<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 For fiscal year ended DECEMBER 31, 1998

                                     OR

[ ]              TRANSITION  REPORT  PURSUANT  TO  SECTION 13 OR 15(d) OF THE
                 SECURITIES  EXCHANGE ACT OF 1934 For the transition period from
                 ________ to ________

                         Commission file number 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  March 4, 1999:
Approximately $405 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.
                 51,134,162 shares of common stock as of March 4, 1999








<PAGE>  2


                       DOCUMENTS INCORPORATED BY REFERENCE
The Proxy  Statement for the  Registrant's  annual meeting of shareholders to be
held on April 26, 1999 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 ...  18

                                 PART II

Item 5     Market for Registrant's Common Equity and Related
             Stockholder Matters ................................   19
Item 6     Selected Financial Data ..............................   20
Item 7     Management's Discussion and Analysis of Financial
             Condition and Results of Operations ................   21
Item 7A    Quantitative and Qualitative Disclosures About
             Market Risk ........................................   29
Item 8     Financial Statements and Supplementary Data ..........   30
Item 9     Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure ................   55

                                 PART III

Item 10    Directors and Executive Officers of the Registrant ...   56
Item 11    Executive Compensation ...............................   56
Item 12    Security Ownership of Certain Beneficial Owners
             and Management .....................................   56
Item 13    Certain Relationships and Related Transactions .......   56

                                 PART IV
Item 14    Exhibits, Financial Statement Schedules
             and Reports on Form 8-K ............................   57






<PAGE> 4

                                 PART I

ITEM 1. BUSINESS

Mid Atlantic Medical Services, Inc. is a holding company for subsidiaries active
in managed health care and other life and health insurance  related  activities.
Mid-Atlantic  Medical  Services,  Inc. and its  subsidiaries  (the  "Company" or
"MAMSI")  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

Mid-Atlantic  Medical  Services,  Inc. 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")  (hereinafter  M.D. IPA, OCI, OCCI and OCIPA will be
collectively  referred  to as the "HMOs" or "MAMSI  HMOs")  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 and large 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 49 counties in West Virginia. For the Medicare Program,
OCI is licensed in Northern  Virginia,  Maryland,  Delaware  and the District of
Columbia. OCI withdrew from the Medicare risk program effective January 1, 1999.







<PAGE> 5

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 as well as Medicaid.  OCCI's  present  service area  includes
certain areas of North Carolina and South  Carolina.  OCCI has yet to market its
products in South Carolina as a provider network is still being developed.

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  eleven  counties  in   south-central
Pennsylvania.

MAMSI Life, a life and health  insurance  company,  is licensed in 31 states and
the District of Columbia and actively markets in the states in which the Company
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 and worker's compensation.

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.

The  Company'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 coverage
to enrollees.  Generally, enrollees arrange for coverage through their employer.
However, in certain circumstances, group enrollees can convert their coverage to
an  individual  contract  upon  separation  from  their  employer.  There  is no
assurance  that  employers  will renew  their HMO  agreements  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 in some of its service  area.  The
Company will no longer  participate in the Medicare program effective January 1,
1999.

Under  traditional  HMO  coverage,  the  enrollee  selects  a PCP from the HMO's
provider network.  Most 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.





<PAGE> 6

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 (except North  Carolina  which is
offered  through  OCCI),  a  wholly  owned  subsidiary  of  MAMSI,   also  offer
point-of-service coverage (the "preferred plan"), which is marketed to appeal to
the following customers:

  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 requested charges or 100% of
a preestablished  fee 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, 1998, MAMSI's Medicaid
service  area  includes  certain  areas of  Virginia,  fifteen  counties in West
Virginia and twelve counties in North Carolina.

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.

Through  December 31, 1998, OCI offered health  coverage to Title XVIII Medicare
recipients.  Under a contractual  arrangement with the United States Health Care
Financing  Administration  ("HCFA"),  OCI received a monthly  premium based upon
age,  sex,  county of  residence  and  enrollment  status for which OCI provides
comprehensive medical coverage to those individuals.  Effective January 1, 1999,
OCI will no longer  participate  in the  Medicare  program.  This  decision  was
primarily motivated by insufficient  reimbursement  rates. The reimbursement OCI
was receiving was insufficient to fund the direct cost of care being provided by
OCI. It is  anticipated  that these  changes will reduce  MAMSI's  membership by
approximately 7,000 members.












<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 increased to
approximately 731,000 at December 31, 1998 from 682,000 at December 31, 1997, an
increase of 7.2 percent.

The following table sets forth information relevant to MAMSI's HMO and indemnity
health plans as of December 31, 1998:

Employer Groups Served              25,000
Population of Aggregate HMO
  Service Area                  33,500,000
Service Area Penetration                28%
Primary Care Physicians              6,700
Specialist Physicians               15,400
Other Affiliated Health
  Care Providers                     8,600
Hospitals and Outpatient
  Facilities                         2,900
Pharmacies                          11,400

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, 1998,  1997
and  1996,  approximately  11% of  premium  revenue  was  derived  from  Federal
government  agencies  which is included in the Medicare and Risk  segments,  and
approximately 18%, 25% and 26%,  respectively,  was derived from state and local
government  agencies located in the Company's  service area which is included in
the Risk segment.

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. The Company compensates  specialist  providers and participating
non-physician  providers using the Medicare  Resource Based Relative Value Scale
methodology of provider reimbursement.









<PAGE> 8

The  HMOs  have  contractual   arrangements  with  a  combined  total  of  2,900
facilities, consisting of 300 hospitals and 2,600 non-hospital facilities, as of
December 31, 1998.  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 subsidiary,  HomeCall Pharmaceutical Services, Inc. provides home
infusion,  delivery of drugs to  physician  offices and mail order  prescription
services to its HMO and Indemnity 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's 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

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  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 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  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 with the physician and hospital
utilization  department.  The  Utilization  Management  staff is working  with a
physician  during the course of treatment.  If the physician  needs to extend an
enrollee's  stay beyond the  expected  length of stay,  the  physician  provides
medical  justification  for the  necessity of such  proposed  action in order to
obtain specific approval.

The HMOs have  established  a grievance  procedure  to respond to  enrollee  and
provider  complaints.  Persons  covered by HMOs are given a right to seek a fast
and fair review of adverse  utilization review decisions,  first internally by a
medical director of the HMO and then by an independent review organization or by
a State  regulator.  Enrollees are encouraged to use this procedure.  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.  In
May, 1998 NCQA completed its most recent  accreditation review and in September,
1998 NCQA informed the Company that M.D. IPA and OCI received full accreditation
through May, 2000. 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,  1998 the Maryland Health Care Access and Cost Commission  released the
results of Maryland's  statewide HMO report card. MAMSI's Maryland HMOs exceeded
the state  wide  average  in several  key  areas.  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 which resulted
in M.D. IPA be designated as a "Top Rated Plan".

The Company's  home health care,  home infusion,  and home hospice  subsidiaries
underwent   voluntary   reaccreditation   review  by  the  Joint  Commission  on
Accreditation  of Healthcare  Organizations  ("JCAHO") in November,  1998.  Full
accreditation status was awarded as a result of this process.







<PAGE> 10

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 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  29 HMOs or other  prepaid  alternative
health care delivery systems that have a presence in MAMSI's significant service
areas (Maryland,  Virginia,  Delaware,  District of Columbia, North Carolina and
West  Virginia).  The  following  table sets forth MAMSI's best estimate of 1998
enrollment of HMOs operating in its significant HMO Service Areas.

<TABLE>
<CAPTION>
                                                                        Approximate
                                                                           Number
HMO                                                Plan Type           of Enrollees
-------------                                      ---------           ------------
<S>                                                <C>                 <C>
AETNA/U.S. Healthcare***.......................          IPA              822,000
Kaiser Permanente Health Plan .................        Group              675,000
Mid Atlantic Medical Services, Inc.* ..........          IPA              562,000
FreeState Health Plan** .......................          IPA              407,000
United Healthcare .............................          IPA              325,000
Trigon ........................................          IPA              273,000
Health Source North Carolina...................          IPA              244,000
Optima ........................................          IPA              222,000
Cigna Healthcare...............................          IPA              216,000
Blue Cross/Blue Shield of North Carolina.......          IPA              206,000
Partners Healthplan of North Carolina..........          IPA              185,000
Qualchoice of Virginia.........................          IPA              107,000

</TABLE>

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

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

*** - Includes NYLCARE and Prudential membership.

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 383 full-time individuals who provide
marketing  services for the Company's  products as of December 31, 1998. 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 45 percent of total large group new members
and 98 percent of total small group new members in 1998.






<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. 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
either 90% of the approved per diem or fixed charge per procedure, or 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.

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; (ix) appeals and grievances.

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  HMOs  generally  fix the  premiums  charged  to
employers  for a 12 month period and revises the premium with each  renewal.  In
setting  premiums,  the HMOs forecast 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,  HMO
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  Employee  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.











<PAGE> 12

In  September,  1998,  a  pretax  charge  of  approximately  $16.5  million  was
recognized in the Company's financial statements in anticipation of negotiations
relating to potential  governmental  claims for contracts with OPM related to an
audit  conducted by the Office of Inspector  General  concerning  the  Company's
participation  in FEHBP for the years  1992-1997  related to findings  for years
1992-1994.  In the normal course of business, OPM audits health plans with which
it contracts to, among other  things,  verify that the premiums  calculated  and
charged to OPM are  established  in  compliance  with the best  price  community
rating guidelines established by OPM. OPM typically audits plans once every five
or six years, and each audit covers the prior five or six year period. While the
government's  initial  on-site  audits  are  usually  followed  by a  post-audit
briefing as well as a preliminary audit report in which the government indicates
its preliminary results,  final resolution and settlement of the audits can take
two to three years.

In  addition  to claims  made by the OPM  auditors  as part of the normal  audit
process,  OPM may also refer their  results to the United  States  Department of
Justice  ("DOJ") for potential  legal action under the False Claims Act. The DOJ
has the authority to file a claim under the False Claims Act if it believes that
the health plan  knowingly  overcharged  the  government or otherwise  submitted
false  documentation  or  certifications.  In  False  Claims  Act  actions,  the
government  may  impose  trebled  damages  and a civil  penalty of not less than
$5,000 nor more than $10,000 for each separate alleged false claim.

The Company  intends to  negotiate  with OPM on all matters to attain a mutually
satisfactory  result.  There can be no assurance that these negotiations will be
concluded  satisfactorily,  that the audit will not be  referred  to the DOJ, or
that  additional,  possibly  material,  liability  will be not be incurred.  The
Company believes that any ultimate  liability in excess of amounts accrued would
not materially affect the Company's  consolidated  financial position.  However,
such  liability  could have a material  affect on results of  operations or cash
flows of a future period if resolved unfavorably.

