------------------------------------------------------------------------------------------------------
      Commercial                                                                      2,931,687        2,171,455      35.0%
    -------------------------------------------------------------------------------------------------------------
    Medicare                                                                            916,126          599,824      52.7%
    Medicaid                                                                            319,411          250,889      27.3%
    -------------------------------------------------------------------------------------------------------------
      Government programs                                                             1,235,537          850,713      45.2%
    -------------------------------------------------------------------------------------------------------------
        Total premium revenues                                                        4,167,224        3,022,168      37.9%
    Third-party administration, net                                                      12,592           10,401      21.1%
    Investment and other income                                                          71,448           42,620      67.6%
    =============================================================================================================
    Total revenues                                                                   $4,251,264       $3,075,189      38.2%
    =============================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                          As of December 31,
                                                                               ----------------------------------    Percent
                                                                                        1997            1996          Change
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>              <C>            <C>
MEMBERSHIP:
    Freedom Plan                                                                      1,333,500        1,015,100      31.4%
    HMOs                                                                                270,400          192,300      40.6%
    -------------------------------------------------------------------------------------------------------------
      Commercial                                                                      1,603,900        1,207,400      32.8%
    -------------------------------------------------------------------------------------------------------------
    Medicare                                                                            161,000          125,000      28.8%
    Medicaid                                                                            189,600          162,000      17.0%
    -------------------------------------------------------------------------------------------------------------
      Government programs                                                               350,600          287,000      22.2%
    -------------------------------------------------------------------------------------------------------------
        Total fully insured                                                           1,954,500        1,494,400      30.8%
    Third-party administration                                                           53,600           41,100      30.4%
    =============================================================================================================
      Total membership                                                                2,008,100        1,535,500      30.8%
    ==============================================================================================================
</TABLE>


    Commercial premium revenues increased 35% to $2.9 billion in 1997 from $2.2
billion in 1996. Membership growth accounted for substantially all of the change
as member months of the Freedom Plan increased 37.2% when compared with 1996,
and member months of Oxford's traditional HMOs increased 43.2% over the prior
year. Premium yields of commercial programs were about the same in 1997 as in
1996. Software and hardware problems experienced in the conversion of a portion
of the Company's computer system in September 1996 resulted in significant
delays in the Company's billing of group and individual customers and in 1997
adversely affected the Company's premium billing. The Company's revenues in 1997
were adversely affected by adjustments of approximately $173.5 million related
to estimates for terminations of group and individual members and for nonpaying
group and individual members.

    Premium revenues of government programs increased 45.2% to $1.2 billion in
1997 from $850.7 million in 1996. Membership growth accounted for most of the
change in Medicare as member months increased 46.4% when compared with the prior
year. The increase in Medicaid revenues was attributable to a 34.4% increase in
member months compared with 1996, offset in part by a 5.2% decrease in average
premium rates during 1997. Average premium yields of Medicare programs in 1997
were 4.3% higher than in 1996.

    Third-party administration revenues for the year ended December 31, 1997
increased to $12.6 million from $10.4 million in 1996, attributable to a 27.1%
increase in member months due to the acquisition of Compass PPA, Incorporated,
partially offset by a 4.7% decrease in per member per month revenue.


                                       46
<PAGE>   47
    Net investment and other income for the year ended December 31, 1997
increased to $71.4 million from $42.6 million in 1996. This was principally due
to significantly greater realized capital gains in 1997 when compared with 1996.

    Health care services expense stated as a percentage of premiums earned (the
"medical loss ratio") was 94.0% for the year ended December 31, 1997 compared
with 80.1% for the year ended December 31, 1996. Overall per member per month
revenue in 1997 was substantially unchanged from 1996, however, overall per
member per month health care services expenses increased 17.0% to $181.46 in
1997 from $155.16 in 1996. Software and hardware problems experienced in the
conversion of a portion of the Company's computer system in September 1996
resulted in significant delays in the Company's payment of provider claims and
adversely affected payment accuracy. Medical costs for 1997 reflect additions to
the Company's reserves for IBNR in the third and fourth quarters aggregating
$327 million. These additions represent revisions to estimates of the Company's
incurred medical costs based on information gained in the process of reviewing
and reconciling previously delayed claims and claims paid or denied in error. A
portion of the reserve additions represent revisions to estimates for claims
incurred in prior years.

    The Company's paid and received claims data and revised estimates show
significant increases in medical costs in 1996 and 1997 in the Company's
Medicare, Medicaid and New York Mandated Plans. The Company estimates that its
per member per month medical costs increased 13.1% in 1996 and 21.4% in 1997 in
its Medicare programs. In its New York Mandated Plans and its Medicaid programs
the Company's per member per month medical costs increased 49.1% and 17.3%,
respectively, in 1997. These increases resulted primarily from higher expenses
for hospital and specialist physician services and increases in per member per
month pharmacy costs of 20.7% and 18.5% in 1996 and 1997, respectively. The
Company reviews its ultimate claims liability in light of its claims payment
history and other factors, and any resulting adjustments are included in the
results of operations for the period in which such adjustments are made.

    Marketing, general and administrative expenses increased 54.5% to $737.4
million in 1997 from $477.4 million in 1996 which, as a percentage of operating
revenues, was 17.6% in 1997 compared with 15.7% in 1996. The increase in
marketing, general and administrative expenses was attributable to the Company's
membership growth, costs associated with expansion into new markets in Florida
and Illinois and expenses attributable to strengthening the Company's
operations, including costs for independent consultants, additional staff and
information system enhancements. Principal areas of increased expense were
payroll and benefits expense, broker commissions, marketing expenses and
depreciation. Payroll and benefits expense increased $87.5 million in 1997
primarily due to an increase in the size of the Company's work force to
approximately 7,200 employees at the end of 1997 from approximately 5,000
employees at the end of 1996. The additional employees were hired primarily in
the areas of health services, member services, management information systems
and marketing. Broker commissions increased by $47.8 million in 1997 due to the
increase in premiums. Marketing expenses other than payroll and benefits
increased by $15.7 million in 1997 as the Company implemented programs to market
its products in a highly competitive environment in several markets.
Depreciation expense was $17.1 million higher than in 1996 as a result of $101.9
million of capital expenditures during 1997.

    The Company incurred interest expense of approximately $11.1 million during
1997 for payment of interest on delayed claims.

    The Company disposed of its 47% interest in Health Partners, Inc. ("Health
Partners") in October 1997, and received 2,090,109 shares of common stock of FPA
Medical Management, Inc. ("FPAM") stock with a market value approximately $76.4
million, resulting in a pretax gain of approximately $63.1 million. As of
December 31, 1997, the market value of the FPAM stock had dropped to
approximately $38.4 million. At year-end 1997, the Company wrote down its
investment in FPAM by $38.0 million, thereby reducing the pretax gain on the
sale of Health Partners to approximately $25.2 million ($20.5 million after
taxes, or $.26 per share). The Company's equity in Health Partners net loss for
1997 prior to the sale was $1.1 million compared with a loss of $4.6 million in
1996.

    The Company acquired all of the outstanding stock of Compass PPA,
Incorporated, as of August 1, 1997 for approximately $8.2 million in cash
(resulting in goodwill of $24.1 million) and acquired all of the outstanding
stock


                                       47
<PAGE>   48
of Riscorp Health Plans, Inc., a Florida-based HMO, as of November 3, 1997, for
approximately $5.3 million in cash (resulting in goodwill of $3.9 million).
Since the dates of acquisition, the Company made investments in such companies
pursuant to a plan to aggressively develop and market the Company's products in
the Florida and Chicago markets. As of December 31, 1997, the Company determined
to focus available administrative resources in its core markets in the Northeast
and to reduce significantly the level of investment planned for these expansion
markets. The Company believes that such reduction in future investments
adversely impacted the value of these companies and, accordingly, the Company
reduced the value of its investment in these companies by writing off $27.3
million in goodwill arising from the acquisitions and subsequent investment. The
Company also reduced the carrying value of its minority investment in the
capital stock and subordinated surplus notes of St. Augustine Health Care, Inc.,
a Florida-based HMO by $14.3 million. The Company determined that its investment
in St. Augustine was worthless after attempts to dispose of the investment
through a sale process failed.

    The income tax benefit for 1997 was $140.3 million, or approximately 32.5%
of the Company's pretax loss in 1997. This is lower than the 42.1% effective tax
rate for 1996 since, due to the Company's significant net loss, the Company
established a valuation allowance related to state net operating loss
carryforwards.

INFLATION

    Although the rate of inflation has remained relatively stable in recent
years, health care costs have been rising at a higher rate than the consumer
price index. In particular, the Company has experienced significant increases in
medical costs in its commercial, Medicare, Medicaid, and New York Individual
Plans. The Company employs various means to reduce the negative effects of
inflation. The Company has in prior years increased overall commercial premium
rates when practicable in order to attempt to maintain margins. The Company's
cost control measures and risk-sharing arrangements with various health care
providers as well as its withdrawal from participation in state Medicaid
programs may mitigate the effects of inflation on its operations. There is no
assurance that the Company's efforts to reduce the impact of inflation will be
successful or that the Company will be able to increase premiums to offset cost
increases associated with providing health care.

LIQUIDITY AND CAPITAL RESOURCES

    Cash used by operations during 1998 aggregated $46.5 million compared with
$152.6 million in 1997. The improvement is primarily attributable to the receipt
in 1998 of federal and state tax refunds totaling $121 million. During 1998, the
Company significantly strengthened its balance sheet and enhanced short-term
liquidity through the infusion of $710 million in cash in the Financing
described below.

    Cash used for capital expenditures totaled $40.0 million during 1998. This
amount was used primarily for computer equipment and software and leasehold
improvements. The Company acquired an additional $40.3 million of computer and
other equipment under capital leases. The Company also sold and leased back
computer equipment with a value of $10.0 million. The Company currently
anticipates that capital expenditures and payments under capital leases for 1999
will be approximately $19 million, a significant portion of which will be
devoted to management information systems. Except for anticipated capital
expenditures and requirements to provide the required levels of capital to its
operating subsidiaries, including any requirement arising from nonadmissibility
of provider advances (as discussed below) or other assets or from operating
losses, the Company currently has no definitive commitments for use of material
cash.

    Cash and investments aggregating $44.8 million at December 31, 1998 have
been segregated as restricted investments to comply with federal and state
regulatory requirements. The Company expects to set aside additional funds, not
expected to exceed $30 million, as collateral for certain advances made by the
Company's New Jersey subsidiary (see below). In addition, the Company's
subsidiaries are subject to certain restrictions on their abilities to make
dividend payments, loans or other transfers of cash to the parent company, which
limit the ability of the Company to use cash generated by subsidiary operations
to pay the obligations of the parent, including debt service and other financing
costs.

    In September 1998, the National Association of Insurance Commissioners
("NAIC") adopted new minimum capitalization requirements, known as risk-based
capital rules, for health care coverage provided by HMOs and


                                       48
<PAGE>   49
other risk-bearing health care entities. Depending on the nature and extent of
the new minimum capitalization requirements ultimately adopted by each state,
there could be an increase in the capital required for certain of the Company's
regulated subsidiaries. Connecticut has introduced legislation allowing the
Connecticut Department of Insurance ("CTDOI") to promulgate regulations based on
the NAIC model. The Company expects the CTDOI regulations to be applicable to
its 1999 annual financial statements. Neither New York nor New Jersey have
introduced similar legislation. However, the New Jersey Department of Banking
and Insurance ("NJDBI") has published draft solvency regulations that it
estimates will result in an additional $250 million worth of deposits by all New
Jersey health care plans. The New York Superintendent of Insurance has announced
an intention to strengthen current solvency regulations to allow the NYSID to
take over failing health plans without a court order. The Company intends to
fund any increase from available parent company cash reserves; however, there
can be no assurance that such cash reserves will be sufficient to fund these
minimum capitalization requirements. The new requirements are expected to be
effective on or before December 31, 1999.

    Premiums receivable at December 31, 1998 decreased to $110.3 million from
$275.6 million at December 31, 1997 primarily due to improved collections and
continued clean-up efforts for nonpaying groups and reconciliations and
increased reserves for doubtful accounts.

    As a result of the previously discussed delays in claims payments, the
Company experienced a significant increase in medical claims payable during the
fourth quarter of 1996 and the first quarter of 1997, but the increase in
medical costs payable was mitigated by progress in paying backlogged claims and
by making advance payments to providers and reductions in IBNR relating to the
Company's exit from certain businesses during the first quarter of 1998 and
thereafter. Outstanding advances, net of a $35 million valuation reserve,
aggregated approximately $139.5 million at December 31, 1998 and have been
netted against medical costs payable in the Company's consolidated balance
sheet. The Company believes that it will be able to recover outstanding advance
payments, either through repayment by the provider or application against future
claims, but any failure to recover funds advanced in excess of the reserve would
adversely affect the Company's results of operations. There can be no assurance
that insurance regulators will continue to recognize such advances as admissible
assets and the New Jersey Department of Banking and Insurance is requiring the
Company to provide collateral for repayment of the advances by setting aside in
trust at the parent company funds equal to the admitted portion of the advances
on the New Jersey subsidiary's statutory financial statement (currently not
expected to exceed $30 million). If the Company fails to provide such collateral
or if all or a portion of the advances were deemed nonadmitted, the capital of
the Company's operating subsidiaries would be impaired and additional capital
contributions would be required for the subsidiaries to meet statutory
requirements.

    The Company's medical costs payable was $989.7 million (including $864.5
million for IBNR) as of December 31, 1998, before netting advance claim payments
of $139.5 million compared with $965.9 million (including $936.7 million for
IBNR) as of December 31, 1997, before netting advance claim payments of $203.4
million. The Company estimates the amount of its IBNR reserves using standard
actuarial methodologies based upon historical data, including the average
intervals between the date services are rendered and the date claims are paid
and between the date services are rendered and the date claims are received by
the Company, expected medical cost inflation, seasonality patterns and changes
in membership. The liability is also affected by shared risk arrangements,
including arrangements relating to the Company's Medicare business in certain
counties and Private Practice Partnerships ("Partnerships"). In determining the
liability for medical costs payable, the Company accounts for the financial
impact of the transfer of risk for certain Medicare members and the experience
of risk-sharing Partnership providers (who may be entitled to credits from
Oxford for favorable experience or subject to deductions for accrued deficits).
In the case of the Medicare risk arrangements, the Company no longer records a
reserve for claims liability since the payment obligation has been transferred
to third parties, as described below. In the case of Partnership providers
subject to deficits, the Company has established reserves to account for delays
or other impediments to recovery of those deficits. The Company has reviewed its
partnership program and has terminated most of its partnership arrangements as a
result of difficulties and expense associated with administering the program as
well as other considerations. The Company recognized estimated costs in taking
these actions in the second quarter of 1998. The Company believes that its
reserves for medical costs payable are adequate to satisfy its ultimate claim
liabilities. However, the Company's prior rapid growth, delays in paying claims,
paying or denying claims in error and changing speed of payment may affect the
Company's ability to rely on historical information in making IBNR reserve
estimates.


                                       49
<PAGE>   50
    The Company has entered into two risk sharing arrangements pursuant to which
the Company has transferred a substantial portion of the medical cost risk
associated with the provision of medical services to certain of the Company's
Medicare members to a network management company in one case and an integrated
healthcare system in the other. Under these risk transfer agreements, the
providers assume a substantial portion of the risk of providing health care
services for this membership in return for payment by the Company of a fixed per
member per month payment. In the event the providers fail to fulfill their
obligations under the risk transfer agreements, the Company remains liable to
provide contracted benefits to its members. The Company and the risk sharing
groups have experienced operational difficulties in implementing these
transactions, including difficulties in timely payment of provider claims by the
risk sharing groups. The Company and the risk sharing groups have made progress
in resolving the operational difficulties referred to above, however, no
assurance can be given as to the outcome, and a failure of one of these
arrangements could have a material adverse effect on the Company's results of
operations.

    During 1997 and 1998, the Company made cash contributions to the capital of
its HMO subsidiaries aggregating $65.7 million and $537.5 million, respectively.
In addition, in 1997, the Company contributed the outstanding capital stock of
OHI, its insurance subsidiary, to Oxford NY to increase Oxford NY's surplus.
These contributions to its subsidiaries were made to ensure that each subsidiary
had sufficient surplus as of December 31, 1998 under applicable regulations
after giving effect to operating losses and reductions to surplus resulting from
the nonadmissibility of certain assets. The Company expects that additional
contributions to the subsidiaries will be required if operating losses are
incurred in 1999. Further, additional capital contributions may be required if
there is an increase in the nonadmissible assets of the Company's subsidiaries
or a need for reserve strengthening as the result of regulatory action or
otherwise. See "Business - Government Regulation".

    On February 6, 1998, the Company issued a $100 million senior secured
increasing rate note due February 6, 1999 ("Bridge Note") and on March 30, 1998,
issued an additional $100 million Bridge Note, pursuant to a Bridge Securities
Purchase Agreement, dated as of February 6, 1998, between the Company and an
affiliate of Donaldson Lufkin & Jenrette Securities Corporation, as amended on
March 30, 1998. The Company used the proceeds of the Bridge Notes to make a
portion of the above described contributions to its HMO subsidiaries, to pay
expenses in connection with the issuance of the Bridge Notes and for general
corporate purposes. The Bridge Notes were redeemed as part of the Financing
described below.

    Pursuant to an Investment Agreement, dated as of February 23, 1998 (the
"Investment Agreement"), between the Company and TPG Oxford LLC ("TPG", together
with the investors thereunder, the "Investors"), the Investors, on May 13, 1998,
purchased $350 million in redeemable Preferred Stock with Warrants to acquire up
to 22,530,000 shares of common stock. The Preferred Stock and Warrants were
issued without registration under the Securities Act in reliance on Section 4(2)
of the Securities Act, which provides an exemption for transactions not
involving any public offering. In determining that such exemption was available,
the Company relied on, among other things, the facts that the Preferred Stock
and Warrants were being issued through direct communication only to a limited
number of sophisticated investors having knowledge and access to information
regarding the Company and that the certificates evidencing such Preferred Stock
and Warrants bear a legend restricting transfer in nonregistered transactions.
Dividends on the Preferred Stock may be paid in kind for the first two years.
The Warrants have an exercise price of $17.75, which represents a 5% premium
over the average trading price of Oxford shares for the 30 trading days ended
February 20, 1998. The exercise price will become 115% of the average trading
price of Oxford common stock for the 20 trading days following the filing of the
Company's annual report on Form 10-K for the year ended December 31, 1998, if
such adjustment would reduce the exercise price.

