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

Commission file no. 0-25944
                    -------
                                   FOHP, INC.
                    -----------------------------------------
                    (Exact name of registrant as specified in
                                  its charter)

            New Jersey                                   22-3314813
-----------------------------------         ------------------------------------
    (State or other jurisdiction of         (I.R.S. Employer Identification No.)
     incorporation or organization)

        
         3501 State Highway 66
          Neptune, New Jersey                                  07753
------------------------------------------------          ---------------
(Address of principal executive offices)                     Zip Code

                         Registrant's telephone number,
                       including area code: (732) 918-6700

Securities registered pursuant to Section 12(b) of the Act:

                                                    Name of each exchange
Title of each class                                  on which registered
--------------------                                ----------------------
      None                                              Not Applicable


Securities registered pursuant to Section 12(g) of the Act:

                                  Common Stock
       -------------------------------------------------------------------
                                (Title of class)

       -------------------------------------------------------------------
                                (Title of class)

<PAGE>

         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. [ ]

         The  aggregate  market value of the shares of the  Registrant's  Common
Stock, par value $.01 per share ("Common Stock"),  held by non-affiliates of the
Registrant,  as of March 15, 1999, was $458,445.  Common Stock is the only class
of the Registrant's  capital stock with shares currently issued and outstanding.
Inasmuch as shares of Common  Stock are not listed on any  exchange or quoted on
any quotation system, nor has there been any regular trading in shares of Common
Stock since the inception of the Registrant,  the aforestated  aggregate  market
value of outstanding  Common Stock held by  non-affiliates of the Registrant was
computed  by  multiplying   the  number  of  shares  of  Common  Stock  held  by
non-affiliates  of the  Registrant  as of March 15, 1999,  by the per share book
value of the Common Stock as of December 31, 1998.

         As of March 15, 1999, the number of outstanding  shares of Common Stock
was 499,000,000.

        Documents incorporated by               Part of Form 10-K into which
        reference into this report                document is incorporated
        --------------------------                ------------------------
                   None                                Not Applicable

         Certain  information  included in this report and other  filings of the
Registrant  under the  Securities  Act of 1933, as amended,  and the  Securities
Exchange Act of 1934, as amended (the  "Exchange  Act"),  as well as information
communicated orally or in writing between the dates of such filings, contains or
may contain forward looking information that is subject to certain risks, trends
and  uncertainties  that could cause actual  results to differ  materially  from
expected  results.  Among  these  risks,  trends and  uncertainties  are matters
related to national and local economic  conditions,  the effect of  governmental
regulation  on  the  Registrant  and  its  subsidiaries   and  affiliates,   the
competitive  environment  in  which  the  Registrant  and its  subsidiaries  and
affiliates  operate,  the  relationship  between the  Registrant  and Foundation
Health  Systems,  Inc., the holder of more than 99% of the  Registrant's  Common
Stock,  including the proposed merger of FHS Transition  Company, a wholly-owned
subsidiary of Foundation  Health Systems,  Inc.,  into the  Registrant,  and the
ability of the Registrant and its  subsidiaries to generate or raise  sufficient
capital to remain in compliance with any applicable statutory net worth or other
capital  requirements  and to continue to operate their  businesses as currently
operated. See "Description of Business,"  "Management's  Discussion and Analysis
of Financial Condition and Results of Operation" and "Certain  Relationships and
Related Transactions."

                                      -2-

<PAGE>

                                     PART I

ITEM 1.       BUSINESS.

(a)      GENERAL DEVELOPMENT OF BUSINESS

         FOHP, Inc., a New Jersey  corporation (the "Company" or  "Registrant"),
was formed in May 1994 to effect the reorganization  (the  "Reorganization")  of
First Option  Health Plan of New Jersey,  Inc., a New Jersey  corporation  which
operates as a health maintenance organization ("HMO") in the State of New Jersey
("FOHP-NJ"),   into  a  holding  company   structure.   The  Reorganization  was
consummated on June 8, 1995.  Pursuant to the  Reorganization,  FOHP-NJ became a
wholly-owned  subsidiary  of the Company.  All health care benefit  products and
services  are  provided  by the  Company's  subsidiaries.  See  "Description  of
Business."

         During 1997,  Foundation Health Systems,  Inc., a Delaware  corporation
formerly  known  as  Health  Systems  International,   Inc.  ("FHS"),  purchased
convertible  debentures  from the Company in the aggregate  principal  amount of
approximately $80 million (each a "Convertible Debenture" and collectively,  the
"Convertible Debentures"). FHS has converted approximately $72 million principal
amount of the Convertible  Debentures into  496,916,161  shares of Common Stock,
which  represents more than 99% of the outstanding  Common Stock of the Company.
The Company and FHS have entered into a merger  agreement  pursuant to which FHS
will acquire a 100%  ownership  interest in the  Company.  See  "Description  of
Business - Transactions  with FHS; The Merger;  Description of FHS" and "Certain
Relationships and Related Transactions."

         On January 1, 1999,  Physicians Health Services of New Jersey,  Inc., a
New Jersey HMO controlled by FHS  ("PHS-NJ"),  merged with and into FOHP-NJ.  At
the effective time of the merger, FOHP-NJ changed its name to "Physicians Health
Services of New Jersey,  Inc." See  "Description of Business - Merger of FOHP-NJ
and Physicians Health Services of New Jersey, Inc."

         The  principal  executive  offices of the  Company  are located at 3501
State Highway 66,  Neptune,  New Jersey 07753 and its  telephone  number at such
location is (732) 918-6700.

(b)      FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

         Since  its  inception,  substantially  all of the  Company's  revenues,
operating results and assets have been attributable to the operation of FOHP-NJ,
an HMO which operates in the State of New Jersey.

(c)      DESCRIPTION OF BUSINESS

         In response to  exclusively  profit driven  managed care  organizations
generally  operated  by  large  insurance  companies,  FOHP-NJ,  a  wholly-owned
subsidiary  of the  Company,  was  formed  in May  1993 by  certain  New  Jersey
hospitals  and  physicians  to operate as a  provider  owned HMO in New  Jersey.
FOHP-NJ received a Certificate of Authority  ("COA") to operate as an HMO in New
Jersey in June 1994, and commenced operations on July 1, 1994.

         The Company  was formed in May,  1994 to effect the  Reorganization  of
FOHP-NJ into a holding company structure.  The Reorganization was consummated on
June 8, 1995.  Pursuant to the  Reorganization,  FOHP-NJ  became a  wholly-owned
subsidiary of the Company,  and all the former  shareholders  of FOHP-NJ  became
shareholders of the Company.

                                      -3-
<PAGE>

         TRANSACTIONS WITH FHS

         During the first quarter of 1996, the Company  learned that FOHP-NJ had
a statutory net worth deficiency.  To raise the capital necessary for FOHP-NJ to
remain in compliance  with its statutory  net worth  requirements,  the Board of
Directors of the Company (the "FOHP Board")  determined  that the Company needed
to locate potential investors who would be interested in acquiring a significant
equity position in the Company.  On October 24, 1996, the Company entered into a
Securities  Purchase  Agreement  with Health  Systems  International,  Inc., the
predecessor to FHS, which was later amended and, as so amended, became effective
on March 14, 1997 (the "Amended Securities Purchase Agreement").

         On April 16, 1997, the Amended Securities Purchase  Agreement,  and the
transactions  contemplated  thereby,  were approved by the  shareholders  of the
Company.  On  April  30,  1997,  pursuant  to the  Amended  Securities  Purchase
Agreement,  FHS  purchased  from the  Company  a  Convertible  Debenture  in the
aggregate   principal  amount  of  $51,701,120.38   (the  "Initial   Convertible
Debenture").  The  principal  amount of the Initial  Convertible  Debenture  was
convertible, at the option of FHS, into up to 71% of the Company's capital stock
on a fully-diluted basis.

         At the closing of the  purchase of the Initial  Convertible  Debenture,
FHS converted  $1,701,120.38 of the principal amount of the Initial  Convertible
Debenture into 168,109 shares of the Company's Common Stock.  Effective December
1, 1997, FHS converted the remaining $50 million of the principal  amount of the
Initial  Convertible  Debenture into 4,941,049 shares of Common Stock, and, as a
result, owned at that time 71% of the outstanding shares of the Company's Common
Stock.

         Pursuant to the Amended Securities Purchase Agreement,  as clarified by
a letter agreement dated April 30, 1997 between FHS and the Company, FHS had the
right to infuse  additional  capital  into the Company in 1997,  for  additional
Convertible Debentures in substantially the same form as the Initial Convertible
Debenture,  in the event that it was  determined  that FOHP-NJ needed capital to
meet applicable statutory net worth requirements.

         The Amended  Securities  Purchase Agreement also provided that FHS may,
at its option, acquire during 1999, through a tender offer or merger, all of the
then  outstanding  shares  of the  Company's  Common  Stock not held by FHS at a
purchase  price per share that is determined by independent  appraisers.  In any
such  tender  offer or  merger,  the  hospital,  physician  and  other  provider
shareholders  of the Company  (collectively,  the "Provider  Shareholders,"  and
individually  a  "Provider  Shareholder")  would  receive  cash or, at FHS' sole
option,  registered  FHS Class A Common  Stock,  par value $.001 per share,  for
their shares of Common Stock of the Company.

         As the Company  continued to reduce its medical claims  back-log during
the second quarter of 1997, it became apparent that the Company's  reserves were
not adequate to ensure payment of all outstanding  claims.  In addition,  it was
anticipated  that the  Company  would  continue to incur  significant  operating
losses  until  certain  unprofitable  products  were  phased-out  or revised and
administrative expenses reduced. As a result, management of the Company informed
the FOHP Board that the Company  would likely need a capital  infusion in excess
of $18  million by  December  31,  1997 so that  FOHP-NJ  could meet  applicable
statutory net worth requirements by year end.

                                      -4-
<PAGE>

         Recognizing that an additional capital infusion by FHS of more than $18
million in exchange  for  additional  Convertible  Debentures  could result in a
significant  dilution to the equity position of the Provider  Shareholders,  and
that such dilution  would reduce the amount of  consideration  that the Provider
Shareholders  would be entitled to receive in any transaction  whereby FHS would
acquire  all of the  outstanding  Common  Stock of the  Company  pursuant to the
Amended  Securities  Purchase  Agreement,  the FOHP Board and FHS began, in July
1997,  discussing  various  alternatives  directed at  preserving  the  Provider
Shareholders' investment in the Company.

         In order to satisfy certain statutory net worth requirements applicable
to FOHP-NJ, and in accordance with the Amended Securities Purchase Agreement, as
clarified by a letter agreement dated April 30, 1997, FHS elected on December 8,
1997 to infuse $29  million  into the  Company  in  exchange  for a  Convertible
Debenture (the "New Convertible  Debenture") in form and substance substantially
similar to the Initial  Convertible  Debenture.  Immediately upon receipt of the
New  Convertible  Debenture,  FHS  converted  approximately  $18,952,930  of the
principal  amount  thereof into  92,804,003  shares of Common  Stock.  After the
partial conversion of the New Convertible Debenture, FHS owned 97,913,161 shares
of the 100,000,000 shares of the Company's Common Stock then outstanding,  which
represented  approximately  98% of the fully-diluted  equity of the Company.  On
December 31, 1998, FHS converted  $1,197,183 of the principal  amount of the New
Convertible  Debenture into  399,003,000  shares of Common Stock pursuant to the
conversion  formula  contained  therein.  As a result  of such  conversion,  FHS
currently owns 496,916,161 shares of Common Stock, representing more than 99% of
the outstanding shares of the Company's Common Stock.

         In December 1997, FHS also contributed an additional $24 million to the
Company  to satisfy  certain  statutory  net worth  requirements  applicable  to
FOHP-NJ in return for  subordinated  debentures  which are not convertible  into
shares of Common Stock (the "Subordinated Debentures"). Further, FHS contributed
$29,897,801  to the  Company as  additional  paid in capital to satisfy  certain
statutory net worth requirements applicable to FOHP-NJ during 1998.

         FHS and the members of the FOHP Board who were not affiliated  with FHS
nor  employees  of the  Company  (the  "Non-FHS  Directors"),  assisted by legal
counsel and a financial  advisor  retained by the FOHP Board,  held  discussions
from October 1997 through June 1998 for purposes of developing a proposal  aimed
at preserving the Provider Shareholders'  investment in the Company. The Non-FHS
Directors  believed it was necessary that any  consideration to be offered for a
share of Common Stock be equal to at least $15.00, the amount originally paid by
a Provider  Shareholder  to the  Company for one share of the  Company's  Common
Stock.  After several months of discussion,  FHS was willing to offer a Provider
Shareholder the opportunity to obtain $15.00 for each share of Common Stock held
by  him,  her  or  it,  provided  that  the  Provider  Shareholder  continue  to
participate in the provider network of FOHP-NJ, or its successor, until December
31, 2001, and provided certain other conditions are met.

         THE MERGER

         Pursuant to the terms of the  Agreement and Plan of Merger (the "Merger
Agreement"),  dated as of November 16, 1998,  by and among the Company,  FHS and
FHS Transition Company, a wholly-owned subsidiary of FHS, FHS Transition Company
will merge with and into the Company (the "Merger"), and the Company will become
a  wholly-owned  subsidiary of  Physicians  Health  Services,  Inc.  ("PHS"),  a
Delaware corporation which is a wholly-owned

                                      -5-
<PAGE>

subsidiary of FHS. In connection with the Merger, a Provider Shareholder will be
entitled to choose to receive for his, her and its shares of Common Stock of the
Company  either  (i) the  value  of such  shares  as  determined  by one or more
independent qualified appraisers as of December 31, 1998, or (ii) payment rights
(individually  a "Payment  Right,"  and  collectively,  the  "Payment  Rights"),
pursuant to which a holder  thereof will be entitled to receive a payment of not
less than $15.00 per Payment Right on or about July 1, 2001, provided the holder
remains a  provider  to FOHP-NJ  until  July 1,  2001,  and agrees in writing to
remain a provider to FOHP-NJ until December 31, 2001, and a specified  number of
hospital  providers in the FOHP-NJ  provider  network does not leave the network
prior to December 31, 2001.  In addition,  a hospital  provider  that chooses to
receive  Payment  Rights  will be subject to  additional  conditions  to payment
relating to reimbursements  rates,  enrollment of hospital  employees in FOHP-NJ
health plans and payments of premiums to FOHP-NJ.

         Any Provider Shareholder who or which is not a hospital, and chooses to
receive Payment Rights for his, her or its shares of Common Stock of the Company
in  connection  with  the  Merger,   will  be  entitled  to  receive  additional
consideration  of (i) $2.25 per Payment Right,  and (ii) a pro rata portion of a
bonus pool to be funded by monies forfeited by Provider Shareholders;  provided,
however, that the additional consideration will only be paid if FOHP-NJ produces
an annualized  return on average  common equity  capital of at least 10% for the
period January 1, 1999 through June 30, 2001.

         The  obligation  of each party to the Merger  Agreement to complete the
Merger is  subject to  several  conditions,  including,  among  others:  (i) the
approval  of  the  Merger  Agreement  by the  holders  of  the  majority  of the
outstanding  shares  of the  Company's  Common  Stock;  (ii) no  statute,  rule,
regulation,  executive order, decree, injunction or restraining order shall have
been  enacted,  promulgated,  enforced or  otherwise  made  applicable  (and not
repealed or superceded) by any court of competent  jurisdiction,  administrative
agency or commission or other governmental  authority or instrumentality,  which
prohibits  the  consummation  of the  transactions  contemplated  by the  Merger
Agreement; (iii) the receipt of requisite governmental consents and approvals to
consummate  the Merger;  and (iv) the  execution and delivery by the Company and
FHS of a contribution  agreement pursuant to which FHS will commit to contribute
to the Company the amount of cash  necessary for the Company to pay, among other
things,  all amounts payable under the Payment Rights to be issued in connection
with the Merger.

         The approval of the majority of the outstanding shares of the Company's
Common Stock is required to approve the Merger  Agreement.  FHS  currently  owns
more than 99% of the  outstanding  shares of Common Stock.  Accordingly,  if FHS
approves the Merger Agreement,  the Merger will occur, provided all of the other
conditions to the Merger are either satisfied or waived.

         If the Merger is  consummated,  no  Provider  Shareholder  will have an
equity position in the Company.  As a result,  FHS, or an affiliate thereof,  as
the sole  shareholder  of the Company,  will terminate the  registration  of the
Common Stock under the Exchange Act.  Consequently,  the Company's obligation to
file periodic reports under the Exchange Act, such as this Annual Report on Form
10-K, will be suspended shortly after the Merger.

                                      -6-
<PAGE>

         DESCRIPTION OF FHS

         FHS is an integrated  managed care  organization  which administers the
delivery of managed health care services.  FHS' HMOs, insured preferred provider
organizations and government  contracts  subsidiaries provide health benefits to
5.8 million individuals in 21 states through group,  individual,  Medicare risk,
Medicaid and CHAMPUS programs.  FHS' subsidiaries also offer managed health care
products related to behavioral  health,  dental and vision  services,  and offer
managed  health  care  product  coordination  for  multi-region   employers  and
administrative  services for medical groups and self-funded  benefits  programs.
Over the past several  years,  FHS has developed a diversified  product line and
has achieved geographic expansion throughout the United States. FHS operates and
conducts  its HMO and other  businesses  through its wholly and  majority  owned
subsidiaries, including the Company.

         DESCRIPTION OF FOHP-NJ

         FOHP-NJ is the Company's principal subsidiary and only subsidiary which
has obtained a COA to operate as an HMO. FOHP-NJ operates an HMO in the State of
New Jersey pursuant to a COA issued by the New Jersey  Department of Banking and
Insurance  (the  "DOI")  and the New  Jersey  Department  of Health  and  Senior
Services (the "DOH") (the DOI and the DOH are collectively referred to herein as
the  "Departments").  FOHP-NJ has established a provider network and has entered
into provider  agreements with NJ Practitioners,  NJ Acute Care Institutions and
NJ Other Providers (as such terms are defined  below).  FOHP-NJ has entered into
provider  agreements with (i) 62 NJ Acute Care Institutions  located  throughout
New Jersey's 21 counties, (ii) approximately 11,000 NJ Practitioners, practicing
in primary  care and 30 medical  specialties  throughout  New Jersey,  and (iii)
approximately 75 NJ Other Providers.  Providers contracting with FOHP-NJ are not
required to be  shareholders  of the Company.  Currently,  of the  approximately
11,137 providers who have contracted with FOHP-NJ, 2,628 are shareholders of the
Company.

         As used herein, a "NJ Acute Care Institution"  shall mean a hospital or
acute care  institution,  licensed by the DOH, which has entered into a provider
agreement  with  FOHP-NJ to  provide  health  care  services  to the  members of
FOHP-NJ's health plans; a "NJ  Practitioner"  shall mean a member of the medical
staff of a NJ Acute Care  Institution,  or a physician  designated by a NJ Acute
Care  Institution,  who is licensed to practice  medicine or  osteopathy  in the
State of New Jersey and who has entered into a provider  agreement  with FOHP-NJ
to provide health care services to the members of FOHP-NJ's  health plans; and a
"NJ Other  Provider"  shall mean a health care provider or  professional,  other
than a NJ  Practitioner  or NJ Acute Care  Institution,  licensed,  certified or
authorized  to operate or practice  in the State of New Jersey,  who has entered
into a provider agreement with FOHP-NJ.

         Each member of FOHP-NJ's  provider  network has entered into a provider
agreement  with  FOHP-NJ.  Each  provider  agreement  has a one-year term and is
renewable annually. Such agreements with NJ Acute Care Institutions and NJ Other
Providers  may be terminated  by mutual  consent or, after the initial  one-year
term, by either party upon 90 days notice;  agreements with NJ Practitioners may
be terminated by either party upon 60 days notice.  The  agreements  also may be
terminated for breaches specified therein.  The terms and conditions of provider
agreements are not affected by whether the provider is, or is not, a shareholder
of the Company.  However,  some agreements with  shareholders  that are NJ Acute
Care Institutions and subscribers in FOHP-NJ health plans are different from the
subscriber  agreements  of  non-

                                      -7-
<PAGE>

shareholders  in that  premium  rates for those NJ Acute Care  Institutions  are
capped to be within a certain  corridor  (+/- 4%) from their prior year  premium
rates. There are 24 NJ Acute Care Institutions with such subscriber  agreements.
Preferred Providers (i.e.,  members of FOHP-NJ's provider network) are permitted
to contract with other entities, including other health plans.

         FOHP-NJ  markets its  services to  employers,  including  NJ Acute Care
Institutions  that  are  providers  of  health  care  services  to  FOHP-NJ  and
shareholders  of  the  Company.   Pursuant  to  the  Company's   Certificate  of
Incorporation,  NJ Acute  Care  Institutions  that own  shares of Common  Stock,
directly or through  affiliates,  are required to offer a FOHP-NJ health plan to
their employees under certain  circumstances.  In the event that a NJ Acute Care
Institution  fails to comply  with such  requirements,  the Company may elect to
repurchase the shares of Common Stock held by the NJ Acute Care Institution. See
"Marketing."

         MERGER OF FOHP-NJ AND PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC.

         On January 1, 1999,  PHS-NJ, a New Jersey HMO controlled by FHS, merged
with and into FOHP-NJ  pursuant to an  Agreement  and Plan of Merger dated as of
October 26, 1998. At the effective time of the merger,  FOHP-NJ changed its name
to "Physicians  Health  Services of New Jersey,  Inc." The purpose of the merger
was to consolidate  the FHS controlled HMO operations in the State of New Jersey
into primarily one corporation.

         BENEFITS PROVIDED BY FOHP-NJ

         FOHP-NJ  currently offers two principal types of coverage plans,  point
of service  ("POS") and Non-POS,  each having  multiple  variations.  Under both
types of product,  each new FOHP-NJ  member will be required to select a primary
care  physician  from a list  supplied by FOHP-NJ.  All medical care  thereafter
received by the member under a Non-POS plan,  including  specialist and hospital
care,  will be supervised by the primary care physician who is familiar with the
member's  medical history.  A POS plan will permit members to utilize  providers
who are not under contract with FOHP-NJ. In such circumstances,  members will be
subject to higher  co-payments  and be responsible for payment of any difference
between  what  FOHP-NJ  pays for covered  services and the amount of the charges
incurred for such services. Generally, FOHP-NJ will pay no more than 80% and the
member will pay no less than 20% of the charges for covered  services  when care
is provided by non-Preferred Providers.

         FOHP-NJ's health plans require precertification for hospital admissions
and diagnostic and outpatient procedures. Except for co-payments, FOHP-NJ covers
all other charges for treatment at non-Preferred Provider emergency rooms in the
event of a medical  emergency or urgently  needed  services,  as  determined  by
FOHP-NJ.

         Generally,  rates for each employer  group are fixed for a twelve-month
period and may be increased for each renewal term; provided,  however,  that the
new rate  methodology must be submitted to the DOI and there can be no assurance
that any new rate  methodology  will be accepted by the DOI.  Renewal dates vary
among employer  groups.  FOHP-NJ utilizes a system of community rating by class,
adjusted  (with respect to employer  groups of more than 100  employees) by age,
sex and industry classification,  in determining its rates for various employers
in the proposed  service  area.  Accordingly,  rates can vary  between  employer
groups  for  coverage  under the same  FOHP-NJ  health  plan.  FOHP-NJ  has also
established  rates for the health  benefits  plans  required by the State of New
Jersey to be offered by all HMOs that choose to market to small employer  groups
(50  employees  or less),  which are based on  overall  community  rates for 

                                      -8-
<PAGE>

New Jersey  calculated  by  independent  consulting  actuaries,  as  statutorily
required.  Proposed  rates for the basic  health care  coverage  required by the
State of New Jersey is  submitted  to the DOI.  Rates will also be  affected  by
federal regulations which generally limit experience rating of group accounts.

         FOHP-NJ health plans require  members to make  co-payments  directly to
the treating  health care  provider for office  visits,  house calls and certain
hospital  emergency room visits.  All FOHP-NJ plans allow  subscribers to enroll
their spouses and eligible dependents.

         FOHP-NJ offers multiple  coverage plans to employer groups of more than
50  employees.  Some  coverages  in each  product are subject to annual  maximum
benefits.  Generally,  the  products  within  each  POS  and  Non-POS  plan  are
distinguished by the amount of the applicable  co-payments and the obligation of
the POS member to pay to the provider the  difference  between what FOHP-NJ pays
and the total charges.

         FOHP-NJ  offers  seven  small  employer  group (50  employees  or less)
products. Four of them are identical to the small business plans designed by the
Board of Directors of the Small Employer Health Benefits Program, the regulatory
agency  responsible  for the  regulation  of  small  business  health  insurance
products  in New  Jersey.  The other three small  employer  group  products  are
offered as riders to one of the four other small employer  products.  Each rider
makes that product virtually  identical to one of FOHP-NJ's large employer group
products.

