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 September 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  or                 (IRS Employer
 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   X       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, 99,997,000 SHARES OUTSTANDING AS OF NOVEMBER 12, 1998


<PAGE>


                                         INDEX                          PAGE NO.




                         PART I - FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS                                               

Condensed Consolidated Balance Sheets - September 30, 1998 and 
  December 31, 1997                                                            3

Condensed Consolidated Statements of Operations                                4
  For the periods July 1 to September 30, 1998 and 1997
  For the periods January 1 to September 30, 1998 and 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 September 30, 1998

Condensed Consolidated Statements of Cash Flows                                6
  For the periods January 1, 1998 to September 30, 1998
  For the periods January 1, 1997 to September 30, 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 5.      OTHER INFORMATION                                                20

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K                                 20

Signature Page                                                                21


                                     2
<PAGE>


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


<TABLE>
<CAPTION>

                                                                                            SEPTEMBER 30,         DECEMBER 31,
                                                                                               1998                  1997
                                                                                    ------------------------------------------
                                                                                            (UNAUDITED)            (AUDITED)
<S>                                                                                        <C>                  <C>

ASSETS
Cash and cash equivalents                                                                   $ 29,340,408         $ 79,266,721
Accounts receivable from owners/providers, net of allowance for doubtful accounts
  and retroactive terminations of $840,783 in 1998 and $922,354 in 1997                       11,415,826           11,096,487
Other accounts receivable, net of allowance for doubtful accounts and retroactive
  terminations of $2,757,248 in 1998 and $2,507,619 in 1997.                                   3,391,750            3,131,333
Prepaid and other current assets                                                                 596,845              635,548
                                                                                    ------------------------------------------
Total current assets                                                                          44,744,829           94,130,089

  Restricted Cash                                                                             57,276,629           13,846,682
  Furniture and equipment (at cost, net of accumulated depreciation
   and amortization of $2,685,845 and $2,349,874, respectively)                                2,422,398            2,480,042
  Goodwill (net of accumulated amortization of $2,019,942 and $0, respectively)              105,710,312          107,730,254
  Other assets                                                                                   383,379              424,164
                                                                                    ------------------------------------------
Total Assets                                                                               $ 210,537,547        $ 218,611,231
                                                                                    ==========================================


LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Medical claims payable to owners/providers                                                $ 13,527,494         $ 20,308,241
  Other medical claims payable                                                                31,564,153           62,614,704
  Accounts payable                                                                             1,540,874              746,369
  Accrued expenses                                                                            16,808,870           17,512,845
  Due to Foundation Health Systems, Inc.                                                       1,569,293              543,075
  Due to QualMed, Inc.                                                                         1,269,630            1,192,716
  Due to Other Affiliates                                                                        213,136                    -
  Unearned premium                                                                             2,282,236            7,965,658
                                                                                    ------------------------------------------
Total current liabilities                                                                     68,775,686          110,883,608

Convertible debentures                                                                        12,145,655           11,294,406
Subordinated debentures                                                                       24,737,761           24,000,000
                                                                                    ------------------------------------------
Total Liabilities                                                                            105,659,102          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                                                                 237,951,597          208,053,796
  Accumulated deficit                                                                       (134,073,152)        (136,620,579)
                                                                                    ------------------------------------------
Total shareholders' equity                                                                   104,878,445           72,433,217
                                                                                    ------------------------------------------
Total Liabilities and Shareholders' Equity                                                 $ 210,537,547        $ 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                  NINE MONTHS ENDED
                                                                    SEPTEMBER 30,                       SEPTEMBER 30,
                                                                 1998              1997            1998              1997
                                                             -------------------------------   --------------------------------
                                                              (unaudited)       (unaudited)     (unaudited)       (unaudited)

