<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, 1998

                                       OR

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

For the transition period from ______________________ to ______________________


Commission File Number: 0-19442


                            OXFORD HEALTH PLANS, INC.
             (Exact name of registrant as specified in its charter)

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

800 Connecticut Avenue, Norwalk, Connecticut                       06854

     (Address of principal executive offices)                    (Zip Code)

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

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

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

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

                    Yes   X    No____

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

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

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

ITEM 1. BUSINESS

GENERAL

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

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

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

RECENT DEVELOPMENTS

      Net Losses

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

      Financings

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

      Pursuant to an Investment Agreement, dated as of February 23, 1998 (the
"Investment Agreement"), between the Company and TPG Oxford LLC (together with
the investors thereunder, the "Investors"), the Investors, on May 13, 1998,
purchased $350 million of ten-year redeemable Preferred Stock with Warrants to
acquire up to 22,530,000 shares of common stock. Simultaneously with the
consummation of the Investment Agreement, the Company issued $200 million
principal amount of 11% Senior Notes due May 15, 2005 (the "Senior Notes") and
entered into a Term Loan Agreement pursuant to which the Company borrowed $150
million in the form of a senior secured term loan (the "Term Loan"). For
additional information regarding the Preferred Stock, the 


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Warrants, the Senior Notes and the Term Loan, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources". Also simultaneously with the aforementioned transactions,
Norman C. Payson, M.D., the Company's Chief Executive Officer, purchased 644,330
shares of Oxford common stock for an aggregate purchase price of $10 million.
The investments under the Investment Agreement and by Dr. Payson and the debt
financings through the Senior Notes and the Term Loan are herein collectively
called the "Financing".

      Management Changes

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

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

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

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

      Status of Information Systems

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

      Turnaround Plan

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

      The Company has also focused on attempting to reduce losses in its
government programs by, among other things, transferring a substantial portion
of the medical cost risk associated with the provision of covered services to
its Medicare beneficiaries to certain health care provider entities in certain
counties, by withdrawing from participation in the Medicare program in other
counties and by withdrawing completely from the Medicaid business. In June 1998,
in coordination with the Health Care Financing Administration ("HCFA"), the
Company voluntarily suspended marketing and most enrollment of new members under
its Medicare programs in order to provide the Company with an opportunity to
strengthen its operations and institute certain corrective actions required by
HCFA. In February 1999, the Company reinstated marketing to and enrollment of
Medicare beneficiaries. See "Business - Products - Medicare and Medicaid",
"Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Restructuring and Unusual Charges".


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

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

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

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

      Legal Proceedings

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

PRODUCTS

      Freedom Plan

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


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Plan premiums earned during 1998, and the ten largest employer groups offering
the Freedom Plan accounted for 9.2% of Freedom Plan premiums earned in 1998.

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

      HMOs

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

      Liberty Plan

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

      Individual Plans

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

      In March 1998, the Company filed with the New York State Insurance
Department ("NYSID") proposed rate increases of 50% and 64%, respectively, for
its New York mandated individual HMO and point-of-service plans as a result of
rapidly rising medical costs in those plans. The Company believes it experiences
significant selection bias in these plans which are chosen, on average, by
individuals who require more health care services than the average commercial
population. In April 1998, the NYSID denied the Company's rate increase request,
but directed the Company to apply funds allocated to the Company from the New
York State Market Stabilization Pools against rate relief in the individual and
small group market. The Company received approximately $6.4 million in August
1998 and another $6.4 million in December 1998 from these pools. Although the
Company anticipates that it will receive refunds from these pools in 1999, there
can be no assurance that such payments will be received or, if received, will
not be less than the payments received in 1998. In addition, the NYSID is
currently finalizing regulations which will modify the methodology used to fund
these pools. The proposed changes to the operation of the pooling methodology
will affect the distribution of remaining 1997 and 1998 pool amounts. In the
fourth quarter of 1998, the Company established a $27.4 million reserve for
premium deficiency losses in the New York Individual Plans and the New Jersey
Mandated Plans. The Company currently intends to reduce the size of the provider
network serving the New York Individual Plans, subject to receipt of government
approvals, in an effort to better control medical costs and utilization to
promote affordability for the plans. The Company has filed with the NYSID to
increase its rates for this product by only 9.8% effective as of April 1, 1999.
The Company expects that operating results for the New York Individual Plans
will continue to be adversely 


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affected by high medical costs and that losses will continue in the absence of
significant additional rate or regulatory relief. Further, there can be no
assurance that the Company will be successful in implementing the network
changes, cost and utilization controls or rate increases referred to above. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations".

      Preferred Provider Organizations

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

      Medicare

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

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

      At December 31, 1998, the Company had approximately 148,600 Medicare
members enrolled in its Medicare plans compared with 161,000 members at the end
of 1997. However, as the result of the Company's withdrawal from the Medicare
program in certain counties in New York, New Jersey, Pennsylvania and
Connecticut, the Company had approximately 110,400 Medicare members as of
January 1, 1999. Medicare premiums accounted for approximately 21.9% of total
premiums earned for the year ended December 31, 1998 compared with 22.0% in 1997
and 19.8% in 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of operating losses
incurred in the Company's Medicare programs and "Legal Proceedings" for a
description of site visits by HCFA during 1998 and the beginning of 1999.

      Medicaid

      As of January 1, 1998, Oxford offered a Medicaid Healthy Start plan to
individuals eligible for Medicaid benefits in New York, New Jersey, Metropolitan
Philadelphia and Connecticut. The Company received fixed monthly premiums per
member under risk contracts with the respective state agencies administering the
Medicaid program. At December 31, 1998, approximately 97,800 members were
enrolled in the Company's Medicaid plans compared with 189,600 members at the
end of 1997. Medicaid premiums accounted for approximately 5.3% of total
premiums earned for the year ended December 31, 1998 compared with 7.7% in 1997
and 8.3% in 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of operating losses
incurred in the Company's Medicaid programs. The Company withdrew from the
Medicaid program in Connecticut and New Jersey, effective April 1, 1998 and July
1, 1998, 


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respectively. In November 1998, the Company completed an agreement to assign its
New York Medicaid contract and certain rights under its provider agreements to a
third party. In January 1999, the Company concluded the sale of its Pennsylvania
HMO subsidiary, including the Pennsylvania Medicaid business. Accordingly, as of
February 1, 1999, the Company had completed its withdrawal from participation in
all state Medicaid programs.

      Self-Funded Health Plans

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

      Other Investments

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

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

MARKETING AND SALES

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

      Internal Representatives

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

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


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      Independent Insurance Agents and Brokers

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

PHYSICIAN NETWORK

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

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

      Risk Sharing Groups

      In an effort to control increasing medical costs in its Medicare programs,
the Company has entered into agreements pursuant to which it has transferred a
substantial portion of the medical cost risk associated with the provision of
covered services to providers in certain service areas where the Company had
been experiencing substantial losses. Under these risk transfer arrangements,
providers assume a substantial portion of the risk of increasing health care
costs. The Company intends to pursue additional risk transfer agreements in
certain of its other Medicare service areas. These arrangements give rise to
regulatory issues and, among other risks and uncertainties involved in the
implementation and operation of these contracts, the Company bears the risk of
nonperformance or default by these providers. See "Legal Proceedings" for a
description of site visits by HCFA during 1998 and the beginning of 1999.

      The Company entered into two risk-sharing arrangements in the third
quarter of 1998, which became fully operational as of December 31, 1998. An
agreement with North Shore-Long Island Jewish Health Systems covers
approximately 34,400 members in certain New York counties as of December 31,
1998. An agreement with Heritage New Jersey Medical Group ("Heritage") covers
all of the Company's approximately 17,600 members in New Jersey as of December
31, 1998. The Company and the risk sharing groups have experienced operational
difficulties in implementing these transactions, including difficulties in
timely payment of provider claims by the risk sharing groups. In addition, the
New Jersey Department of Health and Senior Services has granted only a
conditional approval of the New Jersey arrangement, and the New Jersey
Department of Banking and Insurance has indicated that its final approval of the
arrangement will be subject to the condition that certain aspects of the
arrangements be modified. These modifications must be acceptable to the Company,
Heritage and the regulatory authorities. The Company and the risk sharing groups
have made progress in resolving the operational difficulties referred to above
and will attempt to address the regulatory concerns raised;


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however, no assurance can be given as to the outcome, and a failure of one of
these arrangements could have a material adverse effect on the Company's results
of operations.

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

      Physician Compensation

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

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

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

      Hospital Arrangements

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

      Other Contracted Services

      The Company has entered into new long-term risk sharing contracts for
pharmacy benefits management and laboratory services, effective January 1, 1999,
and for radiology services which is expected to be effective April 15, 1999.
These agreements are structured to provide significant savings to the Company
compared to estimated cost increases for these services over the next several
years. However, implementing these contracts involves various risks and
operational challenges, and there can be no assurance that these contracts, if
implemented, will be successful in reducing the Company's future costs.
Moreover, cost savings under these 


                                       9
<PAGE>   10
contracts are achieved in certain instances through fee reductions, more
rigorous utilization review and reductions in the size of the provider network,
all of which may adversely affect member and provider satisfaction with the
Company's benefit plans. See "Cautionary Statement Regarding Forward Looking
Statements".

CONTROL OF HEALTH CARE COSTS

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

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

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

STATUS OF INFORMATION SYSTEMS

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

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


                                       10
<PAGE>   11
      The Company has undertaken a review of its information systems needs and
capabilities. As a result of this review, the Company has decided to continue
operations on its current claims processing systems and continue to work on
requisite modifications and enhancements.

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

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

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

QUALITY MANAGEMENT

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

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

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

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


                                       11
<PAGE>   12
RISK MANAGEMENT

      The Company limits, in part, the risk of catastrophic losses by
maintaining high deductible reinsurance coverage. The Company's operating
subsidiaries also maintain insolvency coverage as required by the states in
which they do business.

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

GOVERNMENT REGULATION

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

      Federal Regulation

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

      The Company's health plans that have Medicare contracts, Oxford NY, Oxford
NJ and Oxford CT, are subject to regulation by HCFA, a branch of the United
States Department of Health and Human Services. HCFA has the right to audit
health plans operating under Medicare contracts to determine each health plan's
compliance with HCFA's contracts and regulations and the quality of care being
rendered to the health plan's Medicare members. Health plans that offer a
Medicare product must also comply with requirements established by peer review
organizations ("PROs"), which are organizations under contract with HCFA to
monitor the quality of health care received by Medicare members. PRO
requirements relate to quality assurance and utilization review procedures. In
November 1998, prior to awarding Medicare contracts to health plans for calendar
year 1999, HCFA conducted audits of Medicare applicants, including the Company.
The Company's operations were found to be qualified to enter into the Medicare
contracts. For a description of a recent site examination by HCFA, see "Legal
Proceedings".

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

      Other Federal laws which govern the Company's operations include the
Federal Health Insurance Portability and Accountability Act of 1996 ("HIPA") and
the Mental Health Parity Act of 1996 ("MHPA"). HIPA (i) ensures portability of
health insurance to individuals changing jobs or moving to individual coverage
by limiting application of preexisting condition exclusions, (ii) guarantees
availability of health insurance to employees in the small group market and
(iii) prevents exclusion of individuals from coverage under group plans based on
health status. The provisions of HIPA became effective beginning July 1, 1997.
Similar state law provisions in New York limit preexisting condition exclusions
for new group and individual enrollees who had continuous prior coverage and
require issuance of group coverage to small group employers. MHPA applies to
group health plans and health 


                                       12
<PAGE>   13
insurance issuers and became effective for plan years beginning on or after
January 1, 1998. MHPA prohibits group health plans and health insurance issuers
providing mental health benefits from imposing lower aggregate annual or
lifetime dollar-limits on mental health benefits than any such limits for
medical or surgical benefits. MHPA's requirements do not apply to small
employers who have between 2 and 50 employees or to any group health plan whose
costs increase one percent or more due to the application of these requirements.

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

      State Regulation

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

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

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

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

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

      Applicable New York statutes and regulations require the prior approval of
the New York State Commissioner of Health and the New York State Superintendent
of Insurance for any change of control of Oxford NY or the 


                                       13
<PAGE>   14
Company and the prior approval of the New York State Superintendent of Insurance
for any change of control of OHI or the Company. Similar laws in other states
where the Company does business require insurance department approval of any
change in control of the Company or the relevant subsidiary. For purposes of
these statutes and regulations, generally "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of an entity. Control is presumed to exist when a
person, group of persons or entity acquires the power to vote 10% or more of the
voting securities of another entity. Therefore, prior approval is required for
any person to acquire the power to vote 10% or more of the voting securities of
the Company. Applications for approval of TPG's investment in the Company were
filed with and approved by the appropriate regulatory authorities in New York,
New Jersey, Connecticut, Pennsylvania, New Hampshire, Florida and Illinois prior
to completing the investment pursuant to the Investment Agreement. See "Business
- Recent Developments".

      Recent Regulatory Developments

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

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


                                       14
<PAGE>   15
the 1997 Act on Medicare plans and on the success of the Medicare program in
general. As result of this review, Congress may further change the Mechanism and
other Medicare payment methodologies.

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

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

      New York State has recently passed several pieces of legislation which
affect the Company's business. Effective January 22, 1998, New York implemented
prompt payment requirements which require health plans to pay clean claims
within 45 days of receipt and to pay interest on delayed claims at a rate of 12%
per annum commencing on the forty-sixth day after a clean claim is received by
the plan. See "Legal Proceedings - State Insurance Departments". Effective
January 1, 1998, New York passed legislation mandating coverage of chiropractic
benefits. Effective July 1, 1999, New York State will implement an independent
external appeal process for members who have been denied coverage of health care
services based on a determination by the plan that the service is not medically
necessary or such service is experimental or investigational. The effect of this
new regulation on the Company cannot be predicted at this time. The graduate
medical education and bad debt and charity care assessments authorized by the
New York Health Care Reform Act expires on December 31, 1999. The New York
legislature may reauthorize these assessments during the 1999 legislative
session. However, if such assessments are reauthorized, the Company cannot
predict whether these assessments will increase or decrease from their prior
levels.

