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, 1999

                                     OR

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

Commission file number 1-13340

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

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

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

(301) 294-5140
(Registrant's  telephone  number,  including  area code)  Securities  registered
pursuant to Section 12(b) of the Act:

                                            Name of Each Exchange

Title of Each Class                          on Which Registered

-------------------                         ---------------------
Common Stock, $0.01 par value               The New York Stock
  per share.                                  Exchange, Inc.

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

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

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

[  ]

Aggregate  market  value  of  voting  and  non-voting   common  equity  held  by
non-affiliates computed by reference to the price at which the common equity was
sold,  or the average  bid and asked price of such common  equity as of March 3,
2000: Approximately $365 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.

                 48,700,222 shares of common stock as of March 3, 2000






<PAGE>



DOCUMENTS INCORPORATED BY REFERENCE

The Proxy  Statement for the  Registrant's  annual meeting of shareholders to be
held on May 1,  2000 is  incorporated  by  reference  into Part III of this Form
10-K.

                                                                 2


<PAGE>



                               FORM 10-K

                                 INDEX

ITEM NO.   DISCLOSURE REQUIRED                                    PAGE

                                 PART I

Item 1     Business ..............................................   4
Item 2     Properties ............................................  15
Item 3     Legal Proceedings .....................................  15
Item 4     Submission of Matters to a Vote of Security Holders ...  16

                                 PART II

Item 5     Market for Registrant's Common Equity and Related
             Stockholder Matters ................................   17
Item 6     Selected Financial Data ..............................   18
Item 7     Management's Discussion and Analysis of Financial
             Condition and Results of Operations ................   19
Item 7A    Quantitative and Qualitative Disclosures About
             Market Risk ........................................   25
Item 8     Financial Statements and Supplementary Data ..........   26
Item 9     Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure ................   48

                                 PART III

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

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










                                                                 3


<PAGE>



                                     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")  offer a broad  range of  managed  health  care  coverage  and  related
ancillary insurance and other products and deliver these services through health
maintenance  organizations ("HMOs"),  preferred provider organizations ("PPOs"),
and a life and health insurance company.  MAMSI owns 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 non-stock 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 non-stock
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 insuring health care coverage  through its HMOs and
its life and health insurance  company.  During 1999, MAMSI offered HMO coverage
through four licensed HMO  subsidiaries  - M.D.  IPA,  Optimum  Choice,  Inc.(R)
("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").  MAMSI offers life and
health insurance through MAMSI Life and Health Insurance Company ("MLH").

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 in which the HMO
received  regulatory approval to cover 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
U.S. Office of Personnel  Management under the Federal Employees Health Benefits
Program,  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,  which is
comprised  of both small and large group  employers.  OCI also  covers  Medicaid
recipients  in Virginia.  OCI withdrew from Medicaid in West Virginia at the end
of October,  1999.  OCI's  present  commercial  service area includes the entire
states of Maryland,  West Virginia and Delaware,  the District of Columbia,  and
most counties and cities in Virginia.

                                                                 4


<PAGE>



OCCI, a non-Federally  qualified HMO, became a licensed HMO in North Carolina in
1995 and South Carolina in 1996. OCCI operates in both the small and large group
commercial  market.  OCCI  withdrew  from  the  Medicaid  program  at the end of
October,  1999.  OCCI's  present  service area  includes  certain areas of North
Carolina  and South  Carolina.  OCCI has yet to  market  its  products  in South
Carolina.

OCIPA, a  non-Federally  qualified HMO, became a licensed HMO in Pennsylvania in
1996. OCIPA stopped writing new business in June, 1999, and expects to cease all
operations in Pennsylvania by June, 2000.

MLH, 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  HMOs,  including  Pennsylvania.  MLH  sells  group  health  insurance,
including managed indemnity,  PPO, and point of service health products to large
and small employers and  individuals.  MLH also sells dental insurance and group
term life insurance as well as short-term disability insurance.

GENERAL

HMOs  typically  provide or arrange for the provision of  comprehensive  medical
services  (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 enrollees to utilize  participating  physicians and other  participating
health care practitioners.

The goal of an HMO is to  encourage  quality  health  care and to  perform  care
coordination designed to encourage the efficient, effective, and appropriate use
of health care services.  This includes monitoring physician services,  hospital
admissions  and  lengths  of  stay  and  maximizing  the   appropriate   use  of
non-hospital based medical services.

The  Company's  HMO  network of  physicians  and health  care  practitioners  is
organized as an Individual Practice  Association  ("IPA").  Under the IPA model,
the HMO contracts with a broadly  dispersed  group of physicians and health care
practitioners  to provide  medical  services to enrollees in the physicians' own
offices and in  hospitals;  the  physicians  and health care  practitioners  are
generally paid on a capitated or a negotiated fee maximum basis.  Physicians and
health  care  practitioners  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. Employers may or may
not renew their HMO agreements annually.  Moreover,  within each employer group,
the HMO may or may not  experience  increases  or  decreases  in  enrollment  by
individual  enrollees.  MAMSI's  HMOs  also  offer  individual  coverage  to the
commercial  and Medicaid  markets in some of its service area.  During 1999, the
Company ceased its  participation in the Medicaid  programs of West Virginia and
North Carolina.

Under  traditional  HMO  coverage,  the  enrollee  selects  a PCP from the HMO's
network of physicians and health care practitioners.  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.

                                                                 5


<PAGE>



Except in  emergencies,  enrollees are generally  required to utilize only those
participating   professional  and  institutional   health  care  physicians  and
practitioners  that have contracted with the IPA (see further  discussion  under
"HMO Arrangements with Physician and Institutional Health Care Practitioners").

OCI,  M.D.  IPA and OCCI also  offer  point-of-service  coverage.  In this 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  physician  or health  care
practitioner outside of the HMO network, the plan generally covers the lesser of
80% of the requested  charges or 100% of the maximum  allowable  charges for the
service  provided.  The enrollee  may be  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  hybrid  product  combines the use of capitated  PCPs to
serve as care  coordinators and employer funding of specialist and institutional
claims  on an "as  paid"  basis.  For some  large  groups,  MAMSI,  through  its
subsidiary,  MLH,  underwrites the 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 Virginia.  The Medicaid plan operates in a manner similar to the
traditional  HMO plan.  Virginia pays a monthly  premium based upon the age, sex
and geographic location of the recipients for whom OCI provides access to health
care. At December 31, 1999,  OCI's Medicaid  service area includes certain areas
of  Virginia.  OCI's  Medicaid  contract in Virginia  expires on June 30,  2000.
Company management has made the decision to not renew this contract.

Under all coverage  options,  enrollees  receive the following  basic  benefits:
primary and specialist physician services;  hospital services such as diagnostic
tests, x-rays, nursing and maternity services;  outpatient diagnostic tests such
as laboratory  tests,  x-rays,  and allergy testing and  injections.  A pharmacy
benefit is provided under most coverage options.

MLH currently  underwrites the indemnity  coverage of the HMOs  point-of-service
plans,  except OCCI, in addition to offering  stand-alone  indemnity  (including
PPO) 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,  MLH provides an  administrative  services  only ("ASO")
product to the State of Maryland.  ASO business  consists of allowing  access to
MAMSI's network of physicians and health care  practitioners,  without PCPs, and
the payment of claims.  MAMSI has no insurance  risk on this product.  MLH holds
insurance licenses in 31 states and the District of Columbia including Maryland,
Virginia,  West  Virginia,  Delaware,  Pennsylvania,  North  Carolina  and South
Carolina.

The  Company's  total health plan  (managed  care full risk and hybrid,  ASO and
indemnity  health  insurance)  membership  in the  HMOs  and  MLH  increased  to
approximately 766,000 at December 31, 1999 from 731,000 at December 31, 1998, an
increase of 4.8 percent.

                                                                 6


<PAGE>



The following table sets forth information relevant to MAMSI's HMO and indemnity
health plans as of December 31, 1999:

Employer Groups Served              28,000
Population of Aggregate HMO
  Service Area                  32,000,000
HMO Service Area Penetration
  (All HMO's)                           29%
Primary care Physicians              7,300
Specialist Physicians               15,700
Other Affiliated Health
  Care Practitioners                 9,300
Hospitals and Outpatient
  Facilities                         2,400
Pharmacies                          21,000

A significant  portion of the Company's premium revenue is derived from Federal,
state and local government agencies. For the years ended December 31, 1999, 1998
and 1997,  approximately 8%, 11% and 11%,  respectively,  of premium revenue was
derived from Federal  government  agencies which is included in the Medicare and
Risk segments,  and approximately  18%, 18% and 25%,  respectively,  was derived
from Maryland and Virginia state and local  government  agencies  located in the
Company's service area which is included in the Risk segment.

PREFERRED PROVIDER ORGANIZATION ("PPO")

MAMSI offers access to its preferred provider networks through two subsidiaries:
Alliance PPO, LLC,  ("Alliance")  and Mid Atlantic  Psychiatric  Services,  Inc.
("MAPSI").

PPOs allow enrollees to receive care from a network of participating  physicians
and health care  practitioners  who agree to provide  services at  contractually
negotiated  rates in exchange for increased  patient volume.  A PPO is different
than an HMO in that PPOs  allow  participants  the choice of using  health  care
physicians and  practitioners  outside of the PPO network.  The enrollee usually
has a financial  incentive to seek  services from a  participating  physician or
health care  practitioner  and can avoid higher  out-of-pocket  expenses such as
co-payments, coinsurance or deductibles that are applied when an out-of- network
physician or health care practitioner is used.

A PPO operates by being incorporated into an employer's current benefit program,
and offers  access to  physician,  hospital and facility  services;  utilization
management  and claims  screening and  re-pricing.  The employer  determines the
level  of  the  benefits,   eligibility   and  any  applicable   co-payments  or
deductibles.

Alliance does not assume any insurance risk from medical utilization,  and it is
not the claims  payor.  The payor can be a self-funded  employer,  a third party
administrator (TPA), a Health Benefits Trust Fund or a health insurance company.
In return for access to the PPO's network,  Alliance  charges the payor either a
per employee rate or a percentage of the savings of actual claims  processed for
the services  accessed.  MAMSI PPOs  provide  access to  substantially  the same
network of physicians and health care practitioners as MAMSI HMOs.

Alliance is marketed  primarily to and through  insurance  companies,  insurance
brokers,  consultants,  third party administrators,  self-insured  employers and
union health and benefit trusts.  The advantages of this marketing  approach are
minimized  marketing  costs and maximized  market coverage  through  established
employer  relationships.  Alliance also works directly with employers and unions
that are  self-insured  and using direct marketing  efforts.  Major  competition
comes from other PPOs and insurance carriers.