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 31 states and the  District of  Columbia.  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  subsidiaries  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.












<PAGE> 13

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.

In 1997,  the "Health  Insurance  Portability  and  Accountability  Act of 1996,
Public  Law 104-  191",  commonly  called  ("HIPAA"),  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.

HIPAA 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.  HIPAA 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 HIPAA 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 HIPAA 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 HMO's  service  area and the U.S.
Congress  have  considered  legislation,  (1) to amend  civil  tort law so as to
extend   "enterprise   liability"  to  HMOs,  and/or  (2)  to  amend  regulatory
requirements to establish  additional  rules governing HMO internal and external
appeals and  grievances.  Neither the Congress nor any state  legislature in the
HMO's  service area has enacted laws,  which would expand an HMO's  liability in
tort action.

States in the HMOs  service  area  have  enacted  laws  regarding  internal  and
external appeals and grievances.  Under these laws,  persons covered by HMOs are
given a right to seek a fast and  fair  review  of  adverse  utilization  review
decisions,  first  internally  by a medical  director  of the HMO and then by an
independent  review  organization  or  by a  State  regulator.  Maryland,  North
Carolina and Pennsylvania  have enacted laws, which became effective  January 1,
1999 or earlier in 1998, and which require HMOs to have an appeals and grievance
process  meeting  certain  requirements  and  to  submit  adverse  decisions  to
independent outside review in certain circumstances. The District of Columbia is
expected to enact similar  legislation,  which would become effective on January
1, 2000.









<PAGE> 14

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 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.

PREFERRED PROVIDER ORGANIZATIONS

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

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 third  party
administrator, 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 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 health and benefit 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, 1998,  Alliance had contracts with  approximately  31,700  employer
groups that had access to an entire PHP-MD 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, 1998,
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
may also  purchase the MAPSI PPO if the Alliance  PPO is  purchased.  A total of
approximately  1,060,000  lives  were  covered  under  one or both of these  PPO
products as of December 31, 1998.









<PAGE> 15

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 HMOs preferred
plans,  except OCCI, 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 31 states and the District of Columbia including Maryland, Virginia,
West Virginia,  Delaware and North Carolina.  MAMSI Life also became licensed in
Pennsylvania in 1995.

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. The Company achieved reaccreditation in November, 1998.

Also during 1994, the Company formed a home infusion services company,  HomeCall
Pharmaceutical  Services, Inc. ("HCPS"),  which received its pharmacy license in
1994, its Federal  license from the Drug  Enforcement  Agency in 1995, and JCAHO
accreditation in 1995 and 1998 for its infusion services.

HomeCall,  FirstCall and HCPS provide  services  that are  generally  lower cost
alternatives to  institutional  treatment and care. The Company believes that it
can  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 13,500 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 and its  Virginia  hospice  license on
June 26, 1998. Based in Columbia, Maryland, Hospice was organized to address the
needs of  terminally  ill  patients  and their  families.  The  hospice  program
provides  services  to  individuals  in the  comfort  of  their  homes.  Hospice
underwent  a  voluntary  accreditation  review  by JCAHO in  November,  1998 and
received full accreditation.








<PAGE> 16

Hospice currently serves the Baltimore,  Washington,  D.C. and Northern Virginia
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.

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

<TABLE>
<CAPTION>
                                MEMBERSHIP DATA AT DECEMBER 31
                               ---------------------------------
PRODUCT LINE                     1996        1997        1998
------------                   ---------------------------------
                                         (in thousands)
<S>                            <C>         <C>          <C>
Commercial HMO (1)               430.8       389.1        424.9
Hybrid HMO (2)                   106.7       103.5         99.4
Medicaid                          82.5        34.0         30.9
Medicare                          14.4        11.2          7.0
Indemnity                         99.2       132.7        157.5
ASO (3)                           11.0        11.0         11.0
                               -------     -------      -------
                                 744.6       681.5        730.7
PPO (4)                          935.0     1,006.0      1,060.0
                               -------     -------      -------
Total Membership               1,679.6     1,687.5      1,790.7
                               =======     =======     ========
</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 insurance  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.





<PAGE> 17

EMPLOYEES

As of December 31, 1998, the Company had a total of 2,674  employees,  including
2,293 full-time and 381 part-time employees. MAMSI's home health care subsidiary
employed 607 of these employees (400 on a full-time basis and 207 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.

SEGMENT INFORMATION

Segment   information   is  included  in  Item  8  "Financial   Statements   and
Supplementary Data" on pages 49 thru 50.

ITEM 2. PROPERTIES

The Company owns five office buildings. These buildings are located in Rockville
and Frederick,  Maryland and total  approximately  321,000 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  212,000  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.

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  parties  are in active  arbitration  proceedings  at this  time.
Management  believes  that the  ultimate  outcome of this matter will not have a
material adverse effect on the Company's financial statements.

On December 2, 1998, a minority of the MAMSI Board of Directors  filed a lawsuit
in the Delaware  Court of Chancery  against George  Jochum,  CEO,  President and
Chairman of the Board,  and the  Company.  The suit  concerns an evenly  divided
Board of Directors' vote concerning Mr. Jochum's  continued tenure.  There was a
dispute as to whether the Board of  Directors'  vote  operates to terminate  Mr.
Jochum's  employment.  The suit sought  removal of Mr.  Jochum from his position
with the Company and expedited  prosecution  temporarily  restraining Mr. Jochum
from conducting all but the most ministerial of actions and enjoining any change
in the composition of the Board of Directors and restitution  from Mr. Jochum to
the Company for any damages. A trial date on the merit of the case was scheduled
for February 4, 1999.  On January 8, 1999 the  complaint  was  dismissed and Mr.
Jochum resigned as Chairman, CEO and President.

During the  quarter  ended March 31,  1998,  the  Company  became  involved in a
dispute  with the  Maryland  Insurance  Administration  ("MIA")  concerning  the
construction  and  application  of  Section  15-1008 of the  Maryland  Insurance
Article.  The law  limits  the time  within  which a carrier  may  retroactively
collect money owed by providers to the carrier by using the device of offsetting
future  payments  to  providers  with the  amount  owed by the  provider  to the
carrier.  The law does not affect the right of  carriers  to  otherwise  recover
monies owed. The Company construed the law to be applicable to claims paid on or
after  October  1,  1997.  The MIA  construed  the law to apply  to  retroactive
adjustments made on or after October 1, 1997 and the MIA has ordered the Company
to abide by its construction of the law. The Company has not yet decided whether
to appeal. Management believes that the ultimate outcome





<PAGE> 18

of this  matter  will  not  have a  material  adverse  effect  on the  Company's
financial  statements  as the  MIA's  current  position  affects  the  method of
collection of the claims reversals, rather than the Company's legal right to the
refunds.

On February  18, 1999,  certain  providers  filed a class action  lawsuit in the
Circuit Court for Anne Arundel County,  Maryland concerning the construction and
application of Section 15-1008 of the Maryland Insurance Article.  The complaint
requests an  accounting  of claims'  payments,  injunctive  relief and  punitive
damages.  Management  believes that the ultimate outcome of this matter will not
have a material  adverse  effect on the  Company's  financial  statements as the
MIA's current position affects the method of collection of the claims reversals,
rather than the Company's legal right to the refunds.

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
effect 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
1998.







<PAGE> 19

                                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.

                                     1998                     1997
                              -----------------        -----------------
                               HIGH        LOW          HIGH        LOW
                              -----------------        -----------------
First Quarter                 $13.88     $ 9.25        $15.25     $10.75
Second Quarter                 13.88      11.50         15.56      10.25
Third Quarter                  11.19       5.00         17.00      13.88
Fourth Quarter                 10.69       4.44         16.75      10.81

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 March 4, 1999, there were  approximately 775 stockholders of record of the
Company's common stock.






<PAGE> 20


ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                              1998          1997           1996           1995           1994
                                           ----------    ----------     ----------     ----------     ----------
                                             (in thousands except share amounts, key ratios and operating data)

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

Revenue                                    $1,187,901    $1,111,653     $1,133,742     $  954,907     $  749,898
Expense                                     1,175,665     1,090,213      1,138,677        858,567        663,343
Income (loss) before income taxes              12,236        21,440         (4,935)        96,340         86,555
Net income (loss)                               9,045        14,489         (2,768)        61,124         54,530
Earnings (loss) per common share (1):
Basic                                           $0.20         $0.31         ($0.06)         $1.33          $1.21
Diluted                                         $0.20         $0.31         ($0.06)         $1.28          $1.15
Weighted Average Shares
  Basic                                    45,407,006    46,273,484     45,978,864     46,127,112     45,030,113
  Diluted                                  45,473,995    46,885,666     45,978,864     47,908,379     47,370,211
Dividends                                       ---           ---            ---            ---            ---

SELECTED BALANCE SHEET DATA (AT DECEMBER 31)

Working capital                            $  123,138    $  128,065     $  118,870     $  153,668     $   91,983
Total assets                                  362,775       345,959        334,719        354,182        268,522
Long-term debt                                     14            74            134            194          5,331
Stockholders' equity                          191,218       208,307        184,400        217,216        141,326
Cash dividends per common share (2)             ---           ---            ---            ---            ---
KEY RATIOS
Medical loss ratio                               88.8%         89.4%          92.4%          81.9%          80.8%
Administrative expense ratio                     11.3%         11.7%          10.7%          10.5%           9.4%
Net income margin                                 0.8%          1.3%           (.2%)          6.4%           7.3%
OPERATING DATA
Annualized hospital days per
  1,000 enrollees:
All products and health services (4)              265           297            331            313            312
HMO only (3)                                      191           192            203            222            238
Medicare (4)                                    2,425         2,566          2,698          2,531            ---
Medicaid (4)                                      375           552            454            405            466
Annualized hospital admissions per
  1,000 enrollees (4)                              72            78             77             80             76
HMO, hybrid, ASO and indemnity
  health enrollees at year end                731,000       682,000        745,000        658,000        508,000
PPO enrollees at year end                   1,060,000     1,006,000        935,000        825,000        698,000
Participating providers at year end            33,600        28,400         24,300         21,077         16,950
</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.

4. Days include acute and non-acute,  skilled nursing,  neonatal  intensive care
and psychiatric inpatient care.






<PAGE> 21

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 budget related  mandates that reduce  premiums for
Medicaid 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.

6. The possibility  that one of the Company's  vendors will experience year 2000
problems that disrupt the Company's operating or administrative systems.