<S>                                                          <C>              <C>              <C>                <C> 

REVENUE:                                                                                       
  Premiums from owners/providers                             $ 28,710,191      $ 36,793,341     $ 95,373,859      $ 97,781,152
  Other premium revenue                                        50,901,751        60,943,037      155,609,981       176,701,692
  Other, principally administrative service fees                  585,148           888,817        2,098,682         1,797,068
  Interest income                                               1,009,308         1,200,923        3,239,760         2,891,062
                                                             -------------------------------    ------------------------------
Total revenue                                                  81,206,398        99,826,118      256,322,282       279,170,974
                                                             -------------------------------    ------------------------------


EXPENSES:                                                                                      
  Medical services to owners/providers                         19,602,135        32,646,831       60,197,453        78,638,764
  Other medical services                                       45,738,318        81,753,021      140,460,726       204,748,375
  Selling, general and administrative                          13,530,625        11,468,890       42,240,995        36,665,217
  Management fee - QualMed, Inc.                                        -         2,006,759                -         5,546,233
  Management fee - Foundation Health Systems, Inc.                636,000                 -        1,907,000                 -
  Amortization of goodwill                                        673,314                 -        2,019,942                 -
  Depreciation and other amortization                             378,679           410,408        1,117,312         1,000,678
  Interest - Foundation Health Systems, Inc.                      558,728           743,877        1,604,188         1,247,336
  Other interest                                                  143,029            39,265          401,285            68,256
  Restructuring costs                                                   -                 -                -         1,134,097
                                                             ------------------------------     ------------------------------
Total expenses                                                 81,260,828       129,069,051      249,948,901       329,048,956
                                                             ------------------------------     ------------------------------

NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES               (54,430)      (29,242,933)       6,373,381       (49,877,982)

Provision (benefit) for income taxes                              (33,286)              103        3,825,954             2,139
                                                             ------------------------------     ------------------------------

NET INCOME (LOSS)                                            $    (21,144)    $ (29,243,036)    $  2,547,427     $ (49,880,121)
                                                             ==============================     ==============================

NET INCOME (LOSS) PER COMMON SHARE                           $         --     $      (12.97)    $       0.03     $      (22.85)
                                                             ==============================     ==============================


</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
    September 30, 1998                                                                                   2,547,427        2,547,427
Capital contributed by Foundation Health Systems, Inc.                                   29,897,801                      29,897,801
                                                      ------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 (UNAUDITED)              100,000,000    $ 1,000,000     $ 237,951,597  $(134,073,152)   $ 104,878,445
                                                      ==============================================================================



</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 SEPTEMBER 30, 1998           TO SEPTEMBER 30, 1997
                                                            ----------------------------------------------------------
                                                                     (unaudited)                     (unaudited)

<S>                                                                 <C>                            <C> 
Cash flows from operating activities
Net income (loss)                                                    $ 2,547,427                   $ (49,880,121)
Adjustments to reconcile net income (loss) to cash flows
  used in operating activities:
     Depreciation and amortization                                     3,137,254                       1,000,678
     Interest cost converted to debt                                   1,589,010                         503,459
     Changes in operating assets and liabilities:
      Accounts receivable from owners/providers                         (319,339)                         52,230
      Other accounts receivable                                         (260,417)                       (878,108)
      Prepaid expenses and other current assets                           38,703                       1,200,104
      Restricted cash                                                (43,429,947)                    (12,398,571)
      Other assets                                                        40,785                         (18,283)
      Medical claims payable to owners/providers                      (6,780,747)                              -
      Other medical claims payable                                   (31,050,551)                      3,514,425
      Accounts payable                                                   794,505                          47,394
      Accrued expenses                                                  (703,975)                      1,506,177
      Due to Foundation Health Systems, Inc.                           1,026,218                       1,830,830
      Due to QualMed, Inc.                                                76,914                               -
      Due to Other Affiliates                                            213,136                               -
      Unearned premium revenue                                        (5,683,422)                     (3,400,222)
      Other liabilities                                                        -                      (1,178,279)
                                                                  -----------------------------------------------
Net cash flows used in operating activities                          (78,764,446)                    (58,098,287)


CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment                                  (1,059,668)                     (1,270,724)
                                                                  -----------------------------------------------
Net cash used in investing activities                                 (1,059,668)                     (1,270,724)

CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributed by Foundation Health Systems, Inc.                29,897,801                      51,701,120
Payment of issue costs                                                         -                      (1,192,435)
                                                                  -----------------------------------------------
Net cash provided by financing activities                             29,897,801                      50,508,685


Net decrease in cash and cash equivalents at the end of the period   (49,926,313)                     (8,860,326)
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                  $ 29,340,408                    $ 27,804,585
                                                                  ===============================================


Interest paid for the period                                        $    400,948                    $     43,696
                                                                  ===============================================

State income taxes paid for the period                              $        625                    $      1,939
                                                                  ===============================================



</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

                               September 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 nine month periods ended  September 30, 1998
and September 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

                               September 30, 1998

2.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The Company has generated a net loss of $21,144 for the three-month period ended
September 30, 1998 and has an accumulated  deficit of  $134,073,152 at September
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 contributions from FHS. 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 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
September  30,  1998,  $2,836,346  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' 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 nine-month  period ended September 30, 1998
totaling $2,019,942 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 $29,897,801 to FOHP as additional paid in capital to satisfy certain
statutory net worth requirements applicable to FOHP-NJ during 1998.


                                       8


<PAGE>


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

              Notes to Condensed Consolidated Financial Statements

                               September 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 September 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 was
required to be funded by June 30, 1998.  As of September  30, 1998,  FOHP-NJ had
$55,886,738 on deposit with the DOI. FOHP-NJ has obtained  approval from the DOI
to fund the remaining  Insolvency Deposit on December 31, 1998.  Inasmuch as the
Insolvency  Deposit is based on current financial  statements,  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
September 30,1998, FOHP-NJ had $1,389,891 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-

                                       9


<PAGE>


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

              Notes to Condensed Consolidated Financial Statements

                               September 30, 1998

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.

INCOME TAXES

The Company's  operations  are included in FHS'  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' 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  nine-month  periods ended
September 30 (100,000,000 in 1998 and 2,183,196 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

                               September 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 (6.01% as of September 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. In October 1998, the Certificate of  Incorporation  of
the Company was further amended to increase the number of shares of Common Stock
authorized  for issuance  and  decrease the number of shares of Preferred  Stock
authorized  for issuance.  As a result,  the Company  currently has  500,000,000
shares of authorized  capital stock, which is comprised of 499,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock,
par value  $1.00 per  share.  In  connection  with the  reclassification  of the
Company's capital stock, each outstanding share of Common Stock-NJ was converted
into one share of Common  Stock.  As a result,  all  2,086,839  shares of Common
Stock-NJ  outstanding  at the time FHS made its initial  investment in FOHP were
converted into Common Stock.  Prior to the April 30, 1997 investment by FHS, the
authorized  capital  stock of the Company  totaled  100  million  shares and was
comprised  of the  following  classes of Common  Stock,  $.01 par value:  Common
Stock-NJ,  Common Stock-NY,  Common  Stock-PA,  Common Stock-DE and Unclassified
Common  Stock.  During  1995,  the  Company  issued  2,100,173  shares of Common
Stock-NJ. There were no additional shares of Common Stock-NJ issued during 1996.

The Certificate of Incorporation and By-Laws of the Company include  significant
restrictions  on the  issuance  and  transfer  of shares of  Common  Stock.  The
Certificate of  Incorporation  of the Company  provides that only FHS and health
care  providers  who  enter  into  and  maintain  a  provider  agreement  with 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.


                                       11


<PAGE>


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

              Notes to Condensed Consolidated Financial Statements

                               September 30, 1998


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  failed to  increase  its net
worth to 100% of the minimum statutory net worth requirement,  provided that FHS
guaranteed,  in form satisfactory to the Commissioner of the DOI, that FOHP-NJ's
net worth  will be  maintained  at a level  equal to or in excess of 100% of the
minimum statutory net worth requirement applicable to FOHP-NJ. In December 1997,
the  Departments  further  agreed to permit  FOHP-NJ's net worth to remain below
100% until December 31, 1998,  provided that it attain certain  benchmarks  each
quarter during 1998.