    The Preferred Stock was originally issued as 245,000 shares of Series A and
105,000 shares of Series B. The Series A Preferred Stock carried a cash dividend
of 8% per annum, payable quarterly, provided that prior to May 13, 2000, the
Series A Preferred Stock accumulated dividends at a rate of 8.243216% per annum,
payable annually in cash or additional shares of Series A Preferred Stock, at
the option of the Company. The Series A Preferred Stock was issued with Series A
Warrants to purchase 15,800,000 shares of common stock, or approximately 19.9%
of the then outstanding voting power of Oxford's common stock. The Series A
Preferred Stock had approximately 16.6% of the combined voting power of Oxford's
then outstanding common stock and the Series A Preferred Stock. The Series B
Preferred Stock, which was originally issued with Series B Warrants to purchase
nonvoting junior participating preferred stock, was nonvoting and carried a cash
dividend of 9% per


                                       50
<PAGE>   51
annum, payable quarterly, provided that prior to May 13, 2000, the Series B
Preferred Stock accumulated dividends at a rate of 9.308332% per annum, payable
annually in cash or additional shares of Series B Preferred Stock, at the option
of the Company. The Preferred Stock was not redeemable by the Company prior to
May 13, 2003. Thereafter, subject to certain conditions, the Series A and Series
B Preferred Stock were each redeemable at the option of the Company at a
redemption price of $1,000 per share (in each case, plus accrued and unpaid
dividends), and were subject to mandatory redemption at the same price on May
13, 2008. The Series A Warrants and the Series B Warrants expire on the earlier
May 13, 2008 or redemption of the related series of Preferred Stock. The
Warrants are detachable from the Preferred Stock. With respect to dividend
rights, the Series A and Series B Preferred Stock rank on a parity with each
other and prior to the Company's common stock. On August 28, 1998, the Company
held its annual shareholders meeting at which its shareholders approved the
vesting of voting rights in respect of the Series B Preferred Stock and the
issuance, subject to adjustment, of up to 6,730,000 shares of common stock upon
exercise of the Series B Warrants. This approval resulted in the reduction of
the dividend on the Series B Preferred Stock to 8% (8.243216% prior to May 13,
2000) and an increase in the voting rights of TPG to 22.1% of the combined
voting power of the Company's outstanding common stock and Series A and Series B
Preferred Stock.

    On February 13, 1999, the Company entered into a Share Exchange Agreement
(the "Exchange Agreement") with TPG, its affiliates and others to make an
adjustment of the dividends payable on the shares of Series A Preferred Stock
and Series B Preferred Stock in connection with the possible sale of shares of
Preferred Stock by the holders thereof to institutional holders. Pursuant to the
Exchange Agreement, the 245,000 shares of Series A Preferred Stock were
exchanged for 260,146.909 shares of a new Series D Preferred Stock (the "Series
D Preferred Stock"), and the 105,000 shares of Series B Preferred Stock were
exchanged for 111,820.831 shares of a new Series E Preferred Stock (the "Series
E Preferred Stock"). In the exchange, (1) a holder received in exchange for each
share of Series A Preferred Stock, one share of Series D Preferred Stock, plus
0.061824118367 share of Series D Preferred Stock representing dividends on the
Series A Preferred Stock accrued and unpaid through February 13, 1999, and (2) a
holder received in exchange for each share of Series B Preferred Stock, one
share of Series E Preferred Stock, plus 0.064960295238 share of Series E
Preferred Stock representing dividends on the Series B Preferred Stock accrued
and unpaid through February 13, 1999. As a result of the exchange, the holders
hold only Series D Preferred Stock and Series E Preferred Stock. On March 9,
1999, the Company filed Certificates of Elimination for the Series A Preferred
Stock and the Series B Preferred Stock that have the effect of eliminating from
the Certificate of Incorporation all matters with respect to the Series A
Preferred Stock and the Series B Preferred Stock. The terms of the shares of the
Series D Preferred Stock are identical to the terms of the Series A Preferred
Stock, except that the Series D Preferred Stock accumulates cash dividends at
the rate of 5.12981% per annum, payable quarterly, provided that prior to May
13, 2000, the Series D Preferred Stock accumulates dividends at a rate of
5.319521% per annum, payable annually in cash or additional shares of Series D
Preferred Stock, at the option of the Company. The terms of the shares of the
Series E Preferred Stock are identical to the terms of the shares of the Series
B Preferred Stock, except that the Series E Preferred Stock accumulates cash
dividends at a rate of 14.00% per annum, payable quarterly, provided that prior
to May 13, 2000, the Series E Preferred Stock accumulates dividends at a rate of
14.589214% per annum, payable annually in cash or additional shares of Series E
Preferred Stock, at the option of the Company. In addition, prior to May 13,
2000, the holders of the Series D Preferred Stock may not use the Series D
Preferred Stock in connection with the exercise of the Warrants unless they use
a percentage of the total amount of Series D Preferred Stock issued on February
13, 1999 that does not exceed the percentage of the total number of shares of
Series E Preferred Stock issued on February 13, 1999 that have been redeemed,
repurchased or retired by the Company, or used as consideration in connection
with the exercise of the Warrants by the holders. With respect to dividend
rights, the Series D Preferred Stock and Series E Preferred Stock rank on a
parity with each other and prior to the Company's common stock.

    The aggregate cost to the Company of dividends on the Series D Preferred
Stock and Series E Preferred Stock is the same as the aggregate cost to the
Company of dividends on the Series A Preferred Stock and Series B Preferred
Stock. The respective voting rights of the holders of the Series A Preferred
Stock and Series B Preferred Stock have not changed as the result of the
exchange of such shares for shares of Series D Preferred Stock and Series E
Preferred Stock. The exchange had no effect on the consolidated balance sheet as
the issuance of additional redeemable preferred stock effected the in-kind
payment of the accrued redeemable preferred stock dividend which had previously
been credited to redeemable preferred stock. In the Company's


                                       51
<PAGE>   52
view, there was no difference in the aggregate fair value between the redeemable
preferred stock issued in the exchange and the redeemable preferred stock
canceled in the exchange.

    Simultaneously with the consummation of the Investment Agreement, the
Company issued $200 million principal amount of 11% Senior Notes due May 15,
2005. The Senior Notes were issued in a private placement to Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), the initial purchasers, who agreed to
sell the Senior Notes only to "qualified institutional buyers", as defined in
Rule 144A under the Securities Act in reliance upon the exemption from the
registration requirements of the Securities Act provided by Rule 144A, or
outside the United States in accordance with Regulation S under the Securities
Act. DLJ received $6,000,000 in discounts and commissions in connection with the
initial purchase of the Senior Notes. The Senior Notes are senior unsecured
obligations of the Company and rank pari passu in right of payment with all
current and future senior indebtedness of the Company. The Company's obligations
under the Senior Notes are effectively subordinated to all existing and future
secured indebtedness of the Company to the extent of the value of the assets
securing such indebtedness and are structurally subordinated to all existing and
future indebtedness, if any, of the Company's subsidiaries. Interest is payable
semi-annually on May 15 and November 15 of each year commencing November 15,
1998. At any time on or before May 15, 2001, the Company may redeem for cash up
to 33 1/3% of the original aggregate principal amount of the Senior Notes at a
redemption price of 111% of the principal amount thereof, in each case, plus any
accrued and unpaid interest thereon to the redemption date, with the net
proceeds of a public equity offering provided that at least 66 2/3% of the
original aggregate principal amount of the Senior Notes remains outstanding
immediately after the occurrence of such redemption. After May 15, 2002, the
Senior Notes will be subject to redemption for cash at the option of the
Company, in whole or in part, at a redemption prices ranging from 105.5% of face
amount beginning May 15, 2002 to 100% on and after May 15, 2004.

    At the same time, the Company entered into a Term Loan Agreement pursuant to
which the Company borrowed $150 million in the form of a senior secured term
loan (the "Term Loan") with a final maturity in 2003 at which time all
outstanding amounts will be due and payable. Prior to the final maturity of the
Term Loan there are no scheduled principal payments. The Term Loan provides for
mandatory prepayments in certain circumstances. The Term Loan bears interest at
a rate per annum equal to the administrative agent's reserve adjusted LIBO rate
plus 4.25%.

    Also simultaneously with the transactions described above, Norman C. Payson,
M.D., the Company's Chief Executive Officer, purchased 644,330 shares of Oxford
common stock for an aggregate purchase price of $10 million pursuant to his
employment agreement. The common stock issued to Dr. Payson was issued without
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, which provides an exemption for transactions not involving any
public offering.

    The aggregate proceeds of the above Financing of $710 million were utilized,
in part, to retire the Bridge Notes, make capital contributions to certain
regulated subsidiaries and pay fees and expenses approximating $39 million
related to the transactions. The balance has been and will be used for future
subsidiary capital contributions, as necessary, and for general corporate
purposes. The Company believes that the above described proceeds will be
sufficient to finance the capital needs referred to previously and to provide
additional capital for losses or contingencies in excess of the Company's
current expectations. However, there can be no assurance that such proceeds will
be sufficient to finance such capital needs and to provide additional capital
for losses or contingencies in excess of the Company's current expectations.

    Year 2000 Readiness

    The Company has completed its assessment of its computer systems and
facilities that could be affected by the "Year 2000" date conversion and is
continuing to carry out the implementation plan to resolve the Year 2000 date
issue which it developed as a result of the assessment. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize the date "00" as the year 1900 rather than
the year 2000. This could result in system failure or miscalculations. The
Company is utilizing and will utilize both internal and external resources to
identify, correct or reprogram, and test the systems for Year 2000 compliance.
The Company has divided its Year 2000 compliance program into the following
phases: assessment, planning,


                                       52
<PAGE>   53
remediation and testing. As of December 31, 1998, the Company was 80% complete
with its Year 2000 compliance program and anticipates being complete with all
phases of the program by the second quarter of 1999. The Company's Year 2000
compliance program requires remediation of certain programs within particular
time frames in order to avoid disruption of the Company's operations. These time
frames include certain dates throughout 1999. Although the Company believes it
will complete the remediation of these programs within the applicable time
frames, there can be no assurance that such remediation will be completed or
that the Company's operations will not be disrupted to some degree.

    The Company is communicating with certain material vendors to determine the
extent to which the Company may be vulnerable to such vendors' failure to
resolve their own Year 2000 issues. The Company is attempting to mitigate its
risk with respect to the failure of such vendors to be Year 2000 compliant by,
among other things, requesting project plans, status reports and Year 2000
compliance certifications or written assurances from its material vendors,
including certain software vendors, business partners, landlords and suppliers.
The effect of such vendors' noncompliance, if any, is not reasonably estimable
at this time.

    The Company is required to submit periodic reports regarding Year 2000
compliance to certain of the regulatory authorities which regulate its business.
The Company is in compliance with such Year 2000 reporting requirements. Such
regulatory authorities have also asked the Company to submit to certain audits
regarding its Year 2000 compliance.

    The Company is in the process of completing the modifications of its
computer systems to accommodate the Year 2000 and will undertake testing to
ensure its systems and applications will function properly after December 31,
1999. The Company currently expects this modification and testing to be
completed in a time frame to avoid any material adverse effect on operations.
The Company has deferred certain other information technology initiatives to
concentrate on its Year 2000 compliance efforts but the Company believes that
such deferral is not reasonably likely to have a material adverse effect on the
Company's financial condition or results of operations. The Company's inability
to complete Year 2000 modifications on a timely basis or the inability of other
companies with which the Company does business to complete their Year 2000
modifications on a timely basis could adversely affect the Company's operations.

    The Company expects to incur associated expenses of approximately $5 million
in 1999 to complete this effort. As of December 31, 1998, the Company had
incurred approximately $9.8 million of expenses in connection with its Year 2000
compliance efforts. The costs of the project and the date on which the Company
plans to complete the necessary Year 2000 modifications are based on
management's best estimate, which include assumptions of future events including
the continued availability of certain resources. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans.

    The Company has contracted with an external consulting firm to assist in the
generation of a Year 2000 contingency plan in the event compliance is not
achieved. In connection therewith, the Company has begun to identify reasonably
likely scenarios which could arise in the event of the Company's Year 2000
noncompliance. The Company has completed a contingency strategy and will develop
detailed plans to support this strategy. The Company expects to be substantially
complete with these detailed plans by the second quarter of 1999. However, there
can be no assurance that this contingency plan will be completed on a timely
basis or that such a plan will protect the Company from experiencing a material
adverse effect on its financial condition or results of operations.

    Potential consequences of the Company's failure to timely resolve its Year
2000 issues could include, among others: (i) the inability to accurately and
timely process claims, enroll and bill groups and members, pay providers, record
and disclose accurate data and perform other core functions; (ii) increased
scrutiny by regulators and breach of contractual obligations; and (iii)
litigation in connection therewith.


                                       53
<PAGE>   54
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

    The Company's consolidated balance sheet as of December 31, 1998 includes a
significant amount of assets whose fair value is subject to market risk. Since
the substantial portion of the Company's investments are in fixed income
securities, interest rate fluctuations represent the largest market risk factor
affecting the Company's consolidated financial position. Interest rates are
managed within a tight duration band, 2.25 to 2.5 years, and credit risk is
managed by investing in U.S. government obligations and in corporate debt
securities with high average quality ratings and maintaining a diversified
sector exposure within the debt securities portfolio. The Company's investment
in equity securities as of December 31, 1998 was not significant.

    In order to determine the sensitivity of the Company's investment portfolio
to changes in market risk, valuation estimates were made on each security in the
portfolio using a duration model. Duration models measure the expected change in
security market prices arising from hypothetical movements in market interest
rates. Convexity further adjusts the estimated price change by mathematically
"correcting" the changes in duration as market interest rates shift. The model
used industry standard calculations of security duration and convexity as
provided by third party vendors such as Bloomberg and Yield Book. For certain
structured notes, callable corporate notes, and callable agency bonds, the
duration calculation utilized an option-adjusted approach, which helps to ensure
that hypothetical interest rate movements are applied in a consistent way to
securities that have embedded call and put features. The model assumed that
changes in interest rates were the result of parallel shifts in the yield curve.
Therefore, the same basis point change was applied to all maturities in the
portfolio. The change in valuation was tested using positive and negative
adjustments in yield of 100 and 200 basis points. A hypothetical immediate
increase of 100 basis points in market interest rates would decrease the fair
value of the Company's investments in debt securities as of December 31, 1998 by
approximately $23.3 million, while a 200 basis point increase in rates would
decrease the value of such investments by approximately $45.9 million. A
hypothetical immediate decrease of 100 basis points in market interest rates
would increase the fair value of the Company's investment in debt securities as
of December 31, 1998 by approximately $22.4 million, while a 200 basis point
decrease in rates would increase the value of such investments by approximately
$45.7 million. Because duration and convexity are estimated rather than known
quantities for certain securities, there can be no assurance that the Company's
portfolio would perform in-line with the estimated values.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    See Index to Consolidated Financial Statements and Schedules on page 56.

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

    Effective June 2, 1998, the Company dismissed KPMG LLP as the independent
auditors of the Company. At the same time, the Company selected the firm of
Ernst & Young LLP to serve as the independent auditors of the Company. The
reports of KPMG LLP on the financial statements of the Company for the past two
fiscal years contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
This change in auditors was approved by the Audit Committee of the Board of
Directors of the Company. During the Company's two most recent fiscal years and
through June 2, 1998, there were no disagreements with KPMG LLP concerning
accounting principles or practices, financial statement disclosures or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
KPMG LLP would have caused KPMG LLP to make reference thereto in their report on
the financial statements for such years, and there were no reportable events as
that term is defined in Item 304(a)(1)(v) of Regulation S-K. The Company
provided KPMG LLP with a copy of the disclosure contained herein and has
requested that KPMG LLP furnish it with a letter addressed to the Securities and
Exchange Commission stating whether or not it agrees with the above statements.
A copy of such letter, dated June 9, 1998, is filed as an exhibit to the
Company's Form 8-K filed on June 9, 1998 with the Securities and Exchange
Commission.



                                       54
<PAGE>   55
                                    PART III
<TABLE>
<S>       <C>
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.  EXECUTIVE COMPENSATION
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
</TABLE>

    The information required by Items 10 through 13 is incorporated by reference
to Registrant's definitive proxy statement to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended, within 120 days after
December 31, 1998.

                                     PART IV

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

(a)  Exhibits and Financial Statement Schedules

       1. All financial statements - see Index to Consolidated Financial
          Statements and Schedules on page 56.

       2. Financial statement schedules - see Index to Consolidated Financial
          Statements and Schedules on page 56.

       3. Exhibits - see Exhibit Index on page 95.

(b)  Reports on Form 8-K

    In a report on Form 8-K dated October 2, 1998 and filed on October 5, 1998,
the Company reported under Item 5 "Other Events" its exit from a portion of the
Medicare market.

    In a report on Form 8-K dated and filed on October 14, 1998, the Company
reported under Item 5 "Other Events" its agreement to sell its Pennsylvania
subsidiary to Health Risk Management, Inc. for $10.4 million.

    In a report on Form 8-K dated and filed on October 30, 1998, the Company
reported under Item 5 "Other Events" its earnings press release for the third
quarter of 1998.

    In a report on Form 8-K dated and filed on November 19, 1998, the Company
reported under Item 5 "Other Events" an amendment to its agreement with TPG
Partners, L.P. (the "Investor") permitting principals of the Investor to
purchase up to an aggregate of 2,000,000 shares of the Company's common stock.


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
August, 1999.

                                         OXFORD HEALTH PLANS, INC.

                                         By:     /s/ Kurt B. Thompson
                                            ---------------------------------
                                                  KURT B. THOMPSON
                                               Principal Accounting Officer



                                       55
<PAGE>   56
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

<TABLE>
<CAPTION>
                                                                                                                 Page
                                                                                                                 ----
<S>                                                                                                              <C>
Independent Auditors' Reports...............................................................................       57
Consolidated Balance Sheets as of December 31, 1998 and 1997................................................       59
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and
     1996...................................................................................................       60
Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive Earnings (Loss)
     for the years ended December 31, 1998, 1997 and 1996...................................................       61
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and
     1996...................................................................................................       62
Notes to Consolidated Financial Statements..................................................................       64
Independent Auditors' Reports on Financial Statement Schedules..............................................       89

Financial Statement Schedules:
I    Condensed Financial Information of Registrant..........................................................       91
II   Valuation and Qualifying Accounts......................................................................       94
</TABLE>




                                       56
<PAGE>   57
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Oxford Health Plans, Inc.:

    We have audited the consolidated balance sheet of Oxford Health Plans, Inc.
and subsidiaries (the "Company") as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity (deficit) and
comprehensive earnings (loss) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

    In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Oxford
Health Plans, Inc. and subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.


                                                  Ernst & Young LLP

Stamford, Connecticut
March 9, 1999




                                       57
<PAGE>   58
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Oxford Health Plans, Inc.:

    We have audited the accompanying consolidated balance sheet of Oxford Health
Plans, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity (deficit) and
comprehensive earnings (loss) and cash flows for each of the years in the
two-year period ended December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

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

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Oxford
Health Plans, Inc. and subsidiaries as of December 31, 1997 and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.