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

      Over the past several years there has been significant public controversy
surrounding alleged abuses by managed care plans and widely publicized instances
where care or payment for care has allegedly been inappropriately withheld or
delayed. This has led to significant public and political support for reform of
managed care regulation. The U.S. Congress and each of the states in which
Oxford operates are currently considering regulations or legislation relating to
mandatory benefits (such as mental health), provider compensation arrangements,
health plan liability to members who do not receive appropriate care, disclosure
and composition of physician networks, and Congress is considering significant
changes to the Medicare program, including changes which could significantly
reduce reimbursement to HMOs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". In recent years, bills have been
introduced in the legislature in 


                                       15
<PAGE>   16
New York, New Jersey and Connecticut including some form of the so-called "Any
Willing Provider" initiative which would require HMOs, such as the Company's HMO
subsidiaries, to allow any physician meeting their credentialing criteria to
join their physician network regardless of geographic need, hospital admitting
privileges and other important factors. Certain of these bills have also
included provisions relating to mandatory disclosure of medical management
policies and physician reimbursement methodologies. Numerous other health care
proposals have been introduced in the U.S. Congress and in state legislatures.
These include provisions which place limitations on premium levels, impose
health plan liability to members who do not receive appropriate care, increase
minimum capital and reserves and other financial viability requirements,
prohibit or limit capitated arrangements or provider financial incentives,
mandate benefits (including mandatory length of stay with surgery or emergency
room coverage) and limit the ability to manage care. If enacted, certain of
these proposals could have an adverse effect on the Company.

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

COMPETITION

      HMOs and health insurance companies operate in a highly competitive
environment. The Company has numerous competitors, including for-profit and
not-for-profit HMOs, PPOs, and indemnity insurance carriers, some of which have
substantially larger enrollments and greater financial resources than the
Company. The Company competes with independent HMOs, such as Health Insurance
Plan of New York, which have significant enrollment in the New York metropolitan
area. The Company also competes with HMOs and managed care plans sponsored by
large health insurance companies, such as CIGNA Corporation, Aetna U.S.
Healthcare Inc., UnitedHealth Group and Blue Cross/Blue Shield. These
competitors have large enrollment in the Company's service areas and, in some
cases, greater financial resources than the Company. Aetna U.S. Healthcare, Inc.
has announced an agreement to acquire the health plan business of The Prudential
Insurance Company, and additional consolidation of competitors is likely.
Additional competitors may enter the Company's markets in the future. The
Company believes that the network of providers under contract with Oxford is an
important competitive factor. However, the cost of providing benefits is in many
instances the controlling factor in obtaining and retaining employer groups, and
certain of Oxford's competitors have set premium rates at levels below Oxford's
rates for comparable products. Oxford anticipates that premium pricing will
continue to be highly competitive. Recent developments concerning the Company
may also adversely affect the Company's ability to compete for commercial group
business and Medicare members.

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

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

EMPLOYEES

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


                                       16
<PAGE>   17
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

      Net losses; restructuring and unusual charges

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

      A significant portion of the loss incurred by the Company in 1998 was
associated with restructuring and unusual charges relating to the Company's
Turnaround Plan. These restructuring and unusual charges are based on estimates
of the anticipated costs to the Company of taking the actions contemplated by
the Turnaround Plan, including disposition of certain businesses and assets.
There can be no assurance that these estimates correctly reflect the ultimate
costs which the Company will incur in implementing the Turnaround Plan.

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

      Inability to control, and unpredictability of, health care costs

      Oxford's future results of operations depend, in part, on its ability to
predict and maintain effective control over health care costs (through, among
other things, appropriate benefit design, utilization review and case management
programs and risk-sharing and other payment arrangements with providers) while
providing members with coverage for the health care benefits provided under
their contracts. However, Oxford's ability to control such costs may be affected
by various factors, including: new technologies and health care practices,
hospital costs, changes in demographics and trends, selection biases, increases
in unit costs paid to providers, major epidemics, catastrophes, inability to
establish acceptable compensation arrangements with providers, operational and
regulatory issues which could delay, prevent or impede those arrangements, and
higher utilization of medical services, including higher out-of-network
utilization under point of service plans. There can 


                                       17
<PAGE>   18
be no assurance that Oxford will be successful in mitigating the effect of any
or all of the above-listed or other factors.

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

      The effect of high administrative costs on results

      In 1999, the Company expects that results will continue to be adversely
affected by high administrative costs associated with the Company's efforts to
strengthen its operations and service levels and address systems issues,
including those related to Year 2000 readiness. Although a key element of the
Company's Turnaround Plan is a reduction in administrative expenses, no
assurance can be given that the Company will not continue to experience
significant service and systems infrastructure problems in 1999 and beyond which
could have a significant impact on administrative costs. Further, the Company
has been adversely affected by high administrative costs in connection with
increased levels of employee attrition over the last several quarters, and there
can be no assurance that the Company will not continue to experience such
attrition in 1999.

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

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

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

      Premiums for Oxford's Medicare programs are determined through formulas
established by HCFA for Oxford's Medicare contracts. Federal legislation enacted
in 1997 provides for future adjustment of Medicare reimbursement by HCFA which
could reduce the reimbursement received by the Company. Premium reductions, or
premium rate increases in a particular region that are lower than the rate of
increase in health care service expenses for Oxford's Medicare members in such
region, could adversely affect Oxford's results of operations. Risk transfer
provider agreements entered into by Oxford could be adversely affected by
regulatory actions or by the failure of the providers to comply with the terms
of such agreements. Such agreements could also have an 


                                       18
<PAGE>   19
adverse effect on the Company's membership or its relationship with its other
providers. Oxford's Medicare programs are subject to certain additional risks
compared to commercial programs, such as higher comparative medical costs and
higher levels of utilization. Oxford's Medicare programs are subject to higher
marketing and advertising costs associated with selling to individuals rather
than to groups. Further, there can be no assurance that the Company will be
successful in completing or operationalizing such risk transfer and other
provider arrangements. See "Business - Government Regulation" and "Legal
Proceedings".

      Service and systems infrastructure problems caused by rapid growth

      The Company experienced rapid growth in its business and in its staff
since it began operations in 1986 through 1997. The Company has and will
continue to be affected by its ability to manage such growth effectively,
including its ability to continue to develop processes and systems to support
its operations. In September 1996, the Company converted a significant part of
its business operations to a new computer operating system. Unanticipated
software and hardware problems arising in connection with the conversion
resulted in significant delays in the Company's claims payments and group and
individual billing and adversely affected claims payment and billing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The Company does not intend to promote significant membership or
revenue growth in 1999 because the Company's priority in 1999 will continue to
be to attempt to strengthen its service and systems infrastructure, reduce
medical and administrative spending and increase premium rates. No assurance can
be given that the Company will not continue to experience significant service
and systems infrastructure problems, high levels of medical and administrative
spending and difficulties in obtaining premium rate increases in 1999 and
beyond. In addition, the Company has experienced attrition of its Medicare and
commercial business in 1998 and there can be no assurance that the Company will
be successful in the future in promoting membership growth and will not continue
to experience membership attrition.

      Health care provider network

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

      Management of information systems

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

      Year 2000 readiness

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

      Recent events and related publicity

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


                                       19
<PAGE>   20
      Collectibility of advances

   As part of its attempts to ameliorate delays in processing claims for payment
in 1997, the Company advanced approximately $276 million to providers pending
the Company's disposition of claims for payment. As of December 31, 1998,
approximately $139.5 million, net of allowances, remained outstanding. See
"Management's Discussion Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". The NYSID is requiring the Company
to obtain written acknowledgments of such advances from recipients of advances,
and the New Jersey Department of Banking and Insurance is requiring the Company
to provide certain collateral for repayment of the advances by setting aside in
trust at the parent company funds equal to the admitted portions of the advances
on the New Jersey subsidiary's statutory financial statements. If the Company is
unable to receive written acknowledgments or fails to provide such collateral
there can be no assurance that the insurance regulators will continue to
recognize such advances as admissible assets for regulatory purposes. If the
insurance regulators do not recognize such advances as admissible assets, the
capital of certain of the Company's regulated subsidiaries could be impaired.
The Company may be required to make additional capital contributions to
compensate for any impairment. Although the Company believes that the advances
will be repaid, there can be no assurance that this will occur.

   Concentration of business

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


                                       20
<PAGE>   21
ITEM 2. PROPERTIES

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

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

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

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

ITEM 3. LEGAL PROCEEDINGS

      SECURITIES CLASS ACTION LITIGATION

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

      The complaints in these lawsuits purport to be class actions on behalf of
purchasers of Oxford's securities during varying periods beginning on February
6, 1996 through December 9, 1997. The complaints generally allege that
defendants violated Section 10(b) of the Securities Exchange Act of 1934
("Exchange Act") and Rule 10b-5 thereunder by making false and misleading
statements and by failing to disclose certain allegedly material information
regarding changes in Oxford's computer system, and the Company's membership


                                       21
<PAGE>   22
enrollment, revenues, medical expenses, and ability to collect on its accounts
receivable. Certain of the complaints also assert claims against the individual
defendants alleging violations of Section 20(a) of the Exchange Act and claims
against all of the defendants for negligent misrepresentation. The complaints
also allege that in violation of Section 20A of the Exchange Act certain of the
individual defendants disposed of Oxford's common stock while the price of that
stock was artificially inflated by allegedly false and misleading statements and
omissions. The complaints seek unspecified damages, attorneys' and experts' fees
and costs, and such other relief as the court deems proper.

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

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

      The purported class actions commenced in the United States District Court
for the District of Connecticut are Heller v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02295 (filed Oct. 28, 1997); Fanning v. Oxford Health Plans, Inc., et
al., No. 397 CV 02300 (filed Oct. 29, 1997); Lowrie, IRA v. Oxford Health Plans,
Inc., et al., No. 397 CV 02299 (filed Oct. 29, 1997); Barton v. Oxford Health
Plans, Inc., et al., No. 397 CV 02306 (filed Oct. 30, 1997); Sager v. Oxford
Health Plans, Inc., et al., No. 397 CV 02310 (filed Oct. 30, 1997); Cohen v.
Oxford Health Plans, Inc., et al., No. 397 CV 02316 (filed Oct. 31, 1997);
Katzman v. Oxford Health Plans, Inc., et al., No. 397 CV 02317 (filed Oct. 31,
1997); Shapiro v. Oxford Health Plans, Inc., et al., No. 397 CV 02324 (filed
Oct. 31, 1997); Willis v. Oxford Health Plans, Inc., et al., No. 397 CV 02326
(filed Oct. 31, 1997); Saura v. Oxford Health Plans, Inc., et al., No. 397 CV
02329 (filed Nov. 3, 1997); Selig v. Oxford Health Plans, Inc., et al., No. 397
CV 02337 (filed Nov. 4, 1997); Brandes v. Oxford Health Plans, Inc., et al., No.
397 CV 02343 (filed Nov. 4, 1997); Ross v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02344 (filed Nov. 4, 1997); Sole v. Oxford Health Plans, Inc., et
al., No. 397 CV 02345 (filed Nov. 4, 1997); Henricks v. Wiggins, et al., No. 397
CV 02346 (filed Nov. 4 1997); Williams v. Oxford Health Plans, Inc., et al., No.
397 CV 02348 (filed Nov. 5, 1997); Direct Marketing Day in New York, Inc. v.
Oxford Health Plans, Inc., et al., No. 397 CV 02349 (filed Nov. 5, 1997); Howard
Vogel Retirement Plans, Inc., et al. v. Oxford Health Plans, Inc., et al., No.
397 CV 02325 (filed Oct. 31, 1997 and amended Dec. 17, 1997); Serbin v. Oxford
Health Plans, Inc., et al., No. 397 CV 02426 (filed Nov. 18, 1997); Hoffman v.
Oxford Health Plans, Inc., et al., No. 397 CV 02458 (filed Nov. 24, 1997);
Armstrong v. Oxford Health Plans, Inc., et al., No. 397 CV 02470 (filed Nov. 25,
1997); Roeder, et al. v. Oxford Health Plans, Inc., et al., No. 397 CV 02496
(filed Nov. 26, 1997); Braun v. Oxford Health Plans, Inc., et al., No. 397 CV
02510 (filed Dec. 1, 1997); Blauvelt, et al. v. Oxford Health Plans, Inc., et
al., No. 397 CV 02512 (filed Dec. 2, 1997); Hobler et al. v. Oxford Health
Plans, Inc., et al., No. 397 CV 02535 (filed Dec. 3, 1997); Bergman v. Oxford
Health Plans, Inc., et al., No. 397 CV 02564 (filed Dec. 8, 1997); Pasternak v.
Oxford Health Plans, Inc., et al., No. 397 CV 02567 (filed Dec. 8, 1997);
Perkins Partners I, Ltd. v. Oxford Health Plans, Inc., et al., No. 397 CV 02573
(filed Dec. 9, 1997); N.I.D.D., Ltd. v. Oxford Health Plans, Inc., et al., No.
397 CV 02584 (filed Dec. 9, 1997); Burch v. Oxford Health Plans, Inc., et al.,
No. 397 CV 02585 (filed Dec. 9, 1997); Mark v. Oxford Health Plans, Inc., et
al., No. 397 CV 02594 (filed Dec. 11, 1997); Ross, et al. v. Oxford Health
Plans, Inc., et al., No. 397 CV 02613 (filed Dec. 12, 1997); Lerchbacker v.
Oxford Health Plans, Inc., et al., No. 397 CV 02670 (filed Dec. 22, 1997); State
Board of Administration of Florida v. Oxford Health Plans, Inc., et al., No. 397
CV 02709 (filed Dec. 29, 1997) (the complaint, although purportedly not brought
on behalf of a class of shareholders, invites similarly situated persons to join
as plaintiffs); and Ceisler v. Oxford Health Plans, Inc., et al., No. 397 CV
02729 (filed Dec. 31, 1997).

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


                                       22
<PAGE>   23
      The Company anticipates that additional class action complaints containing
similar allegations may be filed in the future.