         FOHP-NJ  also offers a dental plan and has expanded the coverage of the
benefits plans offered by FOHP-NJ to include vision care.  Moreover,  commencing
in December  1995,  FOHP-NJ began  offering  Non-POS  products to individuals as
required  by the State of New  Jersey.  The Non-POS  products  being  offered by
FOHP-NJ to individuals  pursuant to the state requirement  contain all the state
mandated benefits,  including coverage for preventive care,  in-patient hospital
care, substance abuse and mental health. All the products offered to individuals
by  FOHP-NJ as  required  by the State of New Jersey  require  co-payments.  See
"Government Regulation."

         FOHP-NJ currently offers coverage for Medicaid beneficiaries in the New
Jersey counties of Essex, Cumberland,  Gloucester,  Hudson, Middlesex,  Passaic,
Union,  Mercer and Camden. In December 1995,  FOHP-NJ qualified  federally as an
HMO, and, as a result,  currently offers coverage for Medicare  beneficiaries in
certain counties of New Jersey.

         FOHP-NJ also provides utilization management and its Preferred Provider
Organization  ("PPO") product to the members of self-funded plans.  FOHP-NJ also
offers  pharmacy,  mental  health and chemical  dependency  management  services
through third parties who or which have entered into  sub-contract  arrangements
with FOHP-NJ.

         ARRANGEMENTS WITH NJ PRACTITIONERS

         FOHP-NJ  may  contract   with   Individual  or   Independent   Practice
Associations  (individually,  an "IPA"),  Physician Hospital Organizations or NJ
Practitioners.  Under the terms of FOHP-NJ's practitioner provider agreement, NJ
Practitioners  will  provide  primary  and  specialty  care to FOHP-NJ  members.
FOHP-NJ has entered into provider  agreements with physicians and others who are
not shareholders to provide services to its members.  NJ Practitioners  are paid
pursuant to a fee  schedule  established  by FOHP-NJ and only bill  members of a
FOHP-NJ plan for co-payments and non-covered  services, if any. The fees paid to
NJ  Practitioners  are based on a percentage  of the fees payable  under the fee
schedule  developed for

                                      -9-
<PAGE>

Medicare. Co-payments, in amounts approved by FOHP-NJ, are collected directly by
the NJ Practitioner from the member.

         In  addition  to  specifying  the  types  of  services  required,  each
practitioner provider agreement imposes various requirements and standards (many
of  which  are  also  mandated  by  applicable  federal  and  state  law)  on NJ
Practitioners.

         Each member  selects a primary  care  physician  from a list of primary
care  physicians  who are under  contract with FOHP-NJ.  Under the Non-POS plans
offered by  FOHP-NJ,  primary  care  physicians  are  required,  when  medically
necessary and appropriate, to refer members to specialist physicians,  hospitals
and other health care providers who are under contract with FOHP-NJ.

         FOHP-NJ is a named insured under the  Company's  comprehensive  general
liability  insurance,  with coverage of at least  $1,000,000  per occurrence and
$10,000,000  in the  aggregate  per year.  In addition,  FOHP-NJ  maintains  HMO
reinsurance for those situations where the acute care of a commercial,  Medicaid
or Medicare member exceeds $175,000 in a calendar year, with a per member annual
maximum of $1,000,000 and lifetime maximum of $2,000,000. Individual physicians,
including  any  physician  practicing  in an IPA or other group,  must  maintain
professional  liability insurance coverage of at least $1,000,000 per occurrence
and $3,000,000 in the aggregate per year.

         ARRANGEMENTS WITH NJ ACUTE CARE INSTITUTIONS

         FOHP-NJ's  agreements with NJ Acute Care  Institutions  provide,  among
other things, for a reimbursement schedule setting the amounts to be paid to the
NJ Acute Care  Institutions  by FOHP-NJ for  services  provided to members.  The
reimbursement  schedule  of a  provider  agreement  between  an  NJ  Acute  Care
Institution and FOHP-NJ is individually negotiated.  Rates paid to NJ Acute Care
Institutions  for services  provided to members of  FOHP-NJ's  health plans vary
from institution to institution and are based on, among other things,  the types
of services provided by, and the location of, the NJ Acute Care Institution. The
agreements are site specific. Therefore, in the event of a merger or acquisition
or  similar  transaction  between  an NJ  Acute  Care  Institution  and  another
institution, services provided to members of FOHP-NJ health plans pursuant to an
agreement  between it and the affected NJ Acute Care Institution are required to
be provided only at the location of such  institution.  Also, under the terms of
such  agreements,  NJ Acute Care  Institutions  are  required  to use their best
efforts  to notify  FOHP-NJ  within 48 hours or one  business  day of a member's
emergency  admission.  NJ Practitioners are required to notify and receive prior
approval  from FOHP-NJ for all elective  hospital  admissions.  Agreements  with
participating NJ Acute Care Institutions prohibit the NJ Acute Care Institutions
from billing a member of a FOHP-NJ  health plan for any services  paid for under
such plan except for any applicable co-payment.

         In  addition  to  specifying  the  types  of  services  required,  each
agreement with an NJ Acute Care  Institution  imposes various  requirements  and
standards  (some of which are also mandated  under state and federal law) on the
NJ Acute Care Institution.

         Each NJ Acute  Care  Institution  must  maintain  a policy  of  general
liability  insurance  in  amounts  of at least  $1,000,000  per  occurrence  and
$3,000,000  in  the  aggregate  per  year.  In  addition,  each  NJ  Acute  Care
Institution must maintain  professional  liability insurance coverage in amounts
required by the State of New Jersey.  Each NJ Acute Care  Institution has agreed
to
                                      -10-
<PAGE>

indemnify  FOHP-NJ,  and FOHP-NJ has agreed to indemnify each such NJ Acute Care
Institution,  against liability  arising from its actions,  except to the extent
that injury results from the negligence of the other party.

         ARRANGEMENTS WITH NJ OTHER PROVIDERS

         FOHP-NJ  contracts  with NJ Other  Providers  such as  skilled  nursing
facilities and home health care agencies to provide  services to members.  These
providers are paid pursuant to a program rate which is  individually  negotiated
with  FOHP-NJ.   Payment   procedures,   service   authorization   requirements,
obligations   imposed  on  the  provider,   and  insurance  and  indemnification
obligations are similar to those outlined above for NJ Acute Care Institutions.

         OTHER ARRANGEMENTS INVOLVING FOHP-NJ

         FOHP-NJ  arranges  for the  provision  of certain  services  to members
including mental health/chemical dependency,  pharmacy, laboratory and radiology
through risk sharing  arrangements  with other entities,  where feasible and not
prohibited by applicable law.

         COMPETITION

         The competition  for prospective  enrollees in prepaid health plans has
increased over the past few years as a result of the significant increase in the
number of companies  offering HMO and other managed care products.  For example,
FOHP-NJ  competes with other prepaid  health plans and with  traditional  health
insurers  as well as with  self-insured  programs,  PPOs and  other  managed  or
coordinated care organizations.  Other programs or entities may be substantially
better  capitalized  than  FOHP-NJ.  Moreover,  a number of  traditional  health
insurers have begun to  aggressively  market HMO and other managed care products
of  their  own.  In  addition,  competition  may  be  affected  if  any  federal
legislation or regulation  with respect to health plans or health care providers
is adopted. See "Government Regulation."

         Competition  among HMOs and  traditional  and other health  insurers is
based principally on benefits offered and premium cost. FOHP-NJ,  which operates
an HMO, may find itself at a competitive disadvantage if its premiums are higher
than those of other HMOs or traditional  health  insurers.  Premiums  negotiated
with employers,  fee schedules  negotiated with hospitals,  physicians and other
providers,  the scope of benefits offered,  unique benefit designs and access to
physicians and hospitals constitute the principal methods of competition.

         MARKETING

         FOHP-NJ  markets  its health care  benefits  products  and  services to
prospective  members  through  full-time  marketing  representatives,   selected
brokers and consultants and other sales  professionals  under the direction of a
Director of Sales.  Marketing efforts are concentrated on employer groups of all
sizes  with  particular  emphasis  placed on  employers  with  fewer  than 1,000
employees.

         FOHP-NJ  markets its  services to  employers,  including  NJ Acute Care
Institutions  that are providers to FOHP-NJ and are either  shareholders  of the
Company  or  affiliated  with  shareholders  of  the  Company.  Pursuant  to the
Company's  Certificate of  Incorporation,  if the existing health plan of any NJ
Acute Care  Institution  shareholder is a self-insured  plan, such NJ Acute Care
Institution  is obliged to offer a FOHP-NJ health plan to its employees as their
exclusive  plan in  accordance  with a  timetable  determined  by  FOHP-NJ to be
feasible. The Company's Certificate of Incorporation also provides that NJ Acute
Care  Institutions  which are  shareholders or

                                      -11-
<PAGE>

affiliated with  shareholders and offer one or more health plans,  including any
self-insured  plan, are obliged to offer a FOHP-NJ health plan and have at least
75% of its  employees  enrolled  in a FOHP-NJ  health  plan,  and NJ Acute  Care
Institutions  which are  shareholders  or affiliated with  shareholders  and are
subject to  collective  bargaining  agreements  are  required  to use their best
efforts  to offer a  FOHP-NJ  health  plan to  their  non-union  employees  on a
"non-exclusive"  basis.  In  addition,  NJ Acute  Care  Institutions  which  are
shareholders  or  affiliated  with  shareholders  and are subject to  collective
bargaining  agreements  are  required  to use their  best  efforts  to qualify a
FOHP-NJ  health  plan  as  the  union-designated  plan  and  to  pay  reasonable
deductibles or other costs to so qualify a FOHP-NJ health plan.

         The provisions in the Certificate of  Incorporation of the Company with
respect to the above described covenants of the NJ Acute Care Institutions which
own shares of Common Stock or of the  affiliates  of NJ Acute Care  Institutions
which  own  shares  of  Common  Stock  (collectively  referred  to herein as "NJ
Institutional  Shareholders,"  and  individually  referred  to  herein  as a "NJ
Institutional   Shareholder")  shall  continue  until  December  31,  1999.  The
Company's  Certificate  of  Incorporation  also  provides  that,  if,  upon  the
termination of the covenants  contained  therein as they relate to a specific NJ
Institutional Shareholder, the NJ Institutional Shareholder or its affiliated NJ
Acute Care  Institution  proposes  to offer to its  employees  any  health  plan
similar to a health plan offered by FOHP-NJ,  such NJ Institutional  Shareholder
shall provide prior written  notice to FOHP-NJ of the material terms of the Bona
Fide Offer (as hereinafter  defined) by such other health benefits plans. In the
event FOHP-NJ offers to provide an FOHP-NJ health plan containing terms at least
as favorable in all material  respects to the employees of the NJ  Institutional
Shareholder  or its affiliated NJ Acute Care  Institution as those  contained in
the Bona Fide Offer,  such NJ  Institutional  Shareholder  or its  affiliated NJ
Acute Care Institution  shall offer such FOHP-NJ health plan to its employees on
the same  basis as it would  have been  obligated  under the  covenants  if such
covenants had not terminated.

         In the event a NJ Institutional  Shareholder or its affiliated NJ Acute
Care  Institution  (i)  breaches  any of the  covenants  in the  Certificate  of
Incorporation  of the  Company  applicable  to it,  or  (ii)  fails  to  provide
reimbursement  rates (a) for  in-patient  visits at the lower of (1) the  lowest
rate of reimbursement  received by such provider from nongovernmental payors for
each line of business,  or (2) the rate of reimbursement  reflecting a reduction
(compared to calendar 1996 rates) of 5% in in-patient costs,  provided that such
reduction is solely as a result of rate  reductions and not through  utilization
or medical management efforts, and (b) for outpatient visits at the lower of (1)
the lowest rate of reimbursement received by such providers from nongovernmental
payors for each line of business, or (2) the rate of reimbursement  reflecting a
reduction  (compared  to  calendar  1996  rates)  of 10% in  out-patient  costs,
provided that such  reduction is solely as a result of rate  reductions  and not
through utilization or medical management  efforts,  then the Company shall have
the  option to  purchase  all or a portion  of the  Common  Stock held by the NJ
Institutional  Shareholder  at a purchase  price  equal to the lowest of (A) the
Book  Value  (as  such  term  is  defined  in  the  Company's   Certificate   of
Incorporation),  (B) the lowest  shareholder  equity  reflected on the Company's
quarter-end balance sheets during the period of noncompliance giving rise to the
repurchase right,  excluding any Convertible  Debentures issued to FHS, prepared
in accordance  with generally  accepted  accounting  principles,  divided by the
number of outstanding  shares of Common Stock on a fully diluted  basis,  or (C)
the original  purchase price paid by such NJ Institutional  Shareholder for such
shares of Common Stock.  The Company shall have full  discretion with respect to
its election to exercise or not to exercise the  foregoing  rights of repurchase
with respect to any given shareholder, taking into

                                      -12-
<PAGE>

account any factors the Company deems appropriate relating to such shareholder's
relationships with the Company or the Company's  business or otherwise,  and the
Company's  election  to make or not to make a  repurchase  from one  shareholder
shall  have  no  affect  on the  Company's  election  to  make  or not to make a
repurchase from any other shareholder.

         Pursuant to the form of Payment Rights to be issued in connection  with
the Merger, an NJ Acute Care Institution will have to comply with enrollment and
reimbursement  rate  commitments  similar to those  currently  contained  in the
Company's  Certificate of  Incorporation,  as discussed  above,  to receive full
payment under a Payment Right.

         A "Bona Fide Offer" shall mean an offer of a health  benefits plan that
is prepared  with the  objective of covering the offeror's (i) health care costs
and  administrative  expenses  in the case of risk  products,  and (ii) costs of
performing  administrative services and any risk assumed (e.g.,  reinsurance) in
the case of self funded products. An offer by any health benefits plan below the
offeror's  costs for the purpose of achieving  market share  increases shall not
constitute a Bona Fide Offer.

         GOVERNMENT REGULATION

         For a tax exempt  hospital or other  entity to maintain  its tax exempt
status under section  501(c)(3) of the Internal Revenue Code of 1986, as amended
(the "Code"),  (i) it must be operated  exclusively for charitable  purposes and
(ii) its  income or assets  may not be  utilized  to inure to the  benefit of an
individual considered to be an insider by virtue of his or her relationship with
the exempt  organization  (generally,  any person  having a personal  or private
interest in the activities of an organization  exempt under section 501(c)(3) of
the Code and  having  the  ability  to  control  or  influence  its  activities,
including  key staff  personnel or any physician  employed by or with  admitting
privileges at a tax exempt hospital, is often referred to as an "insider").  Any
conduct in  contravention of the furtherance of the entity's exempt purposes may
result  in  the  loss  of a  health  care  provider's  tax  exempt  status.  Any
transaction with any person or entity (including,  among others,  vendors) which
results in an excessive benefit which is not incidental to the accomplishment of
the entity's exempt purposes may constitute private benefit thereby jeopardizing
the  entity's  tax exempt  status.  In the case of an  insider,  a  compensation
arrangement in excess of fair market value, a below market loan, or a no rent or
below market rent arrangement may constitute private inurement.

         Federal law prohibits the payment or receipt of  remuneration  directly
or indirectly for referring business or furnishing any service for which payment
may be made under the  Medicare or Medicaid  programs.  Section  1128B(b) of the
Social Security Act, known as the Medicare/Medicaid  Anti-Kickback  Statute, and
implementing regulations and advisory opinions, prohibit, among other things, an
entity from  selecting a physician or other  investor based upon his, her or its
ability  to make  referrals  or from  offering  such an  investor  (i) a greater
investment  opportunity,   or  (ii)  a  disproportionately  large  return  on  a
disproportionately  small  investment.  The statute imposes  criminal as well as
other penalties for engaging in prohibited practices.

         Federal law also prohibits physician referrals to entities in which the
physician or a member of his or her family has a financial  interest for certain
designated health services.  The statute,  adopted as part of the Omnibus Budget
Reconciliation Act of 1989, as subsequently  amended, and more commonly known as
the Stark Laws, specifically excludes from the prohibition, in-network referrals
by physicians  who have  ownership or investment  interests in, or

                                      -13-
<PAGE>

compensation  arrangements  with,  certain Medicare  competitive  medical plans,
federally qualified HMOs, or other prepaid plans operating under a demonstration
project.

         Management does not believe that any  arrangements  between the Company
or any of its subsidiaries and its shareholders or directors is violative of the
Medicare/Medicaid   Anti-Kickback   Statute  or  the  Stark  Laws.   No  Company
shareholder  nor any  provider  of services  to a  subsidiary  of the Company is
required to make referrals as a condition of making or maintaining an investment
interest in the Company or otherwise.  If any arrangement between the Company or
a  subsidiary  of the Company and its  shareholders  or  directors  was found to
contravene current law or in the event any change in the law should prohibit any
such arrangement, the Company would seek to restructure such arrangement.

         New Jersey has also adopted legislation which prohibits physicians from
referring  patients  to health care  services  in which they or their  immediate
families  have a  significant  beneficial  interest  unless such  interests  are
disclosed  in  advance  to such  patients.  The  restriction  does not  apply to
services  provided  in a  physician's  medical  office or to  certain  specified
services.

         Federal   antitrust  laws   generally   prohibit   agreements   between
competitors that unreasonably  restrict  competition and, as such laws relate to
the Company, may prohibit,  among other things, the disclosure of information by
a provider to FOHP-NJ relating to (i) the providers' rates, costs,  salaries and
benefits,  and (ii) the terms, prices and conditions of any managed care plan in
which the provider  participates,  unless such information is a matter of public
record.  Such laws also may prohibit the disclosure by FOHP-NJ of the prices and
terms of any  arrangement  between  FOHP-NJ  and one of its  providers  to other
providers  in  FOHP-NJ's  provider  network.  In an effort to  prevent  any such
conduct,  the Company has distributed an Antitrust  Compliance  Manual to its NJ
Institutional  Shareholders and requires that each NJ Institutional  Shareholder
acknowledge  the receipt of such  manual.  In  addition,  the  Company  includes
information regarding  prohibitions under federal antitrust laws in the provider
agreements  entered  into  by  FOHP-NJ  and  NJ  Practitioners.  Any  prohibited
disclosure or other  violations of the federal  antitrust laws could subject the
Company or FOHP-NJ or any of their directors or shareholders to monetary damages
and other penalties under such antitrust laws.

         HMOs are subject to extensive governmental regulation.  Among the areas
regulated  are the scope of benefits  required to be made  available to members,
reserves required to be maintained, the manner in which members' co-payments are
structured, procedures for review of quality assurance, enrollment requirements,
the relationship between the HMO and its health care providers and the financial
condition  of the  HMO.  Any  HMO  formed  in New  Jersey  is  regulated  by two
governmental  departments,  the DOI and the DOH. The DOI monitors the  financial
condition  of an HMO formed in New Jersey  whereas the DOH  reviews  quality and
access issues.

         In June 1994,  FOHP-NJ,  the Company's only  subsidiary  licensed as an
HMO, received its COA from the Departments.  In December 1995,  FOHP-NJ received
approval  from  the  U.S.  Health  Care  Financing  Administration  of the  U.S.
Department of Health and Human Services (commonly known as HCFA) to operate as a
federally  qualified HMO and, as a result, is now providing services to Medicare
beneficiaries.  In February 1995, FOHP-NJ entered into an agreement with the New
Jersey Department of Human Services to provide services to Medicaid  recipients,
and it has  received  approval  to  provide  such  services  in nine New  Jersey
counties.

                                      -14-

<PAGE>

         If a New Jersey HMO fails to meet the statutory net worth  requirements
applicable  to it,  the DOI has the power to  suspend  or revoke  the HMO's COA.
Without a COA, an entity cannot conduct business as an HMO in New Jersey.

         Federal law requires a federally  qualified  HMO to have a positive net
worth  (however,  no amount is specified)  and to provide  evidence of financing
until revenues are sufficient to support  operations.  The financial reserves of
federally  qualified HMOs are required to provide adequately against the risk of
insolvency,  but the amount of such  reserves are not  specified  in  applicable
regulations  and is subject to the  discretion  of the  Secretary  of the United
States Department of Health and Human Services.

         Provisions affecting HMOs were enacted as part of the federal "Balanced
Budget  Act of  1997."  The  Balanced  Budget  Act  of  1997  provides  Medicare
beneficiaries with the option to enroll in a new Medicare + Choice Program which
allows  provider-sponsored  networks  and other  non-HMO  entities  to  contract
directly  with  Medicare  to  provide  services  to  Medicare  + Choice  Program
beneficiaries.  The  Balanced  Budget  Act  of  1997  also  includes  provisions
impacting on state  administered  Medicaid managed care plans.  These provisions
include,  among others,  provisions relating to increased beneficiary protection
and quality assurance.

         As a result of  legislation  enacted by the State of New Jersey in 1991
and 1993,  New Jersey HMOs must offer health care benefits  plans to individuals
including  hospital  expense  coverage and annual  physical  examinations  for a
defined  period.  HMOs which do not offer coverage to individuals are subject to
an assessment.  Additionally,  legislation  adopted in New Jersey,  which became
effective  on July 1,  1994,  requires  health  insurers,  including  HMOs which
provide pharmacy  services,  to permit enrollees to select their own pharmacists
and pharmacies.  In 1995, New Jersey enacted  legislation  which requires that a
mother  delivering a baby be permitted to remain at the facility  where the baby
was born for a minimum  of 48 or 96 hours,  depending  upon the method of birth.
Legislation  also was  enacted  in New  Jersey  in 1995  which  requires  health
insurers, including HMOs, to provide certain mandated diabetes benefits.

         In 1997,  the New Jersey  legislature  enacted the "Health Care Quality
Act."  Among other  things,  the Health Care  Quality Act  provides  that health
insurers,  including  HMOs,  must disclose  information  regarding the terms and
conditions of their health benefit plans, as well as other related  information,
to  subscribers at the time of enrollment  and annually  thereafter.  The Health
Care  Quality  Act also  imposes  on an HMO  requirements  with  respect  to the
responsibilities of the HMO's medical director, the HMO's utilization management
program and the HMO's relationship with participating providers. The legislation
also  requires  an HMO to  offer a POS  plan to every  contract  holder  (either
directly or through a  selective  contracting  arrangement)  which would allow a
covered  person to receive  covered  services  from  out-of-network  health care
providers.  Also in 1997, the DOH adopted extensive amendments to the New Jersey
regulations  applicable to HMOs for purposes of providing additional protections
to  consumers  of HMO  products  and  promoting  consumer  confidence  in  HMOs.
Generally, the amended regulations provide, among other things, that a member of
an HMO plan  shall be  entitled  to appeal  service  denials  to an  independent
medical  panel and require  health  plans to disclose  operational  information,
including  information  regarding financial incentives provided to physicians by
HMOs in their reimbursement procedures.

         Prior to the  adopting  of the Health  Care  Quality  Act,  the DOH, in
consultation  with the DOI,  adopted  new  regulations  (the "POS  Regulations")
intended  generally to apply to HMOs

                                      -15

<PAGE>

offering POS products. The POS Regulations clarify the circumstances under which
an HMO may contract with a health insurer, health service corporation or medical
service  corporation to provide  indemnity  benefits or services.  Under the POS
Regulations,  it is  necessary  for an HMO offering POS products to enter into a
contractual  arrangement with a licensed indemnity carrier. In response to these
regulations,  FOHP-NJ  has  entered  into  a  contractual  arrangement  with  an
indemnity carrier.

         Additional  amendments  to the New  Jersey  HMO  regulations  have been
recently  proposed.  The proposed  amendments  address  financial and insolvency
issues relating to HMOs. More specifically, the proposed amendments would, among
other things,  require that a minimum of 60% of an HMO's  admitted  assets be in
cash, cash equivalents or investments;  require that HMO guarantors have certain
liquid  assets  available  to the  HMO;  require  that an HMO  maintain  reserve
liabilities  in an amount  sufficient  to  provide  for  continued  health  care
services to members  who, on the date of  termination  of an HMO  contract,  are
confined in an inpatient facility until discharge from the facility;  change the
basis of the required HMO  solvency  deposit from claims to premium;  require an
HMO to file with the  Commissioner  of the DOI an annual  certification  with an
actuarial  opinion certified by a member of the American Academy of Actuaries or
an active fellow the Society of Actuaries  that the reserves  required under the
HMO regulations and included in the HMO's annual report are sufficient;  require
that HMOs submit a quarterly  certification that includes information  identical
to that contained in the annual certification; and require additional annual and
quarterly reports. In addition to these amendments, the Commissioner of the DOH,
in consultation with the Commissioner of the DOI, intends to propose in the near
future  further  amendments  to the HMO  regulations  addressing  other  issues,
including   pre-operational   review  of  unlicensed   subcontractors   and  the
standardization  of rate filing.  If the proposed  amendments are adopted,  HMOs
operating  in New  Jersey,  including  FOHP-NJ,  could be subject  to  increased
operating restrictions and additional reporting requirements which could have an
adverse impact on operating results.

