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


                                    FORM 10-Q


(Mark One)

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

For the quarterly period ended  June 30, 1998
                                -----------------------------------------------

                                                        or

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

For the transition period from                      to
                                ----------------           --------------------

Commission File Number:         0-25944
                                -----------------------------------------------

                                FOHP, Inc.
-------------------------------------------------------------------------------
              (Exact name of registrant as specified in its charter)

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

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

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

             
-------------------------------------------------------------------------------
   (Former name, former address and former fiscal year, if changed since last
    report)

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 filing requirements
for the past 90 days. Yes X No ----

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No ----

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.


Common Stock, 100,000,000 shares outstanding as of August 13, 1998


<PAGE>

<TABLE>
<CAPTION>



                                 INDEX                                                         PAGE NO.

                                                                                                    


                         PART I - FINANCIAL INFORMATION

             Item 1.     Financial Statements

             <S>                                                                                    <C>
             Condensed Consolidated Balance Sheets - June 30, 1998 and December 31, 1997             3

             Condensed Consolidated Statements of Operations                                         4
               For the periods April 1 to June 30, 1998 & 1997
               For the periods January 1 to June 30, 1998 & 1997

             Condensed Consolidated Statements of Shareholders' (Deficiency) Equity                  5
               For the period January 1, 1997 to December 31, 1997
               For the period January 1, 1998 to June 30, 1998

             Condensed Consolidated Statements of Cash Flows                                         6
               For the periods January 1, 1998 to June 30, 1998
               For the periods January 1, 1997 to June 30, 1997

             Notes to Condensed Consolidated Financial Statements                                    7

             Item 2.     Management's Discussion and Analysis of Financial Condition
                         and Results of Operations                                                  14


                           PART II - OTHER INFORMATION

             Item 1.     Legal Proceedings                                                          19

             Item 6.     Exhibits and Reports on Form 8-K                                           20

             Signature Page                                                                         21

</TABLE>

                                       2
<PAGE>



                            FOHP, INC. & SUBSIDIARIES
           (SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
                      CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                                        June 30,      December 31,
                                                                                           1998            1997
                                                                                      ---------------------------------
                                                                                       (unaudited)       (audited)
Assets
<S>                                                                                     <C>               <C>         
Cash and cash equivalents                                                               $ 29,559,336      $ 79,266,721
Accounts receivable from owners/providers, net of allowance for doubtful accounts
  and retroactive terminations of $345,144 in 1998 and $922,354 in 1997                    9,642,628        11,096,487
Other accounts receivable, net of allowance for doubtful accounts and retroactive
  terminations of $2,709,230 in 1998 and $2,507,619 in 1997.                               3,418,481         3,131,333
Prepaid and other current assets                                                             755,822           635,548
                                                                                      ---------------------------------
Total current assets                                                                      43,376,267        94,130,089

  Restricted Cash                                                                         42,614,363        13,846,682
  Furniture and equipment (at cost, net of accumulated depreciation
   and amortization of $2,313,716 and $2,349,874, respectively)                            2,641,555         2,480,042
  Goodwill (net of accumulated amortization of $1,346,628 and $0, respectively)          106,383,626       107,730,254
  Other assets                                                                               383,379           424,164
                                                                                      ---------------------------------
Total Assets                                                                           $ 195,399,190     $ 218,611,231
                                                                                      =================================


Liabilities and Shareholders' Equity
Current Liabilities:
  Medical claims payable to owners/providers                                            $ 13,398,403      $ 20,308,241
  Other medical claims payable                                                            31,262,941        62,614,704
  Accounts payable                                                                           924,408           746,369
  Accrued expenses                                                                        15,379,691        17,512,845
  Due to Foundation Health Systems, Inc.                                                     741,387           543,075
  Due to QualMed, Inc.                                                                     2,047,303         1,192,716
  Unearned premium                                                                           391,914         7,965,658
                                                                                      ---------------------------------
Total current liabilities                                                                 64,146,047       110,883,608

Convertible debentures                                                                    12,007,362        11,294,406
Subordinated debentures                                                                   24,346,192        24,000,000
                                                                                      ---------------------------------
Total Liabilities                                                                        100,499,601       146,178,014

Shareholders' Equity:
  Preferred Stock, $1.00 par value, 10,000,000 shares authorized,
     none issued or outstanding
  FOHP, Inc. Common Stock, $.01 par value, 100,000,000 shares authorized,
      100,000,000 in 1998 and 100,000,000 in 1997 issued and outstanding                   1,000,000         1,000,000
  Additional paid-in capital                                                             227,951,597       208,053,796
  Accumulated deficit                                                                   (134,052,008)     (136,620,579)
                                                                                      ---------------------------------
Total shareholders' equity                                                                94,899,589        72,433,217
                                                                                      ---------------------------------
Total Liabilities and Shareholders' Equity                                             $ 195,399,190     $ 218,611,231
                                                                                      =================================
</TABLE>




                             See accompanying notes
                                       3


<PAGE>




                            FOHP, INC. & SUBSIDIARIES
           (SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>


                                                                 Three Months Ended                        Six Months Ended
                                                                       June 30                                 June 30,
                                                                1998               1997                1998               1997
                                                            ---------------------------------      --------------------------------
                                                              (unaudited)       (unaudited)          (unaudited)       (unaudited)