GENERAL

During the three year period ended  December 31, 1998,  the Company  experienced
modest membership  expansion.  While membership in certain products continues to
grow,  others have shown  decreases  when  compared  with 1997.  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  marketplace.  During  1998,  after  consideration  of
non-recurring  adjustments,  the Company's  consolidated operating margin showed
increased  profits over 1997. The Company  achieved 1998'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  1999.   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
affected 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 should result in continued profitability.









<PAGE> 22

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 put into effect, 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.

In 1997,  the "Health  Insurance  Portability  and  Accountability  Act of 1996,
Public  Law 104-  191",  commonly  called  ("HIPAA"),  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.

HIPAA 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.  HIPAA 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 HIPAA 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 HIPAA 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 HMOs  service  area and the U.S.
Congress  have  considered  legislation,  (1) to amend  civil  tort law so as to
extend   "enterprise   liability"  to  HMOs,  and/or  (2)  to  amend  regulatory
requirements to establish  additional  rules governing HMO internal and external
appeals and  grievances.  Neither the Congress nor any state  legislature in the
HMOs service  area has enacted  laws,  which would expand an HMO's  liability in
tort action.

States in the HMOs  service  area  have  enacted  laws  regarding  internal  and
external appeals and grievances.  Under these laws,  persons covered by HMOs are
given a right to seek a fast and  fair  review  of  adverse  utilization  review
decisions,  first  internally  by a medical  director  of the HMO and then by an
independent  review  organization  or  by a  State  regulator.  Maryland,  North
Carolina and Pennsylvania  have enacted laws, which became effective  January 1,
1999 or earlier in 1998, and which require HMOs to have an appeals and grievance
process  meeting  certain  requirements  and  to  submit  adverse  decisions  to
independent outside review in certain circumstances. The District of Columbia is
expected to enact similar  legislation,  which would become effective on January
1, 2000.

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.











<PAGE> 23

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 YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------

RESULTS OF OPERATIONS

Consolidated  net income of the Company was $9,045,000  and  $14,489,000 in 1998
and 1997, respectively.  Diluted earnings per share was $.20 in 1998 as compared
to $.31 in 1997.  This  decrease  in  earnings is  primarily  attributable  to a
$16,500,000  non-recurring  item related to the results of an audit conducted in
connection  with the  Company's  participation  in the Federal  Employee  Health
Benefit  Program.  The  audit  covered  the  periods  1992 - 1997 with the audit
findings  related to years 1992 - 1994.  There were no findings for years 1995 -
1997.

The Company has priced its health  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,  1998  increased  approximately  $76.2
million or 6.9 percent over the year ended  December 31, 1997.  Revenue for year
ended  December 31, 1998  includes  $5.7 million  related to the sale of certain
Company owned real estate no longer required in its operations.  Excluding these
sales, year-over-year revenue increased 6.4 percent. A 2 percent increase in net
average HMO and indemnity  enrollment  resulted in an increase of  approximately
$21.2 million in health premium revenue while a 4.8 percent  increase in average
monthly  premium per enrollee,  combined for all  products,  resulted in a $51.1
million  increase in health premium  revenue.  The increase in HMO and indemnity
enrollment  is  principally  due  to  increases  in  the  Company's   commercial
membership.  Management believes that commercial health premiums should continue
to increase over the next twelve months as the Company continues to increase 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.  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. 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.  Commercial  premium rate increases are expected to
continue in 1999 in the range of 6% to 8%.  Management  believes that these rate
increases may have the effect of slowing the Company's future membership growth.
In addition,  management  reevaluated premium reimbursement rates with regard to
its Medicare and Medicaid programs. Specifically, effective January 1, 1998, the
Company withdrew from  participation  in certain areas of the Virginia  Medicaid
program.  On January 1, 1998,  the Company also  modified  certain  benefits for
enrollees in its  Medicare  program and began to charge  additional  premiums in
certain areas.









<PAGE> 24

In the third quarter of 1998,  three HMOs with large Medicare  membership in the
Mid-Atlantic  area  announced  that  effective  January  1, 1999 they  would not
continue   their   Medicare  risk  contract  with  the  Health  Care   Financing
Administration  ("HCFA").  In response to the Company's  perception of increased
risk  related to these HMOs'  departure,  the Company  requested a change to its
already filed rates which were to be effective  January 1, 1999.  HCFA responded
that they would not allow the Company to change its filed rates. Based on HCFA's
response,  the Company  terminated its Medicare  contract  effective  January 1,
1999.  At December 31, 1998 the Company had  approximately  7,000  Medicare Risk
members.

The  Company's  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.

Fee and other income  increased  from $18.4  million in 1997 to $20.5 million in
1998, principally due to increased membership in the Company's PPO product.

Revenue from life and short-term disability products contributed $6.9 million in
revenue in 1998 as compared with $5.3 in 1997. The increase is mainly due to the
products' continued popularity with customers looking for one carrier to provide
all of their employee benefit needs.

Service revenue from non-MAMSI  affiliated entities earned by the Company's home
health care subsidiaries  decreased and contributed  approximately $20.0 million
in revenue in 1998 as compared with $21.0 million in 1997.  This decrease is due
to an  increasing  volume of  business  conducted  for  MAMSI HMO and  indemnity
members which is eliminated in consolidation.

In the third  quarter of 1998,  the  National  Committee  for Quality  Assurance
("NCQA")   announced   that  OCI  and  M.D.  IPA  received   three  year,   full
accreditation.  Full accreditation is granted to those plans that have excellent
programs for continuous quality improvement and meet NCQA's rigorous standards.

Medical  expenses as a  percentage  of health  premium  revenue  ("medical  loss
ratio") decreased to 88.8 percent for 1998 compared to 89.4 percent for 1997. On
a per member, per month basis, medical expenses increased 4.0 percent.  Included
in  the  year  ended  December  31,  1997  are  the  results  of  the  Company's
identification  of certain claims which were overpaid.  These  overpayments were
caused, in large part, by a combination of factors including the ever increasing
complexity of the claims  paying  process as well as providers  enhancing  their
ability to maximize charges. In connection with these overpayments,  during 1997
the Company  recorded,  as a reduction of medical  expenses,  approximately  $12
million  relating to claims paid in 1996. The Company believes that it has taken
the appropriate  action and implemented the appropriate  controls to insure that
future claims are paid at the appropriate amount.  These initiatives should help
to control the Company's  medical loss ratio.  The  statements in this paragraph
and the preceding  paragraphs  regarding  cost  containment  initiatives,  total
medical  costs and  future  increases  in health  premiums  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> 25

Administrative  expenses as a  percentage  of revenue  ("administrative  expense
ratio") decreased to 11.3 percent for 1998 as compared to 11.7 in 1997. Adjusted
to  exclude  the effect of the $5.7  million  gain on sale of real  estate,  the
administrative expense ratio was 11.4 percent for 1998. Management believes that
the  administrative  expense  ratio will likely remain near the current level of
11.4 percent in 1999.  Management's  expectation  concerning the  administrative
expense ratio is a forward-looking  statement.  The administrative expense ratio
is affected by changes in health premiums and other revenues, development of the
Company's  expansion  areas and  increased  administrative  activity  related to
business volume.

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

In  September,  1998,  a  pretax  charge  of  approximately  $16.5  million  was
recognized in the Company's financial statements in anticipation of negotiations
relating to potential  governmental  claims for contracts with OPM related to an
audit  conducted by the Office of Inspector  General  concerning  the  Company's
participation  in  FEHBP  for  the  years  1992-1997  related  to  findings  for
1992-1994.  In the normal course of business, OPM audits health plans with which
it contracts to verify,  among other things,  that the premiums  calculated  and
charged to OPM are  established  in  compliance  with the best  price  community
rating guidelines established by OPM. OPM typically audits plans once every five
or six years, and each audit covers the prior five or six year period. While the
government's  initial  on-site  audits  are  usually  followed  by a  post-audit
briefing as well as a preliminary audit report in which the government indicates
its preliminary results,  final resolution and settlement of the audits can take
two to three years.

In  addition  to claims  made by the OPM  auditors  as part of the normal  audit
process,  OPM may also refer their  results to the United  States  Department of
Justice  ("DOJ") for potential  legal action under the False Claims Act. The DOJ
has the authority to file a claim under the False Claims Act if it believes that
the health plan  knowingly  overcharged  the  government or otherwise  submitted
false  documentation  or  certifications.  In  False  Claims  Act  actions,  the
government  may  impose  trebled  damages  and a civil  penalty of not less than
$5,000 nor more than $10,000 for each separate alleged false claim.

The Company  intends to  negotiate  with OPM on all matters to attain a mutually
satisfactory  result.  There can be no assurance that these negotiations will be
concluded  satisfactorily,  that the audit will not be  referred  to the DOJ, or
that  additional,  possibly  material,  liability  will be not be incurred.  The
Company believes that any ultimate  liability in excess of amounts accrued would
not materially affect the Company's  consolidated  financial position.  However,
such  liability  could have a material  effect on results of  operations or cash
flows of a future period if resolved unfavorably.

Also  reflected in the  Company's  1998 results is a $4.8 million  write down of
certain  computer and computer related assets that the Company had identified as
being no longer of use and which were discarded or sold.

Investment  income decreased $4.4 million due to a decrease in realized gains on
sales of marketable  equity  securities of $5.3 million offset by an increase in
interest income due to higher investable balances.

Income tax expense as a percent of pretax income  decreased from 32.4 percent in
1997 to 26.1 percent in 1998, in large part due to the relative  increase of tax
exempt interest income as a percent of pretax income.







<PAGE> 26

The net margin  rate  decreased  from 1.3 percent in 1997 to .8 percent in 1998.
This  decrease  is  primarily  due  to the  non-recurring  item  related  to the
Company's participation in the FEHBP.

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

RESULTS OF OPERATIONS

Consolidated  net income (loss) of the Company was $14,489,000 and  $(2,768,000)
in 1997 and 1996,  respectively.  Diluted 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.
The medical  loss ratio  decreased  primarily  due to  increased  efforts by the
Company to control medical costs.

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.

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 for 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.

Medical  expenses as a  percentage  of health  premium  revenue  ("medical  loss
ratio")  decreased  to 89.4 percent in 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
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  administrative  expense ratio for 1997  increased to 11.7 percent from 10.7
percent in 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 in 1997.

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.

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.





<PAGE> 27

Accounts  receivable  decreased from $87.9 million at December 31, 1997 to $79.3
million at December 31, 1998.  This  decrease is primarily due to a reduction in
amounts due from the Federal  government  and a reduction  in  receivables  from
customers offset somewhat by increased medical recoverables.

Prepaid expenses, advances and other current assets increased from $19.3 million
at December 31, 1997 to $27.0 million at December 31, 1998,  principally  due to
an  increase in income  taxes  receivable  and an  increase in hospital  working
capital advances.