         Generally,  rates and proposed  coverage  benefits must be submitted to
the DOI  prior  to  their  imposition.  There  can be no  assurance  that  rates
submitted by FOHP-NJ will be accepted without objection or approved.

         Finally,  it is impossible to predict  whether  federal  legislation or
regulations  with  respect  to health  plans or health  care  providers  will be
adopted or the impact that any such federal  legislation or regulations may have
on the health care delivery system.

         EMPLOYEES

         At March 15,  1999,  the  Company,  through  its  principal  subsidiary
FOHP-NJ,  employed 393 full-time and 16 part-time active employees. In addition,
the Company  currently  utilizes  the  services of  approximately  51  temporary
employees. The Company currently has four executive officers who are employed by
FHS or  one  of its  subsidiaries  pursuant  to  the  Administrative  Management
Agreement  (as  hereinafter  defined).  See "Certain  Relationships  and Related
Transactions."  None of the Company's  employees are represented by a union. The
Company believes that its relationships with its employees are satisfactory.

                                      -16
<PAGE>

ITEM 2.  PROPERTIES.

         The Company,  through FOHP-NJ,  subleases  approximately  59,706 square
feet of office space at 3501 State Highway 66,  Neptune,  New Jersey 07753.  The
lease expires on February 28, 2004.  The monthly rental during the lease term is
$84,504.16, plus certain additional charges and expenses, including maintenance,
utilities and taxes.

         The Company  also  leases  approximately  11,000  square feet of office
space at 2 Bridge Avenue, Building 6, Red Bank, New Jersey 07701-1106. The lease
has a term of 5 years ending August 31, 1999, and a 5 year renewal  option.  The
monthly  rental  ranges  from  $10.00 to $12.50 per square foot over the initial
term of the lease, plus certain additional charges and expenses including common
maintenance  charges,  utilities  and taxes.  The  monthly  rental of the 5 year
option term of the lease ranges from  approximately  $14.00 to $16.00 per square
foot.

         The Company also leases office space in Mt. Laurel, New Jersey.

ITEM 3.  LEGAL PROCEEDINGS.

         There are no  material  legal,  governmental,  administrative  or other
proceedings  pending  against  the  Company  or its  properties  or to which the
Company  is a  party,  and to the  knowledge  of  management  no  such  material
proceedings are threatened or contemplated.

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

         During  the fourth  quarter  ended  December  31,  1998,  no matter was
submitted to a vote of security  holders of the Company through the solicitation
of proxies or otherwise.

                                      -17-
<PAGE>

                                     PART II

ITEM 5.  MARKET  FOR THE  REGISTRANT'S  COMMON  EQUITY AND  RELATED  STOCKHOLDER
         MATTERS.

         There is no public  market  for the  Company's  Common  Stock,  and the
Company has no current  intention of listing or  including  any shares of Common
Stock on a stock exchange or quotation  system since shares of Common Stock only
can be held by or  transferred  to (i) providers to the  Company's  subsidiaries
which  operate  as HMOs,  (ii) FHS,  or (iii) the  Company.  Accordingly,  it is
improbable that a market will develop for the Common Stock.

         Since its  inception,  the  Company  has not sold any  shares of Common
Stock for any price  other than  $15.00,  except  for shares  issued to FHS upon
conversion of the Initial Convertible  Debenture and New Convertible  Debenture.
In  addition,  the  Company  is not  aware  of any sale of  Common  Stock by one
provider to another for any price other than $15.00.

         As  of  March  15,  1999,  499,000,000  shares  of  Common  Stock  were
outstanding and were held by 2,629  shareholders,  including  496,916,161 shares
held by FHS,  1,006,717  shares  held by 41 NJ  Institutional  Shareholders  and
1,077,122 shares held by 2,587 NJ Practitioners and NJ Other Providers.

         The Company has not paid any cash  dividends on Common Stock,  and does
not expect to pay any dividends in the future.

         The  certificates  representing  Payment  Rights to be  offered  by the
Company to the Provider  Shareholders in the Merger will be  non-negotiable  and
the  Payment  Rights  will not be  transferable  or  assignable  by the  holders
thereof,  unless such transfer or assignment is expressly  authorized in writing
by the  Company.  Accordingly,  there will be no public  market for the  Payment
Rights.

                                      -18-

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA.

         The selected financial information as of December 31, 1998, 1997, 1996,
1995, and for the years ended December 31, 1998, 1997, 1996 and 1995, is derived
from  the  consolidated  financial  statements  of  the  Company.  Prior  to the
Reorganization,  the Company did not  conduct any  business  nor did it have any
significant   assets  or  liabilities.   Accordingly,   the  selected  financial
information  as of December 31, 1994 and for the year ended December 31, 1994 is
derived  from the  financial  statements  of FOHP-NJ,  the  Company's  principal
subsidiary.  The selected  financial  information  should be read in conjunction
with the consolidated  financial statements of the Company and the related notes
thereto and management's  discussion and analysis thereof appearing elsewhere in
this report.

                                      -19-

<PAGE>

<TABLE>
<CAPTION>
                                     SUMMARIZED BALANCE SHEET INFORMATION

                                                                                              FINANCIAL DATA
                                                                                                OF FOHP-NJ
                                                                                              PREDECESSOR TO
                                                                                               THE COMPANY
                                                                                               -----------

                                                                                                  AS OF
                                                        AS OF DECEMBER 31,                     DECEMBER 31,
                                 ----------------------------------------------------------   ------------
                                      1998            1997           1996           1995           1994
                                 ------------    ------------   ------------   ------------   ------------
Assets:
<S>                              <C>             <C>            <C>            <C>            <C>         
Cash and cash equivalents        $ 44,052,058    $ 79,266,721   $ 36,664,911   $ 23,882,286   $ 13,030,295

Goodwill (net)                     96,237,857     107,730,254            ---            ---            ---

Other                              77,989,500      31,614,256     17,578,306     13,479,547      7,050,765
                                 ------------    ------------   ------------   ------------   ------------
Total Assets                     $218,279,415    $218,611,231   $ 54,252,217   $ 37,361,833   $ 20,081,060
                                 ============    ============   ============   ============   ============
Liabilities and Shareholders'
     Equity (Deficiency):

Liabilities:
     Medical claims payable,
     accounts payable, accrued
     expenses and other
     current liabilities         $ 73,349,221    $110,883,608   $ 80,118,284   $ 32,482,794   $  8,101,405

Convertible debentures             11,131,386      11,294,406            ---            ---            ---

Subordinated debentures            25,113,575      24,000,000            ---            ---            ---
                                 ------------    ------------   ------------   ------------   ------------
Total Liabilities                 109,594,182     146,178,014     80,118,284     32,482,794      8,101,405

FOHP-NJ Practitioner
     Provider Common 
     Stock, $.01 par value,
     511,800 shares issued
     and outstanding (at
     December 31, 1994,
     redeemable at 
     $ 3,900,000)                        ---             ---            ---            ---      7,677,000

Shareholders' Equity
(Deficiency):

FOHP, Inc. Preferred Stock,
     $1.00 par value, 
     1,000,000 shares 
     authorized, none
     issued and outstanding               ---             ---            ---            ---            ---

FOHP, Inc. Common Stock
     $.01 par value,
     499,000,000 shares
     authorized, 499,000,000
     shares issued and
     outstanding                    1,011,941       1,000,000         21,002         21,002            ---
</TABLE>

                                                        -20-

<PAGE>

                                    SUMMARIZED BALANCE SHEET INFORMATION (CONT.)

<TABLE>
<CAPTION>
                                                                                                    FINANCIAL DATA
                                                                                                      OF FOHP-NJ
                                                                                                    PREDECESSOR TO
                                                                                                     THE COMPANY
                                                                                                    -------------

                                                                                                        AS OF
                                                        AS OF DECEMBER 31,                           DECEMBER 31,
                                ---------------------------------------------------------------     -------------
                                      1998            1997           1996           1995                 1994
                                -------------    ------------   ------------   ----------------     -------------
<S>                               <C>              <C>               <C>              <C>              <C>       
FOHP-NJ Institutional         
     Provider Common Stock,   
     $.01 par value, 1,020,051
     shares issued and
     outstanding                          ---              ---              ---              ---           10,201

FOHP-NJ Other Provider
     Common Stock, $.01
     par value, 40,002 shares
     issued and outstanding               ---              ---              ---              ---              400

Additional paid-in capital        239,135,758      208,053,796       30,648,489       30,648,489       15,341,561

Deficit                          (131,462,466)    (136,620,579)     (56,535,558)     (25,790,452)     (11,049,507)
                                -------------    -------------    -------------    -------------    -------------
Total Shareholders' Equity
(Deficiency)                      108,685,233       72,433,217      (25,886,067)       4,879,039       11,979,655
                                -------------    -------------    -------------    -------------    -------------
Total Liabilities and
Shareholders' Equity
(Deficiency)                    $ 218,279,415    $ 218,611,231    $  54,252,217    $  37,361,833    $  20,081,060
                                =============    =============    =============    =============    =============
</TABLE>

                                                                        -21-

<PAGE>

<TABLE>
<CAPTION>
                                     SUMMARIZED STATEMENT OF OPERATIONS INFORMATION
                                                                                                          FINANCIAL DATA OF
                                                                                                               FOHP-NJ
                                                                                                          PREDECESSOR TO THE 
                                                                                                               COMPANY
                                                                                                         -------------------
                                                                 FOR THE YEAR ENDED                      FOR THE YEAR ENDED 
                                                                    DECEMBER 31,                            DECEMBER 31,
                                       ----------------------------------------------------------------  -------------------
                                           1998              1997            1996            1995               1994
                                       -------------    -------------    -------------    -------------  -------------------
<S>                                    <C>              <C>              <C>              <C>                <C>           
Revenue:
Premium revenue from
owners/providers                       $ 118,591,143    $ 132,575,894    $ 135,544,112    $  63,630,797      $  5,639,724

Other premium revenue                    209,268,135      239,132,416      112,125,670       38,819,206         1,803,624

Interest and other income                  6,822,455        5,697,921        9,706,526        8,844,036         1,177,171
                                       -------------    -------------    -------------    -------------      ------------
Total Revenue                            334,681,733      377,406,231      257,376,308      111,294,039         8,620,519
                                       -------------    -------------    -------------    -------------      ------------
Expenses:

Medical services to owners/providers      46,895,944       63,882,103       37,026,903       17,319,035         1,405,175

Hospital services to
owners/providers                          32,154,087       64,553,166       30,156,890       11,068,909           880,920

Other medical services                   109,423,870      148,812,233      105,551,393       38,548,819         2,727,694

Other hospital services                   75,026,204      101,521,355       63,760,554       24,637,249         1,710,020

Selling, general and administrative       53,199,216       55,106,022       50,734,197       32,638,106        10,624,261

Management fee - Foundation Health
     Systems, Inc.                         2,543,000        7,502,899               --               --                --

Interest - Foundation Health
     Systems, Inc.                         2,229,890        1,790,410               --               --                --

Restructuring costs                       (2,250,000)      12,825,570               --               --                --

Other                                      4,761,178        1,495,355          890,553        1,751,263           240,021
                                       -------------    -------------    -------------    -------------      ------------
Total Expenses                           323,983,389      457,489,113      288,120,490      125,963,381        17,588,091
                                       -------------    -------------    -------------    -------------      ------------
Provision for income taxes                 5,540,231            2,139              924           71,603                --
                                       -------------    -------------    -------------    -------------      ------------
Net income (loss)                      $   5,158,113    $ (80,085,021)   $ (30,745,106)   $ (14,740,945)     $ (8,967,572)
                                       =============    =============    =============    =============      ============
Net income (loss)  per  common share   $         .05    $       (9.18)   $      (14.64)   $       (8.65)     $      (8.40)
                                       =============    =============    =============    =============      ============
</TABLE>

                                                             -22-

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATION.

         OVERVIEW

         The Company, a New Jersey corporation, was formed in May 1994 to effect
the   Reorganization   of  FOHP-NJ  into  a  holding  company   structure.   The
Reorganization was consummated on June 8, 1995.  Pursuant to the Reorganization,
FOHP-NJ  became  a  wholly-owned   subsidiary  of  the  Company.  Prior  to  the
Reorganization,  the Company did not  conduct any  business  nor did it have any
significant  assets or  liabilities.  The  Company  does not  conduct,  nor does
management believe that it will conduct,  any business.  All health care benefit
products and services are, and will be, provided by the Company's subsidiaries.

         FOHP-NJ, a New Jersey corporation, was formed in May 1993 to operate as
an HMO in the  State of New  Jersey.  FOHP-NJ  received  its COA in June 1994 to
operate as an HMO in the  service  area  encompassing  the  entire  State of New
Jersey and commenced operations on July 1, 1994. Pursuant to the Reorganization,
FOHP-NJ  became  a  wholly-owned  subsidiary  of the  Company  on June 8,  1995.
Currently, it is the Company's principal subsidiary.

         FOHP-NJ  markets a  comprehensive  range of health  care  benefit  plan
products  pursuant to contractual  arrangements  with physicians,  hospitals and
other  health care  providers.  As of March 15,  1999,  FOHP-NJ had entered into
provider agreements with 62 NJ Acute Care Institutions,  approximately 11,000 NJ
Practitioners and approximately 75 NJ Other Providers.  The provider  agreements
have an initial term of one-year and are  renewable  annually.  Such  agreements
with NJ Acute Care  Institutions  and NJ Other  Providers  may be  terminated by
mutual consent or, after the initial one-year term, by either party upon 90 days
notice;  agreements with NJ Practitioners may be terminated by either party upon
60 days notice.  The agreements  also may be terminated  for breaches  specified
therein.  The terms and  conditions of provider  agreements  are not affected by
whether the provider is, or is not, a shareholder of the Company.  However, some
agreements with shareholders that are NJ Acute Care Institutions and subscribers
in  FOHP-NJ  health  plans  are  different  from the  subscriber  agreements  of
non-shareholders  in that premium rates for those NJ Acute Care Institutions are
capped to be within a certain  corridor  (+/-4%)  from their prior year  premium
rates. There are 24 NJ Acute Care Institutions with such subscriber agreements.

         FOHP-NJ's agreements with NJ Acute Care Institutions provide for, among
other things, a reimbursement  schedule setting the amounts to be paid to the NJ
Acute Care  Institutions  by FOHP-NJ  for  services  provided  to  members.  The
reimbursement  schedule  of a  provider  agreement  between  an  NJ  Acute  Care
Institution and FOHP-NJ is individually negotiated.  Rates paid to NJ Acute Care
Institutions  for services  provided to members of  FOHP-NJ's  health plans vary
from institution to institution and are based on, among other things,  the types
of services  provided by, and the  location  of, the NJ Acute Care  Institution.
Agreements with  participating NJ Acute Care Institutions  prohibit the NJ Acute
Care  Institutions  from  billing  a member  of a  FOHP-NJ  health  plan for any
services  paid  for  under  such  plan  except  for any  applicable  co-payment,
co-insurance, deductibles and non-covered services.

         NJ  Practitioners  are paid pursuant to a fee schedule  established  by
FOHP-NJ and are prohibited  from billing members of a FOHP-NJ health plan except
for  co-payments  and  non-covered  services,  if  any.  The  fees  paid  to  NJ
Practitioners are based on a percentage of the fees

                                      -23-
<PAGE>

payable under the fee schedule developed for Medicare. Co-payments, co-insurance
and deductibles in amounts approved by FOHP-NJ, are collected directly by the NJ
Practitioner from the member.

         Subscriber  contracts are entered into with large employer groups (more
than 50  employees)  and small  employer  groups (50  employees  or less).  Such
contracts  are  generally  for a term of one year,  but may be  cancelled by the
employer group upon 30 days written notice.  Under these contracts,  FOHP-NJ has
agreed to provide  the  employer  groups  with  health  coverage in return for a
monthly  premium.  FOHP-NJ  utilizes  a system  of  community  rating  by class,
adjusted (with respect to employer  groups of 100 or more employees) by age, sex
and industry  classification,  in determining its rates for various employers in
the proposed service area.  Premium revenue generated from subscriber  contracts
is  recorded  as  revenue  in the month in which  subscribers  are  entitled  to
service. Premiums collected in advance are reported as unearned premium revenue.

         RESULTS OF OPERATIONS

         FOR THE YEARS ENDED DECEMBER  31, 1998 AND 1997

         PREMIUM REVENUE.  For the year ended December 31, 1998, medical premium
revenue  totaled $327.9 million or $43.8 million less than the $371.7 million of
medical premium revenue  generated during the same period in 1997. This decrease
was due to reduced  enrollment in FOHP-NJ health benefit plans,  specifically in
the Medicare line of business. Approximately 36% of medical premium generated in
1998 and approximately 35% of medical premium generated in 1997 was attributable
to NJ Acute Care Institutions,  which are obligated to enroll their employees in
FOHP-NJ health plans. The Company believes that it will benefit by its inclusion
in the formation of FHS' Northeast Division,  which is comprised of three health
plans with a total of more than one  million  members in the New York  tri-state
area, and the merger of PHS-NJ into FOHP-NJ,  and that such inclusion and merger
will result in a greater  percentage of future premium  revenue  attributable to
members who are not employees of NJ Acute Care Institutions.

         OTHER REVENUE. Other revenue,  principally administrative fees, for the
year ended December 31, 1998 was $2.5 million  compared to $2.0 million of other
revenue for the same period of the prior year. Interest income for 1998 was $4.3
million, as compared to the $3.7 million generated in 1997.

         MEDICAL AND HOSPITAL SERVICES.  Total expenses  attributable to medical
and hospital  services for the year ended  December 31, 1998 were $263.5 million
or $115.3 million lower than expenses  incurred for the same period in 1997. The
decrease  in  medical  and  hospital  service  expenses  from  1997 to 1998  was
primarily  attributable  to a decrease  in  enrollees  in the  Medicare  line of
business as well as enhanced utilization efforts in the Commercial, Medicaid and
Medicare  lines of  business.  In addition,  the medical  loss ratio (i.e.,  the
percentage  of each premium  dollar used to pay medical  expenses)  for the year
ended  December  31,  1998 was 80.3%  compared  to 101.9% for the same period in
1997.  

The Company  believes that this  decrease is  attributed  to recent  operational
changes,  specifically the  implementation of a modified provider  reimbursement
schedule,  enhanced  utilization  management  efforts,  a reduction  of Medicare
enrollment, which had a higher medical loss ratio than the Company's other lines
of  business,  and a reduction  of claims reserves due to more  complete  claims
payment  data being  available  to the Company as a result of a reduction of the
significant medical claims back-log which had existed at December 31, 1997.

                                      -24-

<PAGE>


         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  expenses  totaled $58.4 million for the year ended  December 31,
1998, including a $2.5 million administrative  management fee charged by FHS and
$2.2 million  interest  expense  associated with the Convertible  Debentures and
Subordinated Debentures issued to FHS, as compared to $64.5 million incurred for
the same period in 1997. This decrease was primarily the result of a decrease in
the management fee charged by FHS to FOHP.

         OTHER EXPENSES.  Depreciation  and  amortization  expenses for the year
ended December 31, 1998 increased by $2.8 million from the $1.4 million incurred
during  the same  period in 1997.  This  increase  was  primarily  the result of
amortization of goodwill associated with FHS' investment in the Company.

         RESTRUCTURING  COSTS.  During 1998, the Company recorded a reduction of
$2.2 million of its estimated  $12.8  million  restructuring  charge  originally
recorded  in  1997  in  connection  with  the  FHS  investment  as a  result  of
management's   reevaluation  of  estimated  restructuring  costs.  The  plan  of
restructuring  primarily  includes costs associated with work force  reductions,
terminations and settlements of existing contracts and asset impairment.  Of the
$2.2 million reduction,  $2.0 million is related to the continuation of a mental
health  contract  during 1998 that was  originally  expected to be terminated as
part of the overall restructuring plan.

         FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

         PREMIUM REVENUE.  For the year ended December 31, 1997, medical premium
revenue totaled $371.7 million or $124.0 million more than the $247.7 million of
medical premium revenue  generated during the same period in 1996. This increase
was due to significant subscriber growth experienced during 1997.  Approximately
35% of  medical  premium  revenue  generated  in 1997 and  approximately  55% of
medical premium generated in 1996 was attributable to NJ Acute Care Institutions
which are  obligated to enroll  their  employees in FOHP-NJ  health  plans.  The
Company believes that the percentage of medical premium revenue  attributable to
NJ Acute Care  Institutions  will  continue to decrease as FOHP-NJ's  operations
grow and as FOHP-NJ's  current sales efforts continue to focus on products which
are not sold  directly to employees  of  providers of FOHP-NJ.  The Company also
believes  that  it  will  benefit  by its  inclusion  in the  formation  of FHS'
Northeast  Division,  which is  comprised  of three health plans with a total of
more than one million members in the New York tri-state area

         OTHER REVENUE. Other revenue,  principally administrative fees, for the
year ended December 31, 1997 was $2.0 million  compared to $7.9 million of other
revenue for 1996.  This decrease is attributed to the sale of First Managed Care
Option,  Inc.,  formally a wholly owned  subsidiary of the Company,  in the last
quarter of 1996.  Interest  income  for 1997 was $3.7  million,  a $1.9  million
increase  from the $1.8  million  generated  in 1996.  The  increase in interest
income was due to the larger cash reserves  related to the investments by FHS in
April 1997 and December 1997.

         MEDICAL AND HOSPITAL SERVICES.  Total expenses  attributable to medical
and hospital  services for the year ended  December 31, 1997 were $378.8 million
or $142.4 million higher than expenses incurred for the same period in 1996. The
increase  in  medical  and  hospital  service  expenses  from  1996 to 1997  was
primarily  attributable to a significant increase in enrollees in FOHP-NJ health
plans. In addition, the medical loss ratio (i.e., the percentage of each premium
dollar used to pay medical  expenses)  for the year ended  December 31, 1997 was
101.9% compared to 95.5% for the same period in 1996. This increase was a result
of increased


                                      -25-

<PAGE>

utilization  in FOHP-NJ  health  benefit  plans,  changes in the mix of products
offered by FOHP-NJ,  the inability of FOHP-NJ to effectively control utilization
and referrals due to the significant growth of FOHP-NJ and an increase in claims
reserves  to an amount  at the high end of an  actuarially  determined  range to
reflect the Company's recent fluctuation of claims payment patterns. The Company
believes that recent operational  changes,  specifically the implementation of a
modified  provider  reimbursement  schedule,  along  with  enhanced  utilization
management  efforts,  will lower the  percentage of medical  expenses to premium
dollars in the future.

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  expenses  totaled $64.4 million for the year ended  December 31,
1997,  including a $7.5 million  management  fee charged by FHS and $1.8 million
interest  expense  associated with the Convertible  Debentures and  Subordinated
Debentures issued to FHS, compared to $50.8 million incurred for the same period
in 1996. This increase in selling,  general and administrative  expenses was the
result of the significant growth of FOHP-NJ.

         OTHER EXPENSES.  Depreciation  and  amortization  expenses for the year
ended  December  31, 1997  increased  by $525  thousand  from the $879  thousand
incurred  during 1996.  This  increase was mostly the result of the costs of the
Convertible Debentures being amortized in 1997 (approximately $309,000).

         RESTRUCTURING  COSTS. During 1997, the Company estimated and recorded a
restructuring charge of $12.8 million in connection with the FHS investment. The
plan of  restructuring  primarily  includes  costs  associated  with work  force
reductions,  terminations  and  settlements  of  existing  contracts  and  asset
impairment.

         LIQUIDITY AND CAPITAL RESOURCES

         Gross proceeds of approximately  $12,400,000,  received by FOHP-NJ from
the private  offering and sale of 826,708  shares of common stock in 1993,  were
sufficient  to cover the  expenses  incurred by FOHP-NJ in  connection  with the
formation  and  development  of its  business.  In order to fund its  continuing
development activities,  FOHP-NJ sold 744,445 shares of common stock in a public
offering which closed on October 31, 1994. Gross proceeds received by FOHP-NJ as
a result of the sale of stock in the public  offering  amounted to  $11,166,675.
Further,  in order  to fund  its  continuing  development  of HMOs in New  York,
Pennsylvania and several other states, the Company sold 529,120 shares of Common
Stock-NJ to NJ  Practitioners  in an offering  which ended on September 1, 1995.
Gross  proceeds  received  by the  Company  as a result  of the  sale of  Common
Stock-NJ in the offering to NJ Practitioners amounted to $7,937,000.

