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  MARCH 31, 1998
                                -----------------------------------------------

                                       or

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

For the transition period from _______________________     to___________________

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

                                   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                   07754
--------------------------------------------------------------------------------
(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 MAY 14, 1998



<PAGE>




                                 INDEX
                                                                        PAGE NO.

                         PART I - FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets - March 31, 1998
  and December 31, 1997                                                       3

Condensed Consolidated Statements of Operations                               4
  For the periods January 1, 1998 to March 31, 1998
  For the periods January 1, 1997 to March 31, 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 March 31, 1998

Condensed Consolidated Statements of Cash Flows                               6
  For the periods January 1, 1998 to March 31, 1998
  For the periods January 1, 1997 to March 31, 1997

Notes to Condensed Consolidated Financial Statements                          7

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS                                         13


                           PART II - OTHER INFORMATION

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS               18

ITEM 5.     OTHER INFORMATION                                                 18

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K                                  19

Signature Page                                                                20


                                       2


<PAGE>


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

<TABLE>
<CAPTION>
                                                                                               MARCH 31,        DECEMBER 31,
                                                                                                1998               1997
                                                                                         -----------------------------------
                                                                                             (UNAUDITED)         (AUDITED)
<S>                                                                                        <C>               <C>
ASSETS
Cash and cash equivalents                                                                  $  58,322,853     $   79,266,721
Accounts receivable from owners/providers, net of allowance for doubtful accounts
  and retroactive terminations of $336,578 in 1998 and $922,354 in 1997                       14,655,238         11,096,487
Other accounts receivable, net of allowance for doubtful accounts and retroactive
  terminations of $2,648,222 in 1998 and $2,507,619 in 1997.                                   3,291,756          3,131,333
Income tax receivables                                                                         1,331,638                 --
Prepaid and other current assets                                                                 422,555            635,548
                                                                                           --------------------------------
Total current assets                                                                          78,024,040         94,130,089

  Restricted Cash                                                                             18,632,052         13,846,682
  Furniture and equipment (at cost, net of accumulated depreciation
   and amortization of $2,713,273 and $2,349,874, respectively)                                2,909,204          2,480,042
  Goodwill (net of accumulated amortization of $673,314 and $0, respectively)                107,056,940        107,730,254
  Other assets                                                                                   413,264            424,164
                                                                                           ================================
Total Assets                                                                               $ 207,035,500     $  218,611,231
                                                                                           ================================


LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Medical claims payable to owners/providers                                               $  13,432,663     $   20,308,241
  Other medical claims payable                                                                56,748,632         62,614,704
  Accounts payable                                                                             1,042,114            746,369
  Accrued expenses                                                                            17,964,499         17,512,845
  Due to Foundation Health Systems, Inc.                                                       1,187,637            543,075
  Due to QualMed, Inc.                                                                           688,157          1,192,716
  Unearned premium                                                                             1,330,023          7,965,658
                                                                                           ---------------------------------
Total current liabilities                                                                     92,393,725        110,883,608

Convertible debentures                                                                        11,800,442         11,294,406
Subordinated debentures                                                                       24,000,000         24,000,000
                                                                                           ---------------------------------
Total Liabilities                                                                            128,194,167        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                                                                 215,351,597        208,053,796
  Accumulated deficit                                                                       (137,510,264)      (136,620,579)
                                                                                           ---------------------------------
Total shareholders' equity                                                                    78,841,333         72,433,217
                                                                                           ---------------------------------
Total Liabilities and Shareholders' Equity                                                 $ 207,035,500     $  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
                                                                                          MARCH 31,
                                                                                 1998                     1997
                                                                           --------------------------------------
                                                                              (unaudited)             (unaudited)
<S>                                                                        <C>                     <C>
REVENUE:
  Premiums from owners/providers                                           $     34,981,939        $    30,925,956
  Other premium revenue                                                          54,891,193             53,118,605
  Other, principally administrative service fees                                    875,331                686,269
  Interest income                                                                 1,232,062                607,871
                                                                           ---------------------------------------
Total revenue                                                                    91,980,525             85,338,701
                                                                           ---------------------------------------