                                                               KPMG LLP

Stamford, Connecticut
February 23, 1998




                                       58
<PAGE>   59
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
                      (In thousands, except share amounts)

                                     Assets

<TABLE>
<CAPTION>
Current assets:                                                                      1998            1997
-----------------------------------------------------------------------------------------------------------
<S>                                                                              <C>               <C>
    Cash and cash equivalents                                                      $237,717          $4,141
    Investments - available-for-sale, at market value                               922,990         635,743
    Premiums receivable, net                                                        110,254         275,646
    Other receivables                                                                36,540          42,517
    Prepaid expenses and other current assets                                         9,746          10,097
    Refundable income taxes                                                               -         120,439
    Deferred income taxes                                                            43,385          38,092
-----------------------------------------------------------------------------------------------------------
        Total current assets                                                      1,360,632       1,126,675

Property and equipment, net                                                         112,941         147,093
Deferred income taxes                                                                94,182          86,406
Restricted investments - held-to-maturity, at amortized cost                         44,798              --
Other noncurrent assets                                                              25,197          29,927
-----------------------------------------------------------------------------------------------------------
        Total assets                                                             $1,637,750      $1,390,101
===========================================================================================================

                                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Medical costs payable                                                          $850,197        $762,959
    Trade accounts payable and accrued expenses                                     176,833         144,264
    Unearned premiums                                                               105,993         124,603
    Current portion of capital lease obligations                                     15,938              --
    Deferred income taxes                                                             2,228           9,059
-----------------------------------------------------------------------------------------------------------
        Total current liabilities                                                 1,151,189       1,040,885

Long-term debt                                                                      350,000              --
Obligations under capital leases                                                     18,850              --
Redeemable preferred stock                                                          298,816              --

Shareholders' equity (deficit):
    Preferred stock, $.01 par value, authorized 2,000,000 shares;
      none issued and outstanding                                                        --              --
    Common stock, $.01 par value, authorized 400,000,000 shares;
      issued and outstanding 80,515,872 in 1998 and 79,474,439 in 1997                  805             795
    Additional paid-in capital                                                      506,243         437,653
    Accumulated deficit                                                           (692,290)        (95,498)
    Accumulated other comprehensive earnings                                          4,137           6,266
-----------------------------------------------------------------------------------------------------------
        Total liabilities and shareholders' equity (deficit)                     $1,637,750      $1,390,101
===========================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.



                                       59
<PAGE>   60
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                    (In thousands, except per share amounts)



<TABLE>
<CAPTION>
                                                                                        1998            1997           1996
-------------------------------------------------------------------------------------------------------------------------------
Revenues:
<S>                                                                                   <C>            <C>             <C>
    Premiums earned                                                                   $4,612,328     $4,167,224      $3,022,168
    Third-party administration, net                                                       17,838         12,592          10,401
    Investment and other income, net                                                      89,245         71,448          42,620
-------------------------------------------------------------------------------------------------------------------------------
      Total revenues                                                                   4,719,411      4,251,264       3,075,189
-------------------------------------------------------------------------------------------------------------------------------

Expenses:
    Health care services                                                               4,353,537      3,916,742       2,421,167
    Marketing, general and administrative                                                772,015        737,425         477,373
    Interest and other financing charges                                                  57,090         11,118              --
    Restructuring charges                                                                113,657             --              --
    Write-downs of strategic investments                                                  38,341         41,618              --
-------------------------------------------------------------------------------------------------------------------------------
      Total expenses                                                                   5,334,640      4,706,903       2,898,540
-------------------------------------------------------------------------------------------------------------------------------

Operating earnings (loss)                                                              (615,229)      (455,639)         176,649

Equity in net loss of affiliate                                                              --         (1,140)          (4,600)
Gain on sale of affiliate                                                                    --         25,168               --
-------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes                                                    (615,229)      (431,611)         172,049
Income tax expense (benefit)                                                            (18,437)      (140,323)          72,426
-------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                                                    (596,792)      (291,288)          99,623
Less preferred dividends and amortization                                               (27,668)            --               --
-------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) attributable to common shares                                     $(624,460)     $(291,288)        $ 99,623
===============================================================================================================================

Earnings (loss) per common and common equivalent share:
      Basic                                                                            $  (7.79)      $  (3.70)         $  1.34
      Diluted                                                                          $  (7.79)      $  (3.70)         $  1.25

Weighted-average common stock and common stock equivalents outstanding:
      Basic                                                                               80,120        78,635           74,285
      Effect of dilutive securities-stock options                                             --            --            5,377
-------------------------------------------------------------------------------------------------------------------------------
      Diluted                                                                             80,120        78,635           79,662
===============================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       60
\
<PAGE>   61
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                        AND COMPREHENSIVE EARNINGS (LOSS)
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (In thousands)

<TABLE>
<CAPTION>

                                                     Common Stock                                                   Accumulated
                                                  ------------------      Additional    Retained                       Other
                                                   Number        Par        Paid-In     Earnings   Comprehensive    Comprehensive
                                                  of Shares     Value       Capital     (Deficit)  Earnings (Loss)  Earnings (Loss)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>         <C>         <C>           <C>        <C>              <C>
Balance at January 1, 1996                          34,390    $     343    $ 116,639    $  96,167         --         $   6,884

Exercise of stock options                            2,965           30       21,200         --           --              --
Proceeds from public offering, net                   5,227           53      220,487         --           --              --
Tax benefit realized upon exercise of stock           --           --         33,624         --           --              --
One-for-one stock dividend                          34,794          348         (348)        --           --              --
Net earnings                                          --           --           --         99,623    $ 199,623            --
Appreciation in value of available-for-sale
securities, net of deferred income taxes              --           --           --           --          3,120           3,120
                                                                                                     ---------
Comprehensive earnings                                                                               $ 102,743
                                                                                                     =========
-----------------------------------------------------------------------------------------------------         ----------------------
Balance at December 31, 1996                        77,376          774      391,602      195,790         --            10,004

Exercise of stock options                            2,098           21       21,243         --           --              --
Tax benefit realized upon exercise of stock
options                                               --           --         24,808         --           --              --
Net loss                                              --           --           --       (291,288)   $(291,288)           --
Depreciation in value of available-for-sale
securities, net of deferred income taxes              --           --           --           --         (3,738)         (3,738)
                                                                                                     ---------
Comprehensive earnings (loss)                                                                        $(295,026)
                                                                                                     =========
-----------------------------------------------------------------------------------------------------         ----------------------
Balance at December 31, 1997                        79,474          795      437,653      (95,498)        --             6,266

Exercise of stock options                              397            4        2,651         --           --              --
Proceeds from sale of common stock                     645            6        9,994         --           --              --
Issuance of Series A and Series B preferred
    stock warrants                                    --           --         67,000         --           --              --
Compensatory stock grants under executive
    stock agreements                                  --           --         16,613         --           --              --
Preferred stock dividends and amortization
    of discount                                       --           --        (26,103)        --           --              --
Amortization of preferred stock issuance costs        --           --         (1,565)        --           --              --
Net loss                                              --           --           --       (596,792)   $(596,792)           --
Depreciation in value of available-for-sale
securities, net of deferred income taxes--            --           --           --           --         (2,129)         (2,129)
                                                                                                     ---------
Comprehensive earnings (loss)                                                                        $(598,921)
                                                                                                     =========
-----------------------------------------------------------------------------------------------------         ----------------------
Balance at December 31, 1998                        80,516    $     805    $ 506,243    $(692,290)                   $   4,137
=====================================================================================================         ======================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       61
<PAGE>   62
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (In thousands)

<TABLE>
<CAPTION>
Cash flows from operating activities:                                            1998          1997           1996
------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>            <C>            <C>
    Net earnings (loss)                                                     $  (596,792)   $  (291,288)   $    99,623
    Adjustments to reconcile net earnings (loss) to net cash
      provided by operating activities:
        Depreciation and amortization                                            67,141         61,045         42,886
        Noncash restructuring charges and write-downs of
            strategic investments                                               101,547         41,618           --
        Deferred income taxes                                                   (18,437)       (75,279)       (13,196)
        Provision for doubtful accounts                                          60,209         25,000          4,505
        Equity in net loss of affiliate                                            --            1,140          4,600
        Realized gain on sale of investments                                    (10,695)       (28,736)        (4,734)
        Gain on sale of affiliate                                                  --          (25,168)          --
        Other, net                                                               13,289            245            480
        Changes in assets and liabilities, net of effect of acquisitions:
           Premiums receivable                                                  130,183         25,942       (223,353)
           Other receivables                                                      2,679        (18,320)       (11,083)
           Prepaid expenses and other current assets                                351         (3,928)        (2,251)
           Medical costs payable                                                 62,238        116,387        323,851
           Trade accounts payable and accrued expenses                           33,802         84,967         14,764
           Income taxes payable/refundable                                      121,102       (123,624)        42,098
           Unearned premiums                                                    (18,610)        61,378         12,753
           Other, net                                                             5,511         (3,959)        (3,747)
------------------------------------------------------------------------------------------------------------------------
             Net cash provided (used) by operating activities                   (46,482)      (152,580)       287,196
------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
    Capital expenditures                                                        (40,045)      (101,946)       (48,348)
    Purchases of available-for-sale securities                               (1,353,403)      (589,690)      (794,099)
    Sales of available-for-sale securities                                      951,941        756,174        311,783
    Maturities of available-for-sale securities                                  41,547         34,621         33,298
    Acquisitions, net of cash acquired                                           (1,312)       (14,034)          --
    Investments in and advances to unconsolidated affiliates                     (5,410)       (19,842)       (18,597)
    Other, net                                                                    3,193         (1,986)           723
------------------------------------------------------------------------------------------------------------------------
             Net cash provided (used) by investing activities                  (403,489)        63,297       (515,240)
------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
    Proceeds of notes and loans payable                                         550,000           --             --
    Redemption of notes and loans payable                                      (200,000)          --             --
    Proceeds of preferred stock, net of issuance expenses                       271,148           --             --
    Proceeds of warrants                                                         67,000           --             --
    Proceeds from issuance of common stock                                       10,000           --          220,539
    Proceeds from exercise of stock options                                       2,655         21,264         21,215
    Debt issuance expenses                                                      (11,793)          --             --
    Payments under capital leases                                                (5,463)          --             --
------------------------------------------------------------------------------------------------------------------------
             Net cash provided by financing activities                          683,547         21,264        241,754
------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                            233,576        (68,019)        13,710
Cash and cash equivalents at beginning of year                                    4,141         72,160         58,450
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                    $   237,717    $     4,141    $    72,160
========================================================================================================================
</TABLE>



                                       62
<PAGE>   63
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (In thousands)
                                   (Continued)

<TABLE>
<CAPTION>
                                                                             1998            1997           1996
------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>           <C>
Supplemental schedule of noncash investing and financing activities:
    Unrealized appreciation (depreciation) of short-term investments      $ (4,255)      $  6,336      $  5,288
    Capital lease obligations incurred                                      40,251           --            --
    Preferred stock dividends paid in-kind                                  18,548           --            --
    Amortization of preferred stock discount                                 7,555           --            --
    Amortization of preferred stock issuance expenses                        1,565           --            --
    Tax benefit realized on exercise of stock options                         --           24,808        33,624
    Sale of affiliate in a pooling-of-interests transaction                   --           38,442          --
    One-for-one stock dividend                                                --             --             348
</TABLE>

See accompanying notes to consolidated financial statements.


                                       63
<PAGE>   64
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)    ORGANIZATION

    Oxford Health Plans, Inc. ("Oxford") is a regional health care company
providing health care coverage in New York, New Jersey, Connecticut, New
Hampshire, Florida and Pennsylvania. Oxford was incorporated on September 17,
1984 and began operations in 1986. Oxford owns and operates five health
maintenance organizations ("HMOs"), three of which are qualified as Competitive
Medical Plans, and an accident and health insurance company and offers a health
benefits administrative service.

    Oxford's HMOs, Oxford Health Plans (NY), Inc. ("Oxford NY"), Oxford Health
Plans (NJ), Inc. ("Oxford NJ"), Oxford Health Plans (CT), Inc. ("Oxford CT"),
Oxford Health Plans (FL), Inc. and Oxford Health Plans (NH), have each been
granted a certificate of authority to operate as a health maintenance
organization by the appropriate regulatory agency of the state in which it
operates. Oxford Health Insurance, Inc. ("OHI") has been granted a license to
operate as an accident and health insurance company by the Department of
Insurance in the states of New York, New Jersey, Connecticut, Florida and New
Hampshire and in the Commonwealth of Pennsylvania. The Company anticipates that
it will have ceased doing business in Pennsylvania, Florida, Illinois and New
Hampshire by the end of 1999. Oxford also owns Oxford Health Plans (IL), Inc.
("Oxford IL") which is licensed by the Illinois Department of Insurance as an
accident and health insurance company with authority to offer HMO products.
However, Oxford ceased its Illinois operations in the third quarter of 1998.

    Oxford maintains a health care network of physicians and ancillary health
care providers who have entered into formal contracts with Oxford. These
contracts set reimbursement at fixed levels or under certain risk-sharing
agreements and require adherence to Oxford's policies and procedures for quality
and cost-effective treatment.

(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    (a) Principles of consolidation. The consolidated financial statements
include the accounts of Oxford Health Plans, Inc. and all majority-owned
subsidiaries ("the Company"). All intercompany balances have been eliminated in
consolidation. The Company's investment in Health Partners, Inc. was accounted
for using the equity method until its disposal in October 1997 (see note 12).

    (b) Premium revenue. Membership contracts are generally on a yearly basis
subject to cancellation by the employer group or Oxford upon 30 days written
notice. Premiums, including premiums from both commercial and governmental
programs, are due monthly and are recognized as revenue during the period in
which Oxford is obligated to provide services to members, and are net of amounts
estimated for termination of members and groups. The Company receives premium
payments from the federal Health Care Financing Administration ("HCFA") on a
monthly basis for its Medicare membership. In 1998, premiums received from HCFA
represented 21.9% of the Company's total premium revenue earned during 1998.
Membership and category eligibility are periodically reconciled with HCFA and
could result in adjustments of revenue. The Company is not aware of any material
claims, disputes or settlements relating to revenues it has received from HCFA.
Premiums receivable are presented net of valuation allowances for estimated
uncollectible amounts of $37.7 million in 1998 and $6.5 million in 1997.
Unearned premiums represent the portion of premiums received for which Oxford is
not obligated to provide services until a future date. All other material
revenue is generated from investments, as described in (f) below. Investment
income is recognized in accordance with generally accepted accounting principles
("GAAP"), accrued when earned and included in investment and other income.

    (c) Health care services cost recognition. The Company contracts with
various health care providers for the provision of certain medical care services
to its members and generally compensates those providers on a fee-for-service
basis or pursuant to certain risk-sharing agreements.

    Costs of health care and medical costs payable for health care services
provided to enrollees are estimated by management based on evaluations of
providers' claims submitted and provisions for incurred but not reported or paid
claims. The Company estimates the amount of the provision for incurred but not
reported or paid claims using standard actuarial methodologies based upon
historical data including the period between the date services



                                       64
<PAGE>   65
are rendered and the date claims are received and paid, denied claim activity,
expected medical cost inflation, seasonality patterns and changes in membership.
The estimates for submitted claims and incurred but not reported or paid claims
are made on an accrual basis and adjusted in future periods as required. Any
adjustments to the prior period estimates are included in the current period.
Medical costs payable also reflects surplus or deficit experience for physicians
participating in risk-sharing arrangements. Amounts advanced to providers for
delayed claims, which are net of a valuation reserve of $35.0 million, have been
applied against medical claims payable in the accompanying balance sheet and
aggregated approximately $139.5 million at December 31, 1998. Management
believes that the Company's reserves for medical costs payable are adequate to
satisfy its ultimate claim liabilities.

    Losses, if any, are recognized when it is probable that the expected future
health care cost of a group of existing contracts (and the costs necessary to
maintain those contracts) will exceed the anticipated future premiums,
investment income and reinsurance recoveries on those contracts. Groups of
contracts are defined as commercial, individual and government contracts
consistent with the method of establishing premium rates. The Company recognizes
premium deficiency reserves based upon expected premium revenue, medical expense
and administrative expense levels and remaining contractual obligations using
the Company's historical experience. Anticipated investment income is not
included in the recognition of premium deficiency reserves since its effect is
deemed to be immaterial.

    As part of the Turnaround Plan, the Company decided that it was not in a
position to make the investment in noncore markets required to achieve
normalized operating results. Accordingly, the Company decided to withdraw from
certain states, namely Pennsylvania, New Hampshire, Florida and Illinois, and
focus on its core businesses of commercial and Medicare membership in New York,
New Jersey and Connecticut. The Company was prohibited by the various state
regulators from simply canceling the outstanding policies and immediately
withdrawing from these noncore markets. As a result, the Company was required to
continue to service the outstanding policies. Using these assumptions, the
premium deficiency reserve aggregating $25.2 million was established for the
noncore businesses in accordance with SFAS 5 and the AICPA Healthcare Audit
Guide.

    As part of its Turnaround Plan, the Company also decided to restructure its
current Medicare arrangements and/or withdraw from Medicare in the counties
where the Medicare business was not profitable and to withdraw from the Medicaid
business entirely. Premium deficiency reserves totaling $51.0 million were
established in the second quarter of 1998. Based on the Company's decision to
restructure or withdraw from these businesses by the end of 1998, the reserves
were determined by estimating the premium deficiency for the remainder of 1998.

    The Company entered into an agreement to dispose of its remaining Medicaid
business in the fourth quarter of 1998, completed two Medicare risk transfer
agreements late in the third quarter of 1998 and notified HCFA in the fourth
quarter of 1998 of its intention to withdraw from Medicare in certain counties
effective January 1, 1999. Under the two risk sharing arrangements the Company
has transferred a substantial portion of the medical cost risk associated with
the provision of medical services to certain of the Company's Medicare members
to a network management company in one case and an integrated health care system
in the other. These risk transfer agreements have five year terms and provide
for delegation of certain claims payment and utilization management functions,
subject to oversight by the Company. The providers agree to provide or arrange
for providing all covered health care services for this membership in return for
payment by the Company of a fixed per member per month payment based on a
percentage of premium received by the Company. In the event the providers fail
to fulfill their obligations under the risk transfer agreements, the Company
remains liable to provide contracted benefits to its members. Losses in these
programs amounted to $31.8 million in the second half of 1998 and were charged
against the reserves established in the second quarter of 1998. As a result of
the Company's early completion of this portion of its Turnaround Plan, the
remaining reserve balance of $19.2 million was reversed as a reduction of health
care services expense in the fourth quarter of 1998, which reduced the net loss
by $.24 per share.

    In the fourth quarter of 1998, the Company also established a premium
deficiency increase of $27 million for losses on the Company's individual
products arising from the Company's decision to seek an approximately 9%
increase in premiums on it New York individual products, instead of seeking a
higher increase which would involve uncertainties associated with the
requirement of a public rate hearing.



                                       65
<PAGE>   66
    Premium deficiency reserves are calculated using generally accepted
actuarial techniques. The significant assumptions used were based primarily on
the Company's experience and the relevant elements of the Turnaround Plan and
are as follows:

             Loss recognition period - The loss recognition period used for
         commercial business was the period through the earliest date that the
         Company believed that the various states would allow withdrawal, and
         for government programs was the earliest contract renewal/termination
         date, which was December 31, 1998 for Medicare business.

             Premiums - The premium level is fixed for the duration of the
         contracts under the terms of the applicable commercial, federal and
         state government contracts.

             Medical expenses - Medical expense assumptions were based on
         historical experience of the Company for all contracts.