                                                                 7


<PAGE>



As of December  31, 1999,  Alliance  had  contracts  with  approximately  19,800
employer  groups that had access to the Company's  entire  network of physicians
and health care practitioners.

The  MAPSI  PPO  is  comprised  of  physicians  and  health  care  practitioners
specializing in behavioral health and substance abuse care.  Similar to Alliance
PPO,  MAPSI PPO does not assume any  insurance  risk and  MAPSI's  products  are
marketed directly to TPAs, self-insured groups, brokers, consultants,  indemnity
insurance  plans and  union  health  and  benefit  trusts.  In  addition,  MAPSI
contracts  with  indemnity  insurers  that want to offer  groups a managed  care
behavioral  health product.  MAPSI believes it has a competitive  advantage with
its unique  behavioral  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 are ValueOptions,  Magellan,  and MCC,
Inc. As of December 31, 1999,  MAPSI had a network of over 4,000  psychiatrists,
psychologists,  social workers,  and other affiliated licensed behavioral health
physicians and practitioners.

Alliance and MAPSI products 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  1,024,000  lives are covered under one or both of these
PPO products as of December 31, 1999.

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 likely that PPOs may be
subject to increased regulatory oversight in the future.

OTHER PRODUCTS

In October, 1994, MAMSI acquired all of the outstanding stock of HomeCall,  Inc.
("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 on
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.

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 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.
HomeCall  Mail RX was  sold to the  Company's  new  Pharmacy  Benefits  Manager,
Merck-Medco Managed Care, LLC effective January 1, 2000.

                                                                 8


<PAGE>




In November, 1996, the Company started HomeCall Hospice Services, Inc. ("HCHS"),
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,  HCHS  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.  HCHS  underwent  a
voluntary  accreditation  review by JCAHO in November,  1998 and  received  full
accreditation.

HCHS currently  serves the  Baltimore,  Washington,  D.C. and Northern  Virginia
metropolitan  areas. It is the goal of HCHS 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, HCHS and HCPS continue to provide services to other payors,
including Medicare, 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                     1997        1998        1999
------------                   ---------------------------------
                                         (in thousands)
<S>                            <C>         <C>           <C>
Commercial HMO (1)               389.1        424.9        452.5
Hybrid HMO (2)                   103.5         99.4        100.4
Medicaid                          34.0         30.9         12.3
Medicare                          11.2          7.0            -
Indemnity                        132.7        157.5        189.5
ASO (3)                           11.0         11.0         11.0
                               -------      -------      -------
                                 681.5        730.7        765.7
PPO (4)                        1,006.0      1,060.0      1,024.0
                               -------      -------      -------
Total Membership               1,687.5      1,790.7      1,789.7
                               =======      =======      =======
</TABLE>

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

(2)  Hybrid  HMO  includes  any  business  that uses  MAMSI's  network  and care
coordination 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 PCPs and no
assumption of insurance risk by any MAMSI affiliate.

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

                                                                 9


<PAGE>



HMO ARRANGEMENTS WITH PHYSICIAN AND INSTITUTIONAL HEALTH CARE PRACTITIONERS

M.D.  IPA and OCI  contract  with PHP-MD to provide  physician  and other health
practitioner  services to their enrollees.  The HMOs are ultimately  responsible
for  ensuring  that an  adequate  number of  physicians  and other  health  care
practitioners  are under  contract in order to provide  health care  services to
enrollees.

The Company  contracts  with primary care and specialist  physicians,  dentists,
social workers,  psychologists,  physical  therapists and podiatrists.  PCPs are
usually 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  physician  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.

The  HMOs  have  contractual   arrangements  with  a  combined  total  of  2,400
facilities, consisting of 400 hospitals and 2,000 non-hospital facilities, as of
December 31, 1999.  These  facilities  are located in the  Company's HMO Service
Area. Contracts with facilities are renewable annually.

HMO ARRANGEMENTS FOR OTHER SERVICES

The HMOs also contract with a number of entities to arrange for the provision of
other  services,   i.e.   emergency  care,  home  health  care,   pharmaceutical
assistance, laboratory testing and dental.

QUALITY ASSESSMENT/IMPROVEMENT

MAMSI conducts a multi disciplinary  approach to its Quality  Improvement ("QI")
Program 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 QI Program to  determine  and  allocate
appropriate  resources  that will have the greatest  impact for members.  The QI
Program  is  designed  to meet  and  serve  the  needs  of  employers,  members,
physicians  and health  care  practitioners  as well as to  monitor  timeliness,
appropriateness and effectiveness of services via ongoing and systematic reviews
of  key  indicators  and  aspects  of  care.  The  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.

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

In addition,  MAMSI utilizes  several quality review  mechanisms.  Physician and
health care practitioner 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 physicians.

                                                                 10


<PAGE>



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,   practitioners   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  clinical  care  coordination  staff  works 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
practitioner  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 in certain states,  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.

MAMSI received commendable accreditation from the National Committee for Quality
Assurance  ("NCQA") for its two largest health maintenance  organizations,  M.D.
IPA and OCI. The  commendable  accreditation  applies to the commercial  HMO/POS
products.  Commendable  accreditation  is given  to  managed  care  organization
product  lines and products  whose systems for consumer  protection  and quality
improvement exceed NCQA's rigorous requirements.

The Company's  home health care,  home infusion,  and home hospice  subsidiaries
underwent  voluntary  reaccreditation  review by JCAHO in November,  1998.  Full
accreditation status was awarded as a result of this process.

COMPETITION AND MARKETING STRATEGY

The  health  care  industry  is  characterized  by  intense  competition.  MAMSI
recognizes the possibility that other entities with greater  resources may enter
into  competition  with  MAMSI  in the  future  by  either  entering  its HMO or
indemnity service area or by designing alternative health care delivery systems.
HMOs  compete not only with other HMOs and managed care  organizations,  such as
physician and health care practitioner  sponsored  organizations,  but also with
insurance companies that offer indemnity insurance products.

MAMSI's HMOs compete with  approximately  19 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 and North Carolina).
The following  table sets forth MAMSI's best estimate of 1999 enrollment of HMOs
operating in its significant service areas.

                                                                 11


<PAGE>



<TABLE>
<CAPTION>

                                                              Approximate
                                                                 Number

Insurer/HMO                                                   of Enrollees
-------------                                                 ------------
<S>                                                           <C>
AETNA/U.S. Healthcare***.......................                  838,000
Mid Atlantic Medical Services, Inc.* ..........                  565,000
FreeState Health Plan** .......................                  541,000
Kaiser Permanente Health Plan .................                  516,192
United Healthcare .............................                  439,000
Cigna Healthcare...............................                  426,351
Trigon ........................................                  297,000
Partners Healthplan of North Carolina..........                  230,000
Optima ........................................                  225,000
Blue Cross/Blue Shield of North Carolina.......                  163,000

</TABLE>

Source: The InterStudy Competitive Edge - 9.2

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

** - This company is owned by Care First-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,  network  of
physicians and health care practitioners,  rates and the HMOs' responsiveness to
enrollee needs.

MAMSI subsidiaries employed  approximately 327 full-time individuals who provide
marketing  services for the Company's  products as of December 31, 1999. 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 64 percent of total large group new members
and 96 percent of total small group new members in 1999.

RISK MANAGEMENT

With the exception of certain small group markets and other markets regulated by
Federal and/or state law, 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.

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.

                                                                 12


<PAGE>





In addition,  MAMSI's HMOs reduce the financial impact of catastrophic losses by
maintaining  reinsurance  coverage for hospital  costs.  The  reinsurer  usually
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  with no more than  $1,000,000  in any given  year,  or
$5,000,000  for  certain  PPO members  who have an  unlimited  lifetime  maximum
benefit.

GOVERNMENT REGULATION

MAMSI's  HMOs and MLH 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) physician and health care practitioner
contracts; (v) quality assurance and utilization review programs; (vi) adherence
to   confidentiality   and  medical  records   requirements;   (vii)  enrollment
requirements;  (viii) financial reserves and other fiscal solvency requirements;
and (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 revise the premium with each  renewal.  In
setting  premiums,  the HMOs forecast health care utilization rates based on the
relevant  demographics and also consider competitive  conditions and the average
number of enrollees in the employer group.  In addition to these  premiums,  HMO
enrollees also make co-payments to physicians and health care practitioners.

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

M.D. IPA contracts with the Office of Personnel Management ("OPM") to provide or
arrange health  services under the Federal  Employees  Health  Benefits  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 FEHBP. The results of these audits could result in material adjustments.  In
recent  years,  OPM's review of the Company's  premium rates has been  completed
during  the  year  for  which  the  rates  were in  effect  without  significant
modification.

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, such as minimum net worth and deposit requirements.

MLH is subject to  regulation  by the  department  of insurance in each state in
which it is licensed.  These regulations  subject MLH to extensive review of the
terms,  administration  and marketing of insurance  products offered and minimum
net worth  and  deposit  requirements.  In  addition,  MLH 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.

                                                                 13


<PAGE>





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 licensor 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 pharmacy businesses have
obtained the necessary licenses and permits to operate.

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 benefits plans in accordance
with each plan's terms.

Due to continued  concern about privacy,  the  accountability of health insurers
and HMOs, and the cost and availability of health care coverage, legislation has
been considered and is likely to be considered by the United States Congress and
the  legislatures  of the state 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 established
certain  requirements for insurers,  health maintenance  organizations and ERISA
plans regarding eligibility rules for health care coverage. It also required the
Federal  government  to  establish  rules  governing  the privacy of health care
information submitted by electronic  transmission.  The Department of Health and
Human Services (HHS) recently  published draft  regulations  specifying rules to
maintain  the  privacy  of  health  care  information  submitted  by  electronic
transmission.   These  rules,  once  final,  will  apply  to  insurers,   health
maintenance organizations and ERISA plans. Depending on the content of the final
regulations,  MLH and MAMSI's HMOs may need to modify current procedures for the
transmission  and  processing  of  electronic  claims  as well  as  transactions
occurring over the Internet.

State  legislatures  and the U.S.  Congress  continue  to  debate  and  consider
legislation  to amend civil tort law so as to expand  "enterprise  liability" to
insurers,  HMOs and ERISA plans as well as other health care reform initiatives.
Neither  Congress nor any state  legislature in MAMSI's service area has enacted
laws that would expand an insurer's or HMO's liability in tort action.