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

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

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

      On December 18, 1998, Oxford and the individual defendants moved to
dismiss the Amended Complaint on the grounds that: (1) plaintiffs have failed to
allege with particularity, as required by the Private Securities Litigation
Reform Act of 1995 (the "PSLRA") and Rule 9(b) of the Federal Rules of Civil
Procedure, that any of the defendants acted with scienter; (2) plaintiffs cannot
premise their securities fraud claims on allegations of mismanagement; (3)
plaintiffs have failed, as required by the PSLRA and Rule 9(b), to specify the
particular facts on which they base their allegations on "information and
belief"; (4) none of the misstatements or omissions alleged in the Amended
Complaint are actionable under the federal securities law; (5) the individual
defendants cannot be liable under the federal securities laws for alleged
misstatements that they did not make; (6) no basis exists for "controlling
person" liability under Section 20(a) of the Exchange Act; and (7) no basis
exists for illegal insider trading liability under Section 20A of the Exchange
Act. Briefing on the motion to dismiss is scheduled to be completed on April 2,
1999.

      The State Board of Administration of Florida (the "SBAF") has stipulated
that, in the action brought by it individually (the "SBAF Action"), it will be
bound by the dismissal of any claims it has that are asserted in the Amended
Complaint. In addition, the parties have stipulated, and Judge Brieant has
ordered, that SBAF may file an amended complaint ("Amended SBAF Complaint")
within thirty (30) days after Judge Brieant rules on Oxford's and the individual
defendants' motion to dismiss the class actions. The Amended SBAF Complaint
likely will assert claims similar to those asserted in the Amended Complaint in
the purported class actions (see above). 


                                       23
<PAGE>   24
The Amended SBAF Complaint may also assert claims against all of the defendants
alleging: (i) violations of Section 18(a) of the Exchange Act, by virtue of
alleged false and misleading information disseminated in the 10-K report Oxford
filed for the year ended December 31, 1996; (ii) violations of the Florida Blue
Sky laws; and (iii) common law fraud and negligent misrepresentation. The
Amended SBAF Complaint likely will seek unspecified damages, attorneys' and
experts' fees and costs, and such other relief as the court deems proper.
Defendants intend to move to dismiss the SBAF Action, to the extent it includes
claims not precluded by Judge Brieant's decision on the motions to dismiss the
Amended Complaint. Pursuant to a stipulation so-ordered by Judge Brieant, such a
motion is to be filed within sixty days after the later of either a ruling on
Oxford's and the individual defendants' motion to dismiss the securities class
actions or the serving upon Oxford of the Amended SBAF Complaint.

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

      SHAREHOLDER DERIVATIVE LITIGATION

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

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

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

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

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

      In March 1998, Oxford and certain of the individual defendants moved to
dismiss or, alternatively, to stay the Connecticut derivative actions. Since
then, the parties to the Connecticut derivative actions have stipulated, under
certain conditions, to hold all pretrial proceedings in those actions in
abeyance during the pretrial proceedings in the federal derivative actions, and
to allow the plaintiffs in the Connecticut derivative actions to participate to
a limited extent in any discovery that is ultimately ordered in the federal
derivative actions. 


                                       24
<PAGE>   25
Stipulations memorializing this agreement have been entered in the Connecticut
derivative actions. On February 19, 1999, Judge Brieant entered an order in the
federal derivative actions permitting the plaintiffs in the Connecticut
derivative actions to participate to a limited extent in any discovery that
ultimately occurs in the federal derivative actions.

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

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

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

      Pursuant to stipulations entered into and filed by the parties and
expected to be so ordered by Judge Brieant, defendants must answer, move or
otherwise respond to the Amended Derivative Complaint on or before March 15,
1999. These stipulations further provide that proceedings in the federal
derivative actions are stayed in all respects until March 15, 1999 (and during
the pendency of any motion to dismiss those actions), unless any of the parties
provides written notice of their desire to terminate this stay, in which case
defendants shall have sixty (60) days from such notice to answer, move to
dismiss the Amended Derivative Complaint or, in the alternative, to stay the
federal derivative actions pending resolution of the securities class actions
(see above).

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

      STATE INSURANCE DEPARTMENTS

      On August 10, 1998, the New York State Insurance Department ("NYSID")
completed its triennial examination and market conduct examination of Oxford's
New York HMO and insurance subsidiaries. In the Reports on Examination (the
"Reports") the NYSID, based on information available through July 1998,
determined that certain assets on the December 31, 1997 balance sheets of the
Company's New York subsidiaries should not be admitted for statutory reporting
purposes and NYSID actuaries recorded additional reserves totaling approximately
$81.3 million for both subsidiaries on the balance sheet as determined by the
examiners. The Company contributed $152 million to the capital of its New York
HMO and insurance subsidiaries in satisfaction 


                                       25
<PAGE>   26
of the issues raised in the Reports relating to the subsidiaries' financial
statements, and maintaining such subsidiaries' compliance with statutory capital
requirements as of June 30, 1998. The Reports also made certain recommendations
relating to financial record-keeping, settlement of intercompany accounts and
compliance with certain NYSID regulations. The Company has agreed to address the
recommendations in the Reports. As previously reported, in December 1997, the
Company made additions of $164 million to the reserves of its New York
subsidiaries at the direction of the NYSID. The NYSID issued a Market Conduct
Report identifying several alleged violations of state law and NYSID
regulations. On December 22, 1997, the NYSID and Oxford entered into a
stipulation under which Oxford promised to take certain corrective measures and
to pay restitution and a $3 million fine. The stipulation provides that the
NYSID will not impose any other fines for Oxford's conduct up to November 1,
1997. The NYSID has directed the Company's New York subsidiaries to obtain notes
or other written evidence of agreements to repay from each provider who has
received an advance. The NYSID has continued to review market conduct issues,
including, among others, those relating to claims processing and continues to
express concern with the Company's claims turnaround and performance. The
Company has agreed to take certain other corrective actions with respect to
certain of these market conduct issues, but additional corrective action may be
required and such actions could adversely affect the Company's results of
operations.

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

      The NYSID has also raised certain issues relating to the Company's
methodology for determining premium rates for the Company's large group
business. The Company believes the NYSID will likely issue rule interpretations
which affect pricing practices of the Company and competing health plans in the
large group market. These interpretations could have the effect of requiring
changes in health plan pricing practices and the form in which the Company's
large group Freedom Plan product is offered to customers in the future.

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

      The New Jersey Department of Banking and Insurance ("NJDBI") is nearing
completion of its market conduct and financial examinations of the Company's New
Jersey HMO subsidiary. The market conduct examination relates to the
subsidiary's activities in 1997 and the first half of 1998 and is expected to
assert deficiencies relating to, among others, claims processing and handling of
complaints. The NJDBI may seek imposition of a fine in connection with
completion of the examination. In connection with the financial examination, the
NJDBI is requiring the Company to provide certain collateral for repayment of
advances made in 1997 to providers in respect of delayed claims by setting aside
in trust at the parent company funds equal to the admitted portions of the
advances on the New Jersey subsidiary's statutory financial statements. The
Company is also subject to ongoing examinations with respect to financial
condition and market conduct for its HMO and insurance subsidiaries in other
states where it conducts business. The outcome of these examinations cannot be
predicted at this time.

      NEW YORK STATE ATTORNEY GENERAL

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

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


                                       26
<PAGE>   27
      The Company has subsequently responded to a number of inquiries by the
Attorney General with respect to Oxford's compliance with the Assurance of
Discontinuance. On February 2, 1998, the Attorney General served a subpoena
duces tecum on Oxford seeking production of certain documents relating to
complaints from providers and subscribers regarding nonpayment or untimely
payment of claims, interest paid under the Assurance, accounts payable, provider
claims processing, and suspended accounts payable. Oxford has produced documents
in response to the subpoena.

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

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

      SECURITIES AND EXCHANGE COMMISSION

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

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

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

      HEALTH CARE FINANCING ADMINISTRATION

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


                                       27
<PAGE>   28
      ARBITRATION PROCEEDINGS

      As previously reported by the Company, on February 3, 1998, the New York
County Medical Society ("NYCMS") initiated an arbitration proceeding before the
American Arbitration Association ("AAA") in New York against Oxford alleging
breach of the written agreements between Oxford and some NYCMS physician members
and failure to adopt standards and practices consistent with the intent of those
agreements. The notice of intention to arbitrate was subsequently amended to
join thirteen additional New York medical associations as co-claimants. NYCMS
and the other claimants seek declaratory and injunctive relief requiring various
changes to Oxford's internal practices and policies, including practices in the
processing and payment of claims submitted by physicians. Oxford 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. On or about September
9, 1998, the NYCMS announced that it was breaking off settlement negotiations
with Oxford, and would resume its litigation against Oxford.

      Also, some individual physicians claiming that payments under their
contracts with Oxford were delayed have announced their intention to seek
arbitration, one of which has been withdrawn by the physician. Oxford has been
served with additional notices of intent to arbitrate, on behalf of more than
twenty individual physicians, many of which may not have been filed with the
AAA. At least six arbitration proceedings have been filed and commenced by
individual physicians.

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

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

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

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

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

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


                                       28
<PAGE>   29
      OTHER

      On May 18, 1998, a purported "Class Action Complaint" was brought against
Oxford and other un-named defendant plan administrators filed in the United
States District Court for the Eastern District of New York by four plaintiffs
who claim to be beneficiaries of defendants' health insurance plans seeking
declaratory and other relief from defendants for alleged wrongful denial of
insurance coverage for the drug Viagra. On September 8, 1998, Oxford moved to
dismiss the complaint based on plaintiffs' failure to exhaust their
administrative remedies; the outcome of this motion cannot be predicted this
time.

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

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

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

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

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


                                       29
<PAGE>   30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

                                     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.

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

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

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

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


                                       30
<PAGE>   31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

<TABLE>
<CAPTION>
(In thousands, except per share 
amounts and operating statistics)                1998           1997           1996        1995 (3)     1994 (3)
------------------------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>            <C>           <C>           <C>
REVENUES AND EARNINGS:
   Operating revenues                        $ 4,630,166    $ 4,179,816    $ 3,032,569   $ 1,745,975   $   752,832
   Investment and other income, net               89,245         71,448         42,620        19,711         7,479
   Net earnings (loss)                          (596,792)      (291,288)        99,623        52,398        28,231
   Net earnings (loss)          
   attributable to common shares                (624,460)      (291,288)        99,623        52,398        28,231
FINANCIAL POSITION:
   Working capital                               209,443         85,790        451,957       103,448        71,731
   Total assets                                1,637,750      1,390,101      1,356,397       611,149       331,084
   Long-term debt                                350,000             --             --            --            --
   Redeemable preferred stock                    298,816             --             --            --            --
   Common shareholders' equity (deficit)        (181,105)       349,216        598,170       220,033       132,394
NET EARNINGS (LOSS) PER COMMON SHARE (1):
   Basic                                     $     (7.79)   $     (3.70)   $      1.34   $      0.78   $      0.43
   Diluted                                   $     (7.79)   $     (3.70)   $      1.25   $      0.71   $      0.40
   Weighted-average number of
     Common shares outstanding:
      Basic                                       80,120         78,635         74,285        67,450        65,410
      Diluted                                     80,120         78,635         79,662        73,344        70,554
OPERATING STATISTICS:
   Enrollment                                  1,881,400      2,008,100      1,535,500     1,007,700       513,000
   Fully insured member months                23,081,900     21,584,700     15,604,400     9,338,610     4,101,863
   Self-funded member months                     765,500        602,900        474,200       514,200       524,000
   Medical loss ratio (2)                           93.7%          94.0%          80.1%         77.5%         74.1%
</TABLE>

(1)   Per share amounts and weighted-average number of common share amounts have
      been restated to reflect the two-for-one stock splits in 1996 and 1995.

(2)   Defined as health care services expense as a percentage of premiums
      earned.

(3)   In July 1995, the Company completed a merger with OakTree Health Plan,
      Inc. ("OakTree") whereby OakTree was merged into a subsidiary of the
      Company. The merger was accounted for as a pooling of interests and,
      accordingly, all prior period consolidated financial statements have been
      restated as if the merger took place at the beginning of such periods.


                                       31
<PAGE>   32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

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

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

      The Company experienced substantial growth in membership and revenues
since it began operations in 1986 through 1997. The membership and revenue
growth has been accompanied by increases in the cost of providing health care in
the Company's service areas. The Company experienced declines in membership and
revenue through 1998 and such declines may continue through 1999 and beyond. The
Company does not intend to promote significant membership or revenue growth in
1999 because the Company has redirected 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.


