UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K/A

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For fiscal year ended DECEMBER 31, 2001

                                     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 1-13340

                       Mid Atlantic Medical Services, Inc.
             (Exact name of registrant as specified in its charter)

                               Delaware 52-1481661
                (State or other jurisdiction of (I.R.S. Employer
               incorporation or organization) Identification No.)

                     4 Taft Court, Rockville, Maryland 20850
               (Address of principal executive offices) (Zip Code)

                                 (301) 294-5140
              (Registrant's telephone number, including area code)
                    Securities registered pursuant to Section
                               12(b) of the Act:
                              Name of Each Exchange
                     Title of Each Class on Which Registered
                    ------------------- ---------------------
                Common Stock, $0.01 par value The New York Stock
                            per share. Exchange, Inc.

        Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
                                                          Yes [X]. No [ ].

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (Sec.  229.405 of this chapter) is not contained  herein,  and
will not be contained,  to the best of the registrant's knowledge, in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
                                                                 [ ]

Aggregate  market  value  of  voting  and  non-voting   common  equity  held  by
non-affiliates computed by reference to the price at which the common equity was
sold,  or the average  bid and asked price of such common  equity as of March 4,
2002: Approximately $1,037 million.

                      APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
                 47,504,822 shares of common stock as of March 4, 2002


<PAGE>


                      Mid Atlantic Medical Services, Inc.

                                  FORM 10-K/A

                                  AMENDMENT 1

The  undersigned  registrant  hereby  amends Item 8,  Financial  Statements  and
Supplementary  Data of its  original  Form 10-K  filed on March 26,  2002 as set
forth in the pages attached hereto for typographical errors. In the Consolidated
Statement  of Cash  Flows on page 31 of Form 10-K,  the  "Increase  in  accounts
payable"  currently  printed as "7,705" should be replaced by "11,556",  and the
"Increase  in income  taxes  payable"  currently  printed as  "5,038"  should be
replaced  by  "7,705."  All totals and  subtotals  within the  statement  remain
unchanged.

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.

April 22, 2002                        By:  /s/ Robert E. Foss
                                               --------------------
                                               Robert E. Foss
                                               Senior Executive Vice President
                                               Chief Financial Officer

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA             PAGE
                                                                 ----

Consolidated Balance Sheets as of December 31, 2001 and 2000.....  28

Consolidated Statements of Operations for the years ended
  December 31, 2001, 2000 and 1999...............................  29

Consolidated Statements of Changes in Stockholders' Equity
  for the years ended December 31, 2001, 2000 and 1999...........  30

Consolidated Statements of Cash Flows for the years ended
  December 31, 2001, 2000 and 1999...............................  31

Notes to Consolidated Financial Statements.......................  32

Report of Ernst & Young LLP Independent Auditors.................  49

Selected Quarterly Financial Data for Fiscal Years 2001 and
 2000 (Unaudited)................................................  50

                                                                 27

<PAGE>


                                     Mid Atlantic Medical Services, Inc.
                                        Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                                     December 31,
(in thousands except share amounts)                                              2001          2000
                                                                               --------      --------
<S>                                                                            <C>           <C>
ASSETS
Current assets
  Cash and cash equivalents                                                    $  4,510      $  5,047
  Investment securities                                                         368,327       270,127
  Accounts receivable, net                                                      105,343        89,954
  Prepaid expenses, advances and other                                           27,194        26,420
  Deferred income taxes                                                             216           850
                                                                               --------      --------
Total current assets                                                            505,590       392,398

Property and equipment, net                                                      57,329        47,222
Statutory deposits                                                               17,690        14,597
Other assets                                                                      9,385         9,793
Deferred income taxes                                                             4,219         3,013
                                                                               --------      --------
    Total assets                                                               $594,213      $467,023
                                                                               ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Short-term borrowings                                                        $  3,681      $  3,000
  Accounts payable                                                               49,397        37,841
  Medical claims payable, net                                                   212,010       178,685
  Income taxes payable                                                            1,315             -
  Deferred premium revenue                                                       37,698        18,494
  Deferred income taxes                                                           8,641           839
                                                                               --------      --------
Total current liabilities                                                       312,742       238,859
Deferred income taxes                                                                 -         2,174
                                                                               --------      --------
    Total liabilities                                                           312,742       241,033

Stockholders' equity
Common stock, $0.01 par,  100,000,000  shares authorized,  63,772,502 issued and
 47,884,422   outstanding  at  December  31,  2001  and  61,772,502  issued  and
 48,602,322 outstanding at December 31, 2000                                        637           617
Additional paid-in capital                                                      349,595       296,347
Stock compensation trust (common stock held in trust),
  9,019,450 shares outstanding at December 31, 2001;
  10,019,756 shares outstanding at December 31, 2000                           (204,742)     (198,516)
Treasury stock, 15,888,080 shares at December 31, 2001;
  13,170,180 shares at December 31, 2000                                       (185,110)     (135,638)
Accumulated other comprehensive income                                            2,528         1,812
Retained earnings                                                               318,563       261,368
                                                                               --------      --------
    Total stockholders' equity                                                  281,471       225,990
                                                                               --------      --------
    Total liabilities and stockholders' equity                                 $594,213      $467,023
                                                                               ========      ========


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
</TABLE>

                                                                 28

<PAGE>



                                    Mid Atlantic Medical Services, Inc.
                                   Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
(in thousands except per share amounts)                                2001          2000           1999
                                                                   ----------     ----------     ----------
<S>                                                                <C>            <C>            <C>
Revenue
  Health premium                                                   $1,740,938     $1,414,847     $1,253,063
  Fee and other                                                        21,244         21,811         21,352
  Life and short-term disability premium                                8,066          8,034          8,175
  Home health services                                                 22,715         26,304         23,630
  Investment                                                           14,772         13,483         11,096
                                                                   ----------     ----------     ----------
Total revenue                                                       1,807,735      1,484,479      1,317,316
                                                                   ----------     ----------     ----------
Expense
  Medical expense
    Referral and ancillary care                                       722,711        582,775        510,114
    Hospitalization, net of coordination of benefits                  455,267        373,349        336,002
    Primary care                                                       80,408         77,616         83,558
    Prescription drugs                                                227,760        189,388        170,745
    Reinsurance premiums, net                                           1,084            144            539
                                                                   ----------     ----------     ----------
                                                                    1,487,230      1,223,272      1,100,958
                                                                   ----------     ----------     ----------
  Life and short-term disability claims                                 3,589          3,108          4,033
                                                                   ----------     ----------     ----------
  Home health patient services                                         21,950         21,514         19,412
                                                                   ----------     ----------     ----------
  Administrative expense
    Salaries and benefits                                             138,425        114,561         99,682
    Promotion and advertising                                           4,668          5,246          4,311
    Professional services                                               9,212          8,029          6,070
    Licenses and taxes                                                 13,191         11,586          8,538
    Facilities, maintenance and supplies                               31,693         28,707         26,848
    Other (including interest expense of $742, $1,045 and $532)        13,435         11,698          7,634
                                                                   ----------     ----------     ----------
                                                                      210,624        179,827        153,083
                                                                   ----------     ----------     ----------
Total expense                                                       1,723,393      1,427,721      1,277,486
                                                                   ----------     ----------     ----------
Income before income taxes                                             84,342         56,758         39,830
Income tax expense                                                    (27,147)       (17,352)       (13,508)
                                                                   ----------     ----------     ----------
Net income                                                         $   57,195     $   39,406     $   26,322
                                                                   ==========     ==========     ==========

Basic earnings per common share                                    $     1.48     $     1.04     $      .64
                                                                   ==========     ==========     ==========