States in the  Company's  service area have enacted laws  regarding the internal
and external review of adverse  utilization review decisions.  Under these laws,
persons  covered by insurers or HMOs (subject to state  regulation)  are given a
right to seek a fast and fair review of these  decisions,  first internally by a
medical  director and then  externally  by an  independent  review  organization
and/or a state regulator.  Maryland, the District of Columbia,  Virginia,  North
Carolina and  Pennsylvania  have enacted such laws. West Virginia is considering
similar action.

State  legislatures  are looking at a variety of proposals to increase access to
health care  coverage.  This includes  expanding the  eligibility  rules for the
Medicaid Program.

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

                                                                 14


<PAGE>





INVESTMENTS

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

EMPLOYEES

As of December 31, 1999, the Company had a total of 2,813  employees,  including
2,439  full-  time  and  374  part-time  employees.  MAMSI's  home  health  care
subsidiary  employed 621 of these employees (391 on a full-time basis and 230 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.

TRADEMARKS

The  Company  has  federally  registered  the  right to use the  trademark  name
"Optimum Choice, Inc."

SEGMENT INFORMATION

Segment   information   is  included  in  Item  8  "Financial   Statements   and
Supplementary Data" on pages 44 thru 46.

ITEM 2. PROPERTIES

The Company owns seven office buildings, one of which is sublet. These buildings
are located in Rockville and Frederick, Maryland and total approximately 350,000
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  193,000  square feet of office
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
physicians and health care  practitioners on March 26, 1997 in the Circuit Court
for Anne Arundel  County,  Maryland,  which alleges that the Company  improperly
reduced  payments to participating  physicians and health care  practitioners 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.

                                                                 15


<PAGE>




During  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 physicians  and
health  care  practitioners  to the  carrier by using the  device of  offsetting
future payments to physicians and health care practitioners with the amount owed
by the physician or health care  practitioner  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 matter remains within the  jurisdiction  of the MIA.  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
1999.

                                                                 16


<PAGE>



                                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.

                                     1999                     1998
                              -----------------        -----------------
                               HIGH        LOW          HIGH        LOW
                              -----------------        -----------------
First Quarter                 $12.88      $7.81        $13.88     $ 9.25
Second Quarter                 11.31       7.00         13.88      11.50
Third Quarter                  10.25       8.25         11.19       5.00
Fourth Quarter                  9.62       5.37         10.69       4.44

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 12 to the Consolidated Financial
Statements.

On January 11, 1999, the Company's Stock  Compensation  Trust ("SCT")  purchased
from the Company 1,500,000 shares of Mid Atlantic Medical Services,  Inc. common
stock at a price of $12.00 for $15,000 in cash and  $17,985,000 in the form of a
note payable to the  Company.  On August 20, 1999,  the SCT  purchased  from the
Company an additional  1,500,000 shares of Mid Atlantic Medical  Services,  Inc.
common stock at a price of $9.19 for $15,000 in cash and $13,766,250 in the form
of a note  payable to the Company.  The sales were exempt under  Section 4(2) of
the  Securities Act of 1933, as amended,  ("1933 Act").  The SCT is used to meet
grant  obligations of the Company's stock option plans,  and the shares issuable
upon exercise of these options are registered under the 1933 Act.

As of March 3, 2000 there were  approximately  753 stockholders on record of the
Company's common stock.

                                                                 17


<PAGE>



ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                                                 Year Ended December 31,
                                              1999          1998          1997          1996          1995
                                           ----------    ----------    ----------    ----------    ----------
                                           (in thousands except share amounts, key ratios and operating data)

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

Revenue                                    $1,317,316    $1,187,901    $1,111,653    $1,133,742    $  954,907
Expense                                     1,277,486     1,175,665     1,090,213     1,138,677       858,567
Income (loss) before income taxes
  (benefit)                                    39,830        12,236        21,440        (4,935)       96,340
Net income (loss)                              26,322         9,045        14,489        (2,768)       61,124
Earnings (loss) per common share
Basic                                           $0.64         $0.20         $0.31        ($0.06)        $1.33
Diluted                                         $0.64         $0.20         $0.31        ($0.06)        $1.28
Weighted Average Shares
  Basic                                    41,255,327    45,407,006    46,273,484    45,978,864    46,127,112
  Diluted                                  41,266,604    45,473,995    46,885,666    45,978,864    47,908,379
Dividends                                       ---           ---           ---           ---           ---

SELECTED BALANCE SHEET DATA (AT DECEMBER 31)

Working capital                           $   118,995   $   123,138   $   128,065   $   118,870   $   153,668
Total assets                                  388,584       362,775       345,959       334,719       354,182
Long-term debt                                      -            14            74           134           194
Stockholders' equity                          186,821       191,218       208,307       184,400       217,216
Cash dividends per common share (1)             ---           ---           ---           ---           ---
KEY RATIOS

Medical care ratio                               87.9%         88.8%         89.4%         92.4%         81.9%
Administrative expense ratio                     11.6%         11.3%         11.7%         10.7%         10.5%
Net income margin                                 2.0%          0.8%          1.3%          (.2%)         6.4%
OPERATING DATA
Annualized hospital days per
  1,000 enrollees:
All products and health services (3)              238           265           297           331           313
HMO only (2)                                      191           191           192           203           222
Medicare (3)                                        -         2,425         2,566         2,698         2,531
Medicaid (3)                                      496           375           552           454           405
Annualized hospital admissions per
  1,000 enrollees (3)                              61            72            78            77            80
HMO, hybrid, ASO and indemnity
  health enrollees at year end                766,000       731,000       682,000       745,000       658,000
PPO enrollees at year end                   1,024,000     1,060,000     1,006,000       935,000       825,000
Participating providers at year end            34,700        33,600        28,400        24,300        21,077
</TABLE>

Notes

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

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

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


                                                                 18


<PAGE>



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

3.   The possibility of increased litigation, legislation or regulation (such as
     the numerous  class action  lawsuits that have been recently  filed against
     managed care companies and the pending  initiatives to increase health care
     regulation) that might increase regulatory  oversight which, in turn, would
     have the potential for increased costs.

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

5.   The  possibility  that the Company is not able to negotiate  new or renewal
     contracts with appropriate physicians and health care practitioners.

GENERAL

During the three year period ended  December 31, 1999,  the Company  experienced
modest membership  expansion.  While membership in certain products continues to
grow,  others  have shown  decreases  when  compared  to 1998.  The  Company has
achieved  its overall  size by  continually  expanding  its product  lines which
include  point-of-service,  small group,  indemnity health,  hybrid products and
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 1999, the Company's  consolidated  operating  margin showed
improvement over 1998 after  consideration  of non-recurring  items in 1998. The
Company  achieved  1999's  results,  in  part,  by  implementing  product  price
increases  and reducing or  eliminating  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 2000.
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 physicians and health care  practitioners  should result
in continued profitability.

                                                                 19


<PAGE>



Due to continued  concern about privacy,  the  accountability of health insurers
and HMOs, and the cost and availability of health care coverage, legislation has
been considered and is likely to be considered by 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
established certain requirements for insurers,  health maintenance organizations
and ERISA plans regarding  eligibility  rules for health care coverage.  It also
required the Federal  government  to establish  rules  governing  the privacy of
health care information submitted by electronic transmission.  The Department of
Health and Human Services (HHS) recently published draft regulations  specifying
rules to maintain the privacy of health care information submitted by electronic
transmission.   These  rules,  once  final,  will  apply  to  insurers,   health
maintenance organizations and ERISA plans. Depending on the content of the final
regulations,  MLH and MAMSI's HMOs may need to modify current procedures for the
transmission  and  processing  of  electronic  claims  as well  as  transactions
occurring over the Internet.

State  legislatures  and the U.S.  Congress  continue  to  debate  and  consider
legislation  to amend civil tort law so as to expand  "enterprise  liability" to
insurers,  HMOs and ERISA plans as well as other health care reform initiatives.
Neither  Congress nor any state  legislature  in the Company's  service area has
enacted laws that would expand an insurer's or HMO's liability in tort action.

States in the  Company's  service area have enacted laws  regarding the internal
and external review of adverse  utilization review decisions.  Under these laws,
persons  covered by insurers or HMOs (subject to state  regulation)  are given a
right to seek a fast and fair review of these  decisions,  first internally by a
medical  director and then  externally  by an  independent  review  organization
and/or a state regulator.  Maryland, the District of Columbia,  Virginia,  North
Carolina and  Pennsylvania  have enacted such laws. West Virginia is considering
similar action.

State  legislatures  are looking at a variety of proposals to increase access to
health care  coverage.  This includes  expanding the  eligibility  rules for the
Medicaid Program.

The Company  believes  that the  current  political  environment  will result in
continued  legislative  scrutiny  of  health  insurers  and HMOs and may lead to
additional  legislative  initiatives.  The  Company  is  unable to  predict  the
ultimate  impact  of any  federal  or state  restructuring  of the  health  care
delivery or 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, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------------

RESULTS OF OPERATIONS

The  Company's  consolidated  net income for the year ended  December  31,  1999
increased to $26,322,000  from  $9,045,000 for the year ended December 31, 1998.
Earnings per share  increased  from $.20 in year ended December 31, 1998 to $.64
for the year ended December 31, 1999.  The increase in earnings is  attributable
to an increase in premiums  per  member,  a reduction  in medical  expenses as a
percentage of health premium revenue ("medical care ratio"),  offset somewhat by
an increase in administrative  expense. In addition,  the 1998 results include a
non-recurring  item related to the results of an audit  conducted in  connection
with the Company's  participation  in the FEHBP as well as the effect of certain
real estate sales and retirements of equipment.

                                                                 20


<PAGE>



Revenue for the year ended  December  31, 1999  increased  approximately  $129.4
million or 10.9 percent over the year ended  December 31, 1998.  Revenue for the
year ended  December 31, 1998 includes $5.7 million in gains related to the sale
of certain  Company  owned real  estate no longer  required  in its  operations.
Excluding  these gains,  year-over-year  revenue  increased 11.4 percent.  A 6.9
percent  increase  in net average HMO and  indemnity  enrollment  resulted in an
increase of  approximately  $77.5 million in health premium  revenue while a 4.3
percent  increase in average  monthly  premium per  enrollee,  combined  for all
products,  resulted in a $51.3 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" for a description
of the risk factors that may affect 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 2000 in the range of 7.5% 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, 1999, the
Company withdrew from participation in the Medicare program.  In October,  1999,
the Company withdrew from  participation in the North Carolina and West Virginia
Medicaid  programs.  The  Company  has  decided to  withdraw  from the  Virginia
Medicaid  Program  which  contractually  is due to expire on June 30, 2000.  The
Company may  effectuate  this  withdrawal by  transferring  its  membership to a
non-affiliated company.