Revenue:
<S>                                                          <C>                <C>                 <C>                <C>         
  Premiums from owners/providers                             $ 31,681,729       $ 30,061,855       $  66,663,668      $  60,987,811
  Other premium revenue                                        49,817,037         62,640,050         104,708,230        115,758,655
  Other, principally administrative service fees                  638,203            221,982           1,513,534            908,251
  Interest income                                                 998,390          1,082,268           2,230,452          1,690,139
                                                            ---------------------------------      ---------------------------------
Total revenue                                                  83,135,359         94,006,155         175,115,884        179,344,856
                                                            ---------------------------------      ---------------------------------


Expenses:
  Medical services to owners/providers                         17,436,261         23,966,704          40,595,318         45,991,933
  Other medical services                                       40,684,608         63,632,941          94,722,408        122,995,354
  Selling, general and administrative                          14,003,766         13,626,664          28,710,370         25,196,327
  Management fee - QualMed, Inc.                                        -          1,838,354                   -          3,539,474
  Management fee - Foundation Health Systems, Inc.                636,000                  -           1,271,000                  -
  Amortization of goodwill                                        673,314                  -           1,346,628                  -
  Depreciation and other amortization                             375,234            349,279             738,633            590,270
  Interest - Foundation Health Systems, Inc.                      529,862            503,459           1,045,460            503,459
  Other interest                                                  149,105             27,434             258,256             28,991
  Restructuring Costs                                                   -          1,134,097                   -          1,134,097
                                                            ---------------------------------      ---------------------------------
Total expenses                                                 74,488,150        105,078,932         168,688,073        199,979,905
                                                            ---------------------------------      ---------------------------------

Net income (loss) before provision for income taxes             8,647,209        (11,072,777)          6,427,811        (20,635,049)

Provision for income taxes                                      5,188,953                600           3,859,240              2,036
                                                            ---------------------------------      ---------------------------------

Net income (loss)                                            $  3,458,256       $(11,073,377)        $ 2,568,571      $ (20,637,085)
                                                            =================================      =================================

Net income (loss) per common share                           $       0.04       $      (5.04)        $      0.03      $       (9.61)
                                                            =================================      =================================
</TABLE>




                             See accompanying notes
                                       4



<PAGE>



                            FOHP, INC. & SUBSIDIARIES
           (SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
     CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY


<TABLE>
<CAPTION>

                                                        Common Stock                                
                                                  --------------------------  Additional                        Total
                                                                    Par        Paid-In     Accumulated     Shareholders
                                                     Shares        Value       Capital       Deficit    (Deficiency) Equity
                                                  -------------------------------------------------------------------------

<S>                                                  <C>          <C>        <C>           <C>              <C>           
Balance at December 31, 1996                          2,100,173    $ 21,002   $30,648,489   $(56,535,558)    $ (25,866,067)

Net loss for the period January 1, 1997 to
     December 31, 1997                                                                       (80,085,021)      (80,085,021)
Retirement of Common Stock-NJ                           (13,334)       (133)          133                                0
Conversion of debentures into shares of
     FOHP, Inc. Common Stock                            168,109       1,681     1,699,440                        1,701,121
Reclassification of Common Stock-NJ to Common
     Stock:
        Common Stock-NJ                              (2,086,839)    (20,869)                                       (20,869)
        Common Stock                                  2,086,839      20,869                                         20,869
Issued Common Stock  (December 1, 1997
    at $10.12 per share)                              4,941,049      49,410    49,950,590                       50,000,000
Issued Common Stock  (December 8, 1997
    at $.20 per share)                               92,804,003     928,040    18,024,890                       18,952,930
Goodwill                                                                      107,730,254                      107,730,254
                                                  -------------------------------------------------------------------------
Balance at December 31, 1997                        100,000,000   1,000,000   208,053,796   (136,620,579)       72,433,217

Net income for the period January 1, 1998 to
    June 30, 1998                                                                              2,568,571         2,568,571
Capital contributed by Foundation Health        
    Systems, Inc.                                                              19,897,801                       19,897,801
                                                  -------------------------------------------------------------------------
Balance at June 30, 1998 (unaudited)                100,000,000  $1,000,000  $227,951,597  $(134,052,008)     $ 94,899,589
                                                  =========================================================================

</TABLE>



                             See accompanying notes
                                       5



<PAGE>



                            FOHP, INC. & SUBSIDIARIES
           (SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                              For the period           For the period
                                                                              January 1, 1998         January 1, 1997
                                                                             to June 30, 1998         to June 30, 1997
                                                                          ----------------------------------------------
                                                                                (unaudited)             (unaudited)