Diluted earnings per common share                                  $     1.41     $     1.00     $      .64
                                                                   ==========     ==========     ==========


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
</TABLE>

                                                                 29

<PAGE>



                       Mid Atlantic Medical Services, Inc.
           Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
                                                                                          Accumulated
                                                  Additional       Stock                     Other
                                        Common     Paid-In     Compensation   Treasury   Comprehensive  Retained
(in thousands except share amounts)     Stock      Capital        Trust        Stock      Income/(Loss) Earnings    Total
                                        ------    ----------   ------------  ---------   -------------  --------   --------
<S>                                     <C>        <C>         <C>           <C>           <C>          <C>        <C>
Balance, December 31, 1998              $  567     $138,247    $ (68,926)    $ (75,623)    $ 1,313      $195,640   $191,218
Exercise of stock options for
  13,100 shares released from the
  Stock Compensation Trust                             (105)         187                                                 82
Stock option tax benefit                                 19                                                              19
Purchase of 3,000,000 shares of MAMSI
  common stock to be held in the
  Stock Compensation Trust                  30       31,751      (31,781)                                                 -
Adjustment to market value for shares
  held in Stock Compensation Trust                  (17,305)      17,305                                                  -
Repurchase of 3,194,940 shares of
  MAMSI common stock                                                           (28,494)                             (28,494)
Comprehensive Income:                                                                                              --------
Net Income                                                                                                26,322     26,322
Other comprehensive loss,
 net of tax benefit of $(1,522)                                                              (2,326)                 (2,326)
                                        ------     --------    ---------     ---------     --------     --------   --------
Total Comprehensive Income                                                                                           23,996
                                                                                                                   --------
Balance, December 31, 1999                 597      152,607      (83,215)     (104,117)      (1,013)     221,962    186,821
Exercise of stock options for
  1,991,094 shares released from the
  Stock Compensation Trust                           (3,443)      28,373                                             24,930
Stock option tax benefit                              3,529                                                           3,529
Purchase of 2,000,000 shares of MAMSI
  common stock to be held in the
  Stock Compensation Trust                  20       28,730      (28,750)                                                 -
Adjustment to market value for shares
  held in Stock Compensation Trust                  114,924     (114,924)                                                 -
Repurchase of 2,836,900 shares of
  MAMSI common stock                                                           (31,521)                             (31,521)
Comprehensive Income:                                                                                              --------
Net Income                                                                                                39,406     39,406
Other comprehensive income,
 net of tax of $1,638                                                                         2,825                   2,825
                                        ------     --------    ---------     ---------     --------     --------   --------
Total Comprehensive Income                                                                                           42,231
                                                                                                                   --------
Balance, December 31, 2000                 617      296,347     (198,516)     (135,638)       1,812      261,368    225,990
Exercise of stock options for
  3,000,306 shares released from the
  Stock Compensation Trust                           (2,695)      42,753                                             40,058
Stock option tax benefit                              6,984                                                           6,984
Purchase of 2,000,000 shares of MAMSI
  common stock to be held in the
  Stock Compensation Trust                  20       36,480      (36,500)                                                 -
Adjustment to market value for shares
  held in Stock Compensation Trust                   12,479      (12,479)                                                 -
Repurchase of 2,717,900 shares of
  MAMSI common stock                                                           (49,472)                             (49,472)
Comprehensive Income:                                                                                              --------
Net Income                                                                                                57,195     57,195
Other comprehensive income,
 net of tax of $386                                                                             716                     716
                                        ------     --------    ---------     ---------     --------     --------   --------
Total Comprehensive Income                                                                                           57,911
                                                                                                                   --------
Balance, December 31, 2001              $ 637      $349,595    $(204,742)    $(185,110)    $  2,528     $318,563   $281,471
                                        ======     ========    =========     =========     ========     ========   ========

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
</TABLE>

                                                            30

<PAGE>



                                        Mid Atlantic Medical Services, Inc.
                                       Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                  Year  Ended  December  31,
(in thousands)                                                                2001           2000           1999
                                                                            --------       --------       --------
<S>                                                                         <C>            <C>            <C>
Cash flows from operating activities:
  Net income                                                                $ 57,195       $ 39,406       $ 26,322
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Depreciation and amortization                                               11,008         10,263         10,249
  Provision for bad debts                                                        510            692            292
  Provision for deferred income taxes                                            947         (5,280)         2,415
  (Gain) loss on sale and disposal of assets                                      (1)           356             49
  Stock option tax benefit                                                     6,984          3,529             19
  Increase in accounts receivable                                            (15,899)        (7,023)        (4,657)
  (Increase) decrease in prepaid expenses, advances and other                 (3,441)         2,159           (332)
  Increase in accounts payable                                                11,556         15,861          2,909
  Increase in income taxes payable                                             7,705              -              -
  Increase in medical claims payable, net                                     33,325         24,282         25,138
  Increase (decrease) in deferred premium revenue                             19,204          1,545           (218)
                                                                            --------       --------       --------
Total adjustments                                                             71,898         46,384         35,864
                                                                            --------       --------       --------
          Net cash provided by operating activities                          129,093         85,790         62,186
                                                                            --------       --------       --------
Cash flows used in investing activities:
  Purchases of investment securities                                        (513,466)      (428,185)      (355,996)
  Sales and maturities of investment securities                              416,368        365,043        325,117
  Purchases of property and equipment                                        (20,237)       (13,297)        (8,147)
  Purchases of statutory deposits                                             (5,563)        (3,394)        (1,476)
  Maturities of statutory deposits                                             2,421          2,782          1,125
  Purchases of other assets                                                     (580)          (631)        (2,598)
  Proceeds from sale of assets                                                   160            377            486
                                                                            --------       --------       --------
          Net cash used in investing activities                             (120,897)       (77,305)       (41,489)
                                                                            --------       --------       --------
Cash flows used in financing activities:
  Principal payments on notes payable                                              -            (14)           (60)
  Increase (decrease) in short-term borrowings                                   681           (558)         1,713
  Exercise of stock options                                                   40,058         24,930             82
  Purchase of treasury stock                                                 (49,472)       (31,521)       (28,494)
                                                                            --------       --------       --------
          Net cash used in financing activities                               (8,733)        (7,163)       (26,759)
                                                                            --------       --------       --------
Net (decrease) increase in cash and cash equivalents                            (537)         1,322         (6,062)
Cash and cash equivalents at beginning of year                                 5,047          3,725          9,787
                                                                            --------       --------       --------
Cash and cash equivalents at end of year                                    $  4,510       $  5,047       $  3,725
                                                                            ========       ========       ========


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
</TABLE>



                                                                 31

<PAGE>



                       Mid Atlantic Medical Services, Inc.
                   Notes to Consolidated Financial Statements


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Mid  Atlantic  Medical  Services,  Inc.  ("MAMSI")  is a holding  company  whose
subsidiaries  are  active  in  managed  health  care and other  life and  health
insurance  related  activities.  MAMSI's  principal  markets  currently  include
Maryland,  Virginia, the District of Columbia,  Delaware,  West Virginia,  North
Carolina and Pennsylvania.  MAMSI and its subsidiaries (collectively referred to
as the  "Company")  have  developed  a broad  range of managed  health  care and
related ancillary products and deliver these services through health maintenance
organizations  ("HMOs"), a preferred provider  organization  ("PPO"), a life and
health insurance company, home health care and home infusion services companies,
a hospice  company,  a collections  company and part  ownership in an outpatient
surgery center.