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 and increased competition in the Company's service
area.

The  Company's  home health  operations  contributed  $23.6 million for the year
ended  December  31,  1999 as  compared  with $20.0  million  for the year ended
December 31, 1998 reflecting an increase in services provided to companies other
than MAMSI.

The medical care ratio decreased to 87.9 percent for the year ended December 31,
1999 as compared to 88.8 percent for the year ended  December 31, 1998. On a per
member per month basis,  medical expenses increased 3.2 percent. The decrease in
the medical care ratio 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 Company's withdrawal from the Medicare program and certain
state Medicaid  programs,  and also increased  premiums per member.  The ongoing
initiatives  should  help to control  the  Company's  medical  care  ratio.  The
statements  in this  paragraph  and the preceding  paragraphs  regarding  future
utilization  rates, cost containment  initiatives,  total medical costs,  future
increases in health  premiums per member and the Virginia  Medicaid  Program 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 care ratio.

                                                                 21


<PAGE>



Administrative  expenses as a  percentage  of revenue  ("administrative  expense
ratio")  increased  from 11.4  percent  (adjusted  to exclude the effect of real
estate  gains in revenue)  for the year ended  December 31, 1998 to 11.6 percent
for  the  year  ended   December  31,  1999.   Management   believes   that  the
administrative  expense  ratio  will  increase  modestly  in 2000 as  additional
personnel with  specialized  medical and other  expertise who were only with the
Company for part of 1999 are reflected for a full year. 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.

Included in the  Company's  year-to-date  1998 results is a  $16,500,000  charge
related to an audit conducted by the Office of Inspector General  concerning the
Company's  participation  in the FEHBP for the years 1992 - 1997.  The  report's
findings  indicated  that in the years 1992 - 1994 the FEHBP was  charged  rates
that  exceeded the then market  price.  The report had no findings for the years
1995  -  1997.  In  early  2000,  the  report  was  finalized  without  material
modification.

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.

The net margin rate  increased  from .8 percent for the year ended  December 31,
1998 to 2.0 percent  for the year ended  December  31,  1999.  This  increase is
consistent with the factors described above.

-----------------------------------------------------------------------------
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 FEHBP. The audit covered the
periods 1992 - 1997 with the audit findings  related to years 1992 - 1994. There
were no findings for the years 1995 - 1997.

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 the
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 two
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.

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  million 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.

                                                                 22


<PAGE>



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.

The medical  care 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
physicians  and health care  practitioners  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 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.

Included in the  Company's  year-to-date  1998 results is a  $16,500,000  charge
related to an audit conducted by the Office of Inspector General  concerning the
Company's  participation  in the FEHBP for the years 1992 - 1997.  The  report's
findings indicate that in the years 1992 - 1994 the FEHBP was charged rates that
exceeded  the then  market  price.  The  report  had no  findings  for the years
1995-1997.

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 percentage 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 percentage of pretax income.

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.

LIQUIDITY AND CAPITAL RESOURCES

The  Company's  business  is not  capital  intensive  and  the  majority  of the
Company's  expenses are payments to  physicians  and health care  practitioners,
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 physician and health care practitioner  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 continue to be sufficient in the future.

                                                                 23


<PAGE>



The Company's  cash and investment  securities  increased from $184.1 million at
December 31, 1998 to $206.2  million at December 31, 1999,  primarily due to the
timing of medical  expense  payments which  traditionally  lag behind  increased
premiums  per  member  and net income  offset by the  effect of  treasury  stock
purchases. Accounts receivable increased from $79.3 million at December 31, 1998
to $83.6 million at December 31, 1999, principally due to the timing of customer
payments,  increases in membership  and  increases in the Company's  home health
care customer base.

Net property and equipment  decreased from $45.0 million at December 31, 1998 to
$43.7 million at December 31, 1999 primarily due to assets being depreciated.

Medical  claims  payable  increased  from $129.3 million at December 31, 1998 to
$154.4 million at December 31, 1999,  primarily due to increased  membership and
an increase in medical expenses per member.

Additional paid-in capital increased from $138.2 million at December 31, 1998 to
$152.6 million at December 31, 1999 due principally to an additional 3.0 million
shares of the Company's  stock being placed into the SCT. This also accounts for
the change in the SCT balance.

Treasury  stock  increased  from $75.6  million at  December  31, 1998 to $104.1
million at December 31, 1999 due to the purchase of 3,194,940  additional shares
by the Company at a total cost of $28,494,000.

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, 1999,  approximately $3.6 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 the  operations  of MLH,  and a  $150,000  letter of credit  for the
Company's home health subsidiary. While no amounts have been drawn against these
letters of credit, they reduce the Company's credit line availability.

Following is a schedule of the  short-term  capital  resources  available to the
Company (in thousands):

<TABLE>
<CAPTION>

                                                          December 31,    December 31,
                                                             1999             1998
                                                         ------------     ------------
<S>                                                      <C>              <C>
Cash and cash equivalents                                $      3,725     $      9,787
Investment securities                                         202,522          174,325
Working capital advances to Maryland hospitals                 15,390           12,261
                                                          -----------      -----------
Total available liquid assets                                 221,637          196,373
Credit line availability                                       13,292           14,855
                                                          -----------      -----------
Total short-term capital resources                       $    234,929     $    211,228
                                                          ===========      ===========
</TABLE>

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.

                                                                 24


<PAGE>



The Company's major business  operations are principally  conducted  through its
HMOs and insurance  company.  HMOs and insurance  companies are subject to state
regulations  that,  among other things,  may require those companies to maintain
certain  levels of  equity,  and  restrict  the  amount of  dividends  and other
distributions that may be paid to their parent  corporations (See Note 12 to the
Consolidated Financial Statements).  As of December 31, 1999, those subsidiaries
of the Company were in compliance with all minimum capital requirements.

At its October  1999 Board  meeting,  the Board of  Directors  authorized  a $20
million stock  repurchase  program to begin November 15, 1999 and extend through
June 30,  2000.  As of December 31, 1999,  the Company had  repurchased  447,200
shares of its common stock for a total cost of approximately  $3.1 million under
its active stock repurchase program.

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 have resulted
in major system  failures or  miscalculations.  The Company  incurred  less than
$500,000 to bring its Y2K compliance program to completion. All of the Company's
critical  vendors  indicated Y2K  compliance at December 31, 1999. The year 2000
date rollover was completed by the Company  without  significant  incident.  The
Company plans to continue to monitor critical systems to insure that they remain
Y2K compliant.

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.  Debt  securities  at
December 31, 1999 mature according to their contractual terms as follows:

<TABLE>
<CAPTION>
                                                                                          There-                 Fair Value
Assets                             2000       2001       2002        2003       2004       after        Total      12/31/99
------                           -------     ------     ------     -------     ------     -------     --------     --------
<S>                              <C>         <C>        <C>        <C>         <C>        <C>         <C>
Available-for-Sale Securities    $90,648     $7,217     $5,691     $17,625     $7,002     $69,592     $197,775     $196,650

Average Interest Rate              5.34%      4.60%      4.66%       5.18%      4.89%       4.84%

Held-to-Maturity                 $ 2,273     $3,064     $  501     $ 3,725     $1,465     $ 3,013     $ 14,043     $ 14,062

Average Interest Rate              5.59%      5.75%      4.70%       4.70%      4.90%       6.76%

</TABLE>

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".

                                                                 25


<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

Consolidated Balance Sheets as of December 31, 1999 and 1998.....  27

Consolidated Statements of Operations for the years ended
  December 31, 1999, 1998 and 1997...............................  28

Consolidated Statements of Changes in Stockholders' Equity
  for the years ended December 31, 1999, 1998 and 1997...........  29

Consolidated Statements of Cash Flows for the years ended
  December 31, 1999, 1998 and 1997...............................  30

Notes to Consolidated Financial Statements.......................  31

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

Selected Quarterly Financial Data for Fiscal Years 1999 and
  1998 (Unaudited)...............................................  48

                                                                 26


<PAGE>



                                     Mid Atlantic Medical Services, Inc.
                                        Consolidated Balance Sheets
<TABLE>
<CAPTION>

                                                                                     December 31,
(in thousands except share amounts)                                              1999          1998
                                                                               --------      --------
<S>                                                                            <C>           <C>
ASSETS

Current assets

  Cash and cash equivalents                                                    $  3,725      $  9,787
  Investment securities                                                         202,522       174,325
  Accounts receivable, net                                                       83,623        79,258
  Prepaid expenses, advances and other                                           27,287        26,955
  Deferred income taxes                                                             381         1,247
                                                                               --------      --------
Total current assets                                                            317,538       291,572

Property and equipment, net                                                      43,668        44,961
Statutory deposits                                                               14,043        14,906
Other assets                                                                     10,357         9,055
Deferred income taxes                                                             2,978         2,281
                                                                               --------      --------
    Total assets                                                               $388,584      $362,775
                                                                               ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities

  Notes payable                                                                $     14      $     60
  Short-term borrowings                                                           3,558         1,845
  Accounts payable                                                               21,980        19,071
  Medical claims payable, net                                                   154,403       129,265
  Deferred premium revenue                                                       16,949        17,167
  Deferred income taxes                                                           1,639         1,026
                                                                               --------      --------
Total current liabilities                                                       198,543       168,434
Notes payable                                                                         -            14
Deferred income taxes                                                             3,220         3,109
                                                                               --------      --------
    Total liabilities                                                           201,763       171,557

Stockholders' equity

Common stock, $0.01 par,  100,000,000  shares authorized,  59,772,502 issued and
 49,439,222   outstanding  at  December  31,  1999  and  56,772,502  issued  and
 49,634,162

 outstanding at December 31, 1998                                                   597           567
Additional paid-in capital                                                      152,607       138,247
Stock compensation trust (common stock held in trust)                           (83,215)      (68,926)
Treasury stock, 10,333,280 shares at December 31, 1999;
  7,138,340 shares at December 31, 1998                                        (104,117)      (75,623)
Accumulated other comprehensive (loss) income                                    (1,013)        1,313
Retained earnings                                                               221,962       195,640
                                                                               --------      --------
    Total stockholders' equity                                                  186,821       191,218
                                                                               --------      --------
    Total liabilities and stockholders' equity                                 $388,584      $362,775
                                                                               ========      ========


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

</TABLE>

                                                                 27


<PAGE>



                                    Mid Atlantic Medical Services, Inc.
                                   Consolidated Statements of Operations

<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
(in thousands except per share amounts)                                1999          1998           1997
                                                                   ----------     ----------     ----------
<S>                                                                <C>            <C>            <C>
Revenue

