<PAGE>  1
                                      UNITED STATES
                           SECURITIES AND EXCHANGE COMMISSION
                                 WASHINGTON, D.C.  20549
                                        FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 [FEE REQUIRED] For fiscal year ended DECEMBER 31, 1997

                                     OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 [NO FEE REQUIRED] 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  February  27,
1998: Approximately $531 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.
       54,677,862 shares of common stock as of February 27, 1998








<PAGE>  2


                       DOCUMENTS INCORPORATED BY REFERENCE
The Proxy  Statement for the  Registrant's  annual meeting of shareholders to be
held on April 27, 1998 is  incorporated  by reference into Part III of this Form
10-K.






<PAGE> 3


                               FORM 10-K

                                 INDEX

ITEM NO.   DISCLOSURE REQUIRED                                    PAGE

                                 PART I

Item 1     Business ..............................................   4
Item 2     Properties ............................................  17
Item 3     Legal Proceedings .....................................  17
Item 4     Submission of Matters to a Vote of Security Holders ...  17

                                 PART II

Item 5     Market for Registrant's Common Equity and Related
             Stockholder Matters ................................   18
Item 6     Selected Financial Data ..............................   19
Item 7     Management's Discussion and Analysis of Financial
             Condition and Results of Operation .................   20
Item 7a    Quantitative and Qualitative Disclosures About
             Market Risk ........................................   26
Item 8     Financial Statements and Supplementary Data ..........   27
Item 9     Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure ................   48

                                 PART III

Item 10    Directors and Executive Officers of the Registrant ...   49
Item 11    Executive Compensation ...............................   49
Item 12    Security Ownership of Certain Beneficial Owners
             and Management .....................................   49
Item 13    Certain Relationships and Related Transactions .......   49

                                 PART IV
Item 14    Exhibits, Financial Statement Schedules
             and Reports on Form 8-K ............................   50







<PAGE> 4

                                 PART I

ITEM 1. BUSINESS

Mid  Atlantic  Medical  Services,  Inc.  ("MAMSI")  is  a  holding  company  for
subsidiaries  active in managed health care and other life and health  insurance
related activities.  MAMSI and its subsidiaries (the "Company") have developed a
broad range of managed  health care and related  ancillary  products and deliver
these services  through health  maintenance  organizations  ("HMOs"),  preferred
provider  organizations  ("PPOs"),  a life and health insurance  company, a home
health care company,  a  pharmaceutical  services company and a hospice company.
The Company also has a partnership interest in an outpatient surgery center.


GENERAL DEVELOPMENT OF BUSINESS

MAMSI was  incorporated in Delaware in 1986 to serve as a holding company for MD
- Individual Practice Association,  Inc. ("M.D. IPA") and Physicians Health Plan
of  Maryland,  Inc.  ("PHP-  MD").  MAMSI made an exchange  offer for all of the
issued and outstanding shares of common stock of M.D. IPA and PHP-MD in 1987.

M.D. IPA, a Federally qualified HMO, was organized as a nonstock  corporation in
1979. M.D. IPA operated as a non-profit  organization until 1985 when it amended
its articles of incorporation and was reorganized into a stock corporation.

PHP-MD, an individual practice  association ("IPA"), was organized as a nonstock
corporation in 1979 to provide  physician and other medical services to M.D. IPA
enrollees.  PHP-MD  operated  as a non-stock  organization  until it amended its
articles of incorporation and was reorganized into a stock corporation in 1984.

MANAGED HEALTH ORGANIZATIONS

MAMSI's primary business is providing access to and managing health care through
its HMOs and its life and health insurance  company.  MAMSI currently offers HMO
coverage through four licensed HMO subsidiaries - M.D. IPA, Optimum Choice, Inc.
("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc.
of  Pennsylvania  ("OCIPA") and offers life and health  insurance  through MAMSI
Life and Health Insurance Company ("MAMSI Life").

M.D. IPA became a licensed HMO in Maryland in 1981 and in Virginia in 1985. M.D.
IPA's present  service area (which  includes all geographic  areas where the HMO
has received  regulatory  approval to provide health care services) includes the
entire state of Maryland,  the District of Columbia and most counties and cities
in Virginia  including  the Northern  Virginia,  Richmond/Tidewater  and Roanoke
areas ("HMO Service Area"). In addition to serving governmental entities such as
the Office of Personnel  Management  of the United States  Government  under the
Federal  Employees Health Benefit Plan, M.D. IPA generally  provides coverage to
the larger commercial group market.

OCI, a  non-Federally  qualified HMO, became a licensed HMO in Maryland in 1988,
in Virginia  in 1990,  in  Delaware  in 1993 and in West  Virginia in 1994.  OCI
generally operates within the small business market segment,  which is comprised
of both small and large group  employers  and also covers  Medicaid and Medicare
recipients.  OCI's present commercial service area includes the entire states of
Maryland and  Delaware,  the District of Columbia,  most  counties and cities in
Virginia,  and certain areas of West Virginia.  For the Medicare Program, OCI is
licensed in Northern Virginia, Maryland, Delaware and the District of Columbia.

OCCI, a non-Federally  qualified HMO, became a licensed HMO in North Carolina in
1995 and South Carolina in 1996. OCCI operates in both the small and large group
commercial  market.  OCCI's present service area includes certain areas of North
Carolina and South Carolina.







<PAGE> 5


OCIPA, a  non-Federally  qualified HMO, became a licensed HMO in Pennsylvania in
1996.  OCIPA  operates  in both the  small and large  group  commercial  market.
OCIPA's   present   service  area  includes   five  counties  in   south-central
Pennsylvania.

MAMSI Life, a life and health insurance  company,  is licensed in over 30 states
and actively markets in the states in which MAMSI has licensed HMO's. MAMSI Life
sells group health  insurance as well as a preferred point of service product to
large and small employers and individuals. MAMSI Life also sells group term life
insurance as well as short-term disability insurance.

GENERAL

HMOs  typically  provide or arrange for the provision of  comprehensive  medical
care (including  physician and hospital care) to enrollees for a fixed,  prepaid
premium regardless of the amount of care provided.  Enrollees  generally receive
care from participating primary care physicians ("PCPs") who, as required, refer
enrollees to participating  specialists and hospitals.  HMOs require patients to
utilize participating  physicians and other participating health care providers.
This allows HMOs to  negotiate  favorable  rates and  control  utilization  to a
greater extent than traditional health insurers,  while monitoring and enhancing
the quality of care provided to enrollees.

The goal of an HMO is to combine  quality health care with  management  controls
designed to encourage efficient and economical use of health care services. Such
controls include monitoring physician services,  hospital admissions and lengths
of stay and maximizing the use of non-hospital  based medical services.  Because
an HMO generally  receives fixed monthly premiums from its enrollees  regardless
of the health care  services  provided,  an HMO has an incentive to maintain the
health  of its  enrollees,  while  carefully  monitoring  expenses  through  the
implementation of various cost control strategies and effective management.

MAMSI's HMO provider network is organized as an Individual Practice  Association
("IPA").  Under the IPA model, the HMO contracts with a broadly  dispersed group
of physicians to provide  medical  services to enrollees in the  physicians' own
offices and in hospitals;  the physicians are generally paid on a capitated or a
negotiated fee maximum basis.  Physicians may contract  directly with the HMO or
through a designated organization that, in turn, contracts with the HMO.

MAMSI'S HMO PRODUCTS

MAMSI's  HMOs  offer a range of  benefit  plans  for  providing  health  care to
enrollees.  Generally,  enrollees  arrange for coverage  through their employer.
However,  group  enrollees can convert their coverage to an individual  contract
upon separation  from their employer.  There is no assurance that HMO agreements
with employers will be renewed annually or that, within each employer group, the
HMO will not experience disenrollment by individual enrollees. MAMSI's HMOs also
offer individual coverage to the commercial, Medicaid and Medicare markets.

Under  traditional  HMO  coverage,  the  enrollee  selects  a PCP from the HMO's
provider  network.  All medical care provided to the enrollee must be authorized
and coordinated by the PCP. Generally, the enrollee pays a copayment for all PCP
and  specialist  office  visits and may also be required to pay a copayment  for
hospital  admissions  and  emergency  room  services.   Except  in  emergencies,
enrollees   are   generally   required  to  utilize  only  those   participating
professional and  institutional  health care providers that have contracted with
the IPA (see further  discussion  under "HMO  Arrangements  with  Physician  and
Institutional Providers").

MAMSI's  HMOs,  in  cooperation  with MAMSI Life, a wholly owned  subsidiary  of
MAMSI, also offer  point-of-service  coverage (the "preferred  plan"),  which is
marketed to appeal to the following customers:






<PAGE> 6


  1.  Individuals  who  will  not  consider  a  closed  delivery  system.  These
individuals  prefer the  flexibility of the  traditional  indemnity plan but are
also seeking a lower-cost alternative such as an HMO.

  2. Small to mid-sized  employers who are looking to limit the number of health
care  plan  options.  In this  case,  the HMO  would  seek to be  offered  as an
exclusive health care provider.

In the preferred plan, enrollees have the choice of seeking care from the PCP or
from any physician of their choice (point-of-service  option).  Whenever care is
provided under the  point-of-service  option and the enrollee  visits a provider
outside  of the HMO  network,  MAMSI  Life,  which  underwrites  this  indemnity
benefit,  generally  covers  the  lesser  of 80%  of the  bill  or  100%  of the
established  fee maximum for the service  provided.  The enrollee is responsible
for the remainder of the charge.

Additionally,  MAMSI, through its subsidiaries,  offers hybrid products to large
employer groups. These products offer the ability to tailor employee health care
offerings by varying benefit designs, funding methods and insurance risk. Hybrid
products   generally  compete  in  the  so-called   self-funded   employer  plan
marketplace.  A typical MAMSI hybrid product  combines the use of capitated PCPs
to serve as gatekeepers, employer funding of specialist and institutional claims
on an "as paid"  basis and  MAMSI's  underwriting  of risk of loss on a specific
and/or aggregate stop loss basis.

OCI  offers  HMO  coverage  to  recipients  of  Title  XIX  Medical   Assistance
("Medicaid") in certain  states.  The Medicaid plan operates in a manner similar
to the  traditional  HMO plan. The  participating  states pay a monthly  premium
based upon the age, sex and geographic  location of the recipients for which OCI
provides  comprehensive medical coverage. At December 31, 1997, MAMSI's Medicaid
service area includes certain areas of Virginia,  nine counties in West Virginia
and Mecklenburg and Gaston Counties in North Carolina.

Effective  January 1, 1997,  because of insufficient  reimbursement  rates,  OCI
withdrew from the mandated  Medicaid  Program in the Tidewater  area of Virginia
which reduced the Company's membership by approximately 26,000 members. In July,
1997,  OCI declined to participate  in the State of Maryland  mandated  Medicaid
program,  again due to  insufficient  rates,  which  resulted in OCI's  Maryland
Medicaid  membership of  approximately  38,000 being reassigned to other managed
care  organizations.  Effective  January 1, 1998, OCI withdrew from the Northern
Virginia area due to insufficient  reimbursement  rates. It is anticipated  that
this will reduce OCI's  Virginia  Medicaid  membership  by  approximately  6,000
members.

Under all coverage  options,  enrollees  receive the following  basic  benefits:
primary and specialist physician services;  hospital services such as diagnostic
tests, x-rays,  drugs,  medication,  nursing and maternity services;  outpatient
diagnostic  tests such as  laboratory  tests,  x-rays,  and allergy  testing and
injections.

OCI also offers  health  coverage to Title XVIII  Medicare  recipients.  Under a
contractual   arrangement   with  the  United  States   Health  Care   Financing
Administration  ("HCFA"),  OCI receives a monthly  premium  based upon age, sex,
county of residence and enrollment  status for which OCI provides  comprehensive
medical coverage to those individuals.  Currently, approximately only 11% of the
Medicare  recipients in MAMSI's Medicare service area (which includes  Delaware,
the District of Columbia, several counties in Northern Virginia, and most of the
State of Maryland) are covered through MAMSI or other HMOs. Effective January 1,
1997,  OCI reduced the size of its  Medicare  service  area.  This  reduction in
service area reduced the Company's  Medicare  membership by approximately  5,000
members.  Effective  January 1, 1998,  the Company again reduced the size of its
service area and changed the benefit  structure.  It is  anticipated  that these
changes will further reduce MAMSI's Medicare membership.







<PAGE> 7


The  Company's  total health plan  (managed  care full risk and hybrid,  ASO and
indemnity health  insurance)  membership in the HMOs and MAMSI Life decreased to
approximately  691,000 at December 31, 1997 from 745,000 at December 31, 1996, a
decrease of 7 percent.

The following table sets forth information relevant to MAMSI's HMO and indemnity
health plans as of December 31, 1997:

Employer Groups Served              30,500
Population of Aggregate HMO
  Service Area                  33,500,000
Service Area Penetration               2.1%
Primary Care Physicians              5,200
Specialist Physicians               14,200
Other Affiliated Health
  Care Providers                     7,500
Hospitals and Outpatient
  Facilities                         1,500
Pharmacies                           8,800

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, 1997,  1996
and 1995,  approximately 11%, 11% and 7%,  respectively,  of premium revenue was
derived from Federal  government  agencies,  and approximately 25%, 26% and 21%,
respectively,  was derived from state and local  government  agencies located in
the Company's service area.

HMO ARRANGEMENTS WITH PHYSICIAN AND INSTITUTIONAL PROVIDERS

M.D. IPA and OCI  contract  with PHP-MD to provide  physician  services to their
enrollees   while  OCCI  (North   Carolina   and  South   Carolina)   and  OCIPA
(Pennsylvania)   generally  contract  directly  with  providers.  The  HMOs  are
ultimately  responsible  for ensuring that an adequate  number of physicians and
other health care providers are maintained in order to service enrollees.

The  Company  contracts  with many  different  kinds of health  care  providers,
including  primary care and specialist  physicians,  dentists,  social  workers,
psychologists,  physical  therapists  and  podiatrists.  PCPs are paid a monthly
capitation  payment for each enrollee who has chosen that PCP.  This  capitation
payment varies according to the age and sex of the enrollee and according to the
primary care  designation  of the provider  chosen by the enrollee.  The primary
care  designations  on which premiums are based fall into one of two types:  (1)
family  and  general  practice,   pediatrics  and  internal  medicine,  and  (2)
obstetrics and gynecology.

PCPs may  receive,  in  addition  to  capitation  payments,  fees for  specified
procedures   and  an  annual   payment  that  is  based  on  a  Quality   Review
Reconciliation. This payment generally does not exceed 3 percent of their annual
capitation  payments.  The  reconciliation  evaluates the  physician's  practice
performance  as well as quality  issues such as  grievance  rates from  members,
sanctions  by a MAMSI HMO,  and member  transfer  rate.  As part of the  Quality
Review Reconciliation,  the Company provides a quarterly report to each PCP that
compares the physician's  practice performance based on outpatient and inpatient
expenses  to those of his/her  peers and allows the PCP not only to monitor  the
number of referrals  consistent  with  quality  medical  standards,  but also to
evaluate  the  most  cost-effective   consultants  and  facilities  within  each
specialty area.

Prior to July, 1, 1995,  specialist  providers and  participating  non-physician
providers were compensated on a discounted fee maximum basis.  This compensation
was  limited to an  established  maximum  rate that  reflected  the amount  that
similar providers of a similar service would typically charge. Effective July 1,
1995, the Company  modified the method used to compensate  providers and adopted
the Medicare Resource Based Relative Value Scale






<PAGE> 8


methodology of provider reimbursement. This methodology, which applies generally
to specialist health claims,  has resulted in the lowering of some reimbursement
levels,  mainly  those having to do with office and  hospital-based  procedures,
while increasing  payments for many evaluation and management tasks.  Management
believes that this change has allowed the Company to continue to be  competitive
within its marketplace.