         FOHP-NJ is required by the Departments to maintain a minimum  statutory
net worth. In addition,  if FOHP-NJ's  statutory net worth is, or is expected to
be, less than 125% of the minimum  statutory net worth  requirement,  FOHP-NJ is
required to submit to the Departments a plan of action to address the deficiency
or expected  deficiency.  During the first quarter of 1996, the Company  learned
that  FOHP-NJ's  statutory net worth as of December 31, 1995 may have been below
125% of the minimum  statutory net worth  requirement.  FOHP-NJ  addressed  this
potential  deficiency by submitting to the  Departments  in April 1996 a plan of
action,  which  outlined the actions taken and measures to be used by FOHP-NJ to
correct the potential deficiency.


                                      -26-

<PAGE>


         As part of the plan of action,  on April 30, 1997,  the Company sold to
FHS the Initial  Convertible  Debenture  in the  aggregate  principal  amount of
$51,701,120.38,  pursuant  to the Amended  Securities  Purchase  Agreement.  The
principal amount of the Initial  Convertible  Debenture was convertible,  at the
option of FHS, into up to 71% of the Company's  capital stock on a fully diluted
basis. At the closing of the purchase of the Initial Convertible Debenture,  FHS
converted $1,701,120.38 of principal amount of the Initial Convertible Debenture
into 168,109 shares of Common Stock.

         To facilitate the sale of the Initial Convertible Debenture to FHS, the
Departments agreed to rescind their conditions attached to their approval of the
plan of action  submitted by FOHP-NJ in April 1996,  subject to the Departments'
right to require  FOHP-NJ  to submit a new plan of action if  FOHP-NJ  failed to
increase its net worth to 100% of the minimum statutory net worth requirement by
December 31, 1997.  In  addition,  the  Departments  agreed that  subsequent  to
December 31,  1997,  FOHP-NJ will only be required to maintain net worth at 100%
of the minimum statutory net worth requirement applicable to it, and not 125% of
the minimum statutory net worth requirement as required prior to the sale of the
Initial   Convertible   Debenture,   provided  that  FHS  guaranteed,   in  form
satisfactory  to the  Commissioner  of the DOI, that FOHP-NJ's net worth will be
maintained at a level equal to or in excess of 100% of the minimum statutory net
worth  requirement  applicable to FOHP-NJ.  In December  1997,  the  Departments
further agreed to permit FOHP-NJ's net worth to remain below 100% until December
31, 1998, provided that it attain certain benchmarks each quarter during 1998.

         In connection with the sale of the Initial Convertible  Debenture,  FHS
and the Company entered into a letter agreement which clarified FHS' right under
the Amended Securities  Purchase Agreement to infuse additional capital into the
Company in the event that it is  determined  that FOHP-NJ  needs capital to meet
applicable  statutory  net  worth  requirements  (referred  to  herein as a "Net
Capital Shortfall").  Pursuant to the letter agreement, FHS had the right to, at
any time prior to December 31, 1997,  contribute  up to $5,000,000 in additional
capital  to the  Company  to be  used in  connection  with  certain  anticipated
liabilities and contribute  such additional  amounts that may be projected to be
required from time to time (based upon  reasonable  projections  prepared by FHS
taking into account  anticipated full year 1997 operating  results) in order for
FOHP-NJ  to meet 100% of the  minimum  statutory  net worth  requirements  as of
December 31, 1997. In the event that FHS contributed  additional  capital to the
Company to meet a Net Capital  Shortfall or projected  Net Capital  Shortfall in
accordance  with the terms of the  Amended  Securities  Purchase  Agreement,  as
clarified by the letter agreement,  FHS would be issued  additional  Convertible
Debentures.

         The Amended  Securities  Purchase  Agreement also provided that if FOHP
projects  a Net  Capital  Shortfall  and FHS does not  advance  funds to FOHP to
satisfy such Net Capital Shortfall, FOHP may initiate a pro rata offering of its
Common  Stock  to all the  then-current  shareholders  of the  Company  to raise
capital to satisfy the Net Capital Shortfall.

         Effective  December 1, 1997, FHS converted the remaining $50 million of
the principal amount of the Initial Convertible Debenture, dated as of April 30,
1997, into 4,941,049  shares of Common Stock.  After the  conversion,  FHS owned
5,109,158 shares of the 7,195,997 shares of Common Stock then outstanding, which
represented 71% of the fully diluted equity of the Company.

                                      -27-

<PAGE>


         In order to satisfy certain statutory net worth requirements applicable
to FOHP-NJ and in accordance with the Amended Securities Purchase Agreement, FHS
elected on December  8, 1997 to infuse $29 million  into the Company in exchange
for  the  New  Convertible  Debenture.  Immediately  upon  receipt  of  the  New
Convertible Debenture, FHS converted approximately  $18,952,930 of the principal
amount  thereof  into  92,804,003  shares of  Common  Stock.  After the  partial
conversion of the New Convertible Debenture,  FHS owned 97,913,161 shares of the
100,000,000   shares  of  Common  Stock  then  outstanding,   which  represented
approximately 98% of the fully-diluted equity of the Company.

         In October 1998, the  Certificate of  Incorporation  of the Company was
further amended to increase the number of shares of Common Stock  authorized for
issuance and decrease the number of shares of  Preferred  Stock  authorized  for
issuance.  As  a  result,  the  Company  currently  has  500,000,000  shares  of
authorized  capital stock,  which is comprised of  499,000,000  shares of Common
Stock and 1,000,000 shares of Preferred Stock, par value $1.00 per share.

         On December 31, 1998, FHS converted  $1,197,182 of the principal amount
of the New Convertible Debenture into 399,003,000 shares of the Company's Common
Stock.  After this conversion,  499,000,000 shares of the Company's Common Stock
were  outstanding,  with FHS owning  496,916,161 of such shares or approximately
99.6% of the  fully-diluted  equity of the Company.  The price per share paid by
FHS  upon  conversion  of  the  New  Convertible  Debenture  was  calculated  in
accordance with the Amended  Securities  Purchase Agreement entered into by FHS,
the Company and FOHP-NJ in connection  with the sale of the Initial  Convertible
Debenture.

         In December 1997, FHS also contributed an additional $24 million to the
Company  to satisfy  certain  statutory  net worth  requirements  applicable  to
FOHP-NJ  in  return  for  Subordinated  Debentures.   Further,  FHS  contributed
$29,897,801  to the  Company as  additional  paid in capital to satisfy  certain
statutory net worth requirements applicable to FOHP-NJ during 1998.

         Pursuant  to new HMO  regulations  adopted in the State of New  Jersey,
FOHP-NJ is required to  maintain a "Minimum  Insolvency  Deposit for Health Care
Expenditures."  As of December  31,  1998,  the deposit  covering  two months of
incurred health care  expenditures  is  approximately  $56 million.  The initial
deposit,  or $12.5 million,  was made by September 30, 1997. An additional  $4.6
million was deposited on March 31, 1998,  $9.5 million was deposited on April 2,
1998,  $14.6  million  was  deposited  on June 30,  1998 and $14.1  million  was
deposited on September 30, 1998. These deposits (including interest earned) have
been deemed  sufficient in accordance with the HMO regulations and no additional
deposits were required at December 31, 1998.

IMPACT OF YEAR 2000

         The Company,  and its parent,  FHS,  recognize  that the arrival of the
year 2000 (the "Year 2000")  requires  computer  systems to be able to recognize
the date change from 1999 to 2000 and, like other  companies,  are assessing and
modifying  their  computer  applications  and business  processes to provide for
their continued functionality.

         The Year 2000 issue is the result of computer  programs  being  written
using two digits  rather  than four to define the  applicable  year.  Any of the
Company's  computer  programs that have time sensitive  software may recognize a
date using "00" as the year 1900 rather than the

                                      -28-

<PAGE>

Year 2000.  This could  result in a system  failure or  miscalculations  causing
disruptions of operations,  including, among other things, a temporary inability
to  process  transactions,   prepare  invoices  or  engage  in  normal  business
activities.  In addition,  the Year 2000 problems of the Company's providers and
customers, including governmental entities, can affect the Company's operations,
which are highly  dependent upon information  technology for processing  claims,
determining eligibility and exchanging information.

         FHS,  for  itself  and on behalf  of its  subsidiaries,  including  the
Company,  has undertaken a  comprehensive  review of the Year 2000 issue and its
affect on the operations of FHS and its  subsidiaries.  The Company has assisted
FHS in  addressing  the Year 2000 issue as it pertains to the Company.  However,
FHS will  ultimately  direct how the Company  addresses  the Year 2000 issue and
will initially incur all the costs  associated with ensuring that the Company is
Year 2000  compliant,  which costs may be  allocated  to the Company at a future
point in time.

         Set forth  below is a brief  description  of FHS' effort to address the
Year 2000 issue:

         PROJECT STATUS.  The Year 2000 effort for FHS has the highest  priority
of technology projects and has the full support of FHS' management.  The project
has  dedicated  resources  with  multiple  teams to address  its unique  systems
environments.  Uniform  project  management  techniques  have been  adopted with
overall oversight  responsibility  residing with FHS' Chief Technology  Officer,
assisted by a special  project  manager  hired by FHS. An  executive  management
committee  is also  actively  involved in FHS' Year 2000  project  and  receives
monthly  reports  from the project  manager.  In addition,  the project  manager
regularly  meets with FHS' audit  committee  to further  discuss  FHS' Year 2000
issues.

         FHS is  addressing  its Year 2000  issues  in  several  ways.  Selected
systems are being retired with the business  functions  being  converted to Year
2000 compliant  systems.  A number of the FHS' systems include packaged software
from large  vendors that FHS is closely  monitoring to ensure that those systems
are Year 2000  compliant.  FHS believes  that  vendors will make timely  updates
available  to  ensure  that  all  remaining  purchased  software  is  Year  2000
compliant. The remaining systems' compliance with Year 2000 will be addressed by
internal  technical  staff. FHS has engaged IBM Global Services to assist in the
program  management  of the  project.  In  addition,  FHS is in the  process  of
assessing  its  third  party   relationships  with  respect  to  non-information
technology  assets and services.  FHS has also  retained  legal  consultants  to
assist in the review of insurance and FHS' obligations and rights, and IBM's The
Wilkerson  Group,  technical  consultants  specializing  in health care, to help
develop contingency plans.

         FHS has divided its Year 2000 effort into five phases:  (1)  Assessment
and Strategy; (2) Detailed Analysis and Planning;  (3) Remediation;  (4) Testing
and Implementation;  and (5) Certification.  FHS believes that Phase 1 is almost
complete.  FHS'  geographical and specialty  service  divisions are conducting a
detailed  self-assessment as to their compliance,  needs, risks, and contingency
planning,  which will then be reviewed and  prioritized at the corporate  level.
During the fourth quarter of 1998,  FHS continued  moving forward in its efforts
to address Year 2000 issues,  though its overall  progress was less  significant
due to  organizational  changes  and  restructuring.  The Year 2000  project  is
experiencing  increased  progress at the start of 1999. FHS has  established the
third  quarter of 1999 to complete all phases and is  endeavoring  to accelerate
completion  ahead of that time.  The  following  table sets forth the  estimated
percentage

                                      -29-

<PAGE>

completion  of each of FHS' Year 2000 phases as of February 1999 with respect to
its core applications and information  technology  infrastructure,  and its Year
2000 project overall.


                            Phase 1    Phase 2   Phase 3   Phase 4   Phase 5
                            -------    -------   -------   -------   -------
Core applications and                                                
IT infrastructure            100%        94%       56%       15%        0%

Overall                      100%        83%       54%       11%        0%

         THIRD   PARTIES.   FHS  has  commenced  an  inventory  of  third  party
relationships,  identifying them and analyzing their strategic importance to FHS
and  their  Year  2000  readiness.   The  strategically  important  third  party
relationships  identified  by FHS are  general  purpose  utility  vendors,  care
delivery  organizations (such as providers),  and customer service vendors.  FHS
now  anticipates  completing its risk assessment for third parties in the second
quarter of 1999.  There can be no assurance that the systems of other  companies
on which the Company and FHS rely will be compliant on a timely  basis,  or that
the failure by a third party to be compliant  would not have a material  adverse
affect on the Company or FHS.

         COSTS.  FHS is  evaluating  on an on-going  basis the related  costs to
resolve its potential Year 2000 problems. FHS currently estimates that the total
cost for the project will be approximately $42.7 million, excluding the costs to
accelerate  the  replacement  of hardware or software  otherwise  required to be
purchased  by FHS.  Through  1998,  FHS  expended  approximately  $13.6  million
relating  to,  among other  things,  the cost to repair or replace  software and
related  hardware  problems,  cost of  assessment,  analysis  and  planning  and
internal and external communications.  FHS estimates that the percentages of its
total  expenditures for Year 2000 issues will be  approximately as follows:  35%
for  internal  costs,  37% for outside  consultants  and  contractors,  6.5% for
software-related   costs,  and  21.5%  for   hardware-related   costs.  FHS  has
established a line-item in its overall  operating  budget  specifically to cover
Year 2000 costs.  The operating  subsidiaries  for each line of business of FHS,
however,  are  paying for the costs of  assessment,  planning,  remediation  and
testing of Year 2000 issues for their respective operations.

         Notwithstanding  the  foregoing,  the  costs  of the  project  and  the
timetable in which FHS plans to complete the Year 2000  compliance  requirements
are based on estimates  derived from  utilizing  numerous  assumptions of future
events including the continued  availability of certain  resources,  third party
modification  plans and other  factors.  There can be no  assurances  that these
estimates will be achieved and actual results and costs could differ  materially
from these estimates.

         Certain insurance coverages for defense costs associated with Year 2000
litigation have already been secured under FHS' Directors and Officers Liability
Insurance policy and will be re-evaluated  upon renewal of that policy.  At this
time, it is unclear as to the extent of existing insurance coverage, if any, FHS
may have to cover  potential  Year 2000  costs and  liabilities  under its other
insurance policies. FHS is currently analyzing the availability of such coverage
under other existing and future insurance policies and products.

                                      -30-

<PAGE>


         CONTINGENCY  PLANNING.  An  important  part of FHS' Year  2000  project
involves  identifying  worst case  scenarios and seeking to develop  contingency
plans.  Each   geographical,   and  specialty   services  division  of  FHS,  is
prioritizing  its mission  critical  business  functions in order to address the
most critical issues and to develop  alternatives to these critical processes as
part of contingency  planning. A mission critical business activity or system is
one that cannot be without an automated or functional  system for a period of 21
days without  causing  significant  business  impact to the  particular  line of
business.  Among other things,  FHS' divisions are assessing  potential negative
impacts on a valid member's ability to receive services, the ability to generate
revenue, the need for additional expenditures, compliance with legal, regulatory
or accreditation  requirements,  meeting contractual obligations and reimbursing
providers,  vendors and agents.  FHS is  currently  projecting  to complete  the
assessment  of its most  critical  business  functions  by the end of the  first
quarter of 1999 and the documentation and validation of its contingency plans by
the end of the  second  quarter  of 1999.  FHS  currently  anticipates  that its
contingency plans will include the use of manual as well as on-line files of its
members to avoid  disruption in the  verification  of membership and eligibility
for the provision of health care services to its members.

         RISKS.  The  Company  and FHS  are  highly  dependent  upon  their  own
information  technology  systems  and that of  their  providers  and  customers.
Failure by the  Company,  FHS or a third  party to correct a material  Year 2000
problem could result in a failure of or an interruption in the Company's or FHS'
business  activities  and  operations.  Such  interruptions  and failures  could
materially  and adversely  affect the  Company's or FHS' results of  operations,
liquidity and financial  condition.  Due to the general uncertainty  inherent in
the Year 2000 problem,  resulting in part from the  uncertainty of the readiness
of third party  providers and customers,  neither the Company nor FHS is able to
determine  at this time  whether  the Year 2000  problems  will have a  material
adverse  effect on the  Company's  or FHS' results of  operations,  liquidity or
financial condition.  FHS' Year 2000 project is expected to reduce significantly
the Company's and FHS' level of uncertainty  and the  possibility of significant
or  long-lasting  interruptions  of the Company's and FHS' business  operations;
however, the Company and FHS believe that it is impossible to predict all of the
areas in which material problems may arise.

         FHS has initiated formal  communications  with others with whom it does
significant  business to  determine  their Year 2000  issues.  FHS is  currently
projecting  to complete  its  assessment  of third party risks by the end of the
second  quarter of 1999.  There can be no  assurances  that the systems of other
companies on which the Company's or FHS' systems rely will be timely  converted,
or that the  failure to convert  by  another  company  would not have a material
adverse affect on the Company or FHS.  Forward-looking  statements  contained in
this  Year  2000  section  should  be  read in  connection  with  the  Company's
cautionary  statements  identifying  important risk factors that could cause the
Company's  actual  results to differ  materially  from those  projected in these
forward-looking  statements,  which  cautionary  statements are contained in the
forepart of this report.

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

         The Company  currently has no outstanding  bank or external  financing.
Moreover,  all of the Company's  investments  are in money market funds and U.S.
Treasury Bills with original  maturities of three months or less when purchased.
Accordingly,  the Company believes that its

                                      -31-

<PAGE>

business  operations  are not exposed to market risk  relating to interest  rate
risk, foreign currency exchange risk, commodity price risk or equity price risk.

ITEM 8.  FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.

         The consolidated  financial  statements and  supplementary  data of the
Company  called for by this item are  submitted  as a  separate  section of this
report.

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

         On July 13,  1998,  the Audit and  Finance  Committees  of the  Company
approved the appointment of Deloitte & Touche LLP  ("Deloitte") as the Company's
independent  accountants for the year ended December 31, 1998. Deloitte replaced
Ernst & Young LLP ("Ernst & Young") as the  Company's  independent  accountants.
Ernst & Young was replaced as the Company's  independent  accountants as of July
13, 1998. The change of independent  accountants was made in connection with the
acquisition  by  FHS of  substantially  all of  the  outstanding  equity  of the
Company.  FHS currently  engages  Deloitte as its independent  accountants.  The
Audit and Finance  Committees  of the Company and FHS  determined  that only one
independent  accounting  firm should be engaged by FHS and its  subsidiaries  so
that  there  is  a  consistent  and  efficient  review  of  the  individual  and
consolidated  financial  statements of FHS and its  subsidiaries,  including the
Company.  See also the Company's Current Report on Form 8-K dated July 13, 1998,
as amended.

                                      -32-

<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         EXECUTIVE OFFICERS OF THE REGISTRANT

         The name,  age and  position  of each  person  serving as an  executive
officer of the Company are set forth below and brief summaries of their business
experience  and certain  other  information  with respect to each of them is set
forth in the information which follows the table:

        Name            Age                  Position
        ----            ---                  --------
Thomas W. Wilfong        43    President and Chief Executive Officer
Dr. Joseph Singer        41    Vice President and Chief Medical Officer
Donald Parisi            43    Vice President, Secretary and General Counsel
Marc M. Stein            47    Chief Financial Officer

         Mr.  Thomas W.  Wilfong  has served as  President  and Chief  Executive
Officer of the  Company  since April 1, 1998 and as Chief  Operating  Officer of
FHS' Northeast  Division since December 8, 1998. Mr. Wilfong served as President
of FHS' New Jersey  operations from February 1998 to December 1998 and served as
Executive  Director of PHS' New Jersey  operations  from August 1996 to February
1998.  From July 1986 to August 1996,  Mr.  Wilfong  served as Vice President of
Medical  Management  of Central  New Jersey  Medical  Group.  He has served as a
director of the Company since March 25, 1998.

         Dr.  Joseph  Singer has served as a Vice  President  and Chief  Medical
Officer of the Company since June 8, 1995. Dr. Singer joined FOHP-NJ on December
1, 1994 and has  served  as the Vice  President,  Medical  Affairs  and  Medical
Director of FOHP-NJ since February 1995.  Prior to joining  FOHP-NJ,  Dr. Singer
was a practicing  physician in Moorestown and Medford, New Jersey, with a family
practice and specialty in geriatrics.

         Donald  Parisi has served as a Vice  President,  Secretary  and General
Counsel  of the  Company  since  June 1, 1997 and from June 8, 1995 to  December
1996. Mr. Parisi served as acting  President and Chief Executive  Officer of the
Company from December 1996 to June 1, 1997. Mr. Parisi served as Vice President,
Legal  Affairs and General  Counsel of FOHP-NJ from August 1994 to June 8, 1995.
From 1992 to 1994 he was a partner in the law firm of Donington, Karcher, Leroe,
Salmond,  Ronan & Rainone  and from 1988 to 1992 he served as a Deputy  Attorney
General for the State of New Jersey.

         Marc M. Stein has  served as Chief  Financial  Officer  of the  Company
since February 18, 1997.  Prior to becoming the Chief  Financial  Officer of the
Company,  he served as  Treasurer  of HIP  Insurance  Company  of New Jersey and
Financial  Officer of HIP Health Plan of  Pennsylvania  from February 1995. From
November  1992 to February  1995,  Mr. Stein served as Senior Vice  President of
Finance for HIP of Greater New York.

         Pursuant to the  Administrative  Management  Agreement (as  hereinafter
defined), each of Mr. Wilfong, Dr. Singer, Mr. Parisi, and Mr. Stein is employed
by FHS or a subsidiary thereof.  The salaries and benefits of the aforementioned
executive  officers is either paid by or charged to the Company.  See "Executive
Compensation-Employment  Agreements"  and  "Certain  Relationships  and  Related
Transactions."


                                      -33-

<PAGE>


CURRENT DIRECTORS OF THE REGISTRANT

The name, address,  age and principal  occupation or employment of each director
currently serving on the Board of Directors of the Company is set forth below:


<TABLE>
<CAPTION>
                                                                 PRINCIPAL OCCUPATION
NAME AND ADDRESS                          AGE                       OR EMPLOYMENT
----------------                          ---                       -------------

<S>                                        <C>        <C>                            
Dr. John F. Bonamo                         48         Obstetrician and Gynecologist
95 Northfield Avenue
West Orange, NJ 07052

Mr. Bruce G. Coe                           68         President Emeritus of New Jersey Business and
41 Lambert Lane                                       Industry Association
Lambertville, NJ 08530

Ms. Karen A. Coughlin                      50         President and Chief Executive Officer of FHS
Physicians Health Services, Inc.                      Northeast Division
One Far Mill Crossing
Shelton, CT  06484

Mr. Christopher Dadlez                     45         Executive Vice President of Saint Barnabas
Saint Barnabas Health Care System                     Health Care System
Old Short Hills Road
Livingston, NJ 07039

Dr. Mark L. Engel                          52         Ophthalmologist
733 North Beers Street
Holmdel, NJ 07733

Dr. Thomas J. Feneran                      50         Urologist
102 East Bay Avenue, Suite C
Manahawkin, NJ 08050

Mr. John J. Gantner                        46         Senior Vice President of Finance and Treasurer
Robert Wood Johnson                                   of the Robert Wood Johnson University Hospital
 University Hospital
One Robert Wood Johnson Place
New Brunswick, NJ 08903
</TABLE>

                                      -34-


<PAGE>


<TABLE>
<CAPTION>
                                                                PRINCIPAL OCCUPATION
NAME AND ADDRESS                          AGE                     OR EMPLOYMENT
----------------                          ---                     -------------
<S>                                        <C>        <C>                            
Mr. Jay M. Gellert                         45         President and Chief Executive Officer of
Foundation Health Systems, Inc.                       Foundation Health Systems, Inc.
21600 Oxanard Street
Woodland Hills, CA 91367

Dr. Om P. Sawhney                          61         Plastic Surgeon
1550 Park Avenue
South Plainfield, NJ 07080

Mr. Thomas W. Wilfong                      43         President and Chief Executive Officer of FOHP,
FOHP, Inc.                                            Inc.
3501 State Highway 66
Neptune, NJ 07753
</TABLE>

         There  are no  family  relationships  among the  current  directors  or
executive  officers of the Company.  None of the executive officers or directors
of the Company are directors of any company registered pursuant to Section 12 of
the Exchange Act or subject to the requirements of Section 15(d) of the Exchange
Act or any company  registered  as an investment  company  under the  Investment
Company Act of 1940. Pursuant to the By-laws of FOHP-NJ,  each person serving on
the Board of the  Company  automatically  serves on the  Board of  Directors  of
FOHP-NJ.

         Dr. John F. Bonamo has been an obstetrician and gynecologist in private
practice  since 1981. He is Clinical  Chief of the Department of OB/GYN of Saint
Barnabas Medical Center. Dr. Bonamo serves as Chairman of the Board of MetroWest
I.P.A. He has served as a director of the Company since April 16, 1997.

