[GIORDANO, HALLERAN & CIESLA, P.C.]









                                 March 31, 1997





Securities and Exchange Commission
Document Control
450 Fifth Street, N.W.
Washington, DC 20549

         RE:    FOHP, Inc.
                Annual Report on Form 10-K for the year ended December  31, 1996
                Commission File No.:  0-25944

Ladies and Gentlemen:

         On behalf of our client, FOHP, Inc. (the "Company"),  we are submitting
to the Securities and Exchange  Commission a copy of the Company's Annual Report
on Form  10-K for the year  ended  December  31,  1996  ("Form  10-K"),  and all
exhibits thereto.

         Please  direct any  comments you may have with respect to the Form 10-K
submitted herewith to the undersigned at (908) 741-3900.

                                                     Very truly yours,

                                                     /s/ PAUL T. COLELLA
                                                     -------------------
                                                       PAUL T. COLELLA


PTC/lav
Enclosure




<PAGE>



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

                                    FORM 10-K
(Mark One)

[x]      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 or  15(d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996

                                       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                        (I.R.S. Employer
    of incorporation or organization)                      Identification No.)

           Building 6
        2 Bridge Avenue
      Red Bank, New Jersey                                    07701-1106
    -----------------------                                  ------------
     (Address of principal                                     Zip Code
      executive offices)

                         Registrant's telephone number,
                       including area code: (908) 842-5000

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-NJ
             -----------------------------------------------------------------
                                      (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-NJ,  par value $.01 per share ("Common Stock-NJ"),  held by non-affiliates
of the Registrant, as of March 15, 1997, was $31,302,585. Common Stock-NJ is the
only class of the  Registrant's  Common Stock with shares  currently  issued and
outstanding.  Inasmuch  as  shares  of  Common  Stock-NJ  are not  listed on any
exchange  or quoted on any  quotation  system,  nor has there  been any  regular
trading in shares of Common Stock-NJ since the inception of the Registrant,  the
aforestated  aggregate  market  value of  outstanding  Common  Stock-NJ  held by
non-affiliates  of the  Registrant  was  computed by  multiplying  the number of
shares of Common Stock-NJ held by  non-affiliates  of the Registrant as of March
15,  1997,  by $15,  the per share  sales price of Common  Stock-NJ  sold by the
Registrant in its last offering of Common Stock-NJ,  which ended on September 1,
1995.

         As of March  15,  1997,  the  number  of  outstanding  shares of Common
Stock-NJ was 2,086,839.

          Documents  incorporated by            Part of Form 10-K into which
         reference into this report               document is incorporated
       -----------------------------           -------------------------------

                       None                               None

         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,  the competitive  environment
in which the Registrant and its subsidiaries  operate,  the Amended and Restated
Securities  Purchase Agreement dated February 10, 1997, as amended (the "Amended
Securities Purchase Agreement"),  among the Registrant, First Option Health Plan
of New Jersey, Inc. ("FOHP-NJ") and Health Systems International,  Inc. ("HSI"),
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"  and  "Management's
Discussion and Analysis of Financial Condition and Results of Operation."


                                       -2-

<PAGE>



                                     PART I

ITEM 1.  BUSINESS.

(A)      GENERAL DEVELOPMENT OF BUSINESS

         FOHP,  Inc.,  a  New  Jersey  corporation  (the  "Holding  Company"  or
"Registrant"),  was  formed  in May  1994  to  effect  the  reorganization  (the
"Reorganization")  of  FOHP-NJ,  a New Jersey  corporation  which  operates as a
health  maintenance  organization  ("HMO")  in the State of New  Jersey,  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
Holding  Company and the former holders of FOHP-NJ common stock received  shares
of Common  Stock-NJ,  the only class of Holding Company Common Stock with shares
issued and outstanding.

         Prior to the  Reorganization,  the Holding  Company did not conduct any
business  nor did it have any  significant  assets  or  liabilities.  After  the
Reorganization,  the Holding Company was issued all the authorized capital stock
of First Option Health Plan of New York, Inc., a New York corporation  formed in
May  1995 to  offer  health  care  benefit  products  in the  State  of New York
("FOHP-NY"), if approval to operate as an HMO in such state is obtained, and was
issued  all  the  authorized  capital  stock  of  First  Option  Health  Plan of
Pennsylvania,  Inc.,  a  Pennsylvania  corporation  formed  in May 1995 to offer
health care benefit products in the Commonwealth of Pennsylvania ("FOHP-PA"), if
approval to operate as an HMO in such state is obtained.  In December  1995, the
Holding  Company formed First Option Health Plan of Delaware,  Inc. for purposes
of  operating  an HMO in the State of  Delaware  ("FOHP-DE"),  and formed  First
Option  Health Plan of  Maryland,  Inc.  for purposes of operating an HMO in the
State of Maryland ("FOHP-MD"). The current assets of the Holding Company consist
principally   of  the   capital   stock  of  its   aforementioned   wholly-owned
subsidiaries.

         During the summer of 1996, as a result of FOHP-NJ's statutory net worth
deficiency and the conditions  imposed by the New Jersey  Departments of Banking
and Insurance and Health and Senior Services (the  "Departments")  in connection
therewith,  the Board of Directors of the Holding Company (the "Board" or "Board
of Directors")  discontinued the Holding  Company's  expansion efforts in states
other than New Jersey, including expansion efforts in New York, Pennsylvania and
Maryland.  It is not  determinable at this time when, or if, the Holding Company
will  continue  expansion  efforts  in any  state  other  than New  Jersey.  See
"Description of Business - Recent Developments - Proposed  Transaction with HSI"
and "Management's  Discussion and Analysis of Financial Condition and Results of
Operation."

         The principal executive offices of the Holding Company are located at 2
Bridge  Avenue,  Building 6, Red Bank,  New Jersey  07701-1106 and its telephone
number at such location is (908) 842-5000.



                                       -3-

<PAGE>



(B)      FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

         Since  its  inception,  substantially  all  of  the  Holding  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 Holding 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.  FOHP-NJ's
objective  was  to  have  quality  medical  care  delivered  by its  network  of
providers, in a cost effective manner, to as many persons as possible. To ensure
that the health care providers  associated  with FOHP-NJ would maintain  control
over and  participate  in the  management of the HMO, only health care providers
associated  with FOHP-NJ were  permitted  to purchase  shares of FOHP-NJ  common
stock. In addition, to ensure that the hospitals and physicians participating in
the FOHP-NJ provider  network were able to contribute  equally to the governance
of FOHP-NJ,  the Certificate of Incorporation of FOHP-NJ required that the Board
of  Directors  of  FOHP-NJ   initially  be  comprised  of  an  equal  number  of
physician-designated directors and hospital-designated directors.

         In early 1995, it became  apparent to the Board of Directors of FOHP-NJ
that the health  plans  offered by  FOHP-NJ  would  become  more  attractive  to
prospective  employer groups with employees in New Jersey and neighboring states
if the employees had access to the  hospitals,  physicians and other health care
providers  located or  practicing  in the states  neighboring  New Jersey.  As a
result,  FOHP-NJ was reorganized into a holding company  structure to facilitate
the  formation  of HMOs  in  states  other  than  New  Jersey.  Pursuant  to the
Reorganization,  the Holding  Company,  which was formed  solely for purposes of
effecting the  Reorganization,  acquired all of the  outstanding  shares of each
class of FOHP-NJ  common stock and, as a result,  FOHP-NJ  became a wholly-owned
subsidiary of the Holding Company and the former holders of FOHP-NJ common stock
received  shares of Common  Stock-NJ,  the only class of Holding  Company Common
Stock with shares currently issued and outstanding.

         RECENT DEVELOPMENTS

         During the first  quarter of 1996,  the Holding  Company  learned  that
FOHP-NJ's  statutory  net worth as of December 31, 1995 may have been below 125%
of the minimum requirement.  FOHP-NJ's COA provides that if its net worth is, or
is  expected  to be,  less  than 125% of the  minimum  requirement,  FOHP-NJ  is
required to submit to the New Jersey  Department of Banking and  Insurance  (the
"DOI") a plan of  action to  address  the  deficiency  or  expected  deficiency.
FOHP-NJ  addressed this potential  deficiency by submitting in April 1996 a plan


                                       -4-

<PAGE>



of  action to the DOI  which  outlined  the  actions  which  had been  taken and
measures to be used by FOHP-NJ to correct the potential deficiency.

         Although the operational  changes implemented by the Holding Company to
increase capital in 1996 enabled the Holding Company to reduce operating losses,
the Board  recognized  that such changes would not allow the Holding  Company to
adequately  address  FOHP-NJ's  statutory  net  worth  deficiency.  In  order to
adequately address FOHP-NJ's statutory net worth deficiency,  the Board believed
that the Holding Company needed to infuse  approximately  $25,000,000 of capital
into FOHP-NJ.  To raise the required  capital,  the Holding  Company  considered
offering,  in a public  offering,  securities  to the  providers  in the FOHP-NJ
provider network. A public offering of securities was ultimately rejected by the
Board because the Board did not believe that the Holding Company could raise the
capital needed in a public offering,  given the Holding Company's  deteriorating
financial condition.

         To raise the capital necessary for FOHP-NJ to remain in compliance with
its  statutory net worth  requirements,  the Board  determined  that the Holding
Company  needed  to  effect  a  private  placement  of  capital  to an  investor
interested in acquiring a significant equity position in the Holding Company.

         PROPOSED  TRANSACTION WITH HSI - After considering  proposals submitted
by several large health care  corporations,  an insurer with  affiliations  to a
provider-owned  HMO, and several private investor  groups,  on October 24, 1996,
the Holding  Company and FOHP-NJ  entered into a Securities  Purchase  Agreement
(the  "Original   Securities   Purchase   Agreement")   with  HSI,  a  national,
well-capitalized managed health care organization with more than 1.9 million HMO
and administrative services only members.

         As a result of a significant  increase in medical claims expense during
the  fourth  quarter of 1996,  due to more  complete  payment  data that was not
available to the Holding Company or its actuaries prior to such quarter, HSI was
not  obligated  to  consummate  the  transactions  contemplated  by the Original
Securities  Purchase  Agreement  and  therefore  elected in late January 1997 to
renegotiate  the  terms  and  conditions  of the  Original  Securities  Purchase
Agreement.  Shortly  thereafter,  on February 10, 1997, the Original  Securities
Purchase  Agreement  was  terminated  and  replaced  by the  Amended  Securities
Purchase Agreement. On March 13, 1997, the Amended Securities Purchase Agreement
was  amended  to  clarify  certain   provisions  therein  and  in  the  proposed
Certificate  of  Incorporation  of the  Holding  Company  attached as an exhibit
thereto.  The Amended  Securities  Purchase  Agreement was declared effective on
March 14, 1997.

         Pursuant to the Amended Securities Purchase Agreement:

         o The Holding  Company will issue,  and HSI will purchase,  convertible
debentures ("Debentures") in the aggregate principal amount of up to $50,000,000
(plus an amount (the "Phase-In  Management Fee Amount"),  currently estimated to
be $1,700,000,  equal to the phase-in  management fee described below), of which
approximately $43,300,000 will be initially

                                       -5-

<PAGE>



issued (the  "Initial  Debenture  Advance  Amount") at an initial  closing  (the
"Initial  Closing")  and the remaining  $8,400,000  (the  "Additional  Debenture
Advance  Amount"),   less  all  Additional  Debenture  Advance  Adjustments  (as
hereinafter  defined),  will be issued at one or more later closings to occur on
or prior to December 31, 1997 (each, an "Additional Debenture Advance Closing").
At the Initial Closing,  HSI will be paid a phase-in management fee equal to the
Phase-In Period Management Fee Amount, based on certain administrative  services
provided by HSI to the Holding Company since January 1, 1997.

         o The Debentures will be convertible, at the option of HSI, into shares
of Common Stock,  par value $.01 per share ("New Common Stock"),  of the Holding
Company which will be available for issuance after the amendments to the Holding
Company's  Certificate of  Incorporation  described  below are effected.  If the
Debentures  are exercised in full,  the shares of New Common Stock issued to HSI
will  represent 71% of the Holding  Company's  outstanding  common equity (after
taking into account the  conversion  of the  Debentures  and the exercise of all
outstanding  options and warrants  exercisable  for shares of New Common Stock),
subject to adjustment under certain circumstances. Immediately after the Initial
Closing,  HSI will convert the principal  amount of the Debentures  evidenced by
the  Phase-In  Period  Management  Fee Amount  into  shares of New Common  Stock
representing  approximately  2.3% of the Holding  Company's  outstanding  equity
(based on $1,700,000 principal amount of Debentures).

         o During 1999, HSI may, at its option, acquire,  through a tender offer
or a  merger,  all of the  then  outstanding  shares  of New  Common  Stock at a
purchase  price per share that is  determined  by  independent  appraisers.  The
shareholders of the Holding Company would receive for their shares of New Common
Stock, at HSI's option, either HSI Common Stock or cash.

         o Prior to December 31, 1998, HSI may, at its option, acquire,  through
a tender offer,  any or all of the then  outstanding  shares of New Common Stock
(a)  at any  purchase  price,  provided  that  HSI  will  then  be  required  to
subsequently effect the 1999 offer described in the preceding paragraph,  (b) at
a purchase price per share that is determined by  independent  appraisers or (c)
at any purchase  price,  if the tender offer  described in clause (b) shall have
previously been made.

         o The Holding Company and HSI will enter into a General  Administrative
Services  Management  Agreement  (the  "Administrative   Management  Agreement")
pursuant  to which HSI will  manage,  for a fee,  all of the  Holding  Company's
administrative services.

         o The Holding Company and HSI will enter into a Management  Information
Systems and Claims Processing Services Management Agreement (the "MIS Management
Agreement") pursuant to which HSI will provide claims processing, record keeping
and data processing  services to all the health plans offered, or to be offered,
by the Holding Company and its subsidiaries.  The MIS Management  Agreement will
become  effective  at HSI's  option and upon the  occurrence  of  certain  other
conditions precedent.



                                       -6-

<PAGE>



         o HSI's obligation to consummate the  transactions  contemplated by the
Amended Securities  Purchase Agreement is subject to the satisfaction of various
conditions, including the execution by the Holding Company of the Administrative
Management Agreement and MIS Management  Agreement.  Such conditions,  including
the aforementioned condition, may be waived in writing by HSI.

         o If the transactions  contemplated by the Amended Securities  Purchase
Agreement  are  effected,  HSI  could  acquire  between  59.5%  and  100% of the
outstanding  capital stock of the Holding Company,  with the likelihood that HSI
would  acquire  between  71% and 100% of the  outstanding  capital  stock of the
Holding Company.

         The DOI has informed HSI that, if the transactions  contemplated by the
Amended Securities  Purchase Agreement  (collectively the "Transaction") are not
consummated  (which  consummation  requires  the prior  approval  by the Holding
Company's  shareholders of the Transaction) on or before April 30, 1997, the DOI
intends to petition the New Jersey  Superior Court for an order to allow the DOI
to place FOHP-NJ into rehabilitation.  It is also the understanding of the Board
of Directors that it is the DOI's intention to place FOHP-NJ into rehabilitation
if the  Transaction  is not  consummated by such date. If FOHP-NJ is placed into
rehabilitation,  it is  likely  that  none of the  shareholders  of the  Holding
Company will receive any  distribution  on the shares of Common Stock-NJ held by
them  since  all  the  assets  of the  Holding  Company  will be used to pay the
liabilities  and other  debts of  FOHP-NJ  and the  Holding  Company  before any
distributions are made to shareholders.

         Although the Board of Directors  believes that the  consummation of the
Transaction is necessary for the continuation of the Holding Company's business,
the Board recognizes that the founding  principle of the Holding  Company,  i.e.
the  provision  of health care  services by an  organization  owned and governed
exclusively  by health  care  providers,  will be  abandoned  as a result of the
Transaction.  If the  Transaction  is  consummated,  HSI will manage the Holding
Company and have significant influence over administrative and policy decisions.
As a  result,  the  health  care  providers  in  the  FOHP-NJ  network  who  are
shareholders  of the Holding  Company will no longer  control the  management or
operations of the Holding Company.

         In  addition,  if the  Transaction  is  consummated,  HSI will have the
ability to effect,  in the future,  a  transaction  which  would  result in each
shareholder of the Holding  Company,  other than HSI, being required,  through a
merger, to exchange or sell his, her or its shares of Holding Company New Common
Stock for cash or  securities of an issuer other than the Holding  Company.  HSI
has  informed  the  Holding  Company  that,  at such time,  it will  comply with
applicable  disclosure  obligations  under the Exchange Act,  including  without
limitation applicable requirements under Rule 13e-3.

         HSI's  obligation to consummate  the Initial  Closing is subject to the
satisfaction  of  various  conditions,  any of  which  may be  waived  by HSI in
writing,  including, among others: (i) the representations and warranties of the
Holding  Company  and  FOHP-NJ  contained  in the  Amended  Securities  Purchase
Agreement shall be true and correct in all material respects as of the date

                                       -7-

<PAGE>



of the Initial Closing,  (ii) all corporate and other proceedings required to be
taken by the Holding Company in connection with the transactions contemplated by
the  Amended  Securities  Purchase  Agreement,  including,  but not  limited to,
approval by the  shareholders of the Holding  Company,  shall have been taken or
obtained, (iii) the Amendments (as hereinafter defined) shall have been approved
by the shareholders and the Certificates of Incorporation of the Holding Company
and FOHP-NJ, as proposed to be amended and restated,  shall have been filed with
the  Office  of the  Secretary  of State of the  State of New  Jersey,  (iv) the
delivery by the Holding  Company of  Debentures  having an  aggregate  principal
amount equal to  approximately  $43,300,000,  (v) the Holding Company shall have
received a minimum number of modified provider  agreements from the providers in
the FOHP-NJ provider network, (vi) all authorizations,  approvals,  consents and
waivers of any governmental  authority necessary for the consummation of any and
all  of  the  transactions  contemplated  by  the  Amended  Securities  Purchase
Agreement  shall have been obtained on terms  satisfactory  to HSI and remain in
full  force and  effect,  and  consents  or  waivers  from  parties  other  than
governmental  bodies  (including  shareholders of the Holding  Company) that are
required in connection with the consummation of the transactions contemplated by
the Amended  Securities  Purchase  Agreement  shall have been  obtained on terms
satisfactory  to HSI and  remain in full  force and  effect,  (vii) the  Holding
Company  shall have  performed  and complied in all material  respects  with all
obligations, agreements and covenants required to be performed by it pursuant to
the Amended Securities Purchase Agreement prior to or on the date of the Initial
Closing,  (viii) the Holding  Company shall have  terminated the agreement dated
January 16, 1995 between Sierra Health Services, Inc. and FOHP-NJ, and (ix) none
of the  letters of credit  currently  available  to the  Holding  Company or the
guarantees of portions of the Holding  Company's  capital  obligation to FOHP-NJ
shall have expired or terminated.  HSI's  obligation to consummate an Additional
Debenture Advance Closing is subject to the satisfaction of various  conditions,
any of which  may be waived  by HSI in  writing  including,  among  others:  the
conditions  set  forth in (vi)  and  (vii)  above  shall  be  satisfied  and the
Administrative  Management  Agreement,  and the  MIS  Management  Agreement  (if
effective),  shall be in full  force and  effect or shall  have been  terminated
without cause by HSI.

         In the event that all of the  conditions  for an  Additional  Debenture
Advance Closing are not satisfied with respect to any given Additional Debenture
Advance Amount, then HSI may, at its option: (a) elect in writing to not advance
such Additional  Debenture Advance Amount (the "No Additional  Advance Option");
or (b) elect to deduct from such Additional  Debenture  Advance Amount an amount
equal to the Additional  Debenture Advance Adjustment relating to the conditions
for an  Additional  Debenture  Advance  Closing not so satisfied  (the  "Advance
Adjustment Option"). "Additional Debenture Advance Adjustment" is defined as the
amount of all losses,  claims,  obligations,  demands,  assessments,  penalties,
liabilities,  costs,  damages,  attorneys' fees and expenses asserted against or
incurred  by HSI by  reason  of or  resulting  from the  nonsatisfaction  of the
conditions for an Additional  Debenture  Advance  Closing.  In  calculating  the
amount of the downward adjustment to the Additional  Debenture Advance Amount in
connection with the Advance  Adjustment Option, HSI is required in good faith to
promptly (and prior to the  applicable  Additional  Debenture  Advance  Closing)
prepare a reasonable  estimate of an Additional  Debenture Advance Adjustment in
consultation with the

                                       -8-

<PAGE>



directors  of  the  Holding  Company  not  affiliated  with  HSI  (the  "Non-HSI
Directors").  In the event HSI and the Non-HSI  Directors are unable to agree on
the correct amount of any Additional Debenture Advance Amount for the Additional
Debenture  Advance  Closing,  and any dispute with respect to the amount of such
adjustment is required to be resolved by binding arbitration.

         The Amended Securities Purchase Agreement may be terminated at any time
prior to the Initial  Closing (i) by the mutual written  consent of the parties,
(ii) by HSI,  if any  conditions  set forth in the Amended  Securities  Purchase
Agreement  to be  performed  by the  Holding  Company or  FOHP-NJ  have not been
satisfied  or waived on or before the  Initial  Closing,  or if there has been a
material breach on or before the Initial  Closing of any of the  representations
or  warranties  of the  Holding  Company and  FOHP-NJ  contained  in the Amended
Securities Purchase  Agreement,  (iii) by the Holding Company, if any conditions
set forth in the Amended  Securities  Purchase  Agreement to be performed by HSI
have not been satisfied or waived on or before the Initial Closing,  or if there
has been a  material  breach on or before  the  Initial  Closing of any of HSI's
representations  or  warranties  contained  in the Amended  Securities  Purchase
Agreement,  or (iv) by either party,  if the Initial  Closing is not consummated
before July 31, 1997.

         No shareholder of the Holding Company, including any shareholder who is
an executive officer, director or affiliate of the Holding Company, will receive
any benefit from the Transaction  which is not shared on a pro rata basis by all
the other shareholders of the Holding Company. In addition,  shareholders of the
Holding  Company will have no dissenters'  rights in connection with the Initial
Closing under the Amended Securities Purchase Agreement.

