SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
               Transition Report under Section 13 or 15 (d) of the
                         Securities Exchange Act of 1934
      For the Transition Period From November 1, 1998 to December 31, 1998
                         Commission File Number 0-26168

                               CAREADVANTAGE, INC.
                               (Name of Business)

        Delaware                                                  52-1849794
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                             Identification No.)

485-C Route 1 South, Iselin, New Jersey                            08830
(Address of principal executive office)                          (Zip Code)

       Registrant's telephone number, including area code: (732) 602-7000
  Securities registered pursuant to Section 12 (b) of the Exchange Act of 1934:

Title of class                       Name of each exchange on which registered

   None

          Securities registered pursuant to Section 12 (g) of the Act:

                          Common Stock $.001 par value
                                (Title of Class)

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  twelve 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      No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X] The Registrant's  revenues for its most recent fiscal year
were $18,902,806 (as of 10/31/98)

Aggregate  market  value  of the  voting  stock  held by  non-affiliates  of the
registrant  as  of  July  31,  1999  (assuming,  solely  for  purposes  of  this
calculation,  that all directors and executive  officers of the  Registrant  are
affiliates).: $28,766,459

Number of shares of common stock outstanding as of September 2, 1999: 82,189,883

            Transitional Small Business Disclosure Format Yes No |X|

     PORTIONS OF THE FOLLOWING DOCUMENTS HAVE BEEN INCORPORATED BY REFERENCE
                  INTO THIS ANNUAL REPORT ON FORM 10-KSB: NONE


<PAGE>







                                     PART I

Item 1. Description of Business

Introduction and Background

         CareAdvantage,  Inc.  ("CAI" or the  "Company")  is a  holding  company
which,  through  its  direct and  indirect  subsidiaries,  CareAdvantage  Health
Systems, Inc. ("CAHS") and Contemporary HealthCare Management, Inc. ("CHCM"), is
in the business of providing health care cost containment  services  designed to
enable health care insurers and other health service organizations to reduce the
costs of medical services provided to their  subscribers.  The services provided
include utilization review in medical/surgical cases where  pre-authorization is
required  for   hospitalization   and  for  certain  in-patient  and  outpatient
procedures,  case management and disease management. The Company's services have
been  principally  provided to several of the statewide Blue  Cross/Blue  Shield
health service organizations in the Northeastern United States.

         CAI was  incorporated  in August 1994 as a wholly owned  subsidiary  of
Primedex Health Systems,  Inc., a publicly traded New York corporation ("PMDX").
During the fiscal year ended October 31, 1994, the Company recruited most of the
members  of  its  former   management  team  and  began  to  put  in  place  the
infrastructure  necessary to execute its growth and acquisition  strategies.  No
revenues were realized from the Company's inception through October 31, 1994, as
its principal  operating  activities were those of a development  stage company.
Effective  November 1, 1994,  the beginning of its 1995 fiscal year, the Company
commenced principal operations and began realizing revenues from certain interim
and long-term  service  agreements.  In October 1994, the Company  acquired CAHS
(under its prior corporate name, Advantage Health Systems, Inc., "AHS"). On June
12, 1995, a stock dividend of all of the issued and outstanding shares of common
stock of the Company was declared  effective by PMDX.  As a result,  the Company
commenced  trading as a publicly  traded  company on that date.  At December 31,
1998, the Company had a cumulative deficit of $18,675,000.

        From its  inception  through  October  31,  1995,  CAI relied on PMDX to
provide the bulk of its working capital.  In addition to transferring all of its
AHS stock to the Company,  PMDX made a total of  $9,700,059  in working  capital
advances to CAI (the last such advance  being made in July 1995).  Pursuant to a
revised  separation  agreement  between CAI and PMDX dated April 20, 1995,  PMDX
agreed to capitalize all such advances in connection with CAI's  separation from
PMDX.

          The Company's  executive offices are located at 485-C Route 1 South,
Koll Corporate Plaza,  Iselin,  New Jersey 08830 and its telephone number is
(732) 602-7000.

         Change in Control - On  February  22,  1996,  the  Company  completed a
series of  transactions  with CW Ventures  II,  L.P.  ("CW  Ventures")  and with
Horizon Blue Cross and Blue Shield of New Jersey, Inc. ("Horizon  BCBSNJ").  The
transactions  included  the  sale to CW  Ventures  of  3,903,201  shares  of the
Company's common stock, par value $.001 per share ("Common Stock") at a purchase
price of  $0.2562  per  share  (after  adjustment  for the "one (1) for six (6)"
reverse  stock split of the  Company's  outstanding  Common  Stock as  discussed
below) for an aggregate  of  $1,000,000  and the issuance of an 8%  Exchangeable
Note in the original  principal amount of $2,000,000,  maturing on June 30, 1998
(the "CW Note").  By its terms, CW Ventures was required to exchange the CW Note
on June 30, 1998 for shares of the  Company's  Common Stock absent any events of

                                       2
<PAGE>

default,  as defined in the CW Note. The CW Note,  which was  collateralized  by
substantially  all of the  assets  of the  Company  and  its  subsidiaries,  was
originally exchangeable into that number of shares of the Company's Common Stock
as would equal  approximately 23 1/3% of the outstanding shares of the Company's
common stock on a fully diluted basis as of February 22, 1996. Accordingly,  the
3,903,201  shares issued to CW Ventures,  together with the shares issuable upon
the exchange of the CW Note, would comprise 35% of the outstanding shares of the
Company's  Common Stock on a fully  diluted  basis as of February 22, 1996 (such
percentage  was  subsequently  adjusted as discussed  below).  In  addition,  in
connection with a $150,000 bridge  financing by CW Ventures to the Company,  the
Company issued to CW Ventures for nominal consideration  five-year warrants (the
"CW Warrants") to purchase  166,667  shares of the Company's  Common Stock at an
exercise  price equal to $0.96 per share (after  adjustment for the "one (1) for
six (6)" reverse stock split of the Company's outstanding Common Stock).

         Concurrently with the February 22, 1996 closing of the transaction with
CW Ventures,  CAHS purchased all of the outstanding capital stock of CHCM from a
wholly-owned  Horizon  BCBSNJ  subsidiary,   Enterprise  Holding  Company,  Inc.
("EHC"). Although this acquisition was consummated on February 22, 1996, results
of operations of CHCM have been reflected in the Company's financial  statements
since  April 30,  1995  pursuant to an Interim  Services  Agreement  between the
Company  and  Horizon  BCBSNJ  (as  amended  from  time to time,  the  "Services
Agreement")  whereby the Company had effective control and responsibility of the
day-to-day  operations  of CHCM pending a sale of CHCM to the Company.  The CHCM
stock was  acquired  in exchange  for an 8%  Exchangeable  Note in the  original
principal  amount of  $3,600,000,  maturing on June 30, 1998 by CAHS in favor of
EHC,  which was  subsequently  assigned to Horizon  BCBSNJ (the "Horizon  BCBSNJ
Note").  The Horizon BCBSNJ Note was  collateralized by substantially all of the
assets  of the  Company  and its  subsidiaries.  The  Horizon  BCBSNJ  Note  was
originally exchangeable into that number of shares of the Company's Common Stock
as would equal  approximately  40% of the outstanding  shares on a fully diluted
basis as of February 22, 1996. The  transaction  was accounted for as a purchase
of CHCM for an amount  originally  approximating  $3,427,000 (the face amount of
the  Horizon  BCBSNJ  Note less an  original  issue  discount  of  approximately
$173,000), plus assumed liabilities of approximately $360,000 and purchase costs
of $64,000 and was subsequently  adjusted. The excess of the purchase price over
the fair value of CHCM's  tangible  assets  consisting of cash of  approximately
$848,000  and fixed  assets,  with a fair value of  approximately  $27,000,  was
allocated  to the  Services  Agreement  (see  Note C [1]  in the  "Notes  to the
Financial Statements" below).

         Pursuant  to the  terms of the CW Note  and the  Horizon  BCBSNJ  Note,
because the Company  failed to realize at least  $15,000,000  in net revenues or
specified  earnings before taxes for its fiscal year ended October 31, 1996, the
Company issued an aggregate of 50,156,559  additional  shares of Common Stock to
Horizon BCBSNJ and CW Ventures on February 27, 1997.

         The Company, Horizon BCBSNJ and CW Ventures are parties to an agreement
dated  February  22,  1996 (the  "Stockholders'  Agreement")  pursuant  to which
Horizon  BCBSNJ and CW Ventures  agreed  that the Board  shall  consist of seven
members.  By unanimous  written  consent dated as of May 22, 1997,  the Board of
Directors  reduced the number of the Company's  Directors to six, and by letters
to the Company dated the same date ("May 22, 1997 Letters"),  Horizon BCBSNJ and
CW Ventures  consented to such reduction and modified  their voting  obligations
under the Stockholders  Agreement.  As modified by the May 22, 1997 Letters, the

                                       3

<PAGE>


Stockholders  Agreement  provides that Horizon BCBSNJ and CW Ventures each shall
vote their  shares in favor of two  members of the Board  designated  by Horizon
BCBSNJ,  two members of the Board  designated  by CW  Ventures,  one member from
senior  management  of the Company who is  acceptable  to Horizon  BCBSNJ and CW
Ventures,  and one member not associated  with  operations of the Company who is
acceptable to Horizon BCBSNJ and CW Ventures.

          Since the Company did not have a sufficient  number of authorized  but
unissued shares of Common Stock to permit the issuance of the required number of
shares  upon  exchange  of  the  CW  Note  and  the  Horizon  BCBSNJ  Note,  the
stockholders of the Company  approved an amendment to the Company's  Certificate
of Incorporation in August 1996, which decreased the authorized shares of Common
Stock to  90,000,000  shares,  created a new class of  "blank  check"  preferred
stock,  $.10 par value,  consisting of 10,000,000 shares and effected a "one (1)
for six (6)" reverse stock split of the Company's outstanding Common Stock. As a
result, and pursuant to the terms of the Horizon BCBSNJ Note, the Horizon BCBSNJ
Note was automatically exchanged on September 30, 1996 into 13,375,083 shares of
Common Stock of the Company.