Property  and  equipment  decreased  from $57.0  million at December 31, 1997 to
$45.0  million at December  31, 1998 due to the sale of two office  buildings no
longer required in the Company's operations and the disposal of certain computer
equipment no longer needed.

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, 1998 reflects
an  unrealized  gain of $1.3 million,  net of tax, on the  Company's  short-term
investments.

Medical  claims  payable  increased  from $98.3  million at December 31, 1997 to
$129.3  million at December 31, 1998  primarily due to increased  membership and
increased medical expense per member.

Additional paid-in capital decreased from $162.9 million at December 31, 1997 to
$138.2  million  at  December  31,  1998,  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.

Treasury  stock  increased  from $41.2  million at  December  31,  1997 to $75.6
million at December  31, 1998 due to the  purchase  of  approximately  5 million
additional shares by the Company.

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 the Company's  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 $29.0
million,  which is used to provide short-term capital resources for routine cash
flow  fluctuations.  At December 31, 1998,  approximately $1.9 million was drawn
against  these  facilities.  In  addition,  the Company  maintains a $12 million
letter of credit for the benefit of the North Carolina  Insurance  Department in
support of operations of MAMSI Life and Health Company and a $300,000  letter of
credit for the  Company's  home health  subsidiary.  While no amounts  have been
drawn  against  these  letters of credit,  they are a reduction of the Company's
credit line availability.
















<PAGE> 28

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

                                                         December 31
(in thousands)                                         1998        1997
                                                     --------------------
Cash and cash equivalents                            $  9,787     $  3,570
Short-term investments                                174,325      152,080
Working capital advances to Maryland hospitals         12,261        9,186
                                                     --------     --------
Total available liquid assets                         196,373      164,836
Credit line availability                               14,855       21,526
                                                     --------     --------
Total short-term capital resources                   $211,228      186,362
                                                     ========     ========

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.  The Company sold an office  building in April,  1998 at a
price of  approximately  $3 million.  In July, 1998, the Company sold another of
its office buildings for approximately  $9.4 million.  The Company's purchase of
an approximately  208,000 square foot office building in Frederick,  Maryland in
1997,  and the resulting  consolidation  of its service  departments in this new
facility,  made the previously  owned  buildings  unnecessary  for the Company's
operations.

In  1997,  the  Company  began  the  process  of  identifying,   evaluating  and
implementing  changes to computer  programs  necessary  to address the year 2000
issue  ("Y2K").  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.  As a part
of the Company's initial assessment, 1,300 software programs were identified for
Y2K review. Of those 1,300, 182 programs were identified as needing modification
of which 145 were modified and 37 were  determined to be obsolete.  To date, the
Company has  modified  the  majority of the  programs  with  internal  resources
diverted from other projects,  none of which are critical to the Company's daily
operations.  Testing and  validation of the modified  programs is complete.  The
Company  has  incurred  less  than  $500,000  to date and  does  not  anticipate
significant  additional costs to bring the Y2K compliance program to completion.
Approximately  two-thirds of the Company's  critical  vendors have indicated Y2K
compliance  and the Company  anticipates  completion  of this  evaluation in the
second  quarter of 1999.  The Company is actively  pursuing  the  remainder  for
confirmation  of Y2K  compliance.  Based upon the work  completed  to date,  the
Company  does  not  anticipate  any  future  material  impact  on its  financial
statements.  With regard to the  Company's  most  reasonably  likely  worst case
scenario,  the Company believes that such scenario involves the possibility that
a small  number of  reports  will  display  incorrect  data,  a small  number of
programs  may give  unusual  data and a small  number of vendors will not be Y2K
compliant.  In  terms  of a  contingency  plan,  the  Company  believes  it  has
sufficient  internal  resources  to be able to correct  such  report  errors and
address  non-compliant vendors within a relatively short time frame. If internal
resources prove to be insufficient,  the Company will engage outside  resources.
The statements in this paragraph regarding future effects of the year 2000 issue
is a  forward-  looking  statement.  See  "Forward-Looking  Information"  for  a
description of risk factors.















<PAGE> 29

At its February,  1998 meeting,  the Board of Directors authorized a $20 million
stock repurchase  program which allowed the Company to purchase its stock on the
open  market,  through  block  trades,  or  in  private  transactions  over  the
succeeding 12 months. On August 3, 1998, the Executive Committee of the Board of
Directors  (subsequently  ratified  by the  Board of  Directors)  increased  the
authorization  to purchase  up to $40 million of common  stock prior to February
25, 1999. The program may be  discontinued at any time. As of December 31, 1998,
the Company had  repurchased  5,043,700  shares of its common  stock for a total
cost of  approximately  $34.4 million  under the stock  repurchase  program.  On
February  25,  1999 the  Board  of  Directors  authorized  a $20  million  stock
repurchase program to extend through September 2, 1999.

MARKET RISK

The  Company is exposed  to market  risk  through  its  investment  in fixed and
variable rate debt securities that are interest rate sensitive. The Company does
not use derivative financial instruments.  The Company places its investments in
instruments  that  meet high  credit  quality  standards,  as  specified  in the
Company's  investment  policy  guidelines;  the policy also limits the amount of
credit exposure to any one issue, issuer, or type of instrument.  A hypothetical
ten  percent  change  in market  interest  rates  over the next  year  would not
materially impact the Company's financial position or cash flow. The Company has
no significant market risk with regard to liabilities.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The  information  required  by  Item  305  of  S-K  is  contained  in  Item  7 -
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations".










<PAGE> 30

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

Consolidated Balance Sheets as of December 31, 1998 and 1997.....  31

Consolidated Statements of Operations for the years ended
  December 31, 1998, 1997 and 1996...............................  32

Consolidated Statements of Changes in Stockholders' Equity
  for the years ended December 31, 1998, 1997 and 1996...........  33

Consolidated Statements of Cash Flows for the years ended
  December 31, 1998, 1997 and 1996...............................  34

Notes to Consolidated Financial Statements.......................  35

Report of Ernst & Young LLP Independent Auditors.................  54

Selected Quarterly Financial Data for Fiscal Years 1998 and
  1997 (Unaudited)...............................................  55





<PAGE> 31

                                     Mid Atlantic Medical Services, Inc.
                                        Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                                     December 31,
(in thousands except share amounts)                                              1998          1997
                                                                               --------      --------
<S>                                                                            <C>           <C>
ASSETS
Current assets
  Cash and cash equivalents                                                    $  9,787      $  3,570
  Short-term investments (Note 2)                                               174,325       152,080
  Accounts receivable, net (Note 3)                                              79,258        87,855
  Prepaid expenses, advances and other                                           26,955        19,294
  Deferred income taxes (Note 7)                                                  1,247           303
                                                                               --------      --------
Total current assets                                                            291,572       263,102

Property and equipment, net (Note 4)                                             44,961        56,964
Statutory deposits (Note 2)                                                      14,906        14,854
Other assets                                                                      9,055        10,427
Deferred income taxes (Note 7)                                                    2,281           612
                                                                               --------      --------
    Total assets                                                               $362,775      $345,959
                                                                               ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Notes payable (Note 5)                                                       $     60      $     60
  Short-term borrowings (Note 5)                                                  1,845         2,249
  Accounts payable                                                               19,071        16,878
  Medical claims payable, net                                                   129,265        98,328
  Deferred premium revenue                                                       17,167        15,722
  Deferred income taxes (Note 7)                                                  1,026         1,800
                                                                               --------      --------
Total current liabilities                                                       168,434       135,037
Notes payable (Note 5)                                                               14            74
Deferred income taxes (Note 7)                                                    3,109         2,541
                                                                               --------      --------
    Total liabilities                                                           171,557       137,652

Stockholders'  equity (Notes 10, 11 and 13)
Common stock, $0.01 par, 100,000,000 shares authorized,
  56,772,502 issued and 49,634,162 outstanding at
  December 31, 1998 and 54,677,862 outstanding at
  December 31, 1997                                                                 567           567
Additional paid-in capital                                                      138,247       162,892
Stock compensation trust (common stock held in trust)                           (68,926)     (101,482)
Treasury stock, 7,138,340 shares at December 31, 1998;
  2,094,640 shares at December 31, 1997                                         (75,623)      (41,211)
Accumulated other comprehensive income (Note 16)                                  1,313           946
Retained earnings                                                               195,640       186,595
                                                                               --------      --------
    Total stockholders' equity                                                  191,218       208,307
                                                                               --------      --------
    Total liabilities and stockholders' equity                                 $362,775      $345,959
                                                                               ========      ========


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





<PAGE> 32

                                    Mid Atlantic Medical Services, Inc.
                                   Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
(in thousands except share amounts)                                    1998          1997          1996
                                                                   ----------     ----------    ---------
<S>                                                                <C>            <C>           <C>
Revenue
  Health premium                                                   $1,124,248     $1,051,923    $1,079,223
  Fee and other                                                        20,501         18,351        16,376
  Life and short-term disability premium                                6,876          5,313         3,240
  Home health services                                                 19,962         21,025        20,519
  Investment                                                           10,622         15,041        14,384
  Gain on sale of real estate                                           5,692              0             0
                                                                   ----------     ----------    ----------
Total revenue                                                       1,187,901      1,111,653     1,133,742
                                                                   ----------     ----------    ----------
Expense
  Medical expense
    Referral and ancillary care (Notes 8 and 9)                       437,279        406,840       432,487
    Hospitalization, net of coordination of benefits                  342,852        323,435       349,445
    Primary care (Notes 8 and 9)                                       81,166         83,183       100,692
    Prescription drugs                                                136,767        127,187       115,544
    Reinsurance premiums, net (Note 6)                                    192            (49)         (600)
                                                                   ----------     ----------    ----------
                                                                      998,256        940,596       997,568
                                                                   ----------     ----------    ----------
  Life and short-term disability claims                                 3,760          2,811         2,314
                                                                   ----------     ----------    ----------
  Home health patient services                                         17,755         16,808        17,141
                                                                   ----------     ----------    ----------
  Administrative expense
    Salaries and benefits                                              85,166         80,700        76,627
    Promotion and advertising                                           3,939          3,543         4,182
    Professional services                                               4,066          6,499         5,837
    Facilities, maintenance and supplies                               27,058         26,609        23,398
    Other (including interest expense of $414, $540 and $691)          14,378         12,647        11,610
                                                                   ----------     ----------    ----------
                                                                      134,607        129,998       121,654
                                                                   ----------     ----------    ----------