The  HMOs  have  contractual   arrangements  with  a  combined  total  of  1,500
facilities, consisting of 300 hospitals and 1,200 non-hospital facilities, as of
December 31, 1997.  These  facilities  are located in the  Company's HMO Service
Area. Contracts with facilities are renewable annually.

HMO ARRANGEMENTS FOR OTHER SERVICES

The HMOs have  contracted with a number of entities to arrange for the provision
of other services:

EMERGENCY CARE - Enrollees may receive urgent care services as an alternative to
hospital  emergency room treatment.  Enrollees can use local urgent care centers
and any hospital emergency room in emergency situations.

HOME HEALTH  CARE - A number of medical  care  providers  are engaged to provide
health  care  services  (such  as  nursing,  pediatric,   neonatal,  orthopedic,
psychiatric,  geriatric,  dialysis treatments,  physical therapy, speech therapy
and respiratory  therapy) at the home of the enrollee.  MAMSI's home health care
subsidiary, HomeCall, Inc. ("HomeCall"), provides these services throughout much
of the Company's service area.

PHARMACEUTICAL  ASSISTANCE  - The Company has  arrangements  with  participating
pharmacies so that an enrollee is only  responsible for the  deductibles  and/or
copayments  that are  indicated on his or her  enrollment  card.  The  Company's
pharmaceutical  company,  HomeCall  Pharmaceutical  Services, Inc. provides home
infusion,  delivery of drugs to  physician  offices and mail order  prescription
services to its members and other payors.

LABORATORY  TESTING - The  Company has an  arrangement  with a  laboratory  that
conducts much of the  laboratory  work required by HMO  providers.  Enrollees in
MAMSI's PPO are similarly referred to this laboratory for testing.

DENTAL - The Company has several dental  products  available  including a dental
indemnity   product   available   from  MAMSI  Life,   subcontracted   capitated
arrangements with a dental HMO, and a discount dental services network through a
dental PPO.

QUALITY ASSESSMENT/IMPROVEMENT AND COST CONTAINMENT

MAMSI conducts a  multidisciplinary  approach to its Quality  Assessment/Quality
Improvement   ("QA/QI")   Program,   utilizing  the  resources  of  all  of  its
subsidiaries  to ensure the provision of quality health care and services to its
HMO enrollees in an appropriate and cost-efficient manner.

MAMSI recognizes the importance of a Continuous Quality  Improvement  Program to
determine and allocate appropriate  resources that will have the greatest impact
for the  members.  The QA/QI  Program is designed to meet and serve the needs of
employers,  members  and  providers  as  well  as  to  monitor  the  timeliness,
appropriateness and effectiveness of services via ongoing and systematic reviews
of key  indicators  and  aspects  of care.  The QA/QI  Program  conducts  member
satisfaction  surveys,  identifies  opportunities  for improvements in providing
care,  adopts  strategies to improve  outcomes and monitors the  improvement  to
report progress.









<PAGE> 9


MAMSI's QA/QI  Committee,  which  operates  under the direction and oversight of
MAMSI's  Board of  Directors,  includes  administrative,  clinical  and provider
representation.  The Committee  evaluates  numerous  quality  related issues and
outcomes measuring overall services provided to enrollees.

In addition,  MAMSI utilizes several cost control and quality review mechanisms.
Provider  applications  are  reviewed  by a  Credentials  Committee  in order to
determine  whether  the  applicant  meets  MAMSI's  criteria,   including  Board
Certification or eligibility.

MAMSI  maintains  a physician  review  process to  determine  whether the needed
levels of medical  service are being provided in a timely and efficient  manner.
The Company  conducts  medical  reviews to monitor the quality of care provided.
The Company  also  monitors the hospital  and  out-of-plan  referrals  issued by
primary care providers.

In most  situations,  prior  authorization  must be obtained  for  non-emergency
hospital  admissions.  Failure to secure prior  authorization  for non-emergency
hospital  admissions  of enrollees  may cause  claims to be denied,  and in some
situations,  providers may be sanctioned.  Prior to admission for  non-emergency
hospital  services,  MAMSI  applies  certain  medical  criteria to authorize the
admission.

After  admission  of an HMO  enrollee,  MAMSI  monitors  the course of  hospital
treatment and coordinates  discharge planning in the hope of preventing unneeded
use of medical  resources.  Although  the  Utilization  Management  staff is not
permitted to interfere with a physician's  medical judgment regarding the course
of treatment,  if the physician decides to extend an enrollee's stay beyond that
authorized,  the physician must provide medical  justification for the necessity
of such proposed action and obtain specific approval.

The HMOs have  established  a grievance  procedure  to respond to  enrollee  and
provider  complaints.  Enrollees  are  encouraged to use this  procedure  before
proceeding  further with a complaint.  Once this  procedure  is  exhausted,  any
unresolved  complaint or grievance may be settled by binding  arbitration rather
than through the courts.  There is a similar  grievance  procedure for physician
complaints.

In 1993, MAMSI invited the National Committee for Quality Assurance ("NCQA"),  a
private, non-profit organization,  to evaluate the Company's methodologies in an
effort to receive NCQA accreditation. NCQA accreditation is a voluntary process.
In the 1993  review,  the Company did not meet certain of NCQA's  criteria  and,
therefore,  did not receive  NCQA  accreditation.  In  response,  MAMSI  adopted
methodologies  and programs designed to respond to concerns and questions raised
in  NCQA's  assessment.  The  Company  requested  the  NCQA to  perform  another
accreditation  review which took place in December of 1996. In May,  1997,  NCQA
informed the Company that its flagship HMOs received one year accreditation. The
Company has  implemented  the Health Plan and Employer Data and  Information Set
("HEDIS") 3.0 which represents a core set of performance  measures  developed by
NCQA to serve the employer as a purchaser.  In  addition,  in October,  1997 the
Maryland  Health  Care  Access  and Cost  Commission  released  the  results  of
Maryland's first ever statewide HMO report card.  MAMSI's Maryland HMOs exceeded
the state wide average in overall  satisfaction,  accessibility and quality.  In
another  survey of member  satisfaction  taken by the U.S.  Office of  Personnel
Management,   federal  employees  expressed   satisfaction  with  the  Company's
federally qualified HMO.

The  Company's  home  health  care  and  home  infusion  subsidiaries  underwent
voluntary  accreditation  review by the Joint  Commission  on  Accreditation  of
Healthcare  Organizations  ("JCAHO") during 1995. Full accreditation  status was
awarded as a result of this process.

COMPETITION AND MARKETING STRATEGY

The  health  care  industry  is  characterized  by  intense  competition.  MAMSI
recognizes the possibility that other entities with greater  resources may enter
into competition with MAMSI






<PAGE> 10


in  the  future  by  either  entering  its  HMO  Service  Area  or by  designing
alternative health care delivery systems.  HMOs compete not only with other HMOs
and managed care  organizations such as provider  sponsored  organizations,  but
also with insurance companies that offer indemnity insurance products.

MAMSI's HMOs compete with  approximately  21 HMOs or other  prepaid  alternative
health care delivery  systems that have a presence in at least one of the cities
or counties in MAMSI's non expansion  service  areas.  The following  table sets
forth  MAMSI's best  estimate of 1997  enrollment  of HMOs  operating in its non
expansion HMO Service Areas. Certain of the HMOs are part of a larger entity and
the enrollees estimated herein include only those in MAMSI's HMO Service Area.

<TABLE>
<CAPTION>
                                                                        Approximate
                                                                           Number
HMO                                                Plan Type           of Enrollees
-------------                                      ---------           ------------
<S>                                                <C>                 <C>
Mid Atlantic Medical Services, Inc.* ..........          IPA              547,000
Kaiser Permanente Health Care Program .........        Group              518,000
NYLCARE of the Mid Atlantic....................          IPA              439,000
FreeState Health Plan** .......................          IPA              270,000
Trigon ........................................          IPA              261,000
Prudential Healthcare..........................          IPA              176,000
Optima/Sentara Health Plans....................    IPA/Staff              176,000
AETNA/U.S. Healthcare..........................          IPA              166,000
United Healthcare .............................          IPA               91,000
George Washington University Health Plan ......        Group               60,000
Southern Health Services (Coventry Corp.) .....          IPA               53,000
Capital Care***................................          IPA               72,000
CIGNA Health Plans ............................          IPA               70,000
Qualchoice ....................................          IPA               54,000
Other HMOs ....................................      Various              259,000

</TABLE>

* - Includes individuals covered by the Company's HMOs only.

** - This company is owned by Blue Cross/Blue Shield of Maryland.

*** - This company is owned by Blue  Cross/Blue  Shield of the National  Capital
Area.

MAMSI's  HMOs compete  with other HMOs and  insurance  companies on the basis of
price, network and range of services offered to enrollees.  PHP-MD competes with
the same entities and with other IPAs for physician  services.  PHP-MD  believes
that  its  capitation  payments  to PCPs  and the fee for  service  payments  to
specialists  are  competitive  with other HMOs.  MAMSI believes that the freedom
IPA-model  HMOs offer  their  enrollees  in  choosing  from a greater  number of
physicians  constitutes a competitive  advantage over group or staff model HMOs.
The ability to retain and attract enrollees will depend, in part, on how present
enrollees assess their benefit packages,  quality of service,  provider network,
rates and the HMOs' responsiveness to enrollee needs.

MAMSI subsidiaries employed  approximately 455 full-time individuals who provide
marketing  services for the Company's  products as of December 31, 1997. MAMSI's
marketing  strategy  includes  identifying  and contacting  employers in its HMO
Service  Area.  In addition,  the Company  employs  prospecting,  telemarketing,
employer group consultation,  referrals by consultants, and the use of a minimum
number of selected  brokers to acquire new accounts.  Since 1994,  the Company's
strategy  has  included  reducing  the use of  brokers  for new  business  while
increasing  its internal  sales  force.  New members  acquired by the  Company's
dedicated  sales force accounted for 48 percent of total large group new members
and 97 percent of total small group new members in 1997.






<PAGE> 11


RISK MANAGEMENT

With the  exception  of  certain  small  group  markets,  OCI uses  underwriting
criteria as a part of its risk management  efforts.  Underwriting is the process
of  analyzing  the risk of  enrolling  employer  groups in order to establish an
appropriate premium rate. Utilizing  underwriting  criteria,  OCI seeks to avoid
contracting  with employers that are likely to experience an actuarially  higher
than  expected need for medical care.  OCI's use of  underwriting  techniques is
restricted in certain  situations by state small group reform  legislation  (see
further discussion under "Government Regulation").

The  Company  maintains  professional,   directors  and  officers,   errors  and
omissions, general liability and property insurance coverage in amounts believed
to be  adequate.  The  Company  requires  participating  hospitals  to  maintain
professional  liability coverage and physicians to have malpractice insurance. A
professional  liability  insurance  policy  provides  coverage in the event that
legal  action is taken  against  any entity as a result of  medical  malpractice
committed by a physician.

In addition,  MAMSI's HMOs reduce the financial impact of catastrophic losses by
maintaining  reinsurance coverage for hospital costs. The reinsurer  indemnifies
80% of the  eligible in and out of service  area  medical  expenses in excess of
$200,000  per  enrollee  per year up to a  lifetime  maximum  of  $2,000,000  in
eligible medical costs.

Through June 30, 1996,  PHP-MD generally placed 5% to 15% of the payments due to
participating  physicians in a Claims Reserve Risk Pool. The Claims Reserve Risk
Pool constitutes a financial  risk-sharing  arrangement  among the participating
physicians  and  PHP-MD.  Amounts  held in the  Claims  Reserve  Risk  Pool were
distributed from time to time by PHP-MD to  participating  physicians if, in the
judgment of PHP-MD's Board of Directors,  PHP-MD's  financial  condition permits
such distribution.  Effective July 1, 1996, Maryland regulations  eliminated the
use of such risk pools by HMOs, therefore,  commencing on that date the majority
of PHP-MD  payments to physicians  are not reduced.  Amounts placed in such risk
pools, in jurisdictions  where it is still  permitted,  are minor. The following
table sets forth  information  regarding the portion of the amount in the Claims
Reserve  Risk Pool that was  distributed  to  participating  physicians  in each
calendar year.

                      Percentage
                     Distributed
Year                 to Providers
----                 ------------
1990                     16
1991                      5
1992                      4
1993                     59
1994                     58
1995                      4
1996                      0
1997                      0

GOVERNMENT REGULATION

MAMSI's HMOs are subject to state and, in some  instances,  Federal  regulation.
Among the areas regulated are: (i) premium rate setting; (ii) benefits provided;
(iii) marketing;  (iv) provider contracts; (v) quality assurance and utilization
review  programs;   (vi)  adherence  to  confidentiality   and  medical  records
requirements;  (vii) enrollment requirements;  and (viii) financial reserves and
other fiscal solvency requirements.









<PAGE> 12


Under  applicable  law,  HMOs  must  generally  provide  services  to  enrollees
substantially  on a fixed,  prepaid basis without regard to the actual degree of
utilization of services.  The Company  generally  fixes the premiums  charged to
employers  for a 12 month period and revises the premium with each  renewal.  In
setting  premiums,  the Company forecasts health care utilization rates based on
the relevant  demographics  and also  considers  competitive  conditions and the
average  number  of  enrollees  in the  employer  group.  In  addition  to these
premiums, enrollees also make copayments to providers as required.

Although premiums established may vary from account to account through composite
rate  factors and  special  treatment  of certain  broad  classes of  enrollees,
Federal regulations generally prohibit Federally qualified HMOs from traditional
experience  rating of accounts on a  retrospective  basis.  Consistent  with the
practices of other Federally qualified HMOs, M.D. IPA, in some situations, bases
the  premiums  it  charges  employers  in part on the  age,  sex and  geographic
location of the enrolled  employees.  M.D.  IPA  believes  that its premiums are
competitive  with other HMOs and health  insurers  and its health  coverage is a
better  value  for  members  because  of the  range of  physician  and  hospital
selection and other benefits provided.

M.D. IPA contracts with the Office of Personnel Management ("OPM") to provide or
arrange health  services  under the Federal  Employees  Health  Benefit  Program
("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.

MAMSI's HMOs must file periodic reports with, and are subject to periodic review
by,  state  regulatory  authorities.  Although  MAMSI's  HMOs are not  regulated
specifically as insurance companies, they must comply with certain provisions of
state  insurance  laws as well as other laws  specifically  enacted to  regulate
HMOs.

MAMSI Life, the Company's insurance subsidiary,  is domiciled in Maryland and is
licensed  in  over 30  states.  MAMSI  Life  is  subject  to  regulation  by the
department of insurance in each state in which it is licensed. These regulations
subject  MAMSI  Life  to  extensive  review  of the  terms,  administration  and
marketing  of  insurance  products  offered  and  minimum  net worth and deposit
requirements.  In addition,  MAMSI Life is required to file periodic reports and
is subject to periodic audits and continuing oversight.  The offering of certain
new insurance products may require the approval of regulatory agencies.

The Company's  home health care  operations  are regulated  principally  in four
areas:  home health care licensing;  certification  for participation in private
insurance and government reimbursement programs; employee licensure and training
requirements;  and Federal occupational safety guidelines.  The Company believes
that  it is  in  compliance  with  all  applicable  regulations,  which  include
possessing  the  required  Certificates  of Need in all  locations in which such
certificates are required.  Additionally,  the Company's infusion and mail order
prescription  businesses  have  obtained the  necessary  licenses and permits to
operate as a full service retail pharmacy.

MAMSI's  customers include employee health benefit plans subject to the Employee
Retirement Income Security Act of 1974 ("ERISA"). To the extent that the Company
has  discretionary  authority in the operation of these plans, the Company could
be considered a plan fiduciary  under ERISA.  Plan  fiduciaries  are barred from
engaging in various prohibited  transactions,  including self-dealing.  They are
also required to conduct the operations of employee  benefit plans in accordance
with each plan's terms.