Industry Overview: Health Care Reform, Expenditures and Managed Care

         In recent years, there have been substantial efforts to reform national
health  care  due to the  ever-increasing  cost of  medical  care in the  United
States.  Employer  groups,  increasingly  concerned  about  the  effect on their
"bottom line" of the cost of providing health insurance to their employees,  are
no longer  content to remain with a traditional  insurance  company which is not
cost effective in its management of health care  coverage.  Employer  groups are
seeking  the   implementation   of  managed  care   concepts  to  improve  their
profitability,  while at the same time providing to their  employees the same or
improved quality and availability of care. The insurance  companies' clients are
demanding that their insurance  companies  begin effecting  strategies to reduce
costs  such  as  enhanced  case  management,  patient  education,  and  wellness
programs.  Accordingly,  employees  have become more assertive in evaluating and
selecting an insurer as well as monitoring such insurer's performance.  This has
consequently created intense competition among traditional indemnity insurers.

         This is a microcosm of a national  trend where market driven forces are
causing  insurance  companies  to align  themselves  with health care  providers
efficient in patient management.  The net result has been a phenomenon where the
medical  industry  has  shifted  to  care  management  initiatives  to  decrease
unnecessary variations in patient care and physician practices.

         In order to remain viable in this  competitive  marketplace and attract
employer  groups,  traditional  indemnity  insurance  companies  have  begun  to
re-engineer to a managed care approach with an outcome versus claims  management
focus.  They  have  done  so  by  establishing  cooperative  relationships  with
providers.

         Management  believes  that while some  insurers  will try to accomplish
this transition without outside assistance, a majority will seek assistance from
firms with  "managed  care  expertise,"  such as the Company.  With  proprietary
criteria and  protocols and physician  employees and advisors  representing  the
full range of subspecialty areas within the health care delivery system, as well
as key employees with  backgrounds in health care cost  containment,  management
believes the Company  provides  state of the art  knowledge  and  experience  in
health care cost containment services.

                                       4

<PAGE>


Services and Products

         The Company's  comprehensive  health care management  programs  provide
health care organizations with the systems, strategies, and mechanisms needed to
manage  appropriate and cost effective  health care services.  These health care
management services adhere to Utilization Review Accreditation Commission,  Inc.
("URAC") standards.

         The cost containment  services offered by the Company are comprehensive
and can be  customized to meet the needs of its clients.  These  services may be
purchased  separately  or  configured  in a variety of resource sets designed to
interface with the client's systems. Management believes the resources necessary
for a successful  health delivery  system are clinical  health care  management,
information   technologies  and  member  or  subscriber  services.  The  Company
possesses  substantial resources in these core areas and makes them available to
its clients in specific packages.

         Management  believes that its physician  developed and driven  criteria
and  medical  protocols  ("critical  pathways"),  as  well  as its  health  care
management  services,  improve how attending  physicians manage health care. The
Company's  personnel work together on-site with clients and potential clients in
order to structure or re-engineer such clients'  utilization review programs and
to implement various disease management strategies.

         Utilization   Review  -  Utilization   review  associates  examine  the
appropriateness of a particular medical event, such as a hospital admission,  an
additional  day of  in-patient  care,  or a  particular  procedure.  The Company
provides  clinical and operational  utilization  review  services  employing its
physician  driven  proprietary  criteria  and  protocols.  The Company  actively
disseminates  its criteria and medical  protocols to local  physicians and holds
meetings  with  its  specialty  physician  advisors  to  inform  them  of  their
significant roles in the utilization management process.

         In addition, while many utilization management firms rely on calls from
nurse  reviewers as the principal form of  communication  with  physicians,  the
Company  believes  that  clinical  peers  should  discuss  cases with  attending
physicians.  Accordingly,  the Company uses nurse reviewers  primarily to screen
cases.  Staff medical  directors and physician  advisors of matched  specialties
review questionable cases with attending physicians. The combination of academic
credentials,  managed  care  experience,  and  on-site  presence  enables  these
advisors to actively  engage local  specialists  in a meaningful  discussion  of
medical  management  alternative  practices,  thereby having a greater impact on
cost containment.

         Overall,  the Company  transforms the client's  utilization  management
program from an  administrative  exercise to a program that uses review criteria
and highly credible physician  advisors to actively engage attending  physicians
in treatment decisions.  Management believes that these strengthened utilization
management  methods  can enable its clients to achieve  utilization  performance
approaching that of well-managed health maintenance organizations.


         Case Management - Large case management services provide an alternative
plan, which enhances or maintains the patient's quality of care, but reduces the
expected expenses for the patient's treatment.  Early identification of patients
severely  compromised  by an acute  injury or  episode  of illness is the key to
successful implementation of large case management services.  Patient evaluation
through   pre-admission  and  concurrent  review  provides  the  foundation  for
effective  discharge  planning and  continuity of care.  The Company  provides a
comprehensive  case  management  program,  which  facilitates  significant  cost
containment  and  contributes to greater  flexibility in the health care setting
for the patient.




                                        5

<PAGE>

         Outpatient  care  coordination  allows  patients to access a variety of
health care  services,  such as home health  care,  rehabilitation  and infusion
therapy services. The Company's outpatient care coordination services provide an
effective  mechanism for cost  containment  while  safeguarding  the delivery of
quality health care services.

         Case management also focuses on how the attending physician is managing
the care of patients  with chronic  diseases on an on-going  basis.  Health risk
assessment  processes,  designed and  implemented by the Company,  identify high
cost/high risk patients and enroll them in case management programs.

         Disease  Management - Management  believes  that  specialists  managing
patients  with  chronic  diseases  should  follow  credible  patient  management
protocols,  or "critical  pathways",  that reflect expert  consensus on the most
appropriate treatment  alternatives for patients at different disease stages and
with  complicating  factors,  and that decisions to deviate from such guidelines
should be reviewed by an independent peer specialist.

         Implementation of a disease management program for a client begins with
disseminating  care  management  "critical  pathways" to, and then meeting with,
local specialists. The Company's specific disease specialists or advisors review
the  progress and  treatment  plans of a patient  with the  patient's  attending
specialist.  This  case  management  ensures  that  any  decisions  made  by the
attending  physician  to  deviate  from  the  critical  pathway  guidelines  are
supported by sound clinical rationale.

         Continuing Product  Development - The Company's  management  recognizes
that the health care market is continually changing and expanding,  due in part,
to  changes  in  medical  technology  and new  medical  information,  as well as
improvements  in  information  technology  and  telecommunication   systems.  In
response to the market and to the  specific  needs of its  clients,  the Company
continues to refine,  improve and expand its existing services and products,  as
well as develop new services and products.

         Some of the Company's current  initiatives include the expansion of its
chronic disease case management services, on-going refinement of its proprietary
criteria and protocols,  and  development of specialty  provider  networks.  The
Company also  continues  to jointly  develop  with a systems  subcontractor  and
software developer a new generation of customer service,  utilization review and
medical/surgical case management software. Furthermore, the Company's management
believes  that  member/subscriber  advisory  services,  which  focus on  patient
knowledge  and  participation  in their own health care,  are products that will
contribute to a more efficient and cost  effective use of the options  available
in the health care system.  With respect  thereto,  the Company hopes to develop
patient education and management programs.

Operations

         The  Company  utilizes a  multi-disciplinary  team  approach  to ensure
effective cost medical management services.  The Company,  through its employees




                                      6
<PAGE>

and  subcontracting  physician  advisors,  reviews,  evaluates  and monitors the
medical  necessity and  appropriateness  of the medical services  prescribed for
members in its  clients'  health  plans.  Generally,  the  pre-admission  review
process for elective and non-elective  admission is initiated  telephonically by
the member or provider.  During this phase,  clinical review staffs evaluate the
need for, and/or initiate when appropriate,  pre-certification,  second surgical
opinion, insurance verification, pre-admission testing, pre-operative education,
pre-operative anesthesia evaluation, and continuing care planning. Additionally,
pre-admission  review determines if the service requested is medically necessary
by utilizing review criteria,  appropriate  alternatives for providing  service,
length of stay and the need for case management intervention.

         During the pre-admission and concurrent review processes,  patients are
evaluated by nurse case managers and physician employees or advisors to identify
anticipated  needs for  discharge.  Patients  with high  cost  diagnoses  or who
require  interdisciplinary  problem solving to expedite discharge are identified
as candidates for large case management  services.  The Company's clinical staff
also plans for and coordinates the outpatient health care services necessary for
a timely  discharge,  such as home  health  care,  rehabilitation  and  infusion
therapy services, thereby insuring the delivery of quality care while containing
costs.

         The  Company   currently   maintains  a   contracted   network  of  112
independent,  multi-specialty  physician  advisors,  most of whom are  active in
managed  care  practices  and some of whom are  affiliated  with major  teaching
hospitals.  Several of these physicians are currently  spending  one-to-two days
per week  on-site  with  and on  behalf  of the  Company's  clients,  discussing
questionable  cases with local  specialists and leading  meetings with groups of
local  specialists to disseminate  and implement the care  management  "critical
pathways"  necessary for effective  case  management.  The Company also uses its
nurse  reviewers for  telephonic  review as well as in hospitals to conduct more
extensive  on-site  reviews of patients,  whenever  possible.  On-site review is
performed for concurrent  review and case management  activities.  These on-site
reviews also include  collaboration  with the Company's local and national board
certified physician employees and advisors.  By reviewing on-site,  these nurses
are in a better  position to determine the need for continued  stay, and to make
necessary arrangements for outpatient care.