  Loss on retirement of equipment                                       4,787              0             0
  Federal Employee Health Benefit Program
    Potential Settlement (Note 12)                                     16,500              0             0
                                                                   ----------     ----------    ----------
Total expense                                                       1,175,665      1,090,213     1,138,677
                                                                   ----------     ----------    ----------
Income (loss) before income taxes                                      12,236         21,440        (4,935)
Income tax benefit (expense) (Note 7)                                  (3,191)        (6,951)        2,167
                                                                   ----------     ----------    ----------
Net income (loss)                                                  $    9,045     $   14,489    $   (2,768)
                                                                   ==========     ==========    ==========

Basic earnings (loss) per common share (Note 11)                   $      .20     $      .31     $    (.06)
                                                                   ==========     ==========     =========

Diluted earnings (loss) per common share (Note 11)                 $      .20     $      .31    $     (.06)
                                                                   ==========     ==========     =========


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





<PAGE> 33

                       Mid Atlantic Medical Services, Inc.
           Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
                                                                                           Accumulated
                                                  Additional       Stock                      Other
                                        Common     Paid-In      Compensation   Treasury   Comprehensive  Retained
(in thousands except share amounts)     Stock      Capital         Trust        Stock         Income     Earnings    Total
                                        ------    ----------    ------------   --------   -------------  --------   --------
<S>                                     <C>        <C>           <C>           <C>          <C>          <C>        <C>

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)

Comprehensive Income:
Net Loss                                                                                                   (2,768)    (2,768)
Other comprehensive income,
  net of tax benefit of $830                                                                  (1,270)                 (1,270)
                                        ------     --------      ---------     --------     --------     --------   --------
Total Comprehensive Income                                                                                            (4,038)
                                                                                                                    --------

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

Comprehensive Income:
Net Income                                                                                                 14,489     14,489
Other comprehensive income,
 net of tax of $444                                                                              681                     681
                                        ------     --------      ---------     --------     --------     --------   --------
Total Comprehensive Income                                                                                            15,170
                                                                                                                    --------
Balance, December 31, 1997                 567      162,892       (101,482)     (41,211)         946      186,595    208,307

Exercise of stock options for
  935,425 shares released from the
  Stock Compensation Trust                           (7,914)        13,330                                             5,416
Stock option tax benefit                              2,495                                                            2,495
Adjustment to market value for shares
  held in Stock Compensation Trust                  (19,226)        19,226
Repurchase of 5,043,700 shares of
  MAMSI common stock                                                            (34,412)                             (34,412)

Comprehensive Income:
Net Income                                                                                                  9,045      9,045
Other comprehensive income
 net of tax of $239                                                                              367                     367
                                        ------     --------      ---------     --------     --------     --------   --------
Total Comprehensive Income                                                                                             9,412

Balance, December 31, 1998              $  567     $138,247      $ (68,926)    $(75,623)    $  1,313     $195,640   $191,218
                                        ======     ========      =========     ========     ========     ========   ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>





<PAGE> 34

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

<TABLE>
<CAPTION>
                                                                                  Year  Ended  December  31,
(in thousands)                                                                1998           1997           1996
                                                                            --------       --------       --------
<S>                                                                         <C>            <C>            <C>
Cash flows from operating activities:
  Net income (loss)                                                         $  9,045       $ 14,489       $ (2,768)
Adjustments to reconcile net income (loss) to net cash provided by
  (used in) operating activities:
  Depreciation and amortization                                               10,796         10,179          7,874
  Provision for bad debts                                                         34           (187)         1,728
  Provision for deferred income taxes                                         (2,273)         7,260          2,261
  Gain (loss) on sale and disposal of assets                                    (833)                           13
  Decrease (increase) in accounts receivable                                   8,563        (10,626)       (20,153)
  Decrease (increase) in prepaid expenses, advances and other                 (7,661)        13,029        (23,349)
  Increase (decrease) in accounts payable                                      2,193         (1,877)         3,680
  Increase (decrease) in medical claims payable, net                          30,937        (20,321)        10,159
  Increase in deferred premium revenue                                         1,445          5,243          3,000
                                                                            --------       --------       --------
Total adjustments                                                             43,201          2,700        (14,787)
                                                                            --------       --------       --------
          Net cash provided by (used in) operating activities                 52,246         17,189        (17,555)
                                                                            --------       --------       --------
Cash flows (used in) provided by investing activities:
  Purchases of short-term investments                                       (329,400)      (249,862)      (338,943)
  Sales and maturities of short-term investments                             307,763        253,267        392,219
  Purchases of property and equipment                                         (9,008)       (21,016)       (13,469)
  Purchases of statutory deposits                                               (100)        (8,761)        (2,407)
  Maturities of statutory deposits                                                               10          1,824
  Purchases of other assets                                                     (893)          (406)          (247)
  Proceeds from sale of assets                                                12,574            131            435
                                                                            --------       --------       --------
          Net cash (used in) provided by investing activities                (19,064)       (26,637)        39,412
                                                                            --------       --------       --------
Cash flows provided by (used in) financing activities:
  Principal payments on notes payable                                            (60)           (60)          (210)
  Increase (decrease) in short-term borrowings                                  (404)           276            322
  Exercise of stock options                                                    5,416          4,859          6,238
  Stock option tax benefit                                                     2,495          3,878          6,162
  Purchase of treasury stock                                                 (34,412)                      (41,178)
                                                                            --------       --------       --------
          Net cash provided by (used in) financing activities                (26,965)         8,953        (28,666)
                                                                            --------       --------       --------
Net increase (decrease) in cash and cash equivalents                           6,217           (495)        (6,809)
Cash and cash equivalents at beginning of year                                 3,570          4,065         10,874
                                                                            --------       --------       --------
Cash and cash equivalents at end of year                                    $ 9,787        $  3,570       $  4,065
                                                                            ========       ========       ========


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





<PAGE> 35

                            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, LLC ("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> 36

MAJOR CUSTOMERS

A significant  portion of the Company's premium revenue is derived from federal,
state  and local  government  agencies,  including  governmental  employees  and
Medicaid and Medicare  recipients.  For the years ended December 31, 1998,  1997
and  1996,  approximately  11% of  premium  revenue  was  derived  from  federal
government  agencies  which is included in the Medicare and Risk  segments,  and
approximately 18%, 25% and 26%,  respectively,  was derived from state and local
government agencies which is included in the Risk segment.

CASH EQUIVALENTS

Floating rate municipal  putable bonds,  which possess an insignificant  risk of
loss from  changes  in  interest  rates,  are 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 in other  comprehensive  income, net of
the related tax effect. Gains and losses are reported in earnings when realized.
Gains  and  losses  on sales of  securities  are  computed  using  the  specific
identification method.

PROPERTY AND EQUIPMENT

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

STATUTORY DEPOSITS

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

GOODWILL

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

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> 37

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 for which the Company bears no insurance
risk, are recognized as fee revenue.

HOME HEALTH SERVICES

Amounts  charged to  patients,  third  party  payors and others for home  health
services  are  recorded  at  net  realizable  amounts,   including   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.












<PAGE> 38

INCOME TAXES

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

EARNINGS (LOSS) PER COMMON SHARE

In 1997, the Company  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.











<PAGE> 39

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.  130,  "Reporting   Comprehensive  Income"
("Statement No. 130"), which establishes  standards for reporting and display of
income and its components (revenue, expenses, gains and losses) in a full set of
general-purpose  financial statements.  The Company adopted Statement No. 130 as
of December  31,  1997 and has  presented  comprehensive  income for all periods
presented in the Consolidated Statements of Changes in Stockholders' Equity.

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.  131,  "Disclosure  about  Segments  of an
Enterprise and Related Information" ("Statement No. 131"), which changes the way
public companies report information about operating segments. Statement No. 131,
which is based on the  management  approach  to segment  reporting,  establishes
requirements  to report  selected  segment  information  quarterly and to report
entity-wide  disclosures about products and services,  major customers,  and the
material  countries in which the entity holds  assets and reports  revenue.  The
Company adopted Statement No. 131 as of December 31, 1997.

In March 1998, the AICPA issued Statement of Position 98-1,  "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"),
which  establishes  guidelines  for the accounting for the costs of all computer
software developed or obtained for internal use. SOP 98-1 is effective for years
beginning  after  December  15,  1998.  The Company  anticipates  adopting  this
statement in the first quarter of 1999 and anticipates  that the adoption of SOP
98-1 will not have a material  impact on the  Company's  consolidated  financial
statements.

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards No. 133 "Accounting for Derivative  Instruments
and Hedging  Activities"  ("Statement No. 133").  Statement No. 133 is effective
for all fiscal  quarters  of all fiscal  years  beginning  after June 15,  1999.
Statement No. 133 requires that all  derivative  instruments  be recorded on the
balance sheet at their fair value.  Changes in the fair value of derivatives are
recorded  each  period  in  current  earnings  or  other  comprehensive  income,
depending  on whether a  derivative  is designed as part of a hedge  transaction
and, if it is, the type of hedge  transaction.  The Company does not expect that
the  adoption  of  Statement  No.  133  will  have  a  material  impact  on  its
consolidated  financial  statements  because the Company does not currently hold
any derivative instruments.

RECLASSIFICATIONS

Certain  balances in the 1997 financial  statements  have been  reclassified  to
conform to 1998 presentation.

NOTE 2 - INVESTMENTS

Investments   are  classified   into  two  categories   (available-for-sale   or
held-to-maturity)  and  are  valued  based  upon  this  designation.  Securities
classified as available-for-sale,  which include debt and equity securities that
the Company does not have the positive intent to hold to maturity, are marked to
market  with  the  resulting   unrealized   gain  or  loss  reflected  in  other
comprehensive income. Securities classified as held-to-maturity,  which are debt
securities  that the Company has both the positive intent and ability to hold to
maturity,  are carried at amortized  cost. The Company  classifies its statutory
deposits as  held-to-maturity  with no effect on the recorded  value.  All other
investments are classified as available-for- sale. Management re-evaluates these
designations  annually.  During  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.