         Mr. Bruce G. Coe is currently serving as President  Emeritus of the New
Jersey  Business  and  Industry  Association.  From  1982 to 1996 he  served  as
President of the New Jersey Business and Industry Association. Mr. Coe serves on
the Board of Directors of New Jersey  Resources  Corporation.  He also serves on
the Boards of Trustees of New Jersey Future and New Jersey  Historical  Society.
He has served as a director of the Company since April 16, 1997.

         Ms. Karen A. Coughlin became  President and Chief Executive  Officer of
FHS'  Northeast  Division in October  1998.  Prior to joining FHS, Ms.  Coughlin
served as President of one of two operating divisions of Humana, Inc., a leading
national health care company.  During her 18 year tenure with Humana,  Inc., Ms.
Coughlin also served as Vice  President and General  Manager of Humana,  Inc. in
Chicago,  Illinois  and as a Vice  President  of  Humana  Health  Care  Plans of
Kentucky. In the not-for-profit sector, Ms. Coughlin served as head nurse of the
Pediatric Intensive Care Unit of Loma Linda University Center in California,  as
Assistant  Professor of Nursing for Minot State University in North Dakota,  and
as a staff nurse in the Neonatal  Intensive Care Unit for  Cleveland's  Fairview
General Hospital. She has served as a director of the Company since November 18,
1998.

                                      -35-

<PAGE>

         Mr. Christopher M. Dadlez,  FACHE, has been Executive Vice President of
the Saint Barnabas  Health Care System since June 1996.  From March 1992 to June
1996, Mr. Dadlez served as the President and Chief Executive Officer of Monmouth
Medical  Center.  From  January  1995 to May  1996,  Mr.  Dadlez  served  as the
President of  Mid-Atlantic  Health  Group.  From June 1984 to March 1992, he was
Executive  Vice  President  and  Chief  Operating  Officer  of  Sinai  Hospital,
Baltimore,  Maryland.  Mr.  Dadlez  serves on the Boards of  Trustees of the New
Jersey Hospital  Association and Ronald McDonald House. He serves as Chairman of
Long Branch  Tomorrow and is on the Board of Trustees of the Greater Long Branch
Chamber of  Commerce.  He has served as a director of the Company  since June 7,
1995 and as a director of FOHP-NJ since January 1994.

         Dr. Mark L.  Engel,  an  ophthalmologist,  has served as  President  of
Ophthalmic  Physicians of Monmouth since August 1975.  From January 1989 through
December 1990 he served as President of the Bayshore Hospital Medical Staff. Dr.
Engel is a trustee of  Ophthalmic  Physicians  of  Monmouth.  He has served as a
director  of FOHP since June 7, 1995 and as Chairman of the Board of the Company
since April 16,  1997.  Dr.  Engel also  served as a director  of FOHP-NJ  since
January 1994 and as Chairman of the Board of FOHP-NJ since June 1995.

         Dr.  Thomas J. Feneran has been a physician in the private  practice of
urology since June 1983. He is associated in Drs.  Feneran & Fernicola,  P.C. He
has served as a director of the Company  since June 7, 1995 and as a director of
FOHP-NJ since January 1994.

         Mr. John J.  Gantner has served as Treasurer of the Robert Wood Johnson
University  Hospital  since May 1995.  In 1993,  he joined  Robert Wood  Johnson
University  as Senior Vice  President of Finance.  From October 1988 to December
1992,  Mr.  Gantner was a partner in the New York/New  Jersey  office of Ernst &
Young. Mr. Gantner is a Certified Public  Accountant and a Certified  Managerial
Accountant. He has served as a director of the Company since April 16, 1997.

         Mr. Jay M. Gellert became President and Chief Operating  Officer of FHS
on May 7, 1997,  and assumed the position of Chief  Executive  Officer of FHS on
August 7, 1998.  From April 1, 1997 until May 7,  1997,  Mr.  Gellert  served as
President and Chief  Operating  Officer of FHS. Mr. Gellert served as a director
and President and Chief Operating Officer of Health Systems International, Inc.,
a predecessor of FHS, from June 1996 until April 1, 1997.  Prior to joining FHS,
Mr.  Gellert  directed  Shattuck  Hammond  Partners  Inc.'s  strategic  advisory
engagements in the area of integrated delivery systems development, managed care
network  formation and physician  group practice  integration.  Prior to joining
Shattuck Hammond Partners, Inc., Mr. Gellert was an independent consultant,  and
from 1988 to 1991,  he served as President  and Chief  Executive  Officer of Bay
Pacific  Health  Corporation.  From 1985 to 1988 Mr.  Gellert  was  Senior  Vice
President and Chief  Operating  Officer for California  Healthcare  System.  Mr.
Gellert serves on the Board of Directors of Paragon Health Network,  Inc. He has
served as a director of the Company since March 25, 1998.

         Dr. Om P. Sawhney has been a practicing  physician in Plastic Surgery &
Rehabilitation  Medicine  Associates  since  January  1974.  Dr.  Sawhney  is  a
consultant to the Audit  Committee of the Medical Inter  Insurance  Exchange and
the Board of Managers of Associates in Medical  Service at Muhlenberg,  L. L. C.
He is on the Board of Directors  of the  Muhlenberg  Foundation  and the Central
Jersey I.P.A. Dr. Sawhney is also President of Associates in Medicine and

                                      -36-

<PAGE>

Surgery,  P.A. He has served as a director of the Company since June 7, 1995 and
as a director of FOHP-NJ since January 1994.

         Mr. Thomas W. Wilfong - Information  regarding Mr.  Wilfong is included
under the caption "Executive Officers of the Registrant."

         DIRECTOR COMPENSATION; COMMITTEE SERVICE

         The  members of the FOHP Board and any  committee  thereof  may be paid
their expenses,  if any, relating to their attendance at FOHP Board or committee
meetings,  and directors  who are not full-time  employees of the Company may be
paid a fixed sum for  attendance  at FOHP Board or committee  meetings or paid a
stated  salary as a  director.  Currently,  the  members  of the FOHP  Board are
entitled  to receive an annual  retainer of $10,000 and $500 for each FOHP Board
meeting  attended,  $300 for each  telephonic  FOHP  Board  meeting in which the
director  participates,  $300 for each committee meeting attended,  and $200 for
each telephonic committee meeting in which a director participates. The Chairman
of the Board is entitled to receive an additional $5,000 annual retainer and the
chairpersons of the following committees are entitled to receive a $2,000 annual
retainer:  Audit Committee;  Finance Committee;  Medical Affairs Committee;  and
Grievance Committee.

         The Company paid approximately  $129,900 during the year ended December
31, 1998 to members of the FOHP Board, or charitable organizations designated by
certain members of the FOHP Board, for their services as directors and committee
members.

         COMMITTEES

         Pursuant to the Company's  By-laws,  the Company has an Audit Committee
which  is  responsible  for  evaluating  and  recommending  the  appointment  of
independent auditors for the Company and its subsidiaries, and for reviewing, in
consultation  with  such  auditors,   the  annual  financial  statements  (on  a
consolidated  and  separate  company  basis),  systems of internal  controls and
accounting principles of the Company and its subsidiaries.

         In addition,  pursuant to the Company's By-laws, the FOHP Board may, by
one or more  resolutions  passed by a majority of the directors  then in office,
establish  such  other  committees  as it  shall  determine  necessary  for  the
operations of the Company. The FOHP Board has empowered the members of the Audit
Committee  to act as the  Company's  Compensation  Committee  which  shall  make
decisions relating to the compensation of the officers,  directors and employees
of the  Company.  The  Compensation  Committee  is  currently  comprised  of the
following  directors:  Mr.  Bruce G.  Coe,  Mr.  John J.  Gantner  and Dr. Om P.
Sawhney.

         COMPENSATION   COMMITTEE   INTERLOCKS  AND  INSIDER   PARTICIPATION  IN
         COMPENSATION DECISIONS

         During the year ended  December 31, 1998,  the  Compensation  Committee
consisted of Mr. Coe, Mr. Gantner and Dr. Sawhney.

         During the year ended  December 31, 1998,  no executive  officer of the
Company,  served as a member of the  compensation  committee or as a director of
another entity, except for a subsidiary or affiliate of the Company.

                                      -37-

<PAGE>

         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Section  16(a) of the Exchange Act  requires  the  Company's  executive
officers and directors,  and persons who own more than 10% of a registered class
of the Company's equity securities,  to file reports of ownership and changes in
ownership on Forms 3, 4 and 5 with the Securities and Exchange  Commission  (the
"Commission").  Executive  officers,  directors  and  greater  than 10%  percent
shareholders are required by the Commission's regulations to furnish the Company
with copies of all Forms 3, 4 and 5 that they file.

         Based solely on the Company's review of the copies of such forms it has
received,  the Company believes that all its executive  officers,  directors and
greater  than  10%  beneficial  owners  complied  with all  filing  requirements
applicable  to them with respect to events or  transactions  during  fiscal 1998
except that the Form 4 required to be filed by FHS in January 1999 in connection
with the conversion of  Convertible  Debentures on December 31, 1998 has not yet
been filed.

                                      -38-

<PAGE>

ITEM 11.

EXECUTIVE COMPENSATION.

         The following  table sets forth  information  concerning the annual and
long-term  compensation  for services in all  capacities  to the Company and its
subsidiaries,  for the years ended  December  31,  1998,  1997 and 1996,  of the
persons  serving as the Chief  Executive  Officer of the Company during the year
ended December 31, 1998,  and the next three highest paid executive  officers of
the Company in 1998 (collectively, the "Named Officers"):

<TABLE>
<CAPTION>
                                                SUMMARY COMPENSATION TABLE

                                          Annual Compensation                        Long-Term Compensation
                                 ---------------------------------------  -----------------------------------------------
                                                                                  Awards           Payouts
                                                                          -----------------------  --------
                                                                  Other                Securities 
                                                                 Annual   Restricted   Underlying   LTIP      All other  
Name and                                                         Compen-    Stock       Options/   Payouts    Compensation
Principal Position        Year     Salary($)       Bonus($)     sations($) Award(s)($)  SARs(#)      ($)      ($)(1)(2)
------------------------- ----   ------------     ---------     ---------  --------    --------    -------   ------------
<S>                       <C>    <C>              <C>           <C>        <C>         <C>         <C>       <C>    
Thomas W. Wilfong         1998   $133,462(3)      $   --        $    --    $    --     $    --     $    --   $    --
   President and Chief
   Executive Officer
Roger W. Birnbaum (4)     1998     74,038(5)       25,000(6)         --         --          --          --    208,754(7)
   Former President and   1997    140,615(8)       25,000(9)         --         --          --          --     85,722
   Chief Executive 
   Officer         
Joseph Singer, M.D.       1998    252,923              --            --         --          --          --     5,336
   Vice President and     1997    240,000          28,000            --         --          --          --     5,035
   Chief Medical Officer  1996    239,354              --            --         --          --          --     4,905

Donald Parisi             1998    163,346              --            --         --          --          --     5,336
   Vice President,        1997    151,346          40,000            --         --          --          --     5,056
   Secretary and          1996    144,231              --            --         --          --          --     4,981
   General Counsel
Marc M. Stein             1998    184,423              --            --         --          --          --     5,336
   Chief Financial        1997    144,038 (10)     35,000(9)         --         --          --          --     5,132
   Officer         
</TABLE>

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

(1)      Includes amounts  contributed by the Company under its 401(k) Plan. All
         full-time  employees  who have  completed  30 days of service  with the
         Company or any of its  subsidiaries  are eligible to participate in the
         401 (k) Plan which allows eligible employees to save up to 15% of their
         pre-tax compensation  (subject to a maximum amount per year established
         annually pursuant to the Code) through a payroll deduction.  Subject to
         the  discretion  of the FOHP  Board,  the  Company  may  make  matching
         contributions to the 401(k) Plan. Amounts contributed by the Company to
         the accounts of the Named Officers for 1998 are as follows: Mr. Wilfong
         - $0; Mr. Birnbaum - $5,000;  Dr. Singer - $5,000; Mr. Parisi - $5,000;
         and Mr. Stein - $5,000.

(2)      Includes amounts of insurance premiums paid by the Company in 1998 with
         respect to term life  insurance for the benefit of the Named  Officers.
         Amounts  paid by the Company for the benefit of the Named  Officers are
         as follows:  Mr. Wilfong - $0; Mr.  Birnbaum - $336; Dr. Singer - $336;
         Mr. Parisi - $336; and Mr. Stein $336.

(3)      Represents the period April 1, 1998 to December 31, 1998.

(4)      Mr.  Birnbaum  served as President and Chief  Executive  Officer of the
         Company from June 1, 1997 to April 1, 1998.

(5)      Represents the period January 1, 1998 to March 31, 1998.

(6)      Such bonus was earned in fiscal 1998 and is payable in 1999.

(7)      Of this amount,  $189,423 represents  severance and consulting payments
         pursuant to his  employment  agreement  with the  Company,  and $13,995
         represents unused vacation pay.

                                      -39-

<PAGE>


(8)      Represents the period June 1, 1997 to December 31, 1997.

(9)      Such bonus was earned in fiscal  year 1997 but was not paid until March
         1998.

(10)     Represents the period February 18, 1997 to December 31, 1997.

         EMPLOYMENT AGREEMENTS

         Effective June 1, 1998, Thomas W. Wilfong and PHS, a subsidiary of FHS,
entered into an employment letter agreement (the "Wilfong Employment Agreement")
pursuant to which Mr.  Wilfong  will act as the  President  and Chief  Executive
Officer of the Company.  The Wilfong Employment  Agreement  supercedes all prior
employment  agreements  relating to Mr. Wilfong's  employment by the Company. In
accordance with the terms of the Wilfong Employment  Agreement,  Mr. Wilfong (i)
earns an annual salary of $190,000,  (ii) is eligible to  participate in the FHS
Executive  Incentive  Plan with a maximum  benefit of 40% of his base salary for
1998 and 50% of his base salary for 1999,  (iii) is eligible to  participate  in
FHS' Stock Option Program, and (iv) is eligible to receive and/or participate in
the  benefits  customarily  provided  by  FHS  to  its  employees.  The  Wilfong
Employment Agreement may be terminated by FHS or Mr. Wilfong at any time. In the
event that Mr.  Wilfong's  employment  is terminated by FHS for any reason other
than "cause" (as defined in the Wilfong Employment Agreement),  FHS will provide
Mr. Wilfong with a minimum of 60 days notice and a severance  package,  provided
he agrees to enter into a standard general release agreement,  totaling one year
of base salary in effect at the date of termination.

         Effective  June 1, 1997,  Roger W.  Birnbaum  became the  President and
Chief  Executive  Officer  of  the  Company  pursuant  to an  employment  letter
agreement  entered into by Mr. Birnbaum and FHS dated May 6, 1997 (the "Birnbaum
Employment  Agreement").  As a consequence  of the  formation of FHS'  Northeast
Division,  Mr. Birnbaum's employment as President and Chief Executive Officer of
the Company ended as of April 1, 1998. In connection with such  separation,  Mr.
Birnbaum  received six months of additional  salary as  severance.  In addition,
pursuant to the Birnbaum Employment Agreement,  Mr. Birnbaum provided consulting
services to the Company for a six month period  following the termination of his
employment for $125,000.

         Effective July 1, 1997, FHS entered into an employment letter agreement
(the "Singer Employment Agreement") with Dr. Joseph Singer pursuant to which Dr.
Singer remained as Chief Medical Officer of the Company.  The Singer  Employment
Agreement  supercedes all prior employment  agreements  relating to Dr. Singer's
employment by the Company. In accordance with the terms of the Singer Employment
Agreement, Dr. Singer (i) earns a monthly salary of $20,000, (ii) is eligible to
receive a monthly  automobile  allowance  of  $1,000,  (iii)  received a $28,000
signing bonus in 1997,  (iv) is eligible to  participate  in the FHS  Management
Bonus Plan under  which he may earn a  percentage  of his base salary as a bonus
subject to the discretion of the FHS  Compensation  and Stock Option  Committee,
and (v) is eligible to receive and/or  participate  in the benefits  customarily
provided by FHS to its employees. Pursuant to the terms of the Singer Employment
Agreement,  Dr. Singer is an "employee-at-will"  and is eligible to receive four
months of severance  pay upon his leaving the employ of FHS,  provided that such
termination  is  not by  reason  of  "just  cause,"  as  defined  in the  Singer
Employment Agreement.

         On February  9, 1998,  FHS and Mr.  Stein  entered  into an  employment
letter agreement (the "Stein Employment Agreement"),  which agreement superseded
a previous  employment  letter  agreement  dated February 6, 1997. In accordance
with the terms of the Stein Employment

                                      -40-

<PAGE>
Agreement, Mr. Stein (i) earns an annual salary of $175,000, (ii) is eligible to
participate in the 1998 FHS Management Bonus Plan and in the 1999 FHS Management
Bonus  Plan on a  prorated  basis,  (iii)  is  entitled  to  receive  a  monthly
automobile  allowance  of  $500,  (iv) is  eligible  to  participate  in the FHS
Management Stock Option Plan, and (v) receives other customary benefits provided
by FHS to its employees.  Provided that Mr. Stein remains  employed by FHS until
March 31, 1999, or if his  employment is terminated  prior to March 31, 1999 for
any  reason  other  than  "just  cause,"  as  defined  in the  Stein  Employment
Agreement,  Mr.  Stein will  receive as  retention  bonus equal to three  months
salary  on  March  31,  1999.  Pursuant  to the  terms of the  Stein  Employment
Agreement,  if Mr.  Stein's  employment is terminated  for any reason other than
"just  cause" prior to March 31,  1999,  FHS will  continue to pay Mr. Stein his
salary  through  September 30, 1999,  which includes six months  severance.  The
Stein Employment Agreement was amended on October 14, 1998 to extend the term of
the agreement until June 30, 1999. The Stein Employment  Agreement,  as amended,
now provides  that Mr. Stein will receive a retention  bonus equal to 10% of his
salary if he remains employed by FHS until June 30, 1999 or if his employment is
terminated for any reason other than "just cause."

                                      -41-

<PAGE>

ITEM 12. PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP MANAGEMENT.

         The following  table sets forth  information as of March 15, 1999, with
respect to the  beneficial  ownership  (as defined in Rule 13d-3 of the Exchange
Act), of the Company's Common Stock by each director of the Company, each of the
Named  Officers  (as  defined  in  the  section  herein   captioned   "Executive
Compensation"),  each person or group of persons  known by the Company to be the
beneficial  owner  of more  than 5% of  Common  Stock,  and  all  directors  and
executive officers of the Company as a group:


                                                       BENEFICIAL OWNERSHIP OF
                                                            COMMON STOCK
                                                     ---------------------------
                                                                      PERCENT OF
NAME OF BENEFICIAL OWNER                             NO. OF SHARES (1)  CLASS
------------------------                             -------------    ----------

Foundation Health Systems, Inc. (2)................. 496,916,161(3)    99.6%(3)

Dr. John F. Bonamo (4)..............................       1,500            (5)

Karen A. Coughlin (6)...............................

Bruce G. Coe (4)....................................         --        

Christopher M. Dadlez (4)...........................         --        

Dr. Mark L. Engel (4)...............................      7,017 (7)         (5)

Dr. Thomas J. Feneran (4)...........................      4,100             (5)

John J. Gantner (4).................................         --        

Jay M. Gellert (6)..................................         --        

Dr. Om P. Sawhney (4)...............................      5,800 (8)         (5)

Thomas W. Wilfong (6) (9)...........................         --

Roger W. Birnbaum (10)..............................         --        

Dr. Joseph Singer (9)...............................      8,000             (5)

Donald Parisi (9)...................................         --        

Marc M. Stein (9)...................................         --        

All Directors and Executive Officers                                   
as a Group (14 persons).............................     26,417 (7)(8)      (5)

----------

(1)      Except as  otherwise  indicated,  all of the shares of Common Stock are
         held beneficially and of record.
(2)      FHS'  principal  offices are located at 21600 Oxnard  Street,  Woodland
         Hills, CA 91367.
(3)      Such number and  percentage do not include or give effect to the number
         of shares of Common  Stock that FHS has the right to receive  upon full
         conversion of the New  Convertible  Debenture.  In December  1997,  FHS
         converted approximately  $18,952,930 of the principal amount of the New
         Convertible  Debenture into  92,804,003  shares of Common Stock and, in
         December 1998, FHS converted  $1,197,183 of the principal amount of the
         New Convertible  Debenture into 399,003,000 shares of Common Stock . If
         FHS elects to convert the  remaining  New  Convertible  Debenture,  FHS
         would receive, in accordance  with  a  formula  set  forth  in the  New
         Convertible  Debenture, additional shares of Common Stock, resulting in
         FHS owning more than 99.9% of the then outstanding Common Stock.
(4)      Such person currently serves as a Non-FHS Director of the Company.

      
                                      -42-

<PAGE>

(5)      Shares  beneficially  owned do not exceed 1% of the outstanding  Common
         Stock.
(6)      Such  person is  affiliated  with FHS and serves as a  director  of the
         Company.
(7)      Includes an aggregate of 417 shares of Common Stock held by Dr. Barbara
         Engel,  Dr. Mark L. Engel's  wife,  as to which shares he disclaims any
         beneficial interest.
(8)      Includes an  aggregate  of 500 shares of Common Stock held by Dr. Veena
         Sawhney,  Dr. Om P. Sawhney's wife, as to which shares he disclaims any
         beneficial interest.
(9)      Such person is an executive officer of the Company.
(10)     Such person was a former executive officer and director of the Company.

                                      -43-

<PAGE>

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         MANAGEMENT AGREEMENTS

         In connection with FHS' initial investment in the Company,  FHS and the
Company entered into a General Administrative Services Management Agreement (the
"Administrative  Management  Agreement"),  pursuant  to which FHS  oversees  the
management  of the Company and assists the  Company's  management  in  providing
contracting, utilization review and quality assurance, employee relations, sales
and marketing,  and strategic planning,  among other services. In addition,  FHS
and the Company have entered  into a Management  Information  Systems and Claims
Processing  Services  Management  Agreement,  (the "MIS Agreement," and together
with the  Administrative  Management  Agreement,  the "Management  Agreements"),
pursuant to which FHS would provide claims  processing,  record keeping and data
processing  services to all the health plans offered,  or to be offered,  by the
Company's subsidiaries. The MIS Agreement will be effective at FHS' option.

         Each of the  Management  Agreements  provides  that FHS will employ the
business  executives in charge of the Company and each of its subsidiaries,  and
each  executive  in charge of a principal  business  division,  unit or function
(including, but not limited to finance, legal, operations,  sales and marketing,
information   systems,   medical  management,   and  provider   contracting  and
relations).  Each of the executives  report to FHS' senior  management.  All the
executives  of the Company  shall be  appointed by the FOHP Board to the offices
requested by FHS: provided, however, that the FOHP Board may reject any proposed
appointee it reasonably finds to be of insufficient  ethical  character for such
office;  and provided  further,  that the FOHP Board may, after due consultation
with  FHS  based on a  reasonable  determination  of  intentional  and  material
unethical behavior or insubordination or willful misconduct or gross negligence,
remove any such executive. Currently, Mr. Thomas W. Wilfong, President and Chief
Executive Officer of the Company,  Dr. Singer,  Vice President and Chief Medical
Officer of the Company,  Mr. Donald Parisi, Vice President,  General Counsel and
Secretary  of the Company,  and Mr. Marc M. Stein,  Chief  Financial  Officer of
Company, are employed by FHS or a subsidiary thereof.

         Each of the Management Agreements provides that the Company will employ
an internal auditor who will report directly to the FOHP Board.

         Each of the  Management  Agreements  has an initial term of five years,
subject to automatic one year renewal terms unless either party provides written
notice of  non-renewal  to the other  party at least two years prior to the then
current term of the  agreement.  A party may terminate  either of the Management
Agreements  if (i) the  other  party  is in  material  breach  of the  agreement
(subject to certain rights to cure any such breach), or (ii) the other party (a)
becomes  insolvent,  (b)  voluntarily  seeks,  consents to or  acquiesces in the
benefit or  benefits  of any Debtor  Relief  Law (as  defined in the  Management
Agreements),  or (c)  becomes  a  party  to (or be  made  the  subject  of)  any
proceeding  provided  by any Debtor  Relief  Law,  other  than as a creditor  or
claimant  (unless,  in the event  the  proceeding  is  voluntary,  the  petition
instituting the voluntary  proceeding is dismissed within 45 days of the date it
was filed).