         For its services, the Company is compensated either: (i) on a fixed fee
per   subscriber   basis;   (ii)  on  a  combination  of  both  fixed  fees  and
performance-based  fees; or (iii) on a fee-for-service basis.  Accordingly,  the
Company has adopted the following  accounting  policies for revenue  recognition
under each contract category:

(a)      Revenue under the fixed-fee  arrangements is recognized as the services
         are provided and the related costs of services are  incurred.  Although
         the fixed fee  arrangements are not subject to any fee adjustment based
         upon the attainment of target  utilization  levels,  such contracts may
         still expose the Company to potential operating losses, particularly in
         the initial stages thereof.


(b)      Revenue  under  the  combination   fixed-fee/incentive   agreements  is
         initially  recognized  for  the  monthly  fixed-fee  component  only as
         services  are  provided  and related  costs of services  are  incurred.
         Incentives (or  reductions)  based upon  performance  are recorded when
         such amounts can reasonably be determined.
<PAGE>

                                        7

(c)      Revenue  under  fee-for-service  arrangements  is recorded  for special
         projects  or the review of cases  assigned to the Company on a per case
         or hourly basis.


         Revenues from  performance-based  service  contracts  generally tend to
follow a pattern whereby  significant  revenues are generated during the initial
term of the contract, as savings opportunities are the greatest and then decline
thereafter as the opportunity for additional  savings  diminishes.  As a result,
the Company's  ability to increase  revenues and gross margins is dependent upon
its ability to enter into additional  contracts with new customers and/or expand
the services provided to existing customers.

Customers and Marketing

         The Company currently provides its services to five Blue Cross and Blue
Shield ("BCBS")  organizations in the Northeastern United States pursuant to one
or a combination of the compensation  arrangements  described above. The Company
is dependent on at least two of such customers  including  Horizon BCBSNJ, a 45%
stockholder  of the Company,  for a substantial  portion of its revenues,  gross
margins and cash flows.  The loss of either of these two customers  would have a
material adverse impact on the Company's cash flows and results of operations.

    Effective  January 1, 1998,  the Company  entered  into a one-year  services
agreement with New York Care Plus Insurance Company, Inc. ("NYCPIC"),  which was
attached as Exhibit  10.20 to the  Company's  Form  10-KSB for the period  ended
October 31, 1997 and is incorporated herein by reference. NYCPIC provides health
care  coverage to New York  residents  through its Blue Cross and Blue Shield of
Western New York and Blue Shield of Northeastern  New York divisions.  Under the
terms of this Agreement,  the Company,  through one or more of its subsidiaries,
provided  both  medical  management   performance  support  and  specialty  care
management  performance support services to NYCPIC for its approximately 650,000
indemnity and HMO  subscribers.  The Agreement  expired by its terms on December
31, 1998,  but has been replaced with a service  agreement  with an affiliate of
NYCPIC,  HealthNow  New York  Inc.  (See Item 6 -  "Recent  Developments  of the
Business.")

         The Company  intends to market its services to other  organized  health
care  delivery  systems  (such  as  preferred-provider   and  physician-hospital
organizations),   self-insured   employers,   union  trust  funds,  health  care
management service organizations and administrative  service organizations (such
as third-party insurance administrators).

         Typically,  the  Company  will  enter into a service  agreement  with a
client pursuant to which the Company  provides its  utilization  review and case
management  services.  The Company's services for an insurer generally cover all
insureds  under  an  indemnity   insurance  plan  and/or  members  of  a  health
maintenance organization plan affiliated with the insurer.  Typically,  when the
Company  contracts to provide its services to an insurer,  the insurer's account
executives  ordinarily  plan  to  offer  the  Company's  services  to its  group
policyholders  and  those  groups  covered  under   administrative-services-only
arrangements.  The Company  presently enters into these service  agreements with
insurers with compensation based upon either a fixed rate per subscriber or with
fees and incentives  based on the achievement of certain health care cost and/or
utilization  targets.  The latter fee  arrangement  provides the opportunity for
substantially  increased earnings, but also carries the risk of loss of revenues
if the targets are not achieved.


                                        8
<PAGE>

Competition

         The Company faces intense  competition in a highly fragmented market of
managed care  services  firms.  Several  managed care  service  firms  currently
provide and aggressively market services,  which are in some respects similar to
the Company services. Management is aware of a significant number of independent
utilization  review  firms  currently  marketing   utilization  review  services
directly  to  employers,  small  insurers,  and third party  administrators.  In
addition to other  utilization  review and  medical  management  companies,  the
Company   competes   with   insurance   companies,   third  party   health  plan
administrators,   health   maintenance   organizations  and  preferred  provider
organizations  that have  developed  in-house  staffs to provide such  services.
There are a variety of competitors offering component services such as physician
reviewers  and demand  management/patient  advisory  products.  There are also a
number of  organizations  developing a variety of approaches to case and disease
management.  Many  of  the  Company's  competitors  have  substantially  greater
financial resources and employ substantially greater numbers of personnel.

         The  Company  intends  to  compete  on the basis of the  quality of its
clinical staff and high degree of specialty-trained  physician involvement,  its
ability to  leverage  its  products to achieve  higher  value at lower cost than
companies offering component services,  its ability to develop tailored programs
for large clients,  its  willingness  to accept risk in methods of  compensation
based on results,  its  computer-based  clinical decision making and information
systems  and its  current  experience  in  developing  outsourcing  arrangements
acceptable to Blue Cross and Blue Shield plans.

Government Regulation

         Health Care  Regulation  -  Government  regulation  of health care cost
containment services,  such as those provided by the Company, is a changing area
of law that  varies  from  jurisdiction  to  jurisdiction  and  generally  gives
responsible  administrative agencies broad discretion. The Company is subject to
extensive and frequently changing federal,  state and local laws and regulations
concerning company licensure, conduct of operations,  acquisitions of businesses
operating  within its industry,  the employment of physicians and other licensed
professionals  by business  corporations  and the  reimbursement  for  services.
Regulatory  compliance  could have an adverse  effect on the  Company's  present
business and future growth by restricting or limiting the manner in which it can
acquire  businesses,  market its services,  and contract for services with other
health  care  providers  by  limiting or denying  licensure  or by limiting  its
reimbursement for services provided.

         It  should  be noted  that in  providing  utilization  review  and case
management  services,  the  Company  makes  recommendations  regarding  what  is
considered  appropriate  medical  care based  upon  professional  judgments  and
established protocols.  However, the ultimate responsibility for all health care
decisions is with the health care provider.  Furthermore,  the Company is not an
insurer,  and the ultimate  responsibility  for the payment of medical claims is
with the insurer.

         Although  the  Company  is not a health  care  provider,  it could have
potential  liability for adverse  medical  consequences.  The Company could also
become  subject  to claims  based upon the denial of health  care  services  and
claims such as  malpractice  arising  from the acts or  omissions of health care
professionals. (See "Legal Proceedings.")

                                        9
<PAGE>


         The Company's operations in a particular state are typically subject to
certification by the appropriate  state agency.  The Company has received or has
filed the  necessary  application  for such  certification  where  required.  In
addition,  various  state and federal laws  regulate the  relationships  between
providers of health care services and physicians and other clinicians, including
employment  or service  contracts,  investment  relationships  and referrals for
certain  designated  health  services.  These laws  include  the fraud and abuse
provisions   of  the  Medicare  or  Medicaid   statutes,   which   prohibit  the
solicitation,   payment,   receipt  or   offering  of  any  direct  or  indirect
remuneration  for the  referral  of  Medicare  or  Medicaid  patients or for the
ordering  or  providing  of  Medicare or  Medicaid  covered  services,  items or
equipment.  Violations  of these  provisions  may  result  in civil or  criminal
penalties for individuals or entities including  exclusion from participation in
the Medicare and Medicaid  programs.  Several  states have adopted  similar laws
that cover patients in private programs as well as government programs.  Because
the anti-fraud and abuse laws have been broadly interpreted,  they may limit the
manner in which the Company can acquire  businesses  and market its services to,
and contract for services with, other health care providers.

         The Company's  management  believes that its present  operations are in
compliance  with all  applicable  laws  and  regulations  and that it  maintains
sufficient  comprehensive general liability and professional liability insurance
coverage to  mitigate  claims to which the Company may be subject in the future.
The Company is unable to predict what, if any, government  regulations affecting
its business may be enacted in the future or how existing or future  regulations
may be interpreted.  To maintain future compliance,  it may be necessary for the
Company to modify its services,  products,  structure or marketing methods. This
could  increase  the  cost of  compliance  or  otherwise  adversely  affect  the
Company's operations, products, profitability or business prospects.

         Proposed Health Care Reform - If proposed federal and state health care
reform initiatives are enacted,  the payments for and the availability of health
care services may be affected.  Aspects of certain proposals, such as reductions
in Medicare and  Medicaid  payments,  could  adversely  affect the Company.  The
Company is unable to predict what impact,  if any,  future  enacted  health care
reform legislation may have on its current and future business, and no assurance
can be given  that any such  reforms  will  not have an  adverse  impact  on its
business operations or potential profitability.

Employees

         In  addition  to  its  current  network  of  115  contracted  physician
advisors,  the Company employed 12 full-time physicians as of December 31, 1998.
Two of these physicians serve as officers of the Company or its subsidiaries and
the  remaining  physicians  serve as on-site  Medical  Directors  and  Associate
Medical Directors in the states where the Company provides services.

         At  December  31,  1998,  in addition  to its  physicians,  the Company
employed a total of 140 full-time  employees.  Of this total,  106 employees are
engaged in clinical  activities  including  on-site nurse reviewers and contract
administrators.  The 34 remaining employees include  executives,  administrative
support,  finance,  marketing,  training and education,  information systems and
human  resources  personnel.  None of the  Company's  employees are party to any
collective bargaining agreements.



                                       10
<PAGE>

Item 2.    Description of Property

         The   Company's   executive   offices   and   operations,    comprising
approximately  28,000  square  feet of office  space,  are  located  in the Koll
Corporate Plaza in Iselin, New Jersey. The Company has executed a six-year lease
for this facility  commencing  June 15, 1995,  which provides for an annual base
rent of  approximately  $445,000 with annual  escalations  based on increases in
real  estate  taxes  and  operating  expenses.  The  Company  believes  that its
facilities are adequate for its current needs and that suitable additional space
will be available as required.