MAMSI delivers managed health care services  principally through HMOs. The HMOs,
MD-   Individual   Practice    Association,    Inc.   ("M.D.   IPA"),    Optimum
Choice,Inc.(R)("OCI"),  and  Optimum  Choice  of the  Carolinas,  Inc.  ("OCCI")
arrange for health care services to be provided to an enrolled  population for a
predetermined,  prepaid  fee,  regardless  of the  extent or nature of  services
provided to the enrollees.  The HMOs offer a full complement of health benefits,
including  physician,  hospital and prescription drug services.  Optimum Choice,
Inc. of  Pennsylvania  ("OCIPA")  ceased all operations in  Pennsylvania  during
2000.

The following are other significant wholly-owned subsidiaries of MAMSI:

Physicians Health Plan of Maryland,  Inc.  ("PHP-MD") is an individual  practice
association ("IPA") that provides physician services to certain of the Company's
HMOs.

Alliance PPO, LLC ("Alliance") provides a delivery network of physicians (called
a preferred  provider  organization)  to employers  and  insurance  companies in
association  with  various  health  plans,  and  provides  psychiatric  services
principally to third party payors or self- insured employer groups.

MAMSI Life and Health Insurance  Company ("MLH") develops and markets  indemnity
health  products  and group life,  accidental  death and  short-term  disability
insurance.

HomeCall,  Inc.,  FirstCall,  Inc. and HomeCall  Pharmaceutical  Services,  Inc.
("HCPS") provide in-home medical care including  skilled  nursing,  infusion and
therapy to MAMSI's HMO members and other payors.

HomeCall Hospice  Services,  Inc.  ("HHSI")  provides services to terminally ill
patients and their families.

Beginning in January 2001,  Alliance  Recovery  Services,  LLC ("ARS")  provides
coordination of benefit collection services to TPAs and insurance companies.

The significant  accounting  policies followed by MAMSI and its subsidiaries are
described below.

PRINCIPLES OF CONSOLIDATION

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





                                                                 32

<PAGE>



MAJOR CUSTOMERS

A significant  portion of the Company's premium revenue is derived from federal,
state  and local  government  agencies,  including  governmental  employees  and
Medicaid and Medicare  recipients.  For the years ended December 31, 2001,  2000
and 1999,  approximately  10%, 8% and 8%,  respectively,  of premium revenue was
derived from federal government agencies which is included in the All Others and
Commercial Risk segments (as described in Note 14), and  approximately  15%, 14%
and 21%,  respectively,  was derived from Maryland and Virginia  state and local
government  agencies  which is  included  in the  Commercial  Risk  segment  (as
described in Note 14).

CASH EQUIVALENTS

Floating rate municipal  putable bonds,  which possess an insignificant  risk of
loss from changes in interest rates and are held less than three months from the
date of purchase, are classified as cash equivalents.

INVESTMENT SECURITIES

Investment  securities,  consisting  principally of municipal bonds and tax-free
bond funds are classified as available-for-sale. These securities are carried at
fair market value plus accrued  interest and any unrealized gains and losses are
reported in other comprehensive income, net of the related tax effect. Gains and
losses are  reported in  earnings  when  realized.  Gains and losses on sales of
securities are computed using the specific identification method.

PROPERTY AND EQUIPMENT

Property  and  equipment  is  stated  at  cost  less  accumulated  depreciation.
Depreciation  is provided on a  straight-line  basis over the  estimated  useful
lives of the property and equipment.  Leasehold  improvements are amortized on a
straight-line  basis over the lesser of the life of the  improvement or the term
of the related lease.

STATUTORY DEPOSITS

Statutory deposits, consisting principally of municipal bonds and treasury notes
held in custodial  accounts by state  regulatory  agencies,  are  classified  as
held-to-maturity. These securities are stated at amortized cost.

GOODWILL

The excess of cost over the fair value of net assets of the acquired  company in
the 1994 purchase  transaction  is recorded as goodwill and is classified in the
consolidated  balance  sheets as an other  asset.  Goodwill  is  amortized  on a
straight-line basis over 15 years.

In June 2001,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards No. 142, "Goodwill and Other Intangible Assets"
("Statement No. 142"), which establishes  standards for financial accounting and
reporting  for  intangible  assets at  acquisition  and for  goodwill  and other
intangible assets subsequent to their acquisition.  Statement No. 142 is applied
to existing goodwill and intangible  assets for fiscal years beginning  December
15, 2001. The Company  anticipates  adopting this Statement  January 1, 2002, at
which time  amortization of the remaining book value of goodwill will cease. The
Company does not expect the  adoption of Statement  No. 142 will have a material
impact on its consolidated financial statements.





                                                                 33

<PAGE>



HEALTH PREMIUM

Amounts  charged for health care services are  recognized as premium  revenue in
the month for which enrollees are entitled to receive care.  Included in premium
revenue are amounts due from  customers  that  utilize the  Company's  capitated
primary  care  physician  network,  its care  coordination  services  and  other
services  related  to  health  management  and who  self-fund,  generally  up to
specified limits, certain elements of medical costs, such as hospitalization and
specialist  physicians.  Premium  revenue  received  in advance is  recorded  as
deferred premium revenue.

FEE AND OTHER

Amounts charged to third party payors solely for use of the Company's network of
physicians and health care practitioners and its discounted fee-for-service rate
structure are  recognized  as fee revenue.  Amounts  charged for  administrative
services  only   arrangements,   entailing  only  claims  payment  services  and
utilization of the provider network without utilization of the Company's primary
care physician network and care coordination services, and for which the Company
bears no insurance risk, are recognized as fee revenue.

HOME HEALTH SERVICES

Amounts  charged to  patients,  third  party  payors and others for home  health
services  are  recorded  at net  realizable  amounts,  including  an estimate of
potential retroactive adjustments under cost reimbursement agreements with third
party payors.

MEDICAL EXPENSE

Medical  expense  consists  principally of medical claims and capitation  costs.
Medical claims include  payments to be made on claims reported as of the balance
sheet date and  estimates  of health care  services  incurred  but not  reported
("IBNR") to the Company as of the balance sheet date. IBNR is estimated using an
expense forecasting model that is based on historical claims incurrence patterns
modified to consider current trends in enrollment,  member utilization patterns,
timeliness of claims  submissions  and other  factors.  This  estimate  includes
medical  costs  to  be  incurred   beyond  the  premium  paying  date  that  are
contractually required.

Capitation  costs  represent  monthly fixed fees to  participating  primary care
physicians  and other  health care  practitioners  as  retainers  for  providing
continuing medical care.

Medical claims reversals result from the determination that the Company has paid
claims in excess of contractually obligated amounts.  Amounts recognized through
specific  identification  are  recorded  at  their  net  realizable  value  as a
reduction of medical expense in the consolidated statements of operations and as
an increase in accounts receivable in the consolidated balance sheets.

The Company has entered into certain long-term vendor  contracts,  some of which
include incentives or cost guarantees designed to provide savings to the Company
over several years. The Company typically  accounts for the benefit derived from
these  incentives or guarantees  ratably over the contract period as a reduction
to medical expense. Because of the complexity of the Company's product offerings
as well as obligations imposed under the contracts, and the timing of settlement
of  various  contractual  periods,  disputes  may  arise  as to  the  degree  of
satisfaction  of the  various  contractual  obligations  which  could  result in
material adjustments to the Company's financial  statements.  In the case of one
of these  contracts,  a dispute with the Company's  pharmacy  benefits  manager,
Merck, has arisen involving  approximately $41 million related to the settlement
of a cost  guarantee  for the year 2000.  If the dispute is not  resolved in the
Company's favor, it could be material to the Company's financial statements. The
Company is recording the amount due under the cost guarantee over the three year


                                                                 34

<PAGE>



term of the contract which  commenced in January 2000.  From  inception  through
December 31, 2001, the Company has recognized  approximately  $28 million of the
$41 million guarantee for financial statement purposes as a reduction of medical
expense and medical  claims  payable.  On August 30, 2001,  the Company  filed a
Demand for  Arbitration  against Merck  asserting  that Merck has reneged on its
obligations under the agreement.  The Company believes that it has complied with
its  contractual  obligations,  that its financial  statements are fairly stated
with  regard  to the  aforementioned  contracts  and  that the  dispute  will be
resolved in the Company's favor. See Note 11.