Due to the  continued  increase in health care costs and the  inability  of many
individuals  to obtain health care  insurance,  numerous  proposals  relating to
health care reform have been made, and  additional  proposals may be introduced,
in the United States  Congress and the  legislatures  of the states in which the
Company operates or may seek to operate.






<PAGE> 13


Recently,  the "Health  Insurance  Portability and  Accountability  Act of 1996,
Public Law 104- 191", commonly called the Kennedy-Kassebaum Bill for its primary
sponsors,  was enacted.  This bill establishes certain Federal  requirements for
large group,  small group, and individual  health benefit plans, and applies not
only to insurers and HMOs but also to ERISA plans.

Kennedy-Kassebaum  is intended to make  coverage  more portable and available by
limiting  pre-existing  condition  requirements;  providing  special  enrollment
periods for  employees who lose other  coverage or whose family status  changes;
prohibiting group plans from denying an individual coverage or charging a higher
premium based on the individual's health status or history;  and by guaranteeing
coverage  availability  and  renewability in certain  circumstances in the small
group  and   individual   markets.   Kennedy-Kassebaum   also   allows  for  the
establishment  of Medical Savings  Accounts;  increases the penalties for health
care fraud and abuse;  and calls for  standardized  health care  information  in
order to reduce administrative costs.

The  effect of  Kennedy-Kassebaum  differs  from  state to  state.  In the group
market,  state laws remain in effect unless they prevent the  application of the
new federal requirements, and in the individual market, state laws govern if the
Health and Human Services Secretary  determines that they provide an "acceptable
alternative  mechanism"  to the  federal  requirement.  This means that in those
states,  like  Maryland,  where state  reforms have already  been  enacted,  the
legislation has little,  if any, effect in the small group market,  but may have
some effect in the individual  market.  In other states,  the  legislation has a
greater effect.

Most of the  provisions of  Kennedy-Kassebaum  took effect on July 1, 1997,  but
some, like the provisions  pertaining to Medical Savings  Accounts,  took effect
earlier and others, like administrative simplification, took effect later.

In recent years,  state  legislatures  in the  Company's  service area have been
active in health care  reform  legislation  targeted at the small group  market,
i.e., usually for groups of 2 to 50 employees. This small group reform is now in
place  in  Maryland,   Virginia,   Delaware  and  North  Carolina,  but  not  in
Pennsylvania,  Washington,  D.C. or West Virginia. Although different in many of
the details,  this type of legislation  generally requires all HMOs and insurers
that offer small  group  coverage  to accept all small  employers  who apply for
coverage  and  to  guarantee   coverage  to  their  employees  seeking  coverage
regardless of their health  status.  The  legislation  also requires  renewal of
these small  group  employer  plans,  limits rate  renewal  increases,  mandates
adjusted  community  rating and eliminates  pre-existing  condition  limitations
either  entirely  or  within a short  period of time,  usually  six  months.  In
addition,  many states have begun to legislate  certain  mandated  benefits like
minimum hospital length of stays and required coverages.

The Company believes that the current political environment in which it operates
will result in continued legislative scrutiny of health care reform and may lead
to  additional  legislative  initiatives.  The  Company is unable to predict the
ultimate  impact on the  Company of any  Federal or state  restructuring  of the
health care delivery or health care  financing  systems,  but such changes could
have a material adverse impact on the operations and financial  condition of the
Company.

The District of  Columbia,  which has not  previously  regulated  HMOs,  enacted
legislation  effective July 1, 1997,  providing for regulatory oversight similar
to that currently  provided by other states. The Company does not anticipate any
significant  negative  impact on its  operations  because of the new  regulatory
oversight in the District of Columbia.

PREFERRED PROVIDER ORGANIZATIONS

MAMSI  offers  PPO  coverage  through  two  subsidiaries:   Alliance  PPO,  Inc.
("Alliance") and Mid Atlantic Psychiatric Services, Inc. ("MAPSI").






<PAGE> 14


PPOs  allow  enrollees  to  receive  care  from   participating   physicians  at
contractually  negotiated  rates.  A PPO is different  from an HMO in that a PPO
does  not  assume  any  financial  risk  from  medical  utilization  nor does it
typically  process claims  payments to providers.  All medical  charges are paid
directly by the payor,  which can be a self-funded  employer,  a health benefits
trust  fund or another  health  insurance  company.  In return for access to the
PPO's  network,  the PPO  charges  the  payor  either a per  employee  rate or a
percentage of the savings of actual claims processed for the services  accessed.
MAMSI's  PPOs  provide  access to  substantially  the same  provider  network as
MAMSI's HMOs.

A PPO operates by being incorporated into an employer's current benefit program,
and offers  some or all of the  following:  access to  physician,  hospital  and
facility  services;  utilization  management and quality  assurance;  and claims
screening and repricing.  The employer  determines the level of the benefits and
any applicable copayments.

Alliance is marketed  primarily to and through  insurance  companies,  insurance
brokers,   consultants,   third  party  administrators  ("TPAs"),   self-insured
employers and union  trusts.  The  advantages  of a TPA  marketing  approach are
minimized  marketing  costs and maximized  market coverage  through  established
TPA-employer  relationships.  Alliance also works  directly  with  employers and
unions  that are  self-insured  and uses  direct  marketing  efforts.  The major
competition comes from other PPOs and individual insurance carriers. At December
31, 1997, Alliance had contracts with approximately  20,900 employer groups that
had access to the entire IPA provider network.

The MAPSI PPO is  comprised  of  providers  specializing  in mental  health  and
substance  abuse  care.   MAPSI's  products  are  marketed   directly  to  TPAs,
self-insured groups, brokers,  indemnity plans, union funds and consultants.  In
addition,  MAPSI  contracts with indemnity  insurers that want to offer groups a
managed  care  mental  health  product.  MAPSI  believes  it  has a  competitive
advantage  with its unique  mental  health  screening  process  that  offers the
employer the benefit of enhanced coordinated  treatment for employees as well as
increased  cost savings.  MAPSI's  major  competitors  include Merit  Behavioral
Health,  Inc.,  Green  Spring  Mental  Health and MCC Inc. At December 31, 1997,
MAPSI  had  a   provider   network   of   approximately   4,000   psychiatrists,
psychologists,  social  workers,  and other  affiliated  licensed  mental health
providers.

Alliance and MAPSI are most often marketed jointly and the prospective purchaser
usually also purchases the MAPSI PPO if the Alliance PPO is purchased. The total
number of lives  covered  under one or both of these PPO products as of December
31, 1997 was approximately 1,006,000.

PPOs are not subject to HMO  regulations by virtue of their  business.  However,
PPOs are subject to certain  state  regulations  governing  the provision of PPO
services such as mandatory state  registration.  It is possible that PPOs may be
subject to increased regulatory oversight in the future.

OTHER PRODUCTS

MAMSI Life currently  underwrites the indemnity  coverage of the HMO's preferred
plans in addition to offering stand-alone indemnity health and dental insurance,
aggregate and specific stop loss insurance for  self-insured  groups,  and group
life,  accidental death and short-term disability policies. In addition, in 1995
MAMSI Life began  providing an  administrative  services only ("ASO") product to
the State of  Maryland.  ASO  business  consists of  allowing  access to MAMSI's
provider network,  without gatekeeper PCPs, and the payment of claims. MAMSI has
no insurance risk on this product.  MAMSI Life holds insurance  licenses in over
30 jurisdictions  including Maryland,  Virginia, the District of Columbia,  West
Virginia,  Delaware  and North  Carolina.  MAMSI Life also  became  licensed  in
Pennsylvania in 1995.








<PAGE> 15


In October,  1994,  MAMSI acquired all of the outstanding  stock of HomeCall and
its wholly owned subsidiary,  FirstCall,  Inc. ("FirstCall"),  for approximately
$10 million, including direct expenses.  HomeCall is a state licensed,  Medicare
certified home health agency. The combined  operations of HomeCall and FirstCall
include 17 branch  locations that serve virtually all of Maryland,  the District
of Columbia, Northern Virginia and the Panhandle area of West Virginia. HomeCall
achieved  full  accreditation  from the Joint  Commission  of  Accreditation  of
Healthcare  Organizations  ("JCAHO"),  following  its survey of all  services in
November, 1995.

Also during 1994, the Company formed a home infusion services company,  HomeCall
Pharmaceutical  Services, Inc. ("HCPS"),  which received its pharmacy license in
1994 and its Federal license from the Drug Enforcement Agency in 1995.

HomeCall,  FirstCall and HCPS provide  services  that are  generally  lower cost
alternatives to  institutional  treatment and care. The Company believes that it
will  provide  better  care to its  members  and  reduce  its  medical  costs by
substituting,  where  medically  appropriate,  in- home  medical  treatment  for
treatment in an institutional setting.

Medical  services  provided by  HomeCall,  FirstCall  and HCPS  include  skilled
nursing,  advanced  nursing  in  support of  infusion  therapy,  maternal/infant
nursing,  physical,  speech  and  occupational  therapy,  medical  social  work,
nutrition  consultation  and home health care aides.  Services  provided by HCPS
include a comprehensive range of in home drug infusion  therapies,  the delivery
of infusion ready drugs for physician office based infusion therapy,  mail order
pharmacy (as described below) and some hospice (as described below).

In April,  1996,  HCPS started a mail-order  pharmacy,  HomeCall  Mail Rx, which
received its pharmacy license and its Federal license in 1996.  HomeCall Mail Rx
fills and delivers  prescription oral medications via common carrier to patients
in their homes. Approximately 12,000 prescriptions are filled each month.

In  November,   1996,  the  Company  started  HomeCall  Hospice  Services,  Inc.
("Hospice"),  which  received  its Maryland  state  license to operate a general
hospice care program on December 3, 1996. Based in Columbia,  Maryland,  Hospice
was  organized  to  address  the  needs of  terminally  ill  patients  and their
families.  This  hospice  program will provide  services to  individuals  in the
comfort of their homes.

Hospice currently serves the Baltimore and Washington,  D.C. metropolitan areas.
It is  the  goal  of  Hospice  to  extend  its  service  delivery  area  to  all
geographical areas served by MAMSI. The addition of hospice services complements
MAMSI's other home care products by having a full range of services available to
its members.

In  addition  to  providing  in-home  medical  care  to the  Company's  members,
HomeCall, FirstCall, Hospice and HCPS will continue to provide services to other
payors, including insurance companies, other HMOs and individuals.

The Company also has an equity interest in an ambulatory  surgery center located
in Rockville,  Maryland.  The surgery  center  conducts  outpatient  surgery and
services to HMO enrollees and other patients.







<PAGE> 16


A summary of MAMSI's membership enrollment in all product lines is as follows:

<TABLE>
<CAPTION>
                                MEMBERSHIP DATA AT DECEMBER 31
                               ---------------------------------
PRODUCT LINE                     1995        1996        1997
------------                   ---------------------------------
                                         (in thousands)
<S>                            <C>         <C>          <C>
Commercial HMO (1)               430.1       430.8        398.1
Hybrid HMO (2)                    94.5       106.7        103.5
Medicaid                          91.0        82.5         34.0
Medicare                           6.0        14.4         11.2
Indemnity                         23.6        99.2        132.7
ASO (3)                           13.2        11.0         11.0
                               -------     -------      -------
                                 658.4       744.6        690.5
PPO (4)                          825.0       935.0      1,006.0
                               -------     -------      -------
Total Membership               1,483.4     1,679.6      1,696.5
                               =======     =======     ========
</TABLE>

(1) Commercial HMO includes traditional HMO and point-of-service members.

(2) Hybrid HMO includes any business  that uses MAMSI's  network and  gatekeeper
PCPs, utilization management services,  claims adjudication and payment services
and that has a self-funded component. Generally, these products include specific
and/or aggregate stop loss provisions.

(3) ASO includes  administrative  services only business without gatekeeper PCPs
and no assumption of insurance risk by any MAMSI affiliate.

(4) PPO  includes  all business  whereby  access is granted to MAMSI's  provider
network.  MAMSI assumes no risk and does not provide claims payment  services on
this business.

INVESTMENTS

The  majority  of the  Company's  investments  are held by its  state  regulated
subsidiaries  to  provide  capital  for those  subsidiaries'  operations  and to
satisfy capital,  surplus and deposit requirements of the HMO and insurance laws
of the various  states in which the Company is licensed.  HMO and insurance laws
generally  protect  consumers of insurance  products  with one of the  principal
focuses being on financial  solvency of the companies that underwrite  insurance
risk. These laws and regulations limit the types of investments that can be made
by the regulated  entities with appropriate  investments  being deemed "admitted
assets."  Admitted  assets are those assets that can be used to fulfill  capital
and surplus  requirements.  The Company's  current  investment  policy generally
prohibits  investments  that would be  "non-admitted"  for  statutory  reporting
purposes. The Company has no investments in derivative financial instruments and
has no current intention of owning such investments.

EMPLOYEES

As of December 31, 1997, the Company had a total of 2,639  employees,  including
2,041  full-time  and  598  part-time   employees.   MAMSI's  home  health  care
subsidiaries  employed 733 of these  employees (284 on a full-time basis and 449
on a  part-time  basis).  None  of the  Company's  employees  are  covered  by a
collective  bargaining  agreement and the Company has not  experienced  any work
stoppage  since  its  inception.  The  Company  believes  that  it  has  a  good
relationship with its employees.









<PAGE> 17


ITEM 2. PROPERTIES

To  accommodate  the  Company's  rapid growth,  the Company has purchased  seven
office  buildings  since 1988.  These  buildings  are located in  Rockville  and
Frederick,  Maryland and total  approximately  453,000 square feet of office and
warehouse  space.  The  Company's  headquarters  is  located  at 4  Taft  Court,
Rockville, Maryland 20850.

In addition,  the Company  leases  approximately  163,000  square feet of office
space  and  approximately  5,200  square  feet of  warehouse  space  in  various
locations  within  its  service  areas  to  support  sales  and   administrative
operations.

During 1997, the Company purchased an office building in Frederick,  Maryland in
order to consolidate  existing office space needs and plan for future growth. As
a result,  the  Company  intends to sell and is  actively  marketing  two office
buildings it currently owns.

ITEM 3. LEGAL PROCEEDINGS

The Company has been named as the  defendant in a suit filed by certain  medical
providers  on March  26,  1997 in the  Circuit  Court for Anne  Arundel  County,
Maryland,  which  alleges  that  the  Company  improperly  reduced  payments  to
participating  providers  in the  form  of  "withhold".  It is  the  plaintiffs'
allegation that certain payments should not have been reduced in this manner and
seek unspecified  damages.  This matter has been filed as a class action against
the Company.  On August 18, 1997,  the court stayed  further  proceedings in the
litigation pending  plaintiff's pursuit of arbitration as provided for under the
contract.

The Company is involved in other  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 that any
ultimate liability that could arise from these other actions will not materially
affect the Company's consolidated financial position or results of operations.

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

There were no matters  submitted for  shareholder  vote in the fourth quarter of
1997.








<PAGE> 18


                                PART II

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

The Company's  common stock is currently  listed on The New York Stock Exchange,
Inc.  ("NYSE") under the trading symbol MME. The following  table sets forth for
the indicated  periods the high and low reported sale prices of the common stock
as furnished by the NYSE.

                                     1997                     1996
                              -----------------        -----------------
                               HIGH        LOW          HIGH        LOW
                              -----------------        -----------------
First Quarter                 $15.25     $10.75        $24.38     $20.38
Second Quarter                 15.56      10.25         24.00      14.25
Third Quarter                  17.00      13.88         14.75      11.75
Fourth Quarter                 16.75      10.81         13.38      10.13

The Company has never paid any cash  dividends on its common stock and presently
anticipates  that no cash dividends will be declared in the foreseeable  future.
Any dividends  will depend on future  earnings,  the financial  condition of the
Company and regulatory  requirements.  See Note 13 to the Consolidated Financial
Statements.