         The   Company   also   maintains   rent-free   operations   offices  in
approximately  600 square feet of space in  Providence,  Rhode  Island  under an
informal  oral  arrangement  with  Blue  Cross and Blue  Shield of Rhode  Island
("BCBSRI").  Additionally,  the Company maintains rent-free operation offices in
New York and Vermont pursuant to informal arrangements with these customers.

         Substantially all of the equipment used in the Company's  operations in
New Jersey is currently being leased under a capital lease agreement.

Item 3.    Legal Proceedings

[1] Potential uninsured exposure to litigation:

a.         On or about March 22, 1996, an action  entitled  Francis X. Bodino v.
           Horizon  BCBSNJ and CHCM (the  "Bodino  Action") was filed in the Law
           Division of the Superior  Court of New Jersey in Hudson  County.  The
           complaint  alleged  misrepresentations  with  respect to the type and
           amount of coverage  afforded  by Mr.  Bodino's  policy  with  Horizon
           BCBSNJ,   specifically   with   respect   to   coverage   for   heart
           transplantation. The complaint also alleged that representations made
           on behalf of Horizon  BCBSNJ by an employee of CHCM led Mr.  Bodino's
           surgeon to  believe  that  contractually  excluded  heart  transplant
           coverage was  available.  The  complaint  demanded a variety of money
           damages,  as well as punitive damages,  against both defendants.  The
           complaint  also contained a claim for treble damages and counsel fees
           under the New Jersey Consumer Fraud Act.

           On or about June 29,  1998, a Settlement  and Release  Agreement  was
           entered  into  among  Horizon  BCBSNJ,   the  Company,   CAHS,  CHCM,
           Enterprise  Holding Company,  Inc.  ("EHC"),  a subsidiary of Horizon
           BCBSNJ,  and CW Ventures.  Under this  agreement,  Horizon BCBSNJ has
           agreed to  indemnify  the  Company,  CAHS and CHCM from any losses or
           obligations in connection  with the claims,  facts and  circumstances
           that are the subject of the Bodino Action except for an amount not to
           exceed $50,000. In addition, Horizon BCBSNJ and EHC, on the one hand,
           and the Company,  CAHS and CHCM,  on the other hand,  granted  mutual
           releases with respect to the claims,  facts and  circumstances  which
           are the subject of the Bodino Action.

b.         The Company has been named as a party in an action entitled Robert T.
           Caruso  v.  Care  Advantage,   Inc.,  John  J.  Petillo,  Vincent  M.
           Achillare,  Lawrence A. Whipple, and Horizon BCBSNJ et al., which was
           filed in  Superior  Court of New Jersey on August 12,  1998.  Messrs.
           Petillo,  Achillare  and Whipple were officers of the Company and may
           have claims for  indemnification  for expenses and for any  judgments
           against  them  in this  case.  Mr.  Caruso  was a  consultant  to the
           Company. The complaint alleges breach of contract, fraud, conspiracy,
           promissory  estoppel and  negligent  misrepresentation  in connection

                                       11
<PAGE>

with,      among  other  things,  the  termination  of Mr.  Caruso's  consulting
           arrangement with the Company.  The Plaintiff seeks treble damages for
           an unspecified  amount and claims actual  damages in the  approximate
           amount of $1.8-2.0  million.  The Company received notice from two of
           its  insurance  carriers  denying  coverage on this  matter,  but the
           Company plans to vigorously  contest these  coverage  decisions.  The
           Company received a written claim for indemnification  from defendants
           Petillo and  Achillare  and,  subject to their  having  acted in good
           faith, the Company has agreed to indemnify them and defendant Whipple
           to pay their reasonable defense costs. The parties to this litigation
           are currently taking discovery, and no trial date has been set. Until
           discovery   has  been   completed,   the  Company  has   insufficient
           information  regarding its potential exposure in this matter, but the
           Company intends to defend the matter vigorously. No amounts have been
           accrued for this claim as of December 31, 1998.

[2] Termination of employment:

     On or about  January 16, 1998, an action  entitled  Mary  DeStefano v. CAI,
     Carol Manzella,  and Thomas P. Riley (the "DeStefano  Action") was filed in
     the  Superior  Court of New  Jersey.  The  complaint  alleges  that (i) the
     plaintiff  was  terminated   from  her  employment   with  the  Company  in
     retaliation for her complaints  regarding  alleged  violations of state and
     federal  labor  laws and (ii) the  Company  violated  the New  Jersey  Wire
     Tapping and  Electronic  Surveillance  Control Act. The  complaint  did not
     demand an amount of specific monetary  damages.  The defendants have denied
     liability in all respects.  On July 7, 1998 its insurance  carrier  advised
     the Company that it would provide a defense to all defendants  named in the
     complaint.  However,  the Company's insurance carrier has also advised that
     it will not pay any judgment  adverse to the insured which  establishes the
     act of deliberate dishonesty committed by the insured with actual dishonest
     purpose and intent and material to the cause of the action so  adjudicated.
     Under the terms of the  policy,  "insured"  includes  the  Company  and its
     officers  and  directors.  The Company  has  retained  separate  counsel to
     represent it in the  litigation for purposes of this  exclusion.  Plaintiff
     has advised  that her damages are  believed to exceed  $250,000 and she has
     also  asserted a claim for punitive  damages.  The Company is continuing to
     contest  this  lawsuit  vigorously.  The  parties  to this  litigation  are
     currently taking discovery, and no trial date has been set. Until discovery
     has been completed,  the Company has insufficient information regarding its
     potential exposure in this matter.

[3]   Professional liability:

      In providing utilization review and case management services,  the Company
      makes recommendations regarding benefit plan coverage based upon judgments
      and  established  protocols  as to the  appropriateness  of  the  proposed
      medical  treatment.   Consequently,   the  Company  could  have  potential
      liability for adverse medical results. The Company could become subject to
      claims  based upon the denial of health care  benefits  and claims such as
      malpractice   arising   from  the  acts  or   omissions   of  health  care
      professionals.  Although  the Company  does not believe that it engages in
      the practice of medicine or that it delivers medical services directly, no
      assurance  can be given that the Company will not be subject to litigation
      or  liability  which may  adversely  affect its  financial  condition  and
      operations  in  a  material   manner.   Although  the  Company   maintains
      comprehensive  general  liability  and  professional  liability  insurance
      coverage,   including  coverage  for  liability  in  connection  with  the
      performance of medical  utilization  review services and typically obtains
      indemnification  from its customers,  no assurances can be given that such
      coverage will be adequate in the event the Company  becomes subject to any
      of the above described claims.

                                       12
<PAGE>


[4]   Settlement agreement:

      A former  Medical  Director of CAHS  asserted a claim against the Company.
      The former Medical Director resigned in February 1996,  allegedly due to a
      change in control of the Company, and alleged,  among other things, breach
      of contract.  As of October 31, 1997, the Company had accrued $150,000 for
      this claim. In February 1998, the claim was settled for $110,000.

[5]   Contractual dispute:

      By a letter dated  November 9, 1998, the Company  received  written notice
      (the "Notice") from Allied Health Group, Inc. ("Allied") pursuant to which
      Allied purportedly  terminated without cause,  effective December 9, 1998,
      that  certain  Joint  Services  Agreement  dated May 29,  1997 (the "Joint
      Services Agreement") between Allied and the Company, which was attached as
      Exhibit No. 10(c) to the Company's Form 10-QSB for the quarter ended April
      30, 1997 and is  incorporated  by reference  herein.  By a response letter
      dated November 16, 1998,  counsel for the Company informed Allied that the
      Notice was null and void and of no legal effect  since the Joint  Services
      Agreement did not provide for  termination  without cause prior to the end
      of the  term of the  Joint  Services  Agreement.  The  Company  instituted
      arbitration proceedings against Allied seeking declaratory relief that the
      Joint Services Agreement is still in effect.  The arbitration  process has
      commenced and the parties are currently  selecting the  arbitrator to hear
      the matter.

Item 4.    Submission of Matters to a Vote of Security Holders

         No matters were submitted to a vote of the Company's  security  holders
during the last two months of calendar year ended December 31, 1998.


                                       13
<PAGE>



                                     PART II

Item 5. Market Price for  Registrant's   Common  Equity and Related Stockholder
        Matters

           (a)    Market Information: Since the Company's effective registration
                  date of June 12, 1995,  the Company's  Common Stock has traded
                  in the over-the-counter  market and is currently quoted on the
                  Electronic Bulletin Board under the symbol CADV. The following
                  table shows the range of closing  bid prices for each  quarter
                  of the Company's two most recent  calendar  years.  The prices
                  reflect inter-dealer prices, without retail mark-up,  markdown
                  or commission, and may not represent actual transactions.


                                    1998                           1997
                                  --------                       --------
Quarter Ended ..........      High          Low           High          Low
                            --------      --------      --------      --------
 March 31, .............     $ .25        $ .23         $ .56         $ .31
 June 30, ..............     $ .27        $ .21         $ .47         $ .31
 September 30, .........     $ .24        $ .10         $ .36         $ .27
 December 31, ..........     $ .10        $ .02         $ .27         $ .23

          (b)     Holders: As of August 24, 1999, there were approximately 2,916
                  holders of record of the Company's  Common Stock. No shares of
                  the Company's preferred stock have been issued.

           (c)    Dividends:  During  the two  most  recent  fiscal  years,  the
                  Company  paid no  cash  dividends  on its  Common  Stock.  The
                  payment of future  dividends on its Common Stock is subject to
                  the  discretion  of the Board of Directors and is dependent on
                  many factors,  including  the  Company's  earnings and capital
                  needs.