             Maintenance expenses - Maintenance expenses for commercial
         contracts are estimated at a level sufficient to provide for member
         maintenance, billing and collections and some provider relations. This
         level represents a normalized expense level based on historical
         experience of the Company and excluded all marketing related expenses
         as well as costs associated with the restructuring that were separately
         evaluated. Maintenance expenses for government programs are estimated
         to be 7% of premiums. This level of expenses was intended to provide
         for member maintenance, billing and collections and some provider
         relations. This level represents a normalized expense level based on
         historical experience of the Company and excluded any substantial
         marketing related expenses and the costs associated with the
         restructuring.

    The Company evaluates the need for premium deficiency reserves on a
quarterly basis. As of December 31, 1998, premium deficiency reserves aggregated
approximately $27.4 million and are included in medical costs payable in the
accompanying consolidated balance sheet.

    The Company evaluated the necessity for premium deficiency reserves in
periods prior to 1998 and concluded that no reserves were required since, at
that time, the Company was projecting marginal profits or immaterial losses on
these businesses based on projected premiums and medical and administrative
expense levels. The projections that had previously shown marginal profits or
immaterial losses on these businesses contemplated growth in the underlying
business to support administrative expense levels, premium increases, reductions
in medical costs resulting from improved medical management, systems and
operational improvements and revised provider contracts.

     (d) Reinsurance. Reinsurance premiums are reported as health care services
expense, while related reinsurance recoveries are reported as deductions from
health care services expense. The Company limits, in part, the risk of
catastrophic losses by maintaining high deductible reinsurance coverage. The
Company does not consider this coverage to be material as the cost is not
significant and the likelihood that coverage will be applicable is low.

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

    (f) Investments. Investments are classified as either available-for-sale or
held-to-maturity. Investments that the Company has the intent and ability to
hold to maturity are designated as held-to-maturity and are stated at amortized
costs. The Company has determined that all other investments might be sold prior
to maturity to support its investment strategies. Accordingly, these other
investments are classified as available-for-sale and are stated at fair value
based on quoted market prices. Unrealized gains and losses on available-for-sale
investments are excluded from earnings and are reported in accumulated other
comprehensive earnings (loss), net of income tax effects. Realized gains and
losses are determined on a specific identification basis and are included in
results of operations. Investment income is recognized in accordance with GAAP,
accrued when earned and included in investment and other income.



                                       66
<PAGE>   67
    (g) Property and equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets,
which range from three to five years. Leasehold improvements are amortized using
the straight-line method over the shorter of the lease terms or the estimated
useful lives of the assets.

    (h) Intangible assets. Intangible assets resulting from business
acquisitions are carried at cost and currently amortized over a period of five
years. At each balance sheet date, the Company evaluates the recoverability of
acquisition-related intangible assets based on expectations of nondiscounted
cash flows of the acquired entity. The Company had no intangible assets recorded
as of December 31, 1998 or 1997.

    (i) Income taxes. The Company recognizes deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Accordingly, deferred tax liabilities
and assets are determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse. A
valuation allowance is recorded to reduce the deferred tax assets to the amount
that is expected to more likely than not be realized.

    (j) Impairment of long-lived assets and assets to be disposed of. The
Company reviews assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.

    (k) Earnings per share. Basic earnings per share is calculated on the
weighted-average number of common shares outstanding. Diluted earnings per share
is calculated on the weighted-average number of common shares and common share
equivalents resulting from options and warrants outstanding. All prior period
amounts have been restated to reflect these calculations. Both basic and diluted
earnings per share give retroactive effect to the two-for-one stock split in
1996.

    Options to purchase 15.3 million shares of common stock and preferred stock
warrants to purchase 22.5 million shares of common stock were outstanding at
December 31, 1998 but were not included in the computation of diluted earnings
per share because the Company had a net loss for 1998 and their inclusion would
have been antidilutive.

    (l) Stock option plans. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principals Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and provide pro forma net earnings and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
subsequent years as if the fair-value-based method defined in SFAS 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123 (see
note 9). With respect to the independent contractor grants, it is the Company's
policy to record such grants and reissuance grants issued after December 15,
1995, based on the fair market value measurement criteria of SFAS 123.

    (m) Marketing costs. Marketing and other costs associated with the
acquisition of plan member contracts are expensed as incurred.

    (n) Use of estimates. The accompanying financial statements have been
prepared in accordance with GAAP. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.



                                       67
<PAGE>   68
    Reclassifications. Certain reclassifications have been made to prior years'
financial statement amounts to conform to the 1998 presentation.

    Adoption of New Accounting Standards. The Company has adopted Statements of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes new rules for the reporting and display of
comprehensive earnings (loss) and its components. The adoption of this statement
had no impact on the Company's net income or shareholder's equity. SFAS No. 130
requires unrealized gains or losses, net of taxes, on the Company's
available-for-sale securities which, prior to adoption, were reported separately
in shareholders' equity, to be included in other comprehensive earnings.

    The changes in value of available-for-sale securities as reported in the
consolidated statements of shareholders' equity (deficit) and comprehensive
earnings (loss) include unrealized holding gains on available-for-sale
securities of $6.4 million, $22.4 million and $10.0 million, reduced by the tax
effects of $1.6 million, $7.5 million and $4.1 million in 1998, 1997 and 1996,
respectively, and reclassification adjustments of $10.7 million, $28.7 million
and $4.7 million, reduced by the tax effects of $3.7 million, $10.1 million and
$1.9 million in 1998, 1997 and 1996, respectively.

    The Company has adopted the standards associated with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information". Management
evaluates its operating performance as a single segment. Therefore, the Company
has not included the additional disclosures required by SFAS No. 131. Adoption
of this accounting standard has no impact on the Company's financial position or
net income.

    The Company has adopted the standards associated with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Company does
not invest in derivative instruments or use hedging activities. The adoption of
this accounting standard has no impact on the Company's financial position or
results of operations.

    The Company is required to adopt Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use",
effective January 1, 1999. The Company's current practice in accounting for
costs of software developed or obtained for internal use is consistent with
those required by the statement.





                                       68
<PAGE>   69
(3)    INVESTMENTS

    The following is a summary of marketable securities as of December 31, 1998
and 1997:

<TABLE>
<CAPTION>
                                                                                           Gross            Gross
(In thousands)                                                        Amortized         Unrealized       Unrealized         Fair
December 31, 1998:                                                      Cost               Gains            Losses          Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>               <C>               <C>
    Available-for-sale:
      U.S. government obligations                                     $585,028            $4,568            $1,673          $587,923
      Corporate obligations                                            331,596             3,688               218           335,066
                                                                      --------          --------          --------          --------
        Total debt securities                                          916,624             8,256             1,891           922,989
      Equity securities
                                                                             1                --                --                 1
                                                                      --------          --------          --------          --------
        Total short-term investments                                  $916,625            $8,256            $1,891          $922,990
                                                                      ========          ========          ========          ========
    Held-to-maturity - U.S. government obligations                     $44,798            $1,028               $--           $45,826
                                                                      ========          ========          ========          ========

December 31, 1997-all available-for-sale:
      U.S. government obligations                                     $252,817            $1,863              $256          $254,424
      Corporate obligations                                            140,434             1,276               307           141,403
      Municipal tax-exempt bonds                                       171,037             2,425                35           173,427
                                                                      --------          --------          --------          --------
        Total debt securities                                          564,288             5,564               598           569,254
      Equity securities                                                 60,834             6,027               372            66,489
                                                                      --------          --------          --------          --------
        Total short-term investments                                  $625,122           $11,591              $970          $635,743
                                                                      ========          ========          ========          ========
</TABLE>


    The amortized cost and estimated fair value of marketable debt securities at
December 31, 1998, by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities because the issuers of securities may
have the right to prepay such obligations without prepayment penalties.

<TABLE>
<CAPTION>
                                                                     Available-for-Sale                     Held-to-Maturity
                                                                   -----------------------------------------------------------------
                                                                   Amortized            Fair            Amortized            Fair
(In thousands)                                                        Cost              Value              Cost              Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                <C>               <C>                <C>
Due in one year or less                                             $74,138            $74,447             $3,229             $3,242
Due after one year through five years                               811,330            816,669             41,569             42,584
Due after five years through ten years                               31,156             31,873                 --                 --
                                                                   --------           --------           --------           --------
    Total                                                          $916,624           $922,989            $44,798            $45,826
                                                                   ========           ========           ========           ========
</TABLE>


Certain information related to marketable securities is as follows:

<TABLE>
<CAPTION>
(In thousands)                                                                        1998              1997              1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>               <C>               <C>
Proceeds from sale or maturity of available-for-sale securities                     $993,488          $790,795          $345,081
Proceeds from sale or maturity of held-to-maturity securities                          3,500                --                --
                                                                                    --------          --------          --------
Total proceeds from sale or maturity of marketable securities                       $996,988          $790,795          $345,081
                                                                                    ========          ========          ========

Gross realized gains on sale of available-for-sale securities                        $19,986           $36,615            $9,036
Gross realized losses on sale of available-for-sale securities                        (9,291)           (7,879)           (4,302)
                                                                                    --------          --------          --------
Net realized gains on sale of marketable securities                                  $10,695           $28,736            $4,734
                                                                                    ========          ========          ========

Net unrealized gain (loss) on available-for-sale securities included
    in comprehensive earnings (loss)                                                 $(4,255)          $(6,336)           $5,288
Deferred income tax expense (benefit)                                                 (2,126)           (2,598)            2,168
                                                                                    --------          --------          --------
Other comprehensive earnings (loss)                                                  $(2,129)          $(3,738)           $3,120
                                                                                    ========          ========          ========
</TABLE>


                                       69
<PAGE>   70
(4) INCOME TAXES

Income tax expense (benefit) consists of:

<TABLE>
<CAPTION>
(In thousands)                                                          Current                  Deferred                  Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                       <C>                       <C>
Year ended December 31, 1998:
    Federal                                                           $      --                 $ (14,371)                $ (14,371)
    State and local                                                   $      --                    (4,066)                   (4,066)
                                                                      ---------                 ---------                 ---------
      Total                                                           $      --                 $ (18,437)                $ (18,437)
                                                                      =========                 =========                 =========

Year ended December 31, 1997:
    Federal                                                           $ (68,604)                $ (78,577)                $(147,181)
    State and local                                                       3,560                     3,298                     6,858
                                                                      ---------                 ---------                 ---------
      Total                                                           $ (65,044)                $ (75,279)                $(140,323)
                                                                      =========                 =========                 =========

Year ended December 31, 1996:
    Federal                                                           $  64,358                 $ (10,093)                $  54,265
    State and local                                                      21,264                    (3,103)                   18,161
                                                                      ---------                 ---------                 ---------
      Total                                                           $  85,622                 $ (13,196)                $  72,426
                                                                      =========                 =========                 =========
</TABLE>



    For the year ended December 31, 1998, cash refunds, net of cash taxes paid,
were $113.0 million. For the years ended December 31, 1997 and 1996, cash
payments for income taxes, net of refunds received, were $66.9 million and $51.9
million, respectively.

    Income tax expense differed from the amounts computed by applying the
federal income tax rate of 35% to earnings (loss) before income taxes as a
result of the following:


<TABLE>
<CAPTION>
(In thousands)                                                                    1998                 1997                  1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                   <C>                   <C>
Income tax expense (benefit) at statutory tax rate                            $(217,415)            $(151,064)            $  60,217
Write-off of goodwill                                                                --                 9,895                    --
State and local income taxes, net of Federal income tax benefit                 (44,073)                4,458                11,805
Nontaxable gain on sale of affiliate                                                 --                (4,104)                   --
Equity in net loss of affiliate                                                      --                   399                 1,610
Tax-exempt interest on municipal bonds                                           (1,060)               (2,484)               (1,630)
Change in valuation allowance - federal                                         242,632                    --                    --
Other, net                                                                        1,479                 2,577                   424
                                                                              ---------             ---------             ---------
Actual income tax expense (benefit)                                           $ (18,437)            $(140,323)            $  72,426
                                                                              =========             =========             =========
</TABLE>





                                       70
<PAGE>   71
    The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets at December 31, 1998 and 1997 are as
follows:

<TABLE>
<CAPTION>
(In thousands)                                                                                    1998                       1997
--------------                                                                                    ----                       ----
<S>                                                                                            <C>                        <C>
Deferred tax assets:
    Net operating loss carryforwards                                                           $ 256,024                  $  99,895
    Medical costs payable                                                                         15,357                     16,440
    Allowance for doubtful accounts                                                               18,804                     11,799
    Unearned premiums                                                                              9,088                     10,509
    Trade accounts payable and accrued expenses                                                   20,298                      8,361
    Write-down of investment in affiliate                                                         19,402                      5,618
    Property and equipment                                                                         6,750                      3,404
    Restructuring related                                                                         64,712                         --
    Other                                                                                          9,730                      5,368
                                                                                               ---------                  ---------
      Total gross deferred assets                                                                420,165                    161,394
    Less valuation allowances                                                                   (282,598)                   (36,896)
                                                                                               ---------                  ---------
      Total deferred tax assets                                                                  137,567                    124,498
                                                                                               ---------                  ---------

Deferred tax liabilities:
    Unrealized appreciation of short-term investments                                              2,228                      4,354
    Gain on sale of affiliate                                                                         --                      4,705
                                                                                               ---------                  ---------
      Total deferred tax liabilities                                                               2,228                      9,059
                                                                                               ---------                  ---------
      Net deferred tax assets                                                                  $ 135,339                  $ 115,439
                                                                                               =========                  =========
</TABLE>



    During the second quarter of 1998, the Company incurred a net loss of $507.6
million. At that time, the Company evaluated the deferred tax assets arising
from the net loss and established a full valuation allowance pending the results
of its Turnaround Plan. Subsequent to the second quarter of 1998, the Company
performed detailed analyses to assess the realizability of the Company's
deferred tax assets. These analyses included an evaluation of the results of
operations for 1998 and prior periods, the progress to date in its Turnaround
Plan and projections of future results of operations, including the estimated
impact of the Turnaround Plan . Based on these analyses, the Company does not
currently believe it is more likely than not that all of its deferred tax assets
will be fully realizable, and the Company has established a valuation allowance
of $282.6 million so that deferred tax assets related to net operating loss
carryforwards and other net tax deductible temporary differences are stated at
their estimated realizable value. The Company will continue to evaluate the
realizability of its net deferred tax assets in future periods and will make
adjustments to the valuation allowances when facts and circumstances indicate
that a change is necessary. The amounts of future taxable income necessary
during the carryforward period to utilize the unreserved net deferred tax assets
is approximately $320 million.

    As of December 31, 1998, the Company has federal net operating loss
carryforwards of approximately $600 million, which will begin to expire in 2012.

(5)    PROPERTY AND EQUIPMENT

    Property and equipment, net of accumulated depreciation is as follows:

<TABLE>
<CAPTION>
                                                                                                         As of December 31,
                                                                                             --------------------------------------
(In thousands)                                                                                 1998                         1997
--------------                                                                                 ----                         ----
<S>                                                                                          <C>                          <C>
Land and buildings                                                                           $     230                    $   2,313
Furniture and fixtures                                                                          31,747                       32,298
Equipment                                                                                      204,249                      176,803
Leasehold improvements                                                                          37,146                       61,605
                                                                                             ---------                    ---------
    Property and equipment, gross                                                              273,372                      273,019
Accumulated depreciation and amortization                                                     (160,431)                    (125,926)
                                                                                             ---------                    ---------
    Property and equipment, net                                                              $ 112,941                    $ 147,093
                                                                                             =========                    =========
</TABLE>



                                       71
<PAGE>   72
    Depreciation and amortization of property and equipment aggregated $63.7
million in 1998, $57.9 million in 1997 and $40.3 million in 1996.

(6)    DEBT

Long-term debt at December 31, 1998 consists of the following:

<TABLE>
<CAPTION>
(In thousands)                                                            1998
                                                                        --------
<S>                                                                    <C>
11% Senior Notes due 2005                                               $200,000
Term Loan due 2003                                                       150,000
                                                                        --------
    Total long-term debt                                                $350,000
                                                                        ========
</TABLE>


    Simultaneously with the consummation of the agreement with TPG described in
note 7, the Company issued $200 million principal amount of 11% Senior Notes due
May 15, 2005 (the "Senior Notes"). The Senior Notes were issued in a private
placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), the
initial purchaser, who agreed to sell the Senior Notes only to "qualified
institutional buyers", as defined in Rule 144A under the Securities Act in
reliance upon the exemption from the registration requirements of the Securities
Act provided by Rule 144A, or outside the United States in accordance with
Regulation S under the Securities Act. DLJ received $6,000,000 in discounts and
commissions in connection with the initial purchase of the Senior Notes. The
Senior Notes are senior unsecured obligations of the Company and rank pari passu
in right of payment with all current and future senior indebtedness of the
Company. The Company's obligations under the Senior Notes are effectively
subordinated to all existing and future secured indebtedness of the Company to
the extent of the value of the assets securing such indebtedness and are
structurally subordinated to all existing and future indebtedness, if any, of
the Company's subsidiaries. Interest is payable semiannually on May 15 and
November 15 of each year commencing November 15, 1998.

    At any time on or before May 15, 2001, the Company may redeem for cash up to
33 1/3% of the original aggregate principal amount of the Senior Notes at a
redemption price of 111% of the principal amount thereof, in each case plus any
accrued and unpaid interest thereon to the redemption date, with the net
proceeds of a public equity offering provided that at least 66 2/3% of the
original aggregate principal amount of the Senior Notes remains outstanding
immediately after the occurrence of such redemption. After May 15, 2002, the
Senior Notes will be subject to redemption for cash at the option of the
Company, in whole or in part, at redemption prices ranging from 105.5% of face
amount beginning May 15, 2002 to 100% on and after May 15, 2004.

    The Senior Notes indenture provides that upon the occurrence of a change of
control (as defined), each holder of Senior Notes will have the right to require
the Company to repurchase all or any part of such holder's Senior Notes pursuant
to the offer described therein at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
liquidated damages, if any, thereon to the date of purchase. The indenture also
contains covenants for the benefit of the holders of Senior Notes that, among
other things, restrict the ability of the Company to pay any dividend or make
any payment or distribution or incur additional indebtedness.

    At the same time, the Company entered into a Term Loan Agreement that
provided for a new $150 million senior secured term loan (the "Term Loan") with
a final maturity in 2003 at which time all outstanding amounts will be due and
payable. Prior to the final maturity of the Term Loan, there are no scheduled
principal payments. The Term Loan provides for mandatory prepayments of the Term
Loan from (1) net proceeds from the sale of assets, subject to certain
exceptions and to the receipt of any required regulatory approvals (2) net
proceeds from the issuance of debt securities and (3) 50% of the net proceeds
from certain equity issuances. The Term Loan also provides for mandatory
prepayment of the entire aggregate principal amount of the Term Loan plus a
premium equal to 1.00% of the aggregate principal amount of the Term Loan upon a
"change of control." The Term Loan bears interest at a rate per annum equal to
the administrative agent's reserve adjusted LIBO rate plus 4.25%. As of December
31, 1998, the interest rate on the Term Loan was 9.335%. Interest is payable
semiannually on May 15 and November 15 each year commencing November 15, 1998.
The Term Loan is secured by a perfected first priority security interest in
substantially all of the assets of the Company. The Term Loan contains covenants


                                       72
<PAGE>   73
that, among other things, restrict the ability of the Company to pay any
dividend or make any payment or distribution or incur additional indebtedness.