  Health premium                                                   $1,253,063     $1,124,248     $1,051,923
  Fee and other                                                        21,352         20,501         18,351
  Life and short-term disability premium                                8,175          6,876          5,313
  Home health services                                                 23,630         19,962         21,025
  Investment                                                           11,096         10,622         15,041
  Gain on sale of real estate                                               -          5,692              -
                                                                   ----------     ----------     ----------
Total revenue                                                       1,317,316      1,187,901      1,111,653
                                                                   ----------     ----------     ----------
Expense
  Medical expense

    Referral and ancillary care                                       510,114        437,279        406,840
    Hospitalization, net of coordination of benefits                  336,002        342,852        323,435
    Primary care                                                       83,558         81,166         83,183
    Prescription drugs                                                170,745        136,767        127,187
    Reinsurance premiums, net                                             539            192            (49)
                                                                   ----------     ----------     ----------
                                                                    1,100,958        998,256        940,596
                                                                   ----------     ----------     ----------
  Life and short-term disability claims                                 4,033          3,760          2,811
                                                                   ----------     ----------     ----------
  Home health patient services                                         19,412         17,755         16,808
                                                                   ----------     ----------     ----------
  Administrative expense

    Salaries and benefits                                              99,682         85,166         80,700
    Promotion and advertising                                           4,311          3,939          3,543
    Professional services                                               4,559          4,066          6,499
    Facilities, maintenance and supplies                               26,848         27,058         26,609
    Other (including interest expense of $532, $414 and $540)          17,683         14,378         12,647
                                                                   ----------     ----------     ----------
                                                                      153,083        134,607        129,998
                                                                   ----------     ----------     ----------

  Loss on retirement of equipment                                           -          4,787              -
  Federal Employees Health Benefits Program

    accrual                                                                 -         16,500              -
                                                                   ----------     ----------     ----------
Total expense                                                       1,277,486      1,175,665      1,090,213
                                                                   ----------     ----------     ----------
Income before income taxes                                             39,830         12,236         21,440
Income tax expense                                                    (13,508)        (3,191)        (6,951)
                                                                   ----------     ----------     ----------
Net income                                                         $   26,322     $    9,045     $   14,489
                                                                   ==========     ==========     ==========

Basic earnings per common share                                    $      .64     $      .20     $      .31
                                                                   ==========     ==========     ==========

Diluted earnings per common share                                  $      .64     $      .20     $      .31
                                                                   ==========     ==========     ==========


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

</TABLE>

                                                                 28


<PAGE>



                       Mid Atlantic Medical Services, Inc.
           Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>

                                                                                           Accumulated

                                                  Additional       Stock                      Other
                                        Common     Paid-In      Compensation   Treasury   Comprehensive  Retained
(in thousands except share amounts)     Stock      Capital         Trust        Stock         Income     Earnings    Total
                                        ------    ----------    ------------  ---------   -------------  --------   --------
<S>                                     <C>        <C>           <C>          <C>           <C>          <C>        <C>

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

Exercise of stock options for
  13,100 shares released from the
  Stock Compensation Trust                             (105)           187                                                82
Stock option tax benefit                                 19                                                               19
Purchase of 3,000,000 shares of MAMSI
  common stock to be held in the
  Stock Compensation Trust                  30       31,751        (31,781)
Adjustment to market value for shares
  held in Stock Compensation Trust                  (17,305)        17,305
Repurchase of 3,194,940 shares of
  MAMSI common stock                                                            (28,494)                             (28,494)

Comprehensive Income:
Net Income                                                                                                 26,322     26,322
Other comprehensive loss,
 net of tax of $(1,522)                                                                       (2,326)                 (2,326)
                                        ------     --------      ---------    ---------     --------     --------   --------
Total Comprehensive Income                                                                                            23,996
                                                                                                                    --------
Balance, December 31, 1999              $  597     $152,607      $ (83,215)   $(104,117)    $ (1,013)    $221,962   $186,821
                                        ======     ========      =========    =========     ========     ========   ========

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

</TABLE>

                                                            29


<PAGE>



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

<TABLE>
<CAPTION>

                                                                                  Year  Ended  December  31,
(in thousands)                                                                1999           1998           1997
                                                                            --------       --------       --------
<S>                                                                         <C>            <C>            <C>
Cash flows from operating activities:
  Net income                                                                $ 26,322       $  9,045       $ 14,489
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Depreciation and amortization                                               10,249         10,796         10,179
  Provision for bad debts                                                        292             34           (187)
  Provision for deferred income taxes                                          2,415         (2,273)         7,260
  (Gain) loss on sale and disposal of assets                                      49           (833)             -
  (Increase) decrease in accounts receivable                                  (4,657)         8,563        (10,626)
  (Increase) decrease in prepaid expenses, advances and other                   (332)        (7,661)        13,029
  Increase (decrease) in accounts payable                                      2,909          2,193         (1,877)
  Increase (decrease) in medical claims payable, net                          25,138         30,937        (20,321)
  (Decrease) increase in deferred premium revenue                               (218)         1,445          5,243
                                                                            --------       --------       --------
Total adjustments                                                             35,845         43,201          2,700
                                                                            --------       --------       --------
          Net cash provided by operating activities                           62,167         52,246         17,189
                                                                            --------       --------       --------
Cash flows used in investing activities:

  Purchases of investment securities                                        (355,996)      (329,400)      (249,862)
  Sales and maturities of investment securities                              325,117        307,763        253,267
  Purchases of property and equipment                                         (8,147)        (9,008)       (21,016)
  Purchases of statutory deposits                                             (1,476)          (100)        (8,761)
  Maturities of statutory deposits                                             1,125              -             10
  Purchases of other assets                                                   (2,598)          (893)          (406)
  Proceeds from sale of assets                                                   486         12,574            131
                                                                            --------       --------       --------
          Net cash used in investing activities                              (41,489)       (19,064)       (26,637)
                                                                            --------       --------       --------
Cash flows (used in) provided by financing activities:

  Principal payments on notes payable                                            (60)           (60)           (60)
  Increase (decrease) in short-term borrowings                                 1,713           (404)           276
  Exercise of stock options                                                       82          5,416          4,859
  Stock option tax benefit                                                        19          2,495          3,878
  Purchase of treasury stock                                                 (28,494)       (34,412)             -
                                                                            --------       --------       --------
          Net cash (used in) provided by financing activities                (26,740)       (26,965)         8,953
                                                                            --------       --------       --------
Net (decrease) increase in cash and cash equivalents                          (6,062)         6,217           (495)
Cash and cash equivalents at beginning of year                                 9,787          3,570          4,065
                                                                            --------       --------       --------
Cash and cash equivalents at end of year                                    $  3,725       $  9,787       $  3,570
                                                                            ========       ========       ========


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

</TABLE>

                                                                 30


<PAGE>



                       Mid Atlantic Medical Services, Inc.

                   Notes to Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Mid  Atlantic  Medical  Services,  Inc.  ("MAMSI")  is a holding  company  whose
subsidiaries  are  active  in  managed  health  care and other  life and  health
insurance  related  activities.  MAMSI's  principal  markets  currently  include
Maryland,  Virginia, the District of Columbia,  Delaware,  West Virginia,  North
Carolina and Pennsylvania.  MAMSI and its subsidiaries (collectively referred to
as the  "Company")  have  developed  a broad  range of managed  health  care and
related ancillary products and deliver these services through health maintenance
organizations  ("HMOs"),  preferred provider organizations  ("PPOs"), a life and
health insurance company, home health care and home infusion services companies,
a hospice  company,  a 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.(R)("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
principally to third party payors or self-insured employer groups.

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

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

                                                                 31


<PAGE>



MAJOR CUSTOMERS

A significant  portion of the Company's premium revenue is derived from federal,
state  and local  government  agencies,  including  governmental  employees  and
Medicaid and Medicare  recipients.  For the years ended December 31, 1999,  1998
and 1997,  approximately 8%, 11% and 11%,  respectively,  of premium revenue was
derived from federal  government  agencies which is included in the Medicare and
Risk segments,  and approximately  21%, 18% and 25%,  respectively,  was derived
from Maryland and Virginia 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 and are held less than three months from the
date of purchase, are classified as cash equivalents.

INVESTMENT SECURITIES

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

PROPERTY AND EQUIPMENT

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

STATUTORY DEPOSITS

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

GOODWILL

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

HEALTH PREMIUM

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

                                                                 32


<PAGE>




FEE AND OTHER

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

HOME HEALTH SERVICES

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

MEDICAL EXPENSE

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

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

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

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

COORDINATION OF BENEFITS

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

                                                                 33


<PAGE>




INCOME TAXES

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

EARNINGS PER COMMON SHARE

The  Company  applies  Statement  of  Financial  Accounting  Standards  No. 128,
"Earnings Per Share," in calculating its earnings per share.  Basic earnings per
common share are based upon the weighted average shares outstanding. Outstanding
stock options are treated as common stock  equivalents for purposes of computing
diluted  earnings per share.  Shares held in the  Company's  Stock  Compensation
Trust  (see Note 10) are  excluded  from the  calculation  of basic and  diluted
earnings per share.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The  Company  follows  Statement  of  Financial  Accounting  Standards  No. 107,
"Disclosure  about Fair Value of Financial  Instruments"  ("Statement No. 107"),
which 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.

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

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

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

ESTIMATES

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

STOCK OPTION PLANS

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

                                                                 34


<PAGE>




NOTE 2 - INVESTMENTS

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

The following is a summary of available-for-sale and held-to-maturity securities
at December 31, 1999 and 1998:

<TABLE>
<CAPTION>

                                                       -----------------------------------------------------
                                                                                1999

                                                       -----------------------------------------------------
                                                                        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       $121,344       $   172        $   939        $120,577
Municipal bond funds                                     74,720             -            358          74,362
Accrued interest                                          1,711             -              -           1,711
                                                       --------       -------        -------        --------
Debt securities                                         197,775           172          1,297         196,650
Equity securities                                         6,423            60            611           5,872
                                                       --------       -------        -------        --------

Investment securities                                  $204,198       $   232        $ 1,908        $202,522
                                                       ========       =======        =======        ========

HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations
 of U.S. government agencies                           $  2,597       $    17        $    18        $  2,596
Obligations of states and political subdivisions         10,592            64             44          10,612
Other investments                                           854             -              -             854
                                                       --------       -------        -------        --------

Statutory deposits                                     $ 14,043       $    81        $    62        $ 14,062
                                                       ========       =======        =======        ========
</TABLE>

                                                                 35


<PAGE>



<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
                                                       --------       -------        -------        --------

Investment securities                                  $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>

For  the  years   ended   December   31,  1999  and  1998,   marketable   equity
available-for-sale  securities  with a  fair  value  at  the  date  of  sale  of
$2,524,000 and $92,570,000, respectively, were sold. The gross realized gains on
such sales totaled $50,000 and $5,793,000, and the gross realized losses totaled
$75,000 and $3,001,000 for each of the  respective  periods.  Realized gains and
losses are included in investment income.  Other sales of investment  securities
consisted principally of redemptions from municipal bond funds.