         Under the  Administrative  Management  Agreement,  FHS is  entitled  to
receive  a  monthly  management  fee (the  "Management  Fee").  Originally,  the
Management  Fee  equaled  the sum of (i) 2% of the total  revenue  of the health
plans  offered by the Company (the "FOHP Health  Plans") for a month,  plus (ii)
reimbursement for (a) direct expenses incurred by third parties, and

                                      -44-

<PAGE>

(b) salaries and benefits of the  executives  of the Company.  Subsequent to the
execution of the  Administrative  Management  Agreement  and  conversion  of the
Initial  Convertible  Debenture,  the Company and FHS agreed that the Management
Fee to be  charged  the  Company  by FHS  under  the  Administrative  Management
Agreement should be based on allocated  corporate charges and not on the formula
originally provided in the Administrative Management Agreement.

         In connection with the sale of the Initial Convertible  Debenture,  the
Company paid FHS a phase-in period  management fee of  $1,701,120.38,  which was
based on certain  administrative  services  provided by FHS to the Company  from
January 1, 1997 to April 30, 1997.

         At the  end  of  each  month  during  the  term  of the  Administrative
Management  Agreement,  FHS shall  provide the Company with  statements  setting
forth the Management Fee for such month.  The Management Fee for any month shall
become  payable within ten days after receipt by FOHP from FHS of the statements
for such month.

         In the event that FHS establishes a regional or centralized multi-entry
system  relating to functions  ordinarily  and  customarily  handled at the plan
level and not  described  in the MIS  Management  Agreement  (such as plan level
accounting and membership  services),  FHS shall have the right to transfer such
functions  performed by the FOHP Health Plans to such regional system,  in which
case the Company  shall be  obligated  to pay to FHS the share of such  regional
systems costs  incurred by FHS with respect to such function  which is allocable
to  the  FOHP  Health  Plans;   provided,   however,   the   regionalization  or
centralization  of  functions  by FHS must  result,  in the  aggregate,  in cost
savings to the FOHP Health  Plans and any data  processing  functions  performed
under such  regionalization or centralization  shall not cost more than what was
contemplated under the Company's  then-existing  Management Information Services
Agreement (the "HSII Agreement") with Health Systems Integration, Inc. ("HSII").

         In the event any of the  Management  Fees due and  payable to FHS under
the Administrative  Management Agreement are not paid, such Management Fees may,
at FHS' option,  be added to the principal amount of the Convertible  Debentures
issued by the Company to FHS except that  Management Fees due and payable during
calendar  year 1998 may only be added to such  principal  amount  to the  extent
permitted  by the  Convertible  Debentures.  Any  due  and  payable  but  unpaid
Management Fees not added to the principal amount of the Convertible  Debentures
issued by the  Company to FHS shall  bear  interest  at the rate of the  Initial
Convertible  Debenture  until paid in their  entirety or added to the  principal
amount of the Convertible Debentures.

         As compensation  under the MIS Management  Agreement,  the Company will
(i) pay FHS fees and charges to be  specified by FHS upon the  effectiveness  of
the agreement,  which fees and charges shall be no greater than the compensation
paid to HSII  pursuant to the HSII  Agreement  and (ii)  reimburse  FHS for such
costs and expenses as to which HSII was entitled to reimbursement under the HSII
Agreement and documents related thereto.

         FHS is required to provide and perform the following services under the
Administrative Management Agreement, subject to the direction of the FOHP Health
Plans and consistent  with the manner in which FHS provides such services to its
other  subsidiaries,  without  disadvantage  to the  Company or the FOHP  Health
Plans:  (i) manage the  diagnosis and  assessment  of the  information/operating
systems  of the  FOHP  Health  Plans  and  provide  support  for  all  necessary
conversions,  supplements and enhancements to such systems; (ii) manage the FOHP
Health  Plans in their  provider  contracting  efforts  and  provider  relations
matters, including the

                                      -45-

<PAGE>

establishment of appropriate provider  reimbursement  structures;  (iii) provide
human resources and employee benefit corporate  management  services to the FOHP
Health Plans in recruiting employees and in implementing  personnel policies and
procedures  and  employee  benefit  programs;   (iv)  provide  consultation  and
assistance to the FOHP Health Plans in connection  with  governmental  relations
and legislative  activities  (including regulatory compliance matters) affecting
the FOHP Health  Plans;  (v) provide  consultation  and  assistance  to the FOHP
Health Plans in conducting analyses of the marketplace in which they operate and
in developing an  appropriate  strategic  plan;  (vi) provide  consultation  and
assistance  to the FOHP Health  Plans in  connection  with the  development  and
dissemination  of enrollment  and  disclosure  materials for enrollees  thereof,
employers  and other  groups  contracting  with any of the FOHP Health Plans and
other third  parties;  (vii) provide  administrative  support to the FOHP Health
Plans in the formulation,  review and  implementation of the utilization  review
and  quality  assurance  programs  thereof;   (viii)  provide  consultation  and
assistance  to  the  FOHP  Health  Plans  in  connection   with  protecting  the
confidentiality  of  the  records  thereof  and  ensuring  compliance  with  all
applicable federal, state and local laws and regulations relating to the records
thereof;  (ix)  consult  with and assist the FOHP Health Plans in support of the
medical management policies and procedures thereof, in preparing and negotiating
contracts with participating  providers,  subscriber  groups,  vendors and other
third parties;  (x) provide consultation and assistance to the FOHP Health Plans
in the  preparation  of the annual  budget  thereof,  which will set forth their
major  operating  objectives,  anticipated  revenues,  expenses,  cash  flow and
capital expenditures; (xi) provide oversight management to the FOHP Health Plans
in recording and analyzing the financial conditions thereof, including financial
review and  analysis  of health  care costs  incurred  thereby and assist in the
preparation of appropriate federal,  state and local tax returns and provide the
FOHP Health Plans with advice as to  appropriate  tax  accruals;  (xii)  provide
consultation  and  assistance  to the FOHP  Health  Plans in the  establishment,
review and modification of collection policies and programs designed to minimize
the number and amount of outstanding accounts receivable thereof; (xiii) provide
consultation  and  assistance in  implementing  the FOHP Health  Plans'  premium
structures,  which  premium  structures  shall take into  account the  financial
obligations of the FOHP Health Plans, the importance of providing quality health
care at a reasonable  cost, and the  competition of the FOHP Health Plans in the
service  areas;  (xiv) give advice to the FOHP Health Plans  concerning  various
business  insurance  programs,   including  but  not  limited  to,  professional
liability insurance, directors and officers liability insurance, reinsurance and
workers' compensation insurance; (xv) provide consultation and assistance to the
FOHP Health Plans in connection with the sales and marketing efforts of the FOHP
Health Plans,  including  assistance with regard to the selection of advertising
agencies,  the conduct of surveys  respecting  the  satisfaction  of  subscriber
groups and  enrollees of the FOHP Health Plans and the FOHP Health  Plans' sales
programs and  techniques;  (xvi) provide to the FOHP Health Plans  actuarial and
data analysis  services,  and  assistance  in the  development  of  underwriting
standards;  (xvii)  assist  the  Boards  of  Directors  of the  Company  and its
subsidiaries  in reviewing  the short,  medium and long range  objectives of the
FOHP Health Plans and in formulating  recommendations  with respect thereto; and
(xviii) provide such other services, not specifically mentioned herein, that are
mutually agreed upon between the parties.

         FHS shall  provide  and perform the  following  services  under the MIS
Management Agreement: (i) provide all claims processing, record keeping and data
processing  services  to the FOHP  Health  Plans that had been  provided by HSII
pursuant to the HSII Agreement;  and (ii) provide such other related services as
are mutually agreed upon between the parties.


                                      -46-

<PAGE>


         Under each of the Management Agreements, FHS will defend, indemnify and
hold the FOHP  Health  Plans  and,  among  others,  their  respective  officers,
directors,  shareholders,  employees  and  agents,  from and against any and all
claims, actions, damages, obligations,  losses, liabilities, costs and expenses,
including  attorneys'  fees,  other  professional  fees, costs of collection and
other costs of defense  ("Management  Agreement  Damages"),  resulting from FHS'
gross negligence or willful misconduct.  In addition,  the Company has agreed to
defend,  indemnify  and hold FHS and,  among others,  its  officers,  directors,
shareholders,  employees  and agents,  from and  against any and all  Management
Agreement Damages resulting from FHS' execution of the Management  Agreements or
performance of services thereunder,  provided that no such indemnification shall
be provided to the extent that such  Management  Agreement  Damages  result from
FHS' gross negligence or willful misconduct.

         MERGERS

         The Company  and FHS have  entered  the Merger  Agreement,  pursuant to
which  FHS  Transition  Company  will  merge  with  and into  the  Company.  See
"Description of Business - The Merger."

         On January 1, 1999,  PHS-NJ, a New Jersey HMO controlled by FHS, merged
with and into  FOHP-NJ.  See  "Description  of  Business - Merger of FOHP-NJ and
Physicians Health Services of New Jersey, Inc."

         EXECUTIVE  OFFICERS  OF NJ ACUTE CARE  INSTITUTIONS  AND FHS SERVING ON
FOHP BOARD.

         The  following  directors of the Company are  executive  officers of NJ
Acute Care  Institutions  which have  purchased,  either  directly or through an
affiliate,  shares of Common  Stock;  Mr.  Christopher  Dadlez,  Executive  Vice
President of Saint  Barnabas  Health Care  System,  which  includes  Clara Maass
Medical Center, Irvington General Hospital, Monmouth Medical Center, Newark Beth
Israel Medical  Center,  Saint Barnabas  Medical Center,  Union Hospital,  Wayne
General Hospital and West Hudson Hospital; and Mr. John J. Gantner,  Senior Vice
President  of Finance  and  Treasurer  of the  Robert  Wood  Johnson  University
Hospital.  See  "Directors  and Executive  Officers of the  Registrant - Current
Directors of the Registrant." In addition, a large percentage of the revenues of
FOHP-NJ  is  generated  from NJ  Acute  Care  Institutions  that  have  enrolled
employees in FOHP-NJ plans as required by the  Certificate of  Incorporation  of
the Company.

         Each of Karen A.  Coughlin,  Jay M. Gellert and Thomas W. Wilfong serve
as executive  officers of FHS and  currently  serve as directors of the Company.
See "Directors and Executive  Officers of the Registrant - Current  Directors of
the Registrant."

                                      -47-

<PAGE>

                                     PART IV

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

(a)      1. and 2.   FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.

         Reference is made to the Index of Financial
         Statements hereinafter contained.......................F-1

         Other than the  Financial  Data  Schedule  included  as Exhibit  27, no
         Financial  Statement  Schedules are required to, nor will any, be filed
         with this Annual Report on Form 10-K.

         3.          EXHIBITS

         Reference is made to the Index of Exhibits
         hereinafter contained..................................E-1

(b)      Reports on Form 8-K

         During the fourth quarter ended  December 31, 1998, no Current  Reports
         on Form 8-K were filed by the Company with the Commission.

                                      -48-


<PAGE>




                                   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.


                                              FOHP, Inc.
                                             (Registrant)



Date: March 30, 1999                 By: /s/ THOMAS W. WILFONG
                                         ---------------------------------------
                                             Thomas W. Wilfong, President 
                                             and Chief Executive Officer


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the date indicated.

<TABLE>
<CAPTION>

Signature                                 Title                            Date
---------                                 -----                            ----

<S>                             <C>                                        <C> 
  /s/ THOMAS W. WILFONG         President and Chief Executive           March 30, 1999
  --------------------------    Officer (Principal Executive
     Thomas W. Wilfong          Officer) and Director
                                

  /s/ MARC M. STEIN             Chief Financial Officer (Principal      March 30, 1999
  --------------------------    Financial and Accounting Officer)
      Marc M.Stein              

  /s/ DR. MARK L. ENGEL         Chairman of the Board                   March 30, 1999
  --------------------------                                     
      Dr. Mark L. Engel

  /s/ DR. JOHN F. BONAMO        Director                                March 30, 1999
  --------------------------
      Dr. John F. Bonamo

  /s/ KAREN A. COUGHLIN         Director                                March 30, 1999
  --------------------------
      Karen A. Coughlin

  /s/ BRUCE G. COE              Director                                March 30, 1999
  --------------------------
      Bruce G. Coe
</TABLE>

                                      -49-

<PAGE>

Signature                       Title                      Date             
---------                       -----                      ----             

  /s/ CHRISTOPHER M. DADLEZ      Director               March 30, 1999
  --------------------------
      Christopher M. Dadlez
  
  /s/ DR. THOMAS J. FENERAN      Director               March 30, 1999
  --------------------------
      Dr. Thomas J. Feneran

  /s/ JOHN J. GANTNER            Director               March 30, 1999
  --------------------------
      John J. Gantner

  /s/ JAY M. GELLERT             Director               March 30, 1999
  --------------------------
      Jay M. Gellert

  /s/ DR. OM P. SAWHNEY          Director               March 30, 1999
  --------------------------
      Dr. Om P. Sawhney

                                      -50-


<PAGE>


                        CONSOLIDATED FINANCIAL STATEMENTS

                           FOHP, INC. AND SUBSIDIARIES

                                DECEMBER 31, 1998

                                    CONTENTS

Reports of Independent Auditors                                              F-2

Consolidated Financial Statements:

Consolidated Balance Sheets                                                  F-4
Consolidated Statements of Operations                                        F-5
Consolidated Statements of Shareholders' Equity                              F-6
Consolidated Statements of Cash Flows                                        F-7
Notes to Consolidated Financial Statements                                   F-8






                                      F-1




<PAGE>


INDEPENDENT AUDITORS' REPORT

The Board of Directors
FOHP, Inc.
Neptune, NJ

We have audited the  accompanying  consolidated  balance  sheet of FOHP Inc. and
subsidiaries as of December 31, 1998 and the related consolidated  statements of
operations,  shareholders'  equity and cash flows for the year then ended. These
financial  statements are the  responsibility  of FOHP, Inc.'s  management.  Our
responsibility  is to express an opinion on these 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, such 1998 financial statements present fairly, in all material
respects, the consolidated financial position of FOHP Inc. and subsidiaries as
of December 31, 1998 and the consolidated results of their operations and cash
flows for the year then ended in conformity with generally accepted accounting
principles.

/s/  Deloitte & Touche LLP

Hartford, CT
February 26, 1999




                                      F-2

<PAGE>

                         Report of Independent Auditors


The Board of Directors
FOHP, Inc.

We have audited the accompanying  consolidated balance sheets of FOHP, Inc. (the
"Company")  and   subsidiaries,   as  of  December  31,  1997  and  the  related
consolidated statements of operations,  shareholders' equity, and cash flows for
the years ended December 31, 1997 and 1996.  These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these 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 financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial  position of FOHP, Inc. and
subsidiaries  as of December 31,  1997,  and the  consolidated  results of their
operations  and their cash flows for the years ended December 31, 1997 and 1996,
in conformity with generally accepted accounting principles.



Iselin, New Jersey
February 13, 1998                                              Ernst & Young LLP



                                      F-3

<PAGE>

                           FOHP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31
                                                                           1998                        1997
                                                                   --------------------------------------------
<S>                                                                   <C>                          <C>
ASSETS
Current assets:
   Cash and cash equivalents                                          $  44,052,058                $ 79,266,721
   Accounts receivable from owners/providers, net of allowances 
       for doubtful accounts and retroactive terminations of
       $1,546,616 in 1998 and $922,354 in 1997                            5,138,201                  11,096,487
   Other accounts receivable, net of allowances for doubtful
       accounts and retroactive terminations of $662,836 in 1998
       and $2,507,619 in 1997                                             4,918,844                   3,131,333
   Due from Integrated Pharmacy Services, Inc.                            3,540,608                          --
   Prepaids and other current assets                                        513,073                     635,548
                                                                    --------------------------------------------
Total current assets                                                     58,162,784                  94,130,089

   Restricted cash                                                       57,855,421                  13,846,682
   Furniture and equipment, net                                           1,730,136                   2,480,042
   Goodwill, net of accumulated amortization of $2,693,256
      and $0 at December 31, 1998 and 1997, respectively                 96,237,857                 107,730,254
   Deferred tax asset                                                     3,942,798                          --
   Other assets                                                             350,419                     424,164
                                                                    --------------------------------------------
 Total assets                                                         $ 218,279,415               $ 218,611,231
                                                                    ============================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Medical claims payable to owners/providers                         $  18,106,942                $ 20,308,241
   Other medical claims payable                                          42,249,530                  62,614,704
   Accounts payable                                                         215,855                     741,010
   Accrued expenses, including restructuring accrual
      of approximately $1,577,000 and $12,709,000 at
      December 31, 1998 and 1997, respectively                            9,512,535                  17,510,150
   Due to Foundation Health Systems, Inc.                                 1,446,459                     543,075
   Due to other affiliates                                                  612,989                   1,192,716
   Unearned premium                                                       1,204,911                   7,965,658
   Other current liabilities                                                     --                       8,054
                                                                    --------------------------------------------
Total current liabilities                                                73,349,221                 110,883,608

Convertible debentures payable to Foundation Health Systems, Inc.        11,131,386                  11,294,406
Subordinated debentures payable to Foundation Health Systems, Inc.       25,113,575                  24,000,000
                                                                    --------------------------------------------
Total liabilities                                                       109,594,182                 146,178,014
                                                                    --------------------------------------------

Commitments and contingencies  (Note 10)

Shareholders' equity:                                               
   Preferred Stock, $1.00 par value, 1,000,000 shares authorized,
        none issued or outstanding                                               --                         --
   Common Stock, $.01 par value, 499,000,000 shares
        authorized, 499,000,000 shares and 100,000,000 shares issued
        and outstanding at December 31, 1998 and 1997, respectively       1,011,941                   1,000,000
   Additional paid-in capital                                           239,135,758                 208,053,796
   Accumulated deficit                                                 (131,462,466)               (136,620,579)
                                                                    --------------------------------------------
Total shareholders' equity                                              108,685,233                  72,433,217
                                                                    --------------------------------------------
Total liabilities and shareholders' equity                            $ 218,279,415               $ 218,611,231
                                                                    ============================================
</TABLE>


See notes to consolidated financial statements.


                                       F-4

<PAGE>

                           FOHP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31
                                                              1998            1997             1996
                                                         ------------------------------------------------
<S>                                                      <C>              <C>              <C>
 Revenue:

   Premiums from owners/providers                        $ 118,591,143    $ 132,575,894    $ 135,544,112
   Other premium revenue                                   209,268,135      239,132,416      112,125,670
   Other, principally administrative service fees            2,513,576        2,045,011        7,863,006
   Interest income                                           4,308,879        3,652,910        1,843,520
                                                         ------------------------------------------------
Total revenue                                              334,681,733      377,406,231      257,376,308
                                                         ------------------------------------------------
 
Expenses:
   Medical services to owners/providers                     46,895,944       63,882,103       37,026,903
   Hospital services to owners/providers                    32,154,087       64,553,166       30,156,890
   Other medical services                                  109,423,870      148,812,233      105,551,393
   Other hospital services                                  75,026,204      101,521,355       63,760,554
   Selling, general and administrative                      53,199,216       55,106,022       50,734,197
   Management fee - Foundation Health Systems, Inc.          2,543,000        7,502,899               --
   Depreciation & amortization                               4,224,987        1,404,192          879,306
   Interest - Foundation Health Systems, Inc.                2,229,890        1,790,410               --
   Other interest                                              536,191           91,163           11,247
   Restructuring costs                                      (2,250,000)      12,825,570              --
                                                         ------------------------------------------------
Total expenses                                             323,983,389      457,489,113      288,120,490
                                                         ------------------------------------------------
 
Net income (loss) before provision for income taxes         10,698,344      (80,082,882)     (30,744,182)

Provision for income taxes                                   5,540,231            2,139              924
                                                         ------------------------------------------------

Net income (loss)                                        $   5,158,113    $ (80,085,021)   $ (30,745,106)
                                                         ================================================
 

Net income (loss) per common share                       $        0.05    $       (9.18)   $      (14.64)
                                                         ================================================

Net income (loss) per common share - assuming dilution   $        --      $       (9.18)   $      (14.64)
                                                         =================================================
</TABLE>


 See notes to consolidated financial statements.



                                       F-5

<PAGE>

                           FOHP, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

 
<TABLE>
<CAPTION>
                                                           COMMON STOCK                                                  TOTAL
                                                   -----------------------------      ADDITIONAL                      SHAREHOLDERS'
                                                                           PAR          PAID-IN       ACCUMULATED        EQUITY
                                                       SHARES             VALUE         CAPITAL         DEFICIT       (DEFICIENCY)
                                                   --------------------------------------------------------------------------------
<S>                                                <C>             <C>              <C>              <C>              <C>
Balance at January 1, 1996                            2,100,173    $      21,002    $  30,648,489    $ (25,790,452)   $   4,879,039
  Net loss                                                                                             (30,745,106)     (30,745,106)
                                                   --------------------------------------------------------------------------------
Balance at December 31, 1996                          2,100,173           21,002       30,648,489      (56,535,558)     (25,866,067)
  Redemption of FOHP, Inc. Common Stock-NJ              (13,334)            (133)             133                                --
  Conversion of outstanding shares of FOHP, Inc. 
    Common Stock-NJ to Common Stock:
      FOHP, Inc. Common Stock-NJ                     (2,086,839)         (20,869)                                           (20,869)
      Issued Common Stock (at $.01 per
         share)                                       2,086,839           20,869                                             20,869
      Issued Common Stock (April 30, 1997
          at $10.12 per share)                          168,109            1,681        1,699,440                         1,701,121
      Issued Common Stock (December 1,
          1997 at $10.12 per share)                   4,941,049           49,410       49,950,590                        50,000,000
      Issued Common Stock (December 8,
          1997 at $.20 per share)                    92,804,003          928,040       18,024,890                        18,952,930
      Goodwill                                                                        107,730,254                       107,730,254
  Net loss                                                                                             (80,085,021)     (80,085,021)
                                                   --------------------------------------------------------------------------------
Balance at December 31, 1997                        100,000,000        1,000,000      208,053,796     (136,620,579)      72,433,217
  Redemption of Common Stock                             (3,000)             (30)          (1,050)                           (1,080)
  Capital contribution from Foundation Health
       Systems, Inc.                                                                   29,897,801                        29,897,801
  Issued Common Stock (December 31,
       1998 at $.003 per share)                     399,003,000           11,971        1,185,211                         1,197,182
  Net income                                                                                             5,158,113        5,158,113
                                                  ---------------------------------------------------------------------------------
Balance at December 31, 1998                        499,000,000    $   1,011,941    $ 239,135,758    $(131,462,466)   $ 108,685,233
                                                  =================================================================================
</TABLE>


See notes to consolidated financial statements.



                                       F-6

<PAGE>

                             FOHP, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31
                                                                1998           1997             1996
                                                          -------------------------------------------------
<S>                                                       <C>              <C>              <C>
Cash Flows from operating activities
Net income (loss)                                         $   5,158,113    $ (80,085,021)   $ (30,745,106)
Adjustments to reconcile net income (loss) to net cash
 (used in) provided by operating activities:

   Depreciation and amortization                              4,224,987        1,404,192          879,306
   Loss on disposal of fixed assets                             434,689           80,966               --
   Write-off of deferred issuance costs                              --        1,132,656               --
   Interest cost converted to debt                            2,147,737        1,247,337               --
   Tax settlements with Foundation Health Systems, Inc.       8,799,141               --               --
   Changes in operating assets and liabilities:

      Accounts receivable from owners/providers               5,958,286       (2,890,016)      (1,865,379)
      Other accounts receivable                              (1,787,511)         535,554         (414,248)
      Due from Integrated Pharmacy Services, Inc.            (3,540,608)              --               --
      Prepaids and other current assets                         122,475        1,268,812       (1,369,609)
      Restricted cash                                       (44,008,739)     (12,581,233)         (64,648)
      Deferred tax asset                                     (3,942,798)              --               --
      Other assets                                               73,745          235,417         (368,448)
      Medical claims payable to owners/providers             (2,201,299)       6,532,707        5,417,849
      Other medical claims payable                          (20,365,174)       7,244,247       36,767,869
      Accounts payable and accrued expenses                  (8,522,770)      13,088,045          872,013
      Due to Foundation Health Systems, Inc.                    903,384          543,075               --
      Due to other affiliates                                  (579,727)       1,192,716               --
      Unearned premium revenue                               (6,760,747)       3,366,996        4,257,570
      Other current liabilities                                  (8,054)      (1,202,462)         320,189
                                                          -------------------------------------------------
Net cash (used in) provided by operating activities         (63,894,870)     (58,886,012)      13,687,358
                                                          -------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment                         (1,216,514)      (1,799,093)        (904,733)
Proceeds from sale of furniture and equipment                        --           27,260               --
                                                          -------------------------------------------------
Net cash used in investing activities                        (1,216,514)      (1,771,833)        (904,733)
                                                          -------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Deferred issuance costs                                              --       (1,441,465)              --
Capital contribution from parent                             29,897,801               --               --
Issuance of convertible debentures                                 --         80,701,120               --
Issuance of subordinated debentures                                --         24,000,000               --
Redemption of common stock                                       (1,080)              --               --
                                                          -------------------------------------------------
Net cash provided by financing activities                    29,896,721      103,259,655               --
                                                          -------------------------------------------------

Increase (decrease) in cash and cash equivalents            (35,214,663)      42,601,810       12,782,625
Cash and cash equivalents at beginning of period             79,266,721       36,664,911       23,882,286
                                                          =================================================
Cash and cash equivalents at end of period                   44,052,058       79,266,721       36,664,911
                                                          =================================================

SUPPLEMENTAL INFORMATION:
-------------------------

Cash paid for interest                                    $     536,191    $      48,319    $       7,488
                                                          =================================================

Conversion of debentures into common stock                $   1,197,182    $  70,654,051    $          --
                                                          =================================================
</TABLE>

See notes to consolidated financial statements.


