<PAGE>   1

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

                                    FORM 10-K

(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, 1997

                                       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.
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             (Exact name of registrant as specified in its charter)

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

800 Connecticut Avenue, Norwalk, Connecticut                06854
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  (Address of principal executive offices)                (Zip Code)

                                 (203) 852-1442
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              (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. [ ]

As of March 24, 1998, there were 79,507,439 shares of common stock issued and
outstanding. The aggregate market value of such stock held by nonaffiliates, as
of that date, was $1,228,350,000.

                       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 providing health benefit plans in New York, New Jersey, Pennsylvania,
Connecticut, New Hampshire, Florida, and Illinois. 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 and Medicaid plans, third-party administration
of employer-funded benefit plans ("self-funded health plans") and dental 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.

      In July 1995, a wholly-owned subsidiary of the Company merged with OakTree
Health Plan, Inc. ("OakTree"), a Philadelphia-based HMO. The merger was
accounted for as a pooling of interests, and accordingly, all data in the
paragraphs that follow have been restated to include the operations and accounts
of OakTree for all periods prior to the merger.

      The Company 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"), Oxford Health Plans (NH),
Inc. ("Oxford NH"), Oxford Health Plans (PA), Inc. ("Oxford PA"), Oxford Health
Plans (FL), Inc. ("Oxford FL"), and through Oxford Health Insurance, Inc.
("OHI") and Oxford Health Plans (IL), Inc. ("Oxford IL"), the Company's health
insurance subsidiaries. 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. Oxford IL is
licensed by the Illinois Department of Insurance as an accident and health
insurance company with authority to offer HMO products. 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 1997 and the ten
largest employer groups contributed 4.4% of total premiums earned during 1997.
The Company's business is managed through regional management structures in New
York, New Jersey, Connecticut, New Hampshire, Florida, Illinois and Pennsylvania
(including southern New Jersey counties in the Philadelphia metropolitan area).

Recent Developments

      Net Losses

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

      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 ("DLJ"), 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. For a description of terms of the Bridge Notes, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". The Company intends to retire
the Bridge Notes with a portion of the proceeds of the Proposed Financing
referred to below.


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      The Company and TPG Oxford LLC ("TPG"), an affiliate of Texas Pacific
Group, have entered into an Investment Agreement, dated as of February 23, 1998
(the "Investment Agreement"), pursuant to which TPG is to make a $350 million
investment in Oxford. Such investment will consist of ten-year Preferred Stock
and Warrants to purchase up to 22,530,000 shares of the Company's common stock.
For additional information regarding the Preferred Stock and the Warrants, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". This financing is subject to
various conditions, including receipt of regulatory approvals, absence of a
Material Adverse Effect (as defined) and completion of debt financing in the
amount of $350 million.

      In connection with the debt financing required as a condition to the
investment under the Investment Agreement, the Company has engaged DLJ to act
as arranger for a senior secured term loan and as placement agent for a senior
unsecured financing, in the aggregate amount of $350 million. These
transactions are subject to the negotiation and execution of definitive
agreements, which are expected to contain various conditions, including, among
others, receipt of regulatory approvals and absence of material adverse change,
and the senior unsecured financing is also subject to placement of the
financing with investors. The terms of these transactions will depend on market
conditions and other factors beyond the Company's control. There can be no
assurance that definitive agreements will be executed or, if such agreements
are executed, that the conditions specified therein will be satisfied.

      The investment under the Investment Agreement and the debt financings
described in the preceding paragraph are herein collectively called the
"Proposed Financing". See "Cautionary Statement Regarding Forward-Looking
Statements-Proposed Financing".

      Management Changes

      Dr. Norman C. Payson has agreed to become Chief Executive Officer of the
Company upon consummation of the Proposed Financing. Prior to closing, Dr.
Payson is working as a consultant to the Company. At the closing, Dr. Payson
will purchase 643,915 shares of the Company's common stock for an aggregate
purchase price of $10 million. Dr. Payson was formerly a founder and the
President and Chief Executive Officer of Healthsource, Inc. Upon consummation of
the Proposed Financing, William M. Sullivan will serve as President of the 
Company.  On March 30, 1998, Marv Rich agreed to become Chief Administrative
Officer of the Company.  

      In February 1998, Fred F. Nazem, a director and formerly Chairman of the
Executive Committee of the Company's Board of Directors, was elected
non-executive Chairman of the Board, and the Executive Committee was disbanded.
Stephen F. Wiggins, founder and formerly Chairman of the Board, continues to
serve as a director.  On March 30, 1998, Marv Rich agreed to become Chief
Administrative Officer of the Company.  Mr. Rich was previously an Executive
Vice President at K-Mart, Inc. and was an Executive Vice President at Wellpoint
Heaalth Networks, Inc. in charge of specialty companies and financial and
information services.    
                       
      Upon consummation of the Proposed Financing, the number of directors will
be increased to twelve, Dr. Payson will become a director, and TPG will be
entitled to nominate four directors.

      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 over
several years. Unanticipated software and hardware problems arising from the
conversion created significant delays in the Company's claims payment, delayed
billing functions and telephone service and adversely affected the Company's
claims payment and billing. For information regarding the Company's plans with
respect to its information systems, see "Business - Status of Information
Systems".

      Turnaround Plan

      The Company intends to focus its resources on employer group products in
the Northeast and particularly 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 medical costs and, where appropriate,
refining benefit plans and increasing premiums.


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      The Company further intends to attempt to reduce losses in its Medicare
and Medicaid lines of business and in the New York mandated individual HMO and
point of service plans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company has withdrawn from the
Connecticut and New Jersey Medicaid programs effective April 1, 1998 and July 1,
1998, respectively. In its Pennsylvania Medicaid program, the Company has
entered into an agreement to transfer the medical risk in that program to a
third party. The Company has filed with the New York State Insurance Department
proposed rate increases of 50% and 64% for its New York mandated individual HMO
and point of service plans, respectively, as a result of rapidly rising medical
costs in those plans. In the Medicare line of business, the Company does not
intend to promote growth at the level of prior years as a consequence of
significant operating losses in those programs in certain geographic areas. The
Company is also actively pursuing certain provider contracts pursuant to which a
significant portion of the medical cost risk of some of the Company's Medicare
enrollment will be transferred to network providers.

      In 1997, the Company entered new markets in Florida and Illinois with the
acquisitions of Riscorp Health Plans, Inc. and Compass PPA, Incorporated,
respectively. The Company is evaluating its expansion efforts in all markets and
intends to reduce the level of its future investment in the Florida and Illinois
subsidiaries. The Company has scaled back its plans to offer dental HMO and life
insurance products and is evaluating its financial commitment to certain ongoing
initiatives.

      The Company may, in certain cases, attempt to improve its contracts with
some of its largest vendors and providers and may implement certain medical
management programs in an effort to reduce medical costs. The Company is also
studying its administrative cost structure and currently intends to attempt to
reduce administrative costs as a percentage of operating revenue over the long
term through operating efficiencies and reduction in 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 consulting and other expenses associated with
strengthening the Company's operations.

      There can be no assurance that the Company will be successful in
implementing the foregoing measures, in receiving the New York State Insurance
Department's approval for premium increases for the mandated individual product,
in implementing medical cost control measures and provider contracting
initiatives, or in reducing administrative costs. 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 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 and officers.

Products

      Freedom Plan

      Oxford's Freedom Plan is a point-of-service health care plan that combines
the benefits of Oxford's HMOs with some of those of conventional indemnity
health insurance. Oxford's Freedom Plan gives members the option at any time of
using Oxford's HMO plan or exercising their freedom to choose physicians not
affiliated with Oxford. The Freedom Plan, first offered in January 1988 in New
York, has grown to approximately 1,333,500 members at December 31, 1997 compared
with 1,015,100 at the end of 1996. As a percentage of total premiums earned,
Freedom Plan premiums were 59.2% in 1997, 61.2% in 1996 and 64.2% in 1995. The
flexibility of this program has enabled Oxford to market successfully health
care coverage to employer groups who have not previously offered HMO products.
The largest employer group offering the Freedom Plan accounted for approximately
1.4% of Freedom Plan premiums earned during 1997, and the ten largest employer
groups offering the Freedom Plan accounted for 6.5% of Freedom Plan premiums
earned in 1997.


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      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 and Pennsylvania, each Freedom Plan
member receives two forms of coverage - HMO coverage through the appropriate
Oxford HMO 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 centrally administered by Oxford.

      The New Jersey Freedom Plan was introduced in New Jersey in January 1991.
During 1992, the Company introduced the Connecticut Freedom Plan which, until
1993, was underwritten by an independent insurer and marketed and administered
by Oxford, with Oxford retaining substantially all of the profits or losses
arising from the product. In 1993, the Company received a license to directly
offer its Freedom Plan and HMO products in Connecticut and now fully markets its
products in such state. The Company commenced offering its Freedom Plan in
Pennsylvania in December 1995 and in Florida in 1997.

      HMOs

      Oxford offers HMO plans in each of the states in which it operates. The
largest HMO commercial employer group accounted for 4.6% of total HMO premiums
earned during 1997, while the ten largest HMO groups accounted for 22.0% of
total HMO premiums earned in 1997. Commercial HMO membership approximated
270,400 members at December 31, 1997 compared with 192,300 members at the end of
1996. As a percentage of total premiums earned, HMO revenues were 11.1 % in
1997, 10.7% in 1996 and 11.2% in 1995.

      Liberty Plan

      In response to demand for more economical health plans, the Company
introduced the Liberty Plan, a point-of-service plan, in late 1993. This plan
offers savings of up to 17% over the standard Freedom Plan and HMO plans by
allowing member groups to choose from a smaller network of highly qualified
providers. 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 premiums earned
represented less than 5% of total premiums earned in 1997.

      Other Products

      The Company currently offers preferred provider organization products in
Pennsylvania, New Jersey, and New Hampshire and anticipates offering similar
products in New York and Illinois in the coming year.

      Medicare and Medicaid

      The Company offers the Oxford Medicare Advantage plan to Medicare eligible
individuals through its New York, New Jersey and Connecticut HMO subsidiaries.
Under risk contracts with the federal Health Care Financing Administration
("HCFA"), Oxford is paid a fixed per member per month capitation amount by HCFA
based upon a formula of the projected 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.

      Medicare risk contracts provide revenues which are generally higher per
member than those for non-Medicare members, and thus provide an opportunity for
increased profits and cash flow. 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. At December 31, 1997, the Company had
approximately 161,000 members enrolled in its Medicare plans compared with
125,000 members at the end of 1996. Medicare premiums accounted for
approximately 22.0% of total premiums earned for the year ended December 31,
1997 compared with 19.8% in 1996 and 14.2% in 1995. See "Management's Discussion
and Analysis of Financial Conditions and Results of 


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Operations" for a description of operating losses incurred in the Company's
Medicare program and "Legal Proceedings" for a description of a recent site
visit by HCFA.

      Oxford also offers a Medicaid Healthy Start plan to individuals eligible
for Medicaid benefits in New York, New Jersey, Metropolitan Philadelphia, and
Connecticut. The Company receives fixed monthly premiums per member under a risk
contract with the respective state agencies administering the Medicaid program.
The Company bears the risk that the actual costs of health care exceed the per
member per month capitation amounts received by the Company. Medicaid plans also
involve the risk of reduced or insufficient government reimbursement and higher
marketing and advertising costs per member as a result of marketing to
individuals rather than to groups. At December 31, 1997, approximately 189,600
members were enrolled in the Company's Medicaid plans compared with 162,000
members at the end of 1996. Medicaid premiums accounted for approximately 7.7%
of total premiums earned for the year ended December 31, 1997 compared with 8.3%
in 1996 and 10.4% in 1995. 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 has withdrawn
from the Medicaid program in New Jersey and Connecticut, effective July 1, 1998
and April 1, 1998, respectively. In its Pennsylvania Medicaid program, the
Company has entered into an agreement to transfer the medical risk in that
program to a third party.

      See "Cautionary Statement Regarding Forward-Looking Statements."

      Self-Funded Health Plans

      Oxford's self-funded health plans have the same flexible plan designs as
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. Unlike most third-party administrators, the Company's self-funded
health plans enable employers to access Oxford's provider network and to realize
savings through certain of Oxford's discounted fee arrangements and medical cost
containment capabilities, while allowing employers to design custom health
benefit plans in accordance with their own requirements and objectives.

      Specialty Care Management

      In 1996, the Company formed Oxford Specialty Holdings, Inc. as a
majority-owned subsidiary (taken together with its subsidiaries, "Specialty
Holdings") which was established to manage specialty medical costs in distinct
specialties, such as cardiology, oncology and orthopedics. Specialty Holdings
provides the Company with advisory services from panels of expert specialists,
case rate reimbursement contracts for diseases and cases in particular medical
specialties, and services related to the management of individual diseases and
conditions. Expert panels provide advice as to appropriate diagnoses and
treatment at the disease or specialty level and also provide certain case
management services. With the assistance of each expert panel, Specialty
Holdings develops case rate contracts with physicians and other providers, which
cover the full spectrum of treatment for a specific case or disease for a fixed
"case rate." The Company has contracted with Specialty Holdings for advisory
services and procures care for its members at case rates from Specialty Holdings
in an effort to reduce the medical costs associated with each specialty.

      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, recognizing a
pretax gain of approximately $25,168,000 ($20,463,000 after taxes, or $.26 per
share).

      On November 7, 1995, Oxford completed the acquisition of a 19% equity
interest in St. Augustine Health Care, Inc. ("St. Augustine"), a health
maintenance organization offering health benefit plans to Medicaid beneficiaries
in eleven counties in Florida. During 1996, St. Augustine received approval of
its application to offer commercial programs and began offering such programs in
1997. Under the terms of the securities purchase agreement, Oxford has provided
$14.3 million in equity and debt financing to St. Augustine and has 


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the right to make future equity investments in St. Augustine. As part of the
Company's decision to reduce the level of its future investment in expansion
markets, the Company reduced by $14.3 million the carrying value of its
investment in St. Augustine as of December 31, 1997.

Marketing and Sales

      Oxford distributes its products through its direct sales force and its
telemarketing representatives and through its network of independent insurance
brokers and agents.

      Direct Sales Force; Telemarketing

      The Company maintains a direct sales staff of account executives and group
service representatives. Account executives sell traditional HMO programs, the
Company's Freedom and Liberty Plans, and self-funded medical plans. 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'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 and by independent
brokers and agents.