EXPENSES:
  Medical services to owners/providers                                           13,693,633             10,174,871
  Hospital services to owners/providers                                          11,799,608             11,860,116
  Other medical services                                                         33,148,428             33,353,832
  Other hospital services                                                        18,555,188             25,075,780
  Selling, general and administrative                                            14,706,604             12,492,706
  Management fee - QualMed, Inc.                                                         --              1,701,120
  Management fee - Foundation Health Systems, Inc.                                  635,000                     --
  Amortization of goodwill                                                          673,314                     --
  Depreciation and other amortization                                               363,399                240,991
  Interest - Foundation Health Systems, Inc.                                        515,598                     --
  Other interest                                                                    109,151                  1,557
                                                                           ---------------------------------------
Total expenses                                                                   94,199,923             94,900,973
                                                                           ---------------------------------------

NET LOSS BEFORE PROVISION (BENEFIT) FOR INCOME TAXES
                                                                                 (2,219,398)            (9,562,272)

Provision (benefit) for income taxes
                                                                                 (1,329,713)                 1,436
                                                                          ----------------------------------------
NET LOSS                                                                  $        (889,685)        $   (9,563,708)
                                                                          ========================================

NET LOSS PER COMMON SHARE                                                 $           (0.01)        $        (4.56)
                                                                          ========================================
</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, 1995                             2,100,173    $   21,002    $ 30,648,489   $ (25,790,452)   $  4,879,039

Net loss for the period January 1, 1996 to
     December 31, 1996                                                                               (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)

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 loss for the period January 1, 1998 to
    March 31, 1998                                                                                      (889,685)       (889,685)
Capital contributed by Foundation Health Systems, Inc.                                 7,297,801                       7,297,801
                                                       -------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 (UNAUDITED)                  100,000,000   $ 1,000,000    $215,351,597   $(137,510,264)   $ 78,841,333
                                                       =========================================================================
</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 MARCH 31, 1998      TO MARCH 31, 1997
                                                                            --------------------------------------------
                                                                                (unaudited)              (unaudited)
<S>                                                                          <C>                       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                                     $    (889,685)            $ (9,563,708)
Adjustments to reconcile net loss to cash flows provided by
  (used in) operating activities:
      Depreciation and amortization                                              1,036,713                  240,991
      Interest cost converted to debt                                              506,036                       --
      Changes in operating assets and liabilities:
      Accounts receivable from owners/providers                                 (3,558,751)              (3,373,708)
      Other accounts receivable                                                   (160,423)               1,220,600
      Income tax receivables                                                    (1,331,638)                      --
      Prepaid expenses and other current assets                                    212,993                  197,971
      Restricted cash                                                           (4,785,370)                 (16,746)
      Other assets                                                                  10,900                    5,810
      Medical claims payable to owners/providers                                (6,875,578)               4,662,815
      Other medical claims payable                                              (5,866,072)              18,043,461
      Accounts payable                                                             303,799                  135,482
      Accrued expenses                                                             451,654                1,064,210
      Due to Foundation Health Systems, Inc.                                       644,562                       --
      Due to QualMed, Inc.                                                        (504,559)               1,701,120
      Unearned premium revenue                                                  (6,635,635)              (2,888,203)
      Other liabilities                                                             (8,054)              (1,129,913)
                                                                             --------------------------------------
Net cash flows (used in) provided by operating activities                      (27,449,108)              10,300,182


CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment                                              (792,561)                (189,394)
                                                                             --------------------------------------
Net cash used in investing activities                                             (792,561)                (189,394)

CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributed by Foundation Health Systems, Inc.                           7,297,801                       --
Payment of issue costs                                                                  --                 (250,186)
                                                                             --------------------------------------
Net cash provided by (used in) financing activities                              7,297,801                 (250,186)


Net (decrease) increase in cash and cash equivalents
 at the end of the period                                                      (20,943,868)               9,860,602
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                           $  58,322,853             $ 46,525,513
                                                                             ======================================


Interest paid for the period                                                 $      73,336             $      1,557
                                                                             ======================================

State income taxes paid for the period                                       $       1,075             $      1,198
                                                                             ======================================
</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