         As a condition to  consummating  the  transactions  contemplated by the
Amended Securities Purchase  Agreement,  the shareholders of the Holding Company
must approve (i) amendments to the Certificate of  Incorporation  of the Holding
Company relating to changes in the classes of securities authorized for issuance
by the Holding  Company,  (ii) amendments to the Certificate of Incorporation of
the Holding  Company  relating to changes in the rights of  shareholders  of the
Holding Company,  and (iii) amendments to the Certificates of Incorporation  and
By-laws of the Holding Company and FOHP-NJ (the amendments  described in clauses
(i), (ii) and (iii) are collectively referred to herein as the "Amendments"). If
the  Amendments  are  approved  by  the   shareholders,   the   Certificates  of
Incorporation  and By-laws of the Holding Company and FOHPNJ will be amended by,
among other things:

         o deleting  each  class of  Holding  Company  capital  stock  currently
authorized,  and  substituting  therefor  110,000,000  shares of  capital  stock
consisting of 100,000,000  shares of New Common Stock and  10,000,000  shares of
Preferred Stock, par value $1.00 per share;

         o eliminating certain of the special shareholder voting rights afforded
shareholders  of the Holding  Company with respect to matters such as amendments
to the  Certificate of  Incorporation  or By-laws of the Holding  Company or the
certificate of incorporation or by-laws of any subsidiary thereof;


                                       -9-

<PAGE>



         o  providing  certain  preemptive  rights to the  holders of New Common
Stock;

         o providing  HSI and the Holding  Company with certain  rights of first
refusal  with respect to the offer and sale of shares of New Common Stock by the
holders thereof;

         o  permitting  HSI to purchase  shares of capital  stock  issued by the
Holding Company;

         o providing for  cumulative  voting in connection  with the election of
directors;

         o deleting  current  provisions  with respect to the composition of the
Boards of Directors of the Holding Company and FOHP-NJ;

         o providing  that the persons  comprising the Board of Directors of the
Holding Company also shall comprise the Board of Directors of FOHP-NJ;

         o including  the  percentage  of the Boards of Directors of the Holding
Company and FOHP-NJ which is required to be designated by HSI; and

         o including a requirement that at least 80% of the directors serving on
the  Boards of  Directors  of the  Holding  Company  and  FOHP-NJ  must  approve
specified  transactions  and a  requirement  that  a  majority  of  the  Non-HSI
Directors must approve specified transactions involving HSI.

         If the  Amendments  are  approved  by  the  shareholders,  the  Holding
Company's  Certificate  of  Incorporation  will be amended to delete most of the
special  voting  rights  afforded  to  shareholders  of  the  Holding   Company.
Accordingly,   certain   actions  which  currently   require   approval  of  the
shareholders  of the Holding Company could be effected by the Board of Directors
after the  consummation of the  Transaction  without first being approved by the
providers in the FOHP-NJ network who are shareholders of the Holding Company. In
addition,  except for certain business  combinations and issuances of New Common
Stock to persons not named in the Holding Company's Certificate of Incorporation
as proposed to be amended,  matters that are voted on by the shareholders of the
Holding Company will be approved by such shareholders if a majority of the votes
cast are voted for the matter.

         The Certificate of Incorporation of the Holding Company, as proposed to
be amended,  includes a provision with respect to preemptive rights. Pursuant to
the  preemptive  rights to be afforded  HSI upon its  acquisition  of New Common
Stock,  HSI shall have the right to acquire any shares of capital stock proposed
to be issued by the Holding Company which are not purchased by the  shareholders
of  the  Holding  Company  who  have  not  exercised  their  preemptive  rights.
Therefore,  not only will HSI be able to maintain its ownership  interest in the
Holding Company, if any, upon issuance of Holding Company capital stock, but may
increase such  ownership  interest in the event that other  shareholders  do not
exercise their preemptive rights.


                                      -10-

<PAGE>



         Generally, if the Transaction is consummated, the existing restrictions
on transfer  provisions  contained in the  Certificate of  Incorporation  of the
Holding  Company will be modified to allow provider  shareholders to sell shares
of New Common Stock to any provider or to HSI without first having to offer such
shares to specific  providers.  The Certificate of  Incorporation of the Holding
Company,  as proposed to be amended,  also  affords HSI and the Holding  Company
with  certain  rights of first  refusal  with  respect  to the offer and sale of
shares of Holding Company capital stock by the holders thereof.

         Inasmuch as the Boards of Directors of the  subsidiaries of the Holding
Company will not  designate  the directors to serve on the Board of Directors of
the Holding  Company if the  Transaction is  consummated,  the provisions in the
Certificate of  Incorporation of the Holding Company  currently in effect,  with
respect to the  composition of the Board of Directors,  will be deleted in their
entirety. In addition,  the Certificate of Incorporation of the Holding Company,
as proposed to be amended, provides for cumulative voting in connection with the
election of directors.

         The  By-laws  of the  Holding  Company  are  proposed  to be amended to
provide that HSI shall have the right to  designate  such number of directors on
the Board as is represented  by the percentage  ownership by HSI of all the then
outstanding shares of New Common Stock. In addition,  the By-laws of the Holding
Company will be amended to provide that for so long as HSI holds the Debentures,
HSI shall be entitled to designate not less than 15% of the directors serving on
the Board. As a result, if HSI acquires more than 50% of the outstanding  shares
of New  Common  Stock,  HSI will have  majority  representation  on the Board of
Directors of the Holding  Company.  Two-thirds  of the directors on the Board of
Directors  of the  Holding  Company  who are not  designees  of HSI  shall be NJ
Practitioners  (as  hereinafter  defined) and  representatives  of NJ Acute Care
Institutions (as hereinafter  defined). In addition, at all times, the number of
NJ Practitioners  serving on the Board and the number of  representatives  of NJ
Acute Care Institutions serving on the Board shall be equal.

         If the Amendments are approved by the shareholders,  the Certificate of
Incorporation  and By-laws of FOHP-NJ  will no longer  afford each NJ Acute Care
Institution  owning shares of Holding  Company Common Stock,  either directly or
through  an  affiliate,  or  NJ  Practitioners,  with  the  right  to  designate
representatives to the Board of Directors of FOHP-NJ. The By-laws of FOHP-NJ are
proposed to be amended to provide that the Board of  Directors of FOHP-NJ  shall
be  comprised  of the persons who are elected to the Board of  Directors  of the
Holding  Company.  Consequently,  the providers in the FOHP-NJ  provider network
will no longer have a right to direct  representation  on the Board of Directors
of FOHP-NJ.

         The  shareholders  of the Holding  Company will vote on the Transaction
and  Amendments at the Holding  Company's  1996 Annual  Meeting of  Shareholders
scheduled for April 16, 1997. If the  Transaction and Amendments are approved by
the  shareholders  of  the  Holding  Company  at  the  1996  Annual  Meeting  of
Shareholders,  the Holding  Company  anticipates  consummating  the  Transaction
shortly thereafter.


                                      -11-

<PAGE>



         SALE OF FIRST MANAGED CARE OPTION,  INC. - In late December  1996,  the
Holding  Company sold all of its interest in First Managed Care Option,  Inc., a
New York  corporation  which  specializes  in the  management  of treatment  and
services  rendered to employees injured in the workplace,  automobile  accidents
and other trauma based victims  ("FMCO"),  to ABSCO Ltd. Corp.  ("ABSCO") for an
aggregate  purchase  price of $250,000.  In connection  with the sale of FMCO to
ABSCO,  FOHP-NJ entered into a network access  agreement with FMCO,  pursuant to
which FMCO will offer to the entities with which it contracts,  the  opportunity
to avail themselves to the services provided by FOHP-NJ's  provider network.  In
addition,  the Holding  Company and ABSCO  entered  into an accounts  receivable
agreement,  pursuant  to which the  Holding  Company  will  receive,  subject to
certain  limitations,  25% of the accounts  receivable of FMCO for which payment
was  outstanding  in excess of 90 days at the close of business on September 30,
1996, when and if collected from FMCO after November 1, 1996.

         FOHP-NJ

         FOHP-NJ  is  the  Holding  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  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) 51 NJ  Acute  Care  Institutions  located  throughout  New
Jersey's 21 counties, (ii) approximately 10,000 NJ Practitioners,  practicing in
primary  care and 30  medical  specialities  throughout  New  Jersey,  and (iii)
approximately 75 NJ Other Providers.  Providers contracting with FOHP-NJ are not
required  to  be  shareholders  of  the  Holding  Company.   Currently,  of  the
approximately  10,126  providers who have  contracted  with  FOHP-NJ,  2,629 are
shareholders of the Holding Company.

         As used herein, a "NJ Acute Care Institution"  shall mean a hospital or
acute care  institution,  licensed  by the New Jersey  Department  of Health and
Senior  Services (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 "NJ Other
Provider"  shall mean a health care  provider or  professional,  other than a NJ
Practitioner or NJ Acute Care Institution,  licensed, certificated or authorized
to operate or  practice in the State of New  Jersey,  which 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


                                      -12-

<PAGE>


agreements also may be terminated for breaches specified therein.  The terms and
conditions of a provider  agreement or any agreement  with a subscriber  are not
affected by whether the provider or subscriber  is, or is not, a shareholder  of
the Holding Company.  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  which are  providers  of  health  care  services  to  FOHP-NJ  and
shareholders  of  the  Holding  Company.   Pursuant  to  the  Holding  Company's
Certificate of Incorporation,  NJ Acute Care Institutions which own directly, or
through  affiliates,  shares of Common  Stock-NJ are required to offer a FOHP-NJ
plan to their  employees  under  certain  circumstances.  In the event that a NJ
Acute Care  Institution  fails to comply  with such  requirements,  the  Holding
Company may elect to  repurchase  the shares of Common  Stock-NJ  held by the NJ
Acute Care Institution. See "Marketing."

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, subject to FOHP-NJ's prior approval. 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 rate
increases  must be submitted  to the DOI and there can be no assurance  that any
such rate  increase  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 50 or more  employees) by age, sex
and industry  classification,  in determining its rates for various employers in
the proposed service

                                      -13-

<PAGE>



area. Accordingly, rates can vary between employer groups for coverage under the
same FOHP-NJ 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 (less than 50 employees),  which are based on
overall  community  rates for 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 must be submitted to the DOI. Rates
will also be affected by federal regulations which generally prohibit 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 to  physicians  and other
health care providers, physician 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 50 or more
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 (less than 50  employees)
products. Five 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 two small employer group products are offered
as riders to one of the four other small employer  products.  Either 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
New Jersey.

         FOHP-NJ also  provides  utilization  management  and its own  preferred
provider


                                      -14-

<PAGE>



organization  product  to the  members  of  self-funded  plans  such  as NJ CAR,
formerly known as the New Jersey  Automobile  Dealers  Association,  a major New
Jersey trade  association  which provides health care benefits through a program
of  self-insurance.   In  addition,  FOHP-NJ  provides  its  preferred  provider
organization product to a number of other self-funded plans, including the North
Jersey  Municipalities  Health  Insurance  Fund  and  the New  Jersey  Builders'
Association. 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.

         In   addition  to  offering   services  as  an  HMO,   FOHP-NJ   offers
administrative  services,  including access to FOHP-NJ's  provider  network,  to
health plans governed by the Employee Retirement Income Security Act of 1974, as
amended,  such as employer  groups  which are  self-insured,  as well as to such
groups as Administrative Service  Organizations,  Third Party Administrators and
Managed or Coordinated Care Organizations ("MCOs").

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  will be
paid  pursuant  to a fee  schedule  established  by  FOHP-NJ  and will 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 Medicare.  Co-payments, in amounts approved
by FOHP-NJ,  are collected  directly by the NJ Practitioner  from the member. In
the future,  FOHP-NJ may consider entering into capitation  arrangements with NJ
Practitioners.

         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 Holding  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  or
Medicaid  member  exceeds  $75,000  in a  calendar  year or the acute  care of a
Medicare  member exceeds  $100,000 in a calendar year,  with a per


                                      -15-

<PAGE>



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  a  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 type
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  a  NJ  Acute  Care  Institution  and  another
institution,  services  provided to members of FOHP-NJ  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 a 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 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.

                                      -16-

<PAGE>



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  affiliates or revenue  generating  relationships  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, Preferred Provider Organizations
and  other  MCOs.  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
Vice President of Sales and Marketing.  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  which are providers to FOHP-NJ and are either  shareholders of the
Holding Company or affiliated with  shareholders of the Holding Company.  If the
existing  health plan of any NJ Acute Care  Institution 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.  NJ Acute  Care  Institutions  which  offer one or more
health plans,  including any  self-insured  plan, are obliged to offer a FOHP-NJ
health plan and have at least 50% of its employees  enrolled in a FOHP-NJ health
plan by January 1, 1996, and at least 75%of its employees  enrolled in a FOHP-NJ
health plan by January 1, 1997, and NJ Acute Care Institutions which 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.

                                      -17-

<PAGE>



In  addition,  NJ Acute  Care  Institutions  which  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.

         If  a NJ  Acute  Care  Institution  fails  to  satisfy  its  enrollment
obligations, the Holding Company has the right to purchase (but is not obligated
to  purchase)  all of the  shares of Common  Stock-NJ  held by the NJ Acute Care
Institution  at a  purchase  price  equal to the  lesser  of the Book  Value (as
defined in the Holding  Company's  Certificate of Incorporation and used herein)
or the  original  purchase  price paid for such  shares.  On March 3, 1997,  the
Holding Company redeemed the shares of one NJ Acute Care  Institution  which had
not complied with its enrollment  obligations.  The Holding Company is currently
reviewing  whether to redeem the Holding  Company Common Stock held by any other
non-compliant NJ Acute Care Institution.

         The Certificate of Incorporation of the Holding Company, as proposed to
be amended in connection with the  Transaction,  provides that the provisions in
the  Certificate  of  Incorporation  of the Holding  Company with respect to the
covenants of the NJ Acute Care Institutions  which own shares of Common Stock-NJ
or of the  affiliates of NJ Acute Care  Institutions  which own shares of Common
Stock-NJ  (collectively  referred to herein as "NJ Institutional  Shareholders,"
and individually  referred to herein as a "NJ Institutional  Shareholder") shall
continue until December 31, 1999. Currently, the covenants, as they apply to any
individual NJ Institutional  Shareholder expire on the second anniversary of the
date a  FOHP-NJ  health  plan  was  first  offered  to the  employees  of the NJ
Institutional  Shareholder or, if the NJ  Institutional  Shareholder is not a NJ
Acute Care Institution, the second anniversary of the date a FOHP-NJ health plan
was first offered to the employees of its affiliated NJ Acute Care  Institution.
As a result of the  aforementioned  proposed  amendment to the Holding Company's
Certificate of Incorporation,  a NJ Institutional  Shareholder or its affiliated
NJ Acute Care  Institution  will be required to keep its  employees in a FOHP-NJ
health plan for a longer period of time if the NJ Institutional Shareholder does
not want to be in breach of the covenants and thus risk having its shares of New
Common Stock redeemed by the Holding Company.

         The  Certificate  of  Incorporation  of the  Holding  Company  also  is
proposed  to be  amended  to  provide  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  proposed
Certificate of  Incorporation  of the Holding  Company  applicable to it


                                      -18-

<PAGE>



or (ii) fails to provide  reimbursement  rates (a) for in-patient  visits at the
lower of (I) the lowest rate of  reimbursement  received by such  provider  from
nongovernmental  payors  for  each  line  of  business,  or  (II)  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  out-patient  visits at the lower of (I) the  lowest  rate of  reimbursement
received  by  such  providers  from  nongovernmental  payors  for  each  line of
business, or (II) 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 Holding Company shall have the option to purchase
all  or a  portion  of the  New  Common  Stock  held  by  the  NJ  Institutional
Shareholder at a purchase price equal to the lowest of (i) the Book Value,  (ii)
the lowest  shareholder  equity reflected on the Holding  Company's  quarter-end
balance sheets during the period of noncompliance  giving rise to the repurchase
right,   excluding  any  convertible  debentures  issued  to  HSI,  prepared  in
accordance with generally accepted accounting principles,  divided by the number
of outstanding  shares of New Common Stock on a fully diluted basis or (iii) the
original  purchase  price  paid by such NJ  Institutional  Shareholder  for such
shares of New Common Stock.  The Holding 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  account  any
factors the Holding  Company deems  appropriate  relating to such  shareholder's
relationships  with the  Holding  Company or the Holding  Company's  business or
otherwise,  and  the  Holding  Company's  election  to  make  or not  to  make a
repurchase  from one shareholder  shall have no effect on the Holding  Company's
election  to  make or not to  make a  repurchase  from  any  other  shareholder.
Consequently, a NJ Institutional Shareholder which breaches the covenants in the
proposed   Certificate  of  Incorporation  of  the  Holding  Company  which  are
applicable  to it could  have its  shares of New Common  stock  redeemed  by the
Holding Company at less than fair market value.

         A "Bona Fide Offer" shall mean an offer of a health benefits plan which
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"),  its income or assets may not be utilized to inure to the benefit
of (i)  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,  including  any  physician  employed by or with
admitting  privileges  at a tax  exempt  hospital,  is often  referred  to as an
"insider"),  or (ii) any other  person.  Any  conduct  in  contravention  of the
furtherance of the entity's exempt purposes may result in the loss of a health

                                      -19-

<PAGE>



care  provider'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,  or, in the case
of any other person or entity  (including,  among  others,  vendors or key staff
personnel),  an excessive benefit which is not incidental to the  accomplishment
of the entity's exempt purposes may constitute private inurement.

         Federal law prohibits the payment or receipt of  remuneration  directly
or indirectly  for referring or furnishing  any service for which payment may be
made under the Medicare or Medicaid programs.  The applicable statute,  known as
the Medicare/Medicaid  Anti-Kickback Statute,  prohibits, 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 clinical laboratories
in which  they or members  of their  families  have a  financial  interest  and,
effective  January 1, 1995,  prohibits  referrals by physicians  for  additional
designated health services to other entities in which physicians or their family
members have a financial interest. The Stark II Amendments  specifically exclude
from the prohibition,  in-network  referrals by physicians who have ownership or
investment  interests in, or compensation  arrangements  with,  certain Medicare
health organizations, federally qualified HMOs, or other prepaid plans operating
under a demonstration project.

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

         Federal   antitrust  laws   generally   prohibit   agreements   between
competitors that unreasonably  restrict  competition and, as such laws relate to
the Holding  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


                                      -20-

<PAGE>



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 Holding 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 Holding
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 Holding 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 Holding 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.

         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.

         As of December 31, 1996,  FOHP-NJ was  approximately  $45,700,000 below
125% of the statutory net worth requirement  applicable to it, and approximately
$42,000,000  below  100%  of  its  statutory  net  worth  requirement.   If  the
Transaction is not  consummated,  the DOI has indicated that it will require the
Holding  Company to draw against the letters of credit made  available to it for
purposes of  contributing  to FOHP-NJ  such monies for net worth  purposes.  See
"Certain Relationships and Related Transactions." If the Holding Company were to
draw against each letter of credit made available to it, and each guarantor paid
the amount of the  Holding  Company's  capital  obligation  to FOHP-NJ  which it
guaranteed, the Holding Company would receive approximately  $11,000,000,  which
would  leave  FOHP-NJ  with a  statutory  net  worth  deficit  of  approximately
$34,700,000 at 125% of the statutory net worth requirement  applicable to it and
approximately $31,000,000 at 100% of such statutory net worth requirement.

                                      -21-

<PAGE>



The DOI has informed HSI that,  if the  Transaction  is not  consummated  (which
consummation  requires the prior approval by the Holding Company's  shareholders
of the  Transaction and Amendments) on or before April 30, 1997, the DOI intends
to petition the New Jersey Superior Court for an order to allow the DOI to place
FOHP-NJ  into  rehabilitation.  It is also  the  understanding  of the  Board of
Directors that it is the DOI's intention to place FOHP-NJ into rehabilitation if
the  Transaction  is not  consummated  by such date.  If FOHP-NJ is placed  into
rehabilitation,  it is  likely  that  none of the  shareholders  of the  Holding
Company will receive any  distribution  on the shares of Common Stock-NJ held by
them  since  all  the  assets  of the  Holding  Company  will be used to pay the
liabilities  and other  debts of  FOHP-NJ  and the  Holding  Company  before any
distributions are made to the shareholders.

         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.

         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.
The new maternity  length of stay law will result in longer  hospital  stays for
mothers giving birth and, as a result,  increased costs to most New Jersey HMOs,
including  FOHP-NJ.  Legislation  also was  enacted  in New Jersey in 1995 which
requires health insurers,  including HMOs, to provide certain mandated  diabetes
benefits.

         The DOH, in  consultation  with the DOI,  has  adopted new  regulations
intended  generally to apply to HMOs offering POS products.  The new regulations
are intended to 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 new regulations,  it will be
necessary  for an  HMO  offering  POS  products  to  enter  into  a  contractual
arrangement  with  a  licensed  indemnity  carrier.   In  response  to  the  new
regulations,  FOHP-NJ  has  entered  into  a  contractual  arrangement  with  an
indemnity  carrier.  The Holding Company does not anticipate the new regulations
having a significant effect on the operating results of FOHP-NJ.



                                      -22-

<PAGE>



         The  DOH  recently  adopted  extensive  amendments  to the  New  Jersey
regulations  applicable  to  HMOs  which  are  intended  to  provide  additional
protections to consumers of HMO products and promote consumer confidence in HMOs
generally. The amended regulations provide 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.  FOHP-NJ  currently  does not provide such  financial
incentives to physicians.  The amended regulations also outline the requirements
for an HMO to maintain a  sufficient  network of  providers,  impose  additional
requirements  for  HMO  utilization  management  programs,  and  set  forth  new
financial standards and reporting requirements.  Compliance with these standards
and requirements may result in additional costs to HMOs, including FOHP-NJ.

         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,  1997,  the  Holding  Company,   through  its  principal
subsidiary  FOHP-NJ,  employed 333 full-time and 17 part-time active  employees,
including  2 executive  officers.  None of the Holding  Company's  employees  is
represented by a union. The Holding Company believes that the relationships with
its employees are satisfactory.

ITEM 2.  PROPERTIES.

         The  Holding  Company  currently  leases,  pursuant  to three  separate
leases,  approximately  25,675  square feet of office space at 2 Bridge  Avenue,
Building 6, Red Bank,  New Jersey  07701-1106.  Each lease has a term of 5 years
ending 1999 or 1998 and a 5 year renewal option.  The monthly rental ranges from
$10.00 to $12.50 per square  foot over the  initial  terms of the  leases,  plus
certain additional  charges and expenses  including common maintenance  charges,
utilities and taxes. The monthly rental of the 5 year option term of each of the
leases ranges from  approximately  $14.00 to $16.00 per square foot.  The office
space  leased by the  Holding  Company  in Red Bank,  which  also  includes  the
principal  executive  offices  of  FOHP-NJ,  is  located  in  a  newly  restored
office/commercial  complex  designed to  accommodate  the Holding  Company's and
FOHP-NJ's  operations.  Part of the cost of  leasing  the Red Bank,  New  Jersey
facility is allocated to FOHP-NJ.