      Group service representatives are also organized on a regional basis and
are responsible for servicing accounts. Group service representatives become the
principal administrative contact for employers and their benefit managers by
conducting on-site employee meetings and by providing reporting and
troubleshooting services.

      The Company also employs a staff of telemarketing representatives who
generate leads for the direct sales force and who sell directly to small group,
individual and government program customers.

      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 7,300 independent
insurance agents and brokers (compared with 4,500 at the end of 1996) who are
paid a commission on sales. Independent insurance agents and brokers have been
responsible for a significant portion of Oxford's Freedom Plan enrollment growth
over the past four years, and the Company expects to continue using independent
insurance agents and brokers in its marketing system over the next several
years. 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.

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 which do not require referrals from
primary care physicians.

      Oxford maintains a network of approximately 65,000 individual physicians,
with approximately 23,100 in New York, 10,700 in New Jersey, 6,500 in
Pennsylvania, 6,300 in Connecticut, 9,000 in Illinois, 7,500 in Florida and
1,900 in New Hampshire. The majority of Oxford's physicians have contracted
individually and directly with Oxford, although Oxford also has contracts with
management service organizations, individual practice associations and physician
groups.


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      Private Practice Partnerships; Risk Sharing Groups

      The Company's Private Practice Partnership program (the "Partnerships"),
was first introduced in 1993 to organize physicians into groups which promote
efficient, quality care. The Partnerships initiative organizes private practice
physicians within a community into small medical groups, in an effort to promote
the efficiencies and quality control of much larger medical groups, while
remaining in their own private offices. These groups also allow the Company to
introduce new forms of payment to physicians that encourage more efficient
patient care. These forms of payment vary among the Partnerships and include
risk sharing and incentive payments which reward the provision of quality, cost
effective care. Each Partnership is responsible for establishing a management
committee to oversee the operation of the group. The Company attempts to provide
utilization information to the Partnerships in order to promote cost-effective,
quality care and allow the Partnerships to measure performance. The Company's
goal in developing the Partnerships is to enable physicians to achieve optimal
cost and quality performance, while giving them greater authority and
responsibility for a patient's full range of health care needs. By the end of 
1997, a total of 225 Partnerships with approximately 4,700 primary care 
physicians and 4,800 specialists had been established. Effective January 1, 
1997, the Company reduced the number of risk sharing Partnerships from 30 to 
15, primarily as a consequence of adverse experience for certain partnerships, 
difficulties experienced by the Company in providing timely utilization and
other data to risk sharing Partnerships and new government regulations. These 
operational challenges, as well as limitations on certain Partnerships' ability
to manage medical cost risk, will limit the Company's ability to expand the 
number of risk sharing Partnerships.

      In an effort to control increasing medical costs in its Medicare and
Medicaid lines of business, the Company is actively pursuing provider contracts
pursuant to which a significant portion of the medical cost risk of some of the
Company's Medicare and Medicaid enrollment will be transferred to network
providers or other risk sharing groups. The Company has entered into a contract
transferring medical cost risk for its Pennsylvania Medicaid program to a third
party. There can be no assurance that the Company will be successful in
procuring such contracts and the operational difficulties experienced with risk
sharing Partnerships described above could limit or delay the implementation of
these contracts. There are also risks inherent in risk transfer arrangements,
including the risk of nonperformance or insolvency of the party assuming risk
and the risk that member satisfaction is negatively impacted. Further, the
implementation of these contracts may require regulatory approval, and there can
be no assurance such approval will be received without delay or the imposition
of burdensome conditions.

      Physician Compensation

      Exclusive of the Partnerships and risk sharing groups and case rate
reimbursement for specialty care, Oxford currently compensates its participating
physicians based upon a fixed, discounted 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. Prior to March 1, 1996, the Company generally withheld 20% of agreed
compensation to primary care physicians, and 15% of agreed compensation to
specialist physicians. The Company returned to the physicians a portion of such
withhold, at its discretion, based upon system-wide and individual physician
medical costs compared to actuarially budgeted expenditures. In March 1996,
Oxford shifted to a modified fee schedule under which withholds were eliminated
for most participating physicians.

      Certain of Oxford's Partnerships and risk sharing groups are compensated
based on global budgeting and risk sharing for serving enrollees in Oxford's
commercial, Medicare and Medicaid plans receiving care through Partnerships or
risk sharing groups. For Partnerships that meet the Company's requirements for
risk sharing and for risk sharing groups, these agreements allocate a fixed,
periodic sum on a per member per month basis, adjusted for certain demographics,
or percentage of the premium received by the Company without regard to the
amount or scope of the services rendered. Such agreements shift a portion of the
Company's health cost risks to these Partnerships and risk sharing groups,
recognizing the providers' role and capabilities in the area of cost
containment. These arrangements are subject to compliance with new risk sharing
regulations adopted by HCFA, which require disclosure and reinsurance for
specified levels of risk sharing, and proposed state regulation which could
affect physician risk sharing. The Company has also developed an 


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incentive program for non-risk sharing Partnerships based on quality and
efficiency measures, and a large number of Partnerships are currently operating
under this program.

      The Company, through Specialty Holdings, is also working with specialists
who provide comprehensive treatment for specific diseases or cases at a
predetermined case rate. These providers will be responsible for care from the
initial diagnosis through post-treatment procedures and will establish contracts
with hospitals, specialists, and ancillary providers involved in each case.

      Delays in payment of provider claims and claims payment errors by the
Company have created a significant number of provider complaints and a backlog
in responding to such complaints. In addition, several medical societies have
filed or stated that they intend to file purported "mass arbitrations" against
the Company to resolve claims related issues of members 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".

Control of Health Care Costs

      Oxford's medical review program attempts to measure and, in some cases, 
influence utilization of certain out-patient services, elective surgeries and 
hospitalizations provided to Oxford members. Under the medical review program, 
for most 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 out-patient 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, all elective
hospitalizations and surgical procedures must be authorized in advance by a
member's primary care physician and, in order to receive the highest level of
benefits, must be delivered by providers who have contracted with Oxford. For
out-of-network services, the member must obtain approval directly from Oxford.

      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. 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 significant 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.

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 known
as "Pulse". From September 1996, most business functions at the Company were
operated on the Pulse system, with the exception of the processing of claims,
which continued to operate on the previous system, known as "Pick". Since the
conversion, the Company must 


                                       9
<PAGE>   10

transmit claims, provider, membership and other data from Pulse to Pick in order
to process claims, and processed claims data is transmitted from Pick to Pulse
where checks are prepared. This transmission of data between systems is 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. 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 and 1997 which had the effect of improving
claims turnaround times, and reducing 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 Pulse
system. The Company is continuing to seek improvements in the process referred
to above and to add needed functionality.

      The Company has undertaken a thorough review of its information systems
needs and capabilities with the assistance of independent experts. As a result
of this review, the Company has decided not to continue the development of
claims processing functionality in Pulse because of the risks associated with
the development, integration and support of this functionality. The Company has
also determined that significant risks would be involved in integrating other
claims processing systems available from third parties with the existing Pulse
system.

        Accordingly, the Company has decided to pursue a strategy of evaluating
alternative information system approaches, including an outsourcing of certain
system functions to a third party or a complete replacement of the Pulse and
Pick operating systems with a system or systems available on the market from
third party vendors. The Company currently believes that it will take between
12 and 18 months to identify and implement alternative systems solutions.
Accordingly, the Company's resources are currently focused on making
improvements to the Pulse and Pick systems to improve performance and provide
additional needed functionality during this time period.

      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 identifying information systems alternatives and improving
existing systems will not be delayed or that additional systems issues will not
arise in the future.

      For information as to the "Year 2000" date conversion, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Year 2000 Date Conversion".

Quality Management

      The majority of Oxford's physicians in its commercial and Medicare rosters
are board certified in his or her specialty (by passing certifying examinations
in his or her 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
biennially 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.

      The Company's physician contracts require adherence to Oxford's Quality
Assurance and Medical Review Programs. Oxford's Quality Management Committees,
which are composed of distinguished physicians from within Oxford's network of
providers, advise the Company's Vice President of Medical Affairs 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. 


                                       10
<PAGE>   11

      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
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.

Risk Management

      The Company limits in part the risk of catastrophic losses by maintaining
reinsurance coverage. Current reinsurance arrangements cover 50% to 90% of
annual medical expenses beyond an annual deductible of $150,000 for each member,
up to a lifetime maximum of $2,000,000 per member.

      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 at least equal to industry standards.

Government Regulation

      The Company's HMO subsidiaries in New York, New Jersey, Pennsylvania,
Connecticut, Florida and New Hampshire are each 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 subject to regulation as a foreign
insurer by New Jersey, Pennsylvania, Connecticut, Florida and New Hampshire. The
Company's Illinois domiciled insurance subsidiary, Oxford IL, is subject to
regulation by the Illinois Department of Insurance.

      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
the HMO Act. 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 risk 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 risk 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 risk product must also comply with requirements established by
peer review 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. For
a description of a recent site examination by HCFA, see "Legal Proceedings".


                                       11
<PAGE>   12

      The Company's health plans that have Medicaid contracts, Oxford NY,
Oxford NJ, Oxford PA and Oxford CT, are subject to both federal and state
regulation regarding services to be provided to Medicaid enrollees, payment for
those services and other aspects of the Medicaid program.

      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 their HMOs, the rates and
benefits applicable to their products and their financial condition and
practices. In addition, state regulations require the 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 Conditions 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 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".

      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, Connecticut, Florida, and New
Hampshire. Oxford IL is an accident and health insurance company licensed by
the Illinois Department of Insurance with authority to offer HMO products.
Applicable state laws and regulations contain requirements relating to OHI's
and Oxford IL's financial condition, reserve requirements, premium rates, form
contracts, and the periodic filing of reports with the applicable insurance
departments. OHI's and Oxford IL's affairs and operations are also subject to
periodic examination by the applicable departments. For a description of recent
examinations, see "Legal Proceedings".

      State regulations generally 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 must
combine the relevant community rate with traditional indemnity insurance rating
criteria.

      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 New Jersey, Pennsylvania,
Connecticut, Florida, Illinois and New Hampshire 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 have been filed with the appropriate regulatory authorities in
New York, New Jersey, Connecticut, Pennsylvania, New Hampshire, Florida and
Illinois, which may approve or disapprove, or impose conditions on,
consummation of the investment.


                                       12
<PAGE>   13

      Recent Regulatory Developments

        State and federal government authorities are continually considering
changes to laws and regulations applicable to Oxford's HMO subsidiaries, OHI
and Oxford IL. The Federal Health Insurance Portability and Accountability Act
of 1996: (i) insures 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 act also permits
offering Medical Savings Account plans on a pilot basis and includes programs
targeting fraud and abuse. The provisions were 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.

      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. This agreement was enacted into law as the Balanced Budget Act
of 1997 (the "1997 Act"). The legislation 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 health plan Medicare reimbursement for the
next five years. 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 or Medicaid
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. These changes could have the effect
of increasing competition in the Medicare market.

      In 1998, the Company will receive a 2% increase in Medicare premiums,
minus the user fee assessment of .428% of the Company's gross monthly Medicare
premium. The user fee is applied to all Medicare risk 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 plans in the Company's
service areas. However, the user fee for 1999 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 risk contractors.
The data will be used to develop and implement a new risk adjustment mechanism
by January 1, 2000. Given the relatively high Medicare risk premium levels in
the Company's market areas, the Company is in significant jeopardy that the new
risk adjustment mechanism to be developed could significantly and adversely
affect the Company's Medicare premium rate going forward. 

      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 a National Bipartisan Commission on the Future of Medicare. This
Commission is required to submit a report to the President and Congress by
March 1, 1999.

      The Newborns' and Mothers' Health Protection Act of 1996 ("NMHPA") was
signed into law on September 26, 1996. This law applies to group health plans
and health insurance issuers and becomes 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 for less than 96
hours for a cesarean section. Authorization and precertification requirements
cannot be imposed for these mandatory minimum hospital stays. Federal
regulations implementing NMHPA have not yet been promulgated.


                                       13
<PAGE>   14

      The Mental Health Parity Act of 1996 ("MPHA") was signed into law on
September 26, 1996. This law applies to group health plans and health insurance
issuers and becomes effective for plan years beginning on or after January 1,
1998. MPHA 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. MPHA'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.

      In 1996, HCFA promulgated regulations which prohibit HMOs with Medicare or
Medicaid 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 and Medicaid recipients. These regulations impose
reinsurance, disclosure and other requirements relating to physician incentive
plans that place physicians participating in a Medicare or Medicaid HMO plan at
substantial financial risk.

      Effective January 22, 1998, New York implemented prompt payment
requirements which require health plans 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. Effective January 1, 1998, New York passed legislation
mandating coverage of chiropractic benefits. The New York legislature also
recently passed legislation related to operation of managed care plans, which
contains provisions relating to, among other things, utilization review,
consumer disclosure and right of hearing on termination of physicians from
health plan networks.

      In 1997, New Jersey updated its HMO regulations and passed the Health Care
Quality Act which, among other things, require health plans to make certain
disclosures to members, to establish certain policies governing removal of
providers from the network and appeals processes for both providers and members
and to offer a point of service plans in commercial group markets.

      In 1997, Connecticut passed an Act Concerning Managed Care which, among
other things, established legislation concerning consumer disclosure,
utilization review, provider contract requirements and certain mandated coverage
for biologically based mental health conditions.

      Many states in which Oxford operates are currently considering regulations
or legislation relating to mandatory benefits, 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 both the Medicare and Medicaid programs,
including changes which would significantly reduce reimbursement to HMOs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Over the past year, bills have been introduced in the legislature
in New York, New Jersey, Connecticut, Illinois, Florida and Pennsylvania
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 reductions could be made in Medicare and Medicaid reimbursement rates. See
"Cautionary Statement Regarding Forward-Looking Statements-Government
Regulation; Reimbursement".