As of February 27, 1998, there were  approximately 765 stockholders of record of
the Company's common stock.







<PAGE> 19


ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                              1997          1996           1995           1994           1993
                                           ----------    ----------     ----------     ----------     ----------
                                             (in thousands except share amounts, key ratios and operating data)

<S>                                        <C>           <C>            <C>            <C>            <C>
SELECTED INCOME STATEMENT DATA

Revenue                                    $1,111,653    $1,133,742     $  954,907     $  749,898     $  648,225
Expense                                     1,090,213     1,138,677        858,567        663,343        605,779
Income (loss) before income taxes and
  cumulative effect of accounting change       21,440        (4,935)        96,340         86,555         42,446
Income (loss) before cumulative effect
  of accounting change                         14,489        (2,768)        61,124         54,530         25,496
Net income (loss)                              14,489        (2,768)        61,124         54,530         24,833
Earnings (loss) per common share (1):
Basic
  Income (loss) before cumulative effect
  of accounting change                          $0.31        ($0.06)         $1.33          $1.21          $0.58
  Net income (loss)                             $0.31        ($0.06)         $1.33          $1.21          $0.57
Diluted
  Income (loss) before cumulative effect
  of accounting change                          $0.31        ($0.06)         $1.28          $1.15          $0.57
  Net income (loss)                             $0.31        ($0.06)         $1.28          $1.15          $0.55
Weighted Average Shares
  Basic                                    46,273,484    45,978,864     46,127,112     45,030,113     43,607,402
  Diluted                                  46,885,666    45,978,864     47,908,379     47,370,211     45,109,230
Dividends                                       ---           ---            ---            ---            ---

SELECTED BALANCE SHEET DATA (AT DECEMBER 31)

Working capital                               128,065       118,870        153,668         91,983         39,758
Total assets                                  342,823       334,719        354,182        268,522        189,561
Long-term debt                                     74           134            194          5,331          5,763
Stockholders' equity                          208,307       184,400        217,216        141,326         71,963
Cash dividends per common share (2)             ---           ---            ---            ---            ---
KEY RATIOS
Medical loss ratio                               89.4%         92.4%          81.9%          80.8%          86.3%
Administrative expense ratio                     11.7%         10.7%          10.5%           9.4%           8.3%
Net income margin                                 1.3%          (.2%)          6.4%           7.3%           3.9%
OPERATING DATA
Annualized hospital days per
  1,000 enrollees:
All products and health services                  297           331            313            312            321
HMO only (3)                                      192           203            222            238            251
Medicare                                        2,566         2,698          2,531            ---            ---
Medicaid                                          552           454            405            466            ---
Annualized hospital admissions per
  1,000 enrollees                                  78            77             80             76             69
HMO, hybrid, ASO and indemnity
  health enrollees at year end                691,000       745,000        658,000        508,000        440,000
PPO enrollees at year end                   1,006,000       935,000        825,000        698,000        510,000
Participating providers at year end            28,400        24,300         21,077         16,950         15,500
</TABLE>

Notes

1.  Earnings  (loss)  per  common  share have been  adjusted  to  reflect  stock
dividends on a retroactive basis and to reflect adoption of Financial Accounting
Standards No. 128. All previously  reported earnings per share amounts have been
restated  to  reflect  the  adoption  of  this  statement.  See  Note  1 to  the
Consolidated Financial Statements.

2. MAMSI has not declared or paid cash dividends on its common stock.

3. Days are presented exclusive of skilled nursing,  neonatal intensive care and
psychiatric inpatient care.







<PAGE> 20


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

FORWARD-LOOKING INFORMATION

All forward-looking  information  contained in this Management's  Discussion and
Analysis  of  Financial   Condition  and  Results  of  Operations  is  based  on
management's  current knowledge of factors  affecting MAMSI's business.  MAMSI's
actual  results  may  differ  materially  if these  assumptions  prove  invalid.
Significant risk factors, while not all-inclusive, are:

1. The  possibility  of increasing  price  competition  in the Company's  market
place.

2. The  possibility  of state or Federal  budget  related  mandates  that reduce
premiums for Medicaid or Medicare recipients.

3.  The potential for increased medical expenses due to: - Increased utilization
    by the  Company's  membership.  - Inflation in provider  and  pharmaceutical
    costs.
    - Federal or state  mandates that  increase  benefits or limit the Company's
      oversight ability.

4. The possibility that the Company is not able to expand its service  territory
as  planned  due  to  regulatory   delays  and/or  inability  to  contract  with
appropriate providers.

5. The possibility  that the Company is not able to increase its market share at
the anticipated premium rates.

GENERAL

During the three year period ended  December 31, 1997,  the Company  experienced
rapid expansion through 1996,  followed by a year of relative  stability.  While
membership in certain products  continues to grow, others have shown substantial
decreases  when compared with 1996. The Company has achieved its overall size by
continually  expanding its product lines which include  point-of-service,  small
group, indemnity health, hybrid products, Medicaid and Medicare, group term-life
and through  expansion  into new geographic  markets.  Premium rates during this
time have remained at or near competitive levels for the Company's market place.
During 1997, the Company's  consolidated  operating margin showed a profit after
being slightly  negative in 1996. The Company achieved 1997's results,  in part,
by implementing  product price increases and reducing  membership in products or
effectively   terminating   groups  that  had  the   potential   for   continued
unprofitability.  The  Company  anticipates  that it will  continue  to increase
premium  rates  during  1998.   This  is  a   forward-looking   statement.   See
"Forward-Looking Information" above for a description of those risk factors.

The Company generally receives a fixed premium amount per member per month while
the majority of medical  expenses are  variable  and  significantly  affected by
spontaneous member utilization. Even with managed care controls, unusual medical
conditions  can occur,  such as an outbreak of influenza or a higher than normal
incidence of high cost cases (such as premature births,  complex  surgeries,  or
rare diseases).  As a result, the Company's  quarterly results can be materially
effected and irregular.  However,  over the longer business  cycle,  the Company
believes that its managed care control  systems,  underwriting  procedures (when
allowed) and network of providers will result in continued profitability.

Due to the  continued  escalation of health care costs and the inability of many
individuals  to obtain health care  insurance,  numerous  proposals  relating to
health care reform have been made, and  additional  proposals may be introduced,
in the United States  Congress and the  legislatures  of the states in which the
Company operates or may seek to operate.







<PAGE> 21


Recently,  the "Health  Insurance  Portability and  Accountability  Act of 1996,
Public Law 104- 191", commonly called the Kennedy-Kassebaum Bill for its primary
sponsors,  was enacted.  This bill establishes certain Federal  requirements for
large group,  small group, and individual  health benefit plans, and applies not
only to insurers and HMOs but also to ERISA plans.

Kennedy-Kassebaum  is intended to make  coverage  more portable and available by
limiting  pre-existing  condition  requirements;  providing  special  enrollment
periods for  employees who lose other  coverage or whose family status  changes;
prohibiting group plans from denying an individual coverage or charging a higher
premium based on the individual's health status or history;  and by guaranteeing
coverage  availability  and  renewability in certain  circumstances in the small
group  and   individual   markets.   Kennedy-Kassebaum   also   allows  for  the
establishment  of Medical Savings  Accounts,  increases the penalties for health
care fraud and abuse,  and calls for  standardized  health care  information  in
order to reduce administrative costs.

The  effect of  Kennedy-Kassebaum  differs  from  state to  state.  In the group
market,  state laws remain in effect unless they prevent the  application of the
new federal requirements, and in the individual market, state laws govern if the
Health and Human Services  Secretary  determines that it provides an "acceptable
alternative  mechanism"  to the  federal  requirement.  This means that in those
states like  Maryland,  where state  reforms  have  already  been  enacted,  the
legislation has little,  if any, effect in the small group market,  but may have
some effect on the  individual  market.  In other states,  the  legislation  has
greater effect.

Most of the  provisions of  Kennedy-Kassebaum  took effect on July 1, 1997,  but
some, like the provisions  pertaining to Medical Savings  Accounts,  took effect
earlier and some, like administrative simplification, take effect later.

In recent years,  state  legislatures  in the  Company's  service area have been
active in health care  reform  legislation  targeted at the small group  market,
i.e., usually for groups of 2 to 50 employees. This small group reform is now in
place  in  Maryland,   Virginia,   Delaware  and  North  Carolina,  but  not  in
Pennsylvania,  Washington,  D.C. or West Virginia. Although different in many of
the details,  this type of legislation  generally requires all HMOs and insurers
that offer small  group  coverage  to accept all small  employers  who apply for
coverage  and  to  guarantee   coverage  to  their  employees  seeking  coverage
regardless of their health  status.  The  legislation  also requires  renewal of
these small  group  employer  plans,  limits rate  renewal  increases,  mandates
adjusted  community  rating and eliminates  pre-existing  condition  limitations
either  entirely  or  within a short  period of time,  usually  six  months.  In
addition,  many states have begun to legislate  certain  mandated  benefits like
minimum hospital length of stays and required coverages.

The Company believes that the current political environment in which it operates
will result in continued legislative scrutiny of health care reform and may lead
to  additional  legislative  initiatives.  The  Company is unable to predict the
ultimate  impact upon the Company of any Federal or state  restructuring  of the
health care delivery or health care  financing  systems,  but such changes could
have a material adverse impact on the operations and financial  condition of the
Company.


The District of  Columbia,  which has not  previously  regulated  HMOs,  enacted
legislation effective July 1, 1997 providing for regulatory oversight similar to
that  currently  provided by other states.  The Company does not  anticipate any
significant  negative  impact on its  operations  because of the new  regulatory
oversight in the District of Columbia.

-----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------------







<PAGE> 22


RESULTS OF OPERATIONS

Consolidated  net income (loss) of the Company was $14,489,000 and  $(2,768,000)
in 1997 and 1996,  respectively.  Net earnings (loss) per share was $.31 in 1997
as  compared  to  $(.06)  in  1996.   The  increase  in  earnings  is  primarily
attributable  to a decrease in the medical  loss ratio for  commercial  products
which was slightly  offset by an increase in the  administrative  expense ratio.
The medical loss ratio  decreased  principally  due to increased  efforts by the
Company to control  medical costs through  utilization  review,  enhanced  claim
adjudication,  and  increased  claims audit and claims  reversal  activity.  The
Company  has  priced  its  products  competitively  in  order  to  increase  its
membership base and thereby enhance its strategic  position in its market place.
The Company  currently  has one of the largest HMO and managed care  enrollments
and also the  largest  network of  contract  providers  of  medical  care in its
service area (which  includes the entire  states of Maryland and  Delaware,  the
District of Columbia,  most counties and cities in Virginia and certain areas of
West Virginia, North Carolina and Pennsylvania).

Revenue for the year ended  December  31,  1997  decreased  approximately  $22.1
million or 2.0 percent  over the year ended  December  31,  1996.  A 4.4 percent
decrease in net average HMO and indemnity  enrollment  resulted in a decrease of
approximately  $47.5  million  in health  premium  revenue  while a 2.0  percent
increase in the average monthly premium per enrollee, combined for all products,
resulted in a $20.2 million increase in health premium revenue. The net decrease
in  revenue is mainly  related to the  Company's  withdrawal  from the  Maryland
Medicaid program and from certain areas of the Virginia  Medicaid program due to
inadequate  premiums paid by the states.  Management  believes  that  commercial
health  premiums  should  increase  over the next  twelve  months as the Company
increases its commercial  membership and as new and renewing  groups are charged
higher premium rates due to  legislatively  mandated  benefit  enhancements  and
general price increases initiated by the Company. Effective January 1, 1998, the
Company has modified its Medicare product  offering.  This  modification has the
potential to significantly  reduce the Company's Medicare membership and related
premium  revenue.  This is a  forward-looking  statement.  See "Forward  Looking
Information"  above for a description of the risk factors that may effect health
premiums per member.

The Company has implemented  increased  premium rates across  essentially all of
its  commercial  products  which  began to take  effect  in July,  1996.  As the
Company's  contracts  are  generally  for a one year period,  increased  pricing
cannot be initiated until a contract reaches its renewal date. Therefore,  price
increases  cannot be made  across  the  Company's  membership  at the same time.
Additionally,  the  Company  received  an  approximate  5 percent  premium  rate
increase in its Virginia Medicaid program effective July 1, 1997, an approximate
8 percent premium rate decrease in its North Carolina Medicaid program effective
August 1, 1997,  and an  approximate  2 percent  premium  rate  increase  in its
Medicare  program,  effective  January 1,  1998.  Management  believes  that the
commercial  premium rate  increases may have the effect of slowing the Company's
future  membership growth as compared to membership growth in 1994 through 1996.
In addition,  management  reevaluated premium reimbursement rates with regard to
its  Medicare  and  Medicaid  participation  and reduced or  eliminated  certain
service areas.  Specifically,  effective January 1, 1997, 59 counties and cities
were eliminated from the Company's  Medicare service area.  Effective January 1,
1998,  the Company again reduced its Medicare  service  area,  modified  certain
benefits  and began  charging  an  additional  premium  in certain  areas.  Also
effective  January  1,  1997,  the  Company  discontinued  participation  in the
mandated  portion  of  the  Virginia  Medicaid  program  which  serves  Medicaid
eligibles  in the  Tidewater  area of  Virginia.  In  addition,  the Company has
withdrawn  from the  Maryland  Medicaid  program  due to changes to premium  and
benefit  levels and other  requirements  made by the State of Maryland  after it
obtained  an 1115  waiver and became a mandated  state.  As the  Company was the
largest provider of managed care Medicaid in Maryland,  the Company continued to
provide  services  in 1997 until an orderly  transition  was  accomplished.  The
Company was compensated  during the transition  period at a rate higher than the
mandated  program allows but lower than historical  reimbursement.  In 1996, the
Company became  licensed to serve  portions of the Medicaid  populations in West
Virginia and North Carolina. The Company's






<PAGE> 23


future  membership  growth depends on several  factors such as relative  premium
prices and product availability,  future increases or decreases in the Company's
service area, increased competition in the Company's service area and changes in
state  mandated  enrollment  in  Medicaid  HMO  programs  in which  the  Company
participates.  Enrollment  may also  decrease  if the  Company  determines  that
premium  reimbursement  rates  related to certain  state  Medicaid  programs are
inadequate,   which  would  cause  the  Company  to  voluntarily  withdraw  from
participation.   As  previously  described,   this  determination  was  made  in
connection with the Maryland  Medicaid program and part of the Virginia Medicaid
program.

Service revenue from non-MAMSI  affiliated entities earned by the Company's home
health  care  subsidiaries  contributed  $21.0  million  in  revenue  in 1997 as
compared to $20.5  million in 1996.  This  increase is the result of  increasing
business volume for these subsidiaries,  particularly in the home infusion area,
which is  largely  offset  by an  increasing  relative  percentage  of  business
conducted  for  MAMSI  HMO  and   indemnity   members  which  is  eliminated  in
consolidation.  Revenue from life and short-term disability products contributed
$5.3 million in 1997 as compared to $3.2 million in 1996.

In 1993, MAMSI invited the National Committee for Quality Assurance ("NCQA"),  a
private, non-profit organization,  to evaluate the Company's methodologies in an
effort to receive NCQA accreditation. NCQA accreditation is a voluntary process.
In the 1993  review,  the Company did not meet certain of NCQA's  criteria  and,
therefore,  did not receive  NCQA  accreditation.  In  response,  MAMSI  adopted
methodologies  and programs designed to respond to concerns and questions raised
in  NCQA's  assessment.  The  Company  requested  the  NCQA to  perform  another
accreditation  review which took place in December of 1996. In May,  1997,  NCQA
informed the Company that its flagship HMOs received one year accreditation. The
Company has  implemented  the Health Plan and Employer Data and  Information Set
("HEDIS") 3.0 which represents a core set of performance  measures  developed by
NCQA to serve the employer as a purchaser.  In  addition,  in October,  1997 the
Maryland  Health  Care  Access  and Cost  Commission  released  the  results  of
Maryland's first ever statewide HMO report card.  MAMSI's Maryland HMOs exceeded
the state wide average in overall  satisfaction,  accessibility and quality.  In
another  survey of member  satisfaction  taken by the U.S.  Office of  Personnel
Management,   federal  employees  expressed   satisfaction  with  the  Company's
federally qualified HMO.