         In  addition,   the  Holding  Company,   through   FOHP-NJ,   subleases
approximately  59,706  square  feet of office  space at 3501 State  Highway  66,
Neptune,  New Jersey 07754. The lease has a term of approximately 3 years ending
on January 30, 1999 and contains a 5 year renewal

                                      -23-

<PAGE>



option.  The  monthly  rental  of the  lease  term is  $77,120.25  plus  certain
additional charges and expenses, including maintenance, utilities and taxes. The
monthly  rental of the 5 year  option of the lease is  $84,504.16  plus  certain
additional charges and expenses, including maintenance, utilities and taxes.

         The Holding Company also leases office space in several other locations
in New Jersey, including Mt. Laurel.

ITEM 3.  LEGAL PROCEEDINGS.

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

         The DOI has informed HSI that, if the  Transaction  is not  consummated
(which  consummation  requires  the  prior  approval  by the  Holding  Company's
shareholder of the  Transaction and Amendments) on or before April 30, 1997, the
DOI intends to petition the New Jersey  Superior Court for an order to allow the
DOI to place FOHP-NJ into  rehabilitation.  It is also the  understanding of the
Board of Directors that it is the DOI's  intention to place into  rehabilitation
if the  Transaction  is not  consummated by such date. If FOHP-NJ is placed into
rehabilitation,  it is  likely  that  none of the  shareholders  of the  Holding
Company will receive an  distribution  of the shares of Common  Stock-NJ held by
them  since  all  the  assets  of the  Holding  Company  will be used to pay the
liabilities  and other  debts of  FOHP-NJ  and the  Holding  Company  before any
distributions  are made to  shareholders.  See  "Description  of Business Recent
Developments; Government Regulation."

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

         During  the fourth  quarter  ended  December  31,  1996,  no matter was
submitted  to a vote of  security  holders of the  Holding  Company  through the
solicitation of proxies or otherwise.


                                      -24-

<PAGE>



                                     PART II

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

         There is no public market for any class of the Holding Company's Common
Stock, and the Holding Company has no current  intention of listing or including
any shares of Common Stock-NJ or any other class of Holding Company Common Stock
on a stock exchange or quotation  system since shares of Holding  Company Common
Stock can be held by or transferred  only to providers to the Holding  Company's
subsidiaries which operates as HMOs and the Holding Company.  If the Transaction
and Amendments are approved by the Holding Company's  shareholders,  the current
restrictions  on the issuance and transfer of shares of Holding  Company  Common
Stock will remain in place, except that HSI will be permitted to purchase shares
of Holding  Company Common Stock.  Accordingly,  it is improbable  that a market
will develop for the Holding  Company's  securities,  regardless  of whether the
Transaction is consummated.

         In  addition,  if the  Transaction  is  consummated,  HSI will have the
ability to effect,  in the future,  a  transaction  which  would  result in each
shareholder of the Holding  Company,  other than HSI, being required,  through a
merger, to exchange or sell his, her or its shares of Holding Company New Common
Stock for cash or  securities of an issuer other than the Holding  Company.  HSI
has  informed  the  Holding  Company  that,  at such time,  it will  comply with
applicable  disclosure  obligations  under the Exchange Act,  including  without
limitation applicable requirements under Rule 13e-3.

         Since its  inception,  the  Holding  Company has not sold any shares of
Common  Stock-NJ for any price other than $15. In addition,  the Holding Company
is not aware of any sale of Common  Stock-NJ by one  provider to another for any
price other than $15.

         As of  March  15,  1997,  2,086,839  shares  of  Common  Stock-NJ  were
outstanding  and  were  held  by  2,629  shareholders  of the  Holding  Company,
including  1,006,717  shares  held by 41 NJ Acute Care  Institutions,  1,036,786
shares  held by  2,585  NJ  Practitioners,  40,002  shares  held  by 2 NJ  Other
Providers and 3,334 shares held by an IPA.

         The Holding  Company has not paid any cash dividends on Holding Company
Common  Stock.  Pursuant  to  the  terms  of  the  Amended  Securities  Purchase
Agreement,  the Holding  Company is  restricted  from paying cash  dividends  on
Holding Company Common Stock until the  consummation of the  Transaction.  After
the consummation of the Transaction,  it is expected that the Board of Directors
of the Holding  Company,  as then  constituted,  will review its dividend policy
from time to time to determine the  desirability  and feasibility of paying cash
dividends  after  giving   consideration  to  the  Holding  Company's  earnings,
financial condition, capital requirements and such other factors as the Board of
Directors of the Holding Company deems relevant.



                                      -25-

<PAGE>



ITEM 6.  SELECTED FINANCIAL DATA.

         Prior to the  Reorganization,  the Holding  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 1993 and for the year
ended  December 31, 1994 and for the period from May 19, 1993 (date of inception
of FOHP-NJ) to December 31, 1993 is derived  from the  financial  statements  of
FOHP-NJ, the Holding Company's principal subsidiary.  The data should be read in
conjunction  with the consolidated  financial  statements of the Holding Company
and the related notes thereto and  management's  discussion and analysis thereof
appearing elsewhere in this report.

         The selected  financial  information  as of December 31, 1996 and 1995,
and for the  years  ended  December  31,  1996 and  1995,  is  derived  from the
consolidated  financial  statements of the Holding Company and should be read in
conjunction  with the consolidated  financial  statements of the Holding Company
and the related notes thereto and  management's  discussion and analysis thereof
appearing elsewhere in this report.



                                      -26-

<PAGE>


<TABLE>

                                                Summarized Balance Sheet Information

<CAPTION>

                                                                                                   Financial Data of
                                                                                                        FOHP-NJ
                                                                                                     Predecessor to
                                                                                                  the Holding Company
                                                                                           -------------------------------
                                                             DECEMBER 31,                             DECEMBER 31,
                                                   -------------------------------         -------------------------------
                                                        1996                1995               1994               1993
                                                   -----------         -----------         -----------         -----------
<S>                                                <C>                 <C>                 <C>                 <C>
Assets:

Cash and cash equivalents                          $36,664,911         $23,882,286        $ 13,030,295         $10,503,225
Other                                               17,587,306          13,479,547           7,050,765             390,965
                                                   -----------         -----------         -----------         -----------
Total Assets                                       $54,252,217         $37,361,833        $ 20,081,060         $10,894,190
                                                   ===========         ===========        ============         ===========

Liabilities and Shareholders'
 (Deficiency) Equity:

Liabilities:
Medical claims payable,
 accounts payable,
 accrued expenses and
 other liabilities                                 $80,118,284         $32,482,794         $ 8,101,405         $   576,125

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' (Deficiency)
 Equity:

 Common stock subscribed                                   ---                 ---                 ---          12,400,000
 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                 ---

Common Stock-NJ, $.01 par
 value 2,100,173 shares
 issued and outstanding                                 21,002              21,002                 ---                 ---

Additional paid-in capital                          30,648,489          30,648,489          15,341,561                 ---

Deficit                                           ( 56,535,558)       ( 25,790,452)       ( 11,049,507)       ( 2,081,935)
                                                   -----------         -----------         -----------         ----------

Total Shareholders'
 (Deficiency) Equity                              ( 25,866,067)          4,879,039           4,302,655         10,318,065
                                                   -----------         -----------         -----------        -----------

Total Liabilities and
 Shareholders' (Deficiency)
 Equity                                            $54,252,217         $37,361,833         $20,081,060        $10,894,190
                                                   ===========         ===========         ===========        ===========
</TABLE>


                                                               -27-

<PAGE>


<TABLE>

                                        Summarized Statement of Operations Information

<CAPTION>


                                                                                                 Financial Data of
                                                                                                      FOHP-NJ
                                                                                                  Predecessor to
                                                                                                the Holding Company
                                                                                         ----------------------------------
                                                                                                                For the
                                                                                                              period from
                                                                                                             May 19, 1993
                                                         For the year ended               For the year          (date of
                                                            December 31,                     ended           inception) to
                                                  --------------------------------         December 31,       December 31,
                                                      1996                1995                1994                1993
                                                  ------------        ------------        ------------         -----------
<S>                                               <C>                 <C>                 <C>                  <C>
Revenue:

Premium revenue from
 owners/providers                                 $135,544,112        $ 63,630,797        $  5,639,724         $       ---

Other premium revenue                              112,125,670          38,819,206           1,803,624                 ---

Interest and other income                            9,706,526           8,844,036           1,177,171              22,151
                                                  ------------        ------------        ------------         -----------

Total Revenue                                      257,376,308         111,294,039           8,620,519              22,151
                                                  ------------        ------------        ------------         -----------

Expenses:

Medical services to
 owners/providers                                   37,026,903          17,319,035           1,405,175                 ---

Hospital services to
 owners/providers                                   30,156,890          11,068,909             880,920                 ---

Other medical services                             105,496,580          38,548,819           2,727,694                 ---

Other hospital services                             63,760,554          24,637,249           1,710,020                 ---

Selling, general and
  administrative                                    50,789,010          32,638,106          10,624,261           2,063,239

Other                                                  890,553           1,751,263             240,021              40,847
                                                  ------------        ------------        ------------        ------------

Total Expenses                                    $288,120,490        $125,963,381        $ 17,588,091        $  2,104,086
                                                  ------------        ------------        ------------        ------------

Provision for state
income taxes                                               924              71,603                 ---                 ---
                                                  ------------        ------------        ------------        ------------

Net loss                                          $(30,745,106)       $(14,740,945)       $ (8,967,572)       $ (2,081,935)
                                                  ------------        ============        ============        ============

Net loss per common share                         $     (14.64)       $      (8.65)       $      (8.40)       $      (2.52)
                                                  ============        ============        ============        ============


</TABLE>



                                                             -28-

<PAGE>




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

OVERVIEW

         The Holding 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 Holding  Company.  Prior to the
Reorganization, the Holding Company did not conduct any business nor did it have
any significant assets or liabilities. The Holding Company does not conduct, nor
does management believe that it will conduct, any business other than to provide
management and consulting services to its subsidiaries.  All health care benefit
products  and  services  are,  and will be,  provided by the  Holding  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 Holding Company on June 8, 1995.
Currently, it is the Holding 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,  1997,  FOHP-NJ had entered into
provider agreements with 51 NJ Acute Care Institutions,  approximately 10,000 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 a provider agreement or any agreement with
a subscriber  are not effected by whether the provider or  subscriber  is, or is
not, a shareholder of the Holding Company.

         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  a  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 type
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 plan for any services paid
for under such plan except for any applicable co-payment.

                                      -29-

<PAGE>



         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  payable  under  the fee
schedule  developed for Medicare.  Co-payments,  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 (50 or
more  employees)  and small  employer  groups  (less  than 50  employees).  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 50 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, 1996 AND 1995

         PREMIUM REVENUE.  For the year ended December 31, 1996, medical premium
revenue  totalled  $247.7 million or $145.2 million more than the $102.5 million
of medical premium revenue generated in 1995.  Medical premium revenue generated
by the Holding Company during the year ended December 31, 1996 was substantially
greater than the medical premium revenue generated by the Holding Company during
the year ended  December  31, 1995,  due to the  significant  subscriber  growth
experienced during 1996.  Approximately 55% of medical premium revenue generated
in 1996 and  approximately  62% of medical premium revenue generated in 1995 was
attributable to NJ Acute Care  Institutions  which are obligated to enroll their
employees  in FOHP-NJ  health  plans.  The  Holding  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 FOHP-NJ  begins to
fully benefit from marketing  efforts  focused on individuals and businesses who
or which are not providers to FOHP-NJ.

         OTHER REVENUE. Other revenue,  principally administrative fees, for the
year ended December 31, 1996 was $7.9 million  compared to $7.6 million of other
revenue for the prior year. This increase is attributed to the subscriber growth
in  self-insured  products.  Interest  income for 1996 was $1.8 million,  a $600
thousand  increase  from the $1.2  million  generated  in 1995.  The increase in
interest  income was due to the larger cash  reserves  maintained by the Holding
Company in 1996.



                                      -30-

<PAGE>



         MEDICAL AND HOSPITAL SERVICE EXPENSES.  Total expenses  attributable to
medical and  hospital  service for the year ended  December 31, 1996 were $236.4
million or $144.8 million higher than expenses incurred in 1995. The increase in
medical  and  hospital   service  expenses  from  1995  to  1996  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)  increased  in 1996 to 95% from 89% in 1995 as a
result of increased  enrollment in the FOHP-NJ health plans,  changes in the mix
of products  offered by FOHP-NJ,  and the  inability  of FOHP-NJ to  effectively
control utilization and referrals due to the significant growth of FOHP-NJ.  The
Holding  Company  believes that recent  operational  changes,  specifically  the
implementation of a modified  provider  reimbursement  schedule,  will lower the
percentage of medical expenses to premium dollars in the future.

         Medical and  hospital  services  expenses are accrued in the period the
services are provided to enrollees in the FOHP-NJ health plans, based in part on
estimates for hospital and other health care  services  which have been incurred
but not yet reported.  Such  estimates are monitored and reviewed by the Holding
Company and its outside  actuaries on a monthly  basis and, as  settlements  are
made or estimates  adjusted,  the  resulting  differences  are  reflected in the
current period of operations.  Since FOHP-NJ recently began operations and lacks
significant  historical  experience,  the  estimate  for  incurred  but  not yet
reported  medical  claims is based on  currently  available  industry  ratios of
claims expense to premiums earned as well as the limited  historical  experience
of FOHP-NJ.

         In the spring of 1996,  the number of medial  claims  that had not been
processed by the Holding Company's outside claims  administrator  increased as a
result of the  significant  increase in the number of  enrollees  in the FOHP-NJ
health plans and the systems  limitations  of the outside  claims  administrator
engaged by the Holding Company to provide claims processing services. During the
summer of 1996, the Holding Company, in an effort to decrease the medical claims
backlog,  began  using its own  personnel  to process  claims and  notified  its
outside  claims  administrator  that if it did not begin to  perform  its claims
processing  functions in a manner  consistent with the contract  between FOHP-NJ
and the claims  administrator,  FOHP-NJ would withhold  payments as permitted in
such  contract.  As a result of these  efforts,  the medical  claims backlog was
reduced  significantly  by the end of the third  quarter of 1996.  In the fourth
quarter of 1996, the Holding Company and its outside  actuaries,  using the same
methodology for estimating  incurred but not yet reported  medical claims as had
been used since FOHP-NJ first  received its COA to operate as an HMO, but having
more claims  payment data  available as a result of the  reduction in the claims
backlog,  realized  that they had  previously  underestimated  the amount of the
incurred but not yet reported  medical  claims and that, as a result,  FOHP-NJ's
incurred  but not yet  reported  reserve  needed to be  increased  in the fourth
quarter of 1996 by approximately $13 million.  The Holding Company believes that
the underestimation  was due to FOHP-NJ's limited historical  experience and the
high medical costs related to new products offered by FOHP-NJ,  such as Medicare
products, Medicaid products and small business products.



                                      -31-

<PAGE>



         As a result of a significant increase in medical claims expenses during
the fourth quarter of 1996,  including an increase in FOHP-NJ's incurred but not
yet reported reserve by  approximately  $13 million due to more complete payment
data that were not  available to the Holding  Company and its outside  actuaries
prior to such quarter,  and the deterioration of the financial  condition of the
Holding Company as a result of continuing  losses  generated from operations due
to over  utilization  and high  medical  costs  related  to  FOHP-NJ's  Medicare
products,  Medicaid products and small business products,  the Holding Company's
losses for the year ended  December  31, 1996  increased  by  approximately  $17
million from the approximately $14 million reported by the Holding Company as of
September 30, 1996.

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  expenses  totalled $50.8 million for the year ended December 31,
1996 compared to $32.6 million incurred in 1995. This increase was the result of
the significant growth of the Holding Company and FOHP-NJ.

         OTHER EXPENSES.  Depreciation  and  amortization  expenses for the year
ended  December  31, 1996  increased  by $205  thousand  from the $674  thousand
incurred in 1995.  This increase was a result of the  significant  investment in
capital equipment in the end of 1995 and the beginning of 1996. Interest expense
decreased in 1996 to $11,200 from the $90,000  incurred in 1995.  This  decrease
was primarily the result of the  repayment of the  short-term  financing for the
acquisition of FMCO.

FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

         PREMIUM REVENUE.  For the year ended December 31, 1995, medical premium
revenue  totalled  $102.5 million or $95.0 million more than the $7.4 million of
medical premium revenue generated in 1994.  Medical premium revenue generated by
the Holding  Company during the year ended  December 31, 1995 was  substantially
greater than the medical  premium  revenue  generated by FOHP-NJ during the year
ended  December 31, 1994,  due to the limited  operations of FOHP-NJ during 1994
and significant subscriber growth experienced during 1995.  Approximately 62% of
medical  premium  revenue  generated  in 1995 and  approximately  76% of medical
premium revenue generated in 1994 was attributable to NJ Acute Care Institutions
which are  obligated to enroll  their  employees in FOHP-NJ  health  plans.  The
Holding  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 FOHP-NJ  begins to fully  benefit  from  current
marketing  efforts  focused on  individuals  and businesses who or which are not
providers to FOHP-NJ.

         OTHER REVENUE. Other revenue,  principally administrative fees, for the
year ended December 31, 1995 was $7.6 million compared to $700 thousand of other
revenue for the prior year. Interest income increased by $800 thousand from $400
thousand  in 1994 to $1.2  million in 1995.  The  increase  in other  revenue is
primarily  attributable  to  administrative  service fees received in connection
with the administrative services provided by the Holding Company to


                                      -32-

<PAGE>



self-insured  employer  groups.  The increase in interest  income was due to the
larger cash reserves maintained by the Holding Company in 1995.

         MEDICAL AND HOSPITAL SERVICE EXPENSES.  Total expenses  attributable to
medical and  hospital  service  during 1995 was $91.6  million or $84.9  million
higher than such  expenses in 1994.  The  increase in medical  claims costs from
1994 to 1995 was primarily  attributable  to an increase in enrollees in FOHP-NJ
health plans. Moreover, the increase in medical claims costs in 1995 is a direct
function of the significant  increase in medical  premium  revenue  generated in
1995.

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  expenses  totalled  $32.6 million  during 1995 compared to $10.6
million  incurred for the year ended  December 31, 1994.  This  increase was the
result of the significant growth of FOHP-NJ and the expansion  activities of the
Holding  Company  during  1995.  For  example,  to  accommodate  such growth and
expansion,  the  Holding  Company  and its  subsidiaries  hired  193  additional
employees in 1995 and leased additional office space in New Jersey and New York.

         OTHER  EXPENSES.   Depreciation  and  amortization   expenses  in  1995
increased by $443  thousand  from the $231  thousand  incurred in the year ended
December 31, 1994, due to significant  investment in 1995 in capital  equipment.
Interest  expense also increased in 1995 to $90,000 from the $9,000  incurred in
the year ended December 31, 1994.  This increase was primarily the result of the
short-term financing of the acquisition of FMCO discussed below.

         In November  1994,  FOHP-NJ  acquired  all the stock of  Individualized
Rehabilitation  Programs,  Inc.,  which was later renamed  FMCO.  In 1995,  FMCO
received less  referrals  from a major  referral  source.  As a result,  revenue
generated from referrals decreased by approximately  $125,000 per month in 1995.
In December 1995,  management determined that due to the recent loss of business
volume  resulting  from less  referrals  and  because of current  and  projected
operating  losses of FMCO, the  recoverability  of the cost of FMCO in excess of
the net assets  acquired  could not be assured.  Accordingly,  the net  carrying
value of FMCO of $986,782 was written-off in 1995 and included in other expenses
for that year.

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 Holding Company sold 529,120 shares
of Common Stock-NJ to NJ  Practitioners  in an offering which ended on September
1, 1995. Gross proceeds


                                      -33-

<PAGE>




received  by the Holding  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 DOI 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 requirement,  FOHP-NJ is required to submit to the
DOI a plan of action to address the  deficiency or expected  deficiency.  During
the first quarter of 1996, the Holding Company learned that FOHP-NJ's  statutory
net worth as of  December  31,  1995 may have  been  below  125% of the  minimum
requirement.  FOHP-NJ addressed this potential deficiency by submitting in April
1996 a plan of action to the DOI which outlined the actions which had been taken
and measures to be used by FOHP-NJ to correct the potential deficiency. The plan
of action  also  outlined  the  actions to be taken by the  Holding  Company and
FOHP-NJ to ensure that FOHP-NJ remained in compliance with applicable  statutory
net worth requirements in 1996.

         The plan of action submitted by FOHP-NJ provides that in the event that
either the DOI or the DOH requires  that FOHP-NJ  obtain  additional  capital to
remain in compliance with the statutory net worth and other capital requirements
applicable to FOHP-NJ as an HMO licensed in New Jersey, the Holding Company will
contribute  such  capital to FOHP-NJ.  To assure  that the  Holding  Company has
sufficient  capital  to  contribute  to  FOHP-NJ  in the event  that  FOHP-NJ is
required to obtain additional capital to remain in compliance with the statutory
net worth and other capital requirements applicable to it, certain directors and
shareholders  of the Holding  Company  either (i)  arranged  for the issuance of
letters of credit by various banks,  against which the Holding  Company may draw
if  required to fund the  payment of its  obligations  to FOHP-NJ so as to allow
FOHP-NJ to remain in  compliance  with the statutory net worth and other capital
requirements  applicable  to it, or (ii)  guaranteed  a portion  of the  Holding
Company's capital  obligation to FOHP-NJ.  In addition,  pursuant to the plan of
action,  the Holding Company  effected several  operational  changes in order to
increase  capital in 1996. The  operational  changes made by the Holding Company
included (a) the  implementation of a modified provider  reimbursement  schedule
which became effective on April 1, 1996, for purposes of reducing medical costs,
(b) the  implementation  of a hiring freeze and suspension of bonus payments and
the use of consultants in order to control the Holding Company's  administrative
costs,  (c) the  implementation  of a program to  generate  increased  operating
profits by requiring  certain  acute care  shareholders  which had not met their
enrollment  commitments  to  meet  such  commitments  if  they  want  to  remain
shareholders  of the Holding  Company  and  providers  in the  FOHP-NJ  provider
network,  and (d) the  discontinuance  of expansion efforts in states other than
New Jersey.