                                       14
<PAGE>   15

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, preferred provider organizations ("PPOs"), and indemnity
insurance carriers, some of which have substantially larger enrollments and
greater financial resources than the Company. The Company competes with
independent HMOs, such as Health Insurance Plan of New York and United Health
Care, each of which has significant enrollment in the New York metropolitan area
and, in the case of the latter, greater financial resources than the Company.
The Company also competes with HMOs and managed care plans sponsored by large
health insurance companies, such as The Prudential Insurance Company, The New
York Life Insurance Company, Aetna U.S. Healthcare Inc. and Blue Cross/Blue
Shield. Aetna U.S. Healthcare, Inc. has announced an agreement to acquire the
health plan business of The New York Life Insurance Company, and additional
consolidation of competitors is likely. Additional competitors may enter the
Company's markets in the future. The Company believes the size and quality of
its physician network are 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.

      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
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 to contract with 
physicians and other providers.  Recent developments concerning the Company may
adversly affect its ability to compete for such contracts.
               
Employees

      At December 31, 1997, the Company had approximately 7,200 employees, none
of whom is represented by a labor union. The Company has experienced no work
stoppages and believes that its employee relations are good.

Cautionary Statement Regarding Forward-Looking Statements

        Certain statements contained in "Business" or "Management's Discussion
and Analysis of Financial Condition and Results of Operations", including
statements concerning future premium rates for commercial, Medicare and
Medicaid business, future medical-loss ratio levels, the Company's ability to
control health care costs,  the Proposed Financing, the Turnaround Plan, the
Company's information systems, proposed efforts to control health care and
administrative costs, government regulation and 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.


                                       15
<PAGE>   16

      Proposed Financing

      Implementation of the Company's Turnaround Plan depends on its ability to
complete the Proposed Financing or an alternative financing, or to implement
measures to reduce its medical and administrative costs below existing levels.
The Company currently believes that, in the event such financing could not be
completed on a timely basis, it has the ability and intent to reduce certain
costs, including those specified in the Turnaround Plan and others, and
otherwise to generate funds to enable it to support its operations through 1998.
Although the Company currently expects to complete the Proposed Financing, there
can be no assurance that all relevant conditions will be satisfied. If the
Proposed Financing cannot be completed, the Company's ability to obtain other
financing, and the timing, form and terms thereof, would depend on a number of
factors beyond the Company's control, including, among others, general economic
and market conditions and the possible need for regulatory approvals.

      Control Over and Predictability of Health Care Costs

      Oxford's future results of operations depend, 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 case rate and risk-sharing arrangements with providers) while
providing members with quality health care. Factors such as utilization, new
technologies and health care practices, hospital costs, changes in demographics
and trends, selection biases, major epidemics, inability to establish acceptable
compensation arrangements with providers, operational and regulatory issues
which could delay, prevent or impede those arrangements, and numerous other
factors may affect Oxford's ability to control such costs. 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 claims ("IBNR") which are estimated by Oxford.
Oxford estimates the amount of such reserves 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 increases 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 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.

      Administrative Costs

        The Company expects that results will continue to be adversely affected
by high administrative costs,  including substantial consulting and other costs
associated with the Company's efforts to strengthen its operations.  However,
no assurance can be given that the Company will not continue to experience
significant service and systems infrastructure problems in 1998 and beyond.

      Government Regulation; Reimbursement

      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. Oxford's ability to declare and pay dividends is limited by state
regulations (although Oxford has not paid cash dividends in the past and does
not anticipate paying cash dividends in the foreseeable future). In 1996, and
1997 significant federal and state legislation affecting the Company's business
was enacted. See "Business-Government Regulation-Recent Regulatory
Developments." Moreover, state and federal government authorities are
continually considering changes to laws and regulations applicable to Oxford
and are currently considering regulation relating to mandatory benefits,
provider compensation, health plan liability to members who fail to receive
appropriate care, disclosure and composition of physician networks which would
apply to the Company. In addition, Congress is considering significant changes
to Medicare and Medicaid 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 and
Medicaid 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, could have a
material 


                                       16
<PAGE>   17

adverse impact on the Company's operations, financial condition and prospects.
See "Business-Government Regulation."

      Premiums for Oxford's Medicare and Medicaid programs are determined
through formulas established by HCFA for Oxford's Medicare contracts and by
state government agencies in the case of Medicaid. Medicaid premiums in New York
were significantly reduced in 1996, and 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 which are lower than the rate of increase
in health care service expenses for Oxford's Medicare or Medicaid members in
such region, could adversely affect Oxford's results of operations. Oxford's
Medicare programs are subject to certain risks relative to commercial programs,
such as higher comparative medical costs and higher levels of utilization.
Oxford's Medicare and Medicaid programs are subject to higher marketing and
advertising costs associated with selling to individuals rather than to groups.

      Competition

      HMOs and health insurance companies operate in a highly competitive
environment. Oxford has numerous competitors, including for-profit and
not-for-profit HMOs, PPOs and indemnity insurance carriers, some of which have
substantially larger enrollments and greater financial resources than Oxford.
Oxford also competes with HMOs and managed care plans sponsored by large health
insurance companies. Many of these competitors offer flexible plans that permit
employers to self-fund the medical risk of their plans. Additional competitors
may enter Oxford's markets in the future. 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. See "Business-Competition."

      Recent Events and Related Publicity

      Recent events at the Company in the last several months have resulted in
adverse publicity. Such events and related publicity may adversely affect the
Company's provider network and future enrollment in the Company's health benefit
plans.

      Litigation and Governmental Proceedings

        The Company is a defendant in a large number of purported securities
class action lawsuits and shareholder derivative lawsuits which have been filed
after the substantial decline in the price of the Company's common stock on
October 27, 1997. Such lawsuits may adversely affect the Company's results of
operations. The Company is also the subject of examinations, investigations and
inquiries by several governmental agencies, including the New York State
Insurance Department, the New York State Attorney General, the federal Health
Care Financing Administration and the Securities and Exchange Commission, and
other state departments of insurance. These governmental inquiries could
adversely affect the Company's result of operations. For additional
information, see "Legal Proceedings".

      As a result of the investigations of the Company by various regulators,
the National Committee for Quality Assurance ("NCQA") has advised that it will
conduct a discretionary review of the Company.

      Management of Growth

      Over the past five years the Company has experienced rapid growth in its
business and in its staff and the Company will be affected by its ability to
manage growth effectively, including its ability to continue to develop
processes and systems to support its growing operations. See "Business-Status of
Information Systems." The Company does not intend to promote growth at the level
of prior years because the Company's priority in 1998 will be to strengthen its
service and systems infrastructure.  However, no assurance can be given that
the Company will not continue to experience significant service and systems
infrastructure problems in 1998 and beyond.


                                       17
<PAGE>   18

Item 2. PROPERTIES

      Oxford occupies as its principal executive offices approximately 210,000
square feet of office space at 800 Connecticut Avenue, Norwalk, Connecticut
under two long-term leases expiring February 28, 1999 through February 28, 2001.
Additionally, the Company has long-term leases to occupy (a) approximately
115,000 square feet of sales and administrative office space at 1133 Avenue of
the Americas in New York City expiring July 31, 2009; (b) approximately 39,000
square feet of sales office space in Melville, Long Island, New York expiring
June 30, 2002; (c) approximately 127,000 square feet of sales office space in
Edison, New Jersey expiring December 1, 1999 through March 31, 2002; (d)
approximately 180,000 square feet of administrative office space in two
locations in Nashua, New Hampshire expiring May 31, 2003 through June 30, 2004;
(e) approximately 58,000 square feet of sales and administrative office space in
Philadelphia, Pennsylvania expiring April 30, 2009; (f) approximately 363,000
square feet of sales and administrative office space in White Plains, New York
expiring November 30, 2004; (g) approximately 352,000 square feet of
administrative office space in two locations in Trumbull, Connecticut expiring
February 28, 2003 through May 31, 2003; (h) approximately 121,000 square feet of
administrative office space in Hooksett, New Hampshire expiring November 30,
2002; (i) approximately 183,000 square feet of administrative office space in
Milford, Connecticut expiring January 31, 2006; (j) approximately 22,000 square
feet of office space in Mullingar, Ireland expiring September 30, 2006; (k)
approximately 76,000 square feet of office space in Hidden River, Florida
expiring January 12, 2008; (l) approximately 31,000 square feet of office space
in Rosemont, Illinois, expiring April 30, 2004; (m) approximately 43,000 square
feet of office space in Woodbridge, New Jersey, expiring March 31, 2006; (n)
approximately 46,000 square feet of office and warehouse space in Edison, New
Jersey, expiring April 30, 2005; and (o) approximately 13,000 square feet of
sales and administrative office space in Chicago, Illinois, expiring December
31, 2000.

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 Rule 10b-5 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. 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 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 complaints filed 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); and Paskowitz v. Oxford Health Plans, Inc., et
al., No. 98 Civ. 1991 (filed March 19, 1998).


                                       18
<PAGE>   19

      The complaints filed 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); and Winters, et al. v. Oxford Health Plans,
Inc., et al., No. 97 Civ. 7449 (filed Dec. 18, 1997).

      The complaints filed 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 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 complaint filed 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. The JPML heard argument on the
applications on March 27, 1998. As these applications are not opposed in any
material respect, the Company anticipates that these actions will be transferred
for consolidated or coordinated pretrial proceedings before Judge Brieant.

      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.


                                       19
<PAGE>   20

Shareholder Derivative Litigation

        As previously reported by the Company, in December, 1997, purported
shareholder derivative actions were filed on behalf of the Company in
Connecticut Superior Court against the Company's directors and certain of its
officers (and the Company itself as a nominal defendant). Several additional
purported shareholder derivative actions (see below) subsequently were filed on
behalf of Oxford in Connecticut Superior Court and in the United States
District Courts for the Southern District of New York and the District of
Connecticut against the Company's directors and certain of its officers (and
the Company itself as a nominal defendant).

      These derivative complaints generally allege 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 complaints filed 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. CV-98-0163665 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 complaints filed 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 complaints filed 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).

      The Company anticipates that additional purported shareholder derivative
actions containing similar allegations may be filed. 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.
On March 16, 1998, Oxford and certain of the individual defendants filed a
motion to dismiss or, alternatively, to stay two of the purported derivative
actions pending in Connecticut Superior Court. On March 23, 1998, Oxford and
certain of the individual defendants filed a motion to dismiss or,
alternatively, to stay the third purported derivative action pending in
Connecticut Superior Court. 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. The JPML heard argument on the application on March 27,
1998. As these applications are not opposed in any material respect, the Company
anticipates that the federal purported derivative actions will be transferred
for consolidated or coordinated pretrial proceedings before Judge Brieant. New
York State Insurance Department.

      As previously reported by the Company, the New York State Insurance
Department ("NYSID") is presently conducting its triennial examination and
market conduct examination of Oxford's New York HMO and insurance subsidiaries.
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 also issued a Market Conduct Report identifying several alleged
violations of state law and NYSID regulations. The NYSID 


                                       20
<PAGE>   21

and Oxford entered into a stipulation under which Oxford promised to take
certain corrective measures and to pay restitution and paid 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 continued to review
market conduct issues, including, among others, those relating to claims
processing. At this time the Company cannot predict the outcome of such
continuing review. 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 is presently conducting an
examination of Oxford's finances and will focus on adequacy of reserves for
medical costs payable, premiums receivable and provider advances. The NYSID is
expected to issue a report in the coming months.

      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 5, 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.

      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. Thereafter, the Company's obligations to make
prompter payments would be governed by applicable New York law.  See "Recent
Regulatory Developments". 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 a number
of documents in response to the Subpoena, and expects to produce additional
documents.

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

      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 in response to this informal request.

      On January 30, 1998, pursuant to a formal order, the Commission served a
subpoena duces tecum on Oxford for documents concerning a number of subjects,
including internal and external audits, uncollectible premium receivables,
timing of payments to vendors, doctors and hospitals, late payments to medical
providers, computer system problems, agreements with the New York State Attorney
General, and policies and procedures relating to the sale of Oxford securities
by officers and directors. Oxford has produced documents in response to this
subpoena, and intends to cooperate fully with the Commission. Oxford cannot
predict the outcome of the Commission's investigation at this time.


                                       21
<PAGE>   22

      Health Care Financing Administration

      From February 9, 1998 through February 13, 1998, the Health Care Financing
Administration ("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 the
Medicare risk program. In its exit interview with the Company, HCFA expressed
concern over claims payment delays and various other regulatory issues,
including HCFA requirements regarding enrollment and disenrollment documentation
and provider contracts. To the extent that alleged violations of regulatory
requirements or contractual obligations are identified, HCFA may seek corrective
action, impose fines, limit enrollment in the Company's Medicare plans and
impose other sanctions. The Company has not received a final report from HCFA
and cannot predict at this time any action HCFA might take as a result of its
site visit.

      Arbitration Proceedings

      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 on February 23 and 27, 1998 to
join eleven 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 has petitioned
the New York State Supreme Court for a permanent stay of this proceeding; the
outcome of this motion cannot be predicted at this time. The NYCMS and other
claimants also announced their intention to seek arbitration on behalf of
physicians having particular claim disputes or seeking payment of delayed claims
from Oxford.

      The Company has been informed that on March 9, 1998, a purported class
action arbitration was brought by two physicians before the AAA in Connecticut
against Oxford alleging breach of contract and violation of the Connecticut
Unfair Insurance Practices Act. The Company has not yet received a copy of the
Demand for Arbitration.

      Jeffrey S. Oppenheim, M.D., et al. v. Oxford Health Plans, Inc., et al.,
      Index No. 97/109088

      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 provides 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 drafts ettlement papers
with plaintiffs' counsel. The parties have not yet submitted final settlement
papers to the Court.


                                       22
<PAGE>   23

      Other

      In the ordinary course of its business, the Company 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,
1997.

                                     PART II

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. Prices have been adjusted
to reflect the two-for-one stock split in 1996 effectuated by the distribution
of dividends of one share of common stock for each share of common stock
outstanding. See note 5 to consolidated financial statements.

<TABLE>
<CAPTION>
                                                                   1997                          1996
                                                           ---------------------          --------------------
                                                            High            Low            High          Low
                                                            ----            ---            ----          ---
<S>                                                        <C>            <C>             <C>           <C>   
First Quarter...........................................   $67.13         $48.88          $44.88        $31.13
Second Quarter..........................................    75.75          55.25           55.25         37.38
Third Quarter ..........................................    89.00          71.50           50.38         27.69
Fourth Quarter..........................................    79.00          13.75           62.25         41.00
</TABLE>

      As of March 24, 1998, there were 1,879 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 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." Pursuant to the Bridge Agreement between the
Company and DLJ, the Company is prohibited from paying cash dividends on its
common stock so long as any Bridge Notes are outstanding. In addition, the
Investment Agreement between the Company and TPG, and the other agreements and
instruments to be entered into in connection with the Proposed Financing, will
prohibit the Company from paying cash dividends on its common stock.