    The costs incurred in connection with the issuance of the Senior Notes and
Term Loan, aggregating approximately $7.1 million and $4.7 million,
respectively, have been capitalized and are being amortized over periods of
seven years and five years, respectively.

    On February 6, 1998, the Company issued a $100 million senior secured
increasing rate note due February 6, 1999 ("Bridge Note") and on March 30, 1998
issued an additional $100 million Bridge Note, pursuant to a Bridge Securities
Purchase Agreement, dated February 6, 1998 as amended on March 30, 1998 (the
"Bridge Agreement"). The Bridge Notes bore interest at prime plus 2.5% per annum
during the first three months, and thereafter the spread over prime increased by
0.5% every three months; provided, however that the per annum interest rate
would not be less than 10.5%, nor more than 17%. The Company used the proceeds
of the Bridge Notes to make capital contributions to certain of its HMO
subsidiaries, to pay for expenses in connection with the issuance of the Bridge
Notes and for general corporate purposes. The Company capitalized the costs of
$9.9 million incurred in the issuance of the Bridge Notes, and these costs were
to be amortized over the life of the Bridge Notes. The capitalized debt issuance
costs were written off on May 13, 1998 due to extinguishment of the Bridge Notes
using funds obtained through the financings referred to above and in note 7.

    The Company made cash payments for interest expense on indebtedness and
delayed claims aggregating approximately $38.7 million in 1998 and $5.3 million
in 1997. No payments for interest expense were made in 1996.

(7)    REDEEMABLE PREFERRED STOCK

    Pursuant to an Investment Agreement, dated as of February 23, 1998 (the
"Investment Agreement"), between the Company and TPG Oxford LLC ("TPG", together
with the investors thereunder, the "Investors"), the Investors, on May 13, 1998,
purchased $350 million in redeemable Preferred Stock with Warrants to acquire up
to 22,530,000 shares of common stock. The Preferred Stock and Warrants were
issued without registration under the Securities Act in reliance on Section 4(2)
of the Securities Act, which provides an exemption for transactions not
involving any public offering. In determining that such exemption was available,
the Company relied on, among other things, the facts that the Preferred Stock
and Warrants were being issued through direct communication only to a limited
number of sophisticated investors having knowledge and access to information
regarding the Company and that the certificates evidencing such Preferred Stock
and Warrants bear a legend restricting transfer in nonregistered transactions.
Dividends on the Preferred Stock may be paid in kind for the first two years.
The Warrants have an exercise price of $17.75, which represents a 5% premium
over the average trading price of Oxford shares for the 30 trading days ended
February 20, 1998. The exercise price will become 115% of the average trading
price of Oxford common stock for the 20 trading days following the filing of the
Company's annual report on Form 10-K for the year ended December 31, 1998, if
such adjustment would reduce the exercise price.

    The Preferred Stock was originally issued as 245,000 shares of Series A and
105,000 shares of Series B. The Series A Preferred Stock carried a cash dividend
of 8% per annum, payable quarterly, provided that prior to May 13, 2000, the
Series A Preferred Stock accumulated dividends at a rate of 8.243216% per annum,
payable annually in cash or additional shares of Series A Preferred Stock, at
the option of the Company. The Series A Preferred Stock and was issued with
Series A Warrants to purchase 15,800,000 shares of common stock, or
approximately 19.9% of the then outstanding voting power of the Company's common
stock. The Series A Preferred Stock had approximately 16.6% of the combined
voting power of the Company's then outstanding common stock and the Series A
Preferred Stock. The Series B Preferred Stock, which was originally issued with
Series B Warrants to purchase nonvoting junior participating preferred stock,
was nonvoting and carried a cash dividend of 9% per annum, payable quarterly,
provided that prior to May 13, 2000, the Series B Preferred Stock accumulated
dividends at a rate of 9.308332% per annum, payable annually in cash or
additional shares of Series B Preferred Stock, at the option of the Company. The
terms of the agreement prohibit the Company from paying cash dividends on its
common stock. The Preferred Stock was not redeemable by the Company prior to May
13, 2003. Thereafter, subject to certain conditions, the Series A and B
Preferred Stock were each redeemable at the option of the Company at a
redemption price of $1,000 per share (in each case, plus accrued



                                       73
<PAGE>   74
and unpaid dividends), and were subject to mandatory redemption at the same
price on May 13, 2008. The Series A and Series B Warrants expire on the earlier
of May 13, 2008 or redemption of the related series of Preferred Stock. The
Warrants are detachable from the Preferred Stock. The carrying value of the
Preferred Stock has been reduced in the financial statements by the value of the
Warrants, estimated to be approximately $67 million at the date of issuance.
This amount has been added to additional paid-in capital and is being amortized
using the interest method over five years. The costs incurred in connection with
the issuance of the Preferred Stock aggregated approximately $11.9 million and
have been charged against the Preferred Stock in the accompanying balance sheet.
Such costs will be amortized over a period of five years. With respect to
dividend rights, the Series A and Series B Preferred Stock rank on a parity with
each other and prior to the Company's common stock. On August 28, 1998, the
Company held its annual shareholders meeting at which its shareholders approved
the vesting of voting rights in respect of the Series B Preferred Stock and the
issuance, subject to adjustment, of up to 6,730,000 shares of common stock upon
exercise of the Series B Warrants. This approval resulted in the reduction of
the dividend on the Series B Preferred Stock to 8% (8.243216% prior to May 13,
2000) and an increase in the voting rights of TPG to approximately 22.1% of the
combined voting power of the Company's then outstanding common stock and Series
A and Series B Preferred Stock.

    Activity for redeemable preferred stock for the year 1998 is as follows:

<TABLE>
<CAPTION>
(In thousands)                                                                                                     Activity
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                               <C>
Balance at December 31, 1997                                                                                            $ -
Issuance of preferred stock, net of issuance expenses                                                               338,148
Discount allocated to detachable warrants                                                                          (67,000)
Amortization of discount                                                                                              7,555
Amortization of issuance expenses                                                                                     1,565
Accrued  in-kind dividends                                                                                           18,548
                                                                                                                   --------
Balance at December 31, 1998                                                                                       $298,816
                                                                                                                   ========
</TABLE>



    On February 13, 1999, the Company entered into a Share Exchange Agreement
(the "Exchange Agreement") with TPG, its affiliates and others to make an
adjustment of the dividends payable on shares of Series A Preferred Stock and
Series B Preferred Stock in connection with the possible sale of shares of
Preferred Stock by the holders thereof to institutional holders. Pursuant to the
Exchange Agreement, the 245,000 shares of Series A Preferred Stock were
exchanged for 260,146.909 shares of a new Series D Preferred Stock (the "Series
D Preferred Stock"), and the 105,000 shares of Series B Preferred Stock were
exchanged for 111,820.831 shares of a new Series E Preferred Stock (the "Series
E Preferred Stock"). In the exchange, (1) a holder received in exchange for each
share of Series A Preferred Stock, one share of Series D Preferred Stock, plus
0.061824118367 share of Series D Preferred Stock representing dividends on the
Series A Preferred Stock accrued and unpaid through February 13, 1999, and (2) a
holder received in exchange for each share of Series B Preferred Stock, one
share of Series E Preferred Stock, plus 0.064960295238 share of Series E
Preferred Stock representing dividends on the Series B Preferred Stock accrued
and unpaid through February 13, 1999. As a result of the exchange, the holders
hold only Series D preferred Stock and Series E Preferred Stock. On March 9,
1999, the Company filed Certificates of Elimination for the Series A Preferred
Stock and the Series B Preferred Stock that have the effect of eliminating from
the Certificate of Incorporation all matters set forth in the Certificates of
Designations with respect to the Series A Preferred Stock and the Series B
Preferred Stock. The terms of the shares of the Series D Preferred Stock are
identical to the terms of the Series A Preferred Stock, except that the Series D
Preferred Stock accumulates cash dividends at the rate of 5.12981% per annum,
payable quarterly, provided that prior to May 13, 2000, the Series D Preferred
Stock accumulates dividends at a rate of 5.319521% per annum, payable annually
in cash or additional shares of Series D Preferred Stock, at the option of the
Company. The terms of the shares of the Series E Preferred Stock are identical
to the terms of the shares of the Series B Preferred Stock, except that the
Series E Preferred Stock accumulates cash dividends at a rate of 14% per annum,
payable quarterly, provided that prior to May 13,2000, the Series E Preferred
Stock accumulates dividends at a rate of 14.589214% per annum, payable annually
in cash or additional shares of Series E Preferred Stock, at the option of the
Company. In addition, prior to May 13, 2001, the holders of the Series D
Preferred Stock may not use the Series D Preferred Stock in connection with the
exercise of the Warrants, unless they use a percentage of the total amount of
Series D Preferred Stock issued on February 13,



                                       74
<PAGE>   75
1999 that does not exceed the percentage of the total number of shares of Series
E Preferred Stock issued on February 13, 1999 that have been redeemed,
repurchased or retired by the Company, or used as consideration in connection
with the exercise of the Warrants by the holders. With respect to dividend
rights, the Series D Preferred Stock and Series E Preferred Stock rank on a
parity with each other and prior to the Company's common stock.

    The aggregate cost to the Company of dividends on the Series D Preferred
Stock and Series E Preferred Stock is the same as the aggregate cost to the
Company of dividends on the Series A Preferred Stock and Series B Preferred
Stock. The respective voting rights of the holders of the Series A Preferred
Stock and Series B Preferred Stock have not changed as the result of the
exchange of such shares for shares of Series D Preferred Stock and Series E
Preferred Stock. The exchange had no effect on the consolidated balance sheet as
the issuance of additional redeemable preferred stock effected the in-kind
payment of the accrued redeemable preferred stock dividend which had previously
been credited to redeemable preferred stock. In the Company's view, there was no
difference in the aggregate fair value between the redeemable preferred stock
issued in the exchange and the redeemable preferred stock canceled in the
exchange.

    Simultaneously with closing of the Investment Agreement, Norman C. Payson,
M.D., the Company's Chief Executive Officer, purchased 644,330 shares of Oxford
common stock at an aggregate purchase price of $10 million pursuant to his
employment agreement. The common stock issued to Dr. Payson was issued without
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, which provides an exemption for transactions not involving any
public offering.

    The aggregate proceeds of $710 million related to the Senior Notes, Term
Loan, common stock sale to Dr. Payson and the Investment Agreement were
utilized, in part, to retire the previously outstanding Bridge Notes, make
capital contributions to certain regulated subsidiaries and pay fees and
expenses related to the transactions. The balance has been and will be used for
subsidiary capital contributions, as necessary, and for general corporate
purposes.

(8)    COMMON STOCK

    On March 17, 1997, Oxford's Board of Directors unanimously adopted a
resolution authorizing an amendment to Oxford's certificate of incorporation to
increase the number of authorized shares of common stock from 200,000,000 shares
to 400,000,000 shares, subject to shareholder approval. On April 22, 1997, the
Company's shareholders approved such amendment.

    On March 15, 1996, Oxford's Board of Directors approved a two-for-one split
of the Company's common stock to be effected by distribution of a dividend of
one share of common stock for each share of common stock outstanding, payable to
shareholders of record on March 25, 1996. A total of 34,793,720 shares of common
stock were issued in connection with the split. The stated par value of $0.01
was not changed and the amount of $347,937 was reclassified from additional
paid-in capital to common stock.

    All appropriate share, weighted-average share and earnings per share amounts
in the consolidated financial statements were restated to retroactively reflect
the stock split.

(9)    STOCK OPTION PLANS

    The Company grants fixed stock options under its 1991 Stock Option Plan, as
amended (the "Employee Plan"), to certain key employees and consultants, under
its 1997 Independent Contractor Stock Option Plan (the "Independent Contractor
Plan") to certain independent contractors who materially contribute to the
long-term success of the Company and under its Nonemployee Directors' Stock
Option Plan, as amended (the "Nonemployee Plan"), to outside directors to
purchase common stock at a price not less than 100% of quoted market value at
date of grant.

    The Employee Plan provides for granting of nonqualified stock options and
incentive stock options which vest as determined by the Company and expire over
varying terms, but not more than seven years from date of grant. The Employee
Plan is administered by a committee consisting of five members of the Board of
Directors,



                                       75
<PAGE>   76
selected by the Board. The committee determines the individuals to whom awards
shall be granted as well as the terms and conditions of each award, the grant
date and the duration of each award. All options are granted at fair market
value on date of grant. The Company's previous nonqualified employee stock
option plan terminated in 1991, except as to options theretofore granted.

    The Independent Contractor Plan provides for granting of nonqualified stock
options which vest as determined by the Company and expire over varying terms,
but not more than seven years from the date of grant.

    The Employee Plan and the Independent Contractor Plan are administered by a
committee consisting of five members of the Board of Directors, selected by the
Board. The committee determines the individuals to whom awards shall be granted
as well as the terms and conditions of each award, the grant date and the
duration of each award. All options are granted at fair market value on date of
grant.

    The Nonemployee Plan provides for granting of nonqualified stock options to
eligible nonemployee directors of the Company. The plan provides that each year
on the first Friday following the Company's annual meeting of stockholders, each
individual elected, reelected or continuing as a nonemployee director will
automatically receive a nonqualified stock option for 5,000 shares of common
stock with an exercise price at the fair market value on that date. The plan
further provides that one-fourth of the options granted under the plan vest on
each of the date of grant and the Friday prior to the second, third and fourth
annual meeting of stockholders following the date of such grant.

    Stock option activity for all fixed option plans, adjusted for all stock
splits, is summarized as follows:

<TABLE>
<CAPTION>
                                                                  Weighted-Average
                                                   Shares          Exercise Prices
----------------------------------------------------------------------------------
<S>                                              <C>               <C>
    Outstanding at January 1, 1996               11,549,436              $ 11.65
    Granted                                       1,518,176              $ 42.58
    Exercised                                    (3,368,208)                6.30
    Cancelled                                      (407,592)               20.51
-----------------------------------------------------------
    Outstanding at December 31, 1996              9,291,812                18.25
    Granted                                       3,332,186                72.58
    Exercised                                    (2,098,157)               10.14
    Cancelled                                      (319,012)               37.35
-----------------------------------------------------------
    Outstanding at December 31, 1997             10,206,829                37.06
    Granted                                      11,810,173                12.95
    Exercised                                      (397,103)                6.67
    Cancelled/exchanged                          (6,319,168)               46.41
-----------------------------------------------------------
    Outstanding at December 31, 1998             15,300,731              $ 15.40
================================================================================

    Exercisable at December 31, 1998              4,378,029              $ 16.80
================================================================================
</TABLE>



    As of December 31, 1998, there were 19,052,625 shares of common stock
reserved for issuance under the plans, including 3,751,894 shares reserved for
future grant. In addition, there were 22,530,000 shares of common stock reserved
for issuance in connection with the warrants issued to TPG (see note 7).

    With the exception of the options described in the next paragraph, the
Company, as of October 1, 1998, offered certain option holders the right to
exchange unexercised options granted subsequent to January 10, 1995 and prior to
December 2, 1997 for options equal to one-half the number of unexercised shares
exchanged. Exercise prices of options granted during that period ranged from
$21.22 per share to $85.812 per share. The options received in exchange were
granted at the then current market value of $9.875 per share and vest over a
period of three years. A total of 1,234,464 original option shares were
exchanged. The Directors, the Chairman, the President, the Chief Executive
Officer and certain Executive Vice Presidents were not permitted to participate
in this exchange.


                                       76
<PAGE>   77
    On August 8, 1997, the Company granted a total of 3,162,436 options under
the Employee Plan and the Independent Contractor Plan to employees and certain
independent contractors of the Company with an exercise price of $74.00. As a
consequence of the significant decrease in the market price of the Company's
common stock in the fourth quarter of 1997, in order to ensure that options
granted in 1997 provide a meaningful incentive to the grantees, the Board of
Directors, on December 13, 1997, approved an option reissuance grant for
employees and certain independent contractors. All of the Directors, the
Chairman, the President, the Chief Executive Officer and Executive Vice
Presidents (other than one Executive Vice President, who commenced employment in
October 1997) were excluded from the reissuance grant. Under the reissuance
grant, the grantees were offered the right to cancel options granted during 1997
and receive options to purchase the same number of shares so canceled with a
grant date of January 2, 1998 and an exercise price of $17.125 per share.

    Under the terms of an employment agreement, Norman C. Payson, M.D., the
Chief Executive Officer of the Company, was granted on February 23, 1998 a
nonqualified stock option (the "Option") to purchase 2,000,000 shares of common
stock at an exercise price of $15.52 per share and, in August 1998, a
nonqualified stock option (the "Additional Option") was granted to purchase an
additional 1,000,000 shares of Company common stock under the 1991 Stock Option
Plan. The Option generally provides that 800,000 shares will vest on February
23, 1999, and that the remaining 1,200,000 shares will vest ratably on a monthly
basis over the 36 month period ending February 23, 2002, provided in each case
that Dr. Payson is employed by the Company on the applicable vesting date. The
Option also provides for acceleration of vesting and extended exercisability
periods in certain circumstances, including certain terminations of employment
and a change in control (as defined in the Employee Plan) of the Company. The
difference between the exercise price and the fair market value of the shares
subject to the Option on the date of issuance has been accounted for as unearned
compensation and is being amortized to expense over the period restrictions
lapse. Unearned compensation charged to operations in 1998 was approximately
$3.2 million. The Additional Option has an exercise price equal to $6.0625,
vests ratably over the four years from the date of grant, and is otherwise
subject to the terms and conditions of the Employee Plan. The Additional Option
also provides for accelerated vesting following a change in control (as defined
in the Employee Plan). On March 30, 1998, another executive officer of the
Company received a nonqualified option to acquire 800,000 shares of the
Company's common stock at the then current market price.