Item 6. Management's Discussion and Analysis of Financial Condition and  Results
        of Operations

Cautionary Statements

         Certain statements in this Form 10-KSB may constitute  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995 ("PSLRA"), including those concerning management's plans, intentions and
expectations  with respect to future  financial  performance  and future events,
particularly   relating  to  revenues   from   performance-based   services  and
re-negotiations  of existing and new contracts with  customers.  Such statements
involve known and unknown risks, uncertainties and contingencies,  many of which
are beyond the control of the  Company,  which could  cause  actual  results and
outcomes to differ materially from those expressed herein.  Although the Company
believes  that  its  plans,   intentions  and  expectations  reflected  in  such
forward-looking  statements is  reasonable,  it can give no assurance  that such
plans, intentions or expectations will be achieved.

                                       14
<PAGE>


         The  following   discussion  contains  certain  cautionary   statements
regarding the Company's business that investors and others should consider. This
discussion is intended to take advantage of the "safe harbor"  provisions of the
PSLRA. In making these  cautionary  statements,  the Company is not committed to
addressing or updating each factor in future filings or communications regarding
the Company's  business or results,  or addressing  how any of these factors may
have caused  results to differ from  discussions  or  information  contained  in
previous filings or  communications.  In addition,  any of the matters discussed
below may have  affected or may affect the  Company's  past, as well as current,
forward-looking statements about future results. The Company's actual results in
the future may differ materially from those expressed in prior communications.

                             CAUTIONARY STATEMENTS:

    INDUSTRY FACTORS.  The managed care industry frequently receives significant
amounts of negative  publicity.  This  publicity  has  contributed  to increased
legislative activity, regulation and review of industry practices. These factors
may adversely  affect the Company's  ability to market its products or services,
may require the Company to change its  products and  services,  and may increase
the regulatory burdens under which the Company operates,  further increasing the
costs of doing business and adversely affecting profitability.

    COMPETITION.  In many of its  geographic  or product  markets,  the  Company
competes  with a  number  of other  entities,  some of  which  may have  certain
characteristics  or  capabilities  that give them an advantage in competing with
the Company.  The Company  believes  that barriers to entry in these markets are
not substantial, so the addition of new competitors can occur relatively easily.
Certain  Company   customers  may  decide  to  perform   functions  or  services
internally,  which were  previously  provided by the  Company,  thus  decreasing
Company  revenues.  Certain Company  providers may decide to market products and
services to Company  customers in  competition  with the  Company.  In addition,
significant  merger and  acquisition  activity  has  occurred in the industry in
which the Company operates as well as in industries that act as suppliers to the
Company, such as the hospital,  physician, and pharmaceutical  industries.  This
activity may create stronger  competitors or result in decreased  opportunities.
To the extent that there is strong  competition or that competition  intensifies
in any  market,  the  Company's  ability  to retain or  increase  customers,  or
maintain or increase its revenue growth,  its pricing  flexibility,  its control
over medical cost trends and its marketing expenses may be adversely affected.

    UTILIZATION REVIEW REGULATIONS. Many states have enacted laws and/or adopted
regulations governing utilization review activities, and these laws may apply to
some Company  operations.  Generally,  these laws and  regulations  set specific
standards for delivery of services,  confidentiality,  staffing and policies and
procedures of private review  entities,  including the  credentials  required of
personnel.  The  enactment of any such law and/or  regulations  could  adversely
affect the results of operations, profitability, and cash flows of the Company.

    LITIGATION AND  INSURANCE.  The Company may be a party to a variety of legal
actions  that  affect  any   business,   such  as  employment   and   employment
discrimination-related  suits,  employee  benefit  claims,  breach  of  contract
actions,  tort claims,  and shareholder  suits,  including  securities fraud and
intellectual property related litigation. In addition,  because of the nature of

                                       15
<PAGE>

its business,  the Company is subject to a variety of legal actions  relating to
its  business  operations.  These  could  include  claims  relating  to  medical
malpractice  or the denial of health care  benefits.  The Company  currently has
insurance  coverage for some of these  potential  liabilities.  Other  potential
liabilities may not be covered by insurance,  insurers may dispute coverage,  or
the amount of insurance may not cover the damages awarded. In addition,  certain
types of damages, such as punitive damages, may not be covered by insurance, and
insurance  coverage for all or certain forms of liability may become unavailable
or prohibitively expensive in the future.

    INFORMATION  SYSTEMS.  The  Company's  business  depends   significantly  on
effective  information  systems, and the Company has linked its computer systems
with that of their  customers  in order to conduct and deliver its  products and
services.  The Company's  information  systems require an ongoing  commitment of
resources  to maintain and enhance  existing  systems and develop new systems in
order to keep pace with continuing changes in information processing technology,
evolving  industry  standards,  and changing  customer  preferences.  Failure to
maintain  effective  and  efficient  information  systems  could  cause  loss of
existing customers,  difficulty in attracting new customers,  customer disputes,
regulatory  problems,  increases  in  administrative  expenses or other  adverse
consequences.  In addition, the Company may from time to time obtain significant
portions of its systems-related or other services or facilities from independent
third parties,  which may make the Company's operations vulnerable to such third
parties' failure to perform adequately.

    THE YEAR 2000.  The  Company is in the  process of  modifying  its  computer
systems to  accommodate  the Year 2000.  The Company  expects to  complete  this
modification  sufficiently  in advance of the Year 2000 to avoid adverse impacts
on its  operations.  The Company is expensing  the costs  incurred to make these
modifications.  If the Company is unable to complete its Year 2000 modifications
in a timely manner or other  companies with which the Company does business fail
to timely complete their Year 2000 modifications, the Company's operations could
be adversely affected.

    ADMINISTRATION AND MANAGEMENT.  Efficient and cost-effective  administration
of the  Company's  operations is essential to the  Company's  profitability  and
competitive  positioning.  While the Company attempts to effectively manage such
expenses,  staff-related and other administrative expenses may rise from time to
time due to business or product  start-ups or  expansions,  growth or changes in
business, acquisitions,  regulatory requirements or other reasons. These expense
increases are not predictable and may adversely  affect results.  The market for
management and technical personnel, including information systems professionals,
in the health care industry is very  competitive.  Loss of certain managers or a
number  of such  managers  could  adversely  affect  the  Company's  ability  to
administer and manage its business.

    MARKETING.  The Company markets its products and services  through  employed
salespeople.  The departure of sales and or certain key  employees  could impair
the Company's ability to retain existing customers. In addition,  certain of the
Company's  customers or potential  customers  consider rating,  accreditation or
certification of the Company by various private or governmental bodies or rating
agencies necessary or important. Certain of the Company's business units may not
have  obtained  or may  not  desire  or be  able  to  obtain  or  maintain  such
accreditation  or  certification,  which could  adversely  affect the  Company's
ability to obtain or retain business with these customers.

                                       16
<PAGE>


        DATA AND PROPRIETARY INFORMATION.  Many of the products that are part of
the Company's knowledge and information-related business depend significantly on
the integrity of the data on which they are based. If the information  contained
in the Company's databases were found or perceived to be inaccurate,  or if such
information were generally perceived to be unreliable,  commercial acceptance of
the  Company's  database-related  products  would be  adversely  and  materially
affected.  Furthermore,  the  Company's  use of  patient  data is  regulated  at
federal,  state and local levels. These laws and rules are changed frequently by
legislation or administrative interpretation. These restrictions could adversely
affect  revenues from these products and, more  generally,  affect the Company's
business, financial condition and results of operations.

    The success of the Company's knowledge and information-related business also
depends  significantly  on its  ability to  maintain  proprietary  rights to its
products.  The Company relies on its agreements with customers,  confidentiality
agreements with employees, trade secrets,  trademarks and patents to protect its
proprietary  rights.  The Company cannot assure that these legal protections and
precautions  will  prevent   misappropriation   of  the  Company's   proprietary
information. In addition, substantial litigation regarding intellectual property
rights  exists  in the  software  industry,  and the  company  expects  software
products to be increasingly  subject to third-party  infringement  claims as the
number  of  products  and  competitors  in this  industry  segment  grows.  Such
litigation  could have an adverse effect on the ability of the Company to market
and sell its products and on the  Company's  business,  financial  condition and
results of operations.

    STOCK MARKET. The market prices of the securities of the Company and certain
of the publicly  held  companies  in the industry in which the Company  operates
have shown  volatility and  sensitivity  in response to many factors,  including
general market trends, public communications regarding managed care, legislative
or regulatory  actions,  health care cost trends,  pricing trends,  competition,
earnings  or  membership  reports  of  particular  industry  participants,   and
acquisition  activity.  The Company  cannot assure the level or stability of the
Company's  share  price at any time or predict the impact the  foregoing  or any
other factors may have on the Company's share price.

    CONTROL  BY  CERTAIN  SHAREHOLDERS.  The  two  largest  stockholders  of the
Company, Horizon BSBSNJ and CW Ventures, beneficially own an aggregate of 91.65%
of the  outstanding  shares  of Common  Stock of the  Company.  Pursuant  to the
Stockholders Agreement, as amended each of BCBSNJ and CW Ventures have agreed to
vote their shares in the Company  with respect to the election of the  Company's
Board of Directors for (i) two  designees of CW Ventures;  (ii) two designees of
BCBSNJ; (iii) one member of the Company's  management  acceptable to CW Ventures
and BCBSNJ; and (iv) one non-employee outside director acceptable to CW Ventures
and BCBSNJ. The Stockholders  Agreement prevents the Company from taking certain
material  actions  without  BCBSNJ's  and/or CW  Ventures'  or their  designated
directors'  consent.  Accordingly if Horizon BCBSNJ and CW Ventures were to vote
in the same manner on the  election of members of the Board of  Directors  or on
any other matter requiring  approval of a majority of the outstanding  shares of
Common Stock, such matter would likely be approved or defeated,  as the case may
be, depending on the vote of such stockholders.