The  amortized  cost and  estimated  fair  value of debt and  marketable  equity
securities  at December  31, 1999,  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                         $ 90,648         $ 90,331
Due after one year through five years             37,535           37,314
Due after five years through ten years            48,566           47,983
Due after ten years                               21,026           21,022
                                                --------         --------
Debt securities                                  197,775          196,650
Equity securities                                  6,423            5,872
                                                --------         --------
                                                $204,198         $202,522
                                                ========         ========
HELD-TO-MATURITY
Due in one year or less                         $  2,273         $  2,274
Due after one year through five years              8,757            8,732
Due after five years through ten years             2,408            2,429
Due after ten years                                  605              627
                                                --------         --------
                                                $ 14,043         $ 14,062
                                                ========         ========
</TABLE>

                                                                 36


<PAGE>



NOTE 3 - ACCOUNTS RECEIVABLE

Accounts receivable consists of the following at December 31:

<TABLE>
<CAPTION>

                                                -------------------------
(in thousands)                                    1999             1998
                                                -------------------------
<S>                                             <C>              <C>
Premium and fee accounts                        $ 62,269         $ 57,399
Home health service accounts                       9,039            5,909
Medical recoverables                              10,574           16,204
Other                                              7,186            4,960
Less: allowance for doubtful accounts             (5,445)          (5,214)
                                                --------         --------
                                                $ 83,623         $ 79,258
                                                ========         ========
</TABLE>

Medical  recoverables  consist of refunds identified on paid claims. This amount
has  been  recorded  as a  reduction  of  medical  expense  in the  consolidated
statements of operations. Other receivables consist primarily of amounts due for
reinsurance  recoveries,  pharmacy  rebates and  interest  accrued on  statutory
deposits and amended tax returns.

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31:

<TABLE>
<CAPTION>

                                                ------------------------
(in thousands)                                     1999           1998
                                                ------------------------
<S>                                             <C>              <C>
Land, buildings and improvements                $32,086          $28,684
Computer equipment and software                  31,259           28,826
Office furniture and equipment                   20,776           19,498
Leasehold improvements                            1,065              861
                                                -------          -------
                                                 85,186           77,869
Less: accumulated depreciation and
  amortization                                  (41,518)         (32,908)
                                                -------          -------
                                                $43,668          $44,961
                                                =======          =======
</TABLE>

NOTE 5 - NOTES PAYABLE

Notes payable consists of the following at December 31:

<TABLE>
<CAPTION>

                                                ------------------------
(in thousands)                                    1999             1998
                                                ------------------------
<S>                                             <C>              <C>
Notes payable                                   $    14          $    74
Current portion                                     (14)             (60)
                                                -------          -------
Noncurrent portion                              $     -          $    14
                                                =======          =======
</TABLE>

                                                                 37


<PAGE>



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  investment  securities.   At  December  31,  1999,
approximately  $3.56 million was outstanding on one of the lines-of-credit at an
interest rate of 6.53% and approximately $12.15 million in letters-of-credit was
outstanding.

Interest  expense  paid in cash  during  1999,  1998 and 1997 was  approximately
$214,000, $188,000 and $538,000, respectively.

NOTE 6 - REINSURANCE

M.D. IPA, OCI, OCCI, OCIPA and MLH 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 or 90% of the approved per diem or fixed charge per
procedure (subject to a $2,000,000 maximum lifetime reinsurance limit per person
and no more than  $1,000,000 in a given year).  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  $950,000  maximum
recovery  per person for life  claims and  $1,000,000  per person on  accidental
death claims. Reinsurance recoveries for the years ended December 31, 1999, 1998
and 1997 were approximately $1,566,000, $1,597,000 and $2,045,000, respectively.
In the consolidated statements of operations, reinsurance premiums are shown net
of the related recoveries.

NOTE 7 - INCOME TAXES

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

<TABLE>

<CAPTION>                                       --------------------------
(in thousands)                                    1999              1998
                                                --------------------------
<S>                                             <C>                <C>
Deferred tax liabilities:
  Accelerated depreciation                      $ 1,770            $ 2,664
  Receivable valuation adjustments                3,988              4,460
  Unrealized investment (losses) gains             (663)               859
                                                -------            -------
Total deferred tax liabilities                    5,095              7,983
                                                -------            -------
Deferred tax assets:
  Accrued medical expenses                        1,144              3,429
  Premium revenue adjustments                     1,248              2,975
  State net operating losses                      3,133              2,449
  Accrued pension expenses                          875              1,263
  Other                                             250               (450)
                                                -------            -------
Total deferred tax assets                         6,650              9,666
Valuation allowance for deferred tax assets      (3,055)            (2,290)
                                                -------            -------
Net deferred tax assets                           3,595              7,376
                                                -------            -------
                                                $(1,500)              (607)
                                                =======            =======
Included in the consolidated balance sheets:

  Current assets - deferred income taxes        $   381            $ 1,247
  Non-current assets - deferred income taxes      2,978              2,281
  Current liabilities - deferred income taxes    (1,639)            (1,026)
  Non-current liabilities - deferred
    income taxes                                 (3,220)            (3,109)
                                                -------            -------
  Net deferred tax liability                    $(1,500)           $  (607)
                                                =======            =======
</TABLE>

                                                                 38


<PAGE>



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)                                     1999            1998          1997
                                                ---------------------------------------
<S>                                             <C>            <C>            <C>
Current:
  Federal                                       $  10,536      $   4,105      $  (1,363)
  State                                               557          1,359          1,054
                                                ---------      ---------      ---------
  Total current                                    11,093          5,464           (309)
                                                ---------      ---------      ---------
Deferred:
  Federal                                           2,623         (1,250)         7,279
  State                                              (208)        (1,023)           (19)
                                                ---------      ---------      ---------
  Total deferred                                    2,415         (2,273)         7,260
                                                ---------      ---------      ---------
                                                $  13,508      $   3,191      $   6,951
                                                =========      =========      =========
</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)                                     1999          1998          1997
                                                -------------------------------------
<S>                                             <C>            <C>            <C>

Statutory rate (35%)                            $13,940        $ 4,282        $ 7,504
Tax-exempt interest                              (1,421)        (1,369)        (1,582)
State income taxes, net of Federal benefit         (163)          (580)           461
Increase in valuation allowance for
  deferred tax assets                               765          1,228            325
Other non-deductible items                          566            526            575
Other, net                                         (179)          (896)          (332)
                                                -------        -------        -------
                                                $13,508        $ 3,191        $ 6,951
                                                =======        =======        =======
</TABLE>

Total tax deposits made by the Company in 1999, 1998 and 1997 were approximately
$10,027,000, $6,870,000 and $2,461,000, respectively.

NOTE 8 - RELATED PARTIES

For the years ended  December 31, 1999,  1998 and 1997,  certain  members of the
Boards  of  Directors  of  MAMSI  and  affiliated   corporations  who  are  also
participating   physicians  provided  medical  services  to  enrollees  totaling
$1,790,000,   $4,430,000  and   $6,103,000,   respectively,   which   represents
approximately .3%, 1% and 1% in 1999, 1998 and 1997,  respectively,  of payments
to all physicians.  Board members are remunerated at the same contractual  level
as all other  participating  physicians  and are selected by enrollees to render
medical   services  under  the  same  guidelines  as  all  other   participating
physicians.

                                                                 39


<PAGE>



NOTE 9 - EMPLOYEE BENEFITS PLANS

PENSION PLANS

The  Company  has a  defined  contribution  401(k)  savings  plan  covering  all
full-time  employees.  Employees  are allowed to  contribute  up to 23% of their
pretax earnings annually up to a maximum contribution of $10,000 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 five years in the Company  contributions.  During 1999,  1998 and 1997, the
Company's  contribution to the 401(k) plan aggregated  $1,056,000,  $681,000 and
$577,000, respectively.

STOCK OPTION PLANS

The  Company  follows  APB 25  under  which  no  compensation  expense  has been
recognized in  connection  with its stock option  plans.  Pro forma  information
regarding  net income and earnings per share are required by Statement  123, and
has been  determined  as if the Company had  accounted  for its  employee  stock
options under the fair value method of that statement.  The fair value for these
options was estimated at the date of grant using a Black-Scholes  option pricing
model with the following  weighted average  assumptions for 1999, 1998 and 1997,
respectively:  risk-free  interest  rates of 5.2%,  5.6%,  and 6.4%;  volatility
factors of the expected market price of the Company's  common stock of .59, .42,
and .42 and a weighted  average life of the options of three years.  The Company
anticipates that it will declare no dividends.