    Information about fixed stock options outstanding at December 31, 1998, is
summarized as follows:

<TABLE>
<CAPTION>
                                                                    Weighted-
                                               Weighted -            Average
   Range of                Number              Average            Remaining
Exercise Prices         Outstanding         Exercise Price       Contractual Life
------------------      -----------        ---------------       ----------------
<S>        <C>          <C>                 <C>                <C>
$0.32 -     $5.00           393,414             $0.84              1.8 Years
 5.01 -     10.00         5,154,357              6.99              3.5 Years
10.01 -     15.00           280,200             12.67              4.8 Years
15.01 -     20.00         7,797,801             16.17              5.4 Years
20.01 -     25.00           795,593             23.78              1.9 Years
25.01 -     50.00           451,866             44.91              2.6 Years
50.01 -     74.00           427,500             73.26              3.9 Years
                         ----------
$0.32 -    $74.00        15,300,731            $15.46              4.4 Years
======     =======       ===========           =======
</TABLE>





                                       77
<PAGE>   78
    Information about fixed stock options exercisable at December 31, 1998, is
summarized as follows:

<TABLE>
<CAPTION>
                                                     Weighted -
   Range of                 Number                   Average
Exercise Prices           Exercisable            Exercise Price
------------------        -------------          ---------------
<S>          <C>          <C>                    <C>
$0.32 -      $5.00            393,414                  $0.84
 5.01 -      10.00          1,198,618                   7.94
10.01 -      15.00             90,200                  14.15
15.01 -      20.00          1,718,309                  16.40
20.01 -      25.00            615,857                  23.80
25.01 -      50.00            238,506                  44.60
50.01 -      74.00            123,125                  72.76
                            ---------
$0.32 -     $74.00          4,378,029                 $16.80
======      ======          =========                 =======
</TABLE>



    The Company applies APB Opinion 25 and related interpretations in accounting
for the plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plans. Had compensation cost for the Company's stock option
plans been determined based on the fair value at the grant dates for grants
under this plan consistent with the methodology of SFAS 123, the Company's net
earnings (loss) and earnings (loss) per share for the years ended December 31,
1998, 1997 and 1996, would have been reduced to the pro forma amounts indicated
below:


<TABLE>
<CAPTION>
(In thousands, except per share amounts)                                             1998           1997            1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                         <C>            <C>               <C>
Net earnings (loss) attributable                     As reported                  $(624,460)     $(291,288)        $99,623
   To common shares                                  Pro forma                    $(711,311)     $(315,188)        $90,011

Basic earnings (loss) per share                      As reported                     $(7.79)        $(3.70)          $1.34
                                                     Pro forma                       $(8.88)        $(4.01)          $1.21

Diluted earnings (loss) per share                    As reported                     $(7.79)        $(3.70)          $1.25
                                                     Pro forma                       $(8.88)        $(4.01)          $1.13
---------------------------------------------------------------------------------------------------------------------------
</TABLE>



    The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $9.00, $40.03 and $19.58, respectively, estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants: no dividend yield for any year;
expected volatility of 72.94% in 1998, 69.56% in 1997 and 48.99% in 1996,
risk-free interest rates of 5.33% in 1998, 6.15% in 1997 and 6.5% in 1996; and
expected lives of four years for all years.

    Pro forma net income reflects only options granted since 1995. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
123 is not reflected in the pro forma net income amounts presented for 1997 and
1996 because compensation cost is reflected over the options' vesting period of
four years and compensation cost for options granted prior to January 1, 1995 is
not considered.

(10)   LEASES

    Oxford leases office space and equipment under capital and operating leases.
Rent expense under operating leases for the years ended December 31, 1998, 1997
and 1996 was approximately $31.0 million, $22.6 million and $18.5 million,
respectively. The Company's lease terms range from one to eleven years with
certain options to renew. Certain lease agreements provide for escalation of
payments which are based on fluctuations in certain published cost-of-living
indices.



                                       78
<PAGE>   79
    Property held under capital leases at December 31, 1998 is summarized as
follows:

<TABLE>
<CAPTION>
(In thousands)                                                                                    1998
---------------------------------------------------------------------------------------------------------
<S>                                                                                               <C>
Computer equipment                                                                                $39,792
Other equipment
                                                                                                      459
---------------------------------------------------------------------------------------------------------
    Gross
                                                                                                   40,251
Less accumulated amortization                                                                      (7,940)
---------------------------------------------------------------------------------------------------------
    Net capital lease assets                                                                      $32,311
=========================================================================================================
</TABLE>



    Future minimum lease payments required under capital and operating leases
that have initial or remaining noncancelable lease terms in excess of one year
at December 31, 1998 were as follows:


<TABLE>
<CAPTION>
                                                                                                   Capital         Operating
(In thousands)                                                                                     Leases           Leases
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>              <C>
1999                                                                                               $17,837          $26,471
2000                                                                                                13,576           24,409
2001                                                                                                 6,704           16,027
2002                                                                                                     -           12,848
Thereafter                                                                                               -           23,848
---------------------------------------------------------------------------------------------------------------------------
Total minimum future rental payments                                                                38,117         $103,603
                                                                                                                   ========
Less amount representing interest                                                                   (3,329)
----------------------------------------------------------------------------------------------------------
Present value of minimum lease payments                                                             34,788
Less current maturities                                                                            (15,938)
----------------------------------------------------------------------------------------------------------
Obligations under capital leases                                                                   $18,850
==========================================================================================================
</TABLE>



    The above amounts for operating leases are net of future minimum subrentals
aggregating approximately $7.0 million.

(11)   ACQUISITIONS

    As of August 1, 1997, the Company acquired all of the outstanding stock of
Compass PPA, Incorporated, the holding company for a Chicago-based HMO, for
approximately $8.2 million in cash. The acquisition was recorded as a purchase
and resulted in goodwill of approximately $24.1 million. Subsequent to the
acquisition, the Company decided to reduce the level of its future investment in
expansion markets and, based on an analysis of the negative cash flows of this
Illinois company, determined that the carrying amount in excess of tangible book
value of its investment was not recoverable. Accordingly, the Company, as of
December 31, 1997, wrote off the remaining unamortized goodwill of $23.4
million.

    On November 3, 1997, the Company acquired all of the outstanding stock of
Riscorp Health Plans, Inc., a Florida-based HMO, for approximately $5.3 million
in cash. The acquisition was recorded as a purchase and resulted in goodwill of
approximately $3.9 million. During 1998, the Company made an additional
contingent payment of $1.3 million. Subsequent to the acquisition, the Company
decided to reduce the level of its future investment in expansion markets and,
based on an analysis of the negative cash flows of this Florida company,
determined that the carrying amount in excess of tangible book value of its
investment was not recoverable. Accordingly, the Company, wrote off the goodwill
of $3.9 million in 1997 and the contingent payment of $1.3 million in 1998.

    Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
permits evaluation of asset value and impairment based upon present value of
expected cash flows, using discount rates commensurate with the risks involved.
Based on decisions not to make additional investments and projected negative
cash flow, asset values of the above



                                       79
<PAGE>   80
investments were deemed to be equal to tangible net assets, which consisted
primarily of cash and marketable securities held to pay claims and premiums
receivable.

    These acquisitions were accounted for by the purchase method and have been
included from the date of acquisition. The pro forma effects of the acquisitions
on the consolidated results of operations for the years ended December 31, 1997
and 1996, assuming these acquisitions had occurred as of January 1, 1996, are
not material and have not been presented.

(12)   RELATED PARTY TRANSACTIONS

    In October 1997, the Company disposed of its 47% interest in Health
Partners, Inc. ("Health Partners") in a pooling of interests transaction. Health
Partners was established to provide management and administrative services to
physicians, medical groups and other providers of health care. The investment
had been accounted for using the equity method. Under this method, the Company
recognized losses of $1.1 million in 1997 and $4.6 million in 1996. The Company
received 2,090,109 shares of common stock of FPA Medical Management, Inc.
("FPAM") with a market value as of the closing of approximately $76.4 million,
resulting in a pretax gain at the time of closing of approximately $63.1
million. As of December 31, 1997, the market value of the FPAM stock had been
reduced to approximately $38.4 million. Because management believed that the
decline was other than temporary, the Company as of December 31, 1997 wrote down
its investment in FPAM by $38.0 million. As a result, the Company ultimately
recognized in 1997 a pretax gain of approximately $25.2 million ($20.5 million
after taxes, or $.26 per share) on the sale of Health Partners. During 1998, the
Company wrote down to nominal value its remaining investment in FPAM (see note
14). The Company contracts with provider groups managed by Health Partners in
the Company's service areas.

    Oxford provided $14.3 million in equity and debt financing, representing a
19.9% interest, to St. Augustine Health Care, Inc. ("St. Augustine"). As of
December 31, 1997, the Company decided to reduce the level of its future
investment in expansion markets. The Company determined that its investment in
St. Augustine was worthless after attempts to dispose of the investment through
a sale process failed. During 1997, the Company wrote off the $14.3 million
carrying value of its investment in the capital stock and subordinated surplus
notes of St. Augustine. The Company fully disposed of its interest in St.
Augustine in October 1998 for consideration of less than one thousand dollars.
No gain or loss was recognized on the transaction.

(13)   RESTRUCTURING CHARGES

    The Company recorded restructuring charges totaling $123.5 million, ($114.8
million after income taxes, or $1.43 per share) in the first half of 1998. These
charges resulted from the Company's actions to better align its organization and
cost structure as part of the Company's Turnaround Plan. These charges included
estimated costs related to: (i) the disposition or closure of noncore
businesses; (ii) write-down of certain property and equipment; (iii) severance
and related costs; and (iv) costs of operations consolidation, including long
term lease commitments. These reserves are generally classified in the Company's
balance sheet as accounts payable and accrued expenses with the exception of
property and equipment, which have been written-down to their estimated net
realizable values. These reserve charges and their activity for 1998 are
summarized in the table below:


<TABLE>
<CAPTION>
                                                                                                                        Ending
                                                  Restructuring                       Noncash         Changes in     Restructuring
(In thousands)                                      Charges         Cash Used         Activity         Estimate        Reserves
--------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>              <C>              <C>              <C>             <C>
Provisions for loss on noncore businesses          $  55,700        $  (9,827)       $ (18,725)       $ (13,343)       $  13,805
Write-down of property and equipment                  29,272               --          (28,267)          (1,005)              --
Severance and related costs                           24,800           (4,246)         (11,200)              --            9,354
Costs of consolidating operations                     13,728             (548)              --            4,505           17,685
                                                   -----------------------------------------------------------------------------
                                                   $ 123,500        $ (14,621)       $ (58,192)       $  (9,843)       $  40,844
                                                   =============================================================================
</TABLE>



                                       80
<PAGE>   81
    The changes in estimate totaling $9.8 million were a result of, among other
things, the receipt of proceeds from the sale of the Pennsylvania business at an
amount higher than anticipated in the Turnaround Plan, accelerated closing of
HMO and insurance operations in New Hampshire, Florida and Illinois which
resulted in a decrease in premium deficiency reserves and the completion of
Medicare risk transfer arrangements sooner than expected. These changes in
estimate totaling $9.8 million were recognized as a credit to restructuring
charges in the fourth quarter of 1998 and reduced the net loss by $.12 per
share.

    Provisions for loss on noncore business

    As part of its Turnaround Plan, the Company decided to withdraw from noncore
markets by selling or closing its HMO and insurance businesses in Pennsylvania,
Illinois, Florida and New Hampshire. Total premium revenue for these businesses
in 1998 was approximately $170.4 million, with operating losses totaling
approximately $37.0 million. In addition, the Company decided to close its
specialty management initiatives and to sell or close certain other health care
services operations and investments in noncore businesses. Restructuring
reserves were established relating to estimated losses associated with premium
deficiencies in the HMO and insurance subsidiaries to be sold or closed, the net
book value of noncore investments was reduced to their estimated recoverable
value, and accruals were recorded for incremental disposition and closing costs
associated with the Turnaround Plan. The Company estimated the net recovery of
its investments in these entities by evaluating the assets and operations for
impairment. This evaluation included an assessment of asset recoverability for
these entities, premium deficiency analysis assuming timely exit of these
noncore markets and the establishment of premium deficiency reserves, estimated
incremental disposition and closing costs including professional services and
anticipated proceeds related to the disposition of assets. In determining the
estimated fair values, the Company reviewed detailed asset listings for each
location to be vacated. Based upon the asset classification, acquisition date
and anticipated net proceeds, if any, upon disposition, as determined by the
Company, the assets were written down to estimated fair value. The fair values
were determined based on the best information available in the circumstances,
including prior experience in disposing of similar assets and discussions with
potential purchasers of the assets. The Company expects to dispose of all of the
property and equipment throughout 1999. The Company calculates premium
deficiency reserves based upon expected premium revenue, medical expense and
administrative expense levels and remaining contractual obligations using the
Company's historical experience. Of the $55.7 million originally recorded as
provision for loss on noncore businesses approximately $25.2 million related to
premium deficiency reserves, approximately $27.9 million related to asset
valuation write-downs and reserves, approximately $2.2 million related to
accounting fees to be incurred for final statutory audits and legal fees to be
incurred in connection with preparation of agreements for sale or disposition of
assets and brokerage costs and approximately $.4 million related to defined
severance arrangements for employees of these entities. Approximately 250
employees in the noncore businesses have been terminated since June 30, 1998. As
of December 31, 1998, the remaining reserve for severance related to individuals
who were no longer employed with the Company.

    During the second half of 1998, the Company entered into an agreement to
sell its Pennsylvania subsidiary to a third party for $7.1 million in cash plus
a subordinated capital surplus note of $2.5 million and transferred its
membership in Illinois to a third party. Oxford Specialty Management, Inc., the
subsidiary through which the Company operated its specialty care management
initiative, ceased operations as of December 31, 1998. The Company concluded the
sale of one of its three health centers in third quarter of 1998 and expects to
sell or close the remaining two health centers by the end of 1999. The Company
is also currently evaluating its telephone nurse triage service and expects that
this service will be substantially restructured by the end of 1999. In 1996 and
1997, the Company invested in several specialty care businesses as noncore
investments. Although the Company will continue to attempt to dispose of these
noncore investments, to date it has been unsuccessful in completing satisfactory
transactions.

    Cash expenses charged against the reserves amounted to $9.8 million. These
payments include net payments of $8.9 million related to disposition of the HMO
and insurance businesses in the noncore markets, payments of $2.9 million
related to premium deficiencies, severance, professional fees and other
incremental exit costs. These payments were partially offset by proceeds of $2.0
million related to the sale of the health center in the third quarter of 1998.


                                       81
<PAGE>   82
    Noncash charges against the reserve of $18.7 million relate to the specific
write-off of assets of the HMO and insurance businesses in the noncore markets
of $1.3 million, specialty care management initiative of $7.2 million, the
health centers and telephone nurse triage service of $4.5 million and write-off
of investments in noncore businesses of $5.7 million.

    Due to recoveries greater than anticipated, primarily the sale of the
Pennsylvania subsidiary for $9.6 million and the early shut-down of other
operations, the Company has revised its estimate of the remaining costs
associated with the final disposition or closure of these operations and
investments, and accordingly a total of $13.3 million of reserves were reversed
as a reduction of restructuring charges in the fourth quarter of 1998. The
change in estimate of $13.3 million was comprised primarily of a $7.3 million
reduction in the estimated liability established relative to the sale of the
Pennsylvania subsidiary due to the receipt of sale proceeds in excess of
anticipated proceeds, and a reduction in the premium deficiency reserve due to
the earlier than anticipated exit from that state. In addition, a $1.3 million
reduction in other asset valuation reserves, a $4.3 million reduction in premium
deficiency reserves, and a $.4 million reduction of accounting and legal fee
reserves were recorded relative to other noncore businesses. The remaining
liability at December 31, 1998 represents premium deficiency reserves for
operations in Illinois and Florida and full valuation allowances for the
investments in the remaining two health centers and the telephone nurse triage
service. The ending restructuring reserve at December 31, 1998 included premium
deficiency reserves totaling approximately $3.5 million, approximately $9.2
million of asset valuation reserves and approximately $1.1 million related to
other closing costs. The Company expects to complete the closure, disposal or
restructure of these noncore businesses and investments during 1999.

    Write-down of property and equipment

    In connection with the Company's attempts to reduce administrative costs
under the Turnaround Plan, the Company decided to consolidate operations and
reduce its occupied square footage from approximately 2,000,000 square feet
under lease to approximately 1,200,000 square feet. The Company attempts to
dispose of property and equipment as it vacates the facilities. The original
estimate for write-down of property and equipment recorded in the second quarter
of 1998 included provisions for the estimated losses related to vacating certain
facilities in connection with the Company's Turnaround Plan. The initial charge
included an estimated provision for loss related to leasehold improvements
($12.5 million), office furniture ($11.8 million), computers and office
equipment ($4.0 million) and software ($1.0 million). In determining the
estimated fair values, the Company reviewed detailed asset listings for each
location to be vacated. Based upon the asset classification, acquisition date
and anticipated net proceeds, if any, upon disposition, as determined by the
Company, the assets were written down to their estimated fair value. The fair
values were determined based on the best information available in the
circumstances, including prior experience in disposing of similar assets and
discussions with potential purchasers of the assets. The Company expects to
dispose of all of the property and equipment throughout 1999. Additionally, the
Company anticipated and experienced a reduction in workforce of over 1,000
employees as a result of this consolidation and its administrative expense
reduction plan. A write-down of approximately $29.3 million, against
approximately $37.1 million of net book value, was established for the estimated
unrecoverable book value of furniture and equipment and leasehold improvements
no longer in use or to be disposed of as a result of these steps. The Company
expects to complete the disposition or sale of these assets by the end of the
fourth quarter of 1999. Depreciation on these assets was suspended as of June
30, 1998. The effect of this write-down was to reduce depreciation expense by
approximately $6.3 million for the second half of 1998.

    Severance and related costs

    The Company's Turnaround Plan contemplated significant changes in the
Company's senior management and, in connection therewith, fifteen members of
senior management were replaced and certain members of the former management
team were granted severance arrangements. As a result, the Company recorded
restructuring charges related to severance costs of $20.8 million in the first
quarter of 1998 and an additional $4.0 million in the second quarter of 1998 for
the former executives and managers. The noncash charges of approximately $11.2
million are attributable to the accelerated vesting of stock options of one
former executive. The December 31, 1998 balance represents contracted amounts
payable through the first half of 2001. The costs associated with the reduction
in workforce of over 1,000 employees were charged as incurred to marketing,



                                       82
<PAGE>   83
general and administrative expense during 1998. Severance arrangements with
these former employees did not carryover to future fiscal periods. As of
December 31, 1998 the entire reserve related to individuals who were no longer
employed with the Company.

    Costs of consolidating operations

    In connection with the consolidating of operations to reduce its occupied
square footage, restructuring charges totaling approximately $13.7 million were
recorded in the first half of 1998 for estimated costs associated with future
rental obligations (net of estimated sublease revenues), commissions, legal
costs, penalties and other expenses relating to disposition of excess space. The
Company will vacate its leased space located in Philadelphia, Pennsylvania;
Edison, New Jersey; Chicago, Illinois; Sarasota, Florida; and one of two
facilities in Milford, CT. In addition, the amount of leased space located in
Norwalk, Connecticut; New York, New York and White Plains, New York will be
significantly reduced. The Company recorded an additional restructuring charge
of approximately $4.5 million in the fourth quarter as a change in estimate as
the Company's experience in negotiating subleases and lease cancellations
through the fourth quarter indicates that costs will exceed previous estimates.
The remaining restructuring reserve of $17.7 million is comprised of the
following estimated costs associated with the disposition of excess space:


<TABLE>
<CAPTION>
<S>                                               <C>
               Gross future minimum rentals       $ 26.1 million
               Sublease income                    $(14.0) million
               Lease termination penalties        $  2.5 million
               Build-out costs                    $  1.5 million
               Brokers commissions                $  1.4 million
               Professional fees and other        $  0.2 million
</TABLE>



    Oxford has estimated future savings as a result of operations consolidation
of approximately $90 million, including $29 million in depreciation.

    The Company's relevant lease obligations extend to July 2005, but the
Company expects that a significant portion of these expenses will be incurred
prior to January 1, 2000.

(14)   WRITE-DOWNS OF STRATEGIC INVESTMENTS

    The Company disposed of its 47% interest in Health Partners, Inc. ("Health
Partners") in October 1997, and received 2,090,109 shares of common stock of FPA
Medical Management, Inc. ("FPAM") stock with a market value of approximately
$76.4. million, resulting in a pretax gain of approximately $63.1 million. As of
December 31, 1997, the market value of the FPAM stock had dropped to
approximately $38.4 million. At year-end 1997, the Company wrote down its
investment in FPAM by $38.0 million, thereby reducing the pretax 1997 gain on
the sale of Health Partners to approximately $25.2 million ($20.5 million after
taxes, or $.26 per share).