                                      F-7



<PAGE>



                           FOHP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

1.  GENERAL

FOHP,  Inc.  (the  "Company"  or "FOHP")  serves as the holding  company for its
wholly-owned subsidiaries. The Company's principal operating subsidiary is First
Option Health Plan of New Jersey,  Inc.  ("FOHP-NJ") during 1998. FOHP-NJ, a New
Jersey  corporation  formed in May 1993,  received its  Certificate of Authority
("COA") to operate as a health maintenance organization ("HMO") in New Jersey in
June 1994.  Other  wholly-owned  subsidiaries  of the Company  are First  Option
Health Plan of  Pennsylvania,  Inc., a  Pennsylvania  corporation,  First Option
Health Plan of Maryland,  Inc.  ("FOHP-MD"),  a Maryland  corporation,  and FOHP
Agency,  Inc.,  a New  Jersey  corporation,  each  formed in 1995.  These  other
subsidiaries are not active.  Since January 1, 1998, First Option Health Plan of
New York,  Inc.,  First Option  Health Plan of  Delaware,  Inc. and First Option
Dental, Inc., former inactive subsidiaries of the Company, have been dissolved.

The Company is a New Jersey corporation that was formed in May 1994. The Company
was  formed to effect  the  reorganization  of  FOHP-NJ  into a holding  company
structure  (the  "Reorganization"),  which was  consummated on June 8, 1995. The
Reorganization was completed through an exchange of FOHP-NJ's outstanding common
stock for  shares of the  Company's  Common  Stock-NJ.  In  connection  with the
Reorganization,  FOHP-NJ  distributed,  as a  dividend,  all of the  outstanding
common  stock of First  Managed  Care  Option,  Inc.  ("FMCO")  to the  Company.
Pursuant  to  the   Reorganization,   FOHP-NJ   and  FMCO  became   wholly-owned
subsidiaries of the Company.  Prior to the  Reorganization,  the Company did not
conduct any business nor did it have any significant assets or liabilities.  The
primary  purpose  of the  Reorganization  was to  facilitate  the  formation  of
additional  HMOs in states other than New Jersey.  In December 1996, the Company
sold all of the outstanding common stock of FMCO.

Health  care  providers  investing  in the  Company  are  required to enter into
provider agreements (the "Provider  Agreements") with the Company.  The Provider
Agreements  have an initial term of one year and are  renewable  annually.  Such
agreements with acute care  institutions and certain other health care providers
may be terminated by either party upon 90 days written  notice;  agreements with
physicians  may be terminated by either party upon 60 days written  notice.  The
Provider  Agreements may also be terminated for breaches specified therein.  The
Provider Agreements, among other things, establish covered services, billing and
payment procedures, and reimbursement methods.

Effective   December  8,  1997,   through  the  conversion  of  debentures  (the
"Convertible  Debentures")  into shares of the Company's  Common Stock  ("Common
Stock"), the Company became a 98% owned subsidiary of Foundation Health Systems,
Inc.  ("FHS"),  a Delaware  corporation  (Note 2). On  December  31,  1998,  FHS
converted additional  Convertible  Debentures into shares of Common Stock, which
increased its ownership interest to 99.6%.

On January 1, 1999, Physicians Health Services of New Jersey, Inc. ("PHS-NJ"), a
New Jersey  corporation  which  operated  as an HMO in the State of New  Jersey,
merged with and into FOHP-NJ  pursuant to an Agreement  and Plan of Merger dated
October 26, 1998. In  connection  with the merger,  FOHP-NJ  changed its name to
Physicians Health Services of New Jersey,  Inc. The purpose of the merger was to
consolidate  the operations of FOHP-NJ and PHS-NJ,  both FHS controlled  HMOs in
the State of New Jersey, into one corporation. This merger will be accounted for
as a pooling of interest of entities under common control.


                                       F-8

<PAGE>

Selected financial  information for PHS-NJ as of and for the year ended December
31, 1998 is as follows:

                  Revenue                        $ 55,512,000
                  Net (Loss)                     $(13,074,000)

                  Total Assets                    $45,550,000
                  Total Liabilities               $42,414,000
                  Shareholders' Equity             $3,136,000

Pursuant to an  Agreement  and Plan of Merger (the  "Merger  Agreement"),  dated
November 16, 1998,  FHS will acquire the remaining  0.4%  outstanding  ownership
interest in the Company from the provider  shareholders  of FOHP.  In connection
with the Merger Agreement,  a provider shareholder of FOHP will receive for his,
her or its shares of Common  Stock  either the value of such  shares at December
31, 1998 as determined by one or more  independent  appraisers or payment rights
(one  payment  rate per share).  Such  payment  rights  would  entitle  provider
shareholders  to  receive a  payment  of not less than $15 per share on or about
July 1, 2001,  provided that certain  conditions are either satisfied or waived.
The Merger Agreement is subject to several conditions, including shareholder and
regulatory approval.

The  Company is  dependent  upon FHS to provide  sufficient  capital to meet its
operating and statutory  financial  requirements.  It is the intention of FHS to
provide such funds, as needed.

The Company  generated net income of  $5,158,113 in 1998 and had an  accumulated
deficit  of  $131,462,466  at  December  31,  1998.  In order for the  Company's
principal  operating  subsidiary,  FOHP-NJ (See Note 7), to meet  statutory  net
worth  requirements set forth in its COA granted by the New Jersey Department of
Banking and  Insurance  (the "DOI") and the New Jersey  Department of Health and
Senior Services (the "DOH") (the DOI and DOH are collectively referred to herein
as the "Departments"),  the Company must generate  sufficient  operating profits
and/or obtain one or more capital contributions from FHS.

In connection  with FOHP-NJ's plan to remedy its statutory net worth  deficiency
at December 31, 1995 (See Note 7) and a corresponding  plan of action  submitted
to the Departments, the Board of Directors of the Company approved an investment
by FHS of approximately $51.7 million into the Company effective April 30, 1997.
FHS invested  $51,701,121 into the Company through the purchase of a Convertible
Debenture  (the "Initial  Convertible  Debenture")  convertible  into 71% of the
Company's  outstanding  equity,  on a fully diluted basis. At the closing of the
purchase of the Initial Convertible Debenture, which occurred on April 30, 1997,
FHS  converted  $1,701,121 of the  principal  amount of the Initial  Convertible
Debenture  into 168,109  shares of the Company's  Common  Stock.  On December 1,
1997, FHS converted the remaining $50,000,000 of principal into 4,941,049 shares
of the  Company's  Common  Stock.  On  December  8, 1997,  due to the  continued
operating losses of FOHP-NJ in 1997, FHS invested an additional $29,897,801 into
the  Company in  exchange  for a  Convertible  Debenture  (the "New  Convertible
Debenture")  in  form  and  substance   substantially  similar  to  the  Initial
Convertible Debenture issued to FHS on April 30, 1997.  Immediately upon receipt
of the New  Convertible  Debenture,  FHS converted  $18,952,930 of the principal
amount thereof into 92,804,003 shares of the Company's Common Stock,  increasing
FHS's ownership interest in the Company to approximately 98%.

On  December  31,  1998,  FHS  converted  $1,197,182  of  principal  of the  New
Convertible  Debenture into  399,003,000  shares of the Company's  Common Stock.
After this  conversion,  499,000,000  shares of the Company's  Common Stock were
outstanding,  with  FHS  owning  496,916,161  of such  shares  or  99.6%  of the
fully-diluted  equity of the  Company.  The  price  per  share  paid by FHS upon
conversion of the  Convertible  Debentures was calculated in accordance with the
Amended and Restated  Securities  Purchase  Agreement  (the "Amended  Securities
Purchase  Agreement") entered into by FHS, the Company and FOHP-NJ in connection
with the sale of the Initial Convertible  Debenture.  The Convertible Debentures
accrue interest at a variable rate adjusted on a calendar  quarterly basis. Such
interest  is due and  payable  within  ten days  after the end of each  calendar
quarter. Any such interest not paid when due and payable is considered defaulted
interest  and  shall  be  added  to the  principal  amount  of  the  Convertible
Debentures.  At December 31, 1998,  $3,395,074 of defaulted interest is included
in the principal  amount of the Convertible  Debentures.


                                       F-9


<PAGE>


In connection with the purchase by FHS of the Company's Common Stock through the
conversion  of  Convertible  Debentures,   goodwill  totaling  $107,730,254  was
recorded to reflect the excess of FHS' purchase  price over the  estimated  fair
value of the net assets acquired.  The acquisition was treated as a purchase for
accounting  purposes.  The goodwill is being amortized on a straight-line  basis
over 40 years.  Amortization  for the year ended  December  31,  1998,  totaling
$2,693,256, has been reflected in the accompanying statement of operations. As a
result of the utilization in 1998 of certain of the Company's preacquisition net
deferred tax assets by FHS, the Company reduced  goodwill by $8,799,141.  In the
event  that  the  deferred  tax  assets   related  to  the  net  operating  loss
carryforwards  are used by FHS,  the future tax  benefits  will be  allocated to
reduce  goodwill.  The Company  evaluates  the  recoverability  of goodwill from
expected future cash flows. Impairments would be recognized in operating results
if a permanent diminution in value were to occur.

In December  1997, FHS  contributed an additional  $24,000,000 to the Company to
satisfy certain statutory net worth requirements applicable to FOHP-NJ in return
for additional subordinated debentures (the "Subordinated Debentures") which are
not   convertible   into  the  Company's   Common  Stock,   but  otherwise  have
substantially  the  same  terms  as the  Convertible  Debentures.  Further,  FHS
contributed $29,897,801 to FOHP as additional paid in capital to satisfy certain
statutory net worth requirements applicable to FOHP-NJ during 1998.

2.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The  Company's  financial  statements  are  prepared  on the  accrual  basis  of
accounting in accordance  with generally  accepted  accounting  principles.  The
following is a summary of significant accounting policies of the Company:

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements  include the accounts of the Company and
its  wholly-owned  subsidiaries.   All  significant  intercompany  balances  and
transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

Cash and cash  equivalents  include money market funds and U.S.  Treasury  Bills
with  original  maturities of three months or less when  purchased.  Fair market
values,  as determined  through  quoted market prices,  of the cash  equivalents
approximate carrying value.

ACCOUNTS RECEIVABLE

Accounts  receivable are reported at estimated net realizable value by including
provisions for retroactive terminations and uncollectible amounts.

RESTRICTED CASH

At December 31, 1998,  FOHP-NJ  maintained  $56,448,778  on deposit with the New
Jersey Department of Banking and Insurance (the "DOI"), as required, to meet its
"Minimum Insolvency Deposit for Healthcare Expenditures" under current insurance
regulations.  In  addition,  FOHP-NJ is required to maintain a  $1,200,000  cash
reserve with the Health Care Financing  Administration  ("HCFA") for its federal
programs.  As of December  31,1998,  FOHP-NJ had  $1,406,643  on deposit for its
federal programs.


                                       F-10

<PAGE>

FURNITURE AND EQUIPMENT

Furniture and equipment are recorded at cost.  Depreciation is calculated on the
straight-line  method over the useful  lives of the  depreciable  assets (3 to 5
years).

PREMIUM REVENUE

Subscriber  contracts for commercial managed care products are on a yearly basis
subject to  cancellation  by the  employer  group upon 30 days  written  notice.
Premium  revenue is  recorded as revenue in the month in which  subscribers  are
entitled  to service.  Premiums  collected  in advance are  reported as unearned
premium revenue.

 Certain  premium  revenue is earned  under a contract  between  FOHP-NJ and the
State of New Jersey Department of Human Services, Division of Medical Assistance
and Health Services ("NJDHS-DMAHS").  The contract with NJDHS-DMAHS is renewable
annually.  The contract can be suspended  (by  NJDHS-DMAHS)  or  terminated  (by
either party) upon the occurrence of certain events. Premiums are earned monthly
on a per capita  basis,  based on the number of  eligible  members  enrolled  in
FOHP-NJ  health  plans.  Members may  disenroll  at any time other than months 2
through 6 of membership and  eligibility is determined by  NJDHS-DMAHS.  Certain
premium revenue is earned under a contract between FOHP-NJ and HCFA for services
provided to Medicare eligible recipients.  The contract with HCFA had an initial
term of 12 months and may be renewed for successive one-year terms. Premiums are
earned  monthly on a per capita basis,  based on the number of eligible  members
enrolled in FOHP-NJ health plans.

OTHER REVENUE

Other  revenue  consists  principally  of fees for  administrative  service only
contracts, which are recognized as income as services are rendered.

MEDICAL AND HOSPITAL SERVICES

Medical and hospital  services  costs are accrued in the period the services are
provided to enrollees,  based in part on estimates for hospital and other health
care services which have been incurred but not reported ("IBNR"). Such estimates
are continually monitored and reviewed and, as settlements are made or estimates
adjusted,  the  resulting  differences  are  reflected in the current  period of
operations.

FOHP-NJ's arrangements for commercial products with hospitals are primarily on a
per diem reimbursement basis and with physicians on a discounted fee for service
basis.  Under the NJDHS-DMAHS for Medicaid,  providers are reimbursed for health
care services provided to Medicaid  eligible members on a per member,  per month
capitation basis for primary care services,  fee for service basis for specialty
services and per diem arrangement for inpatient services.

FOHP-NJ also contracts  with another party for the  arrangement of mental health
services  provided to enrollees in its health care plans.  FOHP-NJ pays for such
services on a capitated  basis.  If the costs of such services are less than the
capitation payments,  the amount of any savings is shared equally by FOHP-NJ and
the servicer.  If costs are greater than the capitation payments,  any shortfall
must be funded equally by FOHP-NJ and the servicer.

Also  included  in  medical  claims  payable  for the  year  1997  is a  premium
deficiency accrual related to FOHP-NJ's Medicare product.

INCOME TAXES

The Company's  operations  are included in FHS'  consolidated  federal and state
income tax returns.  Under FHS' tax  allocation  method,  a tax provision or tax
benefit is allocated to the Company  based upon a  calculation  of the Company's
income taxes as if it filed separate income tax returns,  however,  benefits are
not  allocated to the Company if such  benefits  can't be used by FHS.  Deferred
taxes are provided for the


                                      F-11

<PAGE>


expected  future income tax  consequences of events that have been recognized in
the Company's  financial  statements.  Deferred tax assets and  liabilities  are
determined based on the temporary  differences  between the financial  statement
carrying  amounts and the tax bases of assets or  liabilities  using enacted tax
rates in effect in the years in which the temporary  differences are expected to
reverse.

PER SHARE DATA

Per share data  considered in net income (loss) per common share is based on the
weighted average number of shares of Common Stock outstanding during the related
period (101,000,000 in 1998, 8,724,000 in 1997 and 2,100,000 in 1996).

For net income (loss) per common share - assuming  dilution for 1998, net income
in the accompanying  consolidated  statements of operations was increased by the
interest expense (after tax effect impact considering a 41% tax rate) related to
Convertible Debentures (See Note 1) for an adjusted "numerator" of $6,474,000.

The  weighted  average  number  of  shares  for  all  classes  of  Common  Stock
outstanding during 1998 of 101,000,000 was increased for the following:

     (i)  If the December 31, 1998  conversion of  Convertible  Debentures  into
          399,003,000  shares of Common  Stock had  occurred on January 1, 1998,
          the weighted average shares would have been approximately 400,000,000.

     (ii) If the remaining Convertible  Debentures of $11,131,386 were converted
          into common shares at .003 per share (the  conversion  rate applied at
          December  31,  1998 for the  above-mentioned  399,003,000  shares)  on
          January 1, 1998, an additional 3,712,129,000 of common shares would be
          considered for dilutive purposes.

The  adjusted  weighted  average  shares or the  "denominator"  for  purposes of
calculating  net  income  (loss)  per  common  share  -  assuming  dilution  was
4,112,129,000.  Consequently,  net income  (loss)  per  common  share - assuming
dilution  for 1998 was .0016.  For 1997 and 1996,  net income  (loss) per common
share -  assuming  dilution  is equal to net income  (loss) per common  share as
based on the net loss for such periods,  conversion of Convertible Debentures as
performed above would be antidilutive (decrease the loss per share).

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities"  ("SFAS No. 133"). SFAS No. 133 establishes  accounting
and reporting standards for derivative instruments, including certain derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
"derivatives"), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a  derivative  (that is,  gains and losses)  depends on the  intended use of the
derivative  and  resulting  designation  if used as a  hedge.  SFAS  No.  133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The adoption of SFAS No. 133 is not expected to have a material,  if any, impact
on the Company's consolidated financial statements.

RECLASSIFICATION

Certain  reclassifications  have  been  made to the 1997  and 1996  consolidated
financial statements to conform with the current year presentation.



                                      F-12

<PAGE>


3.  ACCOUNTS RECEIVABLE

The  following  is the  activity of the  allowances  for  doubtful  accounts and
retroactive terminations:

                                            ACCOUNTS
                                           RECEIVABLE
                                              FROM              OTHER
                                             OWNERS/           ACCOUNTS
                                            PROVIDERS         RECEIVABLE
                                          ------------------------------
Balance, January 1, 1996                   $        --       $   676,215
  Provision for bad debts                           --           431,849
  Provision for retroactive terminations     1,600,000           349,579
  Write-offs                                        --        (1,357,643)
                                          ------------------------------
Balance, December 31, 1996                   1,600,000           100,000
  Provision for bad debts                       32,316           475,775
  Provision for retroactive terminations            --         2,283,905
  Write-offs                                  (709,962)         (352,061)
                                          ------------------------------
Balance, December 31, 1997                     922,354         2,507,619
  Provision for bad debts                      794,838         1,098,379
  Reduction in retroactive terminations             --        (1,730,905)
  Write-offs                                  (170,576)       (1,212,257)
                                          ------------------------------
Balance, December 31, 1998                 $ 1,546,616       $   662,836
                                          ==============================

4.  FURNITURE AND EQUIPMENT

Furniture and equipment consists of the following:

                                               1998              1997 
                                          ------------------------------
Leasehold Improvements                     $   237,062       $   247,640
Furniture and fixtures                         719,744           767,401
Equipment                                    3,526,249         3,740,779
Automobiles                                     33,836            74,096
                                          ------------------------------
                                             4,516,891         4,829,916

Less accumulated depreciation               (2,786,755)       (2,349,874)
                                          ------------------------------
                                           $ 1,730,136        $2,480,042
                                          ==============================

Depreciation expense was $1,531,731,  $1,095,383 and $879,306 for 1998, 1997 and
1996, respectively.

5.  SUBORDINATED DEBT

In accordance  with the terms of the  Convertible  Debentures  and  Subordinated
Debentures,  repayment of principal  and interest  will occur only from free and
divisible  surplus as reflected in the  financial  statements of the Company and
with  written  approval  of  the  Commissioner  of the  DOI.  In  the  event  of
dissolution or  liquidation  of the Company,  no repayment on these notes can be
made unless and until all other liabilities of the Company have been satisfied.

The Convertible Debentures and Subordinated Debentures are due December 31, 2002
and accrue interest at a rate determined  quarterly based on the rate charged to
FHS under its credit facility (6.19% and 5.98% as of December 31, 1998 and 1997,
respectively). Interest is due and payable within ten days after the end of each
quarter, subject to the terms noted above.

6.  COMMON STOCK

In  connection  with the April 30, 1997  investment by FHS, the  Certificate  of
Incorporation of the Company was amended to, among other things,  reclassify the
Company's  capital stock. In October 1998, the Certificate of  Incorporation  of
the Company was further amended to increase the number of shares of Common Stock
authorized  for issuance  and  decrease the number of shares of Preferred  Stock
authorized  for issuance.  As a result,  the Company  currently has  500,000,000
shares of authorized  capital stock, 


                                      F-13

<PAGE>

which is comprised of  499,000,000  shares of Common  Stock,  par value $.01 per
share,  and 1,000,000  shares of Preferred  Stock, par value $1.00 per share. In
connection  with the  reclassification  of the  Company's  capital  stock,  each
outstanding  share of Common  Stock-NJ  was  converted  into one share of Common
Stock. As a result,  all 2,086,839 shares of Common Stock-NJ  outstanding at the
time FHS made its initial investment in FOHP were converted into Common Stock.

Prior to the April 30, 1997  investment by FHS, the authorized  capital stock of
the Company  totaled  100  million  shares and was  comprised  of the  following
classes of Common  Stock,  $.01 par value:  Common  Stock-NJ,  Common  Stock-NY,
Common Stock-PA, Common Stock-DE and Unclassified Common Stock. During 1995, the
Company issued  2,100,173  shares of Common  Stock-NJ.  There were no additional
shares of Common Stock-NJ issued during 1996.

The Certificate of Incorporation and By-Laws of the Company include  significant
restrictions  on the  issuance  and  transfer  of shares of  Common  Stock.  The
Certificate of  Incorporation  of the Company  provides that only FHS and health
care  providers  who enter into and  maintain a provider  agreement  with an HMO
subsidiary  of the Company may purchase  Common Stock.  Acute care  institutions
that enter into a provider  agreement  with an HMO subsidiary of the Company may
purchase shares of Common Stock directly or through an affiliate.

The Company may, but is not obligated to, repurchase shares of Common Stock from
any shareholder whose provider  agreement  terminates for any reason or upon the
occurrence  of certain  events,  as described in the  Company's  Certificate  of
Incorporation.  The  determination of the repurchase price of the shares is also
described in the Company's  Certificate of  Incorporation.  In October 1998, the
Company  repurchased  3,000  shares at a cost of $.36 per share from a physician
who left the provider network. In March 1997, the Company redeemed 13,334 shares
of Common Stock-NJ at no cost from a New Jersey acute care institution which had
not complied  with the  enrollment  provision of the  Company's  Certificate  of
Incorporation applicable to it.

7.  STATUTORY NET WORTH AND DIVIDEND RESTRICTIONS

FOHP-NJ,  pursuant to its COA to operate as an HMO in New Jersey, is required to
maintain a minimum  statutory net worth.  In addition,  the COA provides that if
FOHP-NJ's  statutory  net worth is, or is  expected to be, less than 125% of the
minimum statutory net worth requirement applicable to it, FOHP-NJ is required to
submit to the Departments a plan of action to address the deficiency or expected
deficiency. During the first quarter of 1996, the Company learned that FOHP-NJ's
statutory  net worth as of  December  31,  1995 may have been  below 125% of the
minimum statutory net worth requirement applicable to FOHP-NJ. FOHP-NJ addressed
this potential  deficiency by submitting to the Departments in April 1996 a plan
of action  which  outlined  the actions  which had been taken and measures to be
used by FOHP-NJ to correct the potential deficiency.

As part of the plan of action,  on April 30, 1997,  the Company sold the Initial
Convertible  Debenture  to FHS in  the  principal  amount  of  $51,701,121.  The
principal amount of the Initial Convertible Debenture was converted by FHS, into
71% of FOHP's capital stock on a fully-diluted basis.

To  facilitate  the  sale of the  Initial  Convertible  Debenture  to  FHS,  the
Departments agreed to rescind their conditions attached to their approval of the
plan of action  submitted by FOHP-NJ in April 1996,  subject to the Department's
right to require  FOHP-NJ  to submit a new plan of action if  FOHP-NJ  failed to
increase its net worth to 100% of the minimum  statutory net worth  requirement,
provided that FHS guaranteed,  in form  satisfactory to the  Commissioner of the
DOI,  that  FOHP-NJ's  net worth will be  maintained  at a level  equal to or in
excess of 100% of the minimum  statutory  net worth  requirement  applicable  to
FOHP-NJ.  In December 1997, the Departments  further agreed to permit  FOHP-NJ's
net worth to remain below 100% until December 31, 1998,  provided that it attain
certain benchmarks each quarter during 1998.