Medical  expenses as a  percentage  of health  premium  revenue  ("medical  loss
ratio")  decreased to 89.4 percent for 1997 as compared to 92.4 percent for 1996
and, on a per member per month basis,  medical  expenses  decreased 1.4 percent.
This decrease is due to a combination of factors including continuing efforts by
the Company to implement  product specific cost containment  controls,  expanded
activity  in  specialized  subrogation  areas and claims  review for dual health
coverage,  the adoption of  regionalized  and product  specific fee maximums for
health  services,  and the  identification  and possible  termination of certain
providers  and  specialists  from the  delivery  network  following a continuing
intensified  peer  review  analysis.  In  addition,  during  1997,  the  Company
identified certain claims which had been overpaid and recorded as a reduction of
medical expenses  approximately $12 million relating to claims incurred and paid
in 1996.  The  Company  believes  that it has taken the  appropriate  action and
implemented  appropriate  controls to ensure that future  claims are paid at the
appropriate  amounts although the complexity of paying claims and the increasing
sophistication of providers  requires constant  evaluation of historical payment
patterns which might indicate improper payments.  Additionally,  the Company has
greatly  expanded its initial health  assessments of new Medicare  members after
they have enrolled and has also increased its case management  personnel.  These
initiatives  should  help to control  the  Company's  medical  loss  ratio.  The
statements in the preceding  paragraphs regarding future utilization rates, cost
containment  initiatives,  total  medical  costs and future  increases in health
premiums  per  member  are  forward-looking   statements.  See  "Forward-Looking
Information"  above for a  description  of risk factors that may affect  medical
expenses per member and the medical loss ratio.









<PAGE> 24


The administrative  expense ratio for 1997 increased to 11.7 percent as compared
to 10.7 percent for 1996.  This increase is due primarily to increased  salaries
and  expenses  in  certain  administrative  areas  of  the  Company,   including
utilization management,  claims audit, and customer service departments, as well
as reduced revenue.  Management  believes that the administrative  expense ratio
will remain near the current level over the next year. Management's expectations
concerning the administrative expense ratio are forward-looking  statements. The
administrative  expense  ratio is  affected  by changes in health  premiums  per
member,   development   of  the   Company's   expansion   areas  and   increased
administrative activity related to business volume.

The net margin rate  increased from (.2) percent in 1996 to 1.3 percent in 1997.
This increase is primarily due to the decrease in the medical loss ratio.

-----------------------------------------------------------------------------
THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------------

RESULTS OF OPERATIONS

Consolidated  net income (loss) of the Company was  $(2,768,000) and $61,124,000
in 1996 and 1995, respectively. Diluted net earnings (loss) per share was $(.06)
in 1996 as compared to $1.28 in 1995.  The  reduction  in earnings is  primarily
attributable to a significant  increase in the medical loss ratio for commercial
products, continuing losses in the Company's Medicare product and lower earnings
from  the  Company's  Medicaid  products.   The  medical  loss  ratio  increased
principally due to increased member utilization.

Revenue for the year ended  December  31, 1996  increased  approximately  $178.8
million or 18.7  percent  over the year ended  December  31,  1995. A 19 percent
increase in net average HMO and indemnity  enrollment resulted in an increase of
approximately $171.5 million in health premium revenue while the average monthly
premium per enrollee,  combined for all  products,  remained  approximately  the
same.

Service revenue from non-MAMSI  affiliated entities earned by the Company's home
health  care  subsidiaries  contributed  $20.5  million  in  revenue  in 1996 as
compared to $18.9  million for 1995.  This  increase is the result of increasing
business volume for these subsidiaries,  particularly in the home infusion area,
which is  largely  offset  by an  increasing  relative  percentage  of  business
conducted  for  MAMSI  HMO  and   indemnity   members  which  is  eliminated  in
consolidation.  Revenue from life and short-term disability products contributed
$3.2 million in 1996 as compared to $1.0 million in 1995.

Medical  expenses as a  percentage  of health  premium  revenue  ("medical  loss
ratio")  increased  to 92.4 percent in 1996 as compared to 81.9 percent for 1995
and, on a per member per month basis,  medical expenses  increased 12.8 percent.
This  significant  increase is due to a combination of factors  including  lower
commercial  premiums  charged due to  competitive  forces,  higher than expected
utilization by commercial members, cost increases due to legislatively  mandated
benefits and extremely high medical expenses  related to the Company's  Medicare
enrollment.

The  administrative  expense ratio for 1996  increased to 10.7 percent from 10.5
percent in 1995.  This  increase is due  primarily  to  increased  salaries  and
expenses in certain  administrative areas of the Company,  including utilization
management  and  customer  service  departments,  as  well as  additional  sales
expenses in new expansion areas in 1996.

Investment  income  increased  $2.4  million or 20 percent  primarily  due to an
increase  of $1.5  million  in  realized  gains on sales  of  marketable  equity
securities.








<PAGE> 25


The net margin rate  decreased from 6.4 percent in 1995 to (.2) percent in 1996.
This decrease is primarily due to the increase in the medical loss ratio.

LIQUIDITY AND CAPITAL RESOURCES

The  Company's  business  is not  capital  intensive  and  the  majority  of the
Company's  expenses are payments to health care providers,  which generally vary
in direct  proportion to the health  premium  revenues  received by the Company.
Although  medical  utilization  rates  vary by  season,  the  payments  for such
expenses  lag behind cash inflow  from  premiums  because of the lag in provider
billing  procedures.  In the past, the Company's cash requirements have been met
principally  from operating  cash flow and it is  anticipated  that this source,
coupled with the Company's  operating line of credit,  will be sufficient in the
future.

Accounts  receivable  increased from $77.0 million at December 31, 1996 to $84.7
million at December 31, 1997.  This $7.7  million  increase is primarily  due to
amounts  due  from the  Federal  government  related  to the  Company's  Federal
Employees Health Benefit Program participation.

Prepaid expenses, advances and other current assets decreased from $32.3 million
at December 31, 1996 to $19.3 million at December 31, 1997,  principally  due to
the receipt of 1996 tax refunds for net  operating  loss  carrybacks.  Statutory
deposits  increased  from $9.1 million at December 31, 1996 to $14.9  million at
December 31, 1997 due to the increase in state  regulatory  deposits  related to
certain of the Company's regulated subsidiaries.

Property  and  equipment  increased  from $45.2  million at December 31, 1996 to
$57.0 million at December 31, 1997 due to the purchase of a new office  building
for  existing  and future  office  space  needs as well as the  replacement  and
upgrade of certain of the Company's computer equipment.

Short-term  investments are marked to market at the end of every quarter and the
resulting  unrealized  gain or loss is  reflected  in the  ending  stockholders'
equity balance. Accordingly,  stockholders' equity at December 31, 1997 reflects
an  unrealized  gain of $.9  million,  net of tax, on the  Company's  short-term
investments.

Medical  claims  payable  decreased  from $118.7 million at December 31, 1996 to
$98.3  million at  December  31, 1997  primarily  due to  decreased  membership,
decreased member utilization and related claims accruals and reversals of claims
previously paid.

Additional paid-in capital decreased from $173.3 million at December 31, 1996 to
$162.9  million  at  December  31,  1997,  principally  due to  activity  in the
Company's stock compensation  trust. This trust is used to provide shares of the
Company's stock to meet its stock option plan obligations.

Deferred tax assets are recognized for deductible temporary differences that, in
management's  opinion, are more likely than not to be realized in the current or
future periods.  The Company's  history of operating  revenue and income growth,
and expectation of future operating  income,  provides strong positive  evidence
that these deferred tax assets will be realized.  A valuation allowance has been
recorded for net operating loss carryforwards  generated by certain subsidiaries
that are not  deductible on a  consolidated  tax return.  Management  intends to
continue to monitor the  realizability of deferred tax assets in light of future
circumstances and assess the reasonableness of the valuation allowance.

The Company  currently has access to total revolving credit  facilities of $24.0
million,  which is used to provide short-term capital resources for routine cash
flow  fluctuations.  At December 31, 1997,  approximately $2.5 million was drawn
against these facilities.








<PAGE> 26


Following is a schedule of the  short-term  capital  resources  available to the
Company:

                                   December 31
(in thousands)                                       1997            1996
                                                     --------------------

Cash and cash equivalents                            $  3,570     $  4,065
Short-term investments                                152,080      151,359
Working capital advances to Maryland
  hospitals                                             9,186        6,432
                                                     --------     --------

Total available liquid assets                         164,836      161,856
Credit line availability                               21,526       21,802
                                                     --------     --------
Total short-term capital resources                   $186,362     $183,658
                                                     ========     ========

Certain MAMSI  subsidiaries  that are subject to  regulation by state  insurance
departments 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  Company  does  not  perceive  these  requirements  to  be a
significant  restriction on the subsidiaries'  ability to pay appropriate future
dividends to the parent company.

The Company does not anticipate  any adverse  impact on future  liquidity due to
medical malpractice issues because the Company carries substantial  professional
liability insurance.

The Company  believes that cash generated from operations along with its current
liquidity and borrowing  capabilities  are adequate for both current and planned
expanded  operations.  Certain capital  expenditures  will be made over the next
year  to  enhance  the  Company's  computer  systems,   and  to  make  necessary
improvements to new and existing administrative offices.

In  1997,  the  Company  began  the  process  of  identifying,   evaluating  and
implementing  changes to computer  programs  necessary  to address the year 2000
issue.  This issue affects  computer systems that have  time-sensitive  programs
that may not properly recognize the year 2000. This could result in major system
failures or  miscalculations.  The Company is currently  addressing its internal
year 2000 issue with  modifications  to existing  programs.  The Company is also
communicating with vendors, financial institutions,  software vendors and others
with which it conducts  business to help them identify and resolve the year 2000
issue.  While the Company has determined  that certain of its software  programs
require  modification,  it does not anticipate any future material impact on its
financial statements.  The total cost associated with the required modifications
and  conversions  is not known at this time,  however,  it is not expected to be
material to the  Company's  results of  operations  or financial  position.  The
statements in the preceding  paragraph regarding future effects of the year 2000
issue is a forward looking statement.  See  "Forward-Looking  Information" for a
description of risk factors.

At its February  1998 meeting,  the Board of Directors  authorized a $20 million
stock repurchase program. The Company may purchase its stock on the open market,
through block trades, or in private  transactions  over the next 12 months.  The
program may be discontinued at any time.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable






<PAGE> 27


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

Consolidated Balance Sheets as of December 31, 1997 and 1996.....  28

Consolidated Statements of Operations for the years ended
  December 31, 1997, 1996 and 1995...............................  29

Consolidated Statements of Changes in Stockholders' Equity
  for the years ended December 31, 1997, 1996 and 1995...........  30

Consolidated Statements of Cash Flows for the years ended
  December 31, 1997, 1996 and 1995...............................  31

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

Report of Ernst & Young LLP Independent Auditors.................  47

Selected Quarterly Financial Data for Fiscal Years 1997 and
  1996 (Unaudited)...............................................  48






<PAGE> 28

                                     Mid Atlantic Medical Services, Inc.
                                        Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                                     December 31,
(in thousands except share amounts)                                              1997          1996
                                                                               --------      --------
<S>                                                                            <C>           <C>
ASSETS
Current assets
  Cash and cash equivalents                                                    $  3,570     $   4,065
  Short-term investments (Note 2)                                               152,080       151,359
  Accounts receivable, net (Note 3)                                              84,719        77,042
  Prepaid expenses, advances and other                                           19,294        32,323
  Deferred income taxes (Note 7)                                                    303         4,033
                                                                               --------      --------
Total current assets                                                            259,966       268,822

Property and equipment, net (Note 4)                                             56,964        45,210
Statutory deposits (Note 2)                                                      14,854         9,125
Other assets                                                                     10,427        10,261
Deferred income taxes (Note 7)                                                      612         1,301
                                                                               --------      --------
    Total assets                                                               $342,823      $334,719
                                                                               ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Notes payable (Note 5)                                                       $     60      $     60
  Short-term borrowings (Note 5)                                                  2,249         1,973
  Accounts payable                                                               16,878        18,755
  Medical claims payable, net                                                    98,328       118,649
  Deferred premium revenue                                                       12,586        10,479
  Deferred income taxes (Note 7)                                                  1,800            36
                                                                               --------      --------
Total current liabilities                                                       131,901       149,952
Notes payable (Note 5)                                                               74           134
Deferred income taxes (Note 7)                                                    2,541           233
                                                                               --------      --------
    Total liabilities                                                           134,516       150,319

Stockholders'  equity (Notes 10, 11 and 13) Common stock, $0.01 par, 100,000,000
shares authorized,
  56,772,502 issued and 54,677,862 outstanding at
  December 31, 1997 and December 31, 1996                                           567           567
Additional paid-in capital                                                      162,892       173,325
Stock compensation trust (common stock held in trust)                          (101,482)     (120,652)
Treasury stock, 2,094,640 shares at December 31, 1997 and 1996                  (41,211)      (41,211)
Unrealized gains and losses on investments, net of tax
  of $618 and $174 at December 31, 1997 and December 31, 1996                       946           265
Retained earnings                                                               186,595       172,106
                                                                               --------      --------
    Total stockholders' equity                                                  208,307       184,400
                                                                               --------      --------
    Total liabilities and stockholders' equity                                 $342,823      $334,719
                                                                               ========      ========


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






<PAGE> 29

                                    Mid Atlantic Medical Services, Inc.
                                   Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
(in thousands except share amounts)                                    1997          1996          1995
                                                                   ----------     ----------    ---------
<S>                                                                <C>            <C>           <C>
Revenue
  Health premium                                                   $1,051,923     $1,079,223     $907,694
  Fee and other                                                        18,351         16,376       15,334
  Life and short-term disability premium                                5,313          3,240          961
  Home health services                                                 21,025         20,519       18,910
  Investment                                                           15,041         14,384       12,008
                                                                   ----------     ----------     --------
Total revenue                                                       1,111,653      1,133,742      954,907
                                                                   ----------     ----------     --------
Expense
  Medical expense
    Referral and ancillary care (Notes 8 and 9)                       406,840        432,487       320,412
    Hospitalization, net of coordination of benefits                  323,435        349,445       247,870
    Primary care (Notes 8 and 9)                                       83,183        100,692        93,320
    Prescription drugs                                                127,187        115,544        80,438
    Reinsurance premiums, net (Note 6)                                    (49)          (600)        1,587
                                                                   ----------     ----------     ---------
                                                                      940,596        997,568       743,627
                                                                   ----------     ----------     ---------
Life and short-term disability claims                                   2,811          2,314           934
                                                                   ----------     ----------     ---------
Home health patient services                                           16,808         17,141        13,684
                                                                   ----------     ----------     ---------
Administrative expense
  Salaries and benefits                                                80,700         76,627        62,706
  Promotion and advertising                                             3,543          4,182         3,246
  Professional services                                                 6,499          5,837         3,717
  Facilities, maintenance and supplies                                 26,609         23,398        19,134
  Other (including interest expense of $540, $691 and $1,010)          12,647         11,610        11,519
                                                                   ----------     ----------     ---------
                                                                      129,998        121,654       100,322
                                                                   ----------     ----------     ---------
Total expense                                                       1,090,213      1,138,677       858,567
                                                                   ----------     ----------     ---------
Income (loss) before income taxes                                      21,440         (4,935)       96,340
Income tax benefit (expense) (Note 7)                                  (6,951)         2,167       (35,216)
                                                                   ----------     ----------     ---------
Net income (loss)                                                  $   14,489     $   (2,768)    $  61,124
                                                                   ==========     ==========     =========