         On June  12,  1996,  the DOI and  the DOH  approved  FOHP-NJ's  plan of
action,  subject to certain  reporting  and other  conditions.  Such  conditions
include: (i) the submission of a monthly report to the DOI which is to contain a
comparison  of actual  results for the month just ended to the budgeted  results
for such month; (ii) the  administrative  expenses saving measures  specified in
the plan of action including the hiring freeze and the suspension of bonuses and
consultant  use,  shall  not be  discontinued  or  modified  unless  the DOI has
received written notice of any such proposed  discontinuance or modification and
has not objected to the proposed


                                      -34-

<PAGE>



discontinuance or modification within five days of receiving such notice;  (iii)
the  submission  to the  DOI of the  minutes  of any  meeting  of the  Board  of
Directors  of the Holding  Company or the Board of  Directors of FOHP-NJ and the
minutes of certain committee meetings of such corporations within 30 days of the
date of any such  meeting;  (iv) neither the Holding  Company nor FOHP-NJ  shall
enter into any joint venture,  acquisition,  merger,  intercompany related party
transaction,  or other material  transaction (defined as one half of one percent
or  greater  of net  admitted  assets as of the prior  year)  without  the prior
written  approval of the DOI; (v) neither the Holding  Company nor FOHP-NJ shall
declare or apply any dividends or bonuses or make any  distributions  other than
in the course of ordinary  business  without the prior  written  approval of the
DOI;  (vi) any  proceeds  from the sale of Holding  Company  stock to New Jersey
providers  must first be used to pay the  payable  from the  Holding  Company to
FOHP-NJ;  (vii) a claim  reserve  lag study  shall be  provided  to the DOI on a
quarterly basis in a format prescribed by the DOI; (viii) prior written approval
of the  Commissioner  of the DOI must be  obtained  before  either  the  Holding
Company or FOHP-NJ makes any expenditure  related to activities in jurisdictions
other than New Jersey;  (ix) on or before October 1, 1996, at least one third of
the members of each committee of the Boards of Directors of the Holding  Company
and FOHP-NJ shall be persons who are not affiliated  with the Holding Company or
FOHP-NJ  or any  subsidiaries  thereof,  and  who do not  have  any  contractual
relationship  with the Holding Company or FOHP-NJ or any  subsidiaries  thereof,
including any health care provider in the FOHP-NJ provider  network;  and (x) on
or before October 1, 1996, FOHP-NJ shall establish an Audit Committee  comprised
solely of outside independent  directors.  The aforementioned  conditions are to
continue  until  the DOI and the DOH  issue a  written  determination  that  (a)
FOHP-NJ has had two consecutive quarters with a net gain from operations in each
quarter of at least  $2,000,000,  (b) FOHP-NJ  surplus equals or exceeds 125% of
its minimum net worth requirement for the same two consecutive quarters, and (c)
the payable from the Holding  Company to FOHP-NJ has been paid in full.  The DOI
has informed  HSI,  that, if the Initial  Closing  occurs on or before April 30,
1997, and FOHP-NJ increases its statutory net worth to 100% of the minimum level
required  by law,  as expected  in the  Transaction,  the DOI would  immediately
rescind the FOHP-NJ health plan of action  approved by the DOI on June 12, 1996,
subject to a guaranty by HSI that FOHP-NJ will  maintain  surplus equal to or in
excess of 100% of the minimum net worth level  required by law through  December
31, 1997.

         The letters of credit and  institutional  guarantees  available  to the
Holding  Company  expire on March 31, 1997.  Pursuant to the Amended  Securities
Purchase  Agreement,  all the  letters  of credit and  institutional  guarantees
currently available to the Holding Company must be in effect on the closing date
of the Transaction. Inasmuch as the Transaction will not be consummated by March
31, 1997, the Holding Company is seeking extensions of the letters of credit and
institutional  guarantees  currently  available  to it. If any of the letters of
credit or institutional  guarantees is not extended,  the DOI has authorized the
Holding Company to require payment under any such instrument.



                                      -35-

<PAGE>



ITEM 8.  FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.

         The consolidated  financial  statements and  supplementary  data of the
Holding  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.

         Not applicable.



                                      -36-

<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 Holding  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

   Donald Parisi            41            Acting President and Chief Executive
                                          Officer, Secretary and General Counsel

   Dr. Joseph Singer        39            Executive Vice President and Chief
                                          Medical Officer

--------------
         In  December  1996,  Donald  Parisi,  who has  served  as  Senior  Vice
President,  Secretary and General  Counsel of the Holding  Company since June 8,
1995, was appointed acting President and Chief Executive  Officer of the Holding
Company. Mr. Parisi is expected to serve as acting President and Chief Executive
Officer until a permanent  replacement  is appointed.  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.

         Dr.  Joseph  Singer has served as Executive  Vice  President  and Chief
Medical  Officer of the Holding  Company since June 8, 1995. Dr. Singer also has
served as Executive  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.


                                      -37-

<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 Holding Company is
set forth below:

NAME AND ADDRESS              AGE     PRINCIPAL OCCUPATION OR EMPLOYMENT

Mr. William Roberts           59      President of Monmouth
Monmouth Capital                      Capital Corporation and
 Corporation                          Chairman of the Board of FOHP, Inc.
126 East 56th Street
New York, NY  10022

Mr. Michael W. Azzara         49      President and Chief Executive
The Valley Hospital                   Officer of The Valley Hospital
223 North Van Dien Avenue             and a Director of FOHP, Inc.
Ridgewood, NJ  07450

Mr. Christopher Dadlez        43      Executive Vice President of Saint Barnabas
Saint Barnabas Health Care            Health Care System and a Director of
 System                               FOHP, Inc.
Old Short Hills Road
Livingston, NJ  07039

Dr. Mark Engel                50      Ophthalmologist and a Director of
733 North Beers Street                FOHP, Inc.
Holmdel, NJ  07733

Dr. Stephen D. Feldman        48      Physician and a Director of
101 Old Short Hills Road              FOHP, Inc.
West Orange, NJ  07052

Dr. Thomas J. Feneran         49      Urologist and a Director of
53 Nautilus Drive                     FOHP, Inc.
Manahawkin, NJ  08050

Mr. John R. Kopicki           53      President and Chief Executive
Muhlenberg Regional Medical           Officer of Muhlenberg Regional
 Center                               Medical Center and a Director of
Park Avenue & Randolph Road           FOHP, Inc.
Plainfield, NJ  07061


                                      -38-

<PAGE>



NAME AND ADDRESS               AGE    PRINCIPAL OCCUPATION OR EMPLOYMENT

Dr. Joel F. Lehrer             65     Physician and a Director of
315 Cedar Lane                        FOHP, Inc.
Teaneck, NJ  07666

Dr. Paul F. Low                50     Urologist and a Director of
81 Highway 37 West                    FOHP, Inc.
Toms River, NJ  08755

Barry H. Ostrowsky, Esq.       46     Executive Vice President and General
Saint Barnabas Health Care            Counsel of Saint Barnabas Health Care
 System                               System and a Director of FOHP, Inc.
Old Short Hills Road
Livingston, NJ  07039

Donald Parisi, Esq.            41     Acting President and Chief
FOHP, Inc.                            Executive Officer, Secretary,
2 Bridge Avenue                       General Counsel and a
Red Bank, NJ 07701-1106               Director of FOHP, Inc.

Mr. Mark D. Pilla              42     Executive Vice President of Saint Barnabas
Community Medical Center              Health Care System, President and Chief
99 State Highway 37 West              Executive Officer of each of Community
Toms River, NJ  08755                 Medical Center and Kimball Medical Center
                                      and a Director of FOHP, Inc.

Dr. Om P. Sawhney              59     Plastic Surgeon and a Director of
1550 Park Avenue                      FOHP, Inc.
South Plainfield, NJ  07080


----------

         There  are no  family  relationships  among the  current  directors  or
executive officers. None of the officers or directors of the Holding 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.

         William Roberts has been the President of Monmouth Capital Corporation,
a private  investment firm in New York, since 1980. He has served as Chairman of
the Board of the Holding  Company since June 7, 1995. In addition,  he served as
director of FOHP-NJ from May 1993 until the consummation of the Reorganization.

         Michael Azzara has served as President and Chief  Executive  Officer of
The Valley Hospital since May 1981. Mr. Azzara  presently serves on the Board of
Trustees of Valley Home and  Community  Health Care. He also serves on the Board
of Directors of Valley Health Services, Inc., Ridgewood Savings Bank, The Center
for Health Affairs,  and Health Insurance  Company/Princeton  Insurance  Company
(HCIC/PIC). He is a member of the Advisory Board

                                      -39-

<PAGE>



of  Directors  of  The  Governance  Institute  in La  Jolla,  California  and is
President of Valley Care Corporation and Ridgewood  Executive Plaza Association.
Mr.  Azzara  was Vice  Chairman  of the  Board of  Directors  of  Valley  Health
Affiliates  from 1991 through  1993.  He has served as a director of the Holding
Company  since June 7, 1995,  and has also served as a director of FOHP-NJ since
January 1994.

         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 Board 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 Holding  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 and Trust  Optical.  He
has served as a director of the Holding Company since June 7, 1995, and has also
served as a director of FOHP-NJ  since January 1994 and as Chairman of the Board
of FOHP-NJ since June 1995.

         Dr.  Stephen D. Feldman has been a physician in private  practice since
1980. Dr. Feldman serves as the President of St. Barnabas  MetroWest IPA. He has
served as a director of the  Holding  Company  since June 7, 1995,  and has also
served as a director of FOHP-NJ since January 1994.

         Dr.  Thomas J. Feneran has been a physician in private  practice  since
June 1983. He is an urologist,  associated in Drs. Feneran & Fernicola, P.C. Dr.
Feneran  serves  as a  physician  representative  to the  Board of  Trustees  of
Southern  Ocean  County  Hospital.  He has served as a director  of the  Holding
Company  since June 7, 1995,  and has also served as a director of FOHP-NJ since
January 1994.

         John R. Kopicki has served as the President and Chief Executive Officer
of Muhlenberg  Regional  Medical Center since December 1990.  From November 1983
through  December  1990 he  served  as Chief  Operating  Officer  of  Muhlenberg
Regional  Medical  Center.  Mr.  Kopicki  also  serves as a  director  of United
National  Bank and United  National  Bank Corp.  He also  serves as Trustee  and
President of the Muhlenberg  Foundation  and as Governor of Muhlenberg  Regional
Medical Center. He has served as a director of the Holding Company since June 7,
1995, and has also served as a director of FOHP-NJ since January 1994.

         Dr.  Joel F.  Lehrer  has  practiced  as a  physician  and has been the
Surgeon Practice


                                      -40-

<PAGE>



Manager of Northern Jersey Ear, Nose and Throat  Associates,  P.A. since January
1989. Dr. Lehrer is a trustee of the Lotos Club,  NYC, and Holy Name  Physicians
Organization.  He has served as a director of the Holding  Company since June 7,
1995, and has also served as a director of FOHP-NJ since January 1995.

         Dr. Paul F. Low has been an  urologist in private  practice  since July
1978.  Dr. Low is a member of the Board of Trustees of Community  Kimball Health
Care System and  President  of Paragron  Healthcare.  Dr. Low is also the former
President  of Coastal  Care  I.P.A.  He has served as a director  of the Holding
Company  since June 7, 1995,  and has also served as a director of FOHP-NJ since
January 1994.

         Barry H.  Ostrowsky,  Esq. has served as Executive  Vice  President and
General  Counsel of the Saint  Barnabas  Health Care System since  January 1997.
Prior thereto, he served as the Senior Vice President and General Counsel of St.
Barnabas  Medical Center since April 1991.  From June 1975 through March 1991 he
was  employed  by  Brach,  Eichler,  Rosenberg,   Silver,  Bernstein,  Hammer  &
Gladstone, P.C. Mr. Ostrowsky is also on the Board of Directors of The Multicare
Companies Inc., a New Jersey  corporation which provides  long-term care service
in selected  regions.  He has served as a director of the Holding  Company since
June 7, 1995, and has also served as a director of FOHP-NJ since January 1994.

         Donald  Parisi,  Esq. -  Information  regarding  Mr. Parisi is included
under the caption "Executive Officers of the Registrant."

         Mark D.  Pilla has  served as  Executive  Vice  President  of the Saint
Barnabas  Health Care System since June 1997 and as President of Kimball Medical
Center  since  October  1994.  Mr.  Pilla  has  served as the  President  of the
Community  Medical  Center since 1987 and as its Chief  Operating  Officer since
1982.  From 1982 to 1987, he served as Community  Medical  Center's  Senior Vice
President.  Mr. Pilla is a former member of the Board of the Voluntary  Hospital
Association  of New Jersey and is Chairman of the Board of Trustees of Shoreline
Behavioral  Health, a VHA psychiatric  center in Toms River, New Jersey.  He has
served as a director of the  Holding  Company  since June 7, 1995,  and has also
served as a director of FOHP-NJ since January 1994.

         Dr. Om P. Sawhney has been a practicing  physician in Plastic Surgery &
Rehabilitation  Medicine  Associates since January 1974. Dr. Sawhney is Chairman
of the Audit  Committee  - 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 Surgery, P.A. He has
served as a director of the  Holding  Company  since June 7, 1995,  and has also
served as a director of FOHP-NJ since January 1994.



                                      -41-

<PAGE>



NOMINEES FOR DIRECTOR

         Set forth below is the age and the  principal  occupation or employment
of each person  nominated  to serve as a member of the Board of  Directors.  The
shareholders will vote on the following nominees for director at the 1996 Annual
Meeting of Shareholders of the Holding Company scheduled for April 16, 1997.

                                           Principal Occupation
         NOMINEE             AGE               OR EMPLOYMENT

Mr. Roger W. Birnbaum         60    President of Princeton HealthCare Group
1460 Route 9 North
Woodbridge, NJ  07095

Dr. John F. Bonamo            46    Obstetrician and Gynecologist
94 Northfield Avenue
West Orange, NJ  07052

Sister Jane Frances Brady     61    President of St. Joseph's Hospital and
St. Joseph's Hospital and           Medical Center
 Medical Center
703 Main Street
Paterson, NJ  07503

Mr. Bruce G. Coe              66    President Emeritus of New Jersey Business
41 Lambert Lane                     and Industry Association
Lambertville, NJ  08530

Mr. Christopher Dadlez        43    Executive Vice President of Saint Barnabas
Saint Barnabas Health Care          Health Care System and a Director of
 System                             FOHP, Inc.
Old Short Hills Road
Livingston, NJ  07039

Dr. Mark Engel                50    Ophthalmologist and a Director of FOHP, Inc.
733 North Beers Street
Holmdel, NJ  07733

Dr. Thomas J. Feneran         48    Urologist and a Director of FOHP, Inc.
53 Nautilus Drive
Manahawkin, NJ  08050



                                      -42-

<PAGE>



                                       Principal Occupation
         NOMINEE               AGE       OR EMPLOYMENT

Mr. John Gantner               44   Senior Vice President of Finance and
Robert Wood Johnson                 Treasurer of the Robert Wood Johnson
 University Hospital                University Hospital
One Robert Wood Johnson Place
New Brunswick, NJ  08903

Mr. Laurence M. Merlis         42   President and Chief Executive Officer of
Riverview Medical Center            Riverview Medical Center
One Riverview Plaza
Red Bank, NJ  07701

Dr. Om P. Sawhney              59   Plastic Surgeon and a Director of FOHP, Inc.
1550 Park Avenue
South Plainfield, NJ  07080


----------

         Each  nominee  for  director  will hold  office  until the next  annual
meeting  of  shareholders  or until his or her  successor  is duly  elected  and
qualifies.  There are no family relationships among the persons nominated by the
Holding Company to become  directors.  None of the nominees for directors of the
Holding 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.

         Roger  W.  Birnbaum  has  served  as the  President  of  the  Princeton
HealthCare  Group since  October  1991.  From July 1972 to September  1991,  Mr.
Birnbaum  served as the President  and Chief  Executive  Officer of  HIP/Rutgers
Health Plan,  Inc.  Mr.  Birnbaum has been a Professor of Health Care at Rutgers
State University of New Jersey since July 1972 and Adjunct  Associate  Professor
at the  University  of Medicine and  Dentistry of New Jersey since January 1974.
Mr.  Birnbaum is on the Board of Directors of Caldwell B.  Esselstyn  Foundation
and the Board of Trustees of Rutgers Community Health Foundation.

         Dr. John F. Bonamo has been an obstetrician and gynecologist in private
practice  since  1981.  He is  Treasurer  of the  Department  of OB/GYN of Saint
Barnabas  Medical  Center.  Dr.  Bonamo  serves  on the  Board of  Directors  of
MetroWest I.P.A.

         Sister Jane Frances Brady has served as the  President of St.  Joseph's
Hospital and Medical Center since November 1972. She also serves as Treasurer of
St. Joseph's Hospital and Medical Center and the Paterson  Economic  Development
Corporation.  Sister Jane Frances Brady serves as a trustee of both St. Joseph's
Hospital  and  Medical  Center  Foundation,  Health

                                      -43-

<PAGE>



Care Insurance Company and Princeton Insurance Company. In addition,  she serves
as the  President  of  Hospital  Alliance  of New  Jersey.  She has  served as a
director of FOHP-NJ since January 1994.

         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 Boards of  Directors  of New  Jersey  Resources  Corporation  and New Jersey
Manufacturers Insurance Company. He also serves on the Boards of Trustees of New
Jersey Future and New Jersey Historical Society.

         Mr.  Christopher  M.  Dadlez -  Information  regarding  Mr.  Dadlez  is
included under the caption "Current Directors of the Registrant."

         Dr. Mark Engel - Information  regarding Dr. Engel is included under the
caption "Current Directors of the Registrant."

         Mr. John  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.

         Dr. Thomas J. Feneran - Information  regarding Dr.  Feneran is included
under the caption "Current Directors of the Registrant."

         Laurence  M.  Merlis has served as the  President  and Chief  Executive
Officer of Riverview  Medical  Center since May 1993.  From January 1986 through
May 1993 he served as  President of East Orange  General  Hospital.  Mr.  Merlis
serves on the Board of Directors of Monmouth-Ocean Hospital Corporation. He is a
member  of the  Boards  of  Trustees  of the New  Jersey  Hospital  Association,
Voluntary  Hospital of America and Eastern Monmouth Chamber of Commerce.  He has
served as a director of FOHP-NJ since January 1994.

         Dr. Om P. Sawhney - Information regarding Dr. Sawhney is included under
the caption "Current Directors of the Registrant."

DIRECTOR COMPENSATION; COMMITTEE SERVICE

         The  members  of the  Holding  Company's  Board  of  Directors  and any
committee  thereof  may be paid  their  expenses,  if  any,  relating  to  their
attendance at Board or committee  meetings,  and directors who are not full-time
employees of the Holding Company may be paid a fixed sum for attendance at Board
or  committee  meetings or paid a stated  salary as a director.  Currently,  the
members of the Holding Company's Board of Directors and any committee thereof do
not receive any compensation for such services  rendered to the Holding Company,
except that in October 1996 the Board awarded Dr. Engel $12,500 and Dr.  Sawhney
$10,000  for  services

                                      -44-

<PAGE>



performed by such  directors in connection  with the  Transaction.  The Board of
Directors of the Holding Company may in the future consider the  appropriateness
of  compensation  to outside  directors as well as to  individuals  who serve on
committees  and who are  not  employees  of the  Holding  Company  or any of its
subsidiaries.

         Members of the Board of Directors  of FOHP-NJ  currently do not receive
any  compensation  for their  services to  FOHP-NJ.  The Board of  Directors  of
FOHP-NJ  may in the future  consider  the  appropriateness  of  compensation  to
outside  directors.  Physician  members of any of the  following  committees  of
FOHP-NJ  are  entitled  to receive a $250  payment  for each  committee  meeting
attended  by such  member:  the  Executive  Committee,  the  Strategic  Planning
Committee,  the Finance Committee,  the Utilization  Management  Committee,  the
Quality  Assurance  Committee,  the  Credentialling  Subcommittee of the Quality
Assurance Committee and the Reimbursement Committee.

         FOHP-NJ  paid  approximately  $139,000  during  the  fiscal  year ended
December 31, 1996 to physician directors.

COMMITTEES

         Pursuant to the Holding  Company's  By-laws  adopted in connection with
the  Reorganization,  the  Holding  Company  has an  Audit  Committee  which  is
responsible  for  evaluating  and  recommending  the  appointment of independent
auditors for the Holding  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 Holding Company and its subsidiaries.

         In  addition,   the  Holding   Company's   By-laws   provides  for  the
establishment  of  the  following   advisory   committees:   Finance  Committee,
Compensation  Committee,   Strategic  Planning  Committee  and  Medical  Affairs
Committee. The composition of any advisory committee may include persons who are
not directors of the Holding Company.

         The  Compensation  Committee  has been  empowered  by the Board to make
decisions relating to the compensation of the officers,  directors and employees
of the Holding Company. The Compensation Committee is currently comprised of the
following three directors: Mr.Roberts, Mr. Kopicki and Dr. Engel.

COMPENSATION  COMMITTEE  INTERLOCKS AND INSIDER  PARTICIPATION  IN  COMPENSATION
DECISIONS

         During the fiscal  year  ended  December  31,  1996,  the  Compensation
Committee consisted of Mr. Roberts, Mr. Kopicki and Dr. Engel.

         Effective  December 31, 1995,  William B. Roberts,  the Chairman of the
Board of  Directors  of the  Holding  Company,  guaranteed  the payment of up to
$6,000,000 of the Holding Company's capital obligation to FOHP-NJ. The guarantee
terminated on March 27, 1996. Mr.

                                      -45-

<PAGE>



Roberts was paid $10,000 for providing this guarantee.

         Simultaneously   with  the  termination  of  Mr.  Roberts'   $6,000,000
guarantee,  Mr. Roberts  secured from Chase  Manhattan  Bank (formerly  Chemical
Bank) a  $3,000,000  letter of credit (the "Chase  Manhattan  Letter of Credit")
which may be drawn upon by the Holding  Company in the event the Holding Company
is  required  to  contribute  capital  to  FOHP-NJ  so that  FOHP-NJ  remains in
compliance  with  the  statutory  net  worth  and  other  capital   requirements
applicable  to it. The Holding  Company paid $48,500 in bank fees in  connection
with the Chase Manhattan Letter of Credit.  Contemporaneously  with the issuance
of the Chase  Manhattan  Letter of Credit,  the Holding  Company and Mr. Roberts
entered into a  reimbursement  agreement  pursuant to which Mr.  Roberts will be
reimbursed  by the  Holding  Company for any amounts he is required to pay Chase
Manhattan Bank in connection with any draw against the Chase Manhattan Letter of
Credit by the Holding Company.  Under the terms of the  reimbursement  agreement
between Mr. Roberts and the Holding Company, the Holding Company will pay to Mr.
Roberts a fee of $10,000  per month  through  May,  1996 and  $20,000  per month
thereafter until the Chase Manhattan Letter of Credit terminates.