<S>                                                                          <C>                     <C>
Cash flows from operating activities
Net income (loss)                                                            $ 2,568,571            $ (20,637,085)
Adjustments to reconcile net loss to cash flows provided by
  (used in) operating activities:
     Depreciation and amortization                                             2,085,261                  590,270
     Interest cost converted to debt                                           1,059,148                        -
     Changes in operating assets and liabilities:
      Accounts receivable from owners/providers                                1,453,859               (2,613,246)
      Other accounts receivable                                                 (287,148)                 792,113
      Prepaid expenses and other current assets                                 (120,274)               1,248,469
      Restricted cash                                                        (28,767,681)                 (34,264)
      Other assets                                                                40,785                    7,130
      Medical claims payable to owners/providers                              (6,909,838)               4,770,362
      Other medical claims payable                                           (31,351,763)              19,970,998
      Accounts payable                                                           178,039               (1,348,797)
      Accrued expenses                                                        (2,133,154)               2,721,310
      Due to Foundation Health Systems, Inc.                                     198,312                1,224,423
      Due to QualMed, Inc.                                                       854,587                        0
      Unearned premium revenue                                                (7,573,744)              (3,672,720)
      Other liabilities                                                                0               (1,154,096)
                                                                          ----------------------------------------
Net cash flows (used in) provided by operating activities                    (68,705,040)               1,864,867


Cash flows from investing activities
Purchases of furniture and equipment                                            (900,146)                (315,902)
                                                                          ----------------------------------------
Net cash used in investing activities                                           (900,146)                (315,902)

Cash flows from financing activities
Capital contributed by Foundation Health Systems, Inc.                        19,897,801               51,701,120
Payment of issue costs                                                                 -               (1,188,269)
                                                                          ----------------------------------------
Net cash provided by (used in) financing activities                           19,897,801               50,512,851


Net (decrease) increase in cash and cash equivalents
 at the end of the period                                                    (49,707,385)              52,061,816
Cash and cash equivalents at the beginning of the period                      79,266,721               36,664,911
                                                                          ----------------------------------------
Cash and cash equivalents at the end of the period                          $ 29,559,336             $ 88,726,727
                                                                          ========================================


Interest paid for the period                                                $    258,256              $    11,567
                                                                          ========================================

State income taxes paid for the period                                      $        625              $     1,836
                                                                          ========================================
</TABLE>


                             See accompanying notes
                                       6

<PAGE>


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

              Notes to Condensed Consolidated Financial Statements

                                  June 30, 1998





1.  General

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

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

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"),  the Board of
Directors of the Company  discontinued the Company's expansion efforts in states
other than New Jersey, including expansion efforts in New York, Pennsylvania and
Maryland. The Company currently has no plans to expand into any other state.

Effective   December  8,  1997,   through  the  conversion  of  debentures  (the
"Convertible  Debentures") into shares of Common Stock, the Company became a 98%
owned  subsidiary of Foundation  Health  Systems,  Inc. (Note 2). The Company is
dependent upon Foundation  Health Systems,  Inc.  ("FHS") to provide  sufficient
capital to meet its operating and statutory  financial  requirements.  It is the
intention of FHS to provide such funds, as needed.

The financial information for the six month periods ended June 30, 1998 and June
30,  1997  included  herein  are  unaudited.   Such  information   includes  all
adjustments,  including  adjustments of a normal and recurring nature, which, in
the  opinion  of  management,  are  necessary  for a  fair  presentation  of the
Company's   financial   position,   results  of   operations   and  cash  flows.
Additionally,  such information  should be read in conjunction with Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
included in Part I - Item 2 hereof.

                                       7

<PAGE>

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

              Notes to Condensed Consolidated Financial Statements

                                  June 30, 1998




2.  Basis of Presentation and Significant Accounting Policies

The Company has generated net income of $3,458,256  for the  three-month  period
ended June 30, 1998 and has an accumulated  deficit of  $134,052,008 at June 30,
1998. In order for the Company's principal operating  subsidiary FOHP-NJ to meet
statutory  net  worth   requirements  set  forth  in  its  COA  granted  by  the
Departments,  the Company must  generate  sufficient  operating  profits  and/or
obtain one or more capital infusions. See Note 5.

In connection with FOHP-NJ's plan to remedy its statutory net worth  deficiency,
the  Board  of  Directors  of  the  Company  approved  an  investment  by FHS of
approximately $51.7 million into the Company.  FHS invested $51,701,121 into the
Company   through  the  purchase  of  a  Convertible   Debenture  (the  "Initial
Convertible  Debenture")  convertible  into  71%  of the  Company's  outstanding
equity,  on a fully diluted basis. At the closing of the purchase of the Initial
Convertible  Debenture,   which  occurred  on  April  30,  1997,  FHS  converted
$1,701,121 of the principal  amount of the Initial  Convertible  Debenture  into
168,109 shares of the Company's Common Stock. On December 1, 1997, FHS converted
the  remaining  $50,000,000  of  the  principal  into  4,941,049  shares  of the
Company's  Common Stock.  On December 8, 1997,  due to the  continued  operating
losses of FOHP-NJ,  FHS invested an additional  $29,000,000  into the Company in
exchange for a Convertible  Debenture (the "New Convertible  Debenture") in form
and substance  substantially similar to the Initial Convertible Debenture issued
to FHS on April  30,  1997.  Immediately  upon  receipt  of the New  Convertible
Debenture,  FHS  converted  $18,952,930  of the  principal  amount  thereof into
92,804,003 shares of the Company's Common Stock. The price per share paid by FHS
upon conversion of the Convertible  Debentures was calculated in accordance with
the Amended  Securities  Purchase  Agreement (the "Amended  Securities  Purchase
Agreement")  entered into by FHS, the Company and FOHP-NJ in connection with the
sale of the Initial  Convertible  Debenture.  The Convertible  Debentures accrue
interest  at a variable  rate  adjusted  on a  calendar  quarterly  basis.  Such
interest  is due and  payable  within  ten days  after the end of each  calendar
quarter. Any such interest not paid when due and payable is considered defaulted
interest  and  shall  be  added  to the  principal  amount  of  the  Convertible
Debentures.  At June 30, 1998,  $2,306,485 of defaulted  interest is included in
the principal amount of the Convertible Debentures.