Basic earnings (loss) per common share (Note 11)                   $       .31   $       (.06) $      1.33
                                                                   ===========   ===========   ===========

Diluted earnings (loss) per common share (Note 11)                 $       .31   $       (.06) $      1.28
                                                                   ===========   ===========   ===========


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






<PAGE> 30

                       Mid Atlantic Medical Services, Inc.
           Consolidated Statements of Changes in Stockholders' Equity

<TABLE>
<CAPTION>
                                                  Additional       Stock                    Unrealized
                                        Common     Paid-In      Compensation   Treasury     Gains and    Retained
(in thousands except share amounts)     Stock      Capital         Trust        Stock        (Losses)    Earnings    Total
                                        ------    ----------    ------------   --------     ----------   --------   --------
<S>                                     <C>        <C>           <C>           <C>          <C>          <C>        <C>
Balance, December 31, 1994              $  456     $ 29,431                    $   (33)       (2,278)    $113,750   $141,326

Exercise of stock options for
  967,800 shares of MAMSI
  common stock                              10        4,533                                                            4,543
Stock option tax benefit                              6,410                                                            6,410
Change in unrealized gains
  and (losses), net of tax of $2,494                                                           3,813                   3,813
Net Income                                                                                                 61,124     61,124
                                        ------     --------      ---------     -------      --------     --------   --------
Balance, December 31, 1995                 466       40,374                        (33)        1,535      174,874    217,216

Exercise of stock options for
  1,011,175 shares of MAMSI
  common stock                              10        5,682                                                            5,692
Stock option tax benefit                              6,162                                                            6,162
Establishment of Stock
  Compensation Trust for
  9,130,000 shares of MAMSI
  common stock                              91      130,011      $(130,102)
Exercise of stock options
  for 109,300 shares released from
  the Stock Compensation Trust                       (1,011)         1,557                                               546
Adjustment to market value
  for shares held in Stock
  Compensation Trust                                 (7,893)         7,893
Repurchase of 2,048,700 shares of
  MAMSI common stock                                                             (41,178)                             (41,178)
Change in unrealized gains
  and (losses), net of tax
  of $830                                                                                     (1,270)                 (1,270)
Net loss                                                                                                   (2,768)    (2,768)
                                        ------     --------      ---------     --------     --------     --------   --------
Balance, December 31, 1996              $  567     $173,325      $(120,652)    $(41,211)    $    265     $172,106   $184,400

Exercise of stock options for
  1,061,325 shares released from the
  Stock Compensation Trust                          (10,265)        15,124                                             4,859
Stock option tax benefit                              3,878                                                            3,878
Adjustment to market value for shares
  held in Stock Compensation Trust                   (4,046)         4,046
Change in unrealized gains and (losses),
  net of tax of $444                                                                             681                     681
Net income                                                                                                 14,489     14,489
                                        ------     --------      ---------     --------     --------     --------   --------

Balance, December 31, 1997              $  567     $162,892      $(101,482)    $(41,211)    $    946     $186,595   $208,307
                                        ======     ========      =========     ========     ========     ========   ========

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






<PAGE> 31

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

<TABLE>
<CAPTION>
                                                                                  Year  Ended  December  31,
(in thousands)                                                                1997           1996           1995
                                                                            --------       --------       --------
<S>                                                                         <C>            <C>            <C>
Cash flows from operating activities:
  Net income (loss)                                                         $ 14,489       $ (2,768)      $ 61,124
Adjustments to reconcile net income (loss) to net cash provided by
  (used in) operating activities:
  Depreciation and amortization                                               10,179          7,874          6,026
  Provision for bad debts                                                       (187)         1,728             47
  Provision for deferred income taxes                                          7,260          2,261          4,971
  Loss on sale and disposal of assets                                                            13             78
  Increase in accounts receivable                                             (7,490)       (17,507)       (24,279)
  Decrease (increase) in prepaid expenses, advances and other                 13,029        (23,349)        (3,231)
  Increase (decrease) in accounts payable                                     (1,877)         3,680         (2,490)
  Decrease in income taxes payable                                                                          (2,589)
  Increase (decrease) in medical claims payable, net                         (20,321)        10,159         23,476
  Increase (decrease) in deferred premium revenue                              2,107            354         (3,219)
                                                                            --------       --------       --------
Total adjustments                                                              2,700        (14,787)        (1,210)
                                                                            --------       --------       --------
          Net cash provided by (used in) operating activities                 17,189        (17,555)        59,914
                                                                            --------       --------       --------
Cash flows (used in) provided by investing activities:
  Purchases of short-term investments                                       (100,647)      (338,943)      (426,601)
  Sales of short-term investments                                            104,052        392,219        365,076
  Purchases of property and equipment                                        (21,016)       (13,469)       (10,027)
  Purchases of statutory deposits                                             (8,761)        (2,407)        (1,405)
  Maturities of statutory deposits                                                10          1,824            739
  Purchases of other assets                                                     (406)          (247)          (725)
  Proceeds from sale of assets                                                   131            435            946
                                                                            --------       --------       --------
          Net cash (used in) provided by investing activities                (26,637)        39,412        (71,997)
                                                                            --------       --------       --------
Cash flows provided by (used in) financing activities:
  Proceeds from notes payable                                                                                  300
  Principal payments on notes payable                                            (60)          (210)        (5,953)
  Increase in short-term borrowings                                              276            322            603
  Exercise of stock options                                                    4,859          6,238          4,543
  Stock option tax benefit                                                     3,878          6,162          6,410
  Purchase of treasury stock                                                                (41,178)
                                                                            --------       --------       --------
          Net cash provided by (used in) financing activities                  8,953        (28,666)         5,903
                                                                            --------       --------       --------
Net decrease in cash and cash equivalents                                       (495)        (6,809)        (6,180)
Cash and cash equivalents at beginning of year                                 4,065         10,874         17,054
                                                                            --------       --------       --------
Cash and cash equivalents at end of year                                    $  3,570       $  4,065       $ 10,874
                                                                            ========       ========       ========


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






<PAGE> 32

                   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"),  preferred provider organizations  ("PPOs"), a life and
health insurance company, home health care and home infusion services companies,
a hospice company,  a mail-order  pharmacy,  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.
("OCI"), Optimum Choice of the Carolinas, Inc. ("OCCI") and Optimum Choice, Inc.
of Pennsylvania  ("OCIPA") 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.

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,  Inc.  ("Alliance")  provides  a delivery  network of  physicians
(called a preferred provider  organization) to employers and insurance companies
in association with various health plans.

Mid Atlantic Psychiatric Services,  Inc. ("MAPSI") provides psychiatric services
to third party payors or self-insured employer groups.

MAMSI Life and Health  Insurance  Company  ("MAMSI  Life")  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.  In  addition,  HCPS  provides
mail-order pharmacy services to MAMSI's HMO members and other payors.

HomeCall Hospice Services,  Inc. ("HCHS") began operations in December, 1996 and
provides services to terminally ill patients and their families.

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 have been  eliminated in
consolidation.











<PAGE> 33


MAJOR CUSTOMERS

The  Company's   operations  are  conducted  within  one  business  segment.   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, 1997,  1996
and 1995,  approximately 11%, 11% and 7%,  respectively,  of premium revenue was
derived from federal  government  agencies,  and approximately 25%, 26% and 21%,
respectively, was derived from state and local government agencies.

CASH EQUIVALENTS

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

SHORT-TERM INVESTMENTS

Short-term investments,  consisting principally of marketable equity securities,
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  as  a  separate   component  of
stockholders'  equity,  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.

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 medical utilization  management 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.











<PAGE> 34


FEE AND OTHER

Amounts  charged to third party payors solely for use of the Company's  provider
network 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  utilization
management  services and under 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   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.  The 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  physicians and
other medical providers 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  or  estimation)  are recorded at their net  realizable
value as a  reduction  of medical  expense  in the  consolidated  statements  of
operations  and as a reduction  of medical  claims  payable in the  consolidated
balance sheets.

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, both negatively or positively,  and as
such adjustments are deemed necessary,  they are included in current operations.
Establishment of claims estimates is an inherently  uncertain  process and 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.








<PAGE> 35


EARNINGS (LOSS) PER COMMON SHARE

The Company has adopted  Statement of Financial  Accounting  Standards  No. 128,
"Earnings Per Share", resulting in the restatement of earnings per share for all
prior  periods.  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 11) are excluded from
the calculation of basic and diluted earnings per share.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting  Standards  No. 107,  "Disclosure  about Fair
Value of Financial  Instruments"  ("Statement No. 107"),  requires disclosure of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. Statement
No. 107 excludes certain financial instruments and all nonfinancial  instruments
from its disclosure  requirements.  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.

Short-term investments - 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.

ESTIMATES

The  preparation  of the  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  effect 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

The Company has elected to follow  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.

NEW ACCOUNTING STANDARDS

In June, 1997, the Financial Accounting Standards Board issued Statement No. 130
"Reporting  Comprehensive  Income"  ("Statement  130")  and  Statement  No.  131
"Disclosure About Segments of an Enterprise and Related Information" ("Statement
131").  Statement  130  establishes  standards  for  reporting  and  display  of
comprehensive income in a full set of general purpose financial statements,  and
Statement 131 significantly changes the way companies report segment information
in annual financial statements.  Because Statement 131 concerns itself only with
how  supplemental  financial  statement  information  is disclosed in annual and
interim  reports,  the adoption will not have a material impact on the Company's
consolidated financial






<PAGE> 36


statements.  The Company is currently  evaluating the effect of Statement 130 on
its  financial  statements.  Each of these  statements  is effective for periods
beginning after December 15, 1997.

NOTE 2 - INVESTMENTS

Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards  No.  115,  "Accounting  for  Certain  Investments  in Debt and Equity
Securities"  ("Statement  No.  115").  Under  this  statement,   securities  are
classified  into  categories  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 stockholders'  equity.  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 1997,  statutory
deposit  investments with an amortized cost of $3,001,000 were released by state
regulatory  agencies and  transferred  to the  Company's  short-term  investment
portfolio. The unrealized gain at the date of transfer was $94,000.

The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 1997:

<TABLE>
<CAPTION>
                                                       -----------------------------------------------------
                                                                        Gross         Gross        Estimated
(in thousands)                                                       Unrealized     Unrealized       Fair
                                                          Cost          Gains         Losses         Value
                                                       -----------------------------------------------------
<S>                                                    <C>            <C>            <C>            <C>
AVAILABLE-FOR-SALE SECURITIES
Obligations of states and political subdivisions       $ 85,433       $ 1,615        $   21         $ 87,027
Municipal bond funds                                     15,775                                       15,775
Other debt securities                                       462            46                            508
Accrued interest                                          1,170                                        1,170
                                                       --------       -------        ------         --------
Debt securities                                         102,840         1,661            21          104,480
Equity securities                                        46,220         2,812         2,893           46,139
Mutual funds                                              1,456             5                          1,461
                                                       --------       -------        ------         --------

Short-term investments                                 $150,516       $ 4,478        $2,914         $152,080
                                                       ========       =======        ======         ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
  of U.S. government agencies                          $  3,943       $    85        $    2         $  4,026
Obligations of states and political subdivisions         10,661           187                         10,848
Other investments                                           250                                          250
                                                       --------       -------        ------         --------
Statutory deposits                                     $ 14,854       $   272        $    2         $ 15,124
                                                       ========       =======        ======         ========
</TABLE>









<PAGE> 37


The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 1996:

<TABLE>
<CAPTION>
                                                        ----------------------------------------------------
                                                                        Gross          Gross       Estimated
(in thousands)                                                       Unrealized     Unrealized       Fair
                                                          Cost          Gains          Losses        Value
                                                       -----------------------------------------------------
<S>                                                    <C>            <C>            <C>            <C>
AVAILABLE-FOR-SALE SECURITIES
Obligations of states and political subdivisions       $ 98,115       $    885       $    107       $ 98,893
Municipal bond funds                                      8,201                                        8,201
Other debt securities                                     1,478             57                         1,535
Accrued interest                                          1,031                                        1,031
                                                       --------       --------       ---------      --------
Debt securities                                         108,825            942            107        109,660
Equity securities                                        39,184          1,554          1,671         39,067
Mutual funds                                              2,911            142            421          2,632

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

Short-term investments                                 $150,920       $  2,638       $  2,199       $151,359
                                                       ========       ========       ========       ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
  of U.S. government agencies                          $  6,224       $    100       $     15       $  6,309
Obligations of states and political subdivisions          2,003            121              3          2,121
Other investments                                           898                                          898
                                                       --------       --------       --------       --------
Statutory deposits                                     $  9,125       $    221       $     18       $  9,328
                                                       ========       ========       ========       ========

</TABLE>

For  the  years   ended   December   31,  1997  and  1996,   marketable   equity
available-for-sale  securities  with a  fair  value  at  the  date  of  sale  of
$62,804,000 and $53,037,000,  respectively,  were sold. The gross realized gains
on such sales totaled $11,027,000 and $8,971,000,  and the gross realized losses
totaled $2,935,000 and $3,072,000 for each of the respective  periods.  Realized
gains and losses are included in  investment  income.  Other sales of short-term
investments consisted principally of redemptions from municipal bond funds.

The  amortized  cost and  estimated  fair  value of debt and  marketable  equity
securities  at December  31, 1997,  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.






<PAGE> 38

<TABLE>
<CAPTION>
                                                -------------------------
                                                                Estimated
                                                                  Fair
(in thousands)                                     Cost           Value
                                                -------------------------
<S>                                             <C>              <C>
AVAILABLE-FOR-SALE
Due in one year or less                         $ 23,939         $ 23,955
Due after one year through five years             38,157           38,853
Due after five years through ten years            22,449           22,921
Due after ten years                               18,295           18,751
                                                --------         --------
Debt securities                                  102,840          104,480
Equity securities                                 46,220           46,139
Mutual funds                                       1,456            1,461
                                                --------         --------
                                                $150,516         $152,080
                                                ========         ========
HELD-TO-MATURITY
Due in one year or less                         $    250         $    250
Due after one year through five years             11,987           12,103
Due after five years through ten years             2,012            2,065
Due after ten years                                  605              706
                                                --------         --------
                                                $ 14,854         $ 15,124
                                                ========         ========
</TABLE>



NOTE 3 - ACCOUNTS RECEIVABLE

Accounts receivable consists of the following at December 31:

<TABLE>
<CAPTION>
                                                -------------------------
(in thousands)                                    1997             1996
                                                -------------------------
<S>                                             <C>              <C>
Premium and fee accounts                        $ 65,507         $ 58,756
Home health service accounts                       2,735            2,677
Medical recoverables                              11,726           11,707
Other                                              9,931            9,268
Less: allowance for doubtful accounts             (5,180)          (5,366)
                                                --------         --------
                                                $ 84,719         $ 77,042
                                                ========         ========
</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 and pharmacy rebates.






<PAGE> 39

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31:

<TABLE>
<CAPTION>
                                                ------------------------
(in thousands)                                     1997           1996
                                                ------------------------
<S>                                             <C>              <C>
Land, buildings and improvements                $31,355          $20,906
Computer equipment and software                  38,757           30,151
Office furniture and equipment                   17,267           15,566
Leasehold improvements                              688              495
                                                -------          -------
                                                 88,067           67,118
Less: accumulated depreciation and
  amortization                                  (31,103)         (21,908)
                                                -------          -------
                                                $56,964          $45,210
                                                =======          =======
</TABLE>


NOTE 5 - NOTES PAYABLE

Notes payable consists of the following at December 31:

<TABLE>
<CAPTION>
                                                ------------------------
(in thousands)                                     1997            1996
                                                ------------------------
<S>                                             <C>              <C>

Notes payable                                   $   134          $   194
Current portion                                     (60)             (60)
                                                -------          -------
Noncurrent portion                              $    74          $   134
                                                =======          =======
</TABLE>

The  noncurrent  portion of notes at December 31, 1997 mature in future years as
follows (in thousands):

  1999                       $60
  2000                        14

The Company has access to total line-of-credit and  letter-of-credit  facilities
of $24 million, which are subject to annual renewal. Borrowings bear interest at
a rate based on either the bank's prime rate or the Federal Funds rate plus .75%
and are secured by certain cash balances and short-term investments. At December
31,  1997,   approximately   $2.25  million  was   outstanding  on  one  of  the
lines-of-credit  at an interest  rate of 7.43% and  approximately  $225,000  was
outstanding in letters-of-credit.