                                       17
<PAGE>

    HISTORY  OF  LOSSES.  There can be no  assurance  that the  Company  will be
profitable  in  the  future.  For  fiscal  years  prior  to  1997,  the  Company
experienced  significant  operating losses on a consolidated basis. In addition,
the Company has  experienced  a loss of $68,000 for the 2 months ended  December
31, 1998. At October 31, 1998, the Company had working capital of  approximately
$1,077,000,  a stockholders  equity of $3,484,000 and an accumulated  deficit of
$18,607,000 compared to a working capital deficit of approximately $2,487,000, a
capital  deficiency of $1,976,000 and an accumulated  deficit of $21,690,000 for
fiscal year as of October 31, 1997.

    At December 31,  1998,  the Company has a working  capital of  approximately
$715,000,  stockholders  equity of  $3,416,000,  and an  accumulated  deficit of
approximately $18,675,000.

    MARKET  ILLIQUIDITY.  The  Common  Stock of the  Company  is  traded  in the
over-the-counter  market in the so-called  "pink  sheets" or, if available,  the
"OTC  Bulletin  Board  Service."  As a  result,  an  investor  may  find it more
difficult to dispose of, or to obtain  accurate  quotations  as to the value of,
the Company's Common Stock. Because the Company's Common Stock is subject to the
rules on penny stock (See  DISCLOSURE  RELATING TO LOW PRICED  STOCKS;  POSSIBLY
RESTRICTIONS  ON  RESALES  OF LOW  PRICED  STOCKS  AND ON  BROKER-DEALER  SALES;
POSSIBLE  ADVERSE  EFFECT OF "PENNY  STOCK" RULES ON LIQUIDITY FOR THE COMPANY'S
COMMON STOCK),  the market liquidity for the Company's Common Stock is adversely
affected.  There is limited  public float in the  Company's  Common Stock as the
result of the ownership of 91.65% of the Common Stock by two stockholders.

    DISCLOSURE RELATING TO LOW PRICED STOCKS;  POSSIBLY  RESTRICTIONS ON RESALES
OF LOW PRICED STOCKS AND ON  BROKER-DEALER  SALES;  POSSIBLE  ADVERSE  EFFECT OF
"PENNY STOCK" RULES ON LIQUIDITY FOR THE COMPANY'S  COMMON STOCK.  The Company's
Common Stock could become  subject to Rule 15g-9 under the  Securities  Exchange
Act of 1934, as amended, which imposes additional sales practice requirements on
broker-dealers which sell securities to persons other than established customers
and "accredited investors"  (generally,  individuals with net worth in excess of
$1,000,000 or annual incomes exceeding  $200,000 or $300,000 together with their
spouses).  For  transactions  covered by this Rule, a broker-dealer  must make a
special  suitability  determination  for the  purchaser  and have  received  the
purchaser's written consent to the transaction prior to sale. Consequently, such
Rule may affect the ability of broker-dealers  to sell the Company's  securities
and may affect  the  ability of the  Company's  shareholders  to sell any of its
securities in the secondary market.

The SEC has adopted  regulations that generally define a "penny stock" to be any
non-Nasdaq  equity  security  that has a market price (as therein  defined) less
than  $5.00 per share or with an  exercise  price of less than  $5.00 per share,
subject to certain exceptions. For any transaction by broker-dealers involving a
penny stock,  unless exempt, the rules require delivery,  prior to a transaction
in a penny  stock,  of a risk  disclosure  document  relating to the penny stock
market.  Disclosure  is also required to be made about  compensation  payable to
both the broker-dealer and the registered  representative and current quotations
for  the  securities.  Finally,  monthly  statements  are  required  to be  sent
disclosing  recent price information for the penny stock held in the account and
information on the limited market in penny stocks.

                                       18
<PAGE>

Overview

         For fiscal  years prior to 1997,  the Company  experienced  significant
operating losses on a consolidated basis.

         At December 31, 1998, the Company had working capital of  approximately
$715,000,  stockholders  equity of  $3,416,000,  and an  accumulated  deficit of
approximately $18,675,000.  At October 31, 1998, the Company had working capital
of  approximately  $1,077,000,   stockholders  equity  of  $3,484,000,   and  an
accumulated  deficit of  $18,607,000.  At October  31,  1997 the  Company  had a
working capital deficit of  approximately  $2,487,000,  a capital  deficiency of
$1,976,000 and an accumulated deficit of $21,690,000. The Company realized a net
loss of approximately  $68,000 on revenues of  approximately  $2,742,000 for the
two months  ended  December 31, 1998  compared to a net income of  approximately
$223,000 on revenues of approximately  $2,644,000 for the two-month period ended
December 31, 1997.

         By  continuing  to provide  high quality  health care cost  containment
services to its  existing  customer  base of five BCBS plans and pursuant to the
Company's plan to aggressively market its products,  services, and reputation to
other  similar  customers,  management  believes it can continue to leverage its
reputation to other similar customers. This strategy is particularly significant
given the current health care  environment  where large  third-party  payers are
merging in an effort to protect  their  respective  franchises  and expand their
market reach.  The various BCBS plans throughout the country are no exception to
this phenomenon and the Company  believes it can leverage its core  competencies
to participate in this consolidating environment.


Reorganization

         The series of transactions  consummated by the Company in February 1996
resulted in a change in control of the Company and the  acquisition of CHCM (see
"Notes  to  Financial  Statements-Introduction  and  Background").  The Board of
Directors and management  has taken steps and expect to take certain  additional
actions to increase revenues, reduce and re-deploy personnel and other costs and
ultimately increase shareholder value.

         Management  believes it must  continue  to refine its  current  service
lines in order to continue to add value to existing and potential customers.  In
addition,  the Company  intends to broaden the services  offered with unique and
complementary  cost-containment strategies.  Management intends to evaluate each
service in light of anticipated changes in the health care industry, the cost to
enter each such  service  line as well as the  availability  and  timeliness  of
competent  resources.  To  further  expand  its line of  services,  the  Company
contemplates   pursuing   alternatives  to  its  internal  product  and  service
development  efforts by entering into strategic  alliances and joint ventures as
well as through acquisitions.

Recent Developments of the Business:

                                       19
<PAGE>

         New Contract with HealthNow New York Inc.

      Effective  January 1, 1999 the Company  entered into a six-month  services
agreement with  HealthNow New York Inc.  ("HNNY"),  which  provides  health care
coverage to New York residents through its Blue Cross and Blue Shield of Western
New York and Blue Shield of Northeastern New York divisions.  Under the terms of
this agreement, which was attached as Exhibit 10.35 to the Company's Form 10-KSB
for the fiscal year ended October 31, 1998,  incorporated  by reference  herein.
The Company, through one or more of its subsidiaries,  will provide both medical
management performance support and specialty care management performance support
services to HNNY for its  approximately  650,000  indemnity and HMO subscribers.
The service  agreement,  the  initial  term of which  expired on June 30,  1999,
provided  for the  payment  of fixed  compensation.  This  contract  replaces  a
previous  agreement  between the Company and NYCPIC executed on January 1, 1998,
which was  attached  as Exhibit  10.20 to the  Company's  Form  10-KSB  filed on
January 29, 1998. The Company executed a 90-day extension on this contract until
September 30, 1999.

General Developments of the Business during Calendar Year 1998:

           Cancellation of Letter Agreement dated as of March 1, 1997 with
           Horizon Healthcare of New Jersey, Inc., formerly known as Medigroup
           of New Jersey, Inc. (d/b/a HMO Blue) and Allied Health Group, Inc.


      In August of 1998 the Company  received  notice from one of its customers,
Horizon Healthcare of New Jersey, Inc. ("Horizon Healthcare"), formerly known as
Medigroup  of New Jersey,  Inc.  (d/b/a HMO Blue) that  Horizon  Healthcare  had
decided to resume internal  network  management that it had been  outsourcing to
Allied via an Administrative  Service Agreement dated as of January 2, 1997 (the
"Administrative  Service Agreement").  The Administrative  Service Agreement was
terminated  effective  in December of 1998.  Accordingly,  the letter  agreement
dated  March 1, 1997 by and among the  Company,  Horizon  Healthcare  and Allied
which was  attached as Exhibit No.  10(e) to the  Company's  Form 10-QSB for the
quarter  ended  April 30,  1997 and is  incorporated  by  reference  herein (the
"Horizon  Healthcare Letter  Agreement),  pursuant to which the Company provided
certain  network  management  services to Allied and Horizon  Healthcare,  ended
simultaneously  with the termination of the  Administrative  Service  Agreement.
Revenues  for the Company  from the Horizon  Healthcare  Letter  Agreement  were
approximately  $1,432,000 for the twelve-month period ended October 31, 1998. No
revenue was recognized on this contract for the two-month  period ended December
31,  1998.  The  Management  of the  Company  plans to replace  the loss of this
contract with new customers. However, there can be no assurance that the Company
will be successful in obtaining such new customers. In addition, the Company has
deferred  approximately $902,000 to cover the repayment of performance penalties
related to this agreement.

         The  Company and CAHS are parties to a Joint  Services  Agreement  with
Allied (the "Joint Services Agreement"), which was attached as Exhibit No. 10(c)
to the  Company's  Form  10-QSB  for the  quarter  ended  April 30,  1997 and is
incorporated  by  reference  herein.  Under the Joint  Services  Agreement,  the
Company and CAHS were to deliver health care management  services in the form of

                                       20
<PAGE>

management of medical  specialty  networks to various BCBS plans  throughout the
United  States.  The Joint  Services  Agreement  provides for a three-year  term
through  March 29, 2000 with an  automatic  three-year  renewal  clause,  unless
either  Allied or the  Company  gives  notice to the other of its  intent not to
renew the agreement at least 90 days prior to the end of any three-year  period.
The  Company did not receive  any  revenue  under the Joint  Services  Agreement
through  October 31,  1998.  By a letter  dated  November  9, 1998,  the Company
received  written  notice  from  Allied  pursuant  to which  Allied  purportedly
terminated the Joint Services  Agreement  without cause,  effective  December 9,
1998. The Company is contesting this termination through arbitration. (See "Item
3-Legal Proceedings-Contractual Dispute" for a more detailed explanation of this
matter).