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

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

                                                 1999         1998        1997
                                                -------      ------      ------

Pro forma net income                            $19,856      $1,502      $9,007
Pro forma basic earnings per share                  .48         .03         .19
Pro forma diluted earnings per share                .48         .03         .19

In years 1990 through 1996,  1998 and 1999,  MAMSI  implemented a  non-qualified
stock option plan whereby options for the purchase of shares of common stock may
be granted to  directors,  officers  and  employees  of the  Company.  Unexpired
authorized  shares  under the plans total  10,800,000.  Options  under the plans
generally vest over a three-year  period and are exercisable at 100% of the fair
market value per share on the date the options are granted. The Company accounts
for these stock  option  grants in  accordance  with APB 25,  and,  accordingly,
recognizes no compensation  expense for these stock option grants.  Transactions
relating to the plans are summarized as follows:

                                                                 40


<PAGE>



<TABLE>
<CAPTION>

                                              1999                       1998                       1997
                                     -----------------------    -----------------------    -----------------------
<S>                                  <C>            <C>         <C>            <C>         <C>            <C>
                                                    Weighted                   Weighted                   Weighted
                                                    Average                    Average                    Average
                                        1999        Exercise       1998        Exercise       1997        Exercise
                                       Shares        Price        Shares        Price        Shares        Price
                                     ---------      --------    ---------      --------    ---------      --------

Outstanding, January 1               7,913,124      $14.98      8,099,231      $17.76      8,864,021      $ 17.02
Granted                              2,541,630      $ 9.32      6,304,558      $14.77      1,128,500      $ 12.79
Exercised                              (13,100)     $ 6.21       (935,425)     $ 5.79     (1,061,325)     $  4.58
Forfeited                             (917,055)     $16.37     (5,555,240)     $20.34       (831,965)     $ 19.92
                                     ---------                  ---------                  ---------
Outstanding, December 31             9,524,599      $13.35      7,913,124      $14.98      8,099,231      $ 17.76
                                     =========                  =========                  =========
Available for grant, end of year     1,581,308                  1,766,751                  1,188,744
Exercisable, end of year             5,910,801                  1,608,139                  4,887,992
Option price range for exercised
  shares                             $5.06-$7.88                $4.54-$12.63               $3.29-$14.75
Option price range at end of year    $5.00-$20.00               $5.00-$27.13               $4.54-$28.50
Weighted average fair value of
  options granted during year           $3.85                      $4.49                      $4.26

</TABLE>

<TABLE>
<CAPTION>

                              OPTIONS OUTSTANDING                                         OPTIONS EXERCISABLE
-----------------------------------------------------------------------------     --------------------------------
                        Outstanding     Weighted Average                          Exercisable
      Range of             as of           Remaining         Weighted Average        as of        Weighted Average
   Exercise Prices      12/31/1999      Contractual Life      Exercise Price      12/31/1999       Exercise Price
-------------------     -----------     ----------------     ----------------     -----------     ----------------
<S>                     <C>                  <C>                <C>               <C>                <C>
$ 5.00 - $10.00         2,249,557             4.3               $ 8.7831            208,627          $ 8.5196
$10.01 - $15.00         2,974,846             2.6               $12.5341          1,839,678          $12.5795
$15.01 - $20.00         4,300,196             1.3               $16.2930          3,862,496          $16.3272
                        ---------                                                 ---------
                        9,524,599             2.4               $13.3455          5,910,801          $14.8852
                        =========                                                 =========

</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.

INCENTIVE COMPENSATION PLAN

The Company has an incentive  compensation plan whereby managers receive bonuses
based upon the annual operating results of the Company.  During 1999,  incentive
compensation expense was approximately $4,200,000 which was paid to employees in
February,  2000. During 1998,  $800,000 was earned and recognized as expense and
in 1997 no management bonus was earned. 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.

                                                                 41


<PAGE>



NOTE 10 - COMMON STOCK

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

<TABLE>

<CAPTION>                                       -----------------------------------------
                                                    1999           1998           1997
                                                -----------------------------------------
<S>                                             <C>            <C>            <C>
Numerator:
  Net income                                    $26,322,000    $ 9,045,000    $14,489,000

Denominator:
  Denominator for basic earnings per share
    - weighted average shares                    41,225,327     45,407,006     46,273,484
  Dilutive securities - employee stock options       41,277         66,989        612,182
  Denominator for diluted earnings per share
    - adjusted weighted average shares           41,266,604     45,473,995     46,885,666

</TABLE>

On  August  26,  1996,  the  Company  established  the  MAMSI  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
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
are repaid by cash received by the SCT or will be forgiven by MAMSI,  which will
result  in the SCT  releasing  shares to  satisfy  MAMSI  obligations  for stock
compensation.

During 1999, the SCT purchased an additional  3,000,000  shares of the Company's
common stock for approximately  $31.8 million.  The existing promissory note has
been modified to reflect these purchases.

For financial reporting  purposes,  the SCT is consolidated with MAMSI. The fair
market  value  of  the  shares  held  by the  SCT is  shown  as a  reduction  to
stockholders'   equity  in  the  Company's   consolidated  balance  sheets.  All
transactions  between the SCT and MAMSI are eliminated.  The difference  between
the cost and fair  value of  common  stock  held in the SCT is  included  in the
consolidated financial statements as additional paid-in capital. At December 31,
1999, 1998 and 1997, the SCT held 10,010,850,  7,023,950 and 7,959,375 shares of
common stock at a fair market  value of  approximately  $83.2,  $68.9 and $101.5
million, respectively.

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

NOTE 11 - COMMITMENTS AND CONTINGENCIES

The  Company  leases  certain  equipment  and  office  space  under the terms of
non-cancelable  operating leases that expire at various dates through 2004. Rent
expense relating to these operating leases approximated  $3,429,000,  $3,502,000
and $3,552,000 in 1999, 1998 and 1997, respectively.

                                                                 42


<PAGE>



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

Year                    Amount

----                   -------
2000                   $ 2,720
2001                     2,122
2002                     1,521
2003                       617
2004                       178
                       -------
                       $ 7,158

                       =======

During  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 physicians  and
health  care  practitioners  to the  carrier by using the  device of  offsetting
future payments to physicians and health care practitioners with the amount owed
by the physicians and health care practitioners 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.  The matter
remains  within  the  jurisdiction  of the  MIA.  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 OPM to provide or arrange  health  services  under the
FEHBP.  The contract with OPM and applicable  government  regulations  establish
premium rating  requirements for the FEHBP. The premiums  established  under the
OPM contract are subject to periodic review and audit to determine, if they were
established in compliance with the community rating and other requirements under
the program.

In 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 the FEHBP
for the years  1992-1997  related to findings  for the 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.  OPM's current  practice is
to audit large plans every year. 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 early
2000, the Company  settled all findings  without  material  modification  to its
original charge.

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

                                                                 43


<PAGE>



NOTE 12 - STATUTORY REQUIREMENTS

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

Minimum  required  statutory  net worth  and  actual  statutory  net worth as of
December 31 are as follows:
<TABLE>
<CAPTION>

                              1999                              1998
                   --------------------------        --------------------------
                     Minimum         Actual            Minimum         Actual
                   ----------     -----------        ----------     -----------
<S>                <C>            <C>                <C>            <C>
M.D. IPA           $3,000,000     $57,400,000        $3,000,000     $42,000,000
OCI                 3,000,000      64,100,000         3,000,000      56,000,000
MLH                   500,000      52,000,000           500,000      34,500,000
OCCI                2,500,000       2,500,000         2,500,000       2,900,000
OCIPA               1,500,000       2,300,000         1,500,000       2,400,000
</TABLE>

M.D. IPA, OCI,  OCCI,  OCIPA and MLH were in  compliance  with state  depository
rules at  December  31, 1999 and 1998.  OCCI failed to meet its working  capital
requirement of $1.6 million at December 31, 1999. In February,  2000, additional
capital was provided to meet this  requirement.  MLH was in compliance  with the
applicable  risk-based  capital  requirements  for  life  and  health  insurance
companies at December 31, 1999 and 1998,  and M.D. IPA, OCI, OCCI and OCIPA were
in compliance with the applicable  risk-based  capital  requirements at December
31,  1999.  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 13 - RISK CONCENTRATIONS

Financial  instruments  that  potentially  subject  the  Company to credit  risk
consist  primarily of  investments  in marketable  securities  (including  money
market funds, floating rate municipal putable bonds, intermediate term municipal
bonds, and common stocks) and premiums  receivable.  The Company receives advice
through or assigns direct management of investment in securities to professional
investment  managers  selected for their  expertise in various  markets,  within
guidelines established by the Board of Directors. These guidelines include broad
diversification  of  investments.  Concentrations  of credit  risk and  business
volume with respect to commercial  premiums receivable are generally limited due
to the large number of employer groups  comprising the Company's  customer base.
As of December 31, 1999,  approximately  19% 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 14 - REPORTABLE SEGMENTS

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 care
coordinators,  employer funding of specialist and institutional claims on an "as
paid" basis

                                                                 44


<PAGE>



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 received a monthly premium for
which the Company provides  comprehensive medical coverage to those individuals.
Effective  January 1, 1999, the Company no longer  participates  in the Medicare
program.  MAMSI offers access to its preferred provider network of physicians to
employers and insurance companies in association with various health plans. PPOs
allow enrollees to receive care from a network of  participating  physicians and
health  care  practitioners  who  agree to  provide  services  at  contractually
negotiated rates in exchange for increased patient volume. A PPO does not assume
insurance risk from medical utilization and it is not the claims payor.

MEASUREMENT OF SEGMENT PROFIT OR LOSS

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

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

FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS

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

<TABLE>
<CAPTION>

REPORTABLE SEGMENTS
                                                       -----------------------------------------------------------------
(in thousands)                                            Risk       Medicare        PPO        All Others      Totals
                                                       -----------------------------------------------------------------
<S>                                                    <C>            <C>          <C>          <C>           <C>
Year ended December 31, 1999:

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

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

                                                       -----------------------------------------------------------------
(in thousands)                                            Risk       Medicare        PPO        All Others      Totals
                                                       -----------------------------------------------------------------
Year ended December 31, 1998:

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

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

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

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

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

</TABLE>

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

                                                                 45


<PAGE>



<TABLE>
<CAPTION>

                                                                --------------------------------------------
(in thousands)                                                     1999              1998             1997
                                                                --------------------------------------------
<S>                                                             <C>              <C>              <C>
Revenues

Total external revenues for reportable segments                 $1,227,692       $1,107,616       $  989,629

Other revenues                                                      78,528           63,971          106,983

Investment revenue not allocated                                    11,096           10,622           15,041

Gain on sale of real estate                                           -               5,692             -
                                                                ----------       ----------       ----------
     Total consolidated revenues                                $1,317,316       $1,187,901       $1,111,653
                                                                ==========       ==========       ==========

Pretax Profit

Total profit from reportable segments                           $   31,189       $   17,221       $    2,026

Other (loss) or profit                                              (2,011)             519            5,095

Net investment income not allocated                                 10,652           10,091           14,319

Gain on sale of real estate                                           -               5,692             -

Federal Employees Health Benefits Program

  accrual                                                             -             (16,500)            -

Loss on retirement of equipment                                       -              (4,787)            -
                                                                ----------       ----------       ----------
     Total consolidated pretax profit                           $   39,830       $   12,236       $   21,440
                                                                ==========       ==========       ==========
</TABLE>

NOTE 15 - COMPREHENSIVE INCOME

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

<TABLE>
<CAPTION>

                                                                -----------------------------------------
(in thousands)                                                    1999             1998             1997
                                                                -----------------------------------------
<S>                                                             <C>              <C>              <C>
Unrealized holding (losses) gains arising
 during period                                                  $(2,341)         $ 2,055          $ 5,573

Less: Reclassification adjustment for

  net (losses) gains included in net income                         (15)           1,688            4,892
                                                                -------          -------          -------

Net unrealized (losses) gains recognized in
 other comprehensive (loss) income                              $(2,326)         $   367          $   681
                                                                =======          =======          =======
</TABLE>

                                                                 46


<PAGE>













                         Report of Independent Auditors

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


We have audited the  accompanying  consolidated  balance  sheets of Mid Atlantic
Medical  Services,  Inc. and  subsidiaries as of December 31, 1999 and 1998, 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, 1999. Our audits also included the financial  statement  schedule  listed in
the  Index at Item  14(a).  These  financial  statements  and  schedule  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of Mid
Atlantic Medical Services,  Inc. and subsidiaries at December 31, 1999 and 1998,
and the  consolidated  results of their operations and their cash flows for each
of the three years in the period ended  December 31, 1999,  in  conformity  with
accounting  principles  generally  accepted in the United  States.  Also, in our
opinion,  the related financial statement schedule,  when considered in relation
to the financial  statements  taken as a whole,  presents fairly in all material
respects the information set forth therein.