                                       32
<PAGE>   33
      The following table provides certain statement of operations data
expressed as a percentage of total revenues and the medical loss ratio for the
years indicated:

<TABLE>
<CAPTION>
                                                      1998       1997      1996
--------------------------------------------------------------------------------
<S>                                                  <C>        <C>       <C>
Revenues:
   Premiums earned                                    97.7%      98.0%      98.3%
   Third-party administration, net                     0.4%       0.3%       0.3%
   Investment and other income, net                    1.9%       1.7%       1.4%
--------------------------------------------------------------------------------
     Total revenues                                  100.0%     100.0%     100.0%
--------------------------------------------------------------------------------

Expenses:
   Health care services                               91.6%      92.1%      78.8%
   Marketing, general and
   administrative                                     16.4%      17.3%      15.5%
   Interest and other financing costs                  1.2%       0.3%        --
   Restructuring charges                               3.0%        --         --
   Unusual charges                                     0.8%       1.0%        --
--------------------------------------------------------------------------------
     Total expenses                                  113.0%     110.7%      94.3%
--------------------------------------------------------------------------------

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

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

Medical loss ratio                                    93.7%      94.0%      80.1%
================================================================================
</TABLE>

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


                                       33
<PAGE>   34
RESTRUCTURING AND UNUSUAL CHARGES

      The Company recorded restructuring charges totaling $174.5 million ($165.8
million after income taxes, or $2.08 per share) in the first half of 1998. These
charges resulted from the Company's actions to better align its organization and
cost structure as part of the Company's Turnaround Plan. These charges included
estimated costs related to: (i) the disposition or closure of noncore
businesses; (ii) expected losses on government contracts; (iii) write-down of
certain property and equipment; (iv) severance and related costs; and (v) costs
of operations consolidation, including long term lease commitments. These
reserves are generally classified in the Company's balance sheet as accounts
payable and accrued expenses with the exception of property and equipment
reserves, which have been classified against fixed assets. These reserve charges
and their activity for 1998 are summarized in the table below: [OBJECT OMITTED]

<TABLE>
<CAPTION>
                                                                                             Ending
                                    Restructuring                 Noncash     Changes in  Restructuring
(In thousands)                         Charges     Cash Used      Activity      Estimate     Reserves
-------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>            <C>           <C>         <C> 
Provisions for loss on
  noncore businesses                  $ 55,700       $ (9,827)     $(18,725)     $(13,343)   $13,805

Provisions for loss on government
  contracts                             51,000        (31,800)           --       (19,200)        --

Write-down of property and
  equipment                             29,272             --        (6,308)       (1,005)    21,959

Severance and related costs             24,800         (4,246)      (11,200)           --      9,354

Costs of consolidating operations       13,728           (548)           --         4,505     17,685
                                    -------------------------------------------------------------------
                                      $174,500       $(46,421)     $(36,233)     $(29,043)   $62,803
                                    ===================================================================
</TABLE>

      The changes in estimate totaling $29.0 million were recognized as a credit
to restructuring charges in the fourth quarter of 1998 and reduced the net loss
by $.36 per share.

      Provisions for loss on noncore business

      As part of its Turnaround Plan, the Company decided to withdraw from
noncore markets in Pennsylvania, Illinois, Florida and New Hampshire by selling
or closing its health plans in these markets. Total premium revenue for these
businesses in 1998 was approximately $170.4 million, with operating losses
totaling approximately $37.0 million. In addition, the Company decided to close
its specialty management initiatives and to sell or close certain other health
care services operations and investments in noncore businesses. Restructuring
reserves were established relating to estimated losses associated with premium
deficiencies in the HMO subsidiaries to be sold or closed, the net book value of
noncore investments were reduced to their estimated recoverable value, and
accruals were recorded for incremental disposition and closing costs associated
with the Turnaround Plan. During the second half of 1998, the Company entered
into an agreement to sell its Pennsylvania subsidiary to a third party for $7.1
million in cash plus a capital surplus note for $2.5 million and transferred its
membership in Illinois to a third party. Operations in Florida, Pennsylvania and
New Hampshire are expected to be closed by the middle of 1999 pursuant to plans
adopted during 1998. Based on favorable progress to date, the Company has
revised its estimate of the remaining costs associated with the final
disposition or closure of these operations, and accordingly a total of $13.3
million of reserves were reversed as a reduction of restructuring charges in the
fourth quarter of 1998. The Company expects to complete the closure or disposal
of these noncore businesses in 1999.

      Provisions for loss on government contracts

      As part of its Turnaround Plan, the Company decided to restructure its
current Medicare arrangements and/or withdraw from Medicare in certain counties
and to withdraw from Medicaid business entirely. Premium deficiency reserves
totaling $51.0 million were established in the second quarter of 1998. This
amount represented an estimate of the deficiency for the remainder of 1998
pending implementation of the plan to restructure or withdraw from these
businesses.

      The Company entered into an agreement to dispose of its remaining Medicaid
business in the fourth quarter of 1998, completed two Medicare risk transfer
agreements late in the third quarter of 1998 and notified HCFA in the fourth
quarter of 1998 of its intention to withdraw from Medicare in certain counties
effective January 1, 1999. Amortization of the 


                                       34
<PAGE>   35
reserves against losses in these programs amounted to $31.8 million in the
second half of 1998. As a result of the Company's early completion of this
portion of its Turnaround Plan, the remaining reserve balance of $19.2 million
was reversed as a reduction of restructuring charges in the fourth quarter of
1998.

      Write-down of property and equipment

      In connection with the Company's attempts to reduce administrative costs
under the Turnaround Plan, the Company decided to consolidate operations and
reduce its occupied square footage from approximately 2,000,000 square feet
under lease to approximately 1,200,000 square feet. Additionally, the Company
anticipated and experienced a reduction in workforce of over 1,000 employees as
a result of this consolidation and its administrative expense reduction plan. A
reserve of approximately $29.3 million, against approximately $37.1 million of
net book value, was established for the estimated unrecoverable book value of
furniture and equipment and leasehold improvements no longer in use as a result
of these steps. Estimated recoveries were determined by the Company based upon a
specific review of the relevant fixed assets and the Company's prior experience
in connection with past dispositions of similar assets. The effect of this
write-down was to reduce depreciation expense by approximately $6.3 million for
the second half of 1998. The Company expects these activities to be completed
over the next 18 to 24 months.

      Severance and related costs

      The Company's Turnaround Plan contemplated significant changes in the
Company's senior management and, in connection therewith, certain members of the
former management team were granted severance arrangements. As a result, the
Company recorded restructuring charges related to severance costs of $20.8
million in the first quarter of 1998 and an additional $4.0 million in the
second quarter of 1998 for fifteen former executives and managers. The December
31, 1998 balance represents contracted amounts payable through the first half of
2001.

      Costs of consolidating operations

      In connection with the consolidating of operations to reduce its occupied
square footage, restructuring charges totaling approximately $13.7 million were
recorded in the first half of 1998 for estimated costs associated with future
rental obligations (net of estimated sublease revenues), commissions, legal
costs, penalties and other expenses relating to disposition of excess space. The
Company recorded an additional restructuring charge of approximately $4.5
million in the fourth quarter as a change in estimate as the Company's
experience in negotiating subleases and lease cancellations through the fourth
quarter indicates that costs will exceed previous estimates. The Company's
relevant lease obligations extend to July 2005, but the Company expects that a
significant portion of the expense will be incurred prior to January 1, 2000,
including termination fees aggregating approximately $2.4 million.

      Unusual charges and gain on Health Partners

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

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

      The 1997 charges resulted from a reduction in the level of future
investment in expansion markets and, accordingly, the Company wrote down its
investments in its Florida and Illinois subsidiaries and one affiliate. 


                                       35
<PAGE>   36
These write downs have been shown as unusual charges in the accompanying
financial statements and are summarized as follows:

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

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

<TABLE>
<CAPTION>
                                                           Before             After
Quarter ended June 30, 1998 (Dollars in thousands)    Reclassification   Reclassification
-----------------------------------------------------------------------------------------
<S>                                                   <C>                <C>       
Total revenues                                           $1,191,112        $1,191,112
Health services expenses                                  1,188,265         1,256,214
Marketing, general and administrative expenses              203,659           227,968
Restructuring charges                                       174,266           149,500
Unusual charges                                             111,790            38,341
Income tax expense                                               --             5,957
                                                                          
Medical loss ratio                                            102.8%            108.7%
Administrative loss ratio                                      17.6%             19.6%
</TABLE>
                                                                       
      Software and hardware problems experienced in the conversion of a portion
of the Company's computer system in September 1996 resulted in significant
delays in the Company's billing of group and individual customers and have
adversely affected the Company's premium billing. The Company's revenues were
adversely affected by adjustments of approximately $173.5 million in 1997 and
$218.2 million in 1998 related to estimates for terminations of group and
individual members and for nonpaying group and individual members. The Company
has taken steps to attempt to improve billing timeliness, reduce billing errors,
reduce lags in recording enrollment and disenrollment notifications, and improve
the Company's collection processes and is attempting to make requisite
improvements in management information systems concerning the value and aging of
outstanding accounts receivable. The Company continues to experience significant
levels of retroactive member and group terminations impacting revenue and
believes it has made adequate provision in its estimates for group and
individual member terminations and for nonpaying group and individual members as
of December 31, 1998. Adjustments to the estimates may be necessary, however,
and any such adjustments would be included in the results of operations for the
period in which such adjustments were made.

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

      The Company's results of operations are dependent, in part, on its ability
to predict and maintain effective control over health care costs (through, among
other things, appropriate benefit design, utilization review and case management
programs and its risk sharing agreements with providers) while providing members
with coverage for the health care benefits provided under their contracts.
Factors such as new technologies and 


                                       36
<PAGE>   37
health care practices, hospital costs, changes in demographics and trends,
selection biases, increases in unit costs paid to providers, major epidemics,
catastrophes, inability to establish acceptable compensation agreements with
providers, higher utilization of medical services, including higher
out-of-network utilization under point of service plans, operational and
regulatory issues and numerous other factors may affect the Company's ability to
control such costs. The Company attempts to use its medical cost containment
capabilities, such as claim auditing systems and utilization review protocols,
with a view to reducing the rate of growth in health care service expense. The
Company's Turnaround Plan also contemplates attempting to implement new medical
management policies aimed at reducing costs in various lines of business,
principally through utilization management of hospital services. There can be no
assurance that the Company will be successful in mitigating the effect of any or
all of the above-listed or other factors. In addition, the Company's
relationship with many of its contracted providers were adversely affected by
the Company's computer systems and related claims payment problems which could
impede the Company's efforts to obtain favorable arrangements with some of these
providers going forward. Accordingly, past financial performance is not
necessarily a reliable indicator of future performance, and investors should not
use historical performance to anticipate results of future period trends. The
Company continues to reconcile delayed claims and claims previously paid or
denied in error and pay down backlogged claims. Information gained as the
process continues may result in future changes to the Company's estimates of its
medical costs and expected cost trends.

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


                                       37
<PAGE>   38
RESULTS OF OPERATIONS

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

      Total revenues for the year ended December 31, 1998 were $4.7 billion, up
11.0% from $4.3 billion in the prior year. The net loss attributable to common
stock for 1998 totaled $624.4 million, or $7.79 per share, compared with a net
loss of $291.3 million, or $3.70 per share, for 1997. Results of operations for
the year 1998 were adversely affected by significantly higher medical costs in
the Company's commercial group business, Medicare, Medicaid and New York
Individual Plans as well as approximately $145.5 million of restructuring
charges and $38.3 million of unusual charges. Results for 1998 were also
adversely affected by interest and financing expense of $57.1 million relating
primarily to debt issuance costs and interest on claims for medical services.
Results of operations for 1997 were adversely affected by a pretax charge of
approximately $173.5 million relating to accounts receivable write-offs and
additions to accounts receivable reserves, unusual charges of approximately
$41.6 million relating to write-downs of certain investments and a pretax charge
of approximately $327.0 million relating to increased reserves for medical costs
payable. See "Liquidity and Capital Resources" and "Overview".

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

<TABLE>
<CAPTION>
                                                                        Percent
(Dollars In thousands)                          1998           1997     Change
--------------------------------------------------------------------------------
<S>                                          <C>            <C>         <C>
REVENUES:                                                            
   Freedom Plan                              $2,813,712     $2,468,259   14.0%
   HMOs                                         542,835        463,428   17.1%
----------------------------------------------------------------------
   Commercial                                 3,356,547      2,931,687   14.5%
----------------------------------------------------------------------
   Medicare                                   1,010,831        916,126   10.3%
   Medicaid                                     244,950        319,411  (23.3%)
----------------------------------------------------------------------
     Government programs                      1,255,781      1,235,537    1.6%
----------------------------------------------------------------------
       Total premium revenues                 4,612,328      4,167,224   10.7%
   Third-party administration, net               17,838         12,592   41.7%
   Investment and other income                   89,245         71,448   24.9%
----------------------------------------------------------------------
   Total revenues                            $4,719,411     $4,251,264   11.0%
======================================================================
</TABLE>
                                                                   
<TABLE>
<CAPTION>
                                                 As of December 31,      Percent
                                                1998            1997     Change
--------------------------------------------------------------------------------
<S>                                           <C>            <C>         <C>
MEMBERSHIP:
   Freedom Plan                               1,318,100      1,333,500   (1.2%)
   HMOs                                         260,700        270,400   (3.6%)
----------------------------------------------------------------------
   Commercial                                 1,578,800      1,603,900   (1.6%)
----------------------------------------------------------------------
   Medicare                                     148,600        161,000   (7.7%)
   Medicaid                                      97,800        189,600   (48.4%)
----------------------------------------------------------------------
     Government programs                        246,400        350,600   (29.7%)
----------------------------------------------------------------------
       Total fully insured                    1,825,200      1,954,500   (6.6%)
   Third-party administration                    56,200         53,600    4.9%
----------------------------------------------------------------------
     Total membership                         1,881,400      2,008,100   (6.3%)
======================================================================
</TABLE>

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


                                       38
<PAGE>   39
incurred losses. The Company has attempted to increase its premium rates based
on current estimates of medical costs. Renewals and new enrollments in the
Company's core commercial group business for January 1, 1999 received an average
price increase estimated at 9.8%. The Company recently filed with the NYSID for
a 9.8% rate increase for the New York Individual Plans, effective April 1, 1999.
The Company's commercial revenue in 1999 will be adversely affected by the
Company's disposition or withdrawal from noncore commercial markets in
Pennsylvania, Illinois, Florida and New Hampshire. In addition, the Company
experienced attrition of commercial members in its core commercial markets in
1998 and expects such attrition to continue in 1999, adversely affecting
revenue.

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

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

      Health care services expense stated as a percentage of premium revenues
(the "medical loss ratio") was 93.7% for the year 1998 compared with 94.0% for
the year 1997. Overall per member per month revenue in 1998 was $199.82,
however, overall per member per month health care services expenses increased
3.2% to $187.46 in 1998 from $181.38 in 1997. Software and hardware problems
experienced in the conversion of a portion of the Company's computer system in
September 1996 resulted in significant delays in the Company's payment of
provider claims and adversely affected payment accuracy during 1997. Medical
costs for 1997 reflect additions to the Company's reserves for IBNR in the third
quarter of 1997 aggregating $88 million and in the fourth quarter of 1997
aggregating $239 million. These reserve additions represent revisions to
estimates of the Company's incurred medical costs based on information gained in
the process of reviewing and reconciling previously delayed claims and claims
paid or denied in error. Results in the fourth quarter of 1998 were affected by
the establishment of an additional $49 million in medical claims reserves for
disputed claims, a $27 million provision for anticipated losses on individual
products and net accruals of $30 million for certain other medical expense
liabilities partially offset by favorable medical reserve adjustments totaling
$92 million. A portion of these reserve additions represent revisions to
estimates for claims incurred in prior periods.