            Excess Performance Revenues from Blue Cross and Blue Shield of Rhode
            Island ("BCBSRI")

         The Company earned excess performance revenues from BCBSRI for BCBSRI's
calendar  year ended  December  31,  1997.  The Company  realized  approximately
$1,300,000 in excess  performance  revenues during the fiscal year ended October
31,  1998  compared  to  approximately  $210,000  for the last fiscal year ended
October 31, 1997.  Management  anticipates that this excess performance  revenue
will  not  continue  during  calendar  year  1999.  Additionally,   the  Company
re-negotiated the service  agreement with BCBSRI,  which was attached as Exhibit
10(a) to the  Company's  Form 10-QSB for the quarter  ended July 31, 1997 and is
incorporated by reference herein. This agreement provides for fixed compensation
and a small amount of incentive revenues for the Company.  Management  estimates
the revenue realized from this customer during the calendar year ending December
31, 1999 would be  approximately  $1,300,000 less than the aggregate  amounts of
approximately $3,100,000 received for the fiscal year ended October 31, 1998.

                                       21
<PAGE>


Results of  Operations--12  Months Ended  October 31, 1998 Compared to 12 Months
Ended October 31, 1997

<TABLE>
<CAPTION>
 Revenues:                                                                      Year Ended 10/31,
                                                      ---------------------------------------------------------------

                                                                        1998                           1997
                                                              ----------------------          -----------------------
                                                              Amount         Percent          Amount         Percent

<S>                                                      <C>                     <C>     <C>                     <C>
Revenues from fixed-fee arrangements                     $16,821,000             89%     $12,970,000             92%

Revenues from performance-based arrangements               2,064,000             11%         834,000              6%

Consulting revenues                                           18,000              0%         273,000              2%
                                                              ------              --         -------              --

          Total revenues                                 $18,903,000            100%     $14,077,000            100%
                                                         ===========            ====     ===========            ====
</TABLE>


         Total  revenues for the fiscal years ended October 31, 1998 and October
31, 1997 were  approximately  $18,903,000  and  $14,077,000,  respectively.  The
increase  in the  fiscal  1998 year was  primarily  attributable  to: (i) excess
performance  revenues of  approximately  $1,300,000 from BCBSRI,  (ii) increased
revenues  from  Allied of  approximately  $900,000,  and (iii)  increased  fixed
compensation  revenue  of  approximately  $2,300,000  from  the  Company's  core
contracts as a result of the  re-negotiation  efforts  during  fiscal year ended
October 31, 1997.

         These  incremental  revenues are largely  offset by increased  selling,
general and administrative  expenses of approximately  $1,500,000 as a result of
the  Company's  enhanced  product  development  efforts as well as its increased
emphasis on marketing  and sales during the fiscal year ended  October 31, 1998.
Additionally, the Company has experienced a shift in its revenue mix as a result
of the  re-negotiation  of two major  contracts  during the prior  fiscal  year,
leading to increased fixed fees being  recognized for the year ended October 31,
1998 of  approximately  $3,851,000  over the  amount in the  corresponding  1997
period.

         Contracts that provide for  performance-based  revenues  require claims
data that is supplied by the Company's customers to calculate the achievement of
goals for each period.  Because  compilation  of claims data  typically lags the
Company's  actual  performance  by several  months,  it is  difficult  to ensure
complete  accuracy  when  recording  performance-based  revenues.  Management is
working  closely with its  customers to secure more timely and accurate  data to
improve the accuracy of reporting its revenues,  including,  in some cases,  the
re-negotiation  of  the  contract  itself.  Management  believes  its  estimated
performance-based  revenues contained in reported revenues for the twelve months
ended October 31, 1998 are accurate based upon the data available to management.
However,  information  received  by the  Company  after the  filing of this Form
10-KSB  could result in an  adjustment  of its  estimates  of  performance-based
revenues (which would be reflected in subsequent quarters, if necessary).

         Revenues from  performance-based  service  contracts  generally tend to
follow a pattern whereby  significant  revenues are generated during the initial
term of the contract as savings  opportunities are the greatest and then decline
thereafter as the opportunity for additional  savings  diminishes.  As a result,

                                       22
<PAGE>

the Company's  ability to increase  revenues and gross margins is dependent upon
its ability to enter into additional  contracts with new customers and/or expand
the services provided to existing customers.

         Cost of services - Cost of services for the fiscal years ended  October
31,  1998 and October 31, 1997 were  approximately  $7,903,000  and  $7,937,000,
respectively.  The decrease in the cost of services of approximately  $34,000 is
largely  due  to  increases  in  personnel  costs  of  approximately   $213,000,
professional and consulting costs of approximately $79,000,  primarily offset by
decreases in information and communication costs of approximately  $225,000, and
a decrease of approximately $89,000 in other costs.

Operating expenses

Selling, general and administrative:

         Selling,  general and administrative costs during the fiscal year ended
October 31, 1998 were  $6,842,000  compared to  $5,278,000  in the prior  fiscal
year. The increase in selling, general and administrative costs of approximately
$1,564,000  is largely due to  increases  in  personnel  costs of  approximately
$737,000  including  incentive  compensation  paid to  executive  management  of
approximately  $275,000,  an increase in travel costs of approximately  $94,000,
and facility costs of approximately  $20,000,  an increase in telephone costs of
approximately  $69,000 and an increase in professional  and consulting  costs of
approximately  $739,000 in connection with a proposed corporate transaction that
was later abandoned. The Company experienced increased marketing and sales costs
during the period ended October 31, 1998.  This increase is  attributable to the
Company's  increased marketing and sales efforts, as well as, increased emphasis
on new product development.

    While  management has taken and intends to take  additional  steps to reduce
general and  administrative  costs,  any future  reductions in such costs may be
offset to some  extent,  by  anticipated  increases  in selling,  marketing  and
service  development  costs.  There  is no  assurance  that  management  will be
successful  in reducing  general  and  administrative  costs by any  significant
amount.  (See "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations-Cautionary Statements")

Depreciation and amortization:

         Depreciation  and  amortization  for the fiscal year ended  October 31,
1998 aggregated  $1,143,000,  of which $538,000 is included in cost of services,
compared to  $1,033,000  for the fiscal year ended  October 31,  1997,  of which
$549,000 is included in cost of services.  Depreciation and amortization for the
year  ended  October  31,  1998  includes   amortization  of  intangible  assets
attributed to the Services Agreement with Horizon BCBSNJ, in connection with the
acquisition  of  CHCM  of  approximately  $122,000  ( See  "Notes  to  Financial
Statements  -  Introduction  and  Background"),  amortization  of  approximately
$337,000  relating to other  intangible  assets and depreciation of property and
equipment of approximately $683,000.



                                       23
<PAGE>
Interest expense:

         Net interest  expense during the fiscal year ended October 31, 1998 was
$305,000  compared  with net  interest  expense of  $371,000  for the year ended
October 31, 1997. The decrease in net interest expense of approximately  $66,000
is largely due to decreased  interest costs under the IBM master lease agreement
of approximately  $62,000 and decreased interest costs related to the CW Note of
approximately  $53,000  (for a more  detailed  explanation  of the CW Note,  see
"Notes to Financial Statements - Introduction and Background").  These decreases
were partially offset by increased  interest costs under the Horizon BCBSNJ Note
of approximately  $53,000 (for a more detailed explanation of the Horizon BCBSNJ
Note, see "Financial Condition-Liquidity and Capital Resources").

Financial Condition

Liquidity and Capital Resources:

         At October 31, 1998,  the Company had cash of $3,745,000  and a working
capital surplus of approximately  $1,077,000. At October 31, 1997, the Company's
cash balance was $1,038,000 and the working capital deficiency was approximately
$2,487,000.   The  decrease  in  working  capital  deficiency  of  approximately
$3,564,000 is largely due to the conversion of the $2,000,000 CW Note for Common
Stock,  increased BCBSRI performance  revenues of approximately  $1,300,000,  as
well as increased  revenues from the Company's core  contracts of  approximately
$2,300,000 and from Allied of approximately $900,000.

         Net cash provided from operating  activities  amounted to approximately
$4,415,000  and $1,117,000 for the fiscal years ended October 31, 1998 and 1997,
respectively.  This improvement is largely due to the increased operating income
generated during the fiscal year ended October 31, 1998.

         Net  cash  used  by  investing  activities  amounted  to  approximately
$1,133,000  and $623,000  for the fiscal years ended  October 31, 1998 and 1997,
respectively.  This  increase  of  approximately  $490,000 is  primarily  due to
increased capital expenditures  incurred in connection with Software Development
during the current fiscal year.

         Net  cash  used  by  financing  activities  amounted  to  approximately
$575,000  and  $623,000  for the fiscal  years ended  October 31, 1998 and 1997,
respectively. This decrease of approximately $48,000 is primarily due to reduced
payments  related to the IBM Master lease agreement during the fiscal year ended
October 31, 1998.

Financing:

         Amounts  payable  pursuant to long-term  financing  arrangements  as of
October  31,  1998  consisted  of   approximately   $422,000  of  capital  lease
obligations pursuant to a Master Lease Agreement with IBM Credit Corporation for
the financing of computer and telephone  equipment,  installation,  software and
related  system  integration  expenses.  The term of the Master Lease  Agreement






                                       24
<PAGE>

expired  June 30,  1999,  at which  time,  pursuant  to its  terms  the  company
purchased all such items for one dollar.  The Company's  obligations  under this
Master Lease arrangement were guaranteed by Horizon BCBSNJ.