<PAGE> 40

The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                       -----------------------------------------------------
                                                                                1998
                                                       -----------------------------------------------------
                                                                        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       $ 84,072       $ 1,996        $     -        $ 86,068
Municipal bond funds                                     81,468             1                         81,469
Accrued interest                                          1,210                                        1,210
                                                       --------       -------        -------        --------
Debt securities                                         166,750         1,997              -         168,747
Equity securities                                         5,403           181              6           5,578
                                                       --------       -------        -------        --------

Short-term investments                                 $172,153       $ 2,178        $     6        $174,325
                                                       ========       =======        =======        ========
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
  of U.S. government agencies                          $  3,426       $   157        $     -        $  3,583
Obligations of states and political subdivisions         10,626           270                         10,896
Other investments                                           854                                          854
                                                       --------       -------        -------        --------

Statutory deposits                                     $ 14,906       $   427        $     -        $ 15,333
                                                       ========       =======        =======        ========
</TABLE>

<TABLE>
<CAPTION>
                                                       -----------------------------------------------------
                                                                                1997
                                                       -----------------------------------------------------
                                                                        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>

For  the  years   ended   December   31,  1998  and  1997,   marketable   equity
available-for-sale  securities  with a  fair  value  at  the  date  of  sale  of
$92,570,000 and $62,804,000,  respectively,  were sold. The gross realized gains
on such sales totaled $5,793,000 and $11,027,000,  and the gross realized losses
totaled $3,001,000 and $2,935,000 for each of the





<PAGE> 41

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, 1998,  by  contractual  maturity,  are shown below.
Actual maturities may differ from contractual  maturities because the issuers of
the  securities  may have the right to  prepay  obligations  without  prepayment
penalties.

<TABLE>
<CAPTION>
                                                -------------------------
                                                                Estimated
                                                                  Fair
(in thousands)                                     Cost           Value
                                                -------------------------
<S>                                             <C>              <C>
AVAILABLE-FOR-SALE
Due in one year or less                         $ 89,634         $ 89,645
Due after one year through five years             39,444           40,370
Due after five years through ten years            23,356           24,003
Due after ten years                               14,316           14,729
                                                --------         --------
Debt securities                                  166,750          168,747
Equity securities                                  5,403            5,578
                                                --------         --------
                                                $172,153         $174,325
                                                ========         ========
HELD-TO-MATURITY
Due in one year or less                         $  2,021         $  2,029
Due after one year through five years              8,802            8,980
Due after five years through ten years             3,579            3,784
Due after ten years                                  504              540
                                                --------         --------
                                                $ 14,906         $ 15,333
                                                ========         ========
</TABLE>



NOTE 3 - ACCOUNTS RECEIVABLE

Accounts receivable consists of the following at December 31:

<TABLE>
<CAPTION>
                                                -------------------------
(in thousands)                                    1998             1997
                                                -------------------------
<S>                                             <C>              <C>
Premium and fee accounts                        $ 57,399         $ 68,643
Home health service accounts                       5,909            5,466
Medical recoverables                              16,204           11,726
Other                                              4,960            7,200
Less: allowance for doubtful accounts             (5,214)          (5,180)
                                                --------         --------
                                                $ 79,258         $ 87,855
                                                ========         ========
</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> 42

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
                                                ------------------------
(in thousands)                                     1998           1997
                                                ------------------------
<S>                                             <C>              <C>
Land, buildings and improvements                $28,684          $31,355
Computer equipment and software                  28,826           38,757
Office furniture and equipment                   19,498           17,267
Leasehold improvements                              861              688
                                                -------          -------
                                                 77,869           88,067
Less: accumulated depreciation and
  amortization                                  (32,908)         (31,103)
                                                -------          -------
                                                $44,961          $56,964
                                                =======          =======
</TABLE>


NOTE 5 - NOTES PAYABLE

Notes payable consists of the following at December 31:

<TABLE>
<CAPTION>
                                                ------------------------
(in thousands)                                     1998            1997
                                                ------------------------
<S>                                             <C>              <C>
Notes payable                                   $    74          $   134
Current portion                                     (60)             (60)
                                                -------          -------
Noncurrent portion                              $    14          $    74
                                                =======          =======
</TABLE>

The noncurrent portion of notes at December 31, 1998 matures in the year 2000.

The Company has access to total line-of-credit and  letter-of-credit  facilities
of $29 million, which are subject to annual renewal. Borrowings bear interest at
a rate  based on the  Federal  Funds  rate plus .75% - 1.65% and are  secured by
certain  cash  balances  and  short-term  investments.  At  December  31,  1998,
approximately  $1.85 million was outstanding on one of the lines-of-credit at an
interest  rate of 6.45% and  approximately  $12.3  million  was  outstanding  in
letters-of-credit.

Interest  expense  paid in cash  during  1998,  1997 and 1996 was  approximately
$188,000, $538,000 and $688,000, 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 is $200,000.  Reinsurance
for life and accidental  death claims generally covers all settlements in excess
of $50,000  per person  subject to a  $2,500,000  maximum  recovery  per person.
Reinsurance recoveries for the years ended December 31, 1998, 1997 and 1996 were
approximately  $1,597,000,  $2,045,000  and  $2,288,000,  respectively.  In  the
consolidated statements of operations, reinsurance premiums are shown net of the
related recoveries.






<PAGE> 43

NOTE 7 - INCOME TAXES

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

<TABLE>
<CAPTION>
                                                --------------------------
(in thousands)                                    1998              1997
                                                --------------------------
<S>                                             <C>                <C>
Deferred tax liabilities:
  Accelerated depreciation                      $ 2,664            $ 3,422
  Receivable valuation adjustments                4,460              3,314
  Unrealized investment gains                       859                618
                                                -------            -------
Total deferred tax liabilities                    7,983              7,354
                                                -------            -------
Deferred tax assets:
  Accrued medical expenses                        3,429              3,259
  Premium revenue adjustments                     2,975                784
  State net operating losses                      2,449                256
  Accrued pension expenses                        1,263                915
  Other                                            (450)              (224)
                                                -------            -------
Total deferred tax assets                         9,666              4,990
Valuation allowance for deferred tax assets      (2,290)            (1,062)
                                                -------            -------
Net deferred tax assets                           7,376              3,928
                                                -------            -------
                                                $ (607)            $(3,426)
                                                =======            =======
Included in the consolidated balance sheets:

  Current assets - deferred income taxes        $ 1,247            $   303
  Non-current assets - deferred income taxes      2,281                612
  Current liabilities - deferred income taxes    (1,026)            (1,800)
  Non-current liabilities - deferred
    income taxes                                 (3,109)            (2,541)
                                                -------            -------
  Net deferred tax liability                    $  (607)           $(3,426)
                                                =======            =======
</TABLE>






<PAGE> 44

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)                                     1998            1997          1996
                                                ---------------------------------------
<S>                                             <C>            <C>            <C>
Current:
  Federal                                       $   4,105      $  (1,363)     $  (4,239)
  State                                             1,359          1,054           (189)
                                                ---------      ---------      ---------
  Total current                                     5,464           (309)        (4,428)
                                                ---------      ---------      ---------
Deferred:
  Federal                                          (1,250)         7,279          1,828
  State                                            (1,023)           (19)           433
                                                ---------      ---------      ---------
  Total deferred                                   (2,273)         7,260          2,261
                                                ---------      ---------      ---------
                                                $   3,191      $   6,951      $  (2,167)
                                                =========      =========      =========
</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)                                     1998          1997          1996
                                                -------------------------------------
<S>                                             <C>            <C>            <C>
Statutory rate (35%)                            $ 4,282        $ 7,504         (1,727)
Tax-exempt interest                              (1,369)        (1,582)        (1,912)
State income taxes, net of Federal benefit         (580)           461           (254)
Increase in valuation allowance for
  deferred tax assets                             1,228            325            634
Other non-deductible items                          526            575            785
Other, net                                         (896)          (332)           307
                                                -------        -------        -------
                                                $ 3,191        $ 6,951        $(2,167)
                                                =======        =======        =======
</TABLE>

Total tax deposits made by the Company in 1998, 1997 and 1996 were approximately
$6,870,000, $2,461,000 and $10,320,000, 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  in 1996 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 1998 and 1997.











<PAGE> 45

NOTE 9 - RELATED PARTIES

For the years ended  December 31, 1998,  1997 and 1996,  certain  members of the
Boards  of  Directors  of  MAMSI  and  subsidiary   corporations  who  are  also
participating   physicians  provided  medical  services  to  enrollees  totaling
$4,430,000,   $6,103,000  and   $8,406,000,   respectively,   which   represents
approximately 1% in 1998 and 1997, and 2% in 1996 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
pretax 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 1998,  1997 and 1996, the Company's  contribution  to the
401(k) plan aggregated $681,000, $577,000 and $540,000, respectively.

In accordance with a personal  service contract  negotiated by the Company,  its
former 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 in 1996. 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.  During 1998,  certain one-time  elections which reduced the fixed
benefit payable to $250,000 per year, were made under the agreement which caused
1998 pension expense to be reduced by approximately $880,000.

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 1995-1998 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 1998, 1997 and 1996,  respectively:  risk-free interest rates of
5.6%,  6.4%, and 6.3%;  volatility  factors of the expected  market price of the
Company's  common stock of .42, .42, and .47 and a weighted  average life of the
options of 3 years. The Company anticipates that it will declare no dividends.










<PAGE> 46

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

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the option's  vesting  period.  The  Company's  pro
forma information follows (in thousands except share amounts):

                                                 1998        1997         1996
                                                ------      ------      -------

Pro forma net income (loss)                     $1,502      $9,007      $(8,409)
Pro forma basic earnings (loss) per share          .03         .19         (.18)
Pro forma diluted earnings (loss) per share        .03         .19         (.18)

In each year 1990 through 1996 and 1998, 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 17,000,000.  Options under the plans generally vest over a
three-year period and are exercisable at 100% of the fair market value per share
on the date the options are granted. The Company accounts for these stock option
grants in accordance with APB 25, and,  accordingly,  recognizes no compensation
expense for these stock option grants.  Transactions relating to the 1990 - 1996
plans and the 1998 plan through 1998 are summarized as follows:








<PAGE> 47


<TABLE>
<CAPTION>
                                              1998                       1997                       1996
                                     -----------------------    -----------------------    -----------------------
<S>                                  <C>            <C>         <C>            <C>         <C>            <C>
                                                    Weighted                   Weighted                   Weighted
                                                    Average                    Average                    Average
                                        1998        Exercise       1997        Exercise       1996        Exercise
                                       Shares        Price        Shares        Price        Shares        Price
                                       ------       --------      ------       --------      ------       --------