      The Company's paid and received claims data and revised estimates showed
significant increases in medical costs in 1996, 1997 and 1998 for the Company's
commercial, Medicare, Medicaid and New York Individual Plans. These increases
resulted primarily from higher expenses for hospital and specialist physician
services and increases in per member per month pharmacy costs. Results for 1998
continued to reflect high costs in these areas and the Company expects further
increases in 1999. The Company's Turnaround Plan was designed to address the
operating losses incurred in these lines of business, but there can be no
assurance that the Turnaround Plan will succeed. Moreover, improvement of
results in the New York Mandated Plans will require increases in rates or
additional cost control measures which require NYSID approval. The Company
expects to continue to experience losses in these plans. The Company believes it
has made adequate provision for medical costs as of December 31, 1998. There can
be no assurance that additional reserve additions will not be necessary as the
Company continues to review and reconcile delayed claims and claims paid or
denied in error. 


                                       39
<PAGE>   40
Moreover, the Company's claims payment and accuracy still require improvement to
meet acceptable standards. Additions to reserves could also result as a
consequence of regulatory examinations, and such additions also would be
included in the results of operations for the period in which such adjustments
are made. See "Liquidity and Capital Resources".

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

      Effective January 1, 1997, the New York Health Care Reform Act of 1996
(the "New York Act") requires that the Company make payments to state funding
pools to finance hospital bad debt and charity care, graduate medical education
and other state programs under the New York Act. Previously, hospital bad debt
and charity care and graduate medical education were financed by surcharges on
payments to hospitals for inpatient services. The Company's costs have increased
as these payment obligations have not been offset by corresponding reductions in
payments to hospitals and others.

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

      The Company has established a tax valuation allowance related to certain
net operating losses and the effect of the Company's net tax deductible
temporary differences. Based on the results of operations, management does not
currently believe that such tax benefits relating to losses incurred subsequent
to the first quarter of 1998 are more likely than not to be realized in the
foreseeable future. Accordingly, the Company discontinued providing tax benefits
beginning in the second quarter of 1998. Based on management's assessment of the
progress to date in its Turnaround Plan, together with projections of future
performance, management currently believes that it is more likely than not that
deferred tax benefits recorded prior to April 1998 will be realized. However,
the Company will continue to monitor its tax position throughout the
implementation of its Turnaround Plan to determine whether such deferred tax
benefits will require an additional valuation allowance or adjustment. The
amounts of future taxable income necessary during the carryforward period to
utilize the unreserved net deferred tax assets is approximately $320 million.

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


                                       40
<PAGE>   41
      Year Ended December 31, 1997 Compared with Year Ended December 31, 1996

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


<TABLE>
<CAPTION>
                                                                         Percent
(Dollars In thousands)                          1997           1996      Change
--------------------------------------------------------------------------------
<S>                                          <C>            <C>          <C>
REVENUES:
   Freedom Plan                              $2,468,259     $1,849,167   33.5%
   HMOs                                         463,428        322,288   43.8%
----------------------------------------------------------------------
   Commercial                                 2,931,687      2,171,455   35.0%
----------------------------------------------------------------------
   Medicare                                     916,126        599,824   52.7%
   Medicaid                                     319,411        250,889   27.3%
----------------------------------------------------------------------
     Government programs                      1,235,537        850,713   45.2%
----------------------------------------------------------------------
       Total premium revenues                 4,167,224      3,022,168   37.9%
   Third-party administration, net               12,592         10,401   21.1%
   Investment and other income                   71,448         42,620   67.6%
----------------------------------------------------------------------
   Total revenues                            $4,251,264     $3,075,189   38.2%
======================================================================
</TABLE>
                                                   
<TABLE>
<CAPTION>
                                                 As of December 31,      Percent
                                                 1997          1996      Change
--------------------------------------------------------------------------------
<S>                                           <C>            <C>         <C>
MEMBERSHIP:
   Freedom Plan                               1,333,500      1,015,100   31.4%
   HMOs                                         270,400        192,300   40.6%
----------------------------------------------------------------------
   Commercial                                 1,603,900      1,207,400   32.8%
----------------------------------------------------------------------
   Medicare                                     161,000        125,000   28.8%
   Medicaid                                     189,600        162,000   17.0%
----------------------------------------------------------------------
     Government programs                        350,600        287,000   22.2%
----------------------------------------------------------------------
       Total fully insured                    1,954,500      1,494,400   30.8%
   Third-party administration                    53,600         41,100   30.4%
----------------------------------------------------------------------
     Total membership                         2,008,100      1,535,500   30.8%
======================================================================
</TABLE>
                                                         
      Commercial premium revenues increased 35% to $2.9 billion in 1997 from
$2.2 billion in 1996. Membership growth accounted for substantially all of the
change as member months of the Freedom Plan increased 37.2% when compared with
1996, and member months of Oxford's traditional HMOs increased 43.2% over the
prior year. Premium yields of commercial programs were about the same in 1997 as
in 1996. Software and hardware problems experienced in the conversion of a
portion of the Company's computer system in September 1996 resulted in
significant delays in the Company's billing of group and individual customers
and in 1997 adversely affected the Company's premium billing. The Company's
revenues in 1997 were adversely affected by adjustments of approximately $173.5
million related to estimates for terminations of group and individual members
and for nonpaying group and individual members.

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

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

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


                                       41
<PAGE>   42
      Health care services expense stated as a percentage of premiums earned
(the "medical-loss ratio") was 94.0% for the year ended December 31, 1997
compared with 80.1% for the year ended December 31, 1996. Overall per member per
month revenue in 1997 was substantially unchanged from 1996, however, overall
per member per month health care services expenses increased 17.0% to $181.46 in
1997 from $155.16 in 1996. Software and hardware problems experienced in the
conversion of a portion of the Company's computer system in September 1996
resulted in significant delays in the Company's payment of provider claims and
adversely affected payment accuracy. Medical costs for 1997 reflect additions to
the Company's reserves for IBNR in the third and fourth quarters aggregating
$327 million. These additions represent revisions to estimates of the Company's
incurred medical costs based on information gained in the process of reviewing
and reconciling previously delayed claims and claims paid or denied in error. A
portion of the reserve additions represent revisions to estimates for claims
incurred in prior years.

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

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

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

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

      The Company acquired all of the outstanding stock of Compass PPA,
Incorporated, as of August 1, 1997 for approximately $8.2 million in cash
(resulting in goodwill of $24.1 million) and acquired all of the outstanding
stock of Riscorp Health Plans, Inc., a Florida-based HMO, as of November 3,
1997, for approximately $5.3 million in cash (resulting in goodwill of $3.9
million). Since the dates of acquisition, the Company made investments in such
companies pursuant to a plan to aggressively develop and market the Company's
products in the Florida and Chicago markets. As of December 31, 1997, the
Company determined to focus available administrative resources in its core
markets in the Northeast and to reduce significantly the level of investment
planned for 


                                       42
<PAGE>   43
these expansion markets. The Company believes that such reduction in future
investments will adversely impact the value of these companies and, accordingly,
the Company reduced the value of its investment in these companies by writing
off $27.3 million in goodwill arising from the acquisitions and subsequent
investment. The Company also reduced the carrying value of its minority
investment in the capital stock and subordinated surplus notes of St. Augustine
Health Care, Inc., a Florida-based HMO by $14.3 million.

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

INFLATION

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

      In September 1998, the National Association of Insurance Commissioners
("NAIC") adopted new minimum capitalization requirements, known as risk-based
capital rules, for health care coverage provided by HMOs and other risk-bearing
health care entities. Depending on the nature and extent of the new minimum
capitalization requirements ultimately adopted by each state, there could be an
increase in the capital required for certain of the Company's regulated
subsidiaries. Connecticut has introduced legislation allowing the Connecticut
Department of Insurance ("CTDOI") to promulgate regulations based on the NAIC
model. The Company expects the CTDOI regulations to be applicable to its 1999
annual financial statements. Neither New York nor New Jersey have introduced
similar legislation. However, the New Jersey Department of Banking and Insurance
("NJDBI") has published draft solvency regulations that it estimates will result
in an additional $250 million worth of deposit by all 


                                       43
<PAGE>   44
New Jersey health care plans. The New York Superintendent of Insurance has
announced an intention to strengthen current solvency regulations to allow the
NYSID to take over failing health plans without a court order. The Company
intends to fund any increase from available parent company cash reserves;
however, there can be no assurance that such cash reserves will be sufficient to
fund these minimum capitalization requirements. The new requirements are
expected to be effective on or before December 31, 1999 upon enactment by each
state.

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

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

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

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


                                       44
<PAGE>   45
      On February 6, 1998, the Company issued a $100 million senior secured
increasing rate note due February 6, 1999 ("Bridge Note") and on March 30, 1998,
issued an additional $100 million Bridge Note, pursuant to a Bridge Securities
Purchase Agreement, dated as of February 6, 1998, between the Company and an
affiliate of Donaldson Lufkin & Jenrette Securities Corporation, as amended on
March 30, 1998. The Company used the proceeds of the Bridge Notes to make a
portion of the above described contributions to its HMO subsidiaries, to pay
expenses in connection with the issuance of the Bridge Notes and for general
corporate purposes. The Bridge Notes were redeemed as part of the financing
described below.

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

      The Preferred Stock was originally issued as 245,000 shares of Series A
and 105,000 shares of Series B. The Series A Preferred Stock carried a cash
dividend of 8% per annum, payable quarterly, provided that prior to May 13,
2000, the Series A Preferred Stock accumulated dividends at a rate of 8.243216%
per annum, payable annually in cash or additional shares of Series A Preferred
Stock, at the option of the Company. The Series A Preferred Stock was issued
with Series A Warrants to purchase 15,800,000 shares of common stock, or
approximately 19.9% of the then outstanding voting power of Oxford's common
stock. The Series A Preferred Stock had approximately 16.6% of the combined
voting power of Oxford's then outstanding common stock and the Series A
Preferred Stock. The Series B Preferred Stock, which was originally issued with
Series B Warrants to purchase nonvoting junior participating preferred stock,
was nonvoting and carried a cash dividend of 9% per annum, payable quarterly,
provided that prior to May 13, 2000, the Series B Preferred Stock accumulated
dividends at a rate of 9.308332% per annum, payable annually in cash or
additional shares of Series B Preferred Stock, at the option of the Company. The
Preferred Stock was not redeemable by the Company prior to May 13, 2003.
Thereafter, subject to certain conditions, the Series A and Series B Preferred
Stock were each redeemable at the option of the Company at a redemption price of
$1,000 per share (in each case, plus accrued and unpaid dividends), and were
subject to mandatory redemption at the same price on May 13, 2008. The Series A
Warrants and the Series B Warrants expire on the earlier May 13, 2008 or
redemption of the related series of Preferred Stock. The Warrants are detachable
from the Preferred Stock. With respect to dividend rights, the Series A and
Series B Preferred Stock rank on a parity with each other and prior to the
Company's common stock. On August 28, 1998, the Company held its annual
shareholders meeting at which its shareholders approved the vesting of voting
rights in respect of the Series B Preferred Stock and the issuance, subject to
adjustment, of up to 6,730,000 shares of common stock upon exercise of the
Series B Warrants. This approval resulted in the reduction of the dividend on
the Series B Preferred Stock to 8% (8.243216% prior to May 13, 2000) and an
increase in the voting rights of TPG to 22.1% of the combined voting power of
the Company's outstanding common stock and Series A and Series B Preferred
Stock.

      On February 13, 1999, the Company entered into a Share Exchange Agreement
(the "Exchange Agreement") with TPG, its affiliates and others to make an
adjustment of the dividends payable among the shares of Series A Preferred Stock
and Series B Preferred Stock in connection with the possible sale of shares of
Preferred Stock by the holders thereof to institutional holders. Pursuant to the
Exchange Agreement, the 245,000 shares of Series A Preferred Stock were
exchanged for 260,146.909 shares of a new Series D Preferred Stock (the "Series
D Preferred Stock"), and the 105,000 shares of Series B Preferred Stock were
exchanged for 111,820.831 shares of a new Series E Preferred Stock (the "Series
E Preferred Stock"). In the exchange, (1) a holder received in exchange for each
share of Series A Preferred Stock, one share of Series D Preferred Stock, plus
0.061824118367 share of Series D Preferred Stock representing dividends on the
Series 


                                       45
<PAGE>   46
A Preferred Stock accrued and unpaid through February 13, 1999, and (2) a holder
received in exchange for each share of Series B Preferred Stock, one share of
Series E Preferred Stock, plus 0.064960295238 share of Series E Preferred Stock
representing dividends on the Series B Preferred Stock accrued and unpaid
through February 13, 1999. As a result of the exchange, the holders hold only
Series D Preferred Stock and Series E Preferred Stock. On March 9, 1999, the
Company filed Certificates of Elimination for the Series A Preferred Stock and
the Series B Preferred Stock that have the effect of eliminating from the
Certificate of Incorporation all matters with respect to the Series A Preferred
Stock and the Series B Preferred Stock. The terms of the shares of the Series D
Preferred Stock are identical to the terms of the Series A Preferred Stock,
except that the Series D Preferred Stock accumulates cash dividends at the rate
of 5.12981% per annum, payable quarterly, provided that prior to May 13, 2000,
the Series D Preferred Stock accumulates dividends at a rate of 5.319521% per
annum, payable annually in cash or additional shares of Series D Preferred
Stock, at the option of the Company. The terms of the shares of the Series E
Preferred Stock are identical to the terms of the shares of the Series B
Preferred Stock except that the Series E Preferred Stock accumulates cash
dividends at a rate of 14.00% per annum, payable quarterly, provided that prior
to May 13, 2000, the Series E Preferred Stock accumulates dividends at a rate of
14.589214% per annum, payable annually in cash or additional shares of Series E
Preferred Stock, at the option of the Company. In addition, prior to May 13,
2000, the holders of the Series D Preferred Stock may only use to pay the
exercise price of the Warrants a percentage of the total amount of Series D
Preferred Stock issued on February 13, 1999 that does not exceed the percentage
of the total number of shares of Series E Preferred Stock issued on February 13,
1999 that have been redeemed, repurchased or retired by the Company, or used as
consideration for the Warrants by the holders. With respect to dividend rights,
the Series D and Series E Preferred Stock rank on a parity with each other and
prior to the Company's common stock.