                                 March 31, 1998

1.  GENERAL

     FOHP,  Inc. (the "Company" or "FOHP") serves as the holding company for its
wholly-owned subsidiaries. The Company's principal operating subsidiary is First
Option  Health  Plan of New  Jersey,  Inc.  ("FOHP-NJ").  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.  ("FOHP-PA"),  a Pennsylvania  corporation,  First Option
Health Plan of Maryland, Inc. ("FOHP-MD"), a Maryland corporation,  First Option
Health Plan of Delaware,  Inc.  ("FOHP-DE"),  a Delaware  corporation,  and FOHP
Agency,  Inc., a New Jersey  corporation,  each formed in 1995, and First Option
Dental, Inc. ("First Dental"),  a New Jersey corporation,  formed in 1996. These
other subsidiaries have not commenced operations.  The Board of Directors of the
Company recently approved the dissolution of FOHP-NY, FOHP-MD, FOHP-DE and First
Dental.

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 three month periods ended March 31, 1998 and
March 31, 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.

2.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The Company has incurred a net loss of $889,685 for the three-month period ended
March 31, 1998 and has an accumulated deficit of $137,510,264 at March 31, 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.


                                       7


<PAGE>

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

              Notes to Condensed Consolidated Financial Statements

                                 March 31, 1998

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 March 31, 1998,  $1,753,373 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  three-month  period  ended March 31, 1998
totaling $673,314 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  $7,297,801  as  additional  paid  in  capital  to  satisfy  certain
statutory net worth requirements applicable to FOHP-NJ as of March 31, 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.


                                       8


<PAGE>

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

              Notes to Condensed Consolidated Financial Statements

                                 March 31, 1998

ACCOUNTS RECEIVABLE

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

RESTRICTED CASH

At March 31, 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 March 31,  1998,  FOHP-NJ  had  $17,278,723  on
deposit  with the DOI.  FOHP-NJ has obtained  approval  from the DOI to fund the
remaining  Insolvency  Deposit quarterly through December 31, 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 March 31,1998,
FOHP-NJ had $1,353,329 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-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.


                                       9


<PAGE>

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

              Notes to Condensed Consolidated Financial Statements

                                 March 31, 1998


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  three-month  periods ended
March 31 (100,000,000 in 1998 and 2,095,728 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.

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 March 31, 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 these 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.


                                       10


<PAGE>


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

              Notes to Condensed Consolidated Financial Statements

                                 March 31, 1998


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. 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  $7,297,801  as
additional paid in capital to satisfy certain  statutory net worth  requirements
applicable  to FOHP-NJ as of March 31,  1998.  At March 31,  1998,  FOHP-NJ  was
approximately  $17.5  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.


                                       11


<PAGE>


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

              Notes to Condensed Consolidated Financial Statements

                                 March 31, 1998


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 1998 and 2% of total
revenue of the Company's health plans for 1997. For the three-month period ended
March 31,  1998,  the  Company  charged  $635,000  to  expense  related to these
management fees.

The amount due to FHS at March 31, 1998,  represents management fees payable and
interest payable related to the Debentures.  The amount due to QualMed,  Inc. at
March 31, 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
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 March 31, 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.


                                       12


<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 May 14, 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.

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


                                       13


<PAGE>


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 MARCH 31, 1998 AND 1997

PREMIUM  REVENUE.  For the  three-month  period  ended March 31,  1998,  medical
premium  revenue  totaled  $89.9  million  or $5.9  million  more than the $84.0
million of medical  premium  revenue  generated  during the same period in 1997.
Approximately 38% of medical premium revenue generated in 1998 and approximately
36% 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 the  percentage  of medical  premium
revenue  attributable to NJ Acute Care  Institutions  will decrease as FOHP-NJ's
operations grow and FOHP-NJ  continues to benefit from current marketing efforts
focused on commercial  products which are not marketed  directly to employees of
providers  of FOHP-NJ.  The Company  also  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  March 31,  1998 was $875  thousand  compared to $686
thousand of other revenue for the same period of the prior year. Interest income
for the first  quarter of 1998 was $1.2 million,  a $624 thousand  increase from
the $608 thousand  generated in 1997. The increase in interest income was due to
the larger cash  reserves  related to the  investments  by FHS in April 1997 and
December 1997.