In December  1997,  FHS  contributed an additional $24 million to the Company to
satisfy certain statutory net worth requirements applicable to FOHP-NJ in return
for the New Convertible Debenture.  Further, FHS contributed  $29,897,801 to the
Company as  additional  paid in capital to satisfy  certain  statutory net worth
requirements  applicable to FOHP-NJ during 1998. At September 30, 1998,  FOHP-NJ
was  approximately  $11.1  million  above the 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 an administrative  management agreement entered into by FHS and FOHP
in connection with the closing of the Amended Securities Purchase Agreement with
FHS,  the  Company is required to pay FHS,  or a  designated  subsidiary  of FHS
(QualMed,  Inc.), a monthly management fee which is currently based on allocated
corporate  charges.  For the  nine-month  period ended  September 30, 1998,  the
Company charged $1,907,000 to expense related to these management fees.

The amount due to FHS at September 30, 1998,  represents management fees payable
and interest payable related to the Debentures.  The amount due to QualMed, Inc.
at  September  30,  1998  primarily   represents  cost  allocations  for  claims
processing  services.  Amounts due to MD Health Plan, Inc. and Physician  Health
Services, Inc. represent cost allocations for administrative services.  Balances
due to QualMed  Health & Life,  Inc.  and  Integrated  Pharmacy  Services,  Inc.
represent amounts due for  administration of reinsurance and pharmacy  services,
respectively.


                                       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 November  12, 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
shareholders  that are NJ Acute Care  Institutions  and  subscribers  in FOHP-NJ
health plans are different from the subscriber agreements of non-shareholders in
that premium rates for those NJ Acute Care  Institutions  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.


                                       13


<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 SEPTEMBER 30, 1998 AND 1997

PREMIUM REVENUE.  For the three-month  period ended September 30, 1998,  medical
premium  revenue  totaled  $79.6  million or $18.1  million  less than the $97.7
million of medical  premium  revenue  generated  during the same period in 1997.
This decrease was due to reduced  enrollment in FOHP-NJ  health  benefit  plans,
specifically  in the  Medicare  line of business.  Approximately  36% of medical
premium  revenue  generated  in 1998 and  approximately  37% 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'
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, and that such inclusion
will result in a greater  percentage of future premium  revenue  attributable to
members who are not employees of NJ Acute Care Institutions.

OTHER  REVENUE.  Other  revenue,   principally   administrative  fees,  for  the
three-month  period ended September 30, 1998 was $585 thousand  compared to $889
thousand of other revenue for the same period of the prior year. Interest income
for the second quarter of 1998 was $1.0 million, as compared to the $1.2 million
generated in 1997.

MEDICAL AND HOSPITAL SERVICE  EXPENSES.  Total expenses  attributable to medical
and hospital  service for the  three-month  period ended September 30, 1998 were
$65.3 million or $49.1 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 September 30, 1998 was 82.0% compared to 117.1% 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 $14.8 million for the three-month  period ended
September 30, 1998,  including a $636  thousand  administrative  management  fee
charged  by  FHS  and  $559  thousand  interest  expense   associated  with  the
Convertible and Subordinated Debentures,  compared to $14.2 million incurred for
the same period in 1997.

OTHER  EXPENSES.  Depreciation  and  amortization  expenses for the  three-month
period  ended  September  30,  1998  increased  by $642  thousand  from the $410
thousand  incurred  during the same period in 1997.  This increase was primarily
the result of  amortization  of goodwill  associated with FHS' investment in the
Company.


                                       14


<PAGE>


FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

PREMIUM  REVENUE.  For the nine-month  period ended September 30, 1998,  medical
premium  revenue  totaled  $251.0  million or $23.5 million less than the $274.5
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 nine months of 1998 and approximately 35%
of medical premium  generated in the first nine 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'  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,  and that such  inclusion  will result in a greater  percentage  of future
premium  revenue  attributable to members who are not employees of NJ Acute Care
Institutions.