      The aggregate cost to the Company of dividends on the Series D Preferred
Stock and Series E Preferred Stock is the same as the aggregate cost to the
Company of dividends on the Series A Preferred Stock and Series B Preferred
Stock. The respective voting rights of the holders of the Series A Preferred
Stock and Series B Preferred Stock have not changed as the result of the
exchange of such shares for shares of Series D Preferred Stock and Series E
Preferred Stock.

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

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


                                       46
<PAGE>   47
      Also simultaneously with the transactions described above, Norman C.
Payson, M.D., the Company's Chief Executive Officer, purchased 644,330 shares of
Oxford common stock for an aggregate purchase price of $10 million pursuant to
his employment agreement. The common stock issued to Dr. Payson was issued
without registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, which provides an exemption for transactions not involving any
public offering.

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

Year 2000 Readiness

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

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

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

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

      The Company expects to incur associated expenses of approximately $5
million in 1999 to complete this effort. As of December 31, 1998, the Company
had incurred approximately $9.8 million of expenses in connection with its Year
2000 compliance efforts. The costs of the project and the date on which the
Company 


                                       47
<PAGE>   48
plans to complete the necessary Year 2000 modifications are based on
management's best estimate, which include assumptions of future events including
the continued availability of certain resources. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans.

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      The Company's consolidated balance sheet as of December 31, 1998 includes
a significant amount of assets whose fair values are subject to market risk.
Since the substantial portion of the company's investments are in fixed rate
debt securities, interest rate fluctuations represent the largest market risk
factor affecting the Company's consolidated financial position. Interest rate
risk is managed within a tight duration band, and credit risk is managed by
investing in U.S. government obligations and in corporate debt securities with
high average quality ratings and maintaining a diversified sector exposure
within the debt securities portfolio. A hypothetical immediate increase of 100
basis points in market interest rates would decrease the fair value of the
Company's investments in debt securities as of December 31, 1998 by
approximately $23.3 million, while a 200 basis points increase in rates would
decrease the value of such investments by approximately $45.9 million. A
hypothetical immediate decrease of 100 basis points in market interest rates
would increase the fair value of the Company's investments in debt securities as
of December 31, 1998 by approximately $22.4 million, while a 200 basis points
decrease in rates would increase the value of such investments by approximately
$45.7 million. The Company's investment in equity securities as of December 31,
1998 was not significant. The foregoing valuation estimates were based upon 
industry calculations of security durations and convexities as provided by such 
third party vendors as Bloomberg and Yield Book. Due to the fact that durations 
and convexity are estimated rather than known quantities for certain 
securities, there can be no assurance that the Company's portfolio would 
perform in-line with the estimated values.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      See Index to Consolidated Financial Statements and Schedules on page 52.


                                       48
<PAGE>   49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

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


                                       49
<PAGE>   50
                                    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, 1998.

                                     PART IV

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

(a)   Exhibits and Financial Statement Schedules

      1.    All financial statements - see Index to Consolidated Financial
            Statements and Schedules on page 52.

      2.    Financial statement schedules - see Index to Consolidated Financial
            Statements and Schedules on page 52.

      3.    Exhibits - see Exhibit Index on page 87.

(b)   Reports on Form 8-K

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

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

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

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


                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 18th day of
March, 1999. 

                                        OXFORD HEALTH PLANS, INC.

                                        By: /s/ NORMAN C. PAYSON    
                                            ---------------------------------
                                            NORMAN C. PAYSON, M.D.
                                            Chief Executive Officer


                                       50
<PAGE>   51
      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 18, 1999.

         SIGNATURE                                         TITLE


/s/ NORMAN C. PAYSON                             Principal Executive Officer
--------------------------------------
    NORMAN C. PAYSON, M.D.                    
                                             
                                             
/s/ YON Y. JORDEN                                Principal Financial Officer
--------------------------------------
    YON Y. JORDEN                             
                                             
                                             
/s/ KURT B. THOMPSON                             Principal Accounting Officer
--------------------------------------
    KURT B. THOMPSON                    
                                             
                                             
/s/ ROBERT B. MILLIGAN, JR                       Director
--------------------------------------
    ROBERT B. MILLIGAN, JR.                   
                                             
                                             
/s/ DAVID BONDERMAN                              Director
--------------------------------------
    DAVID BONDERMAN                           
                                             
                                             
/s/ JONATHAN T. COSLET                           Director
--------------------------------------
    JONATHAN T. COSLET                        
                                             
                                             
/s/ JAMES G. COULTER                             Director
--------------------------------------
    JAMES G. COULTER                          
                                             
                                             
/s/ FRED F. NAZEM                                Director
--------------------------------------
    FRED F. NAZEM                             
                                             
                                             
/s/ MARCIA J. RADOSEVICH                         Director
--------------------------------------
    MARCIA  J. RADOSEVICH, PH.D.              
                                             
                                             
/s/ BENJAMIN H. SAFIRSTEIN                       Director
--------------------------------------
    BENJAMIN H. SAFIRSTEIN, M.D.              
                                             
                                             
/s/ THOMAS A. SCULLY                             Director
--------------------------------------
    THOMAS A. SCULLY                          
                                             
                                             
/s/ KENT J. THIRY                                Director
--------------------------------------
    KENT J. THIRY                             
                                             
                                             
                                                 Director
--------------------------------------
    STEPHEN F. WIGGINS                        
                                   

                                       51
<PAGE>   52

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

<TABLE>
<CAPTION>
                                                                                      PAGE
                                                                                      ----
<S>                                                                                   <C>
Independent Auditors' Reports ...................................................      53
Consolidated Balance Sheets as of December 31, 1998 and 1997 ....................      55
Consolidated Statements of Operations for the years ended December 31, 1998, 1997
   and 1996 .....................................................................      55
Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive
   Earnings (Loss) for the years ended December 31, 1998, 1997 and 1996 .........      57
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997
   and 1996 .....................................................................      58
Notes to Consolidated Financial Statements ......................................      60

Independent Auditors' Reports on Financial Statement Schedules ..................      80
Financial Statement Schedules:

I  Condensed Financial Information of Registrant ................................      85
II Valuation and Qualifying Accounts ............................................      86
</TABLE>


                                       52
<PAGE>   53
                          INDEPENDENT AUDITORS' REPORT


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

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

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

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


                                                       Ernst & Young LLP

Stamford, Connecticut
March 9, 1999


                                       53
<PAGE>   54
                          INDEPENDENT AUDITORS' REPORT


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

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

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

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


                                                       KPMG LLP

Stamford, Connecticut
February 23, 1998


                                       54
<PAGE>   55
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
                      (In thousands, except share amounts)

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

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

                      LIABILITIES AND SHAREHOLDERS' EQUITY

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

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

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


See accompanying notes to consolidated financial statements.


                                       55
<PAGE>   56
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED
                        DECEMBER 31, 1998, 1997 AND 1996
                    (In thousands, except per share amounts)


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

Expenses:
    Health care services                                                          4,321,737           3,916,742           2,421,167
    Marketing, general and administrative                                           772,015             737,425             477,373
    Interest and other financing charges                                             57,090              11,118                  --
    Restructuring charges and provision for loss on government contracts            145,457                  --                  --
    Unusual charges                                                                  38,341              41,618                  --
-----------------------------------------------------------------------------------------------------------------------------------
      Total expenses                                                              5,334,640           4,706,903           2,898,540
-----------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

See accompanying notes to consolidated financial statements.


                                       56
<PAGE>   57
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND
                          COMPREHENSIVE EARNINGS (LOSS)
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (In thousands)


<TABLE>
<CAPTION>

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

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

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

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

See accompanying notes to consolidated financial statements.


                                       57
<PAGE>   58
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (In thousands)

<TABLE>
<CAPTION>
Cash flows from operating activities:                                                 1998              1997              1996
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>               <C>               <C>
     Net earnings (loss)                                                          $  (596,792)      $  (291,288)      $    99,623
     Adjustments to reconcile net earnings (loss) to net cash
        provided by operating activities:
           Depreciation and amortization                                               67,141            61,045            42,886
           Noncash restructuring and unusual charges                                  101,547            41,618                --
           Deferred income taxes                                                      (18,437)          (75,279)          (13,196)
           Provision for doubtful accounts                                             60,209            25,000             4,505
           Equity in net loss of affiliate                                                 --             1,140             4,600
           Realized gain on sale of investments                                       (10,695)          (28,736)           (4,734)
           Gain on sale of affiliate                                                       --           (25,168)               --
           Other, net                                                                  13,289               245               480
           Changes in assets and liabilities, net of effect of acquisitions:
              Premiums receivable                                                     130,183            25,942          (223,353)
              Other receivables                                                         2,679           (18,320)          (11,083)
              Prepaid expenses and other current assets                                   351            (3,928)           (2,251)
              Medical costs payable                                                    62,238           116,387           323,851
              Trade accounts payable and accrued expenses                              33,802            84,967            14,764
              Income taxes payable/refundable                                         121,102          (123,624)           42,098
              Unearned premiums                                                       (18,610)           61,378            12,753
              Other, net                                                                5,511            (3,959)           (3,747)
---------------------------------------------------------------------------------------------------------------------------------
                 Net cash provided (used) by operating activities                     (46,482)         (152,580)          287,196
---------------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
     Capital expenditures                                                             (40,045)         (101,946)          (48,348)
     Purchases of available-for-sale securities                                    (1,353,403)         (589,690)         (794,099)
     Sales of available-for-sale securities                                           951,941           756,174           311,783
     Maturities of available-for-sale securities                                       41,547            34,621            33,298
     Acquisitions, net of cash acquired                                                (1,312)          (14,034)               --
     Investments in and advances to unconsolidated affiliates                          (5,410)          (19,842)          (18,597)
     Other, net                                                                         3,193            (1,986)              723
---------------------------------------------------------------------------------------------------------------------------------
                 Net cash provided (used) by investing activities                    (403,489)           63,297          (515,240)
---------------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
     Proceeds of notes and loans payable                                              550,000                --                --
     Redemption of notes and loans payable                                           (200,000)               --                --
     Proceeds from issuance of preferred stock and warrants, net of expenses          338,148                --                --
     Proceeds from issuance of common stock                                            10,000                --           220,539
     Proceeds from exercise of stock options                                            2,655            21,264            21,215
     Debt issuance expenses                                                           (11,793)               --                --
     Payments under capital leases                                                     (5,463)               --                --
---------------------------------------------------------------------------------------------------------------------------------
                 Net cash provided by financing activities                            683,547            21,264           241,754
---------------------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                                  233,576           (68,019)           13,710
Cash and cash equivalents at beginning of year                                          4,141            72,160            58,450
---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                          $   237,717       $     4,141       $    72,160
=================================================================================================================================
</TABLE>


                                       58
<PAGE>   59
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (In thousands)
                                   (Continued)

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

See accompanying notes to consolidated financial statements.



                                       59
<PAGE>   60
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  ORGANIZATION

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

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

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

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

   (b) Premium revenue. Membership contracts are generally on a yearly basis
subject to cancellation by the employer group or Oxford upon 30 days written
notice. Premiums 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 of
$37.7 million in 1998 and $6.5 million in 1997. Unearned premiums represent the
portion of premiums received for which Oxford is not obligated to provide
services until a future date.

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

   Costs of health care and medical costs payable for health care services
provided to enrollees are estimated by management based on evaluations of
providers' claims submitted and provisions for incurred but not reported or paid
claims. The Company estimates the amount of the provision for incurred but not
reported or paid claims using standard actuarial methodologies based upon
historical data including the period between the date services are rendered and
the date claims are received and paid, denied claim activity, expected medical
cost inflation, seasonality patterns and changes in membership. The estimates
for submitted claims and incurred but not reported or paid claims are made on an
accrual basis and adjusted in future periods as required. Any adjustments to the
prior period estimates are included in the current period. Medical costs payable
also reflects surplus or deficit experience for physicians participating in
risk-sharing arrangements. Amounts advanced to providers for delayed claims,
which are net of a valuation reserve of $35.0 million have been applied against
medical claims payable in the accompanying balance sheet and aggregated
approximately $139.5 million at


                                       60
<PAGE>   61
December 31, 1998. Management believes that the Company's reserves for medical
costs payable are adequate to satisfy its ultimate claim liabilities.

   Losses, if any, are recognized when it is probable that the expected future
health care cost of a group of existing contracts (and the costs necessary to
maintain those contracts) will exceed the anticipated future premiums,
investment income and reinsurance recoveries on those contracts. Groups of
contracts are defined as commercial, individual and government contracts
consistent with the method of establishing premium rates.

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

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

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

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

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

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

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


                                       61
<PAGE>   62
   (l) Stock option plans. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principals Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and provide pro forma net earnings and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
subsequent years as if the fair-value-based method defined in SFAS 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123 (see
note 9).

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

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

   (o) Reclassifications. Certain reclassifications have been made to prior
years' financial statement amounts to conform to the 1998 presentation.