MEDICAL AND HOSPITAL SERVICE  EXPENSES.  Total expenses  attributable to medical
and hospital service for the three-month  period ended March 31, 1998 were $77.2
million or $3.3  million  lower than  expenses  incurred  for the same period in
1997.  The decrease in medical and hospital  service  expenses from 1997 to 1998
was  primarily  attributable  to a decrease in enrollees in the Medicare line of
business as well as enhanced utilization efforts in the Commercial, Medicaid and
Medicare  lines of  business.  In addition,  the medical  loss ratio (i.e.,  the
percentage  of  each  premium  dollar  used  to pay  medical  expenses)  for the
three-month period ended March 31, 1998 was 85.8% compared to 95.8% 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, along with enhanced utilization management efforts.

SELLING,   GENERAL   AND   ADMINISTRATIVE   EXPENSES.   Selling,   general   and
administrative  expenses totaled $16.0 million for the three-month  period ended
March 31, 1998, including a $635 thousand administrative  management fee charged
by FHS and $516  thousand  interest  expense  associated  with  the  Debentures,
compared to $14.2 million  incurred for the same period in 1997. The increase in
selling,  general and  administrative  expenses was the result of an increase in
resources needed to reduce claims backlog as well as the payments of interest in
1998 associated with the Debentures.

OTHER  EXPENSES.  Depreciation  and  amortization  expenses for the  three-month
period ended March 31, 1998  increased by $796  thousand  from the $241 thousand
incurred  during the same period in 1997. This increase was mostly the result of
amortization of goodwill associated with FHS' investment in the Company.

FOR THE THREE-MONTHS ENDED MARCH 31, 1997 AND 1996

PREMIUM  REVENUE.  For the  three-month  period  ended March 31,  1997,  medical
premium  revenue totaled $84 million or $34 million more than the $50 million of
medical  premium  revenue  generated  during  the same  period in 1996.  Medical
premium  revenue  generated by the Company during the  three-month  period ended
March 31,  1997 was  substantially  greater  than the  medical  premium  revenue
generated by the Company  during the same period in 1996 due to the  significant
subscriber  growth  experienced  since  the end of the  first  quarter  of 1996.
Approximately  37% of medical premium revenue  generated in the first quarter of
1997 and  approximately 69% of medical premium generated in the first quarter of
1996 was  attributable  to NJ Acute Care  Institutions  which are  obligated  to


                                       14


<PAGE>


enroll their  employees in FOHP-NJ health plans.  The Company  believes that the
percentage of medical premium revenue attributable to NJ Acute Care Institutions
will continue to decrease as FOHP-NJ's  operations grow and FOHP-NJ continues to
benefit from  current  marketing  efforts  focused on  commercial,  Medicare and
Medicaid  products which are not marketed  directly to employees of providers of
FOHP-NJ.

OTHER  REVENUE.  Other  revenue,   principally   administrative  fees,  for  the
three-month  period  ended  March 31,  1997 was $686  thousand  compared to $1.5
million of other revenue for the same period of the prior year. This decrease is
attributed  to the sale of  FMCO,  formally  a  wholly-owned  subsidiary  of the
Company,  in the last quarter of 1996.  Interest income for the first quarter of
1997 was $608 thousand, a $270 thousand increase from $338 thousand generated in
the first quarter of 1996. The increase in interest income was due to the larger
cash reserves maintained by the Company in the first quarter of 1997.

MEDICAL AND HOSPITAL SERVICE  EXPENSES.  Total expenses  attributable to medical
and hospital service for the three-month  period ended March 31, 1997 were $81.4
million or $37.9 million higher than expenses  incurred in 1996. The increase in
medical  and  hospital   service  expenses  from  1996  to  1997  was  primarily
attributable to a significant  increase in enrollees in FOHP-NJ health plans. In
addition,  the medical loss ratio (i.e.,  the  percentage of each premium dollar
used to pay medical  expenses) for the  three-month  period ended March 31, 1997
was 96.8%  compared to 86.8% for the same period in 1996.  This  increase  was a
result of increased  utilization  in FOHP-NJ health benefit plans and changes in
the mix of  products  offered by  FOHP-NJ.  The  Company  believes  that  recent
operational  changes,  specifically the  implementation  of a modified  provider
reimbursement schedule, along with enhanced utilization management efforts, will
lower the  percentage  of  medical  expenses  to  premium  dollars in the future
quarters.