The  Company  believes  that its claims  reserves  are  adequate  to satisfy its
ultimate  claims  liabilities;  however,  the liability as established  may vary
significantly from actual claims amounts,  either negatively or positively,  and
as adjustments are deemed  necessary,  they are included in current  operations.
Establishment of claims estimates is an inherently uncertain process;  there can
be no certainty that currently established reserves will prove adequate to cover
actual ultimate expenses.  Subsequent actual experience could result in reserves
being  too high or too low which  could  positively  or  negatively  impact  the
Company's earnings in future periods.

COORDINATION OF BENEFITS

Coordination of benefits ("COB") results from the determination that the Company
has paid for  medical  claims  expenses  for  which an  enrollee  has  duplicate
coverage and for which another insurer is primarily  liable. In the consolidated
statements of operations,  such identified amounts are classified as a reduction
of hospitalization expense and, in the consolidated balance sheets, such amounts
are classified as a reduction of medical claims payable.

INCOME TAXES

The income tax provision  includes Federal and state income taxes both currently
payable and deferred because of differences  between financial reporting and tax
bases of assets  and  liabilities.  Deferred  tax  assets  and  liabilities  are
measured  using the  enacted  tax rates and laws that will be in effect when the
differences are expected to reverse.

EARNINGS PER COMMON SHARE

Basic  earnings  per common  share are based upon the  weighted  average  shares
outstanding.  Outstanding  stock options are treated as common stock equivalents
for  purposes  of  computing  diluted  earnings  per share.  Shares  held in the
Company's  Stock  Compensation  Trust  (see  Note  10)  are  excluded  from  the
calculation of basic and diluted earnings per share.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and cash  equivalents - The carrying  amount  reported in the  consolidated
balance sheets approximates fair value.

Investment securities - Fair values are based on quoted market prices.

Statutory deposits - Fair values are based on quoted market prices.

Short-term borrowings - The carrying amount reported in the consolidated balance
sheets approximates fair value.






                                                                 35

<PAGE>



ESTIMATES

The  preparation  of the  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  Such estimates and assumptions could change in the future as
more  information  becomes  known,  which could impact the amounts  reported and
disclosed herein.

STOCK OPTION PLANS

As permitted  by Financial  Accounting  Standards  No. 123, the Company  follows
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees"  ("APB 25") and related  interpretations  in accounting for its stock
option plans. Under APB 25, because the exercise price of the Company's employee
stock  options  equals the market value of the  underlying  stock on the date of
grant, no compensation expense is recognized.

RECLASSIFICATIONS

Certain  balances in the 2000 financial  statements  have been  reclassified  to
conform with the 2001 presentation.

NOTE 2 - INVESTMENTS

Investments   are  classified   into  two  categories   (available-for-sale   or
held-to-maturity)  and  are  valued  based  upon  this  designation.  Securities
classified as available-for-sale,  which include debt and equity securities that
the Company does not have the positive intent to hold to maturity, are marked to
market  with  the  resulting   unrealized   gain  or  loss  reflected  in  other
comprehensive income. Securities classified as held-to-maturity,  which are debt
securities  that the Company has both the positive intent and ability to hold to
maturity,  are carried at amortized  cost. The Company  classifies its statutory
deposits as  held-to-maturity  with no effect on the recorded  value.  All other
investments are classified as available-for- sale. Management re-evaluates these
designations  annually.  During  1999,  statutory  deposit  investments  with an
amortized cost of $1,166,000 were released by the state regulatory  agencies and
transferred to the Company's  investment  securities  portfolio.  The unrealized
loss at the date of the transfer was  $21,000.  There were no such  transfers in
2001 and 2000.























                                                                 36

<PAGE>



The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                       -----------------------------------------------------
                                                                                2001
                                                       -----------------------------------------------------
                                                                        Gross         Gross        Estimated
(in thousands)                                                       Unrealized     Unrealized       Fair
                                                          Cost          Gains         Losses         Value
                                                       -----------------------------------------------------
<S>                                                    <C>            <C>            <C>            <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations of
  U.S. government agencies                             $  2,152       $   120        $     -        $  2,272
Obligations of states and political subdivisions        206,691         5,115          1,183         210,623
Municipal bond funds                                    145,010             -              -         145,010
Accrued interest                                          2,955             -              -           2,955
                                                       --------       -------        -------        --------
Debt securities                                         356,808         5,235          1,183         360,860
Equity securities                                         7,630           891          1,054           7,467
                                                       --------       -------        -------        --------

Investment securities                                  $364,438       $ 6,126        $ 2,237        $368,327
                                                       ========       =======        =======        ========

HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
 of U.S. government agencies                           $  7,908       $   226        $     1        $  8,133
Obligations of states and political subdivisions          9,532           116              -           9,648
Other investments                                           250             -              -             250
                                                       --------       -------        -------        --------

Statutory deposits                                     $ 17,690       $   342        $     1        $ 18,031
                                                       ========       =======        =======        ========
</TABLE>

<TABLE>
<CAPTION>
                                                       -----------------------------------------------------
                                                                                2000
                                                       -----------------------------------------------------
                                                                        Gross         Gross        Estimated
(in thousands)                                                       Unrealized     Unrealized       Fair
                                                          Cost          Gains         Losses         Value
                                                       -----------------------------------------------------
<S>                                                    <C>            <C>            <C>            <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations of
  U.S. government agencies                             $  2,159       $   113        $     -        $  2,272
Obligations of states and political subdivisions        142,499         3,100             23         145,576
Municipal bond funds                                    113,465             -             84         113,381
Accrued interest                                          2,101             -              -           2,101
                                                       --------       -------        -------        --------
Debt securities                                         260,224         3,213            107         263,330
Equity securities                                         7,116             1            320           6,797
                                                       --------       -------        -------        --------

Investment securities                                  $267,340       $ 3,214        $   427        $270,127
                                                       ========       =======        =======        ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
 of U.S. government agencies                           $  3,160       $   204       $      -       $   3,364
Obligations of states and political subdivisions         10,583            44              -          10,627
Other investments                                           854             -              -             854
                                                       --------       -------        -------        --------

Statutory deposits                                     $ 14,597       $   248        $     -        $ 14,845
                                                       ========       =======        =======        ========
</TABLE>






                                                                 37

<PAGE>



For the  years  ended  December  31,  2001,  2000 and  1999,  marketable  equity
available-for-sale securities with a fair value at the date of sale of $900,000,
$317,000 and  $2,524,000,  respectively,  were sold. The gross realized gains on
such sales totaled $18,000,  $71,000 and $50,000,  and the gross realized losses
totaled $17,000,  $-0- and $75,000 for each of the respective periods.  Realized
gains and losses are included in investment  income.  Other sales and maturities
of investment  securities consisted principally of redemptions on municipal bond
funds.

The  amortized  cost and  estimated  fair  value of debt and  marketable  equity
securities  at December  31, 2001,  by  contractual  maturity,  are shown below.
Actual maturities may differ from contractual  maturities because the issuers of
the  securities  may have the right to  prepay  obligations  without  prepayment
penalties.