                                       23
<PAGE>   24

Item 6  SELECTED CONSOLIDATED FINANCIAL DATA

The statement of earnings data and balance sheet data set forth below for each
year in the five-year period ended December 31, 1997, have been derived from the
audited consolidated financial statements of the Company The information below
has been restated to reflect the merger in July 1995 with OakTree Health Plan,
Inc in a pooling of interests transaction (see note 8 to consolidated financial
statements) and is qualified by reference to and should be read in conjunction
with the consolidated financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein

<TABLE>
<CAPTION>
                                                       1997              1996             1995              1994              1993
------------------------------------------------------------------------------------------------------------------------------------
Revenues and Earnings:                                 (In thousands, except per share amounts and operating statistics)
<S>                                               <C>                  <C>              <C>                <C>              <C>    
   Operating revenues ........................    $  4,179,816         3,032,569        1,745,975          752,832          307,622
   Investment and other income, net ..........          60,330            42,439           19,392            7,438            6,103
   Net earnings (loss) .......................    $   (291,288)           99,623           52,398           28,231           12,347
Financial Position:
   Working capital ...........................    $     80,803           451,957          103,448           71,731           63,192
   Total assets ..............................       1,397,989         1,356,397          608,777          330,160          170,130
   Common shareholders' equity ...............    $    349,216           598,170          220,033          132,394           94,655
Per Common Share (1):
   Basic .....................................    $     (37.00)           134.00            78.00            43.00            19.00
   Diluted ...................................    $     (37.00)           125.00            71.00             4.00            18.00
   Weighted average number of
     common shares outstanding:
       Basic .................................          78,635            74,285           67,450           65,410           63,542
       Diluted ...............................          78,635            79,662           73,344           70,554           67,804
Operating Statistics:
   Enrollment ................................       2,008,100         1,535,500        1,007,700          513,000          221,330
   Fully insured member months ...............      21,584,700        15,604,400        9,338,610        4,101,863        1,715,761
   Self-funded member months .................         602,900           474,200          514,200          524,000          401,000
   Number of contracted physicians ...........          65,000            37,700           29,900           21,000           11,500
   Medical-loss ratio (2) ....................            94.0%            801.0%           775.0%           741.0%           732.0%
</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 1993, 1995 and
      1996
(2)   Defined as health care services expense as a percentage of premiums earned

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


                                       24
<PAGE>   25

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

Overview

      The Company's revenues consist 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 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 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, 1997 were adversely affected by
additions to the Company's reserves for IBNR in the third and fourth quarters.
See "Liquidity and Capital Resources."

      The Company has experienced substantial growth in membership and revenues
since it began operations in 1986. The membership and revenue growth has been
accompanied by increases in the cost of providing health care in New York, New
Jersey, Pennsylvania, Connecticut, Illinois, Florida and New Hampshire. The
Company does not expect its future growth in membership or revenue, if any, to
be similar to its growth in prior years as the Company has to redirect its
strategic initiatives to attempt 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.

      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>
                                                      Years Ended December 31
                                                      -----------------------
Revenues:                                             1997      1996      1995
                                                     -----     -----     -----
<S>                                                  <C>       <C>       <C>  
    Premiums earned ..............................    98.3%     98.3%     98.2%
    Third-party administration, net ..............      .3        .3        .7
    Investment and other income, net .............     1.4       1.4       1.1
                                                     -----     -----     -----
    Total revenues ...............................   100.0     100.0     100.0
                                                     -----     -----     -----
Expenses:
    Health care services .........................    92.4      78.7      76.2
    Marketing, general and administrative ........    17.4      15.5      18.4
    Unusual charges - write-down of assets .......     1.0        --        --
                                                     -----     -----     -----
    Total expenses ...............................   110.8      94.2      94.6
                                                     -----     -----     -----
    Operating earnings (loss) ....................   (10.8)      5.8       5.4

    Income (loss) from affiliate .................      .6       (.1)      (.2)
                                                     -----     -----     -----
    Earnings (loss) before income taxes ..........   (10.2)      5.7       5.2
    Provision (credit) for income taxes ..........    (3.3)      2.4       2.2
                                                     -----     -----     -----
    Net earnings (loss) ..........................    (6.9)%     3.3%      3.0%
                                                     =====     =====     =====

Medical-loss ratio ...............................    94.0%     80.1%     77.5%
                                                     =====     =====     =====
</TABLE>

      The medical-loss ratio for 1997 reflects significant additions to the
Company's reserves recorded in 1997. A portion of the reserve additions in 1997
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. 


                                       25
<PAGE>   26
Results of Operations

   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>
                                                       Years Ended
                                                        December 31           
                                                 -----------------------  Percent
                                                    1997          1996    Increase
                                                 ----------    ---------  --------
Plan Revenues:                                        (In thousands)
<S>                                              <C>           <C>         <C>  
 Freedom Plan ................................   $2,468,259    1,849,167   33.5%
 HMOs ........................................      463,428      322,288   43.8
 Medicare ....................................      916,126      599,824   52.7
 Medicaid ....................................      319,411      250,889   27.3
                                                 ----------    ---------
   Total premium revenues ....................    4,167,224    3,022,168   37.9
 Third-party administration, net .............       12,592       10,401   21.1
                                                 ----------    ---------
   Total plan revenues .......................   $4,179,816    3,032,569   37.8%
                                                 ==========   ==========   ====

<CAPTION>
                                                          As of
                                                       December 31
                                                 -----------------------
Membership:                                         1997         1996
                                                 ----------    ---------
<S>                                               <C>          <C>         <C>  
 Freedom Plan ................................    1,333,500    1,015,100   31.4%
 HMOs ........................................      270,400      192,300   40.6
 Medicare ....................................      161,000      125,000   28.8
 Medicaid ....................................      189,600      162,000   17.0
                                                 ----------    ---------
   Total fully insured .......................    1,954,500    1,494,400   30.8
Self-funded ..................................       53,600       41,100   30.4
                                                 ----------    ---------
   Total membership ..........................    2,008,100    1,535,500   30.8%
                                                 ==========   ==========   ====
</TABLE>

      Total premiums earned for the year ended December 31, 1997 increased 37.9%
to $4.2 billion from $3.0 billion in 1996. This overall increase was primarily
attributable to a 38.4% increase in member months for commercial and government
programs. The substantial growth in membership reflected continued consumer
acceptance of health care plans in the Company's markets in general, and the
popularity of the products offered by the Company in particular.

        Commercial premium revenues increased $760.2 million 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 rates 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 $174 million related to estimates for terminations of group and
individual members and for non-paying group and individual members.  The Company
is taking steps to attempt to improve billing timeliness, reduce billing errors,
lags in recording enrollment and disenrollment notifications, and the Company's
collection processes and is attempting to make requisite improvements in
management information concerning the value and aging of outstanding accounts
receivable. The Company believes it has made adequate provision in its estimates
for group and individual member terminations and for non-paying group and
individual members as of December 31, 1997.  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 are made.  

      Premium revenues of government programs increased $384.8 million 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 


                                       26
<PAGE>   27

premium rates during 1997. Average premium rates of Medicare programs in 1997
were 4.3% higher than in 1996.

      The Company expects that premium rates for commercial business in 1998
will be higher on average than in 1997. The Company's commercial rates are
often higher than those charged by competitors, in part reflecting the size and
quality of the Company's provider network, additional services provided by the
Company and other features of the Company's products. The Company's ability to
receive requested rate increases from group customers may be adversely affected
by publicity surrounding the losses announced by the Company for the third and
fourth quarters and claims payment issues involving the Company's provider
network. The Company believes that commercial premium pricing will continue to
be highly competitive and may be more so. However, the Company does not intend
to promote revenue growth at the level of prior years because the Company's
priority in 1998 will be to attempt to strengthen its service and systems
infrastructure.  Revenues may also be adversely affected as a result of the
Company's decision to reduce its future investment in developing the Florida,
Illinois and New Hampshire markets. Moreover, the Company expects that revenue
growth will be adversely affected by customers' concern regarding recently
publicized operating losses and provider dissatisfaction with timeliness of
claims payment.

      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 (the "New York
Mandated 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 that require more health care services
than the average commercial population. The Company had 40,700 members in the
mandated HMO and 15,300 members in the mandated point of service plan as of
December 31, 1997. Revenues and operating results for 1998 would be adversely
affected if the NYSID does not approve the rates requested or approves lesser
increases. In addition, the Company expects that, if granted, significant rate
increases in these plans will result in membership attrition, which would reduce
revenues and could increase adverse selection bias. The Company is working
cooperatively with the NYSID with respect to the requested rate increases and
other measures to provide affordable health plans in the individual market.
However, no assurances can be given that the NYSID will approve these rate
increases.

      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. This agreement was enacted into law as the Balanced Budget Act
of 1997 (the "1997 Act"). The legislation 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 health plan Medicare reimbursement for the
next five years. 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 or Medicaid
enrollee. These changes could have the effect of increasing competition in the
Medicare market.

      In 1998, the Company will receive a 2% increase in Medicare premiums,
minus the user fee assessment of .428% of the Company's gross monthly Medicare
premium. The user fee is applied to all Medicare risk 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 plans in the Company's
service areas. However, the user fee for 1999 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 risk contractors. The
data will be used to develop and implement a new risk adjustment mechanism by
January 1, 2000. Given the relatively high Medicare risk premium levels in the
Company's market areas, the Company is in significant jeopardy that the new risk
adjustment mechanism to be developed 


                                       27
<PAGE>   28

could significantly and adversely affect the Company's Medicare premium ratio
going forward. 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 a newly appointed National Bipartisan Commission on the
Future of Medicare. This Commission is required to submit a report to the
President and Congress by March 1, 1999.

      The Company does not anticipate revenue growth at the level of prior years
in its Medicare programs because the Company's priority in 1998 will be to
attempt to strengthen its service and system infrastructure and mitigate
operating losses. Medicare enrollment could also be adversely affected, perhaps
substantially so, by customer concern over recently publicized operating losses
and provider dissatisfaction, changes to the Company's Medicare provider
network in certain counties and medical management policies designed to better
control medical costs and HCFA's recent site examination of the Company, among
other factors. See "Business-Government Regulation".

        Premium yields in the Company's Medicaid business in New Jersey and
Connecticut will be unchanged in 1998. The Company has notified the relevant
regulatory authorities that it will not renew its Medicaid risk contracts in
Connecticut and New Jersey due to unfavorable premium and medical expense
trends. The Company will, therefore, be withdrawing from those programs
effective April 1, 1998 for Connecticut and July 1, 1998 for New Jersey. At
December 31, 1997, the Company had approximately 33,000 Connecticut Medicaid
members and 46,100 New Jersey Medicaid members. Premium yields in the Company's
New York Medicaid program (approximately 43,500 members at December 31, 1997)
will be increased 4% effective April1, 1998. The Company expects that premium
yields in the Company's Pennsylvania Medicaid program (approximately 67,000
members at December 31, 1997) were increased 7% effective January 1, 1998. No
assurances can be given regarding prospective premium yields from these
programs.

      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.

      Net investment income for the year ended December 31, 1997 increased to
$61.2 million from $42.4 million in 1996. This was principally due to
significantly greater realized capital gains in 1997 when compared with 1996.
The Company incurred interest expense of approximately $11.1 million during 1997
(which reduces net investment and other income) for payment of interest on
delayed claims in accordance with the Company's interest payment policy and
applicable law. Final reconciliation with providers may result in higher levels
of interest expense. 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".

      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 16.9% to $181.38 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 


                                       28
<PAGE>   29

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.  The Company believes it has made adequate
provision for medical costs as of December 31, 1997. 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. Additions to reserves could also result as a consequence of regulatory
examinations and such additions would also be included in the results of
operations for the period in which such adjustments are made. See "Business -
Government Regulation" and "Legal Proceedings".

      The Company is taking a number of steps to address the deterioration of
operating results in Medicare, Medicaid and the New York Mandated Plans. The
Company is pursuing certain provider contracts for its Medicare programs
pursuant to which a significant portion of the medical cost risk of some  of
the Company's Medicare enrollment  may be transferred to network providers.
Despite these efforts, no assurances can be given that such contracts will be
consummated or, if consummated, will successfully control the Company's
ultimate costs. In its Pennsylvania Medicaid program, the Company has entered
into an agreement to transfer a substantial portion of the medical risk in that
program to a third party. The Company is also attempting to implement new
medical management policies aimed at reducing costs in various lines of
business. The Company has also withdrawn from the Medicaid programs in New
Jersey and Connecticut, effective July 1, 1998 and April 1, 1998, respectively.
Finally, the Company has filed for significant rate increases in the New York
Mandated Plans to reflect rising medical costs in those plans.

      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 case rate and risk-sharing agreements with providers) while
providing members with quality health care. Factors such as utilization, new
technologies and health care practices, hospital costs, major epidemics,
inability to establish acceptable compensation agreements with providers and
numerous other factors may affect Oxford's ability to control such costs. The
Company attempts to use its medical cost containment capabilities, such as claim
auditing systems, physician tracking systems and utilization review protocols,
and improved channeling to cost-effective providers with a view to reducing the
rate of growth in health care services expense. 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. In addition, the Company's relationships 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 or 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.

      Effective January 1, 1997, the New York Health Care Reform Act of 1996
(the "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 Act. Previously, hospital bad debt and charity care and
graduate medical education were financed by surcharges on payments to hospitals
for inpatient services. As contemplated by the Act, the Company has
substantially completed the negotiation of adjustments to rates paid to network
hospitals in New York to reflect elimination of these surcharges. These
adjustments are generally effective as of January 1, 1997, but they are not
expected to result in savings equal to the cost of the surcharges. Accordingly,
the Company has filed for increases of between 2% and 3.2% in certain of its
commercial premium rates in New York in addition to normal trend increases in
view of the increases in costs attributable to the Act. See "Government
Regulation;".