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

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

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

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

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


                                       62
<PAGE>   63
(3) INVESTMENTS

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

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

    Held-to-maturity - U.S. government obligations          $ 44,798          $ 1,028          $   --          $ 45,826
=======================================================================================================================

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


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

<TABLE>
<CAPTION>
                                                                     Available-for-Sale              Held-to-Maturity
                                                                ------------------------------------------------------------
                                                                   Amortized          Fair        Amortized         Fair
(In thousands)                                                        Cost            Value          Cost          Value
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>          <C>            <C>
Due in one year or less                                               $ 74,139       $ 74,448       $  3,229       $  3,242
Due after one year through five years                                  811,330        816,669         41,569         42,584
Due after five years through ten years                                  31,156         31,873
                                                                                                          --             --
============================================================================================================================
    Total                                                             $916,625       $922,990       $ 44,798       $ 45,826
============================================================================================================================
</TABLE>

Certain information related to marketable securities is as follows:

<TABLE>
<CAPTION>

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

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

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


                                       63
<PAGE>   64
(4)  INCOME TAXES

Income tax expense (benefit) consists of:

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

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

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

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

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

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


                                       64
<PAGE>   65
   The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets at December 31, 1998 and 1997 are as
follows:

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

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


   The Company has established a valuation allowance related to certain net
operating losses and the effect of the Company's net tax deductible temporary
differences. Based on the results of operations, management does not currently
believe that such tax benefits relating to losses incurred subsequent to the
first quarter of 1998 are more likely than not to be realized in the foreseeable
future. Accordingly, the Company has provided a full valuation allowance for tax
benefits generated subsequent to the first quarter of 1998. Based on
management's assessment of the progress to date in its turnaround plan, together
with projections of future performance, management currently believes that it is
more likely than not that deferred tax benefits recorded prior to April 1998
will be realized. However, the Company will continue to monitor its tax position
throughout the implementation of its turnaround plan to determine whether such
deferred tax benefits will require an additional valuation allowance or
adjustment. The amounts of future taxable income necessary during the
carryforward period to utilize the unreserved net deferred tax assets is
approximately $320 million.

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

(5) PROPERTY AND EQUIPMENT

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

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

   Depreciation and amortization of property and equipment aggregated $63.7
million in 1998, $57.9 million in 1997 and $40.3 million in 1996.


                                       65
<PAGE>   66
(6)   DEBT

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

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

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

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

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

   At the same time, the Company entered into a Term Loan Agreement that
provided for a new $150 million senior secured term loan (the "Term Loan") with
a final maturity in 2003 at which time all outstanding amounts will be due and
payable. Prior to the final maturity of the Term Loan, there are no scheduled
principal payments. The Term Loan provides for mandatory prepayments in certain
circumstances and bears interest at a rate per annum equal to the administrative
agent's reserve adjusted LIBO rate plus 4.25%. As of December 31, 1998, the
interest rate on the Term Loan was 9.335%. Interest is payable semiannually on
May 15 and November 15 each year commencing November 15, 1998. The Term Loan is
secured by a perfected first priority security interest in substantially all of
the assets of the Company. The Term Loan contains covenants that, among other
things, restrict the ability of the Company to pay any dividend or make any
payment or distribution or incur additional indebtedness.

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

   On February 6, 1998, the Company issued a $100 million senior secured
increasing rate note due February 6, 1999 ("Bridge Note") and on March 30, 1998
issued an additional $100 million Bridge Note, pursuant to a Bridge Securities
Purchase Agreement, dated February 6, 1998 as amended on March 30, 1998 (the
"Bridge


                                       66
<PAGE>   67
Agreement"). The Bridge Notes bore interest at prime plus 2.5% per annum
during the first three months, and thereafter the spread over prime increased by
0.5% every three months; provided, however that the per annum interest rate
would not be less than 10.5%, nor more than 17%. The Company used the proceeds
of the Bridge Notes to make capital contributions to certain of its HMO
subsidiaries, to pay for expenses in connection with the issuance of the Bridge
Notes and for general corporate purposes. The Company capitalized the costs of
$9.9 million incurred in the issuance of the Bridge Notes, and these costs were
to be amortized over the life of the Bridge Notes. The capitalized debt issuance
costs were written off on May 13, 1998 due to extinguishment of the Bridge Notes
using funds obtained through the financings referred to above and in note 7.

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

(7)  REDEEMABLE PREFERRED STOCK

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

   The Preferred Stock was originally issued as 245,000 shares of Series A and
105,000 shares of Series B. The Series A Preferred Stock carried a cash dividend
of 8% per annum, payable quarterly, provided that prior to May 13, 2000, the
Series A Preferred Stock accumulated dividends at a rate of 8.243216% per annum,
payable annually in cash or additional shares of Series A Preferred Stock, at
the option of the Company. The Series A Preferred Stock and was issued with
Series A Warrants to purchase 15,800,000 shares of common stock, or
approximately 19.9% of the then outstanding voting power of the Company's common
stock. The Series A Preferred Stock had approximately 16.6% of the combined
voting power of the Company's then outstanding common stock and the Series A
Preferred Stock. The Series B Preferred Stock, which was originally issued with
Series B Warrants to purchase nonvoting junior participating preferred stock,
was nonvoting and carried a cash dividend of 9% per annum, payable quarterly,
provided that prior to May 13, 2000, the Series B Preferred Stock accumulated
dividends at a rate of 9.308332% per annum, payable annually in cash or
additional shares of Series B Preferred Stock, at the option of the Company. The
terms of the agreement prohibit the Company from paying cash dividends on its
common stock. The Preferred Stock was not redeemable by the Company prior to May
13, 2003. Thereafter, subject to certain conditions, the Series A and B
Preferred Stock were each redeemable at the option of the Company at a
redemption price of $1,000 per share (in each case, plus accrued and unpaid
dividends), and were subject to mandatory redemption at the same price on May
13, 2008. The Series A and Series B Warrants expire on the earlier of May 13,
2008 or redemption of the related series of Preferred Stock. The Warrants are
detachable from the Preferred Stock. The carrying value of the Preferred Stock
has been reduced in the financial statements by the value of the Warrants,
estimated to be approximately $67 million at the date of issuance. This amount
has been added to additional paid-in capital and is being amortized using the
interest method over five years. The costs incurred in connection with the
issuance of the Preferred Stock aggregated approximately $11.9 million and have
been charged against the Preferred Stock in the accompanying balance sheet. Such
costs will be amortized over a period of five years. With respect to dividend
rights, the Series A and Series B Preferred Stock rank on a parity with each
other and prior to the Company's common stock. On August 28, 1998, the Company
held its annual shareholders meeting at which its shareholders approved the
vesting of voting rights in respect of the Series B Preferred Stock and the
issuance, subject to adjustment, of up to 6,730,000 shares of common stock upon


                                       67
<PAGE>   68
exercise of the Series B Warrants. This approval resulted in the reduction of
the dividend on the Series B Preferred Stock to 8% (8.243216% prior to May 13,
2000) and an increase in the voting rights of TPG to approximately 22.1% of the
combined voting power of the Company's then outstanding common stock and Series
A and Series B Preferred Stock.

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

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

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

   The aggregate cost to the Company of dividends on the Series D Preferred
Stock and Series E Preferred Stock is the same as the aggregate cost to the
Company of dividends on the Series A Preferred Stock and Series B Preferred
Stock. The respective voting rights of the holders of the Series A Preferred
Stock and Series B Preferred Stock have not changed as the result of the
exchange of such shares for shares of Series D Preferred Stock and Series E
Preferred Stock.

   Simultaneously with closing of the Investment Agreement, Norman C. Payson,
M.D., the Company's Chief Executive Officer, purchased 644,330 shares of Oxford
common stock at an aggregate purchase price of


                                       68
<PAGE>   69
$10 million pursuant to his employment agreement. The common stock issued to Dr.
Payson was issued without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, which provides an exemption for transactions
not involving any public offering.

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

(8)  COMMON STOCK

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

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

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

 (9) STOCK OPTION PLANS

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

   The Employee Plan provides for granting of nonqualified stock options and
incentive stock options which vest as determined by the Company and expire over
varying terms, but not more than seven years from date of grant. The Employee
Plan is administered by a committee consisting of five members of the Board of
Directors, selected by the Board. The committee determines the individuals to
whom awards shall be granted as well as the terms and conditions of each award,
the grant date and the duration of each award. All options are granted at fair
market value on date of grant. The Company's previous nonqualified employee
stock option plan terminated in 1991, except as to options theretofore granted.

   The Independent Contractor Plan provides for granting of nonqualified stock
options which vest as determined by the Company and expire over varying terms,
but not more than seven years from the date of grant. The Employee Plan is
administered by a committee consisting of five members of the Board of
Directors, selected by the Board. The committee determines the individuals to
whom awards shall be granted as well as the terms and conditions of each award,
the grant date and the duration of each award. All options are granted at fair
market value on date of grant.

   The Nonemployee Plan provides for granting of nonqualified stock options to
eligible nonemployee directors of the Company. The plan provides that each year
on the first Friday following the Company's annual meeting of stockholders, each
individual elected, reelected or continuing as a nonemployee director will
automatically receive a nonqualified stock option for 5,000 shares of common
stock. 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.


                                       69
<PAGE>   70
   Stock option activity for all fixed option plans, adjusted for all stock
splits, is summarized as follows:

<TABLE>
<CAPTION>
                                                                      Weighted-Average
                                                     Shares            Exercise Prices
--------------------------------------------------------------------------------------
<S>                                                <C>                <C>
Outstanding at January 1, 1996                     11,549,436             $11.65
Granted                                             1,518,176              42.58

Exercised                                          (3,368,208)              6.30
Cancelled                                            (407,592)             20.51
-------------------------------------------------------------
Outstanding at December 31, 1996                    9,291,812              18.25

Granted                                             3,332,186              72.58
Exercised                                          (2,098,157)             10.14
Cancelled                                            (319,012)             37.35
-------------------------------------------------------------
Outstanding at December 31, 1997                   10,206,829              37.06
Granted                                            11,810,173              12.95
Exercised                                            (397,103)              6.67
Cancelled/exchanged                                (6,319,168)             46.41
-------------------------------------------------------------
Outstanding at December 31, 1998                   15,300,731             $15.40
======================================================================================

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

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

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

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

   Under the terms of an employment agreement, Norman C. Payson, M.D., the Chief
Executive Officer of the Company, was granted on February 23, 1998 a
nonqualified stock option (the "Option") to purchase 2,000,000 shares of common
stock at an exercise price of $15.52 per share and, in August 1998, a
nonqualified stock option (the "Additional Option") was granted to purchase an
additional 1,000,000 shares of Company common stock under the 1991 Stock Option
Plan. The Option generally provides that 800,000 shares will vest on February
23, 1999, and that the remaining 1,200,000 shares will vest ratably on a monthly
basis over the 36 month period ending February 23, 2002, provided in each case
that Dr. Payson is employed by the Company on the applicable vesting date. The
Option also provides for acceleration of vesting and extended exercisability
periods in certain circumstances, including certain terminations of employment
and a change in control (as defined in the Employee Plan) of the Company. The
Additional Option has an exercise price equal to $6.0625, vests ratably over the
four years from the date of grant, and is otherwise subject to the terms and
conditions of the Employee Plan. The Additional Option also provides for
accelerated vesting following a change in control (as


                                       70
<PAGE>   71
defined in the Employee Plan). On March 30, 1998, another executive officer of
the Company received a nonqualified option to acquire 800,000 shares of the
Company's common stock at the then current market price.

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

<TABLE>
<CAPTION>
                                                                           Weighted-
                                                       Weighted             Average
             Range of                Number            Average             Remaining
          Exercise Prices         Outstanding          Exercise Price   Contractual Life
          ---------------         -----------          --------------   ----------------
<S>                               <C>                  <C>              <C>
         $ 0.32   -  $ 10.31        5,562,771            $ 6.56           3.4 Years
          11.25   -    16.36        5,535,159             15.57           6.0 Years
          16.44   -    19.63        2,516,392             17.12           4.1 Years
          19.75   -    74.00        1,686,409             41.96           2.6 Years
                                  ==========
         $ 0.32   -  $ 74.00       15,300,731           $ 15.40           4.4 Years
         =======     =======       ==========           =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                          Weighted
              Range of                Number              Average
           Exercise Prices         Outstanding          Exercise Price
       ------------------------   ---------------   --------------------
<S>                               <C>                  <C>              <C>
          $ 0.32   -  $ 10.31           1,592,032           $ 6.19
           11.25   -    16.36           1,675,159            16.16
           16.44   -    19.63             121,900            17.73
           19.75   -    74.00             988,938            34.86
                                        =========
          $ 0.32   -  $ 74.00           4,378,029          $ 16.80
          ======      =======           =========          ========
</TABLE>

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

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

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

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

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

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


                                       71
<PAGE>   72
(10) LEASES

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

   Property held under capital leases at December 31, 1998 is summarized as
follows:

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

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

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

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

(11) ACQUISITIONS

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

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

   These acquisitions were accounted for by the purchase method and have been
included from the date of acquisition. The pro forma effects of the acquisitions
on the consolidated results of operations for the years


                                       72
<PAGE>   73
ended December 31, 1997 and 1996, assuming these acquisitions had occurred as of
January 1, 1996, are not material and have not been presented.

(12) RELATED PARTY TRANSACTIONS

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

Oxford provided $14.3 million in equity and debt financing, representing a 19.9%
interest, to St. Augustine Health Care, Inc. ("St. Augustine"). As of December
31, 1997, the Company decided to reduce the level of its future investment in
expansion markets and, therefore, wrote off the $14.3 million carrying value of
its investment in the capital stock and subordinated surplus notes of St.
Augustine. The Company fully disposed of its interest in St. Augustine in
October 1998.