<TABLE>
<CAPTION>
                                                -------------------------
                                                                Estimated
                                                                  Fair
(in thousands)                                     Cost           Value
                                                -------------------------
<S>                                             <C>              <C>
AVAILABLE-FOR-SALE
Due in one year or less                         $152,058         $152,174
Due after one year through five years             82,743           85,801
Due after five years through ten years           105,319          106,568
Due after ten years                               16,688           16,317
                                                --------         --------
Debt securities                                  356,808          360,860
Equity securities                                  7,630            7,467
                                                --------         --------
                                                $364,438         $368,327
                                                ========         ========
HELD-TO-MATURITY
Due in one year or less                         $  5,793         $  5,798
Due after one year through five years              6,733            6,982
Due after five years through ten years             5,164            5,251
Due after ten years                                    -                -
                                                --------         --------
                                                $ 17,690         $ 18,031
                                                ========         ========
</TABLE>

NOTE 3 - ACCOUNTS RECEIVABLE

Accounts receivable consists of the following at December 31:

<TABLE>
<CAPTION>
                                                -------------------------
(in thousands)                                    2001             2000
                                                -------------------------
<S>                                             <C>              <C>
Premium and fee accounts                        $ 84,969         $ 67,893
Home health service accounts                       8,141           10,454
Medical recoverables                               5,165            6,969
Other                                             13,715           10,775
Less: allowance for doubtful accounts             (6,647)          (6,137)
                                                --------         --------
                                                $105,343         $ 89,954
                                                ========         ========
</TABLE>

Medical  recoverables  consist of refunds identified on paid claims. This amount
has  been  recorded  as a  reduction  of  medical  expense  in the  consolidated
statements of operations. Other receivables consist primarily of amounts due for
reinsurance recoveries, pharmacy rebates, interest accrued on statutory deposits
and  amounts  related  to  contractual   arrangements  with  laboratory  service
providers.


                                                                 38

<PAGE>



NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
                                                ------------------------
(in thousands)                                     2001           2000
                                                ------------------------
<S>                                             <C>              <C>
Land, buildings and improvements                $ 44,416         $35,207
Computer equipment and software                   42,345          36,477
Office furniture and equipment                    26,138          22,786
Leasehold improvements                             3,856           2,144
                                                --------         -------
                                                 116,755          96,614
Less: accumulated depreciation and
  amortization                                   (59,426)        (49,392)
                                                --------          -------
                                                $ 57,329         $47,222
                                                ========         =======
</TABLE>


NOTE 5 - NOTES PAYABLE

The Company has access to total  revolving  credit  facilities  of $29  million,
which are subject to annual renewal and collateral requirements, and are used to
provide  short-term  capital  resources for routine cash flow  fluctuations.  At
December  31,  2001,  the  Company's   investment   security  balances  used  as
collateral,  which are parent company only  investments,  fell below the minimum
collateral  requirements  thereby reducing the credit line availability to $24.3
million. Borrowings bear interest at a rate based on the Federal Funds rate plus
..75% - 1.65% and are secured by certain cash balances and investment securities.
At December 31, 2001,  approximately  $3.7 million was outstanding on one of the
lines-of-credit  at an  interest  rate of 3.42% and  approximately  $444,000  in
letters-of-credit were outstanding, although no amounts had been drawn.

Interest  expense paid in cash on  borrowings  and on claims paid  subsequent to
state  mandated   deadlines  during  2001,  2000  and  1999  was   approximately
$1,267,000, $444,000 and $523,000, respectively.

NOTE 6 - REINSURANCE

M.D.  IPA,  OCI,  OCCI and MLH  maintain  reinsurance  coverage  to provide  for
reimbursement  of claims in excess of certain  limits.  The reinsurer for health
claims  indemnifies  either  90% of the  approved  per diem or fixed  charge per
procedure,  or 80% of the eligible in and out of service area acute care medical
expenses in excess of $200,000 per enrollee per year. Transplant costs conducted
in an approved  facility are reimbursed at either 90% or 80% of eligible charges
and in non-approved facilities at 50% of eligible charges. The coverage provides
reimbursement  benefits for a lifetime maximum of $2,000,000 in eligible medical
costs with no more than  $1,000,000  in a given year.  Reinsurance  for life and
accidental  death claims  generally  covers all settlements in excess of $50,000
per person subject to a $950,000 maximum recovery per person for life claims and
$1,000,000 per person on accidental death claims. Reinsurance recoveries for the
years ended  December 31,  2001,  2000 and 1999 were  approximately  $2,319,000,
$2,044,000  and  $1,566,000,  respectively.  In the  consolidated  statements of
operations, reinsurance premiums are shown net of the related recoveries.

NOTE 7 - INCOME TAXES

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's  deferred tax liabilities and assets are as follows as of December
31:

                                                                 39

<PAGE>



<TABLE>
<CAPTION>
                                                --------------------------
(in thousands)                                    2001              2000
                                                --------------------------
<S>                                             <C>                <C>
Deferred tax liabilities:
  Accelerated depreciation                      $ 1,071            $ 1,344
  Receivable valuation adjustments                    9              1,734
  Vendor guarantee revenue                       10,739                  -
  Unrealized investment gains                     1,361                975
                                                -------            -------
Total deferred tax liabilities                   13,180              4,053
                                                -------            -------
Deferred tax assets:
  Accrued medical expenses                        1,559              1,486
  Premium revenue adjustments                     2,639              1,140
  State net operating losses                      4,144              3,802
  Accrued pension expenses                        3,864              1,845
  Accrued vacation                                  400                217
  Other                                             146                164
                                                -------            -------
Total deferred tax assets                        12,752              8,654
Valuation allowance for deferred tax assets      (3,778)            (3,751)
                                                -------            -------
Net deferred tax assets                           8,974              4,903
                                                -------            -------
                                                $(4,206)           $   850
                                                =======            =======
Included in the consolidated balance sheets:
  Current assets - deferred income taxes        $   216            $   850
  Non-current assets - deferred income taxes      4,219              3,013
  Current liabilities - deferred income taxes    (8,641)              (839)
  Non-current liabilities - deferred
    income taxes                                      -             (2,174)
                                                -------            -------
  Net deferred tax (liability) asset            $(4,206)           $   850
                                                =======            =======
</TABLE>

Significant  components  of the  provision  for  income  taxes  attributable  to
continuing operations are as follows for the years ended December 31:

<TABLE>
<CAPTION>
                                                ---------------------------------------
(in thousands)                                     2001            2000          1999
                                                ---------------------------------------
<S>                                             <C>            <C>            <C>
Current:
  Federal                                       $  25,579      $  22,041      $  10,536
  State                                               621            591            557
                                                ---------      ---------      ---------
  Total current                                    26,200         22,632         11,093
                                                ---------      ---------      ---------
Deferred:
  Federal                                           1,771         (5,019)         2,623
  State                                              (824)          (261)          (208)
                                                ---------      ---------      ---------
  Total deferred                                      947         (5,280)         2,415
                                                ---------      ---------      ---------
                                                $  27,147      $  17,352      $  13,508
                                                =========      =========      =========
</TABLE>










                                                                 40

<PAGE>



The Company's tax provision  differs from the statutory  rate for Federal income
taxes for the years ended December 31 as follows:

<TABLE>
<CAPTION>
                                                -------------------------------------
(in thousands)                                     2001          2000          1999
                                                -------------------------------------
<S>                                             <C>            <C>            <C>

Statutory rate (35%)                            $29,520        $19,866        $13,940
Tax-exempt interest                              (2,870)        (2,067)        (1,421)
State income taxes, net of Federal benefit           22           (436)          (163)
Increase in valuation allowance for
  deferred tax assets                                27            706            765
Other non-deductible items                          529            574            566
Tax credits                                        (191)          (664)           (16)
Other, net                                          110           (627)          (163)
                                                -------        -------        -------
                                                $27,147        $17,352        $13,508
                                                =======        =======        =======
</TABLE>

Total tax deposits made by the Company in 2001, 2000 and 1999 were approximately
$11,750,000, $19,255,000 and $10,027,000, respectively.