OTHER  REVENUE.  Other  revenue,   principally   administrative  fees,  for  the
nine-month  period ended  September  30, 1998 was $2.1 million  compared to $1.8
million of other revenue for the same period of the prior year.  Interest income
for the first nine months of 1998 was $3.2  million,  a $300  thousand  increase
from the $2.9 million  generated in the first nine months of 1997.  The increase
in interest  income was due to the larger cash  reserves  related to  additional
capital contributions from FHS in December 1997 and during 1998.

MEDICAL AND HOSPITAL SERVICE  EXPENSES.  Total expenses  attributable to medical
and hospital  service for the  nine-month  period ended  September 30, 1998 were
$200.7 million or $82.7 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
nine-month  period ended September 30, 1998 was 79.9% compared to 103.2% 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 $46.2 million for the nine-month  period ended
September  30,  1998,  including a $1.9 million  management  fee payable to FHS,
compared to $44.7 million incurred for the same period in 1997.

OTHER EXPENSES. Depreciation and amortization expenses for the nine-month period
ended  September 30, 1998  increased by $2.1 million from $1.0 million  incurred
during  the same  period  in 1997.  This  increase  was  mostly  the  result  of
amortization of goodwill associated with FHS' investment in the Company.


                                       15


<PAGE>


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 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  failed to  increase  its net
worth to 100% of the minimum  statutory  net worth  requirement  by December 31,
1997. In addition,  the Departments agreed that subsequent to December 31, 1997,
FOHP-NJ  will only be  required  to  maintain  net worth at 100% of the  minimum
statutory  net worth  requirement  applicable to it, and not 125% of the minimum
statutory  net worth  requirement  as required  prior to the sale of the Initial
Debenture,   provided  that  FHS  guaranteed,   in  form   satisfactory  to  the
Commissioner  of the DOI, that FOHP-NJ's net worth will be maintained at a level
equal to or in excess of 100% of the  minimum  statutory  net worth  requirement
applicable to FOHP-NJ. In December 1997 the Departments further agreed to permit
FOHP-NJ's net worth to remain below 100% until December 31, 1998,  provided that
it attain certain benchmarks each quarter during 1998.

In connection with the sale of the Initial 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 Amended Securities Purchase  Agreement,  as clarified by the Letter
Agreement, FHS would be issued additional Convertible 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.


                                       16


<PAGE>


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  then  outstanding,   which  represented
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 $29,897,801 to the
Company as  additional  paid in capital to satisfy  certain  statutory net worth
requirements applicable to FOHP-NJ during 1998.

Pursuant to new HMO regulations  adopted in the State of New Jersey,  FOHP-NJ is
required   to   maintain  a  "Minimum   Insolvency   Deposit   for  Health  Care
Expenditures."  As of  September  30, 1998,  it is  estimated  that this deposit
covering two months of incurred health care  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,  $14.6 million was
deposited on June 30, 1998 and $14.1  million was  deposited  on  September  30,
1998.  The  remainder  of the deposit  will be made by December  31, 1998 and is
subject to a revised calculation as of September 30, 1998.

During the fourth  quarter of 1998,  the  Company  will  significantly  decrease
membership in its  self-insured  line of business,  which consists  primarily of
administrative service only contracts.  Management does not expect this decrease
in membership to have a material effect on operations.

IMPACT OF YEAR 2000

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

The Year 2000 issue is the result of computer  programs  being written using two
digits  rather than four to define the  applicable  year.  Any of the  Company's
computer  programs that have time sensitive  software may recognize a date using
"00" as the year 1900 rather than the year 2000.  This could  result in a system
failure or miscalculations causing disruptions of operations,  including,  among
other things, a temporary inability to process transactions, prepare invoices or
engage in normal business activities. In addition, the year 2000 problems of the
Company's providers and customers,  including  governmental entities, can affect
the Company's operations, which are highly dependent upon information technology
for processing claims, determining eligibility and exchanging information.