         The Chase Manhattan  Letter of Credit was to expire on January 2, 1997.
However,  in December  1996, the Chase  Manhattan  Letter of Credit was extended
until March 31, 1997.  In connection  with the extension of the Chase  Manhattan
Letter of Credit,  the Holding Company paid $8,550 in bank fees and is obligated
to pay Mr.  Roberts a fee of $20,000 for each month the letter of credit remains
outstanding.  Inasmuch as the  consummation  of the  Transaction  will not occur
prior to March 31, 1997, the Chase Manhattan Letter of Credit was extended until
April 30, 1997.

         Prior to making any draw against the Chase Manhattan  Letter of Credit,
the following conditions must be satisfied: (i) the Holding Company must furnish
written  evidence  to Mr.  Roberts  that the DOI  and/or  the DOH have  required
FOHP-NJ to obtain additional  capital to remain in compliance with the statutory
net worth and other capital  requirements  applicable  to FOHP-NJ;  and (ii) the
Holding  Company does not have  sufficient  capital to  contribute to FOHP-NJ so
that FOHP-NJ is able to satisfy the request of the DOI and/or the DOH and remain
in  compliance  with the  statutory  net worth and  other  capital  requirements
applicable to FOHP-NJ,  and provides Mr. Roberts with written  representation to
that effect.  In addition,  the Holding  Company has agreed not to make any draw
against the Chase Manhattan  Letter of Credit until the Holding Company exhausts
all its rights against any other letter of credit or guarantee made available to
the Holding  Company for purposes of providing the Holding  Company with capital
so that it can fund its capital obligation to FOHP-NJ.

         Any amount to be  reimbursed  to Mr.  Roberts  under the  reimbursement
agreement will be evidenced by a promissory  note.  Interest on the note will be
payable  monthly at a rate equal to the prime rate of Chase  Manhattan Bank plus
4%. The principal  amount of any note issued by the Holding Company  pursuant to
the reimbursement agreement plus all accrued interest thereon will be payable 90
days from the date the note is issued. In the event that the principal amount of
the note plus all accrued  interest is not paid within 90 days from the date the
note is


                                      -46-

<PAGE>



issued, the note will then become payable on demand and bear an interest rate on
any amount  outstanding  after the initial 90 day period equal to the lesser of:
(i) 20%; or (ii) the highest rate permitted by law. Furthermore, if, at the time
the note is issued by the Holding Company,  or at any time during the period the
note is  outstanding,  Mr.  Roberts  is  eligible  to own  shares of the  Common
Stock-NJ,  Mr. Roberts,  at his sole option, may convert the principal amount of
the note into shares of Common  Stock-NJ at a conversion rate of fifteen dollars
per share (as adjusted to give effect to any stock  splits,  stock  dividends or
any other  adjustments  occurring after December 31, 1995);  provided,  however,
that if Mr.  Roberts is eligible to own shares of Common  Stock-NJ,  and chooses
not to convert  the note into shares of Common  Stock-NJ,  any amount owed under
the  note  will  accrue  interest  at a rate  equal to the  prime  rate of Chase
Manhattan Bank plus 4% for so long as the note remains  outstanding.  Currently,
Mr.  Roberts is not a provider to any  subsidiary  of the Holding  Company  and,
therefore,   is  not  permitted  under  the  Holding  Company's  Certificate  of
Incorporation to own shares of Holding Company Common Stock.  Consequently,  Mr.
Roberts will not have an opportunity to convert any note issued to him, pursuant
to his  reimbursement  agreement with the Holding Company,  into Common Stock-NJ
unless the  Certificate of  Incorporation  of the Holding  Company is amended to
allow persons who are not  providers to a subsidiary  of the Holding  Company to
own Holding Company Common Stock.  The conversion  feature to be included in any
note issued to Mr.  Roberts  pursuant to his  reimbursement  agreement  with the
Holding Company will not survive any assignment of the note by Mr. Roberts.

         For so long as the Chase Manhattan  Letter of Credit is in effect,  the
Holding Company will not, without the prior written consent of Mr. Roberts:  (i)
merge into any other entity;  (ii) sell,  lease,  transfer,  convey or otherwise
dispose of more than 50% of its assets during any six month  period;  (iii) make
loans to any person, firm or entity; (iv) sell, assign,  transfer,  discount, or
otherwise dispose of any accounts  receivables or any promissory note payable to
it,  except in the ordinary  course of business;  or (v) declare or pay any cash
dividends or make any distributions  on, or redeem,  retire or otherwise acquire
directly  or  indirectly,  any  share  of its  stock,  other  than  pursuant  to
redemptions  by the  Holding  Company  of  its  stock  in  accordance  with  the
provisions of its Certificate of Incorporation.

         During the fiscal year ended December 31, 1996, no executive officer of
the  Holding  Company,  other than James S.  Vaccaro,  served as a member of the
compensation  committee or as a director of another entity,  except for FOHP-NJ,
FOHP-NY, FOHP-PA, FOHP-DE, FOHP-MD, FOHP Agency, Inc. and FMCO, each of which is
or was a  wholly-owned  subsidiary  of the Holding  Company.  James S.  Vaccaro,
former  Executive  Vice  President  and Chief  Operating  Officer of the Holding
Company,  served on the Board of Trustees of Monmouth Medical Center, a provider
in the FOHP-NJ  provider  network  which is  affiliated  with a  shareholder  of
FOHP-NJ, whose former President and Chief Executive Officer, Christopher Dadlez,
has served on the Board of Directors of the Holding  Company  since June 7, 1995
and on the Board of Directors of FOHP-NJ since January 1994.



                                      -47-

<PAGE>



 COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Section  16(a) of the  Exchange  Act  requires  the  Holding  Company's
executive  officers  and  directors,  and  persons  who own  more  than 10% of a
registered class of the Holding 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 Holding  Company with copies of all Forms 3, 4 and 5
that they file.

         Based  solely on the  Holding  Company's  review of the  copies of such
forms it has  received,  the Holding  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  1996 except for the Form 3 required to be filed by Klas T. Booth
in March 1996 when he became an Executive Vice President of the Holding Company.
Mr. Booth promptly  filed a Form 3 in May 1996 when informed of the  inadvertent
omission.



                                      -48-

<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 Holding Company and
its  subsidiaries,  for the fiscal years ended December 31, 1996, 1995 and 1994,
of the persons  serving as the Chief  Executive  Officer of the Holding  Company
during the fiscal year ended  December 31, 1996,  and the next four highest paid
executive  officers of the Holding  Company in fiscal  1996  (collectively,  the
"Named Officers"):

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                       ANNUAL COMPENSATION                         LONG-TERM COMPENSATION
                                  ---------------------------------  ----------------------------------------------------
                                                                              AWARDS              PAYOUTS
                                                                     ---------------------        -------
                                                          Other                    Securities               All
                                                          Annual     Restricted    Underlying               Other
Name and                                                  Compen-    Stock         Options/       LTIP      Compensa-
PRINCIPAL POSITION       YEAR     SALARY($)   BONUS($)    SATION($)  AWARD(S)($)   SARS(#)        PAYOUTS   TION($)(1)(2)
------------------       ----     ---------   --------    ---------  -----------   -------        -------   -------------

<S>                      <C>     <C>           <C>             <C>       <C>          <C>          <C>          <C>
Donald Parisi(3)          1996    $144,231          ---        ---       ---          ---          ---        $    4,981
 Acting President and     1995     120,019          ---        ---       ---          ---          ---             ---
 Chief Executive Officer  1994      45,673(4)       ---        ---       ---          ---          ---             ---

John W. Rohfritch(5)      1996     195,000          ---        ---       ---          ---          ---            75,770(6)(7)
 Former President and     1995     186,254       43,000        ---       ---          ---          ---             ---
 Chief Executive Officer  1994     118,846          ---        ---       ---          ---          ---             ---

John L. Adessa(8)         1996     180,154(9)       ---        ---        ---         ---          ---            36,819(10)(11)
 Former President and     1995     250,000      593,720(12)    ---        ---         ---          ---             ---
 Chief Executive Officer  1994     215,369       75,000        ---        ---         ---          ---             ---

Joseph Singer             1996     239,354          ---        ---        ---         ---          ---             ---
 Executive Vice President 1995     177,217          ---        ---        ---         ---          ---             ---
 and Chief Medical
 Officer

Paul Kimmins(13)          1996     150,000          ---        ---        ---         ---          ---             ---
 Former Executive Vice    1995     124,731       15,000        ---        ---         ---          ---             5,404
 President

James S. Vaccaro(14)      1996     121,811          ---        ---        ---         ---          ---            58,838(15)
 Former Executive Vice    1995     114,788          ---        ---        ---         ---          ---             ---
 President and Chief
 Operating Officer

Sharon Seitzman(16)       1996       83,251         ---        ---        ---         ---          ---            78,507(17)
 Former Executive Vice    1995      122,777      25,113        ---        ---         ---          ---              ---
 President                1994       99,140      21,205        ---        ---         ---          ---              ---

</TABLE>

----------
(1)     Includes  amounts  contributed  by the Holding  Company under its 401(k)
        Plan. All full-time employees who have completed 30 days of service with
        the  Holding  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

                                      -49-

<PAGE>



        compensation  (subject to a maximum amount per year established annually
        pursuant  to the  Code)  through  a payroll  deduction.  Subject  to the
        discretion  of the Board of  Directors,  the  Holding  Company  may make
        matching  contributions to the 401(k) Plan.  Amounts  contributed by the
        Holding  Company to the  accounts of the Named  Officers for fiscal 1996
        are as follows:  Mr. Parisi - $4,750; Mr. Rohfritch - $3,006; Mr. Adessa
        - $4,149;  Dr.  Singer - $4,750;  Mr.  Kimmins - $4,750;  Mr.  Vaccaro -
        $4,750; and Ms. Seitzman - $4,750.
(2)     Includes  amounts of insurance  premiums paid by the Holding  Company in
        fiscal 1996 with respect to term life  insurance  for the benefit of the
        Named  Officers.  Amounts paid by the Holding Company for the benefit of
        the Named Officers are as follows:  Mr. Parisi - $231;  Mr.  Rohfritch -
        $673;  Mr. Adessa - $193;  Dr. Singer - $155;  Mr.  Kimmins - $654;  Mr.
        Vaccaro - $88; and Ms. Seitzman - $142.
(3)     Mr. Parisi was appointed acting President and Chief Executive Officer of
        the Holding Company in December 1996.
(4)     Represents the period from August 8, 1994 to December 31, 1994.
(5)     Mr. Rohfritch served as acting President and Chief Executive  Officer of
        the Holding Company from June 25, 1996 to December 13, 1996.
(6)     Includes unused vacation pay of approximately $30,000.
(7)     Includes  relocation  expenses of $41,709 which were paid by the Holding
        Company.
(8)     Mr.  Adessa  served as  President  and Chief  Executive  Officer  of the
        Holding Company from its inception in May 1994 to June 1996.
(9)     Of this amount, $21,000 is for services provided by Mr. Adessa in 1995.
(10)    Includes unused vacation pay of approximately $27,000.
(11)    Of this amount,  $5,060  represents life insurance  premiums paid by the
        Holding  Company on the life of Mr.  Adessa for his benefit for the year
        ended December 31, 1996.
(12)    Of  this  amount,   $500,000  represents  the  initial  valuation  bonus
        contemplated in the Adessa Employment Agreement (as hereinafter defined)
        that was accrued and  recognized  by the  Holding  Company in 1995,  but
        which  was  not  paid  to Mr.  Adessa  until  April  1996  when  certain
        conditions in the Adessa Employment Agreement were satisfied.
(13)    Mr. Kimmins  served as Executive  Vice President of the Holding  Company
        from June 1995 to January 1997.
(14)    Mr.  Vaccaro  served as Executive  Vice  President  and Chief  Operating
        Officer of the Holding Company from June 1995 to June 1996.
(15)    Of this  amount,  approximately  $54,000  was  paid to Mr.  Vaccaro  for
        consulting services he provided to the Holding Company from June 1996 to
        November 1996.
(16)    Ms. Seitzman served as Executive Vice President of the Holding  Company,
        and as  President  and a director  of  FOHP-NJ  from June 8, 1995 to May
        1996.
(17)    Of this  amount,  $73,615  was  paid to Ms.  Seitzman  as  severance  in
        connection  with her  resignation  as an Executive Vice President of the
        Holding Company in May 1996.

EMPLOYMENT AGREEMENTS

        Joseph  Singer,  M.D.,  pursuant  to an  agreement  between  the Holding
Company and Alliance Medical Group,  Inc.  ("Alliance")  dated November 30, 1994
(the "Singer Employment Agreement"),  is employed as an Executive Vice President
and as the Chief Medical Officer of the Holding  Company.  In November 30, 1996,
the Singer Employment Agreement was automatically  renewed for a two year period
and shall  continually  be renewed  for periods of two years  unless  either the
Holding  Company or Alliance  gives the other  written  notice of  nonrenewal at
least twelve months prior to the expiration of the then current term.

        Pursuant to the Singer Employment Agreement,  Dr. Singer will receive an
annual  salary  of  $240,000  and  similar  benefits  as  provided  to the other
executive officers of the Holding

                                      -50-

<PAGE>


Company. Further, Dr. Singer is provided, at the expense of the Holding Company,
with an automobile, gasoline credit card, automobile insurance and is reimbursed
for the cost of maintaining the automobile.

        Finally, under the terms of the Singer Employment Agreement,  Dr. Singer
is  subject  to  immediate  termination  for  egregious  acts or loss of medical
license.

        Effective  October  27,  1995,  the  Holding  Company  entered  into  an
employment agreement with John L. Adessa, the Holding Company's former President
and Chief Executive  Officer (the "Adessa  Employment  Agreement").  On June 25,
1996, Mr. Adessa's employment with the Holding Company terminated.  As a result,
Mr. Adessa is to receive  approximately  $700,000 as severance  under the Adessa
Employment  Agreement.  In  accordance  with the terms of the Adessa  Employment
Agreement,  the  severance  to be paid Mr.  Adessa  is the sum of the  following
amounts:  (i) the amount  equal to two times his salary in effect on the date of
severance;  (ii) the amount equal to the annual  bonus earned by Mr.  Adessa for
the full  fiscal  year last ended  before the date of  severance;  and (iii) the
amount equal to 20% of the sum of all salary and annual bonuses earned from July
1, 1994 through the date of severance. The severance payment will be made by the
Holding  Company as soon as such  payment is  permitted  by the DOI. The DOI has
prohibited  the  Holding  Company  from making  such  payment  until the Holding
Company resolves FOHP-NJ's statutory net worth deficiency.

        The Adessa Employment Agreement contains a covenant not to compete which
provides that in the event the Adessa Employment Agreement is terminated for any
reason,  Mr. Adessa will not, for a one year period,  accept employment from any
other HMO,  insurance  company,  preferred  provider  organization  or any other
entity which  competes  with the Holding  Company  within any state in which the
Holding Company or any of its affiliates is licensed to conduct  business or has
filed an application for such license.

        Paul J. Kimmins, former Executive Vice President of the Holding Company,
is employed  pursuant to an  agreement  dated July 17, 1995 and  effective as of
July 1, 1995 (the  "Kimmins  Employment  Agreement").  The term of Mr.  Kimmins'
employment  under  the  Kimmins  Employment  Agreement  will end  July 1,  1997.
Pursuant to the terms of the Kimmins  Employment  Agreement,  Mr.  Kimmins  will
receive an annual salary of $150,000. In addition, since the Holding Company has
not renewed the Kimmins  Employment  Agreement,  Mr. Kimmins will receive a lump
sum payment of $75,000 on or about September 15, 1997.



                                      -51-

<PAGE>



 ITEM 12.  PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP MANAGEMENT.

        The following  table sets forth  information as of March 15, 1997,  with
respect to the  beneficial  ownership  (as defined in Rule 13d-3 of the Exchange
Act) of the Holding  Company's Common  Stock-NJ,  which is the only class of the
Holding  Company's  capital  stock with shares issued and  outstanding,  by each
director of the Holding  Company,  each nominee for director,  each of the Named
Officers (as defined in the section herein captioned "Executive  Compensation"),
each  person  or  group  of  persons  known  by the  Holding  Company  to be the
beneficial owner of more than 5% of Common Stock-NJ, and all directors, nominees
for director and executive officers of the Holding Company as a group:

                                             BENEFICIAL OWNERSHIP OF
                                                 COMMON STOCK-NJ
                                       ------------------------------------
                                                                 Percent of
NAME OF BENEFICIAL OWNER               NO. OF SHARES (1)           CLASS
-------------------------              -----------------          ---------

Saint Barnabas Corporation(2)........        206,677  (3)              9.9%

William Roberts (4)..................             --

John L. Adessa (5)...................             --

Michael W. Azzara (4)................             --

Christopher Dadlez (4)(6)............             --

Dr. Mark Engel (4)(6)................          7,017  (7)               (8)

Dr. Stephen D. Feldman (4)...........          2,000                    (8)

Dr. Thomas J. Feneran (4)(6).........          4,100                    (8)

John R. Kopicki (4)..................             --

Dr. Joel F. Lehrer (4)...............          1,717                    (8)

Dr. Paul F. Low (4)..................         12,400                    (8)

Barry H. Ostrowsky (4)...............             --

Mark D. Pilla (4)....................             --

Dr. Om P. Sawhney (4)(6).............          5,800  (9)               (8)


                                      -52-

<PAGE>



                                                     BENEFICIAL OWNERSHIP OF
                                                          COMMON STOCK-NJ
                                                 -------------------------------

                                                                     Percent of
NAME OF BENEFICIAL OWNER                         NO. OF SHARES (1)      CLASS
-------------------------                        -----------------     --------

Roger Birnbaum (6)   .........................             --

Dr. John F. Bonamo (6)........................          1,500             (8)

Sister Jane Frances Brady (6).................             --

Bruce G. Coe (6)..............................             --

John Gantner (6)..............................             --

Laurence M. Merlis (6)........................             --

Donald Parisi (4) (10)........................             --

John W. Rohfritch (11)........................             --

Dr. Joseph Singer (10)........................          8,000             (8)

Paul J. Kimmins (12)..........................             --

James S. Vaccaro (13).........................             --

Sharon Seitzman (14)..........................            266  (15)       (8)

All Directors, Nominees for Director
and Executive Officers as a Group (20 persons)         42,534  (7)(9)    2.0%
----------

(1)    Except as otherwise  indicated,  all of the shares of Common Stock-NJ are
       held beneficially and of record.
(2)    Saint Barnabas  Corporation's  principal executive offices are located at
       Old Short Hills Road, Livingston, New Jersey 07039.
(3)    Saint Barnabas  Corporation,  on behalf of Saint Barnabas Medical Center,
       owns  33,335  shares of Common  Stock-NJ.  In  addition,  Saint  Barnabas
       Corporation  is the sole member of seven other  hospitals  located in New
       Jersey  which  provide  health  care  services  to the members of FOHP-NJ
       health  plans and own  shares  of Common  Stock-NJ,  either  directly  or
       through an  affiliate.  The  hospitals  affiliated  with  Saint  Barnabas
       Corporation  owning shares of Common Stock-NJ,  other than Saint Barnabas
       Medical Center, and the number of shares of Common Stock-NJ owned by them
       either directly


                                      -53-

<PAGE>



       or indirectly are as follows:  Community  Medical Center - 33,335 shares;
       Irvington  General  Hospital - 13,334  shares;  Kimball  Medical Center -
       33,335  shares;  Monmouth  Medical  Center - 33,335  shares;  Newark Beth
       Israel Medical  Center - 33,335  shares;  Union Hospital - 13,334 shares;
       and West Hudson Hospital - 13,334 shares.  Each hospital  affiliated with
       Saint  Barnabas  Corporation  disclaims  any  beneficial  interest in the
       shares of Common  Stock-NJ  held by Saint  Barnabas  Corporation  and the
       other hospitals affiliated with Saint Barnabas Corporation.
(4)    Such person currently serves as a director of the Holding Company.
(5)    Mr. Adessa served as the President and Chief  Executive  Officer and as a
       director of the Holding  Company  from its  inception in May 1994 to June
       1996.
(6)    Such person is a nominee for director.
(7)    Includes  an  aggregate  of 417  shares  of Common  Stock-NJ  held by Dr.
       Barbara Engel, Dr. Mark Engel's wife, as to which shares he disclaims any
       beneficial interest.
(8)    Shares  beneficially  owned do not  exceed  1% of the  Holding  Company's
       outstanding Common Stock-NJ.
(9)    Includes an aggregate of 500 shares of Common  Stock-NJ held by Dr. Veena
       Sawhney,  Dr. Om Sawhney's  wife,  as to which  shares he  disclaims  any
       beneficial interest.
(10)   Such person is an executive officer of the Holding Company.
(11)   Mr. Rohfritch  served as acting President and Chief Executive  Officer of
       the  Holding  Company  from June 1996 to  December  1996 and served as an
       Executive Vice President of the Holding Company from June 8, 1995 to June
       1996.
(12)   Mr. Kimmins served as an Executive Vice President of the Holding  Company
       from June 1995 to January 1997.
(13)   Mr.  Vaccaro  served  as an  Executive  Vice  President  and as the Chief
       Operating Officer of the Holding Company from June 1995 to June 1996.
(14)   Ms.  Seitzman  served  as an  Executive  Vice  President  of the  Holding
       Company, and as President and a director of FOHP-NJ, from June 8, 1995 to
       May 1996.
(15)   Represents all the shares held by Dr. Lawrence  Seitzman,  Ms. Seitzman's
       husband,  as to  which  shares  Ms.  Seitzman  disclaims  any  beneficial
       interest.