In connection with the purchase by FHS of the Company's Common Stock through the
conversion of Convertible  Debentures,  goodwill totaling  $107,730,254 has been
recorded to reflect the excess of FHS's purchase price over the appropriate fair
value of the net assets acquired.  The acquisition was treated as a purchase for
accounting  purposes.  The goodwill is being amortized on a straight-line  basis
over 40  years.  Amortization  for the  six-month  period  ended  June 30,  1998
totaling $1,346,628 has been reflected in the statement of operations.

In December 1997, FHS also contributed an additional  $24,000,000 to the Company
to satisfy  certain  statutory net worth  requirements  applicable to FOHP-NJ in
return for additional  subordinated  debentures (the "Subordinated  Debentures")
which are not convertible  into the Company's  Common Stock,  but otherwise have
substantially  the  same  terms  as the  Convertible  Debentures.  Further,  FHS
contributed $19,897,801 to FOHP as additional paid in capital to satisfy certain
statutory net worth requirements applicable to FOHP-NJ as of June 30, 1998.


                                       8

<PAGE>


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

              Notes to Condensed Consolidated Financial Statements

                                  June 30, 1998


The following are significant accounting policies of the Company:

Principles of Consolidation

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

Cash and Cash Equivalents

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

Accounts Receivable

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

Restricted Cash

At June 30, 1998,  FOHP-NJ was required to maintain  $69,115,157 on deposit with
the New Jersey  Department  of Banking  and  Insurance  (the  "DOI") to meet its
"Minimum  Insolvency  Deposit  for  Healthcare  Expenditures"  (the  "Insolvency
Deposit")  under  current  insurance  regulations.  The  Insolvency  Deposit  is
calculated  based on the  current  financial  statements  and is  required to be
funded by June 30, 1998. As of June 30, 1998, FOHP-NJ had $41,243,643 on deposit
with the DOI.  FOHP-NJ has obtained  approval from the DOI to fund the remaining
Insolvency  Deposit  quarterly  through  December 31, 1998. The remainder of the
deposit  is  subject to a revised  calculation  as of  September  30,  1998.  In
addition,  FOHP-NJ is required  to maintain  $1,200,000  cash  reserve  with the
Health Care Financing  Administration  ("HCFA") for its federal programs.  As of
June 30,1998, FOHP-NJ had $1,370,720 on deposit for its federal programs.

Furniture and Equipment

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

Premium Revenue

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

Certain premium revenue is earned under a contract between FOHP-NJ and the State
of New Jersey Department of Human Services,  Division of Medical  Assistance and
Health Services  ("NJDHS-DMAHS").  The contract with  NJDHS-DMAHS had an initial
term of 18 months and may be renewed for successive one year terms. The contract
can be suspended  (by  NJDHS-

                                       9

<PAGE>


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

              Notes to Condensed Consolidated Financial Statements

                                  June 30, 1998



DMAHS) or terminated  (by either party) upon the  occurrence of certain  events.
Premiums  are  earned  monthly  on a per  capita  basis,  based on the number of
eligible members enrolled in FOHP-NJ health plans.  Members may disenroll at any
time other than months 2 through 6 of membership  and  eligibility is determined
by NJDHS-DMAHS.

Certain premium revenue is earned under a contract  between FOHP-NJ and HCFA for
services provided to Medicare eligible recipients. The contract with HCFA had an
initial  term of 12 months and may be renewed  for  successive  one-year  terms.
Premiums  are  earned  monthly  on a per  capita  basis,  based on the number of
eligible members enrolled in FOHP-NJ health plans.

Other Revenue

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

Medical and Hospital 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.

Income Taxes

The Company's  operations are included in FHS's  consolidated  federal and state
income  tax  returns.  The  Company  records  income  taxes in  accordance  with
Statement of  Financial  Accounting  Standards  No. 109,  Accounting  for Income
Taxes.  Under FHS's tax  allocation  method,  a tax  provision or tax benefit is
allocated to the Company based upon a calculation of the Company's  income taxes
as if it filed separate income tax returns.

Per Share Data

Per share data are based on the weighted average number of shares of all classes
of common stock outstanding during the comparative  six-month periods ended June
30 (100,000,000 in 1998 and 2,147,320 in 1997, respectively).


3.  Subordinated Debt

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


                                       10

<PAGE>

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

              Notes to Condensed Consolidated Financial Statements

                                  June 30, 1998



The Convertible Debentures and Subordinated Debentures are due December 31, 2002
and accrue interest at a rate determined  quarterly based on the rate charged to
FHS under its credit facility  (5.85% as of June 30, 1998).  Interest is due and
payable  within  ten days  after the end of each  quarter,  subject to the terms
noted above.