                                          /s/ Ernst & Young LLP

                                          ----------------------
                                          Ernst & Young LLP

McLean, Virginia
February 14, 2000

                                                                 47


<PAGE>



SELECTED QUARTERLY FINANCIAL DATA FOR FISCAL YEARS 1999 AND 1998

<TABLE>
<CAPTION>

                                    1999       1999       1999       1999       1998       1998       1998       1998
                                    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                            $313,198   $323,530   $335,250   $345,338   $289,502   $294,225   $299,546   $304,628
Expense                             304,127    316,560    324,689    332,110    278,843    288,496    310,685    297,641

Income (loss) before income taxes
 (benefit)                            9,071      6,970     10,561     13,228     10,659      5,729    (11,139)     6,987
Net income (loss)                     5,871      4,506      7,120      8,825      6,690      3,585     (6,743)     5,513

Basic earnings (loss) per share         .14        .11        .17        .22        .14        .08       (.15)       .13
Diluted earnings (loss) per share       .14        .11        .17        .22        .14        .08       (.15)       .13

</TABLE>

Included  in the third  quarter of 1998 is a one-time,  pre-tax  charge of $16.5
million related to the Company's  participation in the FEHBP. See Note 11 to the
Consolidated Financial Statements.

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

None.



                                                                 48


<PAGE>



                                    Part III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required  by  this  item is  incorporated  by  reference  from
"Directors and Executive  Officers"  section of the Proxy  Statement for MAMSI's
annual meeting of shareholders to be held on May 1, 2000.

ITEM 11. EXECUTIVE COMPENSATION

The  information  required  by  this  item is  incorporated  by  reference  from
"Directors  and Executive  Officers -- Directors'  Compensation"  and "Executive
Management  Compensation"  sections of the Proxy  Statement  for MAMSI's  annual
meeting of shareholders to be held on May 1, 2000.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required by this item is incorporated by reference from "Stock
Owned  by  Management"  and  "Principal  Stockholders"  sections  of  the  Proxy
Statement for MAMSI's annual meeting of shareholders to be held on May 1, 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required  by  this  item is  incorporated  by  reference  from
"Executive  Management  Compensation" section of the Proxy Statement for MAMSI's
annual meeting of shareholders to be held on May 1, 2000.

                                                                 49


<PAGE>



                                     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, 1999 and 1998 ...    27
Consolidated Statements of Operations for the years ended
  December 31, 1999, 1998 and 1997 .............................    28
Consolidated Statements of Changes in Stockholders' Equity
  for the years ended December 31, 1999, 1998 and 1997 .........    29
Consolidated Statements of Cash Flows for the years ended
  December 31, 1999, 1998 and 1997 .............................    30
Notes to Consolidated Financial Statements .....................    31
Report of Ernst & Young LLP Independent Auditors ...............    47

(a)(2) and (d)
INDEX TO FINANCIAL STATEMENT SCHEDULE                             PAGE
                                                                  ----
II - Valuation and Qualifying Accounts as of December 31,
       1999, 1998 and 1997 .....................................    51

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

                                                                 50


<PAGE>



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

YEAR ENDED DECEMBER 31, 1999

Allowance for doubtful accounts - accounts receivable

                $  5,214       $    462          $   (230)(1)   $               $ 5,446
                ========       ========          ========       ========        =======

Valuation allowance - deferred tax assets

                $  2,290       $    765          $              $               $ 3,055
                ========       ========          ========       ========        =======

</TABLE>

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



                                                                 51


<PAGE>



(a)(3)
EXHIBITS

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

(b)
REPORTS ON FORM 8-K

None.

                                                                 52


<PAGE>



                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

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

      By: /s/ Mark D. Groban, M.D.                   3/28/00
         --------------------------------------------------
         Mark D. Groban, M.D.                          Date
         Chairman of the Board and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.

      By: /s/ Thomas P. Barbera                      3/28/00
         --------------------------------------------------
         Thomas P. Barbera                           Date
         Vice Chairman of the Board, President, Chief Executive Officer
         and Director

      By: /s/ Francis C. Bruno, M.D.                 3/28/00
         ---------------------------------------------------
         Francis C. Bruno, M.D.                       Date
         Director

      By:
         ---------------------------------------------------
         John H. Cook, III, M.D.                      Date
         Director

      By: /s/ Raymond H. Cypess, D.V.M., Ph.D.       3/28/00
         ---------------------------------------------------
         Raymond H. Cypess, D.V.M., Ph.D.             Date
         Director

      By: /s/ Robert E. Foss                         3/28/00
         --------------------------------------------------
         Robert E. Foss                               Date
         Senior Executive Vice President and Chief Financial Officer
         and Director
         (Principal Financial Officer)

      By: /s/ Mark D. Groban, M.D.                   3/28/00
         --------------------------------------------------
         Mark D. Groban, M.D.                         Date
         Chairman of the Board and Director
         (Principal Executive Officer)

      By: /s/ Christopher E. Mackail                 3/28/00
         --------------------------------------------------
         Christopher E. Mackail                       Date
         Senior Vice President, Controller and Chief Accounting Officer
         (Principal Accounting Officer)

      By: /s/ John P. Mamana, M.D.                   3/28/00
         --------------------------------------------------
         John P. Mamana, M.D.                         Date
         Director

      By: /s/ William M. Mayer, M.D.                 3/28/00
         --------------------------------------------------
         William M. Mayer, M.D.                       Date
         Director





                                                                 53


<PAGE>



      By: /s/ Edward J. Muhl                        3/28/00
         --------------------------------------------------
         Edward J. Muhl                               Date
         Director

      By: /s/ Gretchen P. Murdza                    3/28/00
         --------------------------------------------------
         Gretchen P. Murdza                           Date
         Chief Executive Officer of Homecare and Pharmacy
         Subsidiaries and Director

      By: /s/ Janet L. Norwood                      3/28/00
         --------------------------------------------------
         Janet L. Norwood, Ph.D.                      Date
         Director

      By: /s/ John A. Paganelli                     3/28/00
         --------------------------------------------------
         John A. Paganelli                            Date
         Director

      By:
         --------------------------------------------------
         Ivan R. Sabel                                Date
         Director

      By: /s/ James A. Wild                         3/28/00
         --------------------------------------------------
         James A. Wild                                Date
         Director



                                                                 54


<PAGE>



(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 15, 2000............
 3.4       Copy of Certificate of Amendment of MAMSI Certificate of
           Incorporation dated June 2, 1994.........................................(4)
10.41      Copy of Agreement between M.D. IPA and Surgical Care Affiliates, Inc.,
           dated April 22, 1985.....................................................(4)
10.60      1993 Non-Qualified Stock Option Plan.....................................(11)
10.61      1993 Non-Qualified Stock Option Letter Sent to Key Employees.............(11)
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)
10.72      List of States in which MAMSI Life is Licensed to Operate................(3)
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)
10.79      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)
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.....................................(14)
10.982     1999 Senior Management Bonus Plan........................................(14)
10.983     1999 Management Bonus Plan...............................................(14)
10.984     Amended and Restated Stock Compensation Trust Agreement
           dated January 11, 1999...................................................(14)
10.985     Common Stock Purchase Agreement dated January 11, 1999...................(14)
10.986     Allonge to Replacement Promissory Note dated January 11, 1999............(14)
10.987     Employment Agreement between the Company and Mark D. Groban..............(14)
10.988     Employment Agreement between the Company and Thomas P. Barbera...........(14)
10.989     Employment Agreement between the Company and Robert E. Foss..............(14)


                                                                 55


<PAGE>



10.990     Form of Executive Employment Agreement between the Company
           and Executive Staff......................................................(14)
10.991     Form of Agreement between MAMSI and Employees Granting Options
           under the 1999 Non-Qualified Stock Option Plan...........................(14)
10.992     Form of Agreement between MAMSI and Non-Employee Directors Granting
           Options under the 1999 Non-Qualified Stock Option Plan...................(14)
10.993     Employment Agreement between the Company and Mark D. Groban..............(15)
10.994     Employment Agreement between the Company and Thomas P. Barbera...........(15)
10.995     First Amendment to Employment Agreement between the Company
           and Mark D. Groban.......................................................(16)
10.996     First Amendment to Employment Agreement between the Company
           and Thomas P. Barbera....................................................(16)
10.997     First Amendment to Employment Agreement between the Company
           and Robert E. Foss.......................................................(16)
10.998     Amended and Restated Stock Compensation Trust Agreement
           dated August 20, 1999....................................................(16)
10.999     Common Stock Purchase Agreement dated August 20, 1999....................(16)
10.21      Allonge to Replacement Promissory Note dated
           August 20, 1999..........................................................(16)
10.22      2000 Non-Qualified Stock Option Plan.....................................
10.23      2000 Senior Management Bonus Plan........................................
10.24      2000 Key Management Bonus Plan...........................................
10.25      Plan for Deferral of Directors Fees......................................
10.26      Form of Agreement between MAMSI and Employees Granting Options
           Under the 2000 Non-Qualified Stock Option Plan...........................
10.27      Form of Agreement between MAMSI and Non-Employee Directors Granting
           Options Under the 2000 Non-Qualified Stock Option Plan...................
10.28      Form of Agreement between MAMSI and Directors Electing
           to Defer Director Fees...................................................
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 of 1934 on Form 10-Q/A for
     the quarterly period ended September 30, 1996.

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

(9)  Incorporated  by reference to exhibits  filed with the Company's  Quarterly
     Report filed under the Securities Exchange Act of 1934 on Form 10-Q for the
     quarterly period ended March 31, 1997.

                                                                 56


<PAGE>


(10) 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 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 of 1934 on Form 10-Q for the
     quarterly period ended March 31, 1998.

(13) 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, 1998.

(14) 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, 1998.

(15) 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 June 30, 1999.

(16) 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, 1999.

                                                                 57