      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 


                                       29
<PAGE>   30

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 expects that results for 1998 will continue to be adversely affected
by high administrative costs, including substantial consulting and other costs
associated with strengthening its operations. The Company also currently expects
to record a nonrecurring charge of between $20 million and $25 million in the
first quarter of 1998 to account for severance and other costs which the Company
expects to incur in connection with restructuring certain administrative and
management functions. Administrative costs in future periods will also be
affected by the costs associated with responding to regulatory inquiries and
investigations and defending pending securities class action and shareholder
derivative litigation, including fees and disbursements of counsel and other
experts, to the extent such costs are not reimbursed under existing policies of
insurance. See "Legal Proceedings".

      In October 1997, the Company disposed of its 47% interest in Health
Partners, Inc. ("Health Partners"). The Company received 2,090,109 shares of
common stock of FPA Medical Management, Inc. ("FPAM") stock with a market value
as of 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 believes that the decline is 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 a pretax gain of
approximately $25.2 million ($20.5 million after taxes, or $.26 per share) on
the sale of Health Partners. 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 contracts with provider groups managed by Health Partners
in the Company's service areas. The Company cannot currently predict if the
costs of using such provider groups will increase with the change in ownership.

      The Company acquired all of the outstanding stock of Compass PPA,
Incorporated, a Chicago-based HMO, 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 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 has 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 will impact the value of these companies and,
accordingly, the Company has 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 by $14.3 million the
carrying value of its investment in the capital stock and subordinated surplus
notes of St. Augustine Health Care, Inc., a Florida-based HMO. The Company holds
19.9% of the outstanding voting stock of St. Augustine Health Care, Inc.

        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.  Management believes that and it is more likely than not
that future operations will generate sufficient taxable income (estimated to be
$330 million) to utilize the unreserved net deferred tax assetsthose deferred
tax assets.

      The Company expects to report losses in 1998 as the result of high medical
costs and high administrative costs as described above. The Company intends to
take the steps referred to above and under "Business - Recent
Developments-Turnaround Plan" in an effort to better control medical and
administrative spending, 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.


                                       30
<PAGE>   31

Year Ended December 31, 1996 Compared with Year Ended December 31, 1995

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

<TABLE>
<CAPTION>
                                                  Years Ended
                                                  December 31           
                                           -------------------------    Percent
                                              1996            1995      Increase
                                           ----------      ---------    --------
Plan Revenues:                                   (In thousands)
    <S>                                        <C>             <C>            <C>  
    Freedom Plan .........................     $1,849,167      1,113,432      66.1%
    HMOs .................................        322,288        193,404      66.6
    Medicare .............................        599,824        247,090     142.8
    Medicaid .............................        250,889        180,172      39.2
                                               ----------      ---------  
      Total premium revenues .............      3,022,168      1,734,098      74.3
    Third-party administration, net ......         10,401         11,877     (12.4)
                                               ----------      ---------  
      Total plan revenues ................     $3,032,569      1,745,975      73.7%
                                               ==========     ==========     =====

<CAPTION>
                                                     As of
                                                  December 31
                                           -------------------------  
Membership:                                   1996           1995
                                           ----------      ---------  
    <S>                                         <C>              <C>          <C>  
    Freedom Plan .........................      1,015,100        680,400      49.2%
    HMOs .................................        192,300        112,000      71.7
    Medicare .............................        125,000         67,100      86.3
    Medicaid .............................        162,000        105,600      53.4
                                               ----------      ---------  
      Total fully insured ................      1,494,400        965,100      54.8
    Self-funded ..........................         41,100         42,600      (3.5)
                                               ----------      ---------  
      Total membership ...................      1,535,500      1,007,700      52.4%
                                               ==========     ==========     =====
</TABLE>

      Total premiums earned for the year ended December 31, 1996 increased 74.3%
to $3.02 billion from $1.73 billion in 1995. This overall increase was primarily
attributable to a 67.1% increase in member months for commercial and government
programs. The substantial growth in membership reflected continued consumer
acceptance of health care plans in the Company's markets in general, and the
popularity of the products offered by the Company in particular.

      Commercial premium revenues increased $864.6 million to $2.17 billion in
1996 from $1.31 billion in 1995. Membership growth accounted for substantially
all of the change as member months of the Freedom Plan increased 63.5% when
compared with 1995, and member months of Oxford's traditional HMOs increased
65.9% over the prior year. Premium rates of commercial programs were slightly
higher in 1996 than in 1995.

      Premium revenues of government programs increased $423.5 million to $850.7
million in 1996 from $427.3 million in 1995. Membership growth accounted for
most of the change in Medicare as member months increased 123.7% when compared
with the prior year. The increase in Medicaid revenues was attributable to a
61.6% increase in member months compared with 1995, offset in part by a 13.8%
decrease in average premium rates during 1996. Premium rates of Medicare
programs in 1996 were 8.5% higher than in 1995.

      Third-party administration revenues for the year ended December 31, 1996
declined to $10.4 million from $11.9 million in 1995, attributable to a 5.1%
decrease in per member per month revenue and a 7.8% decrease in member months.

      Net investment income for the year ended December 31, 1996 increased to
$42.4 million from $19.4 million in 1995. This was principally due to the
increase in invested cash resulting from increased cash flow from operations
during 1996 and approximately $220 million of net proceeds from the Company's
public offering in April 1996.

      Health care services expense stated as a percentage of premiums earned
(the "medical-loss ratio") was 80.1% for the year ended December 31, 1996
compared with 77.5% for the year ended December 31, 1995. The increase in the
medical-loss ratio was attributable to a higher percent of membership in the
Company's Medicare programs, greater than expected pharmacy costs, and decreased
per member per month premium 


                                       31
<PAGE>   32

revenue in the Company's Medicaid programs. Overall per member per month revenue
increased 4.3% to $193.67 in 1996 from $185.69 in 1995 while overall per member
per month health care services expenses increased 7.8% to $155.16 in 1996 from
$143.99 in 1995. As stated above, additions to reserves for IBNR recorded in the
third and fourth quarter of 1997 represent, in part, revisions to estimated
costs for 1996. Based on the revised estimates, medical costs for 1996 would be
higher than those shown.

      Marketing, general and administrative expenses increased 46.6% to $477.4
million in 1996 from $325.6 million in 1995 which, as a percentage of operating
revenues, was 15.7% in 1996 compared with 18.7% in 1995. The increase in
marketing, general and administrative expenses was attributable to the Company's
rapid membership growth and the costs associated with continuing development and
expansion into new markets and the expansion of the Medicaid Healthy Start and
Oxford Medicare Advantage programs. The other areas of increased expense were
payroll and benefits expense, broker commissions, marketing expenses and
depreciation. Payroll and benefits expense increased $74.4 million in 1996
primarily due to an increase in the size of the Company's work force to over
5,000 employees at the end of 1996 from approximately 4,000 employees at the end
of 1995. The additional employees were hired primarily in the areas of
marketing, management information systems, health services and member services.
Broker commissions increased by $23.8 million in 1996 due to the increase in
premiums earned. Marketing expenses other than payroll and benefits increased by
$5.4 million in 1996 reflecting the Company's continuing commitment to
aggressively market its products in a highly competitive environment.
Depreciation expense was $18.5 million higher than in 1995 as a result of $48.3
million of capital expenditures during 1996.

      The Company's equity in the net loss of Health Partners, for 1996 was $4.6
million compared with a loss of $3.9 million in 1995. The increased losses for
Health Partners related primarily to lower per member per month premium revenue
in Health Partners' Medicaid programs.

      The provision for income taxes for 1996 was $72.4 million, or
approximately 42.1% of the Company's pretax income in 1996, approximately the
same as the 1995 tax rate.

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 Medicare, Medicaid, and New York Mandated 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 attempt to maintain margins; nevertheless, these rate
increases have tended to be below those of traditional indemnity health plans
and comparable to competing health plans, thereby maintaining the Company's
competitive position. The Company's cost control measures and risk-sharing
arrangements with various health care providers also 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 1997 aggregated $152.6 million,
contributing to a reduction in cash and cash equivalents and short-term
investments to $639.9 million at December 31, 1997 from $839.5 million at
December 31, 1996. In addition, cash used for capital expenditures totaled
$101.9 million during 1997. This amount was used primarily for computer
equipment and software, reflecting the Company's ongoing need to upgrade and
maintain its information systems to support its rapid growth. In addition,
significant expenditures were incurred for leasehold improvements related to the
Company's headquarters in Norwalk, Connecticut, and existing regional offices,
and to expansion of regional offices in Hooksett, New Hampshire and Hidden
River, Florida. The Company currently anticipates that capital expenditures for
1998, a significant portion of which will be devoted to management information
systems and leasehold improvements, will be less.

      Cash amounts aggregating $610,000 have been segregated as restricted
investments as required by the New York State Department of Insurance, the New
Jersey Department of Insurance and the Pennsylvania Department of Insurance. In
addition, the Company's subsidiaries are subject to certain restrictions on
their 


                                       32
<PAGE>   33


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.

      Premiums receivable at December 31, 1997 decreased to $275.6 million from
$315.1 million at December 31, 1996 primarily due to adjustments  relating to
group and individual member terminations and non-paying group and individual
member previously discussed.           

      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 during the first quarter of 1997 and
thereafter. Outstanding advances aggregated approximately $203 million at
December 31, 1997 and have been netted against medical costs payable in the
Company's consolidated balance sheet. The Company has established a valuation
reserve of $10 million against the advances. The Company believes that it will
be able to recover outstanding advances 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 results of
the Company's operations.

      The Company's medical costs payable, before netting advance claim
payments of $203 million, was $965.9 million as of December 31, 1997 (including
$859.0 million for IBNR) compared with and $624.4 million as of December 31,
1996 (including $551.1 million for IBNR). The increase in medical costs payable
reflects additions to the Company's medical claim reserves during the third and
fourth quarters of 1997 totaling $327 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 increases
in membership. The liability is also affected by shared risk arrangements under
Private Practice Partnerships ("Partnership"). In determining the liability for
medical costs payable, the Company accounts for the financial impact of 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) and, in the case of Partnership providers subject to deficits, has
established reserves to account for delays or other impediments to recovery of
those deficits. The Company believes that its reserves for medical costs payable
are adequate in order to satisfy its ultimate claim liability. However, the
Company's 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 medical costs payable reserve estimates.

      During the fourth quarter of 1997, the Company made cash contributions to
the capital of its HMO subsidiaries aggregating $65.7 million and contributed
the outstanding capital stock of OHI to Oxford NY to increase Oxford NY's
surplus. Since December 31, 1997, the Company has funded additional
contributions of cash and marketable securities (valued at market on the date of
contribution) totaling $160.4 million. The capital contributions were made to
ensure that each subsidiary had sufficient surplus as of December 31, 1997 under
applicable regulations after giving effect to operating losses and reductions to
surplus resulting from the nonadmissibility of certain assets. The contributions
in 1998 were made with the proceeds of the issuance of $200 million of senior
secured notes ("Bridge Notes") under the Bridge Securities Purchase Agreement,
dated as of February 6, 1998, between the Company and an affiliate of Donaldson
Lufkin & Jenrette Securities Corporation ("DLJ"), as amended on March 30, 1998
(the "Bridge Agreement"). The Bridge Notes mature on February 6, 1999 and bear
interest at prime plus 2.5% per annum during the first three months, and
thereafter the spread over prime will increase by 0.5% every three months;
provided, however, that the per annum interest rate will not be less than
10.5%, nor more than 17%. In connection with the issuance of the Bridge Notes,
the Company has paid and will pay commitment and other fees to DLJ and has
granted a security interest in the stock of certain subsidiaries and certain
other assets of the Company. The Bridge Agreement contains various covenants,
financial maintenance requirements and other restrictions, including, among
others, a covenant prohibiting the payment of dividends on the Company's common
stock and a                                               


                                       33
<PAGE>   34

covenant with respect to steps to be taken to refinance the Bridge Notes under
certain circumstances. If the Investment Agreement referred to below is
terminated or amended or the transactions thereunder are not consummated by
June 30, 1998 (subject to extension), and in certain other circumstances, DLJ
would  be entitled to elect 33% of the total number of two directors and the
Company would be required to deliver a resolution of the Company's Board of
Directors adopting a plan or proposal for refinancing the borrowings under the
Bridge Notes, through the issuance of debt or equity securities or the entering
into a strategic transaction acceptable to DLJ, and retain DLJ to effect the
implementation of such plan or proposal.            

      The Company expects that additional capital contributions to the
subsidiaries will be required as the result of expected operating losses in
1998. Further, additional capital contributions will 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". Additional capital will also be required to
fund capital expenditures and repay the Bridge Notes which mature on February
6, 1999.

      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 have agreed to
purchase $350,000,000 in Preferred Stock with Warrants to acquire up to
22,530,000 shares of common stock. 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 is
to 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 ending December 31, 1998, if such adjustment would reduce the
exercise price. The Preferred Stock will be issued as Series A and Series B.
The Series A Preferred Stock will carry a dividend of 8% and will be issued
with Series A Warrants to purchase 15,800,000 shares of common stock, or 19.9%
of the present outstanding voting power of Oxford's common stock. The Series A
Preferred Stock will have 16.6% of the combined voting power of Oxford's
outstanding common stock and the Series A shares. The Series B Preferred stock,
which will be issued with Series B Warrants to purchase non-voting junior
participating preferred stock, is non-voting and will carry a dividend of 9%.
The Series B Preferred Stock will become voting, the dividend rate will
decrease to 8% and the Series B warrants will be exercisable for 6,730,000
shares of common stock at such time as Oxford's shareholders approve the
increase in voting rights of TPG to 22.1%. The Preferred Stock will not be
redeemable by the Company prior to the fifth anniversary of their original
issuance. Thereafter, subject to certain conditions, the Series A and Series B
Preferred Stock will be redeemable at the option of the Company for an
aggregate redemption price of $245 million and $105 million, respectively (in
each case, plus accrued and unpaid dividends), and will be subject to mandatory
redemption at the same price on the tenth anniversary of their original
issuance. The Series A Warrants and the Series B Warrants will expire on the
earlier of the tenth anniversary of their original issuance or redemption of
the related series of Preferred Stock. The Warrants will be detachable from the
Preferred Stock. The investment is subject to various conditions, which include
receipt of regulatory approvals, absence of a Material Adverse Effect (as
defined) and completion of debt financing in the amount of $350 million.
Application for approval of TPG's investment in the Company have been filed
with the departments of insurance and/or health, as appropriate, of New York,
New Jersey, Connecticut, Pennsylvania, New Hampshire, Florida and Illinois.
These regulatory agencies have the authority to approve or disapprove, or
impose conditions on, consummation of the transaction. Closing is not subject
to shareholder approval.
     