At December 31, 2001, the Company has state net operating loss  carryforwards of
$97,014,000  that expire in various  years  beginning  in 2006.  The losses were
generated by certain operating subsidiaries of the Company, in the normal course
of their business.

The  Company  records a  valuation  allowance  for  deferred  tax assets when in
management's judgment that it is more likely than not that all or a portion of a
deferred  tax asset will not be  realized.  At December  31, 2001 and 2000,  the
Company  recorded a  valuation  allowance  related to state net  operating  loss
carryforwards.

NOTE 8 - RELATED PARTIES

For the years ended  December 31, 2001,  2000 and 1999,  certain  members of the
Boards  of  Directors  of  MAMSI  and  affiliated   corporations  who  are  also
participating   physicians  provided  medical  services  to  enrollees  totaling
$5,414,000,   $4,954,000  and   $1,790,000,   respectively,   which   represents
approximately .7%, .8% and .3% in 2001, 2000 and 1999, respectively, of payments
to all physicians.  Board members are remunerated at the same contractual  level
as all other  participating  physicians  and are selected by enrollees to render
medical   services  under  the  same  guidelines  as  all  other   participating
physicians.

NOTE 9 - EMPLOYEE BENEFITS PLANS

PENSION PLANS

The  Company  has a  defined  contribution  401(k)  savings  plan  covering  all
full-time  employees.  Employees  are allowed to  contribute  up to 23% of their
pretax earnings annually up to a maximum contribution of $10,500 and the Company
makes a matching  contribution of 50% on the first 4% of  contributions  made by
employees.  Only Company  contributions may be invested in MAMSI stock. Employee
contributions  can be  invested  in a variety of mutual  funds.  Employees  vest
immediately  in the  employee  contributions  and ratably over five years in the
Company contributions. During 2001, 2000 and 1999, the Company's contribution to
the 401(k) plan aggregated $1,202,000, $1,264,000 and $1,056,000, respectively.






                                                                 41

<PAGE>



Pursuant to the  employment  contracts  entered into by the Company with certain
key  executives,  effective in 2000,  each executive is entitled to supplemental
retirement  income  benefits  based upon years of service  and  attained  salary
levels. The Company is accruing for the liability under these contracts based on
an estimated  present value  calculation of the future benefits  payable to each
executive.  Expense  recognized  related  to this  benefit  was  $5,783,000  and
$2,866,000 for the years ended December 31, 2001 and 2000, respectively.

STOCK OPTION PLANS

The  Company  follows  APB 25  under  which  no  compensation  expense  has been
recognized in  connection  with its stock option  plans.  Pro forma  information
regarding  net income and earnings per share are required by Statement  123, and
has been  determined  as if the Company had  accounted  for its  employee  stock
options under the fair value method of that statement.  The fair value for these
options was estimated at the date of grant using a Black-Scholes  option pricing
model with the following  weighted average  assumptions for 2001, 2000 and 1999,
respectively:  risk-free  interest  rates of 4.8%,  6.6%,  and 5.2%;  volatility
factors of the expected market price of the Company's  common stock of .65, .65,
and .59 and a weighted  average life of the options of three years.  The Company
anticipates that it will declare no dividends.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the option's  vesting  period.  The  Company's  pro
forma information follows (in thousands except per share amounts):
                                                 2001         2000        1999
                                                -------      ------      ------
Pro forma net income                            $49,997     $34,020     $19,856
Pro forma basic earnings per share                 1.29         .90         .48
Pro forma diluted earnings per share               1.23         .86         .48

In years 1990 through  1996,  and years 1998 through 2001,  MAMSI  implemented a
non-qualified  stock option plan  whereby  options for the purchase of shares of
common stock may be granted to directors, officers and employees of the Company.
Unexpired authorized shares under the plans total 10,000,000.  Options under the
plans generally vest over a three-year period and are exercisable at 100% of the
fair market  value per share on the date the options  are  granted.  The Company
accounts  for  these  stock  option  grants  in  accordance  with  APB 25,  and,
accordingly,  recognizes no compensation  expense for these stock option grants.
Transactions relating to the plans are summarized as follows:
















                                                                 42

<PAGE>



<TABLE>
<CAPTION>
                                              2001                       2000                       1999
                                     -----------------------    -----------------------    -----------------------
<S>                                  <C>            <C>         <C>            <C>         <C>            <C>
                                                    Weighted                   Weighted                   Weighted
                                                    Average                    Average                    Average
                                        2001        Exercise       2000        Exercise       1999        Exercise
                                       Shares        Price        Shares        Price        Shares        Price
                                     ---------      --------    ---------      --------    ---------      --------

Outstanding, January 1               7,978,037      $11.59      9,524,599      $13.35      7,913,124      $ 14.98
Granted                              2,526,290      $16.46      3,100,763      $ 9.53      2,541,630      $  9.32
Exercised                           (3,000,306)     $13.35     (1,991,094)     $12.52        (13,100)     $  6.21
Forfeited                             (355,258)     $14.02     (2,656,231)     $14.76       (917,055)     $ 16.37
                                     ---------                  ---------                  ---------
Outstanding, December 31             7,148,763      $12.45      7,978,037      $11.59      9,524,599      $ 13.35
                                     =========                  =========                  =========
Available for grant, end of year     1,251,180                  1,554,976                  1,581,308
Exercisable, end of year             3,977,323                  4,474,207                  5,910,801
Option price range for exercised
  shares                             $5.06-$20.63               $5.06-$17.13               $5.06-$7.88
Option price range at end of year    $5.00-$23.05               $5.00-$21.00               $5.00-$20.00
Weighted average fair value of
  options granted during year           $7.61                      $4.10                      $3.85
</TABLE>

<TABLE>
<CAPTION>
                              OPTIONS OUTSTANDING                                         OPTIONS EXERCISABLE
-----------------------------------------------------------------------------     --------------------------------
                        Outstanding     Weighted Average                          Exercisable
      Range of             as of           Remaining         Weighted Average        as of        Weighted Average
   Exercise Prices      12/31/2001      Contractual Life      Exercise Price      12/31/2001       Exercise Price
-------------------     -----------     ----------------     ----------------     -----------     ----------------
<S>                     <C>                  <C>                <C>               <C>                <C>
$ 0.00   -  $  5.00           150             1.7               $ 5.00                  150          $ 5.00
$ 5.01   -  $ 10.00     3,245,289             2.9               $ 8.76            1,990,215          $ 8.61
$10.01   -  $ 15.00       993,073             1.6               $12.62              869,266          $12.63
$15.01   -  $ 20.00     2,872,096             3.6               $16.46            1,111,252          $16.53
$20.01   -  $ 25.00        38,155             4.3               $21.24                6,440          $20.67
                        ---------                                                 ---------
                        7,148,763             3.0               $12.45            3,977,323          $11.72
                        =========                                                 =========
</TABLE>

INCENTIVE COMPENSATION PLAN

The Company has an incentive  compensation plan whereby managers receive bonuses
based upon the annual  operating  results of the Company.  During 2001, 2000 and
1999, incentive  compensation expense was approximately  $9,000,000,  $6,956,000
and $4,200,000, respectively, which was paid to employees in February 2002, 2001
and 2000, respectively.