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


                                       17

<PAGE>

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

PROJECT  STATUS.  The Year  2000  effort  for FHS has the  highest  priority  of
technology projects.  The project has dedicated resources with multiple teams to
address unique systems environments.  Uniform project management techniques have
been adopted  with overall  oversight  responsibility  residing  with FHS' Chief
Technology Officer, assisted by a special project manager hired by FHS. Selected
systems will be retired with the business functions being converted to Year 2000
compliant  systems.  A number of the FHS' systems include packaged software from
large  vendors that FHS is closely  monitoring  to ensure that those systems are
Year  2000  compliant.  FHS  believes  that  vendors  will make  timely  updates
available  to ensure that all  remaining  software is Year 2000  compliant.  The
remaining  systems'  compliance  with Year 2000 will be  addressed  by  internal
technical staff. FHS has engaged IBM to assist in the program  management of the
project.  FHS has also  retained  legal  consultants  to assist in the review of
insurance  and FHS'  obligations  and rights,  and intends to retain a technical
consultant to help develop contingency plans.

FHS has  divided  its Year 2000  effort into five  phases:  (1)  Assessment  and
Strategy; (2) Detailed Analysis and Planning;  (3) Remediation;  (4) Testing and
Implementation;  and (5)  Certification.  FHS  believes  that  Phase 1 is almost
complete.  FHS has requested that each of its geographical and specialty service
divisions  conduct a detailed internal  self-assessment  as to their compliance,
needs,  risks  and  contingency  planning,  which  will  then  be  reviewed  and
prioritized  at  the  corporate  level.  FHS  believes  that  it  has  completed
approximately 80% of Phase 2, approximately 30% of Phase 3 and approximately 15%
of Phase 4 relating to its internal  technology.  FHS has  established the third
quarter  of 1999  to  complete  all  phases  and is  endeavoring  to  accelerate
completion ahead of that time.

The  Company is a member of FHS'  Northeast  Region.  The  Company is  presently
converting its claims and billing systems to a common  northeast  platform which
is  maintained  by PHS, a  wholly-owned  subsidiary  of FHS.  Therefore,  PHS is
providing,  on behalf  of the  members  of FHS'  Northeast  Region,  a Year 2000
compliance report to FHS.

THIRD  PARTIES.  FHS has  commenced an  inventory of third party  relationships,
identifying  them  and  analyzing  their  strategic  importance  to FHS  and its
subsidiaries  and their Year 2000  readiness.  FHS expects to complete  its risk
assessment  for third  parties  in the fourth  quarter of 1998.  There can be no
assurances  that the  systems  of other  companies  on which FHS or the  Company
relies will be compliant on a timely basis, or that the failure by a third party
to be compliant would not have a material adverse effect on FHS or the Company.

COSTS.  FHS is  evaluating  on an ongoing basis the related costs to resolve its
potential  Year 2000 problems.  FHS currently  estimates that the total cost for
the project  will exceed $17  million,  excluding  the costs to  accelerate  the
replacement of hardware or software  otherwise  required to be purchased by FHS,
and the use of existing personnel to assist in the project. In this quarter, the
first quarter in which FHS separately tracked the costs relating to the project,
FHS has expended  approximately  $5.3 million,  relating to, among other things,
the cost to repair or replace  software and related hardware  problems,  cost of
assessment, analysis and planning and internal and external communications.  The
percentage  of the  total  cost of the Year  2000  project  attributable  to the
Company has not yet been determined.  However, the Company does not believe that
any  allocation of the costs of the Year 2000 project to the Company will have a
material affect on the Company's operations.

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

                                       18

<PAGE>

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

CONTINGENCY  PLANNING.  An  important  part of FHS' Year 2000  project  involves
identifying worst case scenarios and seeking to develop  contingency plans. Each
geographical  and  specialty  services  division of FHS is ranking its  critical
business  functions  in one of four  categories,  from  the  most  important  (a
function  which is vital to the line of  business  and which  has a  significant
impact  on  FHS'  reputation  and  critical  daily  operations,   for  which  an
alternative must be immediately  available),  to the least important (a function
which has a negligible  effect on FHS'  provision of services and reputation and
for which alternatives are readily available).  In addition to acting to address
the most critical problems first in its remediation  effort,  FHS will also seek
to develop  its  contingency  plans to  prioritize  the most  critical  business
functions. FHS has just begun its efforts in this area.