      In connection with the debt financing required as a condition to the
investment under the Investment Agreement, the Company has engaged DLJ to act
as arranger for a senior secured term loan and as placement agent for a senior
unsecured financing, in the aggregate amount of $350 million. These
transactions are subject to the negotiation and execution of definitive
agreements, which are expected to contain various conditions, including, among
others, receipt of regulatory approvals and absence of material adverse change,
and the senior unsecured financing is also subject to placement of the
financing with investors. The terms of these transactions will depend on market
conditions and other factors beyond the Company's control. There can be no
assurance that definitive agreements will be executed or, if such agreements
are executed, that the conditions specified therein will be satisfied.


                                       34
<PAGE>   35

      The investment under the Investment Agreement and the debt financings
described in the proceeding paragraph are herein collectively called the
"Proposed Financing".

      The Company believes that the proceeds of the Proposed Financing will be
sufficient to finance the capital needs referred to above and to provide
additional capital for losses or contingencies in excess of the Company's
current expectations. Although the Company currently expects to complete the
Proposed Financing, there can be no assurance that all relevant conditions will
be satisfied. If the Proposed Financing cannot be completed, the Company
believes that other sources of equity and/or debt financing could be arranged to
finance the Company's immediate capital needs, based on discussions with its
financial advisors and expressions of interest received from qualified investors
in the course of the Company's efforts to negotiate the Investment Agreement and
related agreements. The Company currently believes that, in the event such a
financing could not be completed on a timely basis, it has the ability and
intent to reduce certain costs, including those specified in the Turnaround Plan
and others, and otherwise to generate funds to enable it to support its
operations through 1998. The Company's ability to obtain other financing, and
the timing, form and terms thereof, would depend on a number of factors beyond
the Company's control, including, among others, general economic and market
conditions and the possible need for regulatory approvals.

Year 2000 Date Conversion

      The Company is currently conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" date
conversion and is developing an implementation plan to resolve the issue. 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 not completed its assessment number of
the Year 2000 date conversion.  Accordingly, the Company cannot estimate
itsYear 2000 compliance expense and the related potential effect on the
Company's results of operations.                                               

      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 will attempt to mitigate its
risk with respect to the failure of such vendors to be "Year 2000" complaint.
The effect, if any, is not reasonable estimable at this time.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      See Index to Consolidated Financial Statements on page 38.

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

      Not applicable.

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      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, 1997.

                                     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 financial statements and
            schedules on page 38.


                                       35
<PAGE>   36

      2.    Financial statement schedules - see index to financial statements
            and schedules on page 38.

      3.    Exhibits - see exhibit index on page 58.

(b)   Reports on Form 8-K

      In a report on Form 8-K dated and filed on October 27, 1997, the Company
reported under Item 5 "Other Events" its revised estimated third quarter 1997
earnings results.

      In a report on Form 8-K dated and filed on October 30, 1997, the Company
reported under Item 5 "Other Events" that purported class action lawsuits had
been filed against the Company and certain of its officers alleging violation of
federal securities laws.

      In a report on Form 8-K dated November 4, 1997 and filed on November 6,
1997, the Company reported under Item 5 "Other Events" that the Company received
from the Office of the Attorney General of the State of New York a subpoena
duces tecum requiring the production of various documents, records and
materials; its third quarter earnings press release; and the resignation of it
chief financial officer.

      In a report on Form 8-K dated November 6, 1997 and filed on November 10,
1997, the Company reported under Item 5 "Other Events" the examination of its
New York HMO and insurance subsidiaries by the New York State Insurance
Department and its press release announcing steps to strengthen operations.

      In a report on Form 8-K dated December 9, 1997 and filed on December 29,
1997, the Company reported under Item 5 "Other Events" its press release
announcing further strengthening of medical claim reserves during the fourth
quarter of 1997.

      In a report on Form 8-K dated December 9, 1997 and filed on December 10,
1997, the Company reported under Item 5 "Other Events" a Stipulation entered
into with the New York State Insurance Department.


                                       36
<PAGE>   37

                                   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 30th day of
March 1998.

                                                 OXFORD HEALTH PLANS, INC.

                                                 By: /s/ WILLIAM M. SULLIVAN
                                                    ----------------------------
                                                         William M. Sullivan
                                                         Chief Executive Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and,
in the capacities indicated on March 30, 1998.

<TABLE>
<CAPTION>
              Signature                                     Title
              ---------                                     -----
<S>                                              <C>
    /s/ WILLIAM M. SULLIVAN                      Principal Executive Officer
-------------------------------------------
        William M. Sullivan


    /s/ ALBERT A. KOCH                           Principal Financial Officer
-------------------------------------------
        Albert A. Koch


    /s/ BRENDAN R. SHANAHAN                      Principal Accounting Officer
-------------------------------------------
        Brendan R. Shanahan


    /s/ JAMES B. ADAMSON                         Director
-------------------------------------------
        James B. Adamson


    /s/ ROBERT B. MILLIGAN, JR                   Director
-------------------------------------------
        Robert B. Milligan, Jr.


    /s/ FRED F. NAZEM                            Director
-------------------------------------------
        Fred F. Nazem


    /s/ MARCIA J. RADOSEVICH                     Director
-------------------------------------------
        Marcia  J. Radosevich, Ph.D.


    /s/ BENJAMIN H. SAFIRSTEIN, M.D.             Director
-------------------------------------------
        Benjamin H. Safirstein, M.D.


    /s/ THOMAS A. SCULLY                         Director
-------------------------------------------
        Thomas A. Scully


    /s/ STEPHEN F. WIGGINS                       Director
-------------------------------------------
        Stephen F. Wiggins
</TABLE>


                                       37
<PAGE>   38

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                              <C>
Independent Auditors' Report..............................................................................       39
Consolidated Balance Sheets as of December 31, 1997 and 1996..............................................       40
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and
    1995..................................................................................................       41
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997,
    1996 and 1995.........................................................................................       42
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and
    1995..................................................................................................       43
Notes to Consolidated Financial Statements................................................................       44
</TABLE>


                                       38
<PAGE>   39

                          Independent Auditors' Report

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

      We have audited the accompanying consolidated balance sheets of Oxford
Health Plans, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-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 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.


                                                           KPMG Peat Marwick LLP

Stamford, Connecticut
February 23, 1998, except
as to the last paragraph of
note 15, is as of March 30, 1998



                                       39
<PAGE>   40

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 1997 and 1996
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                      Assets
Current assets:                                                       1997           1996
                                                                  -----------    -----------
<S>                                                               <C>                 <C>   
   Cash and cash equivalents ..................................   $     4,141         72,160
   Short-term investments - available-for-sale, at market value       635,743        767,312
   Premiums receivable, net ...................................       275,646        315,126
   Other receivables ..........................................        45,418         26,343
   Prepaid expenses and other current assets ..................        10,097          5,814
   Refundable income taxes ....................................       120,439             --
   Deferred income taxes ......................................        38,092         23,429
                                                                  -----------    -----------
       Total current assets ...................................     1,129,576      1,210,184
                                                                  -----------    -----------

Property and equipment, at cost:
   Land and buildings .........................................         2,313            226
   Furniture and fixtures .....................................        32,298         24,472
   Equipment ..................................................       176,803        104,902
   Leasehold improvements .....................................        61,605         45,093
                                                                  -----------    -----------
                                                                      273,019        174,693
   Less accumulated depreciation and amortization .............       125,926         69,739
                                                                  -----------    -----------
       Net property and equipment .............................       147,093        104,954
                                                                  -----------    -----------

Deferred income taxes .........................................        86,406          5,700
Other noncurrent assets .......................................        34,914         35,559
                                                                  -----------    -----------
       Total assets ...........................................   $ 1,397,989      1,356,397
                                                                  ===========    ===========

                    Liabilities and Shareholders' Equity
Current liabilities:
   Medical costs payable ......................................   $   762,959        624,359
   Trade accounts payable and accrued expense .................       152,152         51,256
   Income taxes payable .......................................            --          9,902
   Unearned premiums ..........................................       124,603         63,052
   Deferred income taxes ......................................         9,059          9,658
                                                                  -----------    -----------
       Total current liabilities ..............................     1,048,773        758,227
                                                                  -----------    -----------

Shareholders' equity:
   Preferred stock, $.01 par value, authorized 2,000,000 shares            --             --
   Common stock, $.01 par value, authorized 400,000,000
     shares; issued and outstanding 79,474,439 in 1997
     and 77,376,282 in 1996 ...................................           795            774
   Additional paid-in capital .................................       437,653        391,602
   Retained earnings (deficit) ................................       (95,498)       195,790
   Unrealized net appreciation of investments .................         6,266         10,004
                                                                  -----------    -----------
       Total shareholders' equity .............................       349,216        598,170
                                                                  -----------    -----------
       Total liabilities and shareholders' equity .............   $ 1,397,989      1,356,397
                                                                  ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       40
<PAGE>   41

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                       Consolidated Statements of Operations
                  Years Ended December 31, 1997, 1996 and 1995
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
Revenues:                                             1997          1996           1995
                                                  -----------    -----------    -----------
<S>                                               <C>              <C>            <C>      
   Premiums earned ............................   $ 4,167,224      3,022,168      1,734,098
   Third-party administration, net ............        12,592         10,401         11,877
   Investment and other income, net ...........        60,330         42,620         19,711
                                                  -----------    -----------    -----------
     Total revenues ...........................     4,240,146      3,075,189      1,765,686
                                                  -----------    -----------    -----------

Expenses:
   Health care services .......................     3,916,742      2,421,167      1,344,669
   Marketing, general and administrative ......       737,425        477,373        325,643
   Unusual charges - write-down of assets .....        41,618             --             --
                                                  -----------    -----------    -----------
     Total expenses ...........................     4,695,785      2,898,540      1,670,312
                                                  -----------    -----------    -----------

Operating earnings (loss) .....................      (455,639)       176,649         95,374

Equity in net loss of affiliate ...............        (1,140)        (4,600)        (3,873)
Gain on sale of affiliate .....................        25,168             --             --
                                                  -----------    -----------    -----------
Earnings (loss) before income taxes ...........      (431,611)       172,049         91,501
Income tax expense (benefit) ..................      (140,323)        72,426         39,103
                                                  ===========    ===========    ===========
Net earnings (loss) ...........................   $  (291,288)        99,623         52,398
                                                  ===========    ===========    ===========

Earnings (loss) per common and common
  equivalent share:
     Basic ....................................   $     (3.70)          1.34            .78
     Diluted ..................................   $     (3.70)          1.25            .71

Weighted average common stock and
  common stock equivalents outstanding:
     Basic ....................................        78,635         74,285         67,450
     Effect of dilutive securities-stock opions            --          5,377          5,894
                                                  -----------    -----------    -----------
     Diluted ..................................        78,635         79,662         73,344
                                                  ===========    ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       41
<PAGE>   42

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                 Consolidated Statements of Shareholders' Equity
                  Years Ended December 31, 1997, 1996 and 1995
                                 (In thousands)

<TABLE>
<CAPTION>
                                                              Common Stock                               Equity
                                                          -------------------  Additional   Retained   Adjustment-
                                                            Number      Par      Paid-In    Earnings    Short-term
                                                          of Shares    Value     Capital    (Deficit)  Investments
--------------------------------------------------------  --------   --------   --------    --------    --------
<S>                                                         <C>      <C>          <C>         <C>         <C>    
Balance at January 1, 1995 ............................     16,512   $    165     90,084      43,769      (1,624)

Exercise of stock options .............................      1,240         12     10,529          --          --
Two-for-one stock split ...............................     16,638        166       (166)         --          --
Tax benefit realized upon exercise of stock options ...         --         --     16,192          --          --
Net earnings ..........................................         --         --         --      52,398          --
Appreciation in value of available-for-sale securities,
   net of deferred income taxes .......................         --         --         --          --       8,508
                                                          --------   --------   --------    --------    --------
Balance at December 31, 1995 ..........................     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 options ...         --         --     33,624          --          --
Two-for-one stock split ...............................     34,794        348       (348)         --          --
Net earnings ..........................................         --         --         --      99,623          --
Appreciation in value of available-for-sale securities,
   net of deferred income taxes .......................         --         --         --          --       3,120
                                                          --------   --------   --------    --------    --------
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)         --
Depreciation in value of available-for-sale securities,
   net of deferred income taxes .......................         --         --         --          --      (3,738)
                                                          --------   --------   --------    --------    --------
Balance at December 31, 1997 ..........................     79,474   $    795    437,653     (95,498)      6,266
                                                          ========   ========   ========    ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       42
<PAGE>   43

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                Increase (Decrease) in Cash and Cash Equivalents
                  Years Ended December 31, 1997, 1996 and 1995
                                 (In thousands)

<TABLE>
<CAPTION>
Cash flows from operating activities:                                         1997         1996         1995
                                                                           ---------    ---------    ---------
<S>                                                                        <C>             <C>          <C>   
   Net earnings (loss) .................................................   $(291,288)      99,623       52,398
   Adjustments to reconcile net earnings (loss) to net cash
     provided by operating activities:
       Depreciation and amortization ...................................      61,045       42,886       23,014
       Write-down of assets ............................................      41,618           --           --
       Deferred income taxes ...........................................     (75,279)     (13,196)      (6,123)
       Provision for doubtful accounts .................................      25,000        4,505        2,682
       Equity in net loss of affiliate .................................       1,140        4,600        3,873
       Realized gain on sale of investments ............................     (28,736)      (4,734)      (3,365)
       Gain on sale of affiliate .......................................     (25,168)          --           --
       Other, net ......................................................         245          480          274
       Changes in assets and liabilities, net of effect of acquisitions:
          Premiums receivable ..........................................      25,942     (223,353)     (49,938)
          Other receivables ............................................     (18,320)     (11,083)      (9,894)
          Prepaid expenses and other current assets ....................      (3,928)      (2,251)      (2,157)
          Other noncurrent assets ......................................      (3,959)      (3,747)      (3,610)
          Medical costs payable ........................................     116,387      323,851      134,854
          Trade accounts payable and accrued expenses ..................      84,967       14,764       19,325
          Income taxes payable/refundable ..............................    (123,624)      42,098       14,216
          Unearned premiums ............................................      61,378       12,753       38,894
                                                                           ---------    ---------    ---------
            Net cash provided (used) by operating activities ...........    (152,580)     287,196      214,443
                                                                           ---------    ---------    ---------