NOTE 10 - COMMON STOCK

The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
                                                -----------------------------------------
                                                    2001           2000           1999
                                                -----------------------------------------
<S>                                             <C>            <C>            <C>
Numerator:
  Net income                                    $57,195,000    $39,406,000    $26,322,000

Denominator:
  Denominator for basic earnings per share
    - weighted average shares                    38,672,147     38,052,746     41,225,327
  Dilutive securities - employee stock options    1,829,939      1,288,291         41,277
  Denominator for diluted earnings per share
    - adjusted weighted average shares           40,502,086     39,341,037     41,266,604
</TABLE>

                                                            43

<PAGE>



On  August  26,  1996,  the  Company  established  the  MAMSI  SCT to  fund  its
obligations  arising from its various stock compensation  plans. MAMSI initially
funded the SCT with 9,130,000  shares of newly issued MAMSI stock.  In exchange,
the SCT delivered a promissory  note to MAMSI for  approximately  $129.9 million
which  represented the purchase price of the shares.  Amounts owed by the SCT to
MAMSI are repaid by cash received by the SCT or will be forgiven by MAMSI, which
will result in the SCT releasing  shares to satisfy MAMSI  obligations for stock
compensation.

During 2001, the SCT purchased an additional  2,000,000 of the Company's  common
stock for  approximately  $36.5 million.  The existing  promissory note has been
modified to reflect these purchases.

For financial reporting  purposes,  the SCT is consolidated with MAMSI. The fair
market  value  of  the  shares  held  by the  SCT is  shown  as a  reduction  to
stockholders'   equity  in  the  Company's   consolidated  balance  sheets.  All
transactions  between the SCT and MAMSI are eliminated.  The difference  between
the cost and fair  value of  common  stock  held in the SCT is  included  in the
consolidated financial statements as additional paid-in capital.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

The  Company  leases  certain  equipment  and  office  space  under the terms of
non-cancelable  operating leases that expire at various dates through 2006. Rent
expense relating to these operating leases approximated  $4,393,000,  $3,470,000
and $3,429,000 in 2001, 2000 and 1999, respectively.

Future minimum lease  commitments under  non-cancelable  operating leases are as
follows for the years ended December 31 (in thousands):

Year                    Amount
----                   -------
2002                   $ 3,395
2003                     2,303
2004                     3,168
2005                     1,822
2006                     1,016
                       -------
                       $11,704
                       =======

M.D. IPA  contracts  with OPM to provide or arrange  health  services  under the
FEHBP.  The contract with OPM and applicable  government  regulations  establish
premium rating  requirements for the FEHBP. The premiums  established  under the
OPM contract are subject to periodic review and audit to determine, if they were
established in compliance with the community rating and other requirements under
the program.  OPM typically  audits plans once every five or six years, and each
audit covers the prior five or six year period.  While the government's  initial
on-site  audits are  usually  followed  by a  post-audit  briefing  as well as a
preliminary  audit  report in which the  government  indicates  its  preliminary
results,  final  resolution  and  settlement of the audits can take two to three
years.  The results of these audits could result in material  adjustments to the
Company's financial statements. The Company has been audited through 1999. There
were no significant findings related to 1999.

On August 30, 2001, the Company filed a Demand for Arbitration with the American
Arbitration  Association  against  Merck and related  entities  seeking an order
relating  to  the  parties'   Integrated  Drug  Program  Master  Agreement  (the
"Agreement").  The Company  asserts  that Merck has  reneged on its  obligations
under  the  Agreement,   the  aggregate  amount  of  such  obligations  totaling
approximately  $49 million for fiscal year ended 2000. On October 8, 2001, Merck
and  related  entities  filed an  Answer  and  Counterclaim  alleging  breach of
contract and requesting  monetary relief. On October 19, 2001, the Company filed
an Answer to the  Counterclaim  denying all allegations and revising its request
for relief to $44.8  million  which  includes  the $41.0  million  recorded  for


                                                                 44

<PAGE>



financial  statement  purposes and additional amounts the Company believes it is
entitled to under the Agreement.  The Company  believes that the dispute will be
resolved in its favor. If the matter is not resolved in the Company's favor, the
effect could be material to the Company's financial statements. See Note 1.

The Company is involved in various legal actions arising in the normal course of
business,  some of  which  seek  substantial  monetary  damages.  After  review,
including  consultation  with legal  counsel,  management  believes any ultimate
liability that could arise from these other actions will not  materially  effect
the Company's consolidated financial position or results of operations.

NOTE 12 - STATUTORY REQUIREMENTS

M.D. IPA, OCI, OCCI and OCIPA are subject to insurance department regulations in
the states in which they are  licensed.  MLH is subject to insurance  department
regulations in Maryland, its state of domicile.

Minimum  required  statutory  net worth  and  actual  statutory  net worth as of
December 31 are as follows:
<TABLE>
<CAPTION>
                              2001                              2000
                   ---------------------------       --------------------------
                     Minimum          Actual           Minimum         Actual
                   ----------     ------------       ----------     -----------
<S>                <C>            <C>                <C>            <C>
M.D. IPA           $3,000,000     $ 40,500,000       $3,000,000     $42,600,000
OCI                 3,000,000       59,800,000        3,000,000      67,700,000
MLH                 1,125,000      108,280,000          500,000      80,000,000
OCCI                2,500,000        7,100,000        2,500,000       3,600,000
OCIPA               1,500,000        2,100,000        1,500,000       2,100,000
</TABLE>

M.D. IPA, OCI,  OCCI,  OCIPA and MLH were in  compliance  with state  depository
rules at December  31, 2001 and 2000.  OCCI was in  compliance  with its working
capital  requirement  of $1.6 million at December 31, 2001 and 2000.  M.D.  IPA,
OCI, OCCI, OCIPA and MLH exceeded the highest risk-based capital requirements at
December  31,  2001  and  2000.  These  MAMSI  subsidiaries  must  notify  state
regulators  before  the  payment  of any  dividends  to MAMSI  and,  in  certain
circumstances, must receive positive affirmation prior to such payment.

The National  Association  of  Insurance  Commissioners  revised the  Accounting
Practices and Procedures  Manual in a process referred to as  Codification.  The
revised manual became effective January 1, 2001. The domiciliary  states of M.D.
IPA, OCI, OCCI, OCIPA and MLH have adopted the provisions of the revised manual.
The revised manual has changed, to some extent,  prescribed statutory accounting
practices  that  M.D.  IPA,  OCI,  OCCI,  OCIPA  and  MLH use to  prepare  their
statutory-basis  financial statements.  The impact of these changes to MAMSI and
its insurance subsidiaries' statutory-basis capital and surplus as of January 1,
2001 was not significant.

NOTE 13 - RISK CONCENTRATIONS

Financial  instruments  that  potentially  subject  the  Company to credit  risk
consist  primarily of  investments  in marketable  securities  (including  money
market funds, floating rate municipal putable bonds, intermediate term municipal
bonds, and common stocks) and premiums  receivable.  The Company receives advice
through or assigns direct management of investment in securities to professional
investment  managers  selected for their  expertise in various  markets,  within
guidelines established by the Board of Directors. These guidelines include broad
diversification  of  investments.  Concentrations  of credit  risk and  business
volume with respect to commercial  premiums receivable are generally limited due
to the large number of employer groups  comprising the Company's  customer base.
As of December 31, 2001,  approximately  20% of premium and home health  service
receivables  were due from federal  government  agencies.  The Company  performs
ongoing  credit   evaluations  of  customers  and  generally  does  not  require
collateral.