4.  Common Stock

In  connection  with the April 30, 1997  investment by FHS, the  Certificate  of
Incorporation of the Company was amended to, among other things,  reclassify the
Company's  capital stock.  As a result,  the Company  currently has  110,000,000
shares of authorized  capital stock, which is comprised of 100,000,000 shares of
Common  Stock,  par value $.01 per share,  and  10,000,000  shares of  Preferred
Stock, par value $1.00 per share. In connection with the reclassification of the
Company's capital stock, each outstanding share of Common Stock-NJ was converted
into one share of Common  Stock.  As a result,  all  2,086,839  shares of Common
Stock-NJ  outstanding at the time of the Company's  Certificate of Incorporation
was  amended,  were  converted  into Common  Stock.  Prior to the April 30, 1997
investment  by FHS,  the  authorized  capital  stock of the Company  totaled 100
million shares and was comprised of the following  classes of Common Stock, $.01
par value: Common Stock-NJ,  Common Stock-NY,  Common Stock-PA,  Common Stock-DE
and Unclassified  Common Stock. During 1995, the Company issued 2,100,173 shares
of Common  Stock-NJ.  There were no additional  shares of Common Stock-NJ issued
during 1996.

On March 25,  1998,  the  Board of  Directors  of the  Company  and FHS,  as the
majority shareholder of the Company, approved an increase in the total number of
shares of the  Company's  authorized  capital stock from  110,000,000  shares to
500,000,000  shares. Of the total shares,  499,000,000 shares will be classified
as Common Stock and 1,000,000  shares will be classified as Preferred Stock. The
Company expects to amend its Certificate of  Incorporation in the near future to
effect the approved increase in the Company's authorized capital stock.

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

The Company may, but is not obligated to, repurchase shares of Common Stock from
any shareholder whose provider  agreement  terminates for any reason or upon the
occurrence  of certain  events,  as described in the  Company's  Certificate  of
Incorporation.  The  determination of the repurchase price of the shares is also
described in the Company's Certificate of Incorporation.


5.  Statutory Net Worth and Dividend Restrictions

FOHP-NJ,  pursuant  to its COA to operate an HMO in New  Jersey,  is required to
maintain a minimum  statutory net worth.  In addition,  the COA provides that if
FOHP-NJ's  statutory  net worth is, or is  expected to be, less than 125% of the
minimum statutory net worth requirement applicable to it, FOHP-NJ is required to
submit to the Departments a plan of action to address the deficiency or expected
deficiency.

                                       11

<PAGE>

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

              Notes to Condensed Consolidated Financial Statements

                                  June 30, 1998



During the first quarter of 1996, the Company  learned that FOHP-NJ's  statutory
net worth as of  December  31,  1995 may have  been  below  125% of the  minimum
statutory net worth  requirement  applicable to FOHP-NJ.  FOHP-NJ addressed this
potential  deficiency by submitting to the  Departments  in April 1996 a plan of
action which  outlined the actions  which had been taken and measures to be used
by FOHP-NJ to correct the potential deficiency.

As part of the plan of action,  on April 30, 1997,  the Company sold the Initial
Debenture to FHS in the principal amount of $51,701,120.38. The principal amount
of the Initial  Debenture was converted by FHS, into 71% of FOHP's capital stock
on a fully-diluted basis.

To facilitate the sale of the Initial  Debenture to FHS, the Departments  agreed
to rescind  their  conditions  attached to their  approval of the plan of action
submitted by FOHP-NJ in April 1996, subject to the Department's right to require
FOHP-NJ  to submit a new plan of action if  FOHP-NJ  fails to  increase  its net
worth to 100% of the minimum statutory net worth requirement,  provided that FHS
guarantees,  in form satisfactory to the Commissioner of the DOI, that FOHP-NJ's
net worth  will be  maintained  at a level  equal to or in excess of 100% of the
minimum statutory net worth requirement applicable to FOHP-NJ. In December 1997,
the  Departments  further  agreed to permit  FOHP-NJ's net worth to remain below
100% until  December  31,  1998,  provided  that it attain 25%  increments  each
quarter during 1998.

In December  1997,  FHS  contributed an additional $24 million to the Company to
satisfy certain statutory net worth requirements applicable to FOHP-NJ in return
for the New Convertible Debenture.  Further, FHS contributed  $19,897,801 to the
Company as  additional  paid in capital to satisfy  certain  statutory net worth
requirements  applicable  to  FOHP-NJ  as of June 30,  1998.  At June 30,  1998,
FOHP-NJ was  approximately  $2.5 million below 100% of the minimum statutory net
worth requirement.

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


6.  Related Party Transaction

Pursuant to the Amended  Securities  Purchase Agreement with FHS, the Company is
required  to pay FHS, or a  designated  subsidiary  of FHS  (QualMed,  Inc.),  a
management fee based on allocated  corporate  charges.  For the six-month period
ended June 30, 1998, the Company charged  $1,271,000 to expense related to these
management fees.

The amount due to FHS at June 30, 1998,  represents  management fees payable and
interest payable related to the Debentures.  The amount due to QualMed,  Inc. at
June 30,  1998  primarily  represents  cost  allocations  for claims  processing
services.


7.  Impact of Year 2000 (Unaudited)

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


                                       12


<PAGE>


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

              Notes to Condensed Consolidated Financial Statements

                                  June 30, 1998





failure or miscalculations causing disruptions of operations,  including,  among
other things, a temporary inability to process  transactions,  send invoices, or
engage in similar normal business activities.