(13) RESTRUCTURING CHARGES

   The Company recorded restructuring charges totaling $174.5 million, ($165.8
million after income taxes, or $2.08 per share) in the first half of 1998. These
charges resulted from the Company's actions to better align its organization and
cost structure as part of the Company's Turnaround Plan. These charges included
estimated costs related to: (i) the disposition or closure of non-core
businesses; (ii) expected losses on government contracts; (iii) write-down of
certain property and equipment; (iv) severance and related costs; and (v) costs
of operations consolidation, including long term lease commitments. These
reserves are generally classified in the Company's balance sheet as accounts
payable and accrued expenses with the exception of property and equipment
reserves, which have been classified against fixed assets. These reserve charges
and their activity for 1998 are summarized in the table below:

<TABLE>
<CAPTION>
                                                                                                                          Ending
                                                 Restructuring                       Noncash          Changes in       Restructuring
(In thousands)                                      Charges         Cash Used        Activity          Estimate          Reserves
----------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                <C>              <C>               <C>             <C>
Provisions for loss on noncore businesses          $ 55,700        $  (9,827)       $ (18,725)        $ (13,343)         $ 13,805
Provisions for loss on government contracts          51,000          (31,800)               -           (19,200)                -
Write-down of property and equipment                 29,272               --           (6,308)           (1,005)           21,959
Severance and related costs                          24,800           (4,246)         (11,200)                -             9,354
Costs of consolidating operations                    13,728             (548)               -             4,505            17,685
                                                ==================================================================================
                                                  $ 174,500        $ (46,421)       $ (36,233)        $ (29,043)         $ 62,803
                                                ==================================================================================
</TABLE>

   The changes in estimate totaling $29.0 million were recognized as a credit to
restructuring charges in the fourth quarter of 1998 and reduced the net loss by
$.36 per share.

   Provisions for loss on noncore business

   As part of its Turnaround Plan, the Company decided to withdraw from noncore
markets in Pennsylvania, Illinois, Florida and New Hampshire by selling or
closing its health plans in these markets. Total premium revenue for these
businesses in 1998 was approximately $170.4 million with operating losses
totaling


                                       73
<PAGE>   74
approximately $37.0 million. In addition, the Company decided to close
its specialty management initiatives and to sell or close certain other health
care services operations and investments in noncore businesses. Restructuring
reserves were established relating to estimated losses associated with premium
deficiencies in the HMO subsidiaries to be sold or closed, the net book value of
noncore investments were reduced to their estimated recoverable value, and
accruals were recorded for incremental disposition and closing costs associated
with the Turnaround Plan. During the second half of 1998, the Company entered
into an agreement to sell its Pennsylvania subsidiary to a third party for $7.1
million in cash plus a capital surplus note for $2.5 million and transferred its
membership in Illinois to a third party. Operations in Florida and New Hampshire
are expected to be closed by the middle of 1999 pursuant to plans adopted during
the year. Based on favorable progress to date, the Company has revised its
estimate of the remaining costs associated with the final disposition or closure
of these operations, and accordingly a total of $13.3 million of reserves were
reversed as a reduction of restructuring charges in the fourth quarter of 1998.
The Company expects to complete the closure or disposal of these noncore
businesses in 1999.

   Provisions for loss on government contracts

   As part of its Turnaround Plan, the Company decided to restructure its
current Medicare arrangements and/or withdraw from Medicare in certain counties
and to withdraw from Medicaid business entirely. Premium deficiency reserves
totaling $51.0 million were established in the second quarter of 1998. This
amount represented an estimate of the deficiency for the remainder of 1998
pending implementation of the plan to restructure or withdraw from these
businesses.

   The Company entered into an agreement to dispose of its remaining Medicaid
business in the fourth quarter, completed two Medicare risk transfer agreements
late in the third quarter and notified HCFA in the fourth quarter of its
intention to withdraw from Medicare in certain counties effective January 1,
1999. Amortization of the reserves against losses in these programs amounted to
$31.8 million in the second half of 1998. As a result, of the Company's early
completion of this portion of its Turnaround Plan the remaining reserve balance
of $19.2 million was reversed as a reduction of restructuring charges in the
fourth quarter of 1998.

   Write-down of property and equipment

   In connection with the Company's attempts to reduce administrative costs
under the Turnaround Plan, the Company decided to consolidate operations and
reduce its occupied square footage from approximately 2,000,000 square feet
under lease to approximately 1,200,000 square feet. Additionally, the Company
anticipated and experienced a reduction in workforce of over 1,000 employees as
a result of this consolidation and its administrative expense reduction plan. A
reserve of approximately $29.3 million, against approximately $37.1 million of
net book value, was established for the estimated unrecoverable book value of
furniture and equipment and leasehold improvements no longer in use as a result
of these steps. The effect of this write-down was to reduce depreciation expense
by approximately $6.3 million for the second half of 1998.

   Severance and related costs

   The Company's Turnaround Plan contemplated significant changes in the
Company's senior management and, in connection therewith, certain members of the
former management team were granted severance arrangements. As a result, the
Company recorded restructuring charges related to severance costs of $20.8
million in the first quarter of 1998 and an additional $4.0 million in the
second quarter of 1998 for fifteen former executives and managers. The December
31, 1998 balance represents contracted amounts payable through the first half of
2001.

   Costs of consolidating operations

   In connection with the consolidating of operations to reduce its occupied
square footage, restructuring charges totaling approximately $13.7 million were
recorded in the first half of 1998 for estimated costs associated with future
rental obligations (net of estimated sublease revenues), commissions, legal
costs, penalties and other expenses relating to disposition of excess space. The
Company recorded an additional restructuring charge of approximately $4.5
million in the fourth quarter as a change in estimate as the Company's
experience in negotiating subleases and lease cancellations through the fourth
quarter indicates that costs will exceed previous estimates. The Company's
relevant lease obligations extend to July 2005, but the Company expects that a


                                       74
<PAGE>   75
significant portion of the expense will be incurred prior to January 1, 2000,
including termination fees aggregating approximately $2.4 million.

(14)  UNUSUAL CHARGES

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

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

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

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

(15)  DEFINED CONTRIBUTION PLAN

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

(16)  REGULATORY AND CONTRACTUAL CAPITAL REQUIREMENTS

  Certain restricted investments at December 31, 1998 and 1997 are held on
deposit with various financial institutions to comply with federal and state
regulatory requirements. As of December 31, 1998, approximately $44.8 million
was so restricted and is shown as restricted investments in the accompanying
balance sheet. With respect to Oxford NY, the 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 $130 million and $155.6 million at December 31, 1998
and 1997, respectively, and are included in short-term investments.

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

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

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

                                       75
<PAGE>   76
(17)  CONCENTRATIONS OF CREDIT RISK

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

(18)  CONTINGENCIES

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

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

(19)  FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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


                                       76
<PAGE>   77
(20) GOVERNMENT PROGRAMS

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

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

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

(21) YEAR 2000 READINESS

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

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

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

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

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


                                       77
<PAGE>   78
   The Company has contracted with an external consulting firm to assist in the
generation of a Year 2000 contingency plan in the event compliance is not
achieved. In connection therewith, the Company has begun to identify reasonably
likely scenarios which could arise in the event of the Company's Year 2000
noncompliance. The Company has completed a contingency strategy and will develop
detailed plans to support this strategy. The Company expects to be substantially
complete with these detailed plans by the second quarter of 1999. However, there
can be no assurance that this contingency plan will be completed on a timely
basis or that such a plan will protect the Company from experiencing a material
adverse effect on its financial condition or results of operations.

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


                                       78
<PAGE>   79
(22)  QUARTERLY INFORMATION (UNAUDITED)

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

<TABLE>
<CAPTION>
                                                                                     Quarter Ended
(In thousands, except membership                      -----------------------------------------------------------------------------
 and per share amounts)                                 Mar. 31               Jun. 30              Sep. 30               Dec. 31
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                   <C>                   <C>                   <C>
Year ended December 31, 1998:
    Net operating revenues                           $ 1,218,087           $ 1,160,263           $ 1,147,134           $ 1,104,682
    Operating expenses                                 1,292,470             1,677,980             1,188,848             1,124,209
    Net loss                                            (507,620)              (35,922)               (7,948)              (45,302)
    Net loss attributable to common shares              (513,338)              (46,989)              (18,831)              (45,302)

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

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

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

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

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

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

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

   Results of operations for the second quarter of 1998 reflects restructuring
charges of $149.5 million. These charges include a $55.7 million provision for
loss on disposal of noncore businesses and unconsolidated affiliates; a $51.0
million provision for loss on government contracts; a $29.3 million write-down
of property and equipment, primarily leasehold improvements; and a $13.7 million
provision for operations consolidation costs (see note 13). Results for the
second quarter of 1998 also reflect an unusual charge of $38.3 million related
to the write-down of the Company's investment in FPA Medical Management, Inc.
(see note 14).

   The second quarter 1998 amount shown for operating expenses differs from that
included in the Company's Form 10-Q for the period ended June 30, 1998 due to
the reclassification to operating expense of $92.3 million of which $73.4
million was originally included in unusual charges and $24.8 million was
included in restructuring charges.

   Results of operations for the fourth quarter of 1998 includes a net
restructuring credit of $29.0 million which represents a change in estimate of
the restructuring charges incurred in the second quarter of 1998 (see note 13).

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


                                       79
<PAGE>   80
                    Independent Auditors Report On Schedules

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

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

                                          Ernst & Young LLP

Stamford, Connecticut
March 9, 1999


                                       80
<PAGE>   81
                          Independent Auditors' Report

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

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

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


                                                                        KPMG LLP

Stamford, Connecticut
February 23, 1998
                                       81
<PAGE>   82
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            CONDENSED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
                                 (In thousands)


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

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


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

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

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


                                       82
<PAGE>   83
                 OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
   SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
                     CONDENSED STATEMENTS OF OPERATIONS
                YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                               (In thousands)


<TABLE>
<CAPTION>
                                                            1998                1997                1996
                                                         ---------           ---------           ---------
<S>                                                      <C>                 <C>                 <C>
Revenues-management fees and investment and
   other income, net                                     $ 696,119           $ 697,426           $ 494,500
----------------------------------------------------------------------------------------------------------
Expenses:
   Health care services                                      2,827                  --
   Marketing, general and administrative                   713,021             702,136             474,215
   Interest and other financing charges                     43,038                  --                  --
   Restructuring charges                                   145,457                  --                  --
   Unusual charges                                              --              41,618                  --
----------------------------------------------------------------------------------------------------------
     Total expenses                                        904,343             743,754             474,215
----------------------------------------------------------------------------------------------------------
Operating earnings (loss)                                 (208,224)            (46,328)             20,285

Equity in net earnings (losses) of subsidiaries           (401,160)           (265,439)             91,214
Equity in net loss of affiliate                                 --              (1,140)             (4,600)

Gain on sale of affiliate                                       --              25,168                  --
----------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes                       (609,384)           (287,739)            106,899
Income tax expense (benefit)                               (12,592)              3,549               7,276
----------------------------------------------------------------------------------------------------------
Net earnings (loss)                                      $(596,792)          $(291,288)          $  99,623
==========================================================================================================
</TABLE>

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


                                       83
<PAGE>   84
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
                       CONDENSED STATEMENTS OF CASH FLOWS
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                     1998                1997                1996
                                                                  ---------           ---------           ---------
<S>                                                               <C>                 <C>                 <C>
Net cash provided (used) by operating activities                  $  88,212           $ (92,956)          $  99,321
-------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Capital expenditures                                             (34,895)            (89,846)            (45,820)
   Sale or maturity of available-for-sale securities                     --             275,872              78,923
   Purchase of available-for-sale investments                        (4,563)           (143,873)           (127,442)
   Acquisitions and other investments                                (1,312)            (33,876)            (10,295)
   Other, net                                                        20,675              (2,437)             (3,078)
-------------------------------------------------------------------------------------------------------------------
     Net cash provided (used) by investing activities               (20,095)              5,840            (107,712)
-------------------------------------------------------------------------------------------------------------------

Cash flow from financing activities:
   Proceeds from issuance of common stock                            10,000                  --             220,539
   Proceeds from exercise of stock options                            2,655              21,264              21,215
   Proceeds of preferred stock, net of issuance expenses            338,148                  --                  --
   Proceeds of notes and loans payable                              550,000                  --                  --
   Redemption of notes and loans payable                           (200,000)                 --                  --
   Debt issuance expenses                                           (11,793)                 --                  --
   Investments in and advances to subsidiaries, net                (528,073)             65,953            (233,423)
   Payments under capital lease obligations                          (5,463)                 --                  --
-------------------------------------------------------------------------------------------------------------------
     Net cash provided by financing activities                      155,474              87,217               8,331 
-------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                223,591                 101                 (60)
Cash and cash equivalents at beginning of year                        1,657               1,556               1,616
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                          $ 225,248           $   1,657           $   1,556
===================================================================================================================
</TABLE>


                                       84
<PAGE>   85
                   OXFORD HEALTH PLANS, INC. AND SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (In thousands)


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

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

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

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

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


                                       85
<PAGE>   86
                                  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(a)    --Second Amended and Restated Certificate of Incorporation, as amended,
              of the Registrant*

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       86
<PAGE>   87
                            EXHIBIT INDEX (CONTINUED)

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

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

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

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

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

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

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

   10(v)   --Amendment Number 1 to Employment Agreement, dated as of December
              9, 1998, by and between the Registrant and Norman C. Payson, M.D.*

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

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

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

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

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

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

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


                                       87
<PAGE>   88
                            EXHIBIT INDEX (CONTINUED)

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

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

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

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

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

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

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

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

   10(ll)  --Amendment Number 1 to Investment Agreement, dated as of May 13,
              1998 between TPG Oxford LLC and the Registrant*

   10(mm)  --Amendment Number 2 to Investment Agreement, dated as of August
              27, 1998, by and between TPG Partners II, L.P. and the Registrant*

   10(nn)  --Amendment Number 3 to Investment Agreement, dated as of November
              19, 1998, by and between TPG Partners II, L.P. and the Registrant*

   10(oo)  --Oxford Health Plans, Inc. 1996 Management Incentive Compensation Plan*

   10(pp)  --Amendment, dated December 10, 1998, to Employment Agreement between
              the Registrant and Jeffery H. Boyd*

   10(qq)  --Amendment, dated December 9, 1998, to Employment Agreement between
              the Registrant and Norman C. Payson, M.D.*

   10(rr)  --Share Exchange Agreement, dated as February 13, 1999 by and among
              TPG Partners II, L.P., TPG Investors II, L.P., TPG Parallel II,
              L.P., Chase Equity Associates, L.P., Oxford Acquisition Corp. and
              the DLJ Entities listed therein*

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

   21      --Subsidiaries of the Registrant* 

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

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

   *   Filed herewith.


                                       88