    During the second quarter of 1998, the Company sold 540,000 shares of FPAM
and recognized a loss of $8.1 million. In July 1998, FPAM filed for protection
under Chapter 11 of the U.S. Bankruptcy Code and the market value per share of
its common stock fell below one dollar. The Company wrote its remaining
investment in FPAM down to nominal value and recognized a loss in the second
quarter of 1998 of $30.2 million. The total 1998 recognized loss and write-down
of $38.3 million, or $.49 per share, has been recognized as write-downs of
strategic investments in the accompanying financial statements.

    The 1997 charges, resulted from a reduction in the level of future
investment in expansion markets and, accordingly, the Company wrote down its
investments in two subsidiaries (see note 11) and one affiliate (see note 12).
These write-downs have been shown as write-downs of strategic investments in the
accompanying financial statements and are summarized as follows:





                                       83
<PAGE>   84
<TABLE>
<CAPTION>
(In thousands)
--------------------------------------------------------------------------------
<S>                                                                      <C>
Compass PPA, Incorporated                                                $23,427
Riscorp Health Plans, Inc.                                                 3,894
St. Augustine Health Care, Inc.                                           14,297
--------------------------------------------------------------------------------
    Total                                                                $41,618
================================================================================
</TABLE>


(15)   DEFINED CONTRIBUTION PLAN

    The Company has a qualified defined contribution plan (the "Savings Plan")
that covers all employees with six months of service and at least a part-time
employment status as defined. The Savings Plan also provides that the Company
make matching contributions, up to certain limits, of the salary contributions
made by the participants. The Company's contributions to the Savings Plan were
approximately $2.8 million in 1998, $3.2 million in 1997 and $1.8 million in
1996.

(16)   REGULATORY AND CONTRACTUAL CAPITAL REQUIREMENTS

    Certain restricted investments at December 31, 1998 and 1997 are held on
deposit with various financial institutions to comply with federal and state
regulatory capital requirements. As of December 31, 1998, approximately $44.8
million was so restricted and is shown as restricted investments in the
accompanying balance sheet. With respect to Oxford NY, the minimum amount of
surplus required is based on a formula established by the State of New York.
These statutory surplus requirements amounted to approximately $130 million and
$155.6 million at December 31, 1998 and 1997, respectively.

    In addition to the foregoing requirements, the Company's HMO and insurance
subsidiaries are subject to certain restrictions on their abilities to make
dividend payments, loans or other transfers of cash to Oxford. Such restrictions
limit the use of any cash generated by the operations of these entities to pay
obligations of Oxford and limit the Company's ability to declare and pay
dividends.

    During 1998, the Company made cash contributions to its HMO and insurance
subsidiaries of approximately $537.5 million. The capital contributions were
made to ensure that each subsidiary had sufficient surplus as of December 31,
1998 under applicable regulations after giving effect to operating losses and
reductions to surplus resulting from the nonadmissibility of certain assets.

    The Company is subject to ongoing examinations with respect to financial
condition and market conduct for its HMO and insurance subsidiaries. In
connection with these financial examinations, the NYSID is requiring the Company
to obtain written acknowledgements of certain advances made in prior years in
respect to delayed claims, and the New Jersey Department of Banking and
Insurance is requiring the Company to provide collateral for repayment of the
advances by setting aside in trust at the parent company funds equal to the
advances on the New Jersey subsidiary's statutory financial statements. If the
Company is unable to receive written acknowledgements or fails to provide such
collateral, there can be no assurance that the insurance regulators will
continue to recognize such advances as admissible assets for regulatory
purposes.

(17)   CONCENTRATIONS OF CREDIT RISK

    Concentrations of credit risk with respect to premiums receivable are
limited due to the large number of employer groups comprising the Company's
customer base. As of December 31, 1998 and 1997, the Company had no significant
concentrations of credit risk. Financial instruments which potentially subject
the Company to concentrations of such credit risk consist primarily of
short-term investments in equity securities, obligations of the United States
government, certain state governmental entities and high-grade corporate bonds
and notes. These investments are managed by professional investment managers
within the guidelines established by the Board of Directors, which, as a matter
of policy, limit the amounts which may be invested in any one issuer and
prescribe certain minimum investee company criteria. The Company's commercial
and Medicare business is



                                       84
<PAGE>   85
concentrated in New York, New Jersey and Connecticut, with more than 80% of its
tri-state premium revenues received from New York business. As a result, changes
in regulatory, market or health care provider conditions in any of these states,
particularly New York, could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, the
Company's revenue under its contracts with HCFA represented 21.9% of its premium
revenue earned during 1998.

(18)   CONTINGENCIES

    Following the October 27, 1997 decline in the price per share of the
Company's common stock, more than fifty purported securities class action
lawsuits were filed against the Company and certain of its officers and
directors in the United States District Courts for the Southern and Eastern
Districts of New York, the District of Connecticut and the District of Arkansas.
In addition, purported shareholder derivative actions were filed against the
Company, its directors and certain of its officers in the United States District
Courts for the Southern District of New York and the District of Connecticut,
and Connecticut Superior Court. The purported securities class and derivative
actions assert claims arising out of the October 27 decline in the price per
share of the Company's common stock. The purported class actions are now all
consolidated before Judge Charles L. Brieant of the United States District Court
for the Southern District of New York. The purported federal derivative actions
have been consolidated before Judge Brieant for all purposes, and any discovery
in the Connecticut derivative actions will be coordinated with discovery in the
federal derivative actions under the supervision of Judge Brieant. The State
Board of Administration of Florida has filed an individual action against the
Company and certain of its officers and directors, which is also now pending in
the United States District Court for the Southern District of New York,
asserting claims arising from the October 27 decline in the price per share of
the Company's common stock. Additional purported securities class, shareholder
derivative, and individual actions may be filed against the Company and certain
of its officers and directors asserting claims arising from the October 27
decline in the price per share of the Company's common stock. Although the
outcome of these actions cannot be predicted at this time, the Company believes
that the defendants have substantial defenses to the claims asserted in the
complaints and intends to defend the actions vigorously. In addition, the
Company is currently being investigated and is undergoing examinations by
various state and federal agencies, including the Securities and Exchange
Commission, various state insurance departments, and the New York State Attorney
General. The outcome of these investigations and examinations cannot be
predicted at this time.

    The Company also is involved in other legal actions in the normal course of
its business, some of which seek monetary damages, including claims for punitive
damages, which may not be covered by insurance. The Company believes any
ultimate liability associated with these other legal actions would not have a
material adverse effect on the Company's consolidated financial position or
results of operations.

(19)   FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:

    Cash and cash equivalents: The carrying amount approximates fair value based
on the short-term maturities of these instruments.

    Short-term and restricted investments: Fair values for fixed maturity
securities are based on quoted market prices, where available. For fixed
maturity securities not actively traded, fair values are estimated using values
obtained form independent pricing services.

    Long-term debt: The carrying amount of long-term debt, including the current
portion, approximates fair value as the interest rates of outstanding debt are
similar to like borrowing arrangements at December 31, 1998.

    Preferred stock: The carrying amount of preferred stock approximates fair
value as the stated dividend rates are similar to like investments at December
31, 1998 after the impact of discounting for the value attributed to the
detachable warrants.


                                       85
<PAGE>   86
(20)   GOVERNMENT PROGRAMS

    As a risk contractor for Medicare programs, the Company is subject to
regulations covering operating procedures. During 1998, 1997, and 1996, the
Company had premiums earned of $1.26 billion, $1.24 billion and $850.7 million,
respectively, associated with Medicare and Medicaid.

    The Company has executed agreements with third-parties to transfer a
substantial portion of the risk of providing health care and administrative
services to certain of the participants in its Medicare programs. However, the
Company remains primarily liable to pay the cost of covered services provided to
its Medicare members.

    The laws and regulations governing risk contractors are complex and subject
to interpretation. The Health Care Financing Administration ("HCFA") monitors
the Company's operations to ensure compliance with the applicable laws and
regulations. There can be no assurance that administrative or systems issues or
the Company's current or future provider arrangements will not result in adverse
actions by HCFA.

(21)   YEAR 2000 READINESS

    The Company has completed its assessment of its computer systems and
facilities that could be affected by the "Year 2000" date conversion and is
continuing to carry out the implementation plan to resolve the Year 2000 date
issue which it developed as a result of the assessment. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize the date "00" as the year 1900 rather than
the year 2000. This could result in system failure or miscalculations. The
Company is utilizing and will utilize both internal and external resources to
identify, correct or reprogram, and test the systems for Year 2000 compliance.
The Company has divided its Year 2000 compliance program into the following
phases: assessment, planning, remediation and testing. As of December 31, 1998,
the Company was 80% complete with its Year 2000 compliance program and
anticipates being complete with all phases of the program by the second quarter
of 1999. The Company's Year 2000 compliance program requires remediation of
certain programs within particular time frames in order to avoid disruption of
the Company's operations. These time frames include certain dates throughout
1999. Although the Company believes it will complete the remediation of these
programs within the applicable time frames, there can be no assurance that such
remediation will be completed or that the Company's operations will not be
disrupted to some degree.

    The Company is communicating with certain material vendors to determine the
extent to which the Company may be vulnerable to such vendors' failure to
resolve their own Year 2000 issues. The Company is attempting to mitigate its
risk with respect to the failure of such vendors to be Year 2000 compliant by,
among other things, requesting project plans, status reports and Year 2000
compliance certifications or written assurances from its material vendors,
including certain software vendors, business partners, landlords and suppliers.
The effect of such vendors' noncompliance, if any, is not reasonably estimable
at this time.

    The Company is required to submit periodic reports regarding Year 2000
compliance to certain of the regulatory authorities which regulate its business.
The Company is in compliance with such Year 2000 reporting requirements. Such
regulatory authorities have also asked the Company to submit to certain audits
regarding its Year 2000 compliance.

    The Company is in the process of completing the modifications of its
computer systems to accommodate the Year 2000 and will undertake testing to
ensure its systems and applications will function properly after December 31,
1999. The Company currently expects this modification and testing to be
completed in a time frame to avoid any material adverse effect on operations.
The Company has deferred certain other information technology initiatives to
concentrate on its Year 2000 compliance efforts but the Company believes that
such deferral is not reasonably likely to have a material effect on the
Company's financial condition or results of operations. The Company's inability
to complete Year 2000 modifications on a timely basis or the inability of other
companies with which the Company does business to complete their Year 2000
modifications on a timely basis could adversely affect the Company's operations.



                                       86
<PAGE>   87
    The Company expects to incur associated expenses of approximately $5 million
in 1999 to complete this effort. As of December 31, 1998, the Company had
incurred approximately $9.8 million of expenses in connection with its Year 2000
compliance efforts. The costs of the project and the date on which the Company
plans to complete the necessary Year 2000 modifications are based on
management's best estimate, which include assumptions of future events including
the continued availability of certain resources. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans.

    The Company has contracted with an external consulting firm to assist in the
generation of a Year 2000 contingency plan in the event compliance is not
achieved. In connection therewith, the Company has begun to identify reasonably
likely scenarios which could arise in the event of the Company's Year 2000
noncompliance. The Company has completed a contingency strategy and will develop
detailed plans to support this strategy. The Company expects to be substantially
complete with these detailed plans by the second quarter of 1999. However, there
can be no assurance that this contingency plan will be completed on a timely
basis or that such a plan will protect the Company from experiencing a material
adverse effect on its financial condition or results of operations.

    Potential consequences of the Company's failure to timely resolve its Year
2000 issues could include, among others: (i) the inability to accurately and
timely process claims, enroll and bill groups and members, pay providers, record
and disclose accurate data and perform other core functions; (ii) increased
scrutiny by regulators and breach of contractual obligations; and (iii)
litigation in connection therewith.

(22)   QUARTERLY INFORMATION (UNAUDITED)

    Tabulated below are certain data for each quarter of 1998 and 1997.


<TABLE>
<CAPTION>
                                                                                          Quarter Ended
                                                            ------------------------------------------------------------------------
(In thousands, except membership and per share amounts)        Mar. 31             Jun. 30            Sep. 30             Dec. 31
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>                 <C>                 <C>
Year ended December 31, 1998:
    Net operating revenues                                  $ 1,218,087         $ 1,160,263         $ 1,147,134         $ 1,104,682
    Operating expenses                                        1,292,470           1,672,023           1,188,848           1,124,209
    Net loss                                                    (45,302)           (507,620)            (35,922)             (7,948)
    Net loss attributable to common shares                      (45,302)           (513,338)            (46,989)            (18,831)


    Per common and common equivalent share:
      Basic                                                 $     (0.57)        $     (6.41)        $     (0.58)        $     (0.23)
      Diluted                                               $     (0.57)        $     (6.41)        $     (0.58)        $     (0.23)

    Membership at quarter-end                                 2,095,700           2,004,700           1,924,900           1,881,400

Year ended December 31, 1997:
    Net operating revenues                                  $   973,191         $ 1,047,550         $ 1,049,160         $ 1,109,915
    Operating expenses                                          927,520             998,712           1,196,198           1,573,355
    Net earnings (loss)                                          34,379              37,175             (78,157)           (284,685)


    Per common and common equivalent share:
      Basic                                                 $      0.44         $      0.48         $     (0.99)        $     (3.58)
      Diluted                                               $      0.42         $      0.45         $     (0.99)        $     (3.58)

    Membership at quarter-end                                 1,738,800           1,833,500           1,942,600           2,008,100
</TABLE>



    Net operating revenues include premiums earned and third-party
administration fees, net. Operating expenses include health care services and
marketing, general administrative expenses, and restructuring charges and
write-downs of strategic investments and credits.


                                       87
<PAGE>   88
    Restructuring charges related to severance and operations consolidation
costs increased operating expenses by $25.0 million in the first quarter of
1998.

    Results of operations for the second quarter of 1998 reflects restructuring
charges of $98.5 million. These charges include a $55.7 million provision for
loss on disposal of noncore businesses and unconsolidated affiliates; a $29.3
million write-down of property and equipment, primarily leasehold improvements;
and a $13.5 million provision for operations consolidation and severance costs
(see note 13). Results for the second quarter of 1998 also reflect a premium
deficiency reserve of $51.0 million for losses on government contracts (see note
2) and write-downs of strategic investments of $38.3 million related to the
write-down of the Company's investment in FPA Medical Management, Inc. (see note
14).

    The second quarter 1998 amount shown for operating expenses differs from
that included in the Company's Form 10-Q for the period ended June 30, 1998 due
to the reclassification to income tax expense of $6.0 million which was
originally included in restructuring charges.

    Results of operations for the fourth quarter of 1998 includes a net
restructuring credit of $9.8 million which represents a change in estimate of
the restructuring charges incurred in the second quarter of 1998 (see note 13).

    Write-downs of strategic investments related to write-downs of subsidiaries
and unconsolidated affiliates increased operating expenses by $41.6 million in
the fourth quarter of 1997 (see note 14).



                                       88
<PAGE>   89
                    INDEPENDENT AUDITORS REPORT ON SCHEDULES

    We have audited the consolidated financial statements of Oxford Health
Plans, Inc. and subsidiaries as of December 31, 1998, and for the year then
ended, and have issued our report thereon dated March 9, 1999. Our audit also
included the financial statement schedules listed in Item 14(a) of this Annual
Report on Form 10-K. These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit.

    In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.



                                                              Ernst & Young LLP

Stamford, Connecticut
March 9, 1999




                                       89
<PAGE>   90
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Oxford Health Plans, Inc.:

    Under date of February 23, 1998, we reported on the consolidated balance
sheet of Oxford Health Plans, Inc. and subsidiaries as of December 31, 1997, and
the related consolidated statements of operations, shareholders' equity
(deficit) and comprehensive earnings (loss) and cash flows for each of the years
in the two-year period ended December 31, 1997, which are included in the annual
report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules in the annual report on Form 10-K. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.

    In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.


     KPMG LLP


Stamford, Connecticut
February 23, 1998





                                       90
<PAGE>   91
\

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            CONDENSED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
                                 (In thousands)


<TABLE>
<CAPTION>
Current assets:                                                            1998              1997
                                                                        ---------         ---------
<S>                                                                     <C>               <C>
   Cash and cash equivalents                                            $ 225,248         $   1,657
   Investments - available-for-sale                                         4,575            38,442
   Receivables, net                                                         4,309             3,844
   Refundable income taxes                                                     --           120,439
   Deferred income taxes                                                       --            38,092
   Other current assets                                                     5,000             5,409
---------------------------------------------------------------------------------------------------
     Total current assets                                                 239,132           207,883

Property and equipment, net                                               103,105           131,606
Investments in and advances to subsidiaries, net                          301,657            51,089
Deferred income taxes                                                      40,681            86,406
Other assets                                                               13,496            21,853
---------------------------------------------------------------------------------------------------
     Total assets                                                       $ 698,071         $ 498,837
===================================================================================================


Current liabilities:
   Accounts payable, accrued expenses and medical claims payable        $ 195,568         $ 140,562
   Current portion of capital lease obligations                            15,938                --
   Deferred income taxes                                                        4             9,059
---------------------------------------------------------------------------------------------------
     Total current liabilities                                            211,510           149,621
---------------------------------------------------------------------------------------------------

Long-term debt                                                            350,000                --
Obligations under capital leases                                           18,850                --
Redeemable preferred stock                                                298,816                --

Shareholders' equity (deficit):
   Common stock                                                               805               795
   Additional paid-in capital                                             506,243           437,653
   Retained earnings (deficit)                                           (692,290)          (95,498)
   Accumulated other comprehensive earnings                                 4,137             6,266
---------------------------------------------------------------------------------------------------
     Total shareholders' equity (deficit)                                (181,105)          349,216
---------------------------------------------------------------------------------------------------
     Total liabilities and shareholders' equity (deficit)               $ 698,071         $ 498,837
===================================================================================================
</TABLE>


                                       91
<PAGE>   92
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
                       CONDENSED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (In thousands)


<TABLE>
<CAPTION>
                                                         1998              1997              1996
                                                       ---------         ---------         ---------
<S>                                                    <C>               <C>               <C>
Revenues-management fees and investment and
   other income, net                                   $ 696,119         $ 697,426         $ 494,500
----------------------------------------------------------------------------------------------------

Expenses:
   Health care services                                   34,627                --
   Marketing, general and administrative                 713,021           702,136           474,215
   Interest and other financing charges                   43,038                --                --
   Restructuring charges                                 113,657                --                --
   Write-downs of strategic investments                       --            41,618                --
----------------------------------------------------------------------------------------------------
     Total expenses                                      904,343           743,754           474,215
----------------------------------------------------------------------------------------------------

Operating earnings (loss)                               (208,224)          (46,328)           20,285

Equity in net earnings (losses) of subsidiaries         (401,160)         (265,439)           91,214
Equity in net loss of affiliate                               --            (1,140)           (4,600)
Gain on sale of affiliate                                     --            25,168                --
----------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes                     (609,384)         (287,739)          106,899
Income tax expense (benefit)                             (12,592)            3,549             7,276
----------------------------------------------------------------------------------------------------
Net earnings (loss)                                    $(596,792)        $(291,288)        $  99,623
====================================================================================================
</TABLE>

   During 1998, the Registrant received a cash dividend from one consolidated
   subsidiary aggregating $9.6 million.