Based on a recent assessment, the Company determined that it will be required to
modify or replace  significant  portions of its  software  so that its  computer
systems  will  function  properly  with  respect  to dates in the Year  2000 and
thereafter.  The Company presently  believes that with modifications to existing
software  and  conversions  to new  software,  the Year 2000 issue will not pose
significant  operational  problems for its computer  systems.  However,  if such
modifications  and  conversions are not made, or are not completed  timely,  the
Year 2000 issue could have a material impact on the operations of the Company.

The Company has  initiated  formal  communications  with all of its  significant
suppliers  and large  customers to determine  the extent to which the  Company's
interface  systems are vulnerable to those third  parties'  failure to remediate
their own Year 2000 issues.

The Company  has  developed a plan to modify its  information  technology  to be
ready  for the Year  2000 and has  begun  converting  critical  data  processing
systems. The Company currently expects the project to be substantially  complete
by early 1999 and as yet is unable to estimate  the cost.  The Company  does not
expect this project to have a  significant  effect on  operations.  Expenditures
through June 30, 1998 have not been  material.  The Company will  implement  its
plan by placing a higher  priority on the systems with  significant  operational
implications.  The Company  will  continue to implement  systems with  strategic
value though some projects may be delayed due to resource constraints.



                                       13
<PAGE>


Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operation


Overview

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

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

FOHP-NJ  markets a  comprehensive  range of health care benefit  plan  products,
pursuant to contractual arrangements with physicians, hospitals and other health
care  providers.  As of August 13,  1998,  FOHP-NJ  had  entered  into  provider
agreements with 62 New Jersey hospitals and acute care  institutions  ("NJ Acute
Care Institutions"), approximately 11,000 physicians licensed to practice in New
Jersey ("NJ  Practitioners"),  and approximately 75 other health care providers.
The  provider  agreements  have an  initial  term of one year and are  renewable
annually.  Such agreements with NJ Acute Care Institutions and other health care
providers who are not NJ  Practitioners  may be terminated by mutual consent or,
after the initial one year term, by either party upon 90 days notice; agreements
with NJ Practitioners may be terminated by either party upon 60 days notice. The
agreements also may be terminated for breaches specified therein.  The terms and
conditions of provider  agreements  are not affected by whether the provider is,
or is not, a shareholder of the Company.  However, some agreements with NJ Acute
Care  Institution  shareholders  as  subscribers  in  FOHP-NJ  health  plans are
different from the  subscriber  agreements of  non-shareholders  in that premium
rates for those NJ Acute Care  Institutions  that are shareholders are capped to
be within a certain corridor (+/- 4%) from their prior year premium rates. There
are 24 NJ Acute Care Institutions with such subscriber agreements.

FOHP-NJ's  agreements with NJ Acute Care  Institutions  provide for, among other
things, a reimbursement  schedule setting the amounts to be paid to the NJ Acute
Care Institutions by FOHP-NJ for services provided to members. The reimbursement
schedule of a provider agreement between 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  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 an FOHP-NJ  health plan for any services paid for under
such plan except for any applicable  co-payment,  co-insurance,  deductibles and
non-covered services.

NJ Practitioners are paid pursuant to a fee schedule  established by FOHP-NJ and
are  prohibited  from  billing  members of an  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,  co-insurance and deductibles in amounts approved by
FOHP-NJ, are collected directly by the NJ Practitioner from the member.


                                       14

<PAGE>

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


Results of Operations

For the three months ended June 30, 1998 and 1997

Premium Revenue. For the three-month period ended June 30, 1998, medical premium
revenue  totaled  $81.5  million or $11.2 million less than the $92.7 million of
medical premium revenue  generated during the same period in 1997. This decrease
was due to reduced  enrollment in FOHP-NJ health benefit plans,  specifically in
the Medicare  line of business.  Approximately  39% of medical  premium  revenue
generated in 1998 and  approximately 32% of medical premium revenue generated in
1997 was  attributable  to NJ Acute Care  Institutions,  which are  obligated to
enroll their  employees in FOHP-NJ  health plans.  The Company  believes that it
will benefit by its inclusion in the formation of FHS's Northeast region,  which
is comprised of three health plans with a total of more than one million members
in the New York tri-state area.

Other  Revenue.  Other  revenue,   principally   administrative  fees,  for  the
three-month  period  ended  June 30,  1998 was $638  thousand  compared  to $222
thousand of other revenue for the same period of the prior year. Interest income
for the  second  quarter  of 1998 was $998  thousand,  as  compared  to the $1.0
million generated in 1997.