Interest  expense  paid in cash  during  1997,  1996 and 1995 was  approximately
$538,000, $688,000, and $1,541,000, respectively.

NOTE 6 - REINSURANCE

M.D.  IPA, OCI,  OCCI,  OCIPA and MAMSI Life  maintain  reinsurance  coverage to
provide for reimbursement of claims in excess of certain limits. Reinsurance for
health  claims  generally  covers  80% of all  hospital  costs  in  excess  of a
deductible  amount  per  enrollee  per year  (subject  to a  $2,000,000  maximum
lifetime  reinsurance limit per person) but excludes coverage of costs in excess
of certain per diem rates.  The deductible per enrollee was raised from $100,000
to $200,000 effective October 1, 1994. Reinsurance for life and accidental death






<PAGE> 40


claims  generally covers all settlements in excess of $50,000 per person subject
to a $1,000,000  maximum  recovery per person.  Reinsurance  recoveries  for the
years ended  December 31,  1997,  1996 and 1995 were  approximately  $2,045,000,
$2,288,000  and  $128,000,  respectively.  In  the  consolidated  statements  of
operations, reinsurance premiums are shown net of the related recoveries.

NOTE 7 - INCOME TAXES

At December 31, 1997, the Company has net federal  operating loss  carryforwards
of  approximately  $1.3 million for income tax  purposes  that expire in various
years  beginning  in  the  year  2002.   Approximately  $1.2  million  of  these
carryforwards relate to HomeCall,  Inc. operations prior to MAMSI's acquisition.
The  Company's  ability to utilize  these net operating  loss  carryforwards  is
limited.

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:

<TABLE>
<CAPTION>
                                                --------------------------
(in thousands)                                    1997              1996
                                                --------------------------
<S>                                             <C>                <C>
Deferred tax liabilities:
  Accelerated depreciation                      $ 3,422            $ 3,558
  Receivable valuation adjustments                3,314
  Unrealized investment gains                       618                174
                                                -------            -------
Total deferred tax liabilities                    7,354              3,732
                                                -------            -------
Deferred tax assets:
  Accrued medical expenses                        3,259              4,510
  Premium revenue adjustments                       784                725
  Allowance recapture                                                1,753
  Accrued pension expenses                          915              1,405
  Other                                              32              1,166
                                                -------            -------
Total deferred tax assets                         4,990              9,559
Valuation allowance for deferred tax assets      (1,062)              (762)
                                                -------            -------
Net deferred tax assets                           3,928              8,797
                                                -------            -------
                                                $(3,426)           $ 5,065
                                                =======            =======
Included in the consolidated balance sheets:

  Current assets - deferred income taxes        $   303            $ 4,033
  Non-current assets - deferred income taxes        612              1,301
  Current liabilities - deferred income taxes    (1,800)               (36)
  Non-current liabilities - deferred
    income taxes                                 (2,541)              (233)
                                                -------            -------
  Net deferred tax (liability) asset            $(3,426)           $ 5,065
                                                =======            =======
</TABLE>







<PAGE> 41


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)                                     1997            1996          1995
                                                ---------------------------------------
<S>                                             <C>            <C>            <C>
Current:
  Federal                                       $  (1,363)     $  (4,239)     $  32,217
  State                                             1,054           (189)         5,844
                                                ---------      ---------      ---------
  Total current                                      (309)        (4,428)        38,061
                                                ---------      ---------      ---------
Deferred:
  Federal                                           7,279          1,828         (2,207)
  State                                               (19)           433           (638)
                                                ---------      ---------      ---------
  Total deferred                                    7,260          2,261         (2,845)
                                                ---------      ---------      ---------
                                                $   6,951      $  (2,167)     $  35,216
                                                =========      =========      =========
</TABLE>


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)                                     1997          1996          1995
                                                -------------------------------------
<S>                                             <C>            <C>            <C>
Statutory rate (35%)                            $ 7,504         (1,727)       $33,719
Tax-exempt interest                              (1,582)        (1,912)        (1,872)
State income taxes, net of Federal benefit          461           (254)         3,399
Increase (decrease) in valuation allowance for
  deferred tax assets                               325            634            (11)
Other non-deductible items                          575            785            754
Other, net                                         (332)           307           (773)
                                                -------        -------        -------
                                                $ 6,951        $(2,167)       $35,216
                                                =======        =======        =======
</TABLE>

Total tax deposits made by the Company in 1997, 1996 and 1995 were approximately
$2,461,000, $10,320,000 and $27,266,000, respectively.

NOTE 8 - RISK POOL WITHHOLDINGS

Prior to July 1, 1996,  contracts  with  participating  physicians  allowed  for
withholdings  generally  ranging from 5% to 15% from primary care physicians and
participating  specialists  on  capitation  and  fee-for-service  payments.  The
withheld  amounts  ultimately  paid back to providers is generally less than the
total amount  withheld.  Withheld  liabilities and related medical expenses were
reduced  by  $14,535,000  and  $22,802,000  in 1996 and 1995,  respectively,  to
reflect amounts not returned to providers. Commencing July 1, 1996, the Company,
pursuant  to state  law  changes,  discontinued  withholding  from  payments  in
substantially  all areas of operations.  Amounts  placed in such risk pools,  in
jurisdictions where it is still permitted, were insignificant in 1997.











<PAGE> 42

NOTE 9 - RELATED PARTIES

For the years ended  December 31, 1997,  1996 and 1995,  certain  members of the
Boards  of  Directors  of  MAMSI  and  subsidiary   corporations  who  are  also
participating   physicians  provided  medical  services  to  enrollees  totaling
$6,103,000,   $8,406,000  and   $9,699,000,   respectively,   which   represents
approximately  1% in  1997  and  2% in  all  other  years  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 10 - EMPLOYEE BENEFIT 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 10% of their
pre-tax earnings  annually and the Company makes a matching  contribution of 50%
on the first 4% of contributions  made by employees.  Employees vest immediately
in the  employee  contributions  and  ratably  over  six  years  in the  Company
contributions.  During 1997,  1996 and 1995, the Company's  contribution  to the
401(k) plan aggregated $577,000, $540,000 and $433,000, respectively.

Effective  December  31, 1994,  the Company  discontinued  its  non-contributory
defined benefit pension plan (the "Plan"). Benefits earned under the Plan, which
covered  substantially  all  employees,  were  fully  vested at that  date.  The
obligation  to provide  these  benefits  was  satisfied  as of December 31, 1995
through a  combination  of purchases of annuity  contracts,  transfers of vested
funds into the 401(k) plan and cash withdrawals.  The Company  recognized a gain
on  the  curtailment  of the  defined  benefit  pension  plan  of  approximately
$345,000.

In accordance with a personal  service contract  negotiated by the Company,  its
Chairman  is  entitled  to  supplemental  pension  benefits  based upon years of
service and attained salary levels.  Expense recognized related to this plan was
$818,000  and  $1,682,000  for the  years  ended  December  31,  1996 and  1995,
respectively.  During 1997, the service contract was renegotiated, at which time
the supplemental pension benefits package was amended to include a fixed payment
benefit of  $450,000  per year for a fixed term of 15 years.  The  reduction  in
pension expense recognized in 1997 related to this change was approximately $1.1
million.

STOCK OPTION PLANS

In October 1995, the Financial  Accounting  Standards Board issued  Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation"   ("Statement  123").  Statement  123  prescribes  accounting  and
reporting  standards  for all stock  based  compensation  plans.  Statement  123
requires that the company  either adopt the fair value method of accounting  for
its stock option plans or continue to apply the  existing  accounting  rules but
provide supplemental pro forma disclosures as if the new rules had been adopted.
The Company elected to follow the existing rules and make the required pro forma
disclosures for the first time, in its 1996 consolidated  financial  statements.
Although  Statement 123 first became effective in 1996, it requires that the pro
forma  disclosures  include  the effects of all awards  granted in fiscal  years
beginning  after  December 15, 1994, the majority of which were issued under the
Company's 1995 and 1996 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 1997, 1996 and 1995,  respectively:  risk-free interest rates of
6.4%,  6.3% and 6.7%;  volatility  factors of the  expected  market price of the
Company's  common stock of .42,  .47 and .53 and a weighted  average life of the
options of 3 years. The Company anticipates that it will declare no dividends.






<PAGE> 43

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 effect 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 share amounts):

                                                 1997        1996         1995
                                                ------     -------      -------

Pro forma net income (loss)                     $9,007     $(8,409)     $58,670
Pro forma basic earnings (loss) per share          .19        (.18)        1.28
Pro forma diluted earnings (loss) per share        .19        (.18)        1.23

The effects of  applying  Statement  123 as computed  above are not likely to be
representative  of the pro forma  effects on reported net income in future years
as the above only considers options granted in 1997, 1996 and 1995.

In each year 1990 through 1996, 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. Shares authorized under the
plans total 15,500,000. 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 1990 - 1996 plans
through 1997 are summarized as follows:









<PAGE> 44


<TABLE>
<CAPTION>
                                              1997                       1996                       1995
                                     -----------------------    -----------------------    -----------------------
<S>                                  <C>            <C>         <C>            <C>         <C>            <C>
                                                    Weighted                   Weighted                   Weighted
                                                    Average                    Average                    Average
                                        1997        Exercise       1996        Exercise       1995        Exercise
                                       Shares        Price        Shares        Price        Shares        Price
                                       ------       --------      ------       --------      ------       --------

Outstanding, January 1               8,864,021      $ 17.02     7,400,405      $ 14.94     6,425,465      $ 12.51
Granted                              1,128,500      $ 12.79     3,122,371      $ 17.72     2,270,100      $ 18.22
Exercised                           (1,061,325)     $  4.58    (1,120,475)     $  5.57      (967,800)     $  4.69
Forfeited                             (831,965)     $ 19.92      (538,280)     $ 20.67      (327,360)     $ 19.92
                                     ---------                  ---------                  ---------
Outstanding, December 31             8,099,231      $ 17.76     8,864,021      $ 17.02     7,400,405      $ 14.94
                                     =========                  =========                  =========
Available for grant, end of year     1,188,744                  1,494,829                  1,081,670
Exercisable, end of year             4,887,992                  4,107,450                  3,281,405
Option price range for exercised
  shares                             $3.29-14.75                $2.58-22.38
Option price range at end of year    $4.54-28.50                $3.29-28.50
Weighted average fair value of
  options granted during year          $4.26                      $7.32

</TABLE>

<TABLE>
<CAPTION>
                              OPTIONS OUTSTANDING                                         OPTIONS EXERCISABLE
-----------------------------------------------------------------------------     --------------------------------

                        Outstanding     Weighted-Average                          Exercisable
      Range of             as of           Remaining         Weighted-Average        as of        Weighted-Average
   Exercise Prices      12/31/1997      Contractual Life      Exercise Price      12/31/1997       Exercise Price
-------------------     -----------     ----------------     ----------------     -----------     ----------------
<S>                     <C>               <C>                   <C>               <C>                <C>
 $4.54 - $ 5.00            15,000             0.2                $4.80               15,000            $4.80
 $5.01 - $10.00           938,975             0.3                $5.86              938,975            $5.86
$10.01 - $15.00         1,466,100             4.0               $12.61              271,700           $12.99
$15.01 - $20.00         3,698,046             2.9               $18.49            1,779,307           $18.29
$20.01 - $25.00           481,350             2.5               $22.45              383,250           $22.46
$25.01 - $28.50         1,499,760             1.3               $27.07            1,499,760           $27.07
                        ---------         -------               ------            ---------           ------
                        8,099,231             2.5               $17.76            4,887,992           $18.59
                        =========         =======               ======            =========           ======
</TABLE>

The  Company  has an  incentive  compensation  plan  whereby  officers  and  key
employees  receive  bonuses  based  upon the  annual  operating  results  of the
Company.  No  management  bonus was earned in 1997,  1996 or 1995.  In addition,
certain  individuals  receive a cash bonus based upon the achievement of certain
measurable  criteria  other than the annual  operating  results of the  Company.
These bonus amounts are not significant.








<PAGE> 45


NOTE 11 - COMMON STOCK

The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
                                                -----------------------------------------
                                                    1997           1996           1995
                                                -----------------------------------------
<S>                                             <C>            <C>            <C>
Numerator:
  Net income (loss)                             $14,489,000    $(2,768,000)   $61,124,000

Denominator:
  Denominator for basic earnings per share
    - weighted average shares                    46,273,484     45,978,864     46,127,112
  Dilutive securities - employee stock options      612,182              0      1,781,267
  Denominator for diluted earnings per share
    - adjusted weighted average shares           46,885,666     45,978,864     47,908,379

</TABLE>

On April 17, 1995, the  stockholders of MAMSI approved an increase in the number
of authorized shares of common stock from 60,000,000 to 100,000,000.

On August 26, 1996, the Company  established the MAMSI Stock  Compensation Trust
("SCT") to fund its  obligations  arising  from its various  stock  compensation
plans.  MAMSI funded the SCT with 9,130,000  shares of newly issued MAMSI stock.
In exchange,  the SCT has delivered a promissory note to MAMSI for approximately
$129.9 million which  represents the purchase price of the shares.  Amounts owed
by the SCT to  MAMSI  will be  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.

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  sheet.  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. At December 31,
1997 and 1996, the SCT held 7,959,375 and 9,020,700  shares of common stock at a
fair market value of approximately $101.5 and $120.7 million, respectively.

Shares held by the SCT are excluded from  weighted  average  shares  outstanding
used in the computation of income or loss per common share.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

The  Company  leases  certain  equipment  and  office  space  under the terms of
noncancellable  operating leases that expire at various dates through 2000. Rent
expense relating to these operating leases approximated  $3,552,000,  $3,316,000
and $2,593,000 in 1997, 1996 and 1995, respectively.

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

1998                   $ 3,428
1999                     2,687
2000                     1,194
2001                       418
2002                       297
                       -------
                       $ 8,024
                       =======






<PAGE> 46


The Company has been named as the  defendant in a suit filed by certain  medical
providers  on March  26,  1997 in the  Circuit  Court for Anne  Arundel  County,
Maryland,  which  alleges  that  the  Company  improperly  reduced  payments  to
participating  providers  in the  form  of  "withhold".  It is  the  plaintiffs'
allegation that certain payments should not have been reduced in this manner and
seek unspecified  damages.  This matter has been filed as a class action against
the Company.  On August 18, 1997,  the court stayed  further  proceedings in the
litigation pending  plaintiff's pursuit of arbitration as provided for under the
contract. While the Company believes that no significant liability exists, it is
too early to assess the final outcome.

The Company is involved in other  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
affect the Company's consolidated financial position or results of operations.