                                      -54-

<PAGE>




ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      The following  directors of the Holding Company are executive  officers of
NJ Acute Care  Institutions of their  affiliates  which have  purchased,  either
directly  or  through  an  affiliate,  shares of Common  Stock-NJ:  Mr.  Azzara,
President  and Chief  Executive  Officer of The  Valley  Hospital;  Mr.  Dadlez,
Executive  Vice  President of Saint Barnabas  Health Care System;  Mr.  Kopicki,
President and Chief Executive Officer of Muhlenberg Regional Medical Center; Mr.
Ostrowsky, Executive Vice President and General Counsel of Saint Barnabas Health
Care System;  and Mr. Pilla,  Executive Vice President of Saint Barnabas  Health
Care System,  President of Community  Memorial Health Services  Corporation,  an
affiliate of Community Medical Center and Kimball Medical Center,  and President
and Chief  Executive  Officer of each of  Community  Medical  Center and Kimball
Medical Center. See "Current Directors of the Registrant." In addition,  a large
percentage  of  the  revenues  of  FOHP-NJ  is  generated  from  NJ  Acute  Care
Institutions  who have  enrolled  employees in FOHP-NJ  plans as required by the
Certificate of Incorporation of the Holding Company.

      Effective December 31, 1995, William B. Roberts, the Chairman of the Board
of Directors of the Holding Company,  guaranteed the payment of up to $6,000,000
of the Holding Company's capital obligation to FOHP-NJ. The guarantee terminated
on March 27, 1997. Mr.  Roberts was paid $10,000 for providing  this  guarantee.
Simultaneously  with the termination of Mr. Roberts' $6,000,000  guarantee,  Mr.
Roberts  secured from Chase  Manhattan Bank a $3,000,000  letter of credit which
may be drawn upon by the  Holding  Company in the event the  Holding  Company is
required to contribute  capital to FOHP-NJ so that FOHP-NJ remains in compliance
with the statutory net worth and other  capital  requirements  applicable to it.
See "Compensation Committee Interlocks and Insider Participation in Compensation
Decisions."

         On March 29, 1996, certain NJ Practitioners,  each a shareholder of the
Holding Company,  secured from Carnegie Bank a $3,475,000  letter of credit (the
"Carnegie  Letter of Credit") which may be drawn upon by the Holding  Company in
the event the Holding  Company is required to  contribute  capital to FOHP-NJ so
that  FOHP-NJ  remains  in  compliance  with the  statutory  net worth and other
capital  requirements  applicable  to it. The NJ  Practitioners  who secured the
Carnegie Bank letter of credit are: Dr. Chris Anayiotos, Dr. Tun Chu, Dr. Miguel
Damien,  Dr. Shirley Hoh, Dr. Renny Lin, Dr. Carl Raso,  Dr. Donato  Santangelo,
III, Dr. Mohammad A. Sarraf,  Dr. Mohammed Shafi,  Dr. Kishori P. Shah, Dr. Gary
Siemons, Dr. John Sutherland, Dr. Kock-Yen Tsang, Dr. Lewis Wetstein, Dr. Renato
Ynaya and Dr. Henry Yu.

         The Holding  Company paid $52,125 in bank fees in  connection  with the
Carnegie Letter of Credit.  Contemporaneously  with the issuance of the Carnegie
Letter of Credit,  the Holding  Company  entered  into a separate  reimbursement
agreement with each NJ Practitioner  who secured the letter of credit,  pursuant
to which the NJ  Practitioner  will be reimbursed by the Holding Company for any
amounts he or she is required to pay Carnegie Bank in  connection  with any draw
against the Carnegie Letter of Credit by the Holding Company. Under the terms of
the reimbursement  agreements,  the Holding Company paid to the NJ Practitioners
who

                                      -55-

<PAGE>



secured the Carnegie  Letter of Credit an  aggregate  fee of $173,750 or 2.5% of
the aggregate  amount of the  guarantees  furnished by the NJ  Practitioners  to
secure the Carnegie Letter of Credit.

         The  Carnegie  Letter of  Credit  was to expire  on  January  1,  1997.
However,  in December  1996,  the Carnegie  Letter of Credit was extended  until
March 31, 1997.  In  connection  with the  extension  of the Carnegie  Letter of
Credit,  the Holding  Company paid $14,681 in bank fees and an aggregate  fee of
approximately $43,000 to the NJ Practitioners who secured the Carnegie Letter of
Credit.  Inasmuch as the consummation of the Transaction will not occur prior to
March 31, 1997, the Holding  Company is currently  seeking a 30 day extension of
the Carnegie  Letter of Credit.  If the  extension  is not granted,  the DOI has
authorized  the Holding  Company to draw against the  Carnegie  Letter of Credit
prior to March 31, 1997.

         Prior to making any draw  against the  Carnegie  Letter of Credit,  the
Holding  Company  must  furnish to each NJ  Practitioner  securing the letter of
credit the same written evidence and  representations  as the Holding Company is
required to furnish Mr.  Roberts in  connection  with any draw against the Chase
Manhattan Letter of Credit. See "Compensation  Committee  Interlocks and Insider
Participation  in Compensation  Decisions."  Moreover,  under its  reimbursement
agreements with the NJ Practitioners  who secured the Carnegie Letter of Credit,
the Holding  Company is  obligated  to reimburse  the NJ  Practitioners  for any
amounts such persons have paid to Carnegie Bank in  connection  with any draw by
the  Holding  Company  against  the letter of credit.  Interest  on the  Holding
Company's  reimbursement  obligation to a NJ Practitioner  securing the Carnegie
Letter of Credit will be payable  monthly at a rate equal to the prime rate of a
national bank chosen by the Holding Company plus 4%. The principal amount of the
obligation plus all accrued interest will be payable to the NJ Practitioner,  to
whom the  obligation  was owed,  within 9 months from the date the obligation is
first incurred by the Holding Company.

         For so long as the Carnegie Letter of Credit is in effect,  the Holding
Company  will not,  without the prior  written  consent of each NJ  practitioner
securing  the letter of  credit:  (i) merge  into any other  entity;  (ii) sell,
lease,  transfer,  convey or  otherwise  dispose  of more than 50% of its assets
during any six month  period;  (iii) make loans to any  person,  firm or entity;
(iv) sell,  assign,  transfer,  discount,  or otherwise  dispose of any accounts
receivables or any promissory  note payable to it, except in the ordinary course
of business;  or (v) declare or pay any cash dividends or make any distributions
on, or redeem, retire or otherwise acquire directly or indirectly,  any share of
its stock,  other than  pursuant to  redemptions  by the Holding  Company of its
stock in accordance with the provisions of its Certificate of Incorporation.

         In March and April 1996, Dr. Randall Krakauer, a member of the Board of
Directors of FOHP-NJ and shareholder of the Holding Company, and John L. Adessa,
President and Chief Executive Officer of the Holding Company,  each secured from
CoreStates Bank a separate letter of credit (the "CoreStates Letters of Credit")
which may be drawn upon by the Holding  Company in the event the Holding Company
is  required  to  contribute  capital  to  FOHP-NJ  so that  FOHP-NJ  remains in
compliance with the statutory net worth and other capital requirements

                                      -56-

<PAGE>



applicable  to it.  Dr.  Krakauer  secured a  $300,000  letter of credit and Mr.
Adessa secured a $323,000  letter of credit.  The Holding Company paid $7,199 in
bank fees in connection  with the  CoreStates  Letters of Credit.  In connection
with issuance of the CoreStates  Letters of Credit,  the Holding Company entered
into a reimbursement agreement with each of Dr. Krakauer and Mr. Adessa pursuant
to which the Holding  Company will reimburse Dr.  Krakauer or Mr. Adessa for any
amounts they are required to pay CoreStates  Bank in connection with any draw by
the Holding Company against the CoreStates Letters of Credit secured by them. In
all material aspects,  the terms and conditions of the reimbursement  agreements
entered  into by Dr.  Krakauer  and Mr.  Adessa  are  similar  to the  terms and
conditions of the  reimbursement  agreements  between the NJ  Practitioners  who
secured the Carnegie Letter of Credit and the Holding  Company,  except that the
Holding  Company  had agreed not to make any draw  against  the letter of credit
secured by Mr. Adessa from CoreStates  Bank until the Holding Company  exhausted
all its rights against any other letter of credit or guarantee made available to
the Holding  Company.  As  consideration  for  securing a letter of credit,  the
Holding Company paid Dr.  Krakauer $7,500 and Mr. Adessa $8,075,  or 2.5% of the
amount of the letter of credit secured by each individual.

         In September  1996,  the amount of the letter of credit  secured by Mr.
Adessa from  CoreStates  Bank was reduced  from  $323,000  to  $100,000,  and on
January 1, 1997, the remaining amount of the letter of credit expired.

         The letter of credit  secured by Dr.  Krakauer was to expire on January
1, 1997. However, in December 1996, the letter of credit secured by Dr. Krakauer
was  extended  until March 31, 1997.  In  connection  with the  extension of the
letter of credit, the Holding Company paid approximately $800 in bank fees and a
fee of $1,875 to Dr.  Krakauer.  Inasmuch as the consummation of the Transaction
will not occur  prior to March 31,  1997,  the  letter of credit  secured by Dr.
Krakauer was extended until April 30, 1997.

         In March and April 1996, certain NJ Acute Care Institutions and certain
affiliates of NJ Acute Care  Institutions  executed  guarantees on behalf of the
Holding  Company  and in favor of FOHP-NJ  which  guarantee  the  payment of the
Holding Company's capital obligation to FOHP-NJ.  The name of each NJ Acute Care
Institution and affiliate of a NJ Acute Care  Institution  which  guaranteed the
Holding  Company's  capital  obligation to FOHP-NJ and the amount  guaranteed by
each such entity is as follows:  Community-Kimball Health Care Systems, Inc. (an
affiliate of Kimball  Medical Center and Community  Medical  Center) - $250,000;
Saint Barnabas  Corporation  (an affiliate of Saint Barnabas  Medical  Center) -
$250,000;  Monmouth  Medical  Center -  $250,000;  Barnert  Hospital - $100,000;
Bayshore  Community  Hospital - $100,000;  Burdette Tomlin  Memorial  Hospital -
$100,000;  Chilton  Memorial  Hospital - $100,000;  C.H.  Management  Corp.  (an
affiliate of Christ Hospital) - $250,000; Comprehensive Health & Education Corp.
(an affiliate of Muhlenberg  Regional  Medical  Center) - $250,000;  JFK Medical
Center - $250,000;  Memorial Health Alliance (an affiliate of Memorial  Hospital
of  Burlington  County) - $250,000;  Mercer  Medical  Center - $100,000;  Newton
Memorial Hospital - $100,000; Our Lady of Lourdes Health Care Services, Inc. (an
affiliate  of Our Lady of Lourdes  Hospital)  - $100,000;  Beth Israel  Hospital
(Passaic)  -  $100,000;  The  Valley  Hospital

                                      -57-

<PAGE>



- $250,000;  Riverview  Health  Affiliates  (an  affiliate of Riverview  Medical
Center) - $250,000;  West Hudson Hospital - $100,000;  St. Joseph's Hospital and
Medical Center - $250,000;  Morristown  Memorial Hospital - $250,000;  Elizabeth
General Health Services Corp. (an affiliate of Elizabeth General Medical Center)
- $100,000;  Englewood  Healthcare Ent. (an affiliate of Englewood  Hospital and
Medical  Center) - $250,000;  MidJersey  Health  Corporation  (an  affiliate  of
Hunterdon  Medical  Center) -  $100,000;  and  Robert  Wood  Johnson  University
Hospital - $250,000.

         In addition,  in July and August,  1996, Holy Name Hospital  guaranteed
$150,000 of the Holding Company's capital obligation to FOHP-NJ,  and The Valley
Hospital and West Hudson Hospital  guaranteed an additional  $50,000 and $25,000
of such obligation, respectively.

         Pursuant to the terms of the  guarantees  furnished by certain NJ Acute
Care  Instituion  (the  "Institutional  Guarantees"),  a  guarantor  will not be
required to make any payment under an  Institutional  Guarantee  until:  (i) the
Holding Company  furnishes written evidence to the guarantor that the DOI and/or
the DOH have  required  FOHP-NJ  to  obtain  additional  capital  to  remain  in
compliance  with  the  statutory  net  worth  and  other  capital   requirements
applicable  to FOHP-NJ,  and (ii) the Holding  Company does not have  sufficient
capital to  contribute to FOHP-NJ so that FOHP-NJ is able to satisfy the request
of the DOI and/or the DOH and remain in compliance  with the statutory net worth
and other capital  requirements  applicable to FOHP-NJ,  and the Holding Company
provides the guarantor with a written representation to that effect.

         Pursuant  to the terms of the  Institutional  Guarantees,  the  Holding
Company is  required  to  reimburse  a  guarantor  for any  amounts  paid by the
guarantor under an Institutional Guarantee.  Interest on such obligation will be
payable  monthly at a rate equal to the prime rate of a national  bank chosen by
the Holding  Company plus 4%. The principal  amount of the  obligation  plus all
accrued  interest will be payable to the  guarantor  within nine months from the
date the obligation is first incurred by the Holding Company.

         For so long as an  Institutional  Guarantee  is in effect,  the Holding
Company will not, without the prior written consent of the guarantor:  (i) merge
into any other entity; (ii) sell, lease,  transfer,  convey or otherwise dispose
of more than 50% of its assets during any six month period;  (iii) make loans to
any person, firm or entity; (iv) sell, assign, transfer,  discount, or otherwise
dispose of any accounts receivables or any promissory note payable to it, except
in the ordinary course of business;  or (v) declare or pay any cash dividends or
make any  distributions  on, or redeem,  retire or otherwise acquire directly or
indirectly,  any share of its stock,  other than pursuant to  redemptions by the
Holding  Company  of  its  stock  in  accordance  with  the  provisions  of  its
Certificate of Incorporation.  In the event that the Holding Company effects any
of the aforestated actions without the prior written consent of the guarantor or
breaches  certain other covenants  contained in the  Institutional  Guarantee to
which the guarantor is a party, such Institutional Guarantee will be void and of
no further  effect unless such breach is cured by the Holding  Company within 30
days of its receipt of written notification from the guarantor of such breach.

                                      -58-

<PAGE>



         Each  guarantor's  liability under its  Institutional  Guarantee was to
expire on  January  1, 1997.  However,  in  December  1996,  each  Institutional
Guarantee was extended until March 31, 1997. In connection with the extension of
the Institutional  Guarantees,  the Holding Company paid $100 to each guarantor.
Inasmuch as the  consummation of the  Transaction  will not occur prior to March
31, 1997,  the Holding  Company is currently  seeking a 30 day extension of each
Institutional Guarantee. If any of the Institutional Guarantees is not extended,
the DOI has  authorized  the Holding  Company to require  payment under any such
Institutional Guarantee by March 31, 1997.



                                      -59-

<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,  1996,  the  following
         Current  Report on Form 8-K was filed by the Holding  Company  with the
         Commission:

         Form 8-K (Item 5.  Other  Events),  date of  earliest  event  reported,
         October  24,  1996,  with  respect  to the  execution  of the  Original
         Securities Purchase Agreement by and among the Holding Company, FOHP-NJ
         and HSI.


                                      -60-

<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 28, 1997                     By:/S/ DONALD PARISI
                                             -----------------
                                             DONALD PARISI, Acting 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/ DONALD PARISI                           Acting President and Chief                  March 28, 1997
------------------------------------        Executive Officer and
Donald Parisi                               Director (Principal
                                            Executive Officer)

/S/ JOHN MCCARTHY                           Vice President                              March 28, 1997
------------------------------------        (Principal Financial and
John McCarthy                                 Accounting Officer)



/S/ WILLIAM ROBERTS                         Chairman of the Board                       March 28, 1997
------------------------------------
William Roberts



/S/ MICHAEL W. AZZARA                       Director                                    March 28, 1997
------------------------------------
Michael W. Azzara


</TABLE>




                                      -61-

<PAGE>

<TABLE>
<CAPTION>


         SIGNATURE                          TITLE                                           DATE

<S>                                         <C>                                         <C>
/S/ CHRISTOPHER DADLEZ                      Director                                    March 28, 1997
------------------------------------
Christopher Dadlez


/S/ MARK ENGEL                              Director                                    March 28, 1997
------------------------------------
Dr. Mark Engel


/S/ STEPHEN D. FELDMAN                      Director                                    March 28, 1997
------------------------------------
Dr. Stephen D. Feldman


/S/ THOMAS J. FENERAN                       Director                                    March 21, 1997
------------------------------------
Dr. Thomas J. Feneran


/S/ JOHN R. KOPICKI                         Director                                    March 28, 1997
------------------------------------
John R. Kopicki


/S/ JOEL F. LEHRER                          Director                                    March 28, 1997
------------------------------------
Dr. Joel F. Lehrer


/S/ PAUL F. LOW                             Director                                    March 28, 1997
------------------------------------
Dr. Paul F. Low


/S/ BARRY H. OSTROWSKY                      Director                                    March 19, 1997
------------------------------------
Barry H. Ostrowsky


/S/ MARK D. PILLA                           Director                                    March 28, 1997
------------------------------------
Mark D. Pilla


/S/ OM P. SAWHNEY                           Director                                    March 18, 1997
------------------------------------
Dr. Om P. Sawhney

</TABLE>


                                      -62-

                                       <PAGE>

                        Consolidated Financial Statements
                         and Other Financial Information

                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                                December 31, 1996



                                    Contents



Report of Independent Auditors...............................................F-2
Consolidated Balance Sheets..................................................F-4
Consolidated Statements of Operations........................................F-5
Consolidated Statements of Shareholders' (Deficiency) Equity.................F-6
Consolidated Statements of Cash Flows........................................F-7
Notes to Consolidated Financial Statements...................................F-8



                                       F-1

<PAGE>








                         Report of Independent Auditors


The Board of Directors
FOHP, Inc.

We have audited the accompanying  consolidated balance sheets of FOHP, Inc. (the
"Holding  Company") and  subsidiaries  as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' (deficiency) equity
and cash flows for each of the three  years in the  period  ended  December  31,
1996. These financial statements are the responsibility of the Holding 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, 1996 and 1995, and the  consolidated  results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1996,  in  conformity  with  generally  accepted  accounting
principles.

The accompanying  consolidated  financial statements have been prepared assuming
the  Holding  Company  will  continue  as a  going  concern.  As  shown  in  the
consolidated  financial statements,  the Holding Company has incurred a 1996 net
loss of $30,745,106  and has an  accumulated  deficit of $56,535,558 at December
31, 1996. Also, the Holding  Company's  principal  operating  subsidiary,  First
Option Health Plan of New Jersey,  Inc.  ("FOHP-NJ"),  has not met its statutory
net worth  requirements  pursuant to its Certificate of Authority granted by the
New Jersey  Departments of Banking and Insurance and Health and Senior  Services
(the  "Departments").  As discussed in Note 2, the Holding  Company  anticipates
raising additional capital through the sale of convertible  debentures which, in
management's opinion, will provide the capital necessary for FOHP-NJ to meet the
Departments'  statutory  net  worth  requirements.  However,  the  sale  of  the
convertible  debentures  is subject to the approval of the  shareholders  of the
Holding Company.


                                       F-2

<PAGE>



Accordingly,  these matters raise  substantial doubt about the Holding Company's
ability to continue as a going concern.  (Management's  plans in regard to these
matters  are  further  described  in Note  2.) The 1996  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.




Iselin, New Jersey                                             Ernst & Young LLP
February 14, 1997








                                       F-3

<PAGE>


<TABLE>

                                            FOHP, Inc. and Subsidiaries
                          (Successor to First Option Health Plan of New Jersey, Inc.)

                                            Consolidated Balance Sheets

<CAPTION>

                                                                                       DECEMBER 31
                                                                              1996                     1995
                                                                          ----------------------------------
<S>                                                                       <C>                 <C>
ASSETS
Cash and cash equivalents                                                 $ 36,664,911        $ 23,882,286
Accounts receivable from owners/providers, net of allowance
   for retroactive terminations of $1,600,000 in 1996 (NOTE 4)               8,206,471           6,341,092
Other accounts receivable, net of allowances for doubtful
   accounts and retroactive terminations of $100,000 in 1996 and
   $676,215 in 1995 (NOTE 4)                                                 3,666,887           3,252,639
Prepaids and other current assets                                            1,904,360             534,751
                                                                          ----------------------------------
Total current assets                                                        50,442,629          34,010,768



Long-term assets:
   Restricted cash (NOTE 2)                                                  1,265,449           1,200,801
   Furniture and equipment, net (NOTE 5)                                     1,884,558           1,859,131
   Other assets                                                                659,581             291,133
                                                                          ----------------------------------
Total assets                                                              $ 54,252,217        $ 37,361,833
                                                                          ==================================


LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
   Medical claims payable to owners/providers                             $ 13,775,534        $  8,357,685
   Other medical claims payable                                             55,370,457          18,602,588
   Accounts payable and accrued expenses                                     5,163,115           4,291,102
   Unearned premium                                                          4,598,662             341,092
   Other                                                                     1,210,516             890,327
                                                                          ----------------------------------
Total current liabilities                                                   80,118,284          32,482,794


Commitments and contingencies (NOTE 9)

Shareholders' (deficiency) equity:
   FOHP, Inc., 100,000,000 shares authorized, $.01 par value;
    Common Stock-NJ, 2,100,173 shares issued and outstanding (NOTE 6)           21,002              21,002
   Additional paid-in capital                                               30,648,489          30,648,489
   Accumulated deficit                                                     (56,535,558)        (25,790,452)
                                                                          ----------------------------------
Total shareholders' (deficiency) equity                                    (25,866,067)          4,879,039
                                                                          ----------------------------------
Total liabilities and shareholders' (deficiency) equity                   $ 54,252,217        $ 37,361,833
                                                                          ==================================


</TABLE>



SEE ACCOMPANYING NOTES.


                                       F-4

<PAGE>


<TABLE>
                                                   FOHP, Inc. and Subsidiaries
                                   (Successor to First Option Health Plan of New Jersey, Inc.)