In December  1997,  FHS  contributed an additional $24 million to the Company to
satisfy certain statutory net worth requirements applicable to FOHP-NJ in return
for the New Convertible Debenture.  Further, FHS contributed  $29,897,801 to the
Company as  additional  paid in capital to satisfy  certain  statutory net


                                      F-14


<PAGE>

worth  requirements  applicable  to FOHP-NJ  during 1998.  At December 31, 1998,
FOHP-NJ was  approximately  $17,515,000  above 100% of the minimum statutory net
worth requirement.

In addition to the minimum statutory net worth requirements, FOHP-NJ may not pay
dividends to its parent without prior approval of the Commissioner of the DOI.

8.  INCOME TAXES

Significant  components  of the  provision  (benefit)  for  income  taxes are as
follows for the years ended December 31:

                                1998                1997            1996
Current:
   Federal                   $ 6,750,865          $    --           $  --
   State                       1,808,006            2,139             924
                           -----------------------------------------------
Total current                  8,558,871            2,139             924
                           -----------------------------------------------

Deferred:
   Federal                    (2,431,248)              --              --
   State                        (587,392)              --              --
                           -----------------------------------------------
Total Deferred                (3,018,640)              --              --
                           -----------------------------------------------
Total provision for
                           ===============================================
   income taxes              $ 5,540,231          $ 2,139           $ 924
                           ===============================================

A  reconciliation  of the  statutory  federal  income tax rate to the  effective
income tax rate is as follows for the years ended December 31:


                                          1998          1997          1996
Statutory federal income tax rate             35%          35%          35%
State income taxes, net of federal
   income tax effect                           7%           6%           6%
Goodwill amortization                          9%          --           --
Other permanent differences                    1%          --           --
                                       ------------------------------------
Effective income tax rate                     52%          41%          41%
                                              --          (41)%        (41)%
                                       ------------------------------------
Valuation allowance 
Effective income tax rate                     52%          --          --
                                       ====================================


                                      F-15


<PAGE>


Significant  components  (approximated) of the Company's deferred tax assets and
liabilities as of December 31 are as follows:


<TABLE>
<CAPTION>
                                                                      1998                1997
<S>                                                            <C>                    <C>
 Capitalization of start-up costs and organization costs           $   231,000        $   603,000
 Net operating loss carryforwards                                   45,060,000         42,990,000
 Reserve discounting                                                   875,000            877,000
 Allowance for doubtful accounts and retroactive terminations          903,000          1,200,000
 Other                                                               1,289,000          2,287,000
 Restructuring costs                                                   645,000          3,832,000
                                                                -----------------------------------

 Total deferred tax assets                                          49,003,000         51,789,000

 Valuation allowance for deferred tax assets                       (45,060,000)       (51,789,000)
                                                                -----------------------------------
  Net deferred tax assets                                           $ 3,943,000        $        --
                                                                ===================================
</TABLE>



As of December 31, 1998,  the Company had federal and state net  operating  loss
carryforwards  of  approximately  $110 million which may be subject to carryover
limitations  under Section 382 of the Internal  Revenue Code of 1986, as amended
(the  "Code").  A  valuation  allowance  has been  provided  to account  for the
potential  limitations   associated  with  utilization  of  net  operating  loss
carryforwards  as well as the uncertainty of the realization of the deferred tax
asset  since the  realization  of such asset is  dependent  on future  operating
profits of the Company. The net operating loss carryforwards expire between 2008
and 2012.

The valuation  allowance  decreased by  approximately  6.7 million in 1998 while
such  allowance  increased by  approximately  31.7 million in 1997. In the event
that the deferred tax assets related to the net operating loss  carryforward are
utilized,  the future tax  benefits  realized by FHS will be allocated to reduce
goodwill.

9.  DEFINED CONTRIBUTION PLAN

The Company maintains a defined contribution 401(k) plan covering  substantially
all of its  employees.  Employees may  contribute to the plans after  completing
certain service requirements.  The Company matches 50% of employee contributions
not to exceed (i) limits  established  under Section 415 of the Code or (ii) the
lesser of 25% of compensation or $30,000.  Total plan expense for 1998, 1997 and
1996 amounted to $359,000, $403,000 and $406,000, respectively.

10.  COMMITMENTS AND CONTINGENCIES

LEASES

The Company  leases office space under  noncancelable  lease  arrangements.  The
leases are for terms of 5 years and generally  provide for renewal options of up
to 5  additional  years.  Total  rent  expense  for  1998,  1997  and  1996  was
approximately $1,400,000, $1,403,000 and $1,796,000, respectively.

The following is a schedule of minimum  future  payments on long-term  operating
leases at December 31, 1998:

         1999                    $714,780
         2000                     199,995
         2001                      19,669
         2002                       1,186
                                 --------
                                 $935,630
                                 ========



                                      F-16


<PAGE>


MEDICARE CONSULTING AGREEMENT

In January 1995,  FOHP-NJ entered into an agreement with an unrelated company to
assist FOHP-NJ in obtaining approval from the HCFA to offer health care products
to Medicare  beneficiaries in New Jersey. Such approval was obtained in December
1995.  Fees paid by  FOHP-NJ,  including  specified  bonus  payments,  under the
agreement totaled $1,012,604 and $1,621,186 in 1997 and 1996,  respectively.  No
payments  were  made in 1998  pending  a  negotiation  of a  termination  of the
agreement.  In  addition,  a  variable  percentage  (.5% to 1%) of any  Medicare
revenue  generated by FOHP-NJ for a total of eight years after  FOHP-NJ  entered
into a Medicare  Risk  Contract  with HCFA  would be  payable to the  consulting
company.   The  minimum  payment  for  each  year,  pursuant  to  such  variable
percentage,  was $1,000,000 and the maximum for any such payment was $3,500,000.
In connection with the sale of Convertible  Debentures (see Note 2), the Company
agreed under the terms of the Amended Securities  Purchase Agreement with FHS to
negotiate termination of its agreement with the company.

 In 1998, a settlement  agreement was reached between the two companies  whereby
FOHP-NJ paid $6 million  (which was accrued in 1997) for a final  settlement  of
payments due to the company for revenue  generated by FOHP-NJ under the Medicare
Risk Contract (See Note 12). Additionally,  and separate from the aforementioned
$6 million  settlement,  the consulting  company reimbursed FOHP-NJ $2.5 million
related to the  significant  losses  incurred by FOHP-NJ under the Medicare Risk
Contract. Such reimbursement was recorded as a decrease to medical service costs
in the accompanying consolidated statements of operations during 1998.

REINSURANCE ARRANGEMENTS

The  Company  has  entered  into a  reinsurance  contract to limit its losses on
individual claims. The reinsurance  contract for 1998 provides for reimbursement
of eligible hospital claims per enrollee which exceed $175,000 for all enrollees
within a calendar year up to a maximum  reimbursement per enrollee of $1,000,000
per calendar year and $2,000,000  per lifetime.  The  reinsurance  contracts for
1997 and 1996 were consistent with the 1998 contract,  except that the contracts
provided for reimbursement of eligible hospital claims which exceed $150,000 and
$75,000 for all  enrollees  for 1997 and 1996,  respectively.  Additionally  for
1996, the contract  provided for reimbursement of eligible hospital claims which
exceed $100,000 for Medicare enrollees. Per diem arrangements with hospitals are
also subject to maximum  limits  dependent  upon length of stay,  and claims per
enrollee which exceed certain deductibles are subject to coinsurance provisions.

Reinsurance expense, net of recoveries, was approximately $1,538,000, $4,294,000
and $55,000 for 1998, 1997 and 1996, respectively.

LITIGATION

The Company is involved in litigation  matters  involving  certain  claims which
arise in the  normal  course of  business,  none of  which,  in the  opinion  of
management,  are  expected to have a material  adverse  effect on the  Company's
financial statements.

STATUTORY NET WORTH

Financial  statements issued in accordance with statutory  accounting  practices
differ from financial  statements  issued in accordance with generally  accepted
accounting  principles (GAAP).  Statutory  financial  statements exclude certain
items included in GAAP financial statements.  These "non-admitted" items include
certain  assets  such as  accounts  receivable  greater  than 90 days  past due,
prepaid expenses, equipment other than certain computer equipment,  organization
costs, certain loans and other receivables, supplies and other items.

FOHP-NJ,  pursuant  to its COA to operate an HMO in New  Jersey,  is required to
maintain  a  minimum  statutory  net  worth.  The  minimum  statutory  net worth
requirement  at  December  31,  1998  and  1997  amounted  to  $16,570,000   and
$23,694,000, respectively. In addition, under the terms of its COA, if net worth
is less than 125% of the required minimum, FOHP-NJ was required to submit a plan
of action to


                                      F-17


<PAGE>

the DOI. In the first  quarter of 1996,  FOHP-NJ  learned that its net worth was
less than 125% of the required minimum and, as a result,  obtained approval of a
plan of action to  address  such  shortfall  from the  Departments.  The plan of
action  required  FOHP-NJ  to have a positive  statutory  net worth for the year
ended  December  31,  1997 and a  statutory  net  worth of 100% of the  required
minimum by December 31, 1998. FOHP-NJ's statutory net worth at December 31, 1998
and 1997, respectively, were as follows:

<TABLE>
<CAPTION>
                               1998                                        1997
                   GAAP     ELIMINATIONS    STATUTORY        GAAP       ELIMINATIONS     STATUTORY
            -----------------------------------------------------------------------------------------
<S>          <C>              <C>          <C>              <C>             <C>          <C>

Assets       $117,553,168     $2,958,452   $114,594,716     $108,142,744    $3,463,563   $104,679,181
Liabilities    80,508,863         --         80,508,863      104,252,789       --         104,252,789
            -----------------------------------------------------------------------------------------
Net equity   $ 37,044,305     $2,958,452   $ 34,085,853     $  3,889,955    $3,463,563   $    426,392
            =========================================================================================
</TABLE>


11.  RELATED PARTY TRANSACTIONS

Pursuant to an administrative  management agreement entered into by FHS and FOHP
in connection with the closing of the Amended Securities Purchase Agreement with
FHS,  the  Company  is  required  to pay FHS a monthly  management  fee which is
currently based on allocated corporate charges. For the years ended December 31,
1998 and 1997, FHS charged  $2,543,000  and  $7,502,899,  respectively,  to FOHP
which  is  included  as  management  fees  in  the  accompanying  statements  of
operations.

The amount due to FHS at December 31, 1998,  represents  management fees payable
and interest payable related to the Convertible  Debentures  (which haven't been
converted  to  principal  at December  31,  1998) and  Subordinated  Debentures.
Amounts due to other affiliates,  which are wholly owned by FHS,  represent cost
allocations  for  administrative  services.  The  balances  due from  Integrated
Pharmacy Services,  Inc. ("IPS") represents amounts due for payments made by the
Company, on behalf of IPS, for pharmacy services.

12.  RESTRUCTURING COSTS

Pursuant to the Amended  Securities  Purchase  Agreement  with FHS,  the Company
recorded  the  impact of a  restructuring  plan  designed  to  increase  overall
profitability of FOHP-NJ by scaling back certain product lines that have not met
profitability  expectations.  Restructuring costs of approximately $12.8 million
were recorded in 1997 and represented estimated contract settlements, provisions
for lease termination costs,  employee termination  benefits,  write-down of the
related assets and other  miscellaneous  items.  Included in total restructuring
costs was approximately  $2.6 million related to employee  termination  benefits
for  approximately  140 employees from various  departments  of the Company.  In
addition,  $6  million  related  to  an  anticipated  settlement  of a  Medicare
consulting  contract  with a non-related  company and $2 million  related to the
anticipated   termination   of  a  mental  health   contract  were  included  in
restructuring costs at December 31, 1997. As of December 31, 1997, approximately
$116,000 of  employee  termination  benefits  were paid and six  employees  were
terminated.

During 1998, the following  activity  occurred related to restructuring  charges
resulting in a current year decrease of approximately  $11,132,000 and an ending
restructuring   accrual  balance  of   approximately   $1,577,000.   The  ending
restructuring  accrual is solely related to employee  termination benefits which
management believes will be fully paid by the third quarter of fiscal year 1999.
Such accrual is included in accrued  expenses in the  accompanying  consolidated
balance sheets:

     (i)    $6 million of  settlement  costs  related to a  terminated  Medicare
            consulting contract was paid during 1998;

     (ii)   Approximately $978,000 of employee termination benefits were paid as
            of December 31, 1998, including  approximately  $116,000 paid during
            1997;

    (iii)   Approximately $100,000 of payments made for a lease buyout;



                                      F-18

<PAGE>

     (iv)   Asset   write-offs,   disposals  and  other   non-cash   charges  of
            approximately $1.92 million; and

     (v)    1998 reduction of the restructuring accrual of $2.25 million,  which
            is recorded  in the  accompanying  statements  of  operations,  as a
            result of  management's  re-evaluation  of  estimated  restructuring
            costs.  Of  the  $2.25  reduction,  $2  million  is  related  to the
            continuation  of a  mental  health  contract  during  1998  that was
            originally  expected  to  be  terminated  as  part  of  the  overall
            restructuring plan.

No additions were recorded to the restructuring accrual during 1998.

13.  FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair values of the Company's financial instruments,  including cash and cash
equivalents,  restricted cash, and the debentures (convertible and subordinated)
approximate their carrying value at December 31, 1998 and 1997.


                                      F-19
<PAGE>



                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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




                                    EXHIBITS

                                       TO

                                    FORM 10-K

                                  ANNUAL REPORT

                       PURSUANT TO SECTION 13 OR 15(D) OF

                       THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

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




                                   FOHP, INC.

                          (EXACT NAME OF REGISTRANT AS
                            SPECIFIED IN ITS CHARTER)





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




================================================================================


<PAGE>
                                   FOHP, INC.

                                  EXHIBIT INDEX


         EXHIBIT NO.
         ----------

         b         2.1         Agreement  of Merger  and Plan of  Reorganization
                               dated April 12, 1995 among the Registrant,  First
                               Option   Health   Plan   of  New   Jersey,   Inc.
                               ("FOHP-NJ"),  a  wholly-owned  subsidiary  of the
                               Registrant,   and  FOHP  Transition   Company,  a
                               wholly-owned subsidiary of the Registrant.

                   2.2         Agreement  and Plan of Merger dated as of October
                               26, 1998 between  FOHP-NJ and  Physicians  Health
                               Services of New Jersey,  Inc.  and the  following
                               exhibits   thereto:   Exhibit  A  -  Amended  and
                               Restated    Certificate   of   Incorporation   of
                               Physicians  Health  Services of New Jersey,  Inc.
                               (formerly First Option Health Plan of New Jersey,
                               Inc.);  Exhibit B - By-Laws of Physicians  Health
                               Services  of  New  Jersey,   Inc.;  Exhibit  C  -
                               Directors of  Physicians  Health  Services of New
                               Jersey,   Inc.;  and  Exhibit  D  -  Officers  of
                               Physicians Health Services of New Jersey, Inc.

         j         2.3         Agreement and Plan of Merger dated as of November
                               16, 1998 by and among Foundation  Health Systems,
                               Inc.  ("FHS"),  FHS  Transition  Company  and the
                               Registrant  and the following  exhibits  thereto:
                               Exhibit A - Amended and Restated  Certificate  of
                               Incorporation  of  the  Registrant;  Exhibit  B -
                               By-laws of the Registrant;  Exhibit F-1 - Form of
                               Payment  Right - Hospital  Shareholders;  Exhibit
                               F-2  -  Form  of  Payment  Right  -  Non-Hospital
                               Shareholders;   and  Exhibit  G  -   Contribution
                               Agreement. Upon the request of the Securities and
                               Exchange  Commission  (the   "Commission"),   the
                               Registrant  agrees to furnish a copy of Exhibit C
                               - Directors of Surviving Corporation, Exhibit D -
                               Officers of Surviving Corporation and Exhibit E -
                               Section  6.4 of the Amended  Securities  Purchase
                               Agreement.

         f         3.1         Amended and Restated Certificate of Incorporation
                               of the Registrant, as filed with the Secretary of
                               State of the  State of New  Jersey  on April  17,
                               1997.

                   3.2         Certificate  of  Amendment  to  the  Amended  and
                               Restated  Certificate  of  Incorporation  of  the
                               Registrant,  as  filed  with  the  Department  of
                               Treasury, Division of Revenue of the State of New
                               Jersey on October 6, 1998.

         ff        3.3         By-laws of Registrant, as amended.

         fff       4.1         Specimen  certificate  representing  Registrant's
                               Common Stock.


                                      E-1
<PAGE>


         i         4.2         Convertible  Subordinated  Surplus  Debentures in
                               the  aggregate  principal  amount of  $29,000,000
                               issued by the  Registrant  to FHS on  December 8,
                               1997.

         i         4.3         Subordinated  Surplus Debentures in the aggregate
                               principal  amount  of  $24,000,000  issued by the
                               Registrant to FHS on December 31, 1997.

  (*)    i         10.1        Employment  Agreement  dated May 6, 1997  between
                               FHS and Roger W. Birnbaum.

  (*)    i         10.2        Employment Agreement dated July 1, 1997 among the
                               Registrant, FHS and Joseph Singer, M.D.

  (*)    i         10.3        Employment   Agreement  dated  February  8,  1998
                               between FHS and Marc M. Stein.

  (*)              10.3.1      Addendum to Employment  Agreement between FHS and
                               Marc M. Stein dated October 14, 1998.

  (*)              10.4        Employment Agreement dated June 10, 1998  between
                               Thomas W. Wilfong  and Physicians Heath Services,
                               Inc., a subsidiary of FHS.

         a         10.7        Lease  Agreement  dated September 1, 1994 between
                               Theodore G. Sourlis and Elaine  Sourlis,  husband
                               and wife,  and FOHP-NJ,  and an undated  addendum
                               thereto.

         b         10.21       Agreement  to provide  HMO  services  to Medicaid
                               recipients dated February 8, 1995 between FOHP-NJ
                               and the State of New Jersey  Department  of Human
                               Services,  Division  of  Medical  Assistance  and
                               Health Services.

         d         10.22       Sublease  dated as of December  15, 1995  between
                               FOHP-NJ and The Continental Insurance Company.

         d         10.28       Mental Health Management  Agreement dated July 1,
                               1994 between  FOHP-NJ and Mental Health  Network,
                               Inc.,  and  amendment  thereto  entered  into  in
                               January 1996.

         d         10.33       Contract between FOHP-NJ and the Secretary of the
                               Department of Health and Human Services,  who has
                               delegated  authority to the  Administrator of the
                               Health  Care   Financing   Administration,   with
                               respect to health insurance benefits for the aged
                               and disabled (Contract No. H3155).


                                      E-2
<PAGE>

         d         10.43       Capital   Contribution   Agreement  dated  as  of
                               December  31,  1995  between the  Registrant  and
                               FOHP-NJ.

         e         10.45.1     Amended   and   Restated    Securities   Purchase
                               Agreement  dated  February  10,  1997  among  the
                               Registrant,    FOHP-NJ    and   Health    Systems
                               International,  Inc. (the predecessor to FHS) and
                               the following exhibits thereto:  Exhibit A - Form
                               of Debentures;  Exhibit B-1 - Form of Amended and
                               Restated  Certificate  of  Incorporation  of  the
                               Registrant;  Exhibit B-2 - Form of By-laws of the
                               Registrant;  Exhibit  B-3 - Form of  Amended  and
                               Restated Certificate of Incorporation of FOHP-NJ;
                               Exhibit B-4 - Form of By-laws of FOHP-NJ; Exhibit
                               D-1 - Form  of  General  Administrative  Services
                               Management  Agreement;  and Exhibit D-2 - Form of
                               Management   Information   Systems   and   Claims
                               Processing Services  Agreement.  Upon the request
                               of  the  Commission,  the  Registrant  agrees  to
                               furnish a copy of Exhibit C-1 - Form of Exclusive
                               Plan Hospital Provider  Agreement,  Exhibit C-2 -
                               Forms of  Non-Exclusive  Plan  Hospital  Provider
                               Agreements,   Exhibit  E  -  Form  of   Investors
                               Agreement, Exhibit F - Form of Opinion of Outside
                               Counsel of  Registrant  and FOHP-NJ,  Exhibit G -
                               Form of  Officer's  Certificate  and  Exhibit H -
                               Form of  Opinion  of  Outside  Counsel  of Health
                               Systems  International,  Inc., and Schedules 2.1A
                               through   2.25  as  follows:   Schedule   2.1A  -
                               Subsidiaries;  Schedule  2.1B  -  Good  Standing;
                               Schedule 2.3 - Rights of First Refusal;  Schedule
                               2.4(a)   -  SEC   Reports;   Schedule   2.4(b)  -
                               Unreported Liabilities and Obligations;  Schedule
                               2.5  -   Company's   Reports;   Schedule   2.6  -
                               Noncontravention;   Schedule  2.7  -  Litigation;
                               Schedule 2.9 - Compliance with Law; Schedule 2.10
                               -  Certain   Material   Contracts  and  Defaults;
                               Schedule   2.11  -  Consents;   Schedule  2.12  -
                               Licenses,  Permits  and  Governmental  Approvals;
                               Schedule 2.14 - Environmental  Matters;  Schedule
                               2.15 -  Properties  and Assets;  Schedule  2.16 -
                               Taxes; Schedule 2.20 - Insurance; Schedule 2.22 -
                               Employment/Severance Matters; and Schedule 2.25 -
                               Employee Benefit Plans.

         e         10.45.2     Amendment dated March 13, 1997 to the Amended and
                               Restated Securities Purchase Agreement referenced
                               in Exhibit 10.45.1.

         g         10.46       General   Administrative    Services   Management
                               Agreement  dated April 30,  1997  between FHS and
                               the Registrant.

         h         10.47       Management   Information   Systems   and   Claims
                               Processing  Services  Agreement  dated  April 30,
                               1997 between FHS and the Registrant.

                   21.         Subsidiaries of the Registrant.



                                      E-3
<PAGE>


         k         27.         Financial  Data Schedule for Year ended  December
                               31, 1998.

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

  (*)                          Constitutes a management  contract required to be
                               filed as an  exhibit  pursuant  to Item  14(c) of
                               Form 10-K.

         a                     Incorporated  by  reference  to  the  identically
                               numbered exhibit to the Registrant's Registration
                               Statement   on   Form   S-4   (Registration   No.
                               33-89356).

         b                     Incorporated  by  reference  to  the  identically
                               numbered  exhibit  to  Amendment  No.  1  to  the
                               Registrant's  Registration  Statement on Form S-4
                               (Registration No. 33-89356).

         d                     Incorporated  by  reference  to  the  identically
                               numbered  exhibit  to  the  Registrant's   Annual
                               Report on Form 10-K for the year  ended  December
                               31, 1995.

         e                     Incorporated  by reference to  Appendices  A-H of
                               the Registrant's definitive Proxy Statement filed
                               with  the   Commission   on  March  19,  1997  in
                               connection  with  the  Registrant's  1996  Annual
                               Meeting of Shareholders.

         f                     Incorporated  by  reference to Exhibit 2.1 of the
                               Registrant's  Registration Statement on Form 8-A,
                               effective July 8, 1997.

         ff                    Incorporated  by  reference to Exhibit 2.2 of the
                               Registrant's  Registration Statement on Form 8-A,
                               effective July 8, 1997.

         fff                   Incorporated  by  reference  to  Exhibit 4 of the
                               Registrant's  Registration Statement on Form 8-A,
                               effective July 8, 1997.

         g                     Incorporated  by  reference  to Appendix C of the
                               Registrant's  definitive  Proxy  Statement  filed
                               with  the   Commission   on  March  19,  1997  in
                               connection  with  the  Registrant's  1996  Annual
                               Meeting of Shareholders.

         h                     Incorporated  by  reference  to Appendix D of the
                               Registrant's  definitive  Proxy  Statement  filed
                               with  the   Commission   on  March  19,  1997  in
                               connection  with  the  Registrant's  1996  Annual
                               Meeting of Shareholders.


                                      E-4
<PAGE>

         i                     Incorporated  by  reference  to  the  identically
                               numbered  exhibit  to  the  Registrant's   Annual
                               Report on Form 10-K for the year  ended  December
                               31, 1997.

         j                     Incorporated  by reference to Appendices A, B, C,
                               D-1,  D-2 and E of the  Registrant's  preliminary
                               Proxy  Statement  filed  with the  Commission  on
                               February 4, 1999 in connection  with the proposed
                               merger of FHS  Transition  Company  with and into
                               the Registrant.

         k                     The  Financial  Data  Schedule  is  submitted  in
                               electronic format only.


                                      E-5