Medical and Hospital Service  Expenses.  Total expenses  attributable to medical
and hospital  service for the three-month  period ended June 30, 1998 were $58.1
million or $29.5  million  lower than  expenses  incurred for the same period in
1997.  The decrease in medical and hospital  service  expenses from 1997 to 1998
was  primarily  attributable  to a decrease in enrollees in the Medicare line of
business as well as enhanced utilization efforts in the Commercial, Medicaid and
Medicare  lines of  business.  In addition,  the medical  loss ratio (i.e.,  the
percentage  of  each  premium  dollar  used  to pay  medical  expenses)  for the
three-month  period ended June 30, 1998 was 71.3% compared to 94.5% for the same
period in 1997. The Company  believes that this decrease is attributed to recent
operational  changes,  specifically the  implementation  of a modified  provider
reimbursement schedule,  enhanced utilization management efforts, a reduction of
Medicare  enrollment,  which had a higher  medical loss ratio than the Company's
other lines of business and a reduction of the IBNR reserve due to more complete
claims payment data being available to the Company.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses totaled $15.3 million for the three-month  period ended
June 30, 1998, including a $636 thousand  administrative  management fee charged
by FHS and $530 thousand  interest  expense  associated with the Convertible and
Subordinated Debentures,  compared to $15.5 million incurred for the same period
in 1997.

Other  Expenses.  Depreciation  and  amortization  expenses for the  three-month
period ended June 30, 1998  increased by $699  thousand  from the $349  thousand
incurred  during the same period in 1997. This increase was mostly the result of
amortization of goodwill associated with FHS's investment in the Company.


                                       15

<PAGE>


For the six-months ended June 30, 1998 and 1997

Premium Revenue.  For the six-month period ended June 30, 1998,  medical premium
revenue  totaled  $171.4 million or $5.3 million less than the $176.7 million of
medical premium revenue  generated during the same period in 1997. This decrease
was due to reduced  enrollment in FOHP-NJ health benefit plans,  specifically in
the Medicare  line of business.  Approximately  38% of medical  premium  revenue
generated  in the first  six  months of 1998 and  approximately  35% of  medical
premium  generated in the first six months of 1997 was  attributable to NJ Acute
Care  Institutions  which are  obligated  to enroll  their  employees in FOHP-NJ
health plans.  The Company believes that it will benefit by its inclusion in the
formation of FHS's  Northeast  region,  which is comprised of three health plans
with a total of more than one million members in the New York tri-state area.

Other Revenue. Other revenue, principally administrative fees, for the six-month
period ended June 30, 1998 was $1.5 million  compared to $908  thousand of other
revenue for the same period of the prior year. Interest income for the first six
months of 1998 was $2.2 million,  a $500 thousand increase from the $1.7 million
generated in the first six months of 1997.  The increase in interest  income was
due to the larger cash  reserves  related to the  investment by FHS on April 30,
1997.

Medical and Hospital Service  Expenses.  Total expenses  attributable to medical
and hospital  service for the  six-month  period ended June 30, 1998 were $135.3
million or $33.7  million  less than  expenses  incurred  for the same period in
1997.  The decrease in medical and hospital  service  expenses from 1997 to 1998
was  primarily  attributable  to a decrease in enrollees in the Medicare line of
business as well as enhanced utilization efforts in the Commercial, Medicaid and
Medicare  lines of  business.  In addition,  the medical  loss ratio (i.e.,  the
percentage  of  each  premium  dollar  used  to pay  medical  expenses)  for the
six-month  period  ended June 30, 1998 was 78.9%  compared to 95.6% for the same
period in 1997. The Company  believes that this decrease is attributed to recent
operational  changes,  specifically the  implementation  of a modified  provider
reimbursement schedule,  enhanced utilization management efforts, a reduction of
Medicare  enrollment,  which had a higher  medical loss ratio than the Company's
other lines of business and a reduction of the IBNR reserve due to more complete
claims payment data being available to the Company.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  totaled $31.3  million for the six-month  period ended
June 30, 1998,  including a $1.3 million management fee payable to FHS, compared
to $29.3 million incurred for the same period in 1997.

Other Expenses.  Depreciation and amortization expenses for the six-month period
ended June 30, 1998 increased by $1.5 million from $590 thousand incurred during
the same period in 1997.  This increase was mostly the result of amortization of
goodwill associated with FHS's investment in the Company.

Liquidity and Capital Resources

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

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


                                       16


<PAGE>

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

To facilitate the sale of the Initial  Debenture to FHS, the Departments  agreed
to rescind  their  conditions  attached to their  approval of the plan of action
submitted by FOHP-NJ in April 1996, subject to the Department's right to require
FOHP-NJ  to submit a new plan of action if  FOHP-NJ  fails to  increase  its net
worth to 100% of the minimum  statutory  net worth  requirement  by December 31,
1997. In addition,  the Departments agreed that subsequent to December 31, 1997,
FOHP-NJ  will only be  required  to  maintain  net worth at 100% of the  minimum
statutory  net worth  requirement  applicable to it, and not 125% of the minimum
statutory  net worth  requirement  as required  prior to the sale of the Initial
Debenture,   provided  that  FHS  guarantees,   in  form   satisfactory  to  the
Commissioner  of the DOI, that FOHP-NJ's net worth will be maintained at a level
equal to or in excess of 100% of the  minimum  statutory  net worth  requirement
applicable to FOHP-NJ. In December 1997 the Departments further agreed to permit
FOHP-NJ's net worth to remain below 100% until December 31, 1998,  provided that
it attain 25% increments each quarter during 1998.

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

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

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

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

In December 1997, FHS also  contributed an additional $24 million to the Company
to satisfy  certain  statutory net worth  requirements  applicable to FOHP-NJ in
return for Subordinated Debentures.  Further, FHS contributed $19,897,801 to the
Company as  additional  paid in capital to satisfy  certain  statutory net worth
requirements applicable to FOHP-NJ as of June 30, 1998.