Cash flows from investing activities:
   Capital expenditures ................................................    (101,946)     (48,348)     (83,946)
   Purchases of available-for-sale securities ..........................    (589,690)    (794,099)    (255,841)
   Sales of available-for-sale securities ..............................     756,174      311,783       96,182
   Maturities of available-for-sale securities .........................      34,621       33,298       36,340
   Maturity of long-term investment ....................................          --           --       13,505
   Acquisitions, net of cash acquired ..................................     (14,034)          --           --
   Investments in and advances to unconsolidated affiliates ............     (19,842)     (18,597)      (8,243)
   Other, net ..........................................................      (1,986)         723          175
                                                                           ---------    ---------    ---------
            Net cash provided (used) by investing activities ...........      63,297     (515,240)    (201,828)
                                                                           ---------    ---------    ---------

Cash flows from financing activities:
   Proceeds from issuance of common stock ..............................          --      220,539           --
   Proceeds from exercise of stock options .............................      21,264       21,215       10,491
                                                                           ---------    ---------    ---------
            Net cash provided by financing activities ..................      21,264      241,754       10,491
                                                                           ---------    ---------    ---------

Net increase (decrease) in cash and cash equivalents ...................     (68,019)      13,710       23,106
Cash and cash equivalents at beginning of period .......................      72,160       58,450       35,344
                                                                           ---------    ---------    ---------
Cash and cash equivalents at end of period .............................   $   4,141       72,160       58,450
                                                                           =========    =========    =========

Supplemental schedule of noncash investing and financing activities:
   Unrealized appreciation (depreciation) of short-term investments ....   $   6,336        5,288       16,192
   Tax benefit realized on exercise of stock options ...................      24,808       33,624       14,547
   Sale of affiliate in a pooling-of-interests transaction .............      38,442           --           --
   One-for-one stock dividend ..........................................   $      --          348          166
</TABLE>

See accompanying notes to consolidated financial statements.


                                       43
<PAGE>   44

                   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 services in New York, New Jersey, Connecticut, New
Hampshire, Florida, Illinois, and Pennsylvania. Oxford was incorporated on
September 17, 1984 and began operations in 1986. Oxford owns and operates seven
health maintenance organizations ("HMOs"), three of which are federally
qualified as Competitive Medical Plans, and two accident and health insurance
companies, one of which is also authorized to offer HMO products, 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 (NH), Inc. ("Oxford NH"), Oxford Health Plans (PA), Inc.
("Oxford PA"), and Oxford Health Plans, (FL), Inc. ("Oxford FL"), 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. Oxford Health Plans (IL),
Inc. ("Oxford IL") is licensed by the Illinois Department of Insurance as an
accident and health insurance company with authority to offer HMO products.

      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. 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 (see note
8). The Company's investment in Health Partners, Inc. was accounted for using
the equity method until its disposal in October 1997 (see note 9).

      (b) Premium revenue. Membership contracts are generally on a yearly basis
subject to cancelation by the employer group or Oxford upon 30 days written
notice. Premiums 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. Premiums receivable are
presented net of valuation allowances for estimated uncollectible amounts.
Uneraned premiums represent the portion of premiums received for which Oxford
is not obligated to provide services until a future date.

      (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. As part of a cost control
incentive program, the Company, until March 1, 1996, retained up to 20 percent
of the fee-for-service reimbursement as a risk-sharing fund. Amounts retained
under this arrangement were payable to the physicians at the discretion of the
Company and were included in medical costs payable in the accompanying
consolidated balance sheets. Effective March 1, 1996, the Company shifted to a
modified fee schedule under which withholds were eliminated for most
participating physicians.

      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 claims.
The Company estimates the amount of the provision for incurred but not reported
claims


                                       44
<PAGE>   45

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

using standard actuarial methodologies based upon historical data including the
period between the date services are rendered and the date claims are received
and paid, expected medical cost inflation, seasonality patterns and increases
in membership. The estimates for submitted claims and incurred but not reported
claims are made on an accrual basis and adjusted in future periods as required.
Medical costs payable also reflects surplus or deficit experience for
physicians participating in risk-sharing arrangements through Private Practice
Partnerships. Amounts advanced to providers for delayed claims, which are net
of a valuation reserve of $10,000,000, have been applied against medical claims 
payable in the accompanying balance sheet and aggregated $203,355,000 at
December 31, 1997. Management believes that the Company's reserves for medical
costs payable are the adequate  to satisfy its ultimate claim liability.

      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 in a manner consistent with the method of
establishing premium rates.

      (d) Reinsurance. Reinsurance premiums are reported as health care services
expense, while related reinsurance recoveries are reported as deductions from
health care services expense.

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

      (f) Financial instruments. The Company has determined that the marketable
equity and fixed income securities included in short-term investments might be
sold prior to maturity to support its investment strategies. Accordingly, such
investments have been classified as available-for-sale and are carried at market
value based on quotations obtained from brokers for those or similar
instruments, and the unrealized appreciation or depreciation, net of deferred
income taxes, has been charged to a separate component of shareholders' equity.

      The carrying amount of other financial instruments approximates fair value
generally due to the short-term nature of these instruments.

      (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 (see note 8).

      (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 difference 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 this deferred tax assets to the
amount that is expected to more likely than not realized.

      (j) Impairment of long-lived assets and assets to be disposed of. The
Company has adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"), on January 1, 1996. SFAS 121
requires that long-lived assets and certain identifiable intangibles be reviewed
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 nondiscount 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


                                       45
<PAGE>   46

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. (See note 8).

      (k) Earnings per share. The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which became effective in 1997. Under the provisions of SFAS 128, 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
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 splits in 1995 and 1996 (see note 5) and to the merger
with OakTree in July 1995 (see note 8).

      (l) Stock option plans. Prior to January 1, 1996, the Company accounted
for its stock option plans in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. 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 APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future 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 6).

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

      (n) Use of estimates. Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.

      (o) Reclassifications. Certain reclassifications have been made to prior
years' financial statement amounts to conform to the 1997 presentation.


                                       46
<PAGE>   47

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) Financial Instruments

      Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt and equity securities have been classified as available-for-sale and
recorded at fair value, with unrealized gains and losses, net of deferred income
taxes, reported in a separate component of shareholders' equity. The cost of
securities sold is determined on a specific identification basis. Realized gains
and losses are included in results of operations.

      The methods and assumptions used to estimate the fair value of each class
of financial instruments are described in note 2. The following is a summary of
available-for-sale securities as of December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                          Gross         Gross
                                        Amortized       Unrealized     Unrealized         Fair
                                          Cost            Gains          Losses           Value
                                        ---------       ----------     ----------       --------
December 31, 1997:                                            (In thousands)
<S>                                     <C>                <C>               <C>         <C>    
  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
                                        ========        ========        ========        ========

December 31, 1996:
  U.S. government obligations ..        $357,944           1,739             741         358,942
  Corporate obligations ........         150,662             782             574         150,870
  Municipal tax-exempt bonds ...         188,441           1,561             115         189,887
                                        --------        --------        --------        --------
    Total debt securities ......         697,047           4,082           1,430         699,699
  Equity securities ............          53,309          15,360           1,056          67,613
                                        --------        --------        --------        --------
    Total short-term investments        $750,356          19,442           2,486         767,312
                                        ========        ========        ========        ========
</TABLE>

      The amortized cost and estimated fair value of available-for-sale debt
securities at December 31, 1997, 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>
                                                      Amortized           Fair
                                                        Cost              Value
                                                      ---------         --------
                                                            (In thousands)
<S>                                                   <C>                 <C>   
Due in one year or less ....................          $ 64,833            64,982
Due after one year through five years ......           491,049           495,767
Due after five years through ten years .....             8,406             8,505
                                                      --------          --------
                                                      $564,288           569,254
                                                      ========          ========
</TABLE>

      Included in investment income are net recognized gains on disposals of
available-for-sale securities of $28,736,000 in 1997, $4,734,000 in 1996 and
$3,365,000 in 1995. Proceeds from the sale or maturity of available-for-sale
securities aggregated $790,795,000 in 1997, resulting in gross recognized gains
of $36,615,000 and gross recognized losses of $7,879,000. Proceeds from the sale
or maturity of available-for-sale securities aggregated $345,081,000 in 1996,
resulting in gross recognized gains of $9,036,000 and gross recognized losses of
$4,302,000. Proceeds from the sale or maturity of available-for-sale securities
aggregated $132,522,000 in 1995, resulting in gross realized gains of $5,654,000
and gross unrealized losses of $2,289,000. The change in the net unrealized
gains (losses) on available-for-sale securities included in the separate
component of shareholders' equity during 1997 totaled $(6,336,000) before
deferred income taxes of


                                       47
<PAGE>   48

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$(2,598,000); during 1996 totaled $5,288,000 before deferred income taxes of
$2,168,000; and during 1995 totaled $14,547,000 before deferred income taxes of
$6,039,000.

(4) Income Taxes

<TABLE>
<CAPTION>
Income tax expense (benefit) consists of:   Current         Deferred           Total
                                            -------         --------           -----
      Year ended December 31, 1997:                      (In thousands)
<S>                                        <C>               <C>             <C>       
          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
                                           ========         ========         ========
      Year ended December 31, 1995:
          Federal .................        $ 34,672           (4,743)          29,929
          State and local .........          10,554           (1,380)           9,174
                                           --------         --------         --------
            Total .................        $ 45,226           (6,123)          39,103
                                           ========         ========         ========
</TABLE>

      For the years ended December 31, 1997, 1996 and 1995, cash payments for
income taxes, net of refunds received were $66,927,000, $51,931,000 and
$35,132,000, repectively.

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

<TABLE>
<CAPTION>
                                                             1997              1996             1995
                                                          ---------         ---------         ---------
                                                                          (In thousands)
<S>                                                       <C>                  <C>               <C>   
Income tax expense (benefit) at statutory tax rate        $(151,064)           60,217            32,025
Write-off of goodwill ............................            9,895                --                --
State and local income taxes, net
   of federal income tax benefit .................            4,458            11,805             5,963
Nontaxable gain on sale of affiliate .............           (4,104)               --                --
Equity in net loss of affiliate ..................              399             1,610             1,356
Tax-exempt interest on municipal bonds ...........           (2,484)           (1,630)             (726)
Other, net .......................................            2,577               424               485
                                                          ---------         ---------         ---------
Actual tax provision .............................        $(140,323)           72,426            39,103
                                                          =========         =========         =========
</TABLE>


                                       48
<PAGE>   49

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The tax effects of temporary differences that give rise to significant
     portions of the net deferred tax assets at December 31, 1997 and 1996 are
     as follows:

<TABLE>
<CAPTION>
                                                        1997               1996
                                                      ---------         ---------
Deferred tax assets:                                         (In thousands)
<S>                                                   <C>                  <C>   
   Net operating loss carryforwards ..........        $  99,895                --
   Medical costs payable .....................           16,440            11,467
   Allowance for doubtful accounts ...........           11,799                --
   Unearned premiums .........................           10,509             5,790
   Trade accounts payable and accrued expenses            8,361             5,073
   Write-down of investment in affiliate .....            5,618                --
   Losses of unconsolidated affiliate ........               --             4,837
   Property and equipment ....................            3,404             3,593
   Other .....................................            5,368             3,206
                                                      ---------         ---------
       Total gross deferred tax assets .......          161,394            33,966
   Valuation allowance .......................          (36,896)           (4,837)
                                                      ---------         ---------
       Total deferred tax assets .............          124,498            29,129
                                                      ---------         ---------

Deferred tax liabilities:
   Unrealized appreciation of short-term
        investments ..........................            4,354             6,952
   Gain on sale of affiliate .................            4,705                --
   Other .....................................               --             2,706
                                                      ---------         ---------
       Total deferred tax liabilities ........            9,059             9,658
                                                      ---------         ---------
       Net deferred tax assets ...............        $ 115,439            19,471
                                                      =========         =========
</TABLE>

        The company has federal net operating loss carry fowards of
approximately $205 million which will be available to offset future taxable
income and expire in the year 2012. The Company's state net operating loss
carryfowards expire in various periods from 1998 to 2012.

        The valuation allowance as of December 31,1997 relates to state
operating losses and the state effect the of the Company's net deductable
temporary differences. Due to the limited net operating loss carryforward
period in some of the states in which the Company operates, management does not
believe it is more likely than not that these benefits will be realized.
 
        At December 31, 1996, the valuation allowance related to the          
Company's equity in the cumulative losses of Health Partners, Inc., which was
disposed of in the fourth quarter of 1997. At December 31, 1997 and 1996, there
were no other valuation allowances associated with the deferred tax assets as
management believes that it is more likely than not that  future operations
generate sufficient taxable income to utilize the unreserved net deferred tax
assets.those deferred tax assets. The amount of future taxable income necessary
during the carryfoward period to utilize the unreserved net deferred tax assets
is approximately $330,000,000.  

(5) Capital 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.

      On October 28, 1994, 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 25,000,000 shares
to 200,000,000 shares, subject to shareholder approval. On March 3, 1995, the


                                       49
<PAGE>   50

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company's shareholders approved such amendment. On the same date, the Board of
Directors approved a two-for-one split of the Company's common stock effected by
distribution of a dividend of one share of common stock for each share of common
stock outstanding on March 6, 1995. The two-for-one split was effectuated on
March 27, 1995. A total of 16,638,339 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 $166,383 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 splits.

(6) 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 three 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 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
times, but not more than seven years from the date of grant. The Employee Plan
is administered by a committee consisting of three 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. 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.


                                       50
<PAGE>   51

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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, 1995 .         11,896,360         $      7.25
    Granted ....................          2,521,104               23.84
    Exercised ..................         (2,734,050)               3.84
    Canceled ...................           (133,978)               9.82
                                        -----------
Outstanding at December 31, 1995         11,549,436               11.65
    Granted ....................          1,518,176               42.58
    Exercised ..................         (3,368,208)               6.30
    Canceled ...................           (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
    Canceled ...................           (319,012)              37.35
                                        -----------
Outstanding at December 31, 1997         10,206,829         $     37.06
                                        ===========         ===========
</TABLE>

      On August 8, 1997, the Company granted a total of 3,162,436 options under
the 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, 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 and 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.
A total of 2,754,194 options are subject to this grant.