                                              Consolidated Statements of Operations


<CAPTION>


                                                                               Year ended December 31
                                                               1996                  1995                  1994
                                                          -------------------------------------------------------------
<S>                                                       <C>                     <C>                     <C>
Revenue:
  Premiums from owners/providers                          $ 135,544,112           $  63,630,797           $   5,639,724
  Other premium revenue                                     112,125,670              38,819,206               1,803,624
  Other, principally administrative service fees              7,863,006               7,621,790                 749,817
  Interest income                                             1,843,520               1,222,246                 427,354
                                                          -------------------------------------------------------------
Total revenue                                               257,376,308             111,294,039               8,620,519



Expenses:
  Medical services to owners/providers                       37,026,903              17,319,035               1,405,175
  Hospital services to owners/providers                      30,156,890              11,068,909                 880,920
  Other medical services                                    105,496,580              38,548,819               2,727,694
  Other hospital services                                    63,760,554              24,637,249               1,710,020
  Selling, general and administrative                        50,789,010              32,638,106              10,624,261
  Depreciation and amortization                                 879,306                 674,433                 231,057
  Interest                                                       11,247                  90,048                   8,964
  Write-off of intangible asset (NOTE 2)                                                986,782
                                                          -------------------------------------------------------------
Total expenses                                              288,120,490             125,963,381              17,588,091
                                                          -------------------------------------------------------------
Net loss before provision for state income taxes            (30,744,182)            (14,669,342)             (8,967,572)


Provision for state income taxes (NOTE 6)                           924                  71,603
                                                          -------------------------------------------------------------
Net loss                                                  $ (30,745,106)          $ (14,740,945)          $  (8,967,572)
                                                          =============================================================


Net loss per common share                                 $      (14.64)          $       (8.65)          $       (8.40)
                                                          =============================================================

</TABLE>


SEE ACCOMPANYING NOTES.


                                       F-5

<PAGE>

<TABLE>
<CAPTION>


                                                       FOHP, Inc. and Subsidiaries
                                     (Successor to First Option Health Plan of New Jersey, Inc.)

                                     Consolidated Statements of Shareholders' (Deficiency) Equity

                                         COMMON STOCK                                                           TOTAL
                                    -----------------------     ADDITIONAL     COMMON                        SHAREHOLDERS'
                                                     PAR          PAID-IN       STOCK        ACCUMULATED     (DEFICIENCY)
                                       SHARES       VALUE         CAPITAL     SUBSCRIBED      DEFICIT            EQUIT
                                    --------------------------------------------------------------------------------------
<S>                                  <C>          <C>         <C>             <C>            <C>             <C>
Balance at January 1, 1994                  --    $     --    $         --    $ 12,400,000   $ (2,081,935)   $ 10,318,065
 FOHP-NJ Common Stock
  issued (at $15 per share):
  FOHP-NJ Institutional Provider     1,020,051      10,201      14,741,961     (12,400,000)                     2,352,162
  FOHP-NJ Other Provider                40,002         400         599,600                                        600,000
 Net loss                                                                                      (8,967,572)     (8,967,572)
                                    --------------------------------------------------------------------------------------
Balance at December 31, 1994         1,060,053      10,601      15,341,561              --    (11,049,507)      4,302,655
 Reclassification of FOHP-NJ
  Practitioner Provider Common
  Stock from temporary equity          511,800       5,118       7,671,882                                      7,677,000
 Redemption of FOHP-NJ Prac-
  titioner Provider Common Stock          (100)         (1)         (1,499)                                        (1,500)
 Conversion of outstanding shares
  of FOHP-NJ Common Stock to
  FOHP, Inc. Common Stock-NJ:
  FOHP-NJ Institutional Provider    (1,020,051)    (10,201)                                                       (10,201)
  FOHP-NJ Other Provider               (40,002)       (400)                                                          (400)
  FOHP-NJ Practitioner Provider       (511,700)     (5,117)                                                        (5,117)
 FOHP, Inc. Common Stock-NJ
  issued (at $15 per share)          2,100,173      21,002       7,931,516                                      7,952,518
 Payment of issue costs                                           (294,971)                                      (294,971)
 Net loss                                                                                     (14,740,945)    (14,740,945)
                                    --------------------------------------------------------------------------------------
Balance at December 31, 1995         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)
                                    ======================================================================================


</TABLE>

SEE ACCOMPANYING NOTES.


                                       F-6

<PAGE>



<TABLE>
                                      FOHP, Inc. and Subsidiaries
                       (Successor to First Option Health Plan of New Jersey, Inc.)

                                 Consolidated Statements of Cash Flows

<CAPTION>


                                                                             YEAR ENDED DECEMBER 31
                                                                   1996              1995               1994
                                                              -----------------------------------------------
<S>                                                             <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                        $(30,745,106)   $(14,740,945)   $ (8,967,572)
Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
     Provision for bad debts and retroactive terminations          2,381,428         674,860         100,300
     Depreciation                                                    879,306         563,769         221,835
     Amortization of cost in excess of assets acquired                               110,664           9,222
     Write-off of intangible asset                                                   986,782
     Changes in operating assets and liabilities:
        Increase in accounts receivable from owners/providers     (4,246,807)     (4,539,229)     (1,801,863)
        Increase in other accounts receivable                       (414,248)     (2,750,685)       (778,197)
        (Increase) decrease in prepaids and other current
        assets                                                    (1,369,609)        232,524        (661,038)
        Increase in restricted cash                                  (64,648)       (893,610)       (307,191)
        (Increase) decrease in other assets                         (368,448)        207,136        (410,283)
        Increase in medical claims payable to
        owners/providers                                           5,417,849       6,496,873       1,468,045
        Increase in other medical claims payable                  36,767,869      14,990,425       3,267,585
        Increase in accounts payable and accrued expenses            872,013       1,787,571       1,835,586
        Increase in unearned premium                               4,257,570         216,193         124,899
        Increase in other liabilities                                320,189         890,327
                                                              -----------------------------------------------
Net cash provided by (used in) operating activities               13,687,358       4,232,655      (5,898,672)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment                                 (904,733)     (1,020,993)     (1,368,975)
Purchase of FMCO, net of cash acquired                                                              (834,445)
                                                              -----------------------------------------------
Net cash used in investing activities                               (904,733)     (1,020,993)     (2,203,420)

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock                                                           7,640,329      10,629,162
                                                              -----------------------------------------------
Net cash provided by financing activities                                 --       7,640,329      10,629,162
                                                              -----------------------------------------------

Increase in cash and cash equivalents                             12,782,625      10,851,991       2,527,070
Cash and cash equivalents at beginning of year                    23,882,286      13,030,295      10,503,225
                                                              -----------------------------------------------
Cash and cash equivalents at end of year                        $ 36,664,911    $ 23,882,286    $ 13,030,295
                                                              ===============================================
Interest paid for the year                                      $      7,488    $     75,123    $      9,057
                                                              ===============================================


</TABLE>

                                       F-7

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996



1.   GENERAL

FOHP, Inc. (the "Holding  Company" or "FOHP") is a New Jersey  corporation which
was  formed  in  May  1994.  The  Holding  Company  was  formed  to  effect  the
reorganization of First Option Health Plan of New Jersey, Inc.  ("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 Holding 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
Holding  Company.  Pursuant  to the  Reorganization,  FOHP-NJ  and  FMCO  became
wholly-owned  subsidiaries  of FOHP.  Prior to the  Reorganization,  the Holding
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  health  maintenance  organizations in states other than
New Jersey.

The  Holding  Company  serves  as  the  holding  company  for  its  wholly-owned
subsidiaries  to which it  provides  management  and  consulting  services.  The
Holding Company's  principal  operating  subsidiary is FOHP-NJ.  FOHP-NJ,  a New
Jersey  corporation  formed in May 1993,  received its  Certificate of Authority
("COA") to operate  as an HMO in New  Jersey in June  1994.  Other  wholly-owned
subsidiaries  of the Holding  Company  include  First Option  Health Plan of New
York,  Inc.  ("FOHP-NY"),  a New York  corporation,  First Option Health Plan of
Pennsylvania,  Inc. ("FOHPPA"), a Pennsylvania corporation,  First Option Health
Plan of Maryland,  Inc.,  a Maryland  corporation,  First Option  Health Plan of
Delaware,  Inc., a Delaware  corporation,  and FOHP  Agency,  Inc., a New Jersey
corporation,  each formed in 1995, and First Option Dental, Inc. formed in 1996.
These other  subsidiaries  have not  commenced  operations.  Each of FOHP-NY and
FOHP-PA has filed an application  for a COA to operate as an HMO in its state of
incorporation.

During  the  summer  of 1996,  as a result  of  FOHP-NJ's  statutory  net  worth
deficiency  discussed  in Note 2 and the  conditions  imposed  by the New Jersey
Departments  of Banking  and  Insurance  and Health  and  Senior  Services  (the
"Departments"),  the Board of Directors of the Holding Company  discontinued the
Holding Company's  expansion efforts in states other than New Jersey,  including
expansion efforts in New York, Pennsylvania and Maryland. It is not determinable
at this time when, or if, the Holding Company will continue expansion efforts in
any state other than New Jersey.

The Holding  Company  raised equity  capital from various New Jersey health care
providers to fund its operations. Health care providers investing in the Holding
Company  are  required  to  enter  into  provider   agreements   (the  "Provider
Agreements") with the Holding 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 either by
mutual  consent of both parties or,  after the initial one year term,  by either
party upon 90 days written notice;  agreements with physicians may be terminated
by either party upon 60 days written  notice.  Provider  Agreements  also may be
terminated for breaches specified therein. The Provider Agreements,  among other
things,  establish  covered  services,   billing  and  payment  procedures,  and
reimbursement methods.

2.   BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The  Holding  Company  has  incurred a 1996 net loss of  $30,745,106  and has an
accumulated  deficit of  $56,535,558  at December  31, 1996.  Also,  the Holding
Company's principal operating subsidiary FOHP-NJ has not met its statutory


                                       F-8

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996


2.    BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

net worth requirements pursuant to its COA granted by the Departments.  In order
for FOHP-NJ to meet its statutory net worth requirements, the Holding Company or
FOHP-NJ must generate  sufficient  operating  profits  and/or obtain  additional
equity  financing.  In an effort to increase  capital,  FOHP-NJ effected several
operational  changes in 1996. The operational changes made by FOHP-NJ's included
(a) the  implementation  of a modified  provider  reimbursement  schedule  which
became  effective on April 1, 1996, for purposes of reducing  medical costs, (b)
the  implementation  of a hiring freeze and suspension of bonus payments and the
use of consultants in order to control FOHP-NJ's  administrative  costs, (c) the
implementation of a program to generate increased operating profits by requiring
certain acute care shareholders  which had not met their enrollment  commitments
to meet such  commitments in order to remain  shareholders of FOHP and providers
in the FOHP-NJ  network,  and (d) the  discontinuation  of expansion  efforts in
states other than New Jersey.  In connection  with  FOHP-NJ's plan to remedy the
statutory  net worth  deficiency,  in October 1996 the Board of Directors of the
Holding Company  initially  approved a $30 million  investment by Health Systems
International,  Inc.,  a  California  based  managed  health  care  organization
("HSI"),  into the Holding Company. At closing,  HSI was to purchase $30 million
of debentures  convertible into 40% of the Holding Company's  outstanding equity
and HSI would have received an option to acquire  another 11%  ownership.  After
closing, HSI would have been obligated to either acquire up to an additional 20%
of the outstanding equity of the Holding Company, or require the Holding Company
to  have  repurchased  that  amount  with  HSI  financing.  However,  due  to  a
significant  increase in medical  claims  expenses  during the fourth quarter of
1996 as a result of more  complete  claim  payment  data,  in  January  1997 HSI
exercised  its right to  renegotiate  certain  terms of the original  Securities
Purchase  Agreement among HSI, the Holding Company and FOHP-NJ.  Under the terms
of the  renegotiated  Securities  Purchase  Agreement  (the "Amended  Securities
Purchase  Agreement"),  HSI will  invest  up to $50  million  into  the  Holding
Company.  At closing,  which is expected in the first quarter of 1997,  HSI will
purchase  up to $50  million  of  debentures  convertible  into up to 71% of the
Holding Company's  outstanding  equity.  HSI will also have the right to acquire
the  remaining  shares  of the  Holding  Company's  outstanding  equity  through
December  31, 1999 by tender offer or merger.  The  satisfactory  completion  of
these  efforts and  negotiations  is  essential in order for FOHP-NJ to meet its
statutory net worth requirement.  In addition,  the Amended Securities  Purchase
Agreement is subject to the approval of the shareholders of the Holding Company.

The New Jersey  Department  of Banking and  Insurance  ("DOI") has  informed HSI
that,  if  the  transaction  with  HSI is not  consummated  (which  consummation
requires  the  prior  approval  by the  Holding  Company's  shareholders  of the
transaction  with HSI) on or before  April 30,  1997 the DOI intends to petition
the New  Jersey  Superior  Court for an order to allow the DOI to place  FOHP-NJ
into rehabilitation. It is also the understanding of the Holding Company's Board
of Directors that it is the DOI's intention to place FOHP-NJ into rehabilitation
if the transaction with HSI is not consummated by such date. Accordingly,  these
matters raise  substantial doubt about the Holding Company's ability to continue
as a going concern.

These consolidated  financial statements have been prepared assuming the Holding
Company will continue as a going concern and do not include any adjustments that
might result from the outcome of this uncertainty.

The following are significant accounting policies of the Holding Company:

PRINCIPLES OF CONSOLIDATION

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


                                       F-9

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996


2.    BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


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. Cash and cash equivalents at December 31, 1996 were
on deposit with two commercial banks.

RESTRICTED CASH

FOHP-NJ is required to maintain $1,000,000 on deposit with the DOI.

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).

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.

ACCOUNTS RECEIVABLE

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

COSTS IN EXCESS OF NET ASSETS ACQUIRED

Costs in excess of net assets  acquired  related to the  acquisition  of FMCO in
1994.  Amortization  was being charged to  operations  over 10 years and in 1995
amounted to $110,664.  The carrying value of this  intangible  asset was written
off in 1995.

STOCK ISSUE COSTS

Stock issue costs are accounted for using the offset method and represent legal,
accounting,  and other costs incurred for the stock offering. Under this method,
stock issue costs are treated as a  reduction  of the amount  received  from the
sale of the related common stock.



                                      F-10

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996


2.    BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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  NJDHSDMAHS has an initial
term of 18 months and may be renewed for successive one year terms. 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.  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 the
Health Care Financing  Administration ("HCFA") for services provided to Medicare
eligible recipients.  The contract with HCFA has a 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.

OTHER REVENUE

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

MEDICAL AND HOSPITAL SERVICE EXPENSES

Medical and hospital service expenses 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. Since FOHP-NJ recently began operations and lacks its own historical
experience,  the  estimate  for  IBNR is in part  based on  currently  available
industry  ratios of claims expense to premiums  earned.  Despite the variability
inherent in such estimates,  management  believes that the liability for medical
claims payable is adequate,  however, actual results may vary from the estimated
amount.

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  contract  with the  NJDHS-DMAHS  for  Medicaid  and HCFA for
Medicare, providers are reimbursed for health care services provided to Medicaid
and Medicare  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.  Payments to  providers  are subject to a
withhold of up to 15% of the reimbursement  rate for Medicaid claims and 10% for
Medicare  claims.  The Medicaid  withholds are  segregated  into  geographically
designated  risk pools.  Payments from the risk pools are settled  annually with
the  participating  providers based on annual incurred costs. At settlement,  if
there is a surplus in any of the risk pools,  such surplus is first used to fund
deficits  in other  risk  pools,  after  which  any  remaining  surplus  will be
distributed among all providers. The


                                      F-11

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996


2.    BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Medicare  withhold program is a statewide  program which has one risk pool which
covers anticipated health care expenses. At settlement, if there is a surplus of
funds,  FOHP-NJ  will  retain 10% for a  contingency  reserve  pool that will be
available to offset any future year losses,  with the  remaining  surplus  funds
being distributed among the providers.  If a deficit fund exists,  the withholds
will be applied to the deficit with FOHP-NJ assuming the  responsibility for the
remaining  deficit.  Estimated  surpluses  associated  with these  contracts are
included in medical claims payable.

FOHP-NJ also contracts  with another party for the  arrangement of mental health
services  provided  to  enrollees  in its health  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 short-fall
must be funded equally by FOHP-NJ and the servicer.

ADVERTISING COSTS

Advertising  costs are charged to operations  when the  advertising  first takes
place and approximated  $2,154,000,  $1,692,000 and $758,000 for the years 1996,
1995 and 1994, respectively.

INCOME TAXES

The Holding  Company  provides for income taxes based on income  recognized  for
financial  statement  purposes.  The Holding  Company  recognizes a deferred tax
asset or  liability  for the  expected  future tax effects  attributable  to the
temporary  differences  between the tax and financial  statement bases of assets
and  liabilities.  Deferred tax assets and  liabilities  are adjusted to reflect
changes in tax rates or other  provisions  of  applicable  federal and state tax
laws in the period in which such  changes are  enacted.  Deferred tax assets are
recognized  unless it is more  likely  than not that some  portion or all of the
deferred tax assets will not be recovered.

PER SHARE DATA

Per share data are based on the weighted average number of shares of all classes
of common stock outstanding  during the period (2,100,173 in 1996,  1,703,908 in
1995 and 1,067,997 in 1994).

RECLASSIFICATION

Certain  reclassifications  have  been  made  to the  1995  and  1994  financial
statements to conform with the current year presentation.

3.   ACQUISITION

Pursuant to a Stock  Purchase  and Sale  Agreement  (the  "Agreement"),  FOHP-NJ
purchased in November 1994, all of the outstanding  common stock of IRP, renamed
FMCO,  for cash  totaling  $900,000,  plus  contingent  consideration  which was
dependent upon FMCO's  ability to meet certain  revenue goals for calendar years
1995 and 1994, as defined in the  Agreement.  Since these revenue goals were met
for calendar year 1994, additional consideration of $600,000 was


                                      F-12

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996


3.    ACQUISITION (CONTINUED)

payable to the sellers of the stock (the  "Sellers") and was included in expense
in 1994 since the payment related to services performed by the Sellers.

Each of the Sellers  entered  into a  consulting  agreement  with FMCO,  and the
additional  consideration  was deemed  payable  for  services  performed  by the
Sellers and included in expenses in 1994.

In August  1995,  FOHP-NJ and the Sellers  agreed to  terminate  their  existing
relationships  and entered into a Settlement  Agreement and General Release (the
"Settlement  Agreement").  Pursuant to this Settlement Agreement, the consulting
agreements  between  the  Sellers and FMCO were  terminated  and, in  connection
therewith,  the Sellers were paid, in the aggregate,  $218,000 which is included
in the Holding Company's 1995 selling, general and administrative expenses.

In December 1995,  management determined that due to the recent loss of business
volume  from  certain  FMCO  customers  and  because  of current  and  projected
operating losses of FMCO, the  recoverability of this intangible asset could not
be assured.  Accordingly,  the net carrying value of $986,782 was written-off in
1995.

In December 1996, the Holding Company sold all of the  outstanding  common stock
of FMCO to an  unrelated  third  party for  $250,000  plus,  subject  to certain
limitations,  a  percentage  of  collections  on accounts  receivable  that were
greater than 90 days old as of September 30, 1996  collected  after  November 1,
1996. As a result of the  transaction,  the Holding  Company  recorded a loss of
approximately  $145,000.  Revenues  and  operating  results  of  FMCO  were  not
significant in 1996, 1995 or 1994.

4.   ACCOUNTS RECEIVABLE

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


Balance, January 1, 1995                                            $   100,300
   Provision for bad debts                                              232,604
   Provision for retroactive terminations                               442,256
   Write-offs                                                           (98,945)
                                                                    -----------
Balance, December 31, 1995                                              676,215
   Provision for bad debts                                              431,849
   Provision for retroactive terminations                             1,949,579
   Write-offs                                                        (1,357,643)
                                                                    -----------
Balance, December 31, 1996                                          $ 1,700,000
                                                                    ===========




                                      F-13

<PAGE>



                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996



5.   FURNITURE AND EQUIPMENT

Furniture and equipment consists of the following:


                                                      1996               1995
                                             ----------------------------------
Leasehold improvements                          $    258,381      $      55,118
Furniture and fixtures                               806,518            947,485
Equipment                                          2,090,020          1,372,218
Automobiles                                           68,113             61,198
                                             ----------------------------------
                                                   3,223,032          2,436,019
Less accumulated depreciation                     (1,338,474)          (576,888)
                                             ----------------------------------
                                                $  1,884,558      $   1,859,131
                                             ==================================


6.   COMMON STOCK

At December 31, 1996, the authorized  common stock of the Holding Company totals
100 million  shares.  The  authorized  Common  Stock of the  Holding  Company is
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 which may be  classified  by the Board of Directors as provided in
the  Certificate  of  Incorporation  of the Holding  Company.  During 1995,  the
Holding  Company  issued  2,100,173  shares of Common  Stock-NJ.  There  were no
additional shares of Common Stock-NJ issued during 1996.

At December 31, 1994, the authorized common stock of FOHP-NJ, the predecessor to
the Holding Company,  totalled 10 million shares. The authorized Common Stock of
FOHP-NJ was comprised of the following  classes of Common Stock, $.01 par value:
Institutional  Provider  Common Stock;  Practitioner  Provider  Common Stock and
Other Provider Common Stock.  During 1994,  FOHP-NJ issued  1,020,051  shares of
Institutional  Provider Common Stock,  511,800 shares of  Practitioner  Provider
Common Stock, and 40,002 shares of Other Provider Common Stock.

The  Certificate of  Incorporation  and By-Laws of the Holding  Company  include
significant restrictions on the issuance and transfer of shares of Common Stock.
The  Certificate  of  Incorporation  of the Holding  Company  requires that only
health care  providers who enter into and maintain a Provider  Agreement  with a
subsidiary  of the Holding  Company may  purchase the Holding  Company's  Common
Stock.  Acute care  institutions  which enter into a Provider  Agreement  with a
subsidiary of the Holding  Company may purchase  shares of Common Stock directly
or through an affiliate.

The Holding  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 other events,  as described in the Certificate of
Incorporation.  The  determination of the repurchase price of the shares is also
described in the Certificate of Incorporation.



                                      F-14

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996



7.    INCOME TAXES

The Holding Company and its subsidiaries file a consolidated  federal income tax
return. No federal income taxes have been provided for or paid since the Holding
Company  and its  subsidiaries  have  incurred  operating  losses for  financial
statement and income tax reporting  purposes.  For state  purposes,  each entity
files separately. At December 31, 1996, net operating loss ("NOL") carryforwards
for federal and state  income tax  reporting  purposes  (which may be subject to
certain limitations) approximate $39,640,600 and $36,815,200 respectively. These
losses will be  available to offset  future  taxable  income.  Such NOL's expire
through 2011 for federal  purposes,  as well as New York,  Delaware and Maryland
state  purposes,  through  2002  for New  Jersey  state  purposes  and  1999 for
Pennsylvania state purposes.