                                       17
<PAGE>


Pursuant to new HMO regulations  adopted in the State of New Jersey,  FOHP-NJ is
required   to   maintain  a  "Minimum   Insolvency   Deposit   for  Health  Care
Expenditures."  As of June 30, 1998, it is estimated that this deposit  covering
two months of incurred health  expenditures  will be approximately  $69 million.
The initial deposit, or $12.5 million (including  interest earned),  was made by
September 30, 1997. An additional  $4.6 million was deposited on March 31, 1998,
$9.5  million  was  deposited  on April  2,  1998 and an  additional  $14.6  was
deposited  on June  30,  1998.  The  remainder  of the  deposit  will be made in
quarterly  installments and is subject to a revised  calculation as of September
30, 1998.

Impact of Year 2000

The Year 2000 issue is the result of computer  programs  being written using two
digits  rather than four to define the  applicable  year.  Any of the  Company's
computer programs that have  time-sensitive  software may recognize a date using
"00" as the year 1900 rather than the year 2000.  This could  result in a system
failure or miscalculations causing disruptions of operations,  including,  among
other things, a temporary inability to process

transactions,  send invoices,  or engage in similar normal business  activities.
See "Part 1, Item 1 Notes to Condensed  Consolidated Financial Statements - Note
7."


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<PAGE>



Item 1.           Legal Proceedings

As reported in Item 3 of the  Company's  Annual Report on Form 10-K for the year
ended December 31, 1997,  FOHP received a letter from the New Jersey  Department
of Health and Senior  Services  (the  "DOH")  dated  January  23, 1998 (the "DOH
Letter"),  in which the DOH stated  that it was in receipt of  information  that
indicated  that FOHP was in violation of a number of  provisions of the statutes
and rules governing HMOs in New Jersey. In the DOH Letter,  the DOH alleged that
FOHP constructively terminated its provider contracts with certain NJ Acute Care
Institutions by unilaterally  adding new terms to the existing contracts between
FOHP and such NJ Acute Care  Institutions.  More  specifically,  the DOH alleged
that  FOHP had  stated  that it would not honor  its  existing  agreements  with
certain NJ Acute Care Institutions for the provision of surgical services unless
all  anesthesiologists  at the  hospitals  became  providers in FOHP's  provider
network.  The DOH also  stated in the DOH  Letter  its  intention  to levy fines
against FOHP based on the information  that it had already received with respect
to  FOHP  and on any  additional  information  obtained  by the DOH  during  its
investigation of FOHP.

After FOHP's receipt of the DOH Letter,  various members of the DOH visited FOHP
and met with certain employees and  representatives  of FOHP for the purposes of
gathering  information  necessary to complete the DOH's  inquiry with respect to
the matters  identified in the DOH Letter.  FOHP fully cooperated with the DOH's
investigation  and  provided  all  of the  information  requested  by  the  DOH.
Subsequent to the DOH's site visit at FOHP,  representatives of the DOH and FOHP
had ongoing discussions regarding the DOH's investigation into the matters which
were identified in the DOH Letter.

As a result of the ongoing  discussions  between  representatives of the DOH and
FOHP, the DOH and FOHP entered into an administrative  consent order,  effective
July 2, 1998 (the "ACO"), in order to amicably resolve the matters identified in
the DOH Letter and promote the  public's  interests,  without any  admission  of
liability or fact by either  party,  and without  trial or  adjudication  of any
facts or issues  contained  therein.  Pursuant  to the ACO,  FOHP  agrees (i) to
provide  in-network  coverage  for  anesthesiology   services  for  non-emergent
procedures  at  participating  hospitals  for its  commercial  HMO and  point of
service  members,  even in those  circumstances  where there is no participating
anesthesiologist at a participating facility,  unless FOHP notifies all affected
members,  providers  and the DOH to the  contrary  at least  thirty (30) days in
advance,  and, if requested by the DOH, meets with the DOH for  consultation and
review,  (ii) in the event FOHP is  required  to give  notice to members  and/or
providers  concerning  a change in  FOHP's  network  of  providers,  to  provide
assistance  to its members  during the  transition  period  necessitated  by the
change,  and (iii) to pay the DOH the amount of $99,800  within ninety (90) days
of the effective date of the ACO.



                                       19
<PAGE>



Item 6.           Exhibits and Reports on Form 8-K

Exhibit 11 - Computation of Earnings Per Share.

Exhibit 27 - Financial Data Schedule.

Reports on Form 8-K - For the three months ended June 30, 1998,  the Company did
not file any  Current  Reports  on Form 8-K  with the  Securities  and  Exchange
Commission.



                                       20

<PAGE>



                                   SIGNATURES



Pursuant  to the  requirements  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)



             August 13, 1998        /s/  Thomas W. Wilfong
             ---------------        -------------------------------------------
                  Date                              (Signature)**
                                                Thomas W. Wilfong
                                       President and Chief Executive Officer





             August 13, 1998       /s/ Marc M. Stein
             ---------------       --------------------------------------------
                 Date                               (Signature)**
                                                   Marc M. Stein
                                     Principal Financial and Accounting Officer


                                       21