      Information about fixed stock options outstanding at December 31, 1997, 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>
           $  0.32    -   13.75           2,023,928            $ 6.33              1.3 Years
             14.19    -   23.94           3,567,071             20.03              2.4 Years
             24.13    -   44.00             941,043             38.68              3.6 Years
             46.13    -   84.38           3,674,787             70.10              4.6 Years
                                         ----------
           $  0.32    -   84.38          10,206,829            $37.06              3.1 Years
                                         ==========             =====
</TABLE>

      Information about fixed stock options exercisable at December 31, 1997, is
summarized as follows:

<TABLE>
<CAPTION>
                                                             Weighted-
                  Range of                  Number            Average
              Exercise Prices            Exercisable       Exercise Price
              ---------------            -----------       --------------
           <S>                            <C>                 <C>   
           $  0.32    -   13.75           1,921,854           $ 6.37
             14.19    -   23.94           1,952,956            19.17
             24.13    -   44.00             194,722            39.55
             46.13    -   84.38             160,450            47.05
                                          ---------
           $  0.32    -   84.38           4,229,982           $15.35
                                          =========           ======
</TABLE>


                                       51
<PAGE>   52

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      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 and earnings per share for the years ended December 31,
1997, 1996 and 1995, would have been reduced to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
                                                                                          1997      1996        1995
                                                                                         -----     ------      -----
         <S>                                         <C>                               <C>           <C>       <C>   
         Net earnings (000)                          As reported.......................$(291,288)    99,623    52,398
                                                     Pro forma.........................$(315,188)    90,011    49,416

         Basic earnings per share                    As reported.......................$  (3.70)     1.34         .78
                                                     Pro forma.........................$  (4.01)     1.21         .73

         Diluted earnings per share                  As reported.......................$  (3.70)     1.25         .71
                                                     Pro forma.........................$  (4.01)     1.13         .67
</TABLE>

      The per share weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $40.03, $19.58 and $10.70, 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 69.56% in 1997, 48.99% in 1996 and 50.25% in
1995, risk-free interest rates of 6.15% in 1997, 6.5% in 1996 and 6.3% in 1995;
and expected lives of four years for all years.

      Pro forma net income reflects only options granted in 1997, 1996 and 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
above 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.

      As of December 31, 1997, there were 12,661,263 shares reserved for
issuance under the plans, including 2,454,434 shares reserved for future grant.

(7) Leases

      Oxford leases office space and equipment under operating leases. Rent
expense for the years ended December 31, 1997, 1996 and 1995 was $22,646,000,
$18,546,000 and $13,792,000, respectively. Future minimum lease payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 1997 were as follows:

<TABLE>
<CAPTION>
                                                                                  (In thousands)
         <S>                                                                         <C>       
         1998...................................................................     $   27,264
         1999...................................................................         24,406
         2000...................................................................         22,778
         2001...................................................................         13,486
         2002...................................................................          8,139
         Thereafter.............................................................         12,068
                                                                                     ----------
         Total minimum future rental payments...................................     $  108,141
                                                                                     ==========
</TABLE>

(8) 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 $8,200,000 in cash. The acquisition was recorded as a purchase
and, goodwill of approximately $24,100,000 resulted. Subsequent to the
acquisition, the Company decided to reduce the level of its future investment in
expansion markets and, therefore,


                                       52
<PAGE>   53

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

determined the carrying amount of its investment is not recoverable.
Accordingly, the Company, as of December 31, 1997 wrote off the remaining
unamortized goodwill of $23,427,000.

      On November 3, 1997, the Company acquired all of the outstanding stock of
Riscorp Health Plans, Inc., a Florida-based HMO for approximately $5,300,000 in
cash. The acquisition was recorded as a purchase resulting in goodwill of
approximately $3,894,000. Subsequent to the acquisition, the Company decided to
reduce the level of its future investment in expansion markets and, therefore,
determined that the carrying amount of its investment is not recoverable.
Accordingly, the Company, as of December 31,1997, wrote off the goodwill of
$3,894,000.

      Results of operations of the companies acquired by the purchase method
have been included from the date of acquisition. The proforma effects of the
acquisitions on the consolidated results of operations for the years ended
December 31, 1997, 1996 and 1995, assuming these acquisitions had occurred as of
January 1, 1995 are not material and have not been presented.

      On July 3, 1995, the Company issued 1,177,047 shares of its common stock
in connection with the merger of a wholly-owned subsidiary of the Company with
OakTree Health Plan, Inc., the holding company for a Philadelphia- based HMO.
The merger has been accounted for as a pooling of interests and, accordingly,
the Company's consolidated financial statements have been restated to include
the accounts and operations of OakTree for all periods prior to the merger.
Separate operating revenues, net earnings and other changes in shareholders'
equity for all periods presented prior to the merger are not material and have
not been presented.

(9) 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 since April 1995. Under this
method, the Company recognized losses of $1,140,000 in 1997, $4,600,000 in 1996
and $3,873,000 in 1995. 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 $76,420,000, resulting in a pretax gain at the time of closing of
approximately $63,146,000. As of December 31, 1997, the market value of the FPAM
stock had been reduced to approximately $38,442,000. Because management believes
that the decline is other than temporary, the Company as of December 31, 1997
wrote down its investment in FPAM by $37,978,000, in accordance with SFAS 115.
As a result, the Company ultimately recognized a pretax gain of approximately
$25,168,000 ($20,463,000 after taxes, or $.26 per share) on the sale of Health
Partners. The Company contracts with provider groups managed by Health Partners
in the Company's service areas.

      In 1995, Oxford acquired a 19.9% interest in St. Augustine Health Care,
Inc. ("St. Augustine"), a health maintenance organization offering health
benefit plans in eleven counties in the State of Florida. Under the terms of the
transaction, Oxford has provided $14,297,000 in equity and debt financing to St.
Augustine and has the right to make future equity investments. As of December
31, 1997, the Company decided to reduce the level of its future investment in
expansion markets and, therefore, wrote off the $14,297,000 carrying value of
its investment in the capital stock and subordinated surplus notes of St.
Augustine.


                                       53
<PAGE>   54

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10) Unusual Charges

      As previously described, the Company reduced the level of its future
investment in expansion markets and, accordingly, wrote down its investment in
two subsidiaries (see note 8) and one affiliate (see note 9). These write downs
have been shown as unusual charges in the accompanying financial statements and
are summarized as follows:

<TABLE>
          <S>                                              <C>        
          Compass PPA, Incorporated                        $23,427,000
          Riscorp Health Plans, Inc.                         3,894,000
          St. Augustine Health Care, Inc.                   14,297,000
                                                           -----------
               Total                                       $41,618,000
                                                           ===========
</TABLE>

(11) Defined Contribution Plan

      Effective October 1, 1990, the Company adopted a qualified defined
contribution plan ("the Savings Plan"). The Savings Plan 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
$3,241,000 in 1997, $1,798,000 in 1996 and $901,000 in 1995.

(12) Regulatory and Contractual Capital Requirements

      Certain restricted investments at December 31, 1997 and 1996 are held on
deposit with various financial institutions to comply with federal, New York,
New Jersey and Pennsylvania regulatory requirements. As of December 31,1997, a
total of $610,000 in cash was also restricted. With respect to Oxford NY,
the amount of cash required to be available in addition to restricted
investments is based on a formula established by the State of New York. These
additional cash requirements amounted to approximately $155,612,000 and
$106,200,000 at December 31, 1997 and 1996, respectively, and are included in
short-term investments.

      In addition to the foregoing requirements, Oxford NY, Oxford NJ, Oxford
CT, Oxford NH, Oxford PA, Oxford FL, Oxford IL and OHI 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 Oxford NY, Oxford NJ, Oxford CT, Oxford NH,
Oxford PA, Oxford FL, Oxford IL and OHI to pay obligations of Oxford and limit
the Company's ability to declare and pay dividends. As of Dcecmber 31, a total
of $1,998,000 was so restricted.

        Since December 31, 1997, the Company has made additional contributions
of cash and marketable securities (valued at market on the date of
contribution) of approximately $243,000,000. The capital contributions were
made to ensure that each subsidiary had sufficient surplus as of December 31,
1997 under applicable regulations after giving effect to operating losses and
reductions to surplus resulting from the nonadmissibility of certain assets.

(13) 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, 1997 and 1996, 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 certain state
governmental entities, the United States government and high-grade corporate
bonds and notes. These short-term 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.


                                       54
<PAGE>   55

                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(14) Contingencies

      Following the October 27, 1997 decline in the price per share of the
Company's common stock, several purported securities class action lawsuits were
filed 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 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 Company anticipates that additional purported
shareholder derivative actions containing similar allegations may be filed.
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.

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

(15) Subsequent Events

      As of February 23, 1998, the Company signed a definitive agreement with
the investment firm Texas Pacific Group providing that Texas Pacific will
purchase $350 million in preferred stock issued as Series A and Series B with
dividend rates of 8% and 9% respectively. The preferred shares also come with
warrants to acquire 22.5 million shares of Oxford common stock with a strike
price of $17.75. This price represents a 5% premium over the average trading
price of Oxford shares for 30 trading days ended February 20, 1998. The strike
price is to 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 ending December 31, 1998, if such adjustment would reduce the
strike price. The Series A Preferred Stock will carry a dividend of 8% and will
be issued with warrants to purchase 15,800,000 shares of common stock, or 19.9%
of the present outstanding voting power of the Company's common stock. The
Series A Preferred Stock will have 16.6% of the combined voting power of the
Company's outstanding common stock and the Series A shares. The Series B
Preferred Stock, which will be issued with warrants to purchase non-voting
junior participating preferred stock, is non-voting and will carry a dividend of
9%. The Series B Preferred Stock will become voting, the dividend rate will
decrease to 8% and the related warrants will be exercisable for 6,730,000 shares
of common stock at such time as the Company's shareholders approve the increase
in voting rights of Texas Pacific to 22.1%. The terms of the investment will
prohibit the Company from paying cash dividends on its common stock . The
investment is subject to various conditions, which include regulatory
approvals, completion of the debt financing in the amount of $350 million.

      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, as amended on March 30, 1998
("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.
Pursuant to the Bridge Agreement, the Company is prohibited from paying cash 
dividends on its common stock so as long as any Bridge Notes are outstanding.


                                       55
<PAGE>   56

(16) Quarterly Information (Unaudited)

      Tabulated below are certain data for each quarter of 1997 and 1996.

<TABLE>
<CAPTION>
                                                                      Quarters Ended
                                                -----------------------------------------------------------
                                                  Mar. 31         Jun. 30         Sep. 30          Dec. 31
                                                ----------       ---------       ---------        ---------
Year ended December 31, 1997:                     (In thousands, except membership and per share amounts)
<S>                                             <C>              <C>             <C>              <C>      
   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 ..............................      $      .44             .48            (.99)           (3.58)
      Diluted ............................      $      .42             .45            (.99)           (3.58)

   Membership at quarter-end .............       1,738,800       1,833,500       1,942,600        2,008,100

Year ended December 31, 1996:
   Net operating revenues ................      $  651,364         715,114         800,006          866,085
   Operating expenses ....................         624,976         685,569         763,471          824,524
   Net earnings ..........................      $   18,517          22,458          26,650           31,998

   Per common and common equivalent share:
      Basic ..............................      $      .27             .30             .35              .42
      Diluted ............................      $      .25             .28             .33              .39

   Membership at quarter-end .............       1,200,400       1,321,100       1,442,200        1,535,500
</TABLE>

Net operating revenues include premiums earned and third-party administration,
net. Operating expenses include health care services and marketing, general and
administrative expenses.

Unusual charges increased operating expenses by $41,618,000 in the fourth
quarter of 1997 (see note 10).


                                       56
<PAGE>   57

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No.                       Description of Document
-----------                       -----------------------

<S>         <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(i)        --Second Amended and Restated Certificate of Incorporation, as
                amended, of the Registrant, incorporated by reference to Exhibit
                3(a) of the Registrant's Annual Report on Form 10-K for the year
                ended December 31, 1994 (File No. 0-19442)

3(ii)(a)    --Amended and Restated By-laws of the Registrant*

4           --Form of Stock Certificate, incorporated by reference to
                Exhibit 4 of the Registrant's Registration Statement of 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*

10(o)       --Bridge Securities Purchase Agreement, dated as of February 6,
                1998, between the Registrant and Oxford Funding, Inc.*- portions
                of this exhibit have been onitted pursuant to a request for
                confidential treatment.

10(p)       --Security Agreement, dated as of February 6, 1998, between the
                Registrant and Oxford Funding, Inc.*

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.*
</TABLE>


                                       57
<PAGE>   58

                            EXHIBIT INDEX (Continued)

<TABLE>
<CAPTION>
Exhibit No.                     Description of Document
-----------                     -----------------------

<S>         <C>          
10(r)       --Investment Agreement, dated as of February 23, 1998, between
                TPG Oxford LLC and the Registrant*

10(s)       --Registration Rights Agreement, dated as of February 23, 1998,
                between TPG Oxford LLC and the Registrant *

10(t)       --Employment Agreement, dated as of February 23, 1998, between
                the Registrant and Dr. Norman C. Payson*

10(u)       --Oxford Health Plans, Inc. Stock Option Agreement, dated
                February 23, 1998, by and between Dr. Norman C. Payson and the
                Registrant.*

10(v)       --Amendment, dated as of February 23, 1998, to Employment
                Agreement between the Registrant and William M. Sullivan*

10(w)       --Amendment, dated as of February 23, 1998, to Employment
                Agreement between the Registrant and Jeffery H. Boyd*

10(x)       --Employment Agreement, dated as of February 16, 1998, between
                the Registrant and Kevin F. Hickey*

10(y)       --Retirement, Consulting and Non-Competition Agreement, dated as
                of February 23, 1998, between the Registrant and Stephen F.
                Wiggins*

10(z)       --Employment Agreement, dated as of March 30,1998, by and between
                the Registrant and Marvin P. Rich*

21          --Subsidiaries of the Registrant*

23          --Consent of KPMG Peat Marwick LLP*
</TABLE>

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


                                       58