                                       92
<PAGE>   93
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
                       CONDENSED STATEMENTS OF CASH FLOWS
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                      1998              1997              1996
                                                                    ---------         ---------         ---------
<S>                                                                 <C>               <C>               <C>
Net cash provided (used) by operating activities                    $  88,212         $ (92,956)        $  99,321
-----------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
   Capital expenditures                                               (34,895)          (89,846)          (45,820)
   Sale or maturity of available-for-sale securities                       --           275,872            78,923
   Purchase of available-for-sale investments                          (4,563)         (143,873)         (127,442)
   Acquisitions and other investments                                  (1,312)          (33,876)          (10,295)
   Other, net                                                          20,675            (2,437)           (3,078)
-----------------------------------------------------------------------------------------------------------------
     Net cash provided (used) by investing activities                 (20,095)            5,840          (107,712)
-----------------------------------------------------------------------------------------------------------------

Cash flow from financing activities:
   Proceeds from issuance of common stock                              10,000                --           220,539
   Proceeds from exercise of stock options                              2,655            21,264            21,215
   Proceeds of preferred stock and warrants, net of issuance
      expenses                                                        338,148                --                --
   Proceeds of notes and loans payable                                550,000                --                --
   Redemption of notes and loans payable                             (200,000)               --                --
   Debt issuance expenses                                             (11,793)               --                --
   Investments in and advances to subsidiaries, net                  (528,073)           65,953          (233,423)
   Payments under capital lease obligations                            (5,463)               --                --
-----------------------------------------------------------------------------------------------------------------
     Net cash provided by financing activities                        155,474            87,217             8,331
-----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                  223,591               101               (60)
Cash and cash equivalents at beginning of year                          1,657             1,556             1,616
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                            $ 225,248         $   1,657         $   1,556
=================================================================================================================
</TABLE>


                                       93
<PAGE>   94
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (In thousands)


<TABLE>
<CAPTION>
                Column A                      Column B                    Column C             Column D         Column E
----------------------------------------------------------------------------------------------------------------------------
                                                                         Additions
                                                               ----------------------------
                                             Balance at         Charged to       Charged to                      Balance at
                                             Beginning of        Cost and          Other                          End of
              Description                      Period            Expenses         Accounts     Deductions         Period
----------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                <C>              <C>           <C>                <C>
Year Ended December 31, 1998:
   Estimated uncollectible amount of
     notes and accounts receivable            $   6,514          $  35,209        $      --     $   3,964          $  37,759
                                              =========          =========        =========     =========          =========

   Estimated uncollectible amount of
     claims advances                          $  10,000          $  25,000        $      --     $      --          $  35,000
                                              =========          =========        =========     =========          =========

Year Ended December 31, 1997:
   Estimated uncollectible amount of
     notes and accounts receivable            $   5,117          $  15,000        $      --     $  13,603          $   6,514
                                              =========          =========        =========     =========          =========

   Estimated uncollectible amount of
     claims advances                          $      --          $  10,000        $      --     $      --          $  10,000
                                              =========          =========        =========     =========          =========

Year Ended December 31, 1996:
   Estimated uncollectible amount of
     notes and accounts receivable            $   3,029          $   4,505        $      --     $   2,417          $   5,117
                                              =========          =========        =========     =========          =========
</TABLE>


                                       94
<PAGE>   95
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                     DESCRIPTION OF DOCUMENT
-----------                     -----------------------
<S>         <C>   <C>
     2      --    Agreement of Plan and Merger, dated as of March 30, 1995, by
                  and among Oxford Health Plans, Inc., OHP Acquisition
                  Corporation and OakTree Health Plan, Inc., incorporated by
                  reference to the Registrant's Registration Statement on Form
                  S-3 (File No. 33-92006)

     3(a)   --    Second Amended and Restated Certificate of Incorporation, as
                  amended, of the Registrant, previously filed with and
                  incorporated by reference to the Registrant's Form 10-K for
                  the year ended December 31, 1998, filed on March 19, 1999
                  (File No. 0-19442)

     3(b)   --    Amended and Restated By-laws of the Registrant, incorporated
                  by reference to Exhibit 3(ii) of the Registrant's Form 10-Q
                  for the quarterly period ended September 30, 1998 (File No.
                  0-19442)

     4      --    Form of Stock Certificate, incorporated by reference to
                  Exhibit 4 of the Registrant's Registration Statement on Form
                  S-1 (File No. 33-40539)

     10(a)  --    Employment Agreement, dated August 14, 1996, between the
                  Registrant and Stephen F. Wiggins, incorporated by reference
                  to Exhibit 10(a) of the Registrant's Form 10-Q for the
                  quarterly period ended September 30, 1996 (File No. 0-19442)

     10(b)  --    Employment Agreement, dated August 14, 1996, between the
                  Registrant and William M. Sullivan, incorporated by reference
                  to Exhibit 10(b) of the Registrant's Form 10-Q for the
                  quarterly period ended September 30, 1996 (File No. 0-19442)

     10(c)  --    Employment Agreement, dated August 14, 1996, between the
                  Registrant and Jeffery H. Boyd, incorporated by reference to
                  Exhibit 10(c) of the Registrant's Form10-Q for the quarterly
                  period ended September 30, 1996 (File No. 0-19442)

     10(d)  --    Employment Agreement, dated August 14, 1996, between the
                  Registrant and Robert M. Smoler, incorporated by reference to
                  Exhibit 10(e) of the Registrant's Form 10-Q for the quarterly
                  period ended September 30, 1996 (File No. 0-19442)

     10(e)  --    Employment Agreement, dated August 14, 1996, between the
                  Registrant and David B. Snow, Jr., incorporated by reference
                  to Exhibit 10(f) of the Registrant's Form 10-Q for the
                  quarterly period ended September 30, 1996 (File No. 0-19442)

     10(f)  --    Employment Agreement, dated August 14, 1996 between the
                  Registrant and Andrew B. Cassidy, incorporated by reference to
                  Exhibit 10(d) of the Registrant's Form 10-Q for the quarterly
                  period ended September 30, 1996 (File No. 0-19442)

     10(g)  --    1991 Stock Option Plan, as amended, incorporated by reference
                  to Exhibit 10(h) of the Registrant's Annual Report on Form
                  10-K for the year ended December 31, 1995 (File No. 0-19442)

     10(h)  --    Letter Agreement, dated April 13, 1990, between the Registrant
                  and Lincoln National Administrative Services Corporation,
                  incorporated by reference to Exhibit 10(p) of the Registrant's
                  Registration Statement on Form S-1 (File No. 33-40539)

     10(i)  --    Incentive Compensation Plan, adopted June 7, 1991,
                  incorporated by reference to Exhibit 10(n) of the Registrant's
                  Registration Statement on Form S-1 (File No. 33-40539)

     10(j)  --    Oxford Health Plans, Inc. 401(k) Plan, as amended,
                  incorporated by reference to Exhibit 10(k) of the Registrant's
                  Annual Report on Form 10-K for the year ended December 31,
                  1995 (File No. 0-19442)

     10(k)  --    Non-Employee Directors Stock Option Plan, as amended,
                  incorporated by reference to Exhibit 10(l)(ii) of the
                  Registrant's Annual Report on Form 10-K for the year ended
                  December 31, 1994 (File No. 0-19442)

     10(l)  --    Letter Agreement, dated April 18, 1990, between the Registrant
                  and Phoenix Mutual Life Insurance Company, incorporated by
                  reference to Exhibit 10(q) of the Registrant's Registration
                  Statement on Form S-1 (File No. 33-40539)

     10(m)  --    Securities Purchase Agreement among Health Partners, Inc.,
                  Foxfield Ventures, Inc., the Registrant and certain management
                  investors, dated May 18, 1994, incorporated by reference to
                  Exhibit 10 of the Registrant's Form 10-Q for the quarterly
                  period ended June 30, 1994 (File No. 0-19442)

     10(n)  --    Agreement and Plan of Merger by and among FPA Medical
                  Management, Inc., FPA Acquisition Corp. and Health Partners,
                  Inc. dated as of July 1, 1997, incorporated by reference to
                  Exhibit 10(n) of the Registrant's Annual Report on Form 10-K/A
                  for the period ended December 31, 1997 (File No. 0-19442)
</TABLE>


                                       95
<PAGE>   96
                            EXHIBIT INDEX (CONTINUED)

<TABLE>
<CAPTION>
EXHIBIT NO.                     DESCRIPTION OF DOCUMENT
-----------                     -----------------------
<S>         <C>   <C>
     10(o)  --    Bridge Securities Purchase Agreement, dated as of February 6,
                  1998, between the Registrant and Oxford Funding, Inc.,
                  incorporated by reference to Exhibit 10(o) of the Registrant's
                  Annual Report on Form 10-K/A for the period ended December 31,
                  1997 (File No. 0-19442)

     10(p)  --    Security Agreement, dated as of February 6, 1998, between the
                  Registrant and Oxford Funding, Inc., incorporated by reference
                  to Exhibit 10(p) of the Registrant's Annual Report on Form
                  10-K/A for the period ended December 31, 1997 (File No.
                  0-19442)

     10(q)  --    Amendment No. 1, dated as of March 30, 1998, to the Bridge
                  Securities Purchase Agreement, dated as of February 6, 1998,
                  between the Registrant and Oxford Funding, Inc., incorporated
                  by reference to Exhibit 10(q) of the Registrant's Annual
                  Report on Form 10-K/A for the period ended December 31, 1997
                  (File No. 0-19442)

     10(r)  --    Investment Agreement, dated as of February 23, 1998, between
                  TPG Oxford LLC and the Registrant., incorporated by reference
                  to Exhibit 10(r) of the Registrant's Annual Report on Form
                  10-K/A for the period ended December 31, 1997 (File No.
                  0-19442)

     10(s)  --    Registration Rights Agreement, dated as of February 23, 1998,
                  between TPG Oxford LLC and the Registrant, incorporated by
                  reference to Exhibit 10(s) of the Registrant's Annual Report
                  on Form 10-K/A for the period ended December 31, 1997 (File
                  No. 0-19442)

     10(t)  --    Employment Agreement, dated as of February 23, 1998, between
                  the Registrant and Dr. Norman C. Payson, incorporated by
                  reference to Exhibit 10(t) of the Registrant's Annual Report
                  on Form 10-K/A for the period ended December 31, 1997 (File
                  No. 0-19442)

     10(u)  --    Oxford Health Plans, Inc. Stock Option Agreement, dated
                  February 23, 1998, by and between Dr. Norman C. Payson and the
                  Registrant, incorporated by reference to Exhibit 10(u) of the
                  Registrant's Annual Report on Form 10-K/A for the period ended
                  December 31, 1997 (File No. 0-19442)

     10(v)  --    Amendment Number 1 to Employment Agreement, dated as of
                  December 9, 1998, by and between the Registrant and Norman C.
                  Payson, M.D., previously filed with and incorporated by
                  reference to the Registrant's Form 10-K for the year ended
                  December 31, 1998, filed on March 19, 1999 (File No. 0-19442)

     10(w)  --    Amendment, dated as of February 23, 1998, to Employment
                  Agreement between the Registrant and William M. Sullivan,
                  incorporated by reference to Exhibit 10(v) of the Registrant's
                  Annual Report on Form 10-K/A for the period ended December 31,
                  1997 (File No. 0-19442)

     10(x)  --    Amendment, dated as of February 23, 1998, to Employment
                  Agreement between the Registrant and Jeffery H. Boyd,
                  incorporated by reference to Exhibit 10(w) of the Registrant's
                  Annual Report on Form 10-K/A for the period ended December 31,
                  1997 (File No. 0-19442)

     10(y)  --    Employment Agreement, dated as of February 16, 1998, between
                  the Registrant and Kevin F. Hickey, incorporated by reference
                  to Exhibit 10(x) of the Registrant's Annual Report on Form
                  10-K/A for the period ended December 31, 1997 (File No.
                  0-19442)

     10(z)  --    Retirement, Consulting and Non-Competition Agreement, dated as
                  of February 23, 1998, between the Registrant and Stephen F.
                  Wiggins, incorporated by reference to Exhibit 10(y) of the
                  Registrant's Annual Report on Form 10-K/A for the period ended
                  December 31, 1997 (File No. 0-19442)

     10(aa) --    Employment Agreement, dated as of March 30, 1998, by and
                  between the Registrant and Marvin P. Rich, incorporated by
                  reference to Exhibit 10(z) of the Registrant's Annual Report
                  on Form 10-K/A for the period ended December 31, 1997 (File
                  No. 0-19442)

     10(bb) --    Purchase Agreement, dated May 7, 1998, between Registrant and
                  Donaldson, Lufkin & Jenrette Securities Corporation,
                  incorporated by reference to Exhibit 10(a) of the Registrant's
                  Form 10-Q for the quarterly period ended March 31, 1998 (File
                  No. 0-19442)

     10(cc) --    Registration Rights Agreement, dated May 13, 1998, between
                  Registrant and Donaldson, Lufkin & Jenrette Securities
                  Corporation, incorporated by reference to Exhibit 10(b) of the
                  Registrant's Form 10-Q for the quarterly period ended March
                  31, 1998 (File No. 0-19442)
</TABLE>


                                       96
<PAGE>   97
                            EXHIBIT INDEX (CONTINUED)


<TABLE>
<CAPTION>
EXHIBIT NO.                     DESCRIPTION OF DOCUMENT
-----------                     -----------------------
<S>         <C>   <C>
     10(dd) --    Indenture of Registrant, dated May 13, 1998, between
                  Registrant and the Chase Manhattan Bank, as Trustee, including
                  for of 11% Senior Notes, incorporated by reference to Exhibit
                  10(c) of the Registrant's Form 10-Q for the quarterly period
                  ended March 31, 1998 (File No. 0-19442)

     10(ee) --    Term Loan Agreement, dated May 13, 1998, among Registrant,
                  Lenders listed therein, DLJ Capital Funding, Inc. and IBJ
                  Schroder Bank & Trust Company, including exhibits,
                  incorporated by reference to Exhibit 10(d) of the Registrant's
                  Form 10-Q for the quarterly period ended March 31, 1998 (File
                  No. 0-19442)

     10(ff) --    Amendment, dated June 26, 1998, to Employment Agreement
                  between the Registrant and William M. Sullivan, incorporated
                  by reference to Exhibit 10(a) of the Registrant's Form 10-Q
                  for the quarterly period ended June 30, 1998 (File No.
                  0-19442)

     10(gg) --    Amendment, dated June 23, 1998, to Employment Agreement
                  between the Registrant and Jeffery H. Boyd, incorporated by
                  reference to Exhibit 10(b) of the Registrant's Form 10-Q for
                  the quarterly period ended June 30, 1998 (File No. 0-19442)

     10(hh) --    Employment Agreement, dated as of June 9, 1998, between the
                  Registrant and Yon Y. Jorden, incorporated by reference to
                  Exhibit 10(c) of the Registrant's Form 10-Q for the quarterly
                  period ended June 30, 1998 (File No. 0-19442)

     10(ii) --    Employment Agreement, dated as of April 1, 1998, between the
                  Registrant and Alan Muney, M.D., M.H.A., incorporated by
                  reference to Exhibit 10(d) of the Registrant's Form 10-Q for
                  the quarterly period ended June 30, 1998 (File No. 0-19442)

     10(jj) --    Letter Agreement, dated September 28, 1998, between the
                  Registrant and Fred F. Nazem, incorporated by reference to
                  Exhibit 10(a) of the Registrant's Form 10-Q for the quarterly
                  period ended September 30, 1998 (File No. 0-19442)

     10(kk) --    Letter Agreement, dated July 24, 1998, between the Registrant
                  and Benjamin Safirstein, M.D., incorporated by reference to
                  Exhibit 10(b) of the Registrant's Form 10-Q for the quarterly
                  period ended September 30, 1998 (File No. 0-19442)

     10(ll) --    Amendment Number 1 to Investment Agreement, dated as of May
                  13, 1998 between TPG Oxford LLC and the Registrant, previously
                  filed with and incorporated by reference to the Registrant's
                  Form 10-K for the year ended December 31, 1998, filed on March
                  19, 1999 (File No. 0-19442)

     10(mm) --    Amendment Number 2 to Investment Agreement, dated as of August
                  27, 1998, by and between TPG Partners II, L.P. and the
                  Registrant, previously filed with and incorporated by
                  reference to the Registrant's Form 10-K for the year ended
                  December 31, 1998, filed on March 19, 1999 (File No. 0-19442)

     10(nn) --    Amendment Number 3 to Investment Agreement, dated as of
                  November 19, 1998, by and between TPG Partners II, L.P. and
                  the Registrant, previously filed with and incorporated by
                  reference to the Registrant's Form 10-K for the year ended
                  December 31, 1998, filed on March 19, 1999 (File No. 0-19442)

     10(oo) --    Oxford Health Plans, Inc. 1996 Management Incentive
                  Compensation Plan, previously filed with and incorporated by
                  reference to the Registrant's Form 10-K for the year ended
                  December 31, 1998, filed on March 19, 1999 (File No. 0-19442)

     10(pp) --    Amendment, dated December 10, 1998, to Employment Agreement
                  between the Registrant and Jeffery H. Boyd, previously filed
                  with and incorporated by reference to the Registrant's Form
                  10-K for the year ended December 31, 1998, filed on March 19,
                  1999 (File No. 0-19442)

     10(qq) --    Amendment, dated December 9, 1998, to Employment Agreement
                  between the Registrant and Norman C. Payson, M.D. , previously
                  filed with and incorporated by reference to the Registrant's
                  Form 10-K for the year ended December 31, 1998, filed on March
                  19, 1999 (File No. 0-19442)

     10(rr) --    Share Exchange Agreement, dated as February 13, 1999 by and
                  among TPG Partners II, L.P., TPG Investors II, L.P., TPG
                  Parallel II, L.P., Chase Equity Associates, L.P., Oxford
                  Acquisition Corp. and the DLJ Entities listed therein,
                  previously filed with and incorporated by reference to the
                  Registrant's Form 10-K for the year ended December 31, 1998,
                  filed on March 19, 1999 (File No. 0-19442)

     16     --    Letter from KPMG Peat Marwick LLP regarding change in
                  certifying accountant of Registrant, incorporated by reference
                  to Exhibit 16 of the Registrant's Form 8-K dated June 2, 1998
                  (File No. 0-19442)
</TABLE>


                                       97
<PAGE>   98
                           EXHIBIT INDEX (CONTINUED)


<TABLE>
<CAPTION>
EXHIBIT NO.                     DESCRIPTION OF DOCUMENT
-----------                     -----------------------
<S>         <C>   <C>
     21     --    Subsidiaries of the Registrant, previously filed with and
                  incorporated by reference to the Registrant's Form 10-K for
                  the year ended December 31, 1998, filed on March 19, 1999
                  (File No. 0-19442)

     23(a)  --    Consent of Ernst & Young LLP*

     23(b)  --    Consent of KPMG LLP*
</TABLE>

--------------
     *   Filed herewith.


                                       98