                                                                 45

<PAGE>




NOTE 14 - REPORTABLE SEGMENTS

DESCRIPTION  OF THE TYPES OF PRODUCTS  AND SERVICES  FROM WHICH EACH  REPORTABLE
SEGMENT DERIVES ITS REVENUES

The Company has two reportable segments:  Commercial risk products and Preferred
Provider Organizations ("PPO"). Commercial risk products include traditional HMO
and point-of-service  health care plans as well as hybrid products.  Traditional
products  provide for the provision of  comprehensive  medical care to enrollees
for a fixed,  prepaid premium regardless of the amount of care provided.  Hybrid
products offer the ability to tailor  employee  health care offerings by varying
benefit designs,  funding methods and insurance risk. These products combine the
use of capitated  physicians to serve as care coordinators,  employer funding of
specialist  and  institutional  claims  on  an  "as  paid"  basis  with  MAMSI's
underwriting  of risk on a specific  and/or  aggregate  stop loss  basis.  MAMSI
offers access to its preferred  provider  network of physicians to employers and
insurance  companies  in  association  with  various  health  plans.  PPOs allow
enrollees to receive care from a network of participating  physicians and health
care  practitioners  who agree to provide services at  contractually  negotiated
rates in exchange for increased  patient volume. A PPO does not assume insurance
risk from medical utilization and it is not the claims payor.

MEASUREMENT OF SEGMENT PROFIT OR LOSS

The Company  evaluates  performance  and allocates  resources based on profit or
loss  from  operations  before  income  taxes,  not  including  income  from the
Company's  investment  portfolio.  The  accounting  policies  of the  reportable
segments  are  the  same  as  those  described  in the  summary  of  significant
accounting policies.

Management  does not allocate  assets in the  measurement  of segment  profit or
loss;  therefore,  jointly  used  assets  are not  allocated  to the  reportable
segments.



























                                                                 46

<PAGE>



FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS

The  Company's  reportable  segments  are  business  units that offer  different
products.  The reportable  segments are each managed  separately  because of the
range of benefit plans offered for providing health care coverage to enrollees.

<TABLE>
<CAPTION>

REPORTABLE SEGMENTS
(in thousands)
                                                       ----------------------------------------------------
                                                       Commercial
                                                          Risk        PPO        All Others      Totals
                                                       ----------------------------------------------------
<S>                                                    <C>            <C>          <C>           <C>
Year ended December 31, 2001:
Revenue from external customers                        $1,740,938     $21,244      $30,781       $1,792,963

Segment pretax profit (loss)                               60,448      10,622       (1,057)          70,013

                                                       ----------------------------------------------------
                                                       Commercial
                                                          Risk        PPO        All Others      Totals
                                                       ----------------------------------------------------
Year ended December 31, 2000:
Revenue from external customers                        $1,404,910     $21,811      $44,275       $1,470,996

Segment pretax profit                                      30,773      10,906        2,135           43,814

                                                       ----------------------------------------------------
                                                       Commercial
                                                          Risk        PPO        All Others      Totals
                                                       ----------------------------------------------------
Year ended December 31, 1999:

Revenue from external customers                        $1,206,340     $21,352      $ 78,528      $1,306,220

Segment pretax profit (loss)                               20,086      11,103        (2,011)         29,178

</TABLE>

The  sources  of  revenue  included  in the All  Others  category  are  composed
primarily of Medicaid and miscellaneous.  The Company ended its participation in
Medicaid in 2000. All revenue is generated within the United States.

<TABLE>
<CAPTION>
                                                                --------------------------------------------
(in thousands)                                                     2001              2000             1999
                                                                --------------------------------------------
<S>                                                             <C>              <C>              <C>
Revenues

Total external revenues for reportable segments                 $1,762,182       $1,426,721       $1,227,692

Other revenues                                                      30,781           44,275           78,528

Investment revenue not allocated                                    14,772           13,483           11,096
                                                                ----------       ----------       ----------
     Total consolidated revenues                                $1,807,735       $1,484,479       $1,317,316
                                                                ==========       ==========       ==========

Pretax Profit

Total profit from reportable segments                           $   71,070       $   41,679       $   31,189

Other (loss) profit                                                 (1,057)           2,135           (2,011)

Net investment income not allocated                                 14,329           12,944           10,652
                                                                ----------       ----------       ----------
     Total consolidated pretax profit                           $   84,342       $   56,758       $   39,830
                                                                ==========       ==========       ==========
</TABLE>


                                                                 47

<PAGE>



NOTE 15 - COMPREHENSIVE INCOME

Changes  in  accumulated  other  comprehensive  income  related  to  changes  in
unrealized gains (losses) on securities, net-of-tax, were as follows:

<TABLE>
<CAPTION>
                                                                -----------------------------------------
(in thousands)                                                    2001             2000             1999
                                                                -----------------------------------------
<S>                                                             <C>              <C>              <C>
Unrealized holding gains (losses) arising
 during period                                                  $   722          $ 2,887          $(2,341)

Less: Reclassification adjustment for
  net gains (losses) included in net income                           6               62              (15)
                                                                -------          -------          -------

Net unrealized gains (losses) recognized in
 other comprehensive income (loss)                              $   716          $ 2,825          $(2,326)
                                                                =======          =======          =======
</TABLE>








                                                                 48

<PAGE>



                         Report of Independent Auditors


Board of Directors and Stockholders
Mid Atlantic Medical Services, Inc.


We have audited the  accompanying  consolidated  balance  sheets of Mid Atlantic
Medical  Services,  Inc. and  subsidiaries as of December 31, 2001 and 2000, and
the related  consolidated  statements of  operations,  changes in  stockholders'
equity and cash flows for each of the three years in the period  ended  December
31, 2001. Our audits also included the financial  statement  schedule  listed in
the  Index at Item  14(a).  These  financial  statements  and  schedule  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We have  conducted our audits in accordance  with auditing  standards  generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of Mid
Atlantic Medical Services,  Inc. and subsidiaries at December 31, 2001 and 2000,
and the  consolidated  results of their operations and their cash flows for each
of the three years in the period ended  December 31, 2001,  in  conformity  with
accounting  principles  generally  accepted in the United  States.  Also, in our
opinion,  the related financial statement schedule,  when considered in relation
to the financial  statements  taken as a whole,  presents fairly in all material
respects the information set forth therein.


                                          /s/ Ernst & Young LLP
                                          ----------------------
                                          Ernst & Young LLP



McLean, Virginia
February 11, 2002

                                                                 49

<PAGE>



SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 2001 AND 2000

<TABLE>
<CAPTION>
                                    2001       2001       2001       2001       2000       2000       2000       2000
                                    First     Second      Third     Fourth      First     Second      Third     Fourth
                                   Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter
                                   --------   --------   --------   --------   --------   --------   --------   --------
                                                             (in thousands except share amounts)
                                                                           (unaudited)
<S>                                <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>

Revenue                            $424,661   $450,475   $459,667   $472,932   $360,113   $368,339   $371,428   $384,599
Expense                             405,342    432,656    437,049    448,346    347,050    357,169    356,779    366,723

Income before income taxes           19,319     17,819     22,618     24,586     13,063     11,170     14,649     17,876
Net income                           12,882     11,986     15,036     17,291      8,602      7,313     10,974     12,517

Basic earnings per share                .34        .31        .38        .45        .22        .19        .29        .33
Diluted earnings per share              .32        .30        .36        .43        .22        .19        .28        .31

</TABLE>