NOTE 13 - STATUTORY REQUIREMENTS

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

Minimum  required  statutory  net worth and  actual  statutory  net worth are as
follows:

<TABLE>
<CAPTION>
                              1997                              1996
                     Minimum         Actual            Minimum         Actual
                   ----------     -----------        ----------     -----------
<S>                <C>            <C>                <C>            <C>
M.D. IPA           $3,000,000     $43,300,000        $3,000,000     $27,200,000
OCI                 3,000,000      49,800,000         3,000,000      43,100,000
MLH                   500,000      28,300,000           500,000      16,400,000
OCCI                2,500,000       1,800,000         2,500,000       2,700,000
OCIPA               1,000,000       2,700,000         1,500,000       2,600,000
</TABLE>

M.D.  IPA,  OCI,  OCCI,  OCIPA and  MAMSI  Life were in  compliance  with  state
depository  rules at  December  31,  1997 and 1996.  OCCI failed to meet its net
worth  requirement  of $2.5  million and  working  capital  requirement  of $1.6
million at December 31, 1997. In February, 1998, additional capital was provided
so that each of these  requirements  was met.  In  addition,  MAMSI  Life was in
compliance  with the applicable  risk-based  capital  requirements  for life and
health  insurance   companies  at  December  31,  1997  and  1996.  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.

NOTE 14 - 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 short-term  investments  in marketable
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, 1997,  approximately 24% 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.






<PAGE> 47










                         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, 1997 and 1996, 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, 1997. 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  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 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, 1997 and 1996,
and the  consolidated  results of their operations and their cash flows for each
of the three years in the period ended  December 31, 1997,  in  conformity  with
generally  accepted  accounting  principles.  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



Washington, D.C.
February 25, 1998




<PAGE> 48


SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1997 AND 1996 (1)

<TABLE>
<CAPTION>
                                    1997      1997      1997      1997      1996      1996      1996      1996
                                    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                            $283,165  $282,443  $269,875  $276,170  $271,558  $281,455  $287,960  $292,769
Expense                             281,856   278,014   262,685   267,658   252,528   292,204   295,170   298,775

Income (loss) before income taxes     1,309     4,429     7,190     8,512    19,030   (10,749)   (7,210)   (6,006)
Net income (loss)                       806     2,788     4,726     6,169    11,869    (6,537)   (4,711)   (3,389)

Basic earnings (loss) per share         .02       .06       .10       .13       .25      (.14)     (.10)     (.07)
Diluted earnings (loss) per share       .02       .06       .10       .13       .25      (.14)     (.10)     (.07)

</TABLE>

Notes

1. Certain 1996  quarterly  revenue and expense  amounts are different  from the
amounts originally reported due to reclassifications necessary to conform to the
current presentation.

2. During 1997, the Company adopted Financial  Accounting Standards No. 128. All
previously reported earnings per share amounts have been restated to reflect the
adoption of this Statement. See Note 1 to the Consolidated Financial Statements.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

None.






<PAGE> 49


                                          Part III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to "Directors
and Executive  Officers" in the Proxy  Statement for MAMSI's  annual  meeting of
shareholders to be held on April 27, 1998.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to "Directors
and Executive  Officers -- Directors'  Compensation"  and "Executive  Management
Compensation"  in the Proxy Statement for MAMSI's annual meeting of shareholders
to be held on April 27, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required by this item is  incorporated  by reference to "Stock
Owned by Management"  and "Principal  Stockholders"  in the Proxy  Statement for
MAMSI's annual meeting of shareholders to be held on April 27, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to "Executive
Management  Compensation"  in the Proxy  Statement for MAMSI's annual meeting of
shareholders to be held on April 27, 1998.






<PAGE> 50


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                        PAGE
                                                                  ----
Consolidated Balance Sheets as of December 31, 1996 and 1995 ...    28
Consolidated Statements of Operations for the years ended
  December 31, 1997, 1996 and 1995 .............................    29
Consolidated Statements of Changes in Stockholders' Equity
  for the years ended December 31, 1997, 1996 and 1995 .........    30
Consolidated Statements of Cash Flows for the years ended
  December 31, 1997, 1996 and 1995 .............................    31
Notes to Consolidated Financial Statements .....................    32
Report of Ernst & Young LLP Independent Auditors ...............    47

(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE                             PAGE
                                                                  ----
II - Valuation and Qualifying Accounts as of December 31,
       1997, 1996 and 1995 .....................................    51

All other  schedules for which  provision is made in the  applicable  accounting
regulations of the Securities and Exchange  Commission are omitted  because they
are not required under the related instructions or are inapplicable.






<PAGE> 51

                          Mid Atlantic Medical Services, Inc.
                  Schedule II - Valuation and Qualifying Accounts
                              (in thousands)
<TABLE>
<CAPTION>
                                          Additions
                Balance at     ------------------------------
                Beginning        Charged to      Charged to                      Balance
                    of              Costs          Other        Deductions-       at End
Description       Period        and Expenses      Accounts      Write-Offs      of Period
-----------     ----------     -------------     ----------     -----------     ---------
<S>             <C>            <C>               <C>            <C>             <C>

DEDUCTED FROM ASSET ACCOUNTS:

YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts - accounts receivable

                $  3,591       $     25          $     22(1)    $               $  3,638
                ========       ========          ========       ========        ========

Valuation allowance - deferred tax assets

                $    139       $                 $              $    (11)       $    128
                ========       ========          ========       ========        ========

YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts - accounts receivable

                $  3,638       $                 $  1,756(1)    $    (28)       $  5,366
                ========       ========          ========       ========        ========

Valuation allowance - deferred tax assets

                $    128       $                 $    634       $               $    762
                ========       ========          ========       ========        ========

YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts - accounts receivable

                $  5,366       $                 $    (93)(1)   $    (93)       $  5,180
                ========       ========          ========       ========        ========

Valuation allowance - deferred tax assets

                $    762       $                 $    325       $    (25)       $  1,062
                ========       ========          ========       ========        ========

</TABLE>

(1) The changes to the allowance were charged to premium revenue.








<PAGE> 52

(a)(3)
EXHIBITS

See the Exhibit Index on pages 55-56 of this Form 10-K.

(b)
REPORTS ON FORM 8-K

None.






<PAGE> 53

                                SIGNATURES

Pursuant to the  requirements  of Section 13 or 15(d) of the  Exchange  Act, the
registrant  has caused  this  report to be signed on its  behalf by  undersigned
thereunto duly authorized.


      MID ATLANTIC MEDICAL SERVICES, INC. ("MAMSI")
      (Registrant)

      By: /s/ George T. Jochum                      3/28/98
         --------------------------------------------------
         George T. Jochum                              Date
         Chairman, Chief Executive Officer, President, and Director

Pursuant to the  requirements  of the Exchange  Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.


      By: /s/ Thomas P. Barbera                     3/28/98
         --------------------------------------------------
         Thomas P. Barbera                           Date
         Vice Chairman, Executive Vice President and
         Director

      By: /s/ Francis C. Bruno, M.D.                3/28/98
         ---------------------------------------------------
         Francis C. Bruno, M.D.                       Date
         Director

      By: /s/ Stanley M. Dahlman, Ph.D.             3/28/98
         --------------------------------------------------
         Stanley M. Dahlman, Ph.D.                    Date
         Director

      By: /s/ Peter L. Flaherty, Jr., M.D.          3/28/98
         --------------------------------------------------
         Peter L. Flaherty, Jr., M.D.                  Date
         Director

      By: /s/ Robert E. Foss                        3/28/98
         --------------------------------------------------
         Robert E. Foss                                Date
         Executive Vice President and Chief Financial Officer
         (Principal Financial Officer)

      By: /s/ Walter Girardin                       3/28/98
         --------------------------------------------------
         Walter Girardin                               Date
         Director

      By: /s/ Mark D. Groban, M.D.                  3/28/98
         --------------------------------------------------
         Mark D. Groban, M.D.                          Date
         Assistant Medical Director for Mental Health Services
         and Director

      By: /s/ George T. Jochum                      3/28/98
         --------------------------------------------------
         George T. Jochum                              Date
         Chairman, Chief Executive Officer, President and Director
         (Principal Executive Officer)

      By: /s/ John P. Mamana, M.D.                  3/28/98
         --------------------------------------------------
         John P. Mamana, M.D.                          Date
         Director

      By: /s/ William M. Mayer, M.D.                3/28/98
         --------------------------------------------------
         William M. Mayer, M.D.                        Date
         Director







<PAGE> 54



      By: /s/ Gretchen P. Murdza                    3/28/98
         --------------------------------------------------
         Gretchen P. Murdza                            Date
         Chief Executive Officer of Homecare and Pharmacy
         Subsidiaries and Director

      By: /s/ Creighton R. Schneck                  3/28/98
         --------------------------------------------------
         Creighton R. Schneck                          Date
         Director

      By: /s/ Mary E. Shocklee                      3/28/98
         --------------------------------------------------
         Mary E. Shocklee                              Date
         Vice President, Controller and Chief Accounting Officer
         (Principal Accounting Officer)

      By: /s/ Alfred Talamantes                     3/28/98
         --------------------------------------------------
         Alfred Talamantes                             Date
         Executive Vice President,
         Chief Operating Officer and Director

      By: /s/ James A. Wild                         3/28/98
         --------------------------------------------------
         James A. Wild                                 Date
         Director






<PAGE> 55

(a)(3), (b) and (c) List of Exhibits.


<TABLE>
<CAPTION>
                                  EXHIBIT INDEX
                                                                             Location of Exhibit
Exhibit                                                                        in Sequential
Number     Description of Document                                             Numbering System
-------    -----------------------                                           -------------------
<S>        <C>                                                                <C>
 3.1       Copy of Certificate of Incorporation of MAMSI dated
           October 7, 1986..........................................................(1)
 3.2       Copy of Certificate of Amendment of MAMSI Certificate of
           Incorporation dated April 23, 1990.......................................(4)
 3.3       Amended and Restated By-laws of MAMSI as of February 25, 1998............
 3.4       Copy of Certificate of Amendment of MAMSI Certificate of
           Incorporation dated June 2, 1994.........................................(4)
10.5       Copy of Agreement between M.D. IPA and the United States
           Secretary of Health and Human Services dated December 20, 1985...........(1)
10.20      Copy of Amendments to Agreement between M.D. IPA and the United
           States Secretary of Health and Human Services dated December 24, 1987....(3)
10.26      1990 Non-Qualified Stock Option Plan.....................................(4)
10.27      Copy of 1990 Non-Qualified Stock Option Letter sent to Key Employees.....(4)
10.32      Copy of Contract between George T. Jochum and M.D. IPA for the period
           January 1, 1991 through January 1, 1994..................................(4)
10.35      1991 Non-Qualified Stock Option Plan.....................................(4)
10.36      Copy of 1991 Non-Qualified Stock Option Letter sent to Key Employees.....(4)
10.41      Copy of Agreement between M.D. IPA and Surgical Care Affiliates, Inc.,
           dated April 22, 1985.....................................................(4)
10.44      1992 Non-Qualified Stock Option Plan.....................................(4)
10.45      Copy of 1992 Non-Qualified Stock Option Letter sent to Key Employees.....(4)
10.48      Equipment Term Loan Agreement with Signet Bank dated March 25, 1991......(4)
10.50      Amendment to Revolving Loan Agreement with Signet Bank dated
           June 19, 1991............................................................(4)
10.53      Amendments to the Stock Option Plans effective May 15, 1991..............(4)
10.54      Summary Plan Description of the Employees Cash or Deferred Profit
           Sharing (401k) Plan dated October, 1991..................................(4)
10.55      Defined Benefit Plan Agreement with the Principal Financial Group which
           was approved September 12, 1991..........................................(4)
10.57      Mortgage and Loan Agreement with Aid Association for Lutherans dated
           October 4, 1990..........................................................(4)
10.60      1993 Non-Qualified Stock Option Plan.....................................
10.61      1993 Non-Qualified Stock Option Letter Sent to Key Employees.............
10.62      1992 Amendment to Employment Agreement Between George T. Jochum and
           the Company..............................................................
10.65      Agreement to Purchase 2301 Research Boulevard dated September 30, 1993...(2)
10.66      1994 Management Bonus Program............................................(3)
10.67      1994 Non-Qualified Stock Option Plan.....................................(3)
10.68      1994 Non-Qualified Stock Option Letter sent to Key Employees.............(3)
10.69      Revolving Loan Agreement with Signet Bank dated September 30, 1993.......(3)
10.71      Agreement between OCI and the State of Maryland governing the Medical
           Assistance Program ("Medicaid") dated August 5, 1993.....................(3)
10.72      List of States in which MAMSI Life is Licensed to Operate................(3)
10.73      1995 Management Bonus Program............................................(4)
10.74      1995 Non-Qualified Stock Option Plan.....................................(4)
10.75      1995 Non-Qualified Stock Option Plan letter sent to Key Employees........(4)
10.76      Agreement between OCI and the Commonwealth of Virginia governing the
           Medical Assistance Program ("Medicaid") dated May 27, 1994...............(4)
10.77      1995 Amendment to Employment Agreement between George T. Jochum and
           the Company..............................................................(5)
10.78      1996 Management Bonus Program............................................(5)
10.79      1996 Non-Qualified Stock Option Plan.....................................(5)
10.80      Form of Agreement between MAMSI and Employees Granting Options
           under the 1996 Non-Qualified Stock Option Plan...........................(5)
10.81      Form of Agreement between MAMSI and George T. Jochum Granting Options
           under the 1996 Non-Qualified Stock Option Plan...........................(5)
10.82      Form of Agreement between MAMSI and Non-Employee Directors Granting
           Options under the 1996 Non-Qualified Stock Option Plan...................(5)
10         Amended and Restated Compensation Trust Agreement dated
           December 20, 1996........................................................(7)
10.1       Amended and Restated Common Stock Purchase Agreement dated
           December 20, 1996........................................................(7)
10.2       Replacement Promissory Note dated December 20, 1996......................(7)
10.83      1997 Management Bonus Program............................................(8)






<PAGE> 56

10.84      Form of Non-Qualified Stock Option Agreement for Options Granted
           under 1991, 1992, 1993, 1994 and 1995 Non-Qualified Stock Option Plan....(9)
10.85      Agreement of Purchase of Real Property by Mid-Atlantic
           Medical Services, Inc....................................................(10)
10.86      1997 Amendment to Employment Agreement between George T. Jochum
           and the Company..........................................................
10.87      1998 Non-Qualified Stock Option Plan.....................................
10.88      1998 Senior Management Bonus Plan........................................
10.89      1998 Management Bonus Plan...............................................
10.90      Amendment to 1994 Non-Qualified Stock Option Plan........................
10.91      Amendment to 1995 Non-Qualified Stock Option Plan........................
10.92      Amendment to 1996 Non-Qualified Stock Option Plan........................
10.93      1999 Employment Agreement Between George T. Jochum and the Company.......
21         Subsidiaries of the Company..............................................
23         Consent of Independent Auditors..........................................
27         Financial Data Schedule..................................................
</TABLE>

(1) Incorporated by reference to exhibits filed with the Company's  Registration
Statement filed under the Securities Act of 1933 on Form S-4  (Registration  No.
33-9803).

(2)  Incorporated  by reference to exhibits  filed with the Company's  Quarterly
Report  filed  under the  Securities  Exchange  Act of 1934 on Form 10-Q for the
Quarterly Period Ended September 30, 1993.

(3) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1993.

(4) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1994.

(5) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1995.

(6)  Incorporated  by reference to exhibits  filed with the Company's  Quarterly
Report filed under the  Securities  Exchange Act on Form 10-Q for the  Quarterly
Period Ended March 31, 1996.

(7)  Incorporated  by reference to exhibits  filed with the Company's  Quarterly
Report filed under the Securities  Exchange Act on Form 10-Q/A for the Quarterly
Period Ended September 31, 1996.

(8) Incorporated by reference to exhibits filed with the Company's Annual Report
filed under the Securities Exchange Act of 1934 on Form 10-K for the fiscal year
ended December 31, 1996.

(9)  Incorporated  by reference to exhibits  filed with the Company's  Quarterly
Report filed under the  Securities  Exchange Act on Form 10-Q for the  Quarterly
Period Ended March 31, 1997.

(10)  Incorporated  by reference to exhibits filed with the Company's  Quarterly
Report filed under the  Securities  Exchange Act on Form 10-Q for the  Quarterly
Period Ended June 30, 1997.