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

Forward-looking statements contained in this Year 2000 section should be read in
connection with the Company's cautionary  statements  identifying important risk
factors that would cause the Company's actual results to differ  materially from
those projected in these forward-looking statements, which cautionary statements
were previously filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.

                                       19

<PAGE>


ITEM 5.           OTHER INFORMATION

         AMENDMENT TO CERTIFICATE OF  INCORPORATION  OF THE COMPANY - On October
6,  1998,  a  Certificate   of  Amendment  to  the  Company's   Certificate   of
Incorporation was filed with the Department of Treasury,  Division of Revenue of
the State of New  Jersey,  pursuant  to which the total  number of shares of the
Company's  authorized  capital stock was increased  from  110,000,000  shares to
500,000,000  shares.  Of the  500,000,000  shares of authorized  capital  stock,
499,000,000  shares are  classified  as Common  Stock and  1,000,000  shares are
classified as Preferred Stock.

         HMO  SUBSIDIARY  MERGER - FOHP-NJ,  a  wholly-owned  subsidiary  of the
Company,  and  Physicians  Health  Services of New Jersey,  Inc.  ("PHS-NJ"),  a
wholly-owned  subsidiary  of  Physicians  Health  Services,  Inc.,  which  is  a
wholly-owned  subsidiary  of FHS,  have entered  into an  Agreement  and Plan of
Merger  dated as of October 26,  1998,  pursuant to which PHS-NJ will merge with
and into  FOHP-NJ  (the "HMO  Subsidiary  Merger").  Each of FOHP-NJ  and PHS-NJ
currently  operates  as an HMO in the State of New  Jersey.  The HMO  Subsidiary
Merger is expected to be effective as of January 1, 1999. At the effective  time
of the HMO Subsidiary Merger,  FOHP-NJ will change its name to Physicians Health
Services of New Jersey,  Inc.  The  purpose of the HMO  Subsidiary  Merger is to
consolidate  the FHS  controlled  HMO operations in the State of New Jersey into
primarily one corporation.


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 September 30, 1998, the Company
filed the following  Current Report on Form 8-K with the Securities and Exchange
Commission:

Form 8-K  (Item 4.  Changes  in  Registrant's  Certifying  Accountant),  date of
earliest  event  reported  July 13,  1998,  with respect to the  appointment  of
Deloitte  & Touche LLP as the  Company's  independent  accountants  for the year
ending December 31, 1998, as amended.


                                       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)



 NOVEMBER 12, 1998               /s/  Thomas W. Wilfong
 -----------------               ----------------------------------
    Date                                   (Signature)**
                                        THOMAS W. WILFONG
                              PRESIDENT AND CHIEF EXECUTIVE OFFICER




 NOVEMBER 12, 1998               /s/  Marc M. Stein
 -----------------               ----------------------------------
    Date                                   (Signature)**
                                        MARC M STEIN
                                 PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER


                                       21


<PAGE>

                            FOHP, INC. & SUBSIDIARIES
           (SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
                                   EXHIBIT 11
                        COMPUTATION OF EARNINGS PER SHARE


<TABLE>
<CAPTION>


                                                              NINE MONTHS ENDED
                                                                SEPTEMBER 30,
                                                          1998                1997
                                                    ------------------------------------

<S>                                                 <C>                 <C>  

Net Income (Loss)                                   $      2,547,427    $   (49,880,121)
                                                    ====================================


Weighted average number of common shares:
  Shares outstanding quarter ended 9/30/98              100,000,000
  Shares outstanding at 2/28/97                                               2,100,173
  Shares outstanding at 4/30/97                                               2,086,839
  Shares outstanding at 6/30/97                                               2,254,948
  Shares outstanding at 9/30/97                                               2,254,948

Weighted average shares outstanding                     100,000,000           2,183,196
                                                    ====================================


NET INCOME (LOSS) PER COMMON SHARE                  $          0.03     $        (22.85)
                                                    ====================================
</TABLE>