The tax effects of temporary  differences  that give rise to deferred tax assets
are as follows:

<TABLE>
<CAPTION>

                                                                                   December 31,
                                                                                1996                1995
                                                                        -----------------------------------
<S>                                                                      <C>                 <C>
Capitalization of start-up costs and organization costs                  $     2,987,000     $    2,630,000
Net operating loss carryforwards                                              15,039,000          6,209,000
Amortization of acquired intangibles                                                                553,000
Reserve discounting                                                              738,000            574,000
Allowances for doubtful accounts and retroactive terminations                    595,000             81,000
Other                                                                            726,000            268,000
Total deferred tax assets                                                     20,085,000         10,315,000
                                                                        -----------------------------------
Valuation allowance for deferred tax assets                                  (20,085,000)       (10,315,000)
                                                                        -----------------------------------
Net deferred tax assets                                                  $           --      $          --
                                                                        ===================================

</TABLE>


The  valuation  allowance  has  been  recorded  due  to the  uncertainty  of the
realization  of the  deferred tax asset since the  realization  of such asset is
dependent on future operating profits.

The effective  income tax rate for 1996, 1995 and 1994 varied from the statutory
federal income tax rate as follows:


                                               1996        1995         1994
                                         ------------------------------------

Statutory federal income tax rate                35%         35%          35%
State income taxes                                6           6            6
                                         ------------------------------------
Subtotal                                         41          41           41

Valuation allowance                             (41)        (41)         (41)
                                         ------------------------------------
Effective income tax rate                         -%          -%           -%
                                         ====================================






                                      F-15

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996



8.   DEFINED CONTRIBUTION PLAN

Beginning  in 1994,  the Holding  Company  maintained  two defined  contribution
(401[k]) plans covering substantially all of its employees. In 1995, the Holding
Company  combined the two plans into one.  Employees may contribute to the plans
after completing certain service  requirements.  The Holding Company matches 50%
of employee contributions not to exceed (i) limits established under Section 415
of the  Internal  Revenue  Code or (ii) the  lesser  of 25% of  compensation  or
$30,000.  Total plan  expense  for 1996,  1995 and 1994  amounted  to  $406,000,
$197,000 and $1,000, respectively.

9.   COMMITMENTS AND CONTINGENCIES

LEASES

The Holding 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  1996,  1995 and 1994 was
approximately $1,796,000, $927,000 and $200,000, respectively.

The following is a schedule of minimum  future  payments on long-term  operating
leases at December 31, 1996:


1997                                                              $     994,161
1998                                                                    966,693
1999                                                                    458,161
2000                                                                    127,062
2001                                                                      1,185
                                                                 --------------
                                                                  $   2,547,262
                                                                 ==============

EMPLOYMENT CONTRACTS

The Holding Company has entered into employment arrangements with certain of its
key  employees.  These  arrangements  provide  for  compensation  in the form of
salary,  annual bonus and reimbursement of certain expenses.  As of December 31,
1996,  these  contracts  expire  within 1 to 2 years  and  provide  for  minimum
compensation of approximately  $1,140,000 and $358,000 for the years ending 1997
and 1998, respectively.

SERVICE AGREEMENT

FOHP-NJ  entered into an agreement with a claims  processing  company to provide
recordkeeping  and data  processing  functions  to FOHP-NJ on a fee for services
basis. The agreement expires March 31, 1998.  FOHP-NJ has the right to terminate
this  agreement  without cause upon not less than 180 days prior written  notice
provided  that FOHP-NJ does so by acquiring a license for the system used by the
service  bureau  processor.  The cost for the system  license  is  approximately
$800,000 and is subject to reduction  as long as the Holding  Company  continues
the agreement.



                                      F-16

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996



9.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

MEDICARE CONSULTING AGREEMENT

In January  1995,  FOHP-NJ  entered  into an agreement  with another  company to
assist   FOHP-NJ  in  obtaining   approval   from  the  Health  Care   Financing
Administration  ("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
$1,621,186,  $392,000  and  $62,000  in 1996,  1995 and 1994,  respectively.  In
addition, a variable percentage (.5% to 1%) of any Medicare revenue generated by
FOHP-NJ  for a total of eight  years after  FOHPNJ  enters into a Medicare  Risk
Contract with HCFA will be payable to the other company. The minimum payment for
each year, pursuant to such variable  percentage,  is $1,000,000 and the maximum
for any such payment is $3,500,000.  In connection  with the sale of convertible
debentures  (see Note 2), the Holding  Company has agreed under the terms of the
Amended Securities Purchase Agreement with HSI to negotiate a termination of its
agreement with the other company.

REINSURANCE ARRANGEMENTS

The  reinsurance  contract in effect  through  December  31, 1994  provided  for
reimbursement  of eligible  hospital claims per enrollee which exceeded  $50,000
per enrollee up to a $2,000,000 maximum lifetime reimbursement per enrollee. Per
diem  arrangements  with hospitals were also subject to maximum limits dependent
upon length of stay, and claims per enrollee which exceeded $50,000 were subject
to coinsurance provisions.

The  reinsurance  contract  for 1996  and 1995  provides  for  reimbursement  of
eligible  hospital  claims per enrollee  which exceed $75,000 for commercial and
Medicaid enrollees and $100,000 for Medicare 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.  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 $55,000, $695,000 and
$101,436 for the years ended 1996, 1995 and 1994, respectively,  and is included
in medical and hospital services expense.

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 certain  prepaid  expenses,  equipment other than certain
computer  equipment,   organizational  costs,  certain  loans  and  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,  1996  and  1995  amounted  to  $15,054,000   and
$5,523,000.  In addition,  under the terms of its COA, if statutory net worth is
less than 125% of the minimum required


                                      F-17

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996



9.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

($18,818,000  and  $6,904,000  at  December  31,  1996 and 1995,  respectively),
FOHP-NJ is required to submit a plan of action to the DOI.  FOHP-NJ's  statutory
net worth requirements are shown below:

<TABLE>
<CAPTION>

                                             1996                                                 1995
                      ----------------------------------------------------------------------------------------------------
                            GAAP         Eliminations       Statutory            GAAP         Eliminations     Statutory
                      ----------------------------------------------------------------------------------------------------
<S>                    <C>                <C>              <C>                <C>              <C>             <C>
Assets                 $ 62,225,369       $12,359,871      $ 49,865,498       $38,211,395      $8,049,000      $30,162,395
Liabilities              76,705,815                          76,705,815        28,631,898                       28,631,898
                      ----------------------------------------------------------------------------------------------------
Net deficiency
   (equity)            $(14,480,446)      $12,359,871      $(26,840,317)      $ 9,579,497      $8,049,000      $ 1,530,497
                      ====================================================================================================

</TABLE>

FOHP submitted a plan of action to the DOI that outlined the measures FOHP would
use to address FOHP-NJ's  statutory net worth deficiency,  which was approved by
the DOI in 1996.  FOHP has also obtained the DOI's approval of its plan to raise
capital  to  address  FOHP-NJ's   statutory  net  worth  deficiency  by  selling
convertible  debentures to HSI. If FOHP's sale of convertible  debentures to HSI
is consummated,  HSI will invest up to $50 million in the Holding  Company.  HSI
will  also  have the  right to  acquire  the  remaining  shares  of the  Holding
Company's  outstanding  equity  through  December  31,  1999 by tender  offer or
merger.  In connection  with meeting the statutory net worth  requirements,  the
Holding Company has also obtained certain financial  commitments and guarantees.
Certain  institutional  owner/providers  have executed  corporate  guarantees of
capital on behalf of the Holding Company totaling approximately $4.4 million. In
addition,  certain  physician  shareholders  and other  individuals have secured
letters of credit for the benefit of the Holding Company totaling  approximately
$6.7  million.  No amounts have been drawn under these  commitments  and all the
guarantees and letters of credit expire March 31, 1997.

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




                                      F-18

<PAGE>

                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996



10.    PRO FORMA FINANCIAL INFORMATION

The following pro forma condensed consolidated balance sheet gives effect to the
proposed  sale of  convertible  debentures to HSI (as discussed in Note 2) as if
the sale had occurred on December 31, 1996.

                 Pro Forma Condensed Consolidated Balance Sheet

                                December 31, 1996

<TABLE>
<CAPTION>


                                                                                                Pro Forma                 Pro Forma
                                                                      As Reported              Adjustments                  Results
                                                                    ---------------------------------------------------------------
<S>                                                                 <C>                     <C>                       <C>
ASSETS
Cash and cash equivalents                                           $ 36,664,911               $ 51,100,000(1)        $  87,764,911
Accounts receivable from owner/providers, net                          8,206,471                                          8,206,471
Other current assets                                                   5,571,247                                          5,571,247
                                                                    ---------------------------------------------------------------
Total current assets                                                  50,442,629                 51,100,000             101,542,629
Other non-current assets                                               3,809,588                                          3,809,588
                                                                    ---------------------------------------------------------------
Total assets                                                        $ 54,252,217               $ 51,100,000           $ 105,352,217
                                                                    ===============================================================
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Medical claims payable to owners/providers                          $ 13,775,534                                      $  13,775,534
Other medical claims payable                                          55,370,457                                         55,370,457
Other current liabilities                                             10,972,293                                         10,972,293
                                                                    ------------                                       ------------
Total current liabilities                                             80,118,284                                         80,118,284
Long-term debt-convertible debentures                                                          $ 51,100,000(1)           51,100,000
Total shareholders' (deficiency) equity                              (25,866,067)                                       (25,866,067)
                                                                    ---------------------------------------------------------------
                                                                    $ 54,252,217               $ 51,100,000           $ 105,352,217
                                                                    ===============================================================

</TABLE>

(1)  Adjustment  represents  the  sale of  convertible  debentures  to HSI.  The
     debentures are convertible  into 71% of the Holding  Company's  outstanding
     equity, bear interest at 6% and mature in 2002.




                                      F-19

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996


10.    PRO FORMA FINANCIAL INFORMATION (CONTINUED)

The following pro forma  condensed  consolidated  statement of operations  gives
effect to the proposed  sale of  convertible  debentures to HSI (as discussed in
Note 2) as if the sale had occurred on January 1, 1996.

            Pro Forma Condensed Consolidated Statement of Operations

                          Year ended December 31, 1996


<TABLE>
<CAPTION>

                                                                         Pro Forma         Pro Forma
                                                      As Reported       Adjustments          Results
                                                    --------------------------------------------------
<S>                                                   <C>                 <C>             <C>
Revenue:
   Premiums from owners/providers                     $135,544,112                        $135,544,112
   Other premium revenue                               112,125,670                         112,125,670
   Other, principally administrative service fees        7,863,006                           7,863,006
   Interest income                                       1,843,520                           1,843,520
                                                    --------------                       -------------
                                                       257,376,308                         257,376,308
Expenses:
   Medical services to owners/providers                 37,026,903                          37,026,903
   Hospital services to owners/providers                30,156,890                          30,156,890
   Other medical services                              105,496,580                         105,496,580
   Other hospital services                              63,760,554                          63,760,554
   Selling, general and administrative                  50,777,763        $ 5,910,656 (1)   56,688,419
   Interest                                                 11,247          3,060,000 (2)    3,071,247
   Other expense                                           891,477                             891,477
                                                    --------------------------------------------------
                                                       288,121,414          8,970,656      297,092,070
                                                    --------------------------------------------------
   Net loss                                           $(30,745,106)       $(8,970,656)    $(39,715,762)
                                                    ==================================================
Net loss per common share before
  conversion of  debentures                           $     (14.64)       $     (4.27)    $     (18.91)
                                                    ==================================================
Net loss per common share after
  conversion of debentures                            $     (14.64)       $      9.58 (3) $      (5.06)
                                                    ==================================================

</TABLE>

(1)    Adjustment  consists  of two  components:  an  $800,000  fee  paid to the
       investment  banker  utilized  in the  HSI  transaction  and a  $5,110,656
       management  fee paid to HSI based on 2% of total  revenue of the  Holding
       Company's health plans.

(2)    Adjustment represents one year's  interest on the outstanding  debentures
       calculated at 6%.


                                      F-20

<PAGE>


                           FOHP, Inc. and Subsidiaries
           (Successor to First Option Health Plan of New Jersey, Inc.)

                   Notes to Consolidated Financial Statements

                                December 31, 1996


10.    PRO FORMA FINANCIAL INFORMATION (CONTINUED)

(3)    Calculated as follows:

    Net loss, pro forma results                                 $(39,715,762)
    Add interest expense                                           3,060,000
                                                                ------------
                                                                $(36,655,762)(A)
                                                                ============
    Shares outstanding during 1996                                 2,100,173
    Shares issued assuming conversion of convertible debentures    5,141,803
                                                                ------------
                                                                   7,241,976(B)
                                                                ============
    Net loss per common share assuming conversion
      (A divided by B)                                          $      (5.06)
                                                                ============



                                      F-21

<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, 1996
                           --------------------------



                                   FOHP, INC.
                          (EXACT NAME OF REGISTRANT AS
                            SPECIFIED IN ITS CHARTER)





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



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



<PAGE>



                                   FOHP, INC.

                                  EXHIBIT INDEX




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


     y    2.1       Agreement of Merger and Plan of  Reorganization  dated April
                    12, 1995 among FOHP-NJ,  the Registrant and FOHP  Transition
                    Company, a wholly-owned subsidiary of the Registrant.

     k    3.1       Amended and Restated  Certificate  of  Incorporation  of the
                    Registrant,  as  filed  with the  Secretary  of State of New
                    Jersey on December 7, 1995.

     k    3.2       Amended  and  Restated   Certificate  of   Incorporation  of
                    FOHP-NJ,  as filed with the Secretary of State of New Jersey
                    on December 7, 1995.

     k    3.5       By-laws of Registrant, as amended.

     k    3.6       Amended and Restated By-laws of FOHP-NJ.

     y    4.1       Specimen   certificate   representing   Registrant's  Common
                    Stock-NJ.

(*)  k   10.1       Employment  Agreement  dated  October  27,  1995  among  the
                    Registrant, FOHP-NJ and John L. Adessa.

(*)  z   10.2       Amendment  dated  as of  November  15,  1995  to  Employment
                    Agreement  dated  October  27,  1995  among the  Registrant,
                    FOHP-NJ and John L. Adessa.

(*)      10.3       Employment   Agreement  dated  July  17,  1995  between  the
                    Registrant and Paul J. Kimmins.

     x   10.4       Managed Care Management  Information Service Agreement dated
                    August 1, 1993  between  Health  Systems  Integration,  Inc.
                    ("HSII") and FOHP-NJ.

     z   10.4.1     Addendum dated May 5, 1995 to Managed Care Management
                    Information  Service  Agreement dated August 1, 1993 between
                    HSII and FOHP-NJ.


                                       E-1

<PAGE>



     x   10.5       Lease  Agreement  dated August 18, 1993 between  Theodore G.
                    Sourlis and Elaine  Sourlis,  husband and wife,  and FOHP-NJ
                    and the Addendum thereto dated August 1993.

     x   10.6       Lease Agreement dated November 17, 1993 between  Theodore G.
                    Sourlis and Elaine  Sourlis,  husband and wife,  and FOHP-NJ
                    and the undated Addendum thereto.

     x   10.7       Lease Agreement dated September 1, 1994 between  Theodore G.
                    Sourlis and Elaine  Sourlis,  husband and wife,  and FOHP-NJ
                    and the undated Addendum thereto.

(*)      10.9       Agreement dated November 30, 1994 between the Registrant and
                    Alliance Medical Group,  Inc.,  concerning the employment by
                    the Registrant of Joseph Singer, M.D.

     x   10.10      Form of Hospital Participation (provider) Agreement required
                    to  be   executed   by  each  NJ  Acute   Care   Institution
                    participating in the FOHP-NJ network and by FOHP-NJ.

     x   10.11      Form of Individual Practice Association (provider) agreement
                    required   to  be   executed   by   FOHP-NJ   and  the  IPAs
                    participating in the FOHP-NJ network.

     x   10.12      Form of  Individual  Practitioner  Participation  (provider)
                    Agreement  required  to be  executed  by FOHP-NJ and each NJ
                    Practitioner participating in the FOHP-NJ network.

     x   10.13      Form of Provider  Agreement  (Non-Acute Care) required to be
                    executed by FOHP-NJ and each NJ Other Provider participating
                    in the FOHP-NJ network.

     k   10.14.1    Form  of  First  Option  Master  Group  Contract  (point  of
                    service) for large employer groups (50 or more persons).

     k   10.14.2    Form  of  First  Option   Master  Group   Contract   (health
                    maintenance  organization)  for large employer groups (50 or
                    more persons).

     k   10.14.3    Form  of  First  Option  Master  Group  Contract  for  small
                    employer groups (less than 50 persons).

     k   10.14.4    Form of First Option Individual Contract for individuals.


                                       E-2

<PAGE>



     x   10.16      Agreement  dated January 6, 1995 between  FOHP-NJ and Sierra
                    Health Services, Inc.

     x   10.17      Agreement dated July 1, 1994 between FOHP-NJ and NJADA Group
                    Insurance Trust.

     x   10.18      Agreement  dated  August 1,  1994  between  FOHP-NJ  and EBP
                    HealthPlans, Inc.

     x   10.19      Agreement   dated  October  31,  1994  between  FOHP-NJ  and
                    National Prescription Administrators, Inc.

     x   10.20      Agreement dated October 31, 1994 between FOHP-NJ and CFI.

     y   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.

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

     z   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.

     z   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).

     z   10.34      Guarantee  dated as of December 31,  1995,  in the amount of
                    $6,000,000, provided by William B. Roberts to FOHP-NJ.

     z   10.35      Form of Guarantee which has been provided to FOHP-NJ by each
                    of the following NJ Institutional Shareholders in the amount
                    set forth next to such shareholder's  name; Monmouth Medical
                    Center - $250,000;  Barnert  Hospital -  $100,000;  Bayshore
                    Community  Hospital -  $100,000;  Burdette  Tomlin  Memorial
                    Hospital - $100,000;  Chilton Memorial  Hospital - $100,000;
                    C.H.  Management  Corp. (an affiliate of Christ  Hospital) -
                    $250,000;   Comprehensive   Health  &  Education  Corp.  (an
                    affiliate of Muhlenberg Regional Medical Center) - $250,000;
                    JFK  Medical

                                       E-3

<PAGE>


                    Center - $250,000;  Holy Name Hospital - $150,000;  Memorial
                    Health  Alliance  (an  affiliate  of  Memorial  Hospital  of
                    Burlington  County)  -  $250,000;  Mercer  Medical  Center -
                    $100,000;  Newton Memorial Hospital - $100,000;  Our Lady of
                    Lourdes Health Care Services, Inc. (an affiliate of Our Lady
                    of  Lourdes  Hospital)  -  $100,000;  Beth  Israel  Hospital
                    (Passaic)  -  $100,000;  The  Valley  Hospital  -  $300,000;
                    Riverview  Health  Affiliates  (an  affiliate  of  Riverview
                    Medical Center) - $250,000; West Hudson Hospital - $125,000;
                    St.  Joseph's   Hospital  and  Medical  Center  -  $250,000;
                    Morristown  Memorial Hospital - $250,000;  Elizabeth General
                    Health  Services  Corp.  (an affiliate of Elizabeth  General
                    Medical  Center) - $100,000;  Englewood  Healthcare Ent. (an
                    affiliate  of  Englewood  Hospital  and  Medical  Center)  -
                    $250,000;  and Robert  Wood  Johnson  University  Hospital -
                    $250,000.

     z   10.36      Guarantee in the amount of  $100,000,  provided by MidJersey
                    Health   Corporation  (an  affiliate  of  Hunterdon  Medical
                    Center) to FOHP-NJ.

     z   10.37      Guarantee in the amount of $250,000,  provided by Community-
                    Kimball  Health Care Systems,  Inc. (an affiliate of Kimball
                    Medical Center and Community Medical Center) to FOHP-NJ.

     z   10.38      Guarantee  in the  amount  of  $250,000,  provided  by Saint
                    Barnabas Corporation (an affiliate of Saint Barnabas Medical
                    Center) to FOHP-NJ.

     z   10.39      Reimbursement  Agreement  dated March 26,  1996  between the
                    Registrant and William B. Roberts.

     z   10.40      Form  of  Reimbursement   Agreement   entered  into  by  the
                    Registrant and the following  physician  shareholders of the
                    Registrant  who  secured  the  $3,435,000  Letter  of Credit
                    issued  for the  Registrant  by  Carnegie  Bank on March 29,
                    1996, and form of addendum thereto: Dr. Chris Anayiotos, Dr.
                    Tun Chu, Dr. Miguel Damien,  Dr. Shirley Hoh, Dr. Renny Lin,
                    Dr. Carl Raso, Dr. Donato  Santangelo,  III, Dr. Mohammed A.
                    Sarraf,  Dr. Mohammad  Shafi,  Dr. Kishori P. Shah, Dr. Gary
                    Siemons, Dr. John Sutherland,  Dr. Kock-Yen Tsang, Dr. Lewis
                    Wetstein, Dr. Renato Ynaya and Dr. Henry Yu.

     z   10.41      Reimbursement  Agreement  entered into by the Registrant and
                    Dr.  Randall  Krakauer,  the  physician  shareholder  of the
                    Registrant who

                                       E-4

<PAGE>


                    secured  the  $300,000  Letter  of  Credit  issued  for  the
                    Registrant by CoreStates Bank on March 27, 1996.

         10.42      Reimbursement  Agreements entered into by the Registrant and
                    Mr. John L. Adessa, the former President and Chief Executive
                    Officer of the Registrant who secured the $323,000 Letter of
                    Credit issued for the Registrant by CoreStates Bank on April
                    11, 1996.

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

         10.44      Forms of  First  and  Second  Amendments  to the  Guarantees
                    included as exhibits 10.35, 10.36, 10.37 and 10.38 hereto.

     b   10.45.1    Amended and Restated  Securities  Purchase  Agreement  dated
                    February 10, 1997 among the  Registrant,  FOHP-NJ and Health
                    Systems  International,  Inc.  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 Securities and
                    Exchange 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

                                       E-5

<PAGE>


                    - Employment/Severance Matters; and Schedule 2.25 - Employee
                    Benefit Plans.

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

         21.        Subsidiaries of the Registrant.

     j   27.        Financial Data Schedule for year ended December 31, 1996.

----------

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

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

     y     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).

     k     Incorporated by reference to the identically  numbered exhibit to the
           Registrant's  Registration  Statement on Form S-1  (Registration  No.
           33-80817).

     z     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.

     b     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.

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


                                       E-6