Outstanding, January 1               8,099,231      $ 17.76     8,864,021      $ 17.02     7,400,405      $ 14.94
Granted                              6,304,558      $ 14.77     1,128,500      $ 12.79     3,122,371      $ 17.72
Exercised                             (935,425)     $  5.79    (1,061,325)     $  4.58    (1,120,475)     $  5.57
Forfeited                           (5,555,240)     $ 20.34      (831,965)     $ 19.92      (538,280)     $ 20.67
                                     ---------                  ---------                  ---------
Outstanding, December 31             7,913,124      $ 14.98     8,099,231      $ 17.76     8,864,021      $ 17.02
                                     =========                  =========                  =========
Available for grant, end of year     1,766,751                  1,188,744                  1,494,829
Exercisable, end of year             1,608,139                  4,887,992                  4,107,450
Option price range for exercised
  shares                             $4.54-$12.63               $3.29-14.75                $2.58-22.38
Option price range at end of year    $5.00-$27.13               $4.54-28.50                $3.29-28.50
Weighted average fair value of
  options granted during year          $4.49                      $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      12/31/1998      Contractual Life      Exercise Price      12/31/1998       Exercise Price
-------------------     -----------     ----------------     ----------------     -----------     ----------------
<S>                     <C>               <C>                   <C>               <C>                <C>
 $5.00 - $10.00           236,337             4.7               $ 7.07                3,750          $ 9.56
$10.01 - $15.00         2,868,341             3.8               $12.70              990,000          $12.74
$15.01 - $20.00         4,609,546             2.4               $16.28              415,489          $18.31
$20.01 - $25.00               900             2.2               $23.75                  900          $23.75
$25.01 - $27.13           198,000             0.3               $27.13              198,000          $27.13
                        ---------         -------               ------            ---------          ------
                        7,913,124             2.9               $14.98            1,608,139          $15.95
                        =========         =======               ======            =========          ======
</TABLE>


On April  15,  1998,  the  Stock  Option  Committee  of the  Company's  Board of
Directors  authorized a voluntary  exchange  ("Exchange")  of all existing stock
options  with an exercise  price of $16.00 or more per share.  Each stock option
that was  voluntarily  tendered  was  replaced  with a newly issued stock option
priced at $16.00 per share.  As a  condition  of the  Exchange,  option  holders
agreed to extend the vesting period for one year. In addition,  the newly issued
stock  options  are  exercisable  for one  additional  year  beyond the  current
expiration  date.  Approximately  4.3 million  options were exchanged for a like
number of newly issued options.

The Company has an incentive  compensation plan whereby managers receive bonuses
based upon the annual operating results of the Company.  During 1998,  incentive
compensation  expense was  approximately  $800,000  which was paid to  employees
below the level of Vice  President.  No  management  bonus was earned in 1997 or
1996.  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> 48


NOTE 11 - COMMON STOCK

The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
                                                -----------------------------------------
                                                    1998           1997           1996
                                                -----------------------------------------
<S>                                             <C>            <C>            <C>
Numerator:
  Net income (loss)                             $ 9,045,000    $14,489,000    $(2,768,000)

Denominator:
  Denominator for basic earnings per share
    - weighted average shares                    45,407,006     46,273,484     45,978,864
  Dilutive securities - employee stock options       66,989        612,182              0
  Denominator for diluted earnings per share
    - adjusted weighted average shares           45,473,995     46,885,666     45,978,864

</TABLE>

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.

On January 11, 1999 the SCT  purchased  an  additional  1,500,000  shares of the
Company's common stock for approximately  $18,000,000.  The existing  promissory
note has been modified to reflect this purchase.

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,
1998, 1997 and 1996, the SCT held 7,023,950,  7,959,375 and 9,020,700  shares of
common stock at a fair market value of  approximately  $68.9,  $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  $3,502,000,  $3,552,000
and $3,316,000 in 1998, 1997 and 1996, respectively.






<PAGE> 49

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

1999                   $ 2,907
2000                     1,505
2001                       719
2002                       397
2003                       203
                       -------
                       $ 5,731
                       =======

During the  quarter  ended March 31,  1998,  the  Company  became  involved in a
dispute  with the  Maryland  Insurance  Administration  ("MIA")  concerning  the
construction  and  application  of  Section  15-1008 of the  Maryland  Insurance
Article.  The law  limits  the time  within  which a carrier  may  retroactively
collect money owed by providers to the carrier by using the device of offsetting
future  payments  to  providers  with the  amount  owed by the  provider  to the
carrier.  The law does not affect the right of  carriers  to  otherwise  recover
monies owed. The Company construed the law to be applicable to claims paid on or
after  October  1,  1997.  The MIA  construed  the law to apply  to  retroactive
adjustments made on or after October 1, 1997 and the MIA has ordered the Company
to abide by its construction of the law. The Company has not yet decided whether
to appeal. Management believes that the ultimate outcome of this matter will not
have a material  adverse  effect on the  Company's  financial  statements as the
MIA's current position affects the method of collection of the claims reversals,
rather than the Company's legal right to the refunds.

On February  18, 1999,  certain  providers  filed a class action  lawsuit in the
Circuit Court for Anne Arundel County,  Maryland concerning the construction and
application of Section 15-1008 of the Maryland Insurance Article.  The complaint
requests an  accounting  of claims'  payments,  injunctive  relief and  punitive
damages.  Management  believes that the ultimate outcome of this matter will not
have a material  adverse  effect on the  Company's  financial  statements as the
MIA's current position affects the method of collection of the claims reversals,
rather than the Company's legal right to the refunds.

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

In  September,  1998,  a pretax  charge of  approximately  $16.5  million  which
includes approximately $4.4 million of interest, was recognized in the Company's
financial  statements  in  anticipation  of  negotiations  relating to potential
governmental  claims for contracts with OPM related to an audit conducted by the
Office of Inspector General concerning the Company's  participation in FEHBP for
the years  1992-1997  related to  findings  for years  1992-1994.  In the normal
course of business,  OPM audits  health plans with which it contracts to verify,
among  other  things,  that  the  premiums  calculated  and  charged  to OPM are
established  in  compliance  with the best  price  community  rating  guidelines
established by OPM. OPM typically audits plans once every five or six years, and
each  audit  covers the prior five or six year  period.  While the  government's
initial on-site audits are usually followed by a post-audit  briefing as well as
a preliminary  audit report in which the  government  indicates its  preliminary
results,  final  resolution  and  settlement of the audits can take two to three
years.









<PAGE> 50

In  addition  to claims  made by the OPM  auditors  as part of the normal  audit
process,  OPM may also refer their  results to the United  States  Department of
Justice  ("DOJ") for potential  legal action under the False Claims Act. The DOJ
has the authority to file a claim under the False Claims Act if it believes that
the health plan  knowingly  overcharged  the  government or otherwise  submitted
false  documentation  or  certifications.  In  False  Claims  Act  actions,  the
government  may  impose  trebled  damages  and a civil  penalty of not less than
$5,000 nor more than $10,000 for each separate alleged false claim.

The Company  intends to  negotiate  with OPM on all matters to attain a mutually
satisfactory  result.  There can be no assurance that these negotiations will be
concluded  satisfactorily,  that the audit will not be  referred  to the DOJ, or
that additional,  possibly material, liability will not be incurred. The Company
believes  that any  ultimate  liability in excess of amounts  accrued  would not
materially affect the Company's consolidated  financial position.  However, such
liability could have a material effect on results of operations or cash flows of
a future period if resolved unfavorably.

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
effect 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:

                              1998                              1997
                   --------------------------        --------------------------
                     Minimum         Actual            Minimum         Actual
                   ----------     -----------        ----------     -----------
M.D. IPA           $3,000,000     $42,000,000        $3,000,000     $43,300,000
OCI                 3,000,000      56,000,000         3,000,000      49,800,000
MLH                   500,000      34,500,000           500,000      28,300,000
OCCI                2,500,000       2,900,000         2,500,000       1,800,000
OCIPA               1,500,000       2,400,000         1,500,000       2,700,000

M.D.  IPA,  OCI,  OCCI,  OCIPA and  MAMSI  Life were in  compliance  with  state
depository  rules at  December  31,  1998 and 1997.  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. MAMSI Life was in compliance  with
the applicable  risk-based  capital  requirements  for life and health insurance
companies at December 31, 1998 and 1997,  and M.D. IPA, OCI, OCCI and OCIPA were
in compliance with the applicable newly enacted risk-based capital  requirements
at December  31, 1998.  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





<PAGE> 51

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, 1998,
approximately  16% 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.

NOTE 15 - REPORTABLE SEGMENTS

Effective  January  1,  1998,  the  Company  adopted  the  Financial  Accounting
Standards  Board's  Statement  of  Financial   Accounting   Standards  No.  131,
"Disclosures   about  Segments  of  an  Enterprise   and  Related   Information"
("Statement  131").  Statement 131 superseded FASB Statement No. 14,  "Financial
Reporting  for Segments of a Business  Enterprise".  Statement  131  establishes
standards for the way that public business  enterprises report information about
operating  segments  in annual  financial  statements  and  requires  that those
enterprises  report selected  information  about  operating  segments in interim
financial  reports.  The  adoption of  Statement  131 did not affect  results of
operations  or  financial  position,  but did affect the  disclosure  of segment
information.

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

The Company has three reportable  segments:  Commercial risk products,  Medicare
products and Preferred Provider  Organizations  (PPO).  Commercial risk products
include traditional HMO and point of service health care plans as well as hybrid
products.  Traditional  products  provide  for the  provision  of  comprehensive
medical care to enrollees for a fixed,  prepaid premium regardless of the amount
of care provided.  Hybrid  products offer the ability to tailor  employee health
care offerings by varying benefit  designs,  funding methods and insurance risk.
These products combine the use of capitated  physicians to serve as gatekeepers,
employer  funding of specialist and  institutional  claims on an "as paid" basis
with  MAMSI's  underwriting  of risk on a specific  and/or  aggregate  stop loss
basis.  The Medicare  product is health coverage offered to Title XVIII Medicare
recipients.  Under a contractual  arrangement with the United States Health Care
Financing  Administration  ("HCFA"),  the Company receives a monthly premium for
which the Company provides  comprehensive medical coverage to those individuals.
Effective  January  1,  1999,  the  Company  will no longer  participate  in the
Medicare  program.  The PPO product provides a delivery network of physicians to
employers and insurance companies in association with various health plans. PPOs
allow enrollees to receive care from  participating  physicians at contractually
negotiated  rates.  A PPO  does not  assume  any  financial  risk  from  medical
utilization nor does it typically process claims payments to providers.

MEASUREMENT OF SEGMENT PROFIT OR LOSS

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

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

FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS

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





<PAGE> 52

<TABLE>
<CAPTION>

REPORTABLE SEGMENTS
                                                       -----------------------------------------------------------------
(in thousands)                                            Risk       Medicare        PPO        All Other       Totals
                                                       -----------------------------------------------------------------
<S>                                                    <C>            <C>          <C>          <C>           <C>
Year ended December 31, 1998:

Revenue from external customers                        $1,040,701     $46,414      $20,501      $ 63,971      $1,171,587

Segment profit (loss)                                      13,251      (6,778)      10,748           519          17,740

                                                       -----------------------------------------------------------------
(in thousands)                                            Risk       Medicare        PPO        All Other       Totals
                                                       -----------------------------------------------------------------
Year ended December 31, 1997:

Revenue from external customers                        $  917,613     $53,665      $18,351      $106,983      $1,096,612

Segment profit (loss)                                       7,282     (14,799)       9,543         5,095           7,121

                                                       -----------------------------------------------------------------
(in thousands)                                            Risk       Medicare        PPO        All Other       Totals
                                                       -----------------------------------------------------------------
Year ended December 31, 1996:

Revenue from external customers                        $  878,060     $55,542      $16,376      $169,380      $1,119,358

Segment profit (loss)                                        (743)    (25,555)       9,171        (2,048)        (19,175)

</TABLE>

The sources of revenue included in the All Other category are composed primarily
of  Medicaid  and  miscellaneous.  All  revenue is  generated  within the United
States.