SELLING,   GENERAL   AND   ADMINISTRATIVE   EXPENSES.   Selling,   general   and
administrative  expenses totaled $13.3 million for the three-month  period ended
March 31, 1997, including a $1.7 million management fee payable to FHS, compared
to  $11.9  million  incurred  for the same  period  in 1996.  The  increase  was
principally due to continued  resource  commitment to  infrastructure,  which is
necessary to support enrollment growth.

OTHER  EXPENSES.  Depreciation  and  amortization  expenses for the  three-month
period  ended  March 31,  1997  increased  by $52  thousand  from $189  thousand
incurred  during  the same  period in 1996.  This  increase  was a result of the
significant investment in capital equipment in the end of 1996 and the beginning
of 1997.

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.

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


                                       15


<PAGE>


Initial  Debenture  was  convertible,  at the option of FHS,  into 71 percent 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 and  Restated  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  $7,297,801 as
additional paid in capital to satisfy certain  statutory net worth  requirements
applicable to FOHP-NJ as of March 31, 1998.

Pursuant to new HMO regulations  adopted in the State of New Jersey,  FOHP-NJ is
required   to   maintain  a  "Minimum   Insolvency   Deposit   for  Health  Care
Expenditures."  As of March 31, 1998, it is estimated that this deposit covering
two months of incurred health  expenditures  will be approximately  $69 million.
One-fourth of the deposit,  or $12.5 million  (including  interest earned),  was
made by September 30, 1997.  An  additional  $4.6 million


                                       16


<PAGE>


was deposited on March 31, 1998 and an additional  $9.5 million was deposited on
April  2,  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."


                                       17


<PAGE>


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

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 these 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.

Of the 100,000,000 shares of the Company's Common Stock outstanding,  97,913,161
shares are held by FHS and were voted by FHS for the  proposed  increase  in the
number of shares of  authorized  capital  stock of the Company.  Pursuant to New
Jersey law,  the Company was not  required to solicit  votes from the holders of
the remaining  2,086,839  shares of outstanding  Common Stock.  Accordingly,  no
shares of Common  Stock were voted for or against the  proposal to increase  the
number  of shares of the  Company's  authorized  capital  stock  other  than the
97,913,161 shares of Common Stock held by FHS.

ITEM 5.   OTHER EVENTS

Effective  April 1,  1998,  Thomas  W.  Wilfong  was named  President  and Chief
Executive  Officer of the Company.  Mr. Wilfong replaced Roger W. Birnbaum,  who
will continue his affiliation with the Company as a consultant.  Mr. Wilfong has
served as President of the New Jersey Operations of FHS, a Delaware  corporation
which owns  approximately  98% of the  outstanding  Common Stock of the Company,
since February  1998.  Prior to joining FHS, Mr. Wilfong served from August 1996
to February  1998 as Executive  Director of  Physicians  Health  Services of New
Jersey, Inc., a subsidiary of Physicians Health Services,  Inc. ("PHS"), a group
of managed health care companies headquartered in Connecticut with operations in
Connecticut,  New Jersey and New York. PHS was acquired by FHS in December 1997.
From July 1986 to August 1996, he served as Vice President of Medical Management
of Central New Jersey Medical  Group.  Mr. Wilfong also has served as a director
of the Company since March 25, 1998.


                                       18


<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 March 31,  1998,  the Company
filed the following  Current Report on Form 8-K with the Securities and Exchange
Commission:

Form 8-K (Item 5. Other Events),  date of earliest  event  reported  December 1,
1997, with respect to (i) the conversion of Debentures by FHS and the additional
infusion of capital into the Company by FHS, and (ii) the  acquisition of PHS by
FHS.

                                       19


<PAGE>


                                   SIGNATURE

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)



          MAY 14, 1998             /s/Thomas W. Wilfong
          ------------             --------------------------------------------
             Date                                  (Signature)**
                                                THOMAS W. WILFONG
                                      PRESIDENT AND CHIEF EXECUTIVE OFFICER




          MAY 14, 1998             /s/Marc M. Stein
          ------------             --------------------------------------------
             Date                                  (Signature)**
                                                   MARC M. STEIN
                                    PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER




                                       20