Results of  Operations--2  Months Ended  December 31, 1998  Compared to 2 Months
Ended December 31, 1997

<TABLE>
<CAPTION>
                                                                         Two-Months Ended 12/31,
                                                      ---------------------------------------------------------------

                                                                      1998                        1997(Unaudited)
                                                              ----------------------          ----------------------
                                                              Amount         Percent          Amount         Percent

<S>                                                       <C>                    <C>      <C>                    <C>
Revenues from fixed-fee arrangements                      $2,720,000             99%      $2,507,000             95%

Revenues from performance-based arrangements                  21,000              1%         136,000              5%

Consulting revenues                                            1,000              0%           1,000              0%
                                                               -----              --           -----              --

          Total revenues                                  $2,742,000            100%      $2,644,000            100%
                                                          ==========            ====      ==========            ====
</TABLE>

         Total  revenues for the two months ended December 31, 1998 and December
31,  1997  were  approximately  $2,742,000  and  $2,644,000,  respectively.  The
increase in the current year was primarily  attributable to increased fixed- fee
revenue  resulting from contract  renegotiations  offset by decreased revenue of
approximately  $142,000  from  Allied  Health  Group,  Inc.  due  to a  contract
termination.

         Cost of services - Cost of services for the two months  ended  December
31, 1998 and December 31, 1997 were  approximately  $1,414,000  and  $1,319,000,
respectively.  The increase in the cost of services of approximately  $95,000 is
largely due to increases in personnel costs of approximately $135,000, primarily
offset by decreases in professional, consulting and travel costs.

Operating expenses

Selling, general and administrative:

         Selling,  general  and  administrative  costs for the two  month  ended
December  31, 1998 and  December  31,  1997 were  approximately  $1,251,000  and
$944,000,  respectively.  The  increase in selling,  general and  administrative
costs of  approximately  $307,000 is largely due to increases in personnel costs
of  approximately  $61,000,  an  increase of  approximately  $28,000 in facility
costs,  an increase in travel  costs of  approximately  $24,000,  an increase in
information and  communication  costs of approximately  $51,000,  an increase in
professional and consulting  costs of  approximately  $56,000 and an increase in
other general and administrative costs of approximately  $87,000, which includes
$40,000 in investor relations.  The Company experienced  increased marketing and
sales  costs  during the period  ended  December  31,  1998.  This  increase  is
attributable to the Company's increased marketing and sales efforts, as well as,
increased emphasis on new product development.

Depreciation and amortization:

         Depreciation  and  amortization  for the two months ended  December 31,
1998 and  December  31, 1997 was  approximately  $215,000,  of which  $90,000 is
included in cost of  services,  compared to  $175,000  for the two months  ended

                                       25

<PAGE>

December  31,  1997,   of  which  $90,000  is  included  in  cost  of  services.
Depreciation  and  amortization  for the two  months  ended  December  31,  1998
includes  amortization of intangible assets attributed to the Services Agreement
with Horizon BCBSNJ, in connection with the acquisition of CHCM of approximately
$20,000 ( See "Notes to Financial  Statements - Introduction  and  Background"),
amortization of approximately  $72,000  relating to other intangible  assets and
depreciation of property and equipment of approximately $123,000.

Interest expense:

         Net  interest  expense for the two months  ended  December 31, 1998 was
$20,000  compared with net interest  expense of $61,000 for the two months ended
December 31, 1997. The decrease in net interest expense of approximately $41,000
is largely due to decreased  interest costs under the IBM master lease agreement
of  approximately  $12,000,  decreased  interest costs related to the CW Note of
approximately  $27,000  (for a more  detailed  explanation  of the CW Note,  see
"Notes to Financial  Statements - Introduction and Background"),  and a decrease
in interest costs under the Horizon BCBSNJ Note of  approximately  $2,000 (for a
more  detailed   explanation   of  the  Horizon   BCBSNJ  Note,  see  "Financial
Condition-Liquidity and Capital Resources.)

Financial Condition

Liquidity and Capital Resources:

         At December 31, 1998,  the Company had cash of  $3,354,000  and working
capital of  approximately  $715,000.  At December 31, 1997,  the Company's  cash
balance was $1,142,000  and its working  capital  deficiency  was  approximately
$1,969,000. The change in working capital of approximately $2,841,000 is largely
due to the conversion of the $2,000,000 CW Note for Common Stock.

         Net cash provided from operating  activities  amounted to approximately
$30,000 and $377,000 for the two-month periods ended December 31, 1998 and 1997,
respectively.  The change is largely due to a decrease in accrued  expenses  and
other liabilities of approximately  $224,000, and an increase in other assets of
approximately   $236,000,   offset  by  decreases  in  customer  receivables  of
approximately $352,000, and non-cash charges of approximately $215,000.

         Net cash used by investing activities amounted to approximately $47,000
and  $182,000  for the  two-month  periods  ended  December  31,  1998 and 1997,
respectively.  This  decrease  of  approximately  $145,000 is  primarily  due to
decreased capital expenditures  incurred in connection with Software Development
during the current two-month period.


         Net  cash  used  by  financing  activities  amounted  to  approximately
$384,000 and $91,000 for the two-month periods ended December 31, 1998 and 1997,
respectively.  This  increase  of  approximately  $293,000 is  primarily  due to
increased principal payments to a stockholder/customer  company of approximately
$281,000  and  increased  principal  payments  related to the IBM  Master  lease
agreement of approximately $12,000.

                                       26
<PAGE>


         While there can be no assurances,  management believes that its cash on
hand,  projected  future cash flows from operations and the Company's  borrowing
capacity  under its Credit  Agreement  with  Summit Bank will  provide  adequate
capital  resources to support the  Company's  anticipated  cash needs for fiscal
year ending December 31, 1999.

Financing:

         Amounts  payable  pursuant to long-term  financing  arrangements  as of
December  31,  1998  consisted  of  approximately   $319,000  of  capital  lease
obligations pursuant to a Master Lease Agreement with IBM Credit Corporation for
the financing of computer and telephone  equipment,  installation,  software and
related  system  integration  expenses.  The term of the Master Lease  Agreement
expired  June 30,  1999,  at which  time,  pursuant  to its  terms  the  company
purchased all such items for one dollar.

        Pursuant to the BCBSNJ  Note,  the Company  owes  $1,748,000  (including
approximately  $166,000 in accrued interest) and $1,863,000 to Horizon BCBSNJ as
of December 31, 1998 and October 31, 1998,  respectively,  due in equal  monthly
payments of principal  and interest  commencing on October 1, 1998 and ending on
June 30,  2000,  at which  time such  amount  is  payable  and due in full.  The
promissory  note bears interest at a five-year  U.S.  treasury  yield,  adjusted
quarterly.  While there can be no assurances that future operating  results will
be sufficient to fund this  obligation of the Company,  management  expects such
amounts to be funded through operations.

        Effective June 30, 1998, the CW Note (plus  $377,000  accrued  interest)
issued by the Company to CW Ventures was automatically  converted into 7,799,997
shares of the Company's Common Stock and the CW Note was then canceled.


         The  company  has a credit  facility  with a bank that  provides  for a
$1,500,000  working  capital  revolver  to be used for general  working  capital
needs,  which has been extended through September 3, 1999. In September of 1998,
the bank issued an  irrevocable  letter of credit in the amount of $250,000  for
the account of the Company in favor of a vendor as  security  for the  Company's
obligation  under a  noncancelable  operating  lease.  This  letter of credit is
issued under the company's  credit facility and the availability is thus reduced
by the face amount of the letter of credit. The remainder of the credit facility
is available to the Company.


Year 2000:

Potential Impact of Year 2000 Computer Issues Overview:

  The year 2000  computer  problem is the  inability of computer  systems  which

                                       27
<PAGE>

store  dates by using the last two digits of the year (i.e.  "98" for "1998") to
reliably  recognize  that dates after  December 31, 1999 are later than, and not
before,  1999.  For  instance,  the date  January  1,  2000,  may be  mistakenly
interpreted as January 1, 1900, in calculations  involving dates on systems that
are non-year 2000 compliant. The Company relies on information technology ("IT")
systems and other systems and  facilities  such as telephones,  building  access
control systems and heating and ventilation  equipment  ("Embedded  Systems") to
conduct its  business.  These  systems are  potentially  vulnerable to year 2000
problems  due to their use of date  information.  The Company  also has business
relationships  with  customers  and health  care  providers  and other  critical
vendors who are themselves  reliant on IT and Embedded  Systems to conduct their
businesses.

State of Readiness:

The  Company's  IT systems are largely  centralized,  with  substantially  all
systems  maintained  in the  Company's  corporate  headquarters  in Iselin,  New
Jersey,  the Company has  developed  its own standards for systems which include
both  purchased  and  internally-developed  software.  The Company's IT hardware
infrastructure is built mainly around mid-range  computers and IBM PC-compatible
servers and desktop systems. The Company's principal means of ensuring year 2000
readiness for purchased software has been the replacement,  upgrade or repair of
non-compliant  systems.  This replacement process would have been undertaken for
business reasons irrespective of the year 2000 problem;  however, it would, more
than likely,  have been  implemented over a longer period of time. The Company's
internally-developed  software  was either  designed  to be year 2000 ready from
inception  or is in the  process  of  being  modified  to be  year  2000  ready.
Substantially all of the Company's  mid-range IT hardware has been remedied to a
state of year 2000 readiness, with the remainder scheduled to be remedied by the
end of the third quarter of fiscal 1999. Most of the Company's non-compliant IBM
PC-compatible  servers  and  desktops  have been  replaced,  with the  remainder
expected to be replaced by the end of fiscal  1999.  The  Company's  plan for IT
systems consists of several phases, primarily: (i) Inventory--identifying all IT
systems and the magnitude of year 2000  readiness  risk of each according to its
potential business impact; (ii) Date assessment--identifying IT systems that use
date   functions  and  assessing  them  for  year  2000   functionality;   (iii)
Remediation--reprogramming,  replacing or upgrading where necessary, inventoried
items  to   ensure   they  are  year   2000   ready;   and  (iv)   Testing   and
certification--testing  the code  modifications  and new  inventory  with  other
associated  systems,  including  extensive date testing and  performing  quality
assurance testing to ensure successful  operation in the post-1999  environment.
The Company has substantially  completed the inventory and assessment phases for
substantially  all of its IT systems.  The Company's IT systems are currently in
the