<TABLE>
<CAPTION>
                                                                --------------------------------------------
(in thousands)                                                     1998              1997             1996
                                                                --------------------------------------------
<S>                                                             <C>              <C>              <C>
Revenues

Total external revenues for reportable segments                 $1,107,616       $  989,629       $  949,978

Other revenues                                                      63,971          106,983          169,380

Investment revenue not allocated                                    10,622           15,041           14,384

Gain on sale of real estate                                          5,692
                                                                ----------       ----------       ----------
     Total consolidated revenues                                $1,187,901       $1,111,653       $1,133,742
                                                                ==========       ==========       ==========

Pretax Profit or Loss

Total profit or loss from reportable segments                   $   17,221       $    2,026       $  (17,127)

Other profit or loss                                                   519            5,095           (2,048)

Net investment income not allocated                                 10,091           14,319           14,240

Gain on sale of real estate                                          5,692

Federal Employee Health Benefit Program
 potential settlement                                              (16,500)

Loss on retirement of equipment                                     (4,787)
                                                                ----------       ----------       ----------
     Total consolidated pretax profit (loss)                    $   12,236       $   21,440       $   (4,935)
                                                                ==========       ==========       ==========
</TABLE>







<PAGE> 53

NOTE 16 - COMPREHENSIVE INCOME

As  of  January  1,  1998,  the  Company  adopted   Statement  130,   "Reporting
Comprehensive Income". Statement 130 establishes new rules for the reporting and
display of  comprehensive  income and its components;  however,  the adoption of
this  statement  had no  impact on the  Company's  net  income or  stockholders'
equity.  Statement  130 requires  unrealized  gains and losses on the  Company's
available-for-sale  securities,  which  prior  to  the  adoption  were  reported
separately  in the  stockholders'  equity to be included in other  comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.

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

<TABLE>
<CAPTION>
                                                                -----------------------------------------
(in thousands)                                                    1998             1997             1996
                                                                -----------------------------------------
<S>                                                             <C>              <C>              <C>

Unrealized holding gains arising during period                  $ 2,055          $ 5,573          $ 2,296

Less: Reclassification adjustment for
  net gains included in net income                                1,688            4,892            3,566
                                                                -------          -------          -------

Net unrealized gain (loss) recognized in
 other comprehensive income                                     $   367          $   681          $(1,270)
                                                                =======          =======          =======
</TABLE>




<PAGE> 54
















                         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, 1998 and 1997, 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, 1998. 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, 1998 and 1997,
and the  consolidated  results of their operations and their cash flows for each
of the three years in the period ended  December 31, 1998,  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 24, 1999





<PAGE> 55


SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1998 AND 1997 

<TABLE>
<CAPTION>
                                    1998      1998      1998      1998      1997      1997      1997      1997
                                    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                            $289,502  $294,225  $299,546  $304,628  $283,165  $282,443  $269,875  $276,170
Expense                             278,843   288,496   310,685   297,641   281,856   278,014   262,685   267,658

Income (loss) before income taxes    10,659     5,729   (11,139)    6,987     1,309     4,429     7,190     8,512
Net income (loss)                     6,690     3,585    (6,743)    5,513       806     2,788     4,726     6,169

Basic earnings (loss) per share         .14       .08      (.15)      .13       .02       .06       .10       .13
Diluted earnings (loss) per share       .14       .08      (.15)      .13       .02       .06       .10       .13

</TABLE>



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

None.







<PAGE> 56


                                          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 26, 1999.

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 26, 1999.

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 26, 1999.

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 26, 1999.





<PAGE> 57


                                     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, 1998 and 1997 ...    31
Consolidated Statements of Operations for the years ended
  December 31, 1998, 1997 and 1996 .............................    32
Consolidated Statements of Changes in Stockholders' Equity
  for the years ended December 31, 1998, 1997 and 1996 .........    33
Consolidated Statements of Cash Flows for the years ended
  December 31, 1998, 1997 and 1996 .............................    34
Notes to Consolidated Financial Statements .....................    35
Report of Ernst & Young LLP Independent Auditors ...............    54

(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE                             PAGE
                                                                  ----
II - Valuation and Qualifying Accounts as of December 31,
       1998, 1997 and 1996 .....................................    58

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> 58

                          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, 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
                ========       ========          ========       ========        ========

YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts - accounts receivable

                $  5,180       $    143          $   (309)(1)   $    200        $ 5,214
                ========       ========          ========       ========        =======

Valuation allowance - deferred tax assets

                $  1,062       $  1,228          $              $               $ 2,290
                ========       ========          ========       ========        =======

</TABLE>

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







<PAGE> 59

(a)(3)
EXHIBITS

See the Exhibit Index on pages 62-63 of this Form 10-K.

(b)
REPORTS ON FORM 8-K

None.





<PAGE> 60

                                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/ Mark D. Groban, M.D.                  3/29/99
         --------------------------------------------------
         Mark D. Groban, M.D.                          Date
         Chairman of the Board 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                     3/29/99
         --------------------------------------------------
         Thomas P. Barbera                           Date
         Vice Chairman of the Board, President,Chief Executive Officer and
         Director

      By: /s/ Francis C. Bruno, M.D.                3/29/99
         ---------------------------------------------------
         Francis C. Bruno, M.D.                       Date
         Director

      By: /s/ John H. Cook, III, M.D.               3/29/99
         ---------------------------------------------------
         John H. Cook, III, M.D.                      Date
         Director

      By: /s/ Raymond H. Cypess, D.V.M., Ph.D.      3/29/99
         ---------------------------------------------------
         Raymond H. Cypess, D.V.M., Ph.D.             Date
         Director

      By: /s/ Stanley M. Dahlman, Ph.D.             3/29/99
         --------------------------------------------------
         Stanley M. Dahlman, Ph.D.                    Date
         Director

      By: /s/ Robert E. Foss                        3/29/99
         --------------------------------------------------
         Robert E. Foss                                Date
         Senior Executive Vice President and Chief Financial Officer and
         Director
         (Principal Financial Officer)

      By: /s/ Mark D. Groban, M.D.                  3/29/99
         --------------------------------------------------
         Mark D. Groban, M.D.                          Date
         Chairman of the Board and Director
         (Principal Executive Officer)

      By: /s/ Christopher E. Mackail                3/29/99
         --------------------------------------------------
         Christopher E. Mackail                        Date
         Senior Vice President, Controller and Chief Accounting Officer
         (Principal Accounting Officer)

      By: /s/ John P. Mamana, M.D.                  3/29/99
         --------------------------------------------------
         John P. Mamana, M.D.                          Date
         Director










<PAGE> 61


      By: /s/ William M. Mayer, M.D.                3/29/99
         --------------------------------------------------
         William M. Mayer, M.D.                        Date
         Director

      By: /s/ Edward J. Muhl                        3/29/99
         --------------------------------------------------
         Edward J. Muhl                                Date
         Director

      By: /s/ Gretchen P. Murdza                    3/29/99
         --------------------------------------------------
         Gretchen P. Murdza                            Date
         Chief Executive Officer of Homecare and Pharmacy
         Subsidiaries and Director

      By: /s/ James A. Wild                         3/29/99
         --------------------------------------------------
         James A. Wild                                 Date
         Director







<PAGE> 62

(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, 1999............
 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.....................................(11)
10.61      1993 Non-Qualified Stock Option Letter Sent to Key Employees.............(11)
10.62      1992 Amendment to Employment Agreement Between George T. Jochum and
           the Company..............................................................(11)
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> 63

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..........................................................(11)
10.87      1998 Non-Qualified Stock Option Plan.....................................(11)
10.88      1998 Senior Management Bonus Plan........................................(11)
10.89      1998 Management Bonus Plan...............................................(11)
10.90      Amendment to 1994 Non-Qualified Stock Option Plan........................(11)
10.91      Amendment to 1995 Non-Qualified Stock Option Plan........................(11)
10.92      Amendment to 1996 Non-Qualified Stock Option Plan........................(11)
10.93      1999 Employment Agreement Between George T. Jochum and the Company.......(11)
10.94      Form of Agreement between MAMSI and Employees Granting Options
           under the 1998 Non-Qualified Stock Option Plan...........................(12)
10.95      Form of Agreement between MAMSI and George T. Jochum Granting Options
           under the 1998 Non-Qualified Stock Option Plan...........................(12)
10.96      Form of Agreement between MAMSI and Non-Employee Directors Granting
           Options under the 1998 Non-Qualified Stock Option Plan...................(12)
10.97      Memorandum to Employees and Form for Election Of Exchange
           and Repricing of Stock Options...........................................(12)
10.98      Agreement of Purchase and Sale of Real Estate............................(13)
10.981     1999 Non-Qualified Stock Option Plan.....................................
10.982     1999 Senior Management Bonus Plan........................................
10.983     1999 Management Bonus Plan...............................................
10.984     Amended and Restated Stock Compensation Trust Agreement
           dated January 11, 1999...................................................
10.985     Common Stock Purchase Agreement dated January 11, 1999...................
10.986     Allonge to Replacement Promissory Note dated January 11, 1999............
10.987     Employment Agreement between the Company and Mark D. Groban..............
10.988     Employment Agreement between the Company and Thomas P. Barbera...........
10.989     Employment Agreement between the Company and Robert E. Foss..............
10.990     Form of Executive Employment Agreement between the Company
           and Executive Staff......................................................
10.991     Form of Agreement between MAMSI and Employees Granting Options
           under the 1999 Non-Qualified Stock Option Plan...........................
10.992     Form of Agreement between MAMSI and Non-Employee Directors Granting
           Options under the 1999 Non-Qualified Stock Option Plan...................
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  Quarterly
Report filed under the  Securities  Exchange Act on Form 10-Q for the  Quarterly
Period Ended March 31, 1995.

(6) 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.

(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.




<PAGE> 64

(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.

(11)  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, 1997.

(12)  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 March 31, 1998.

(13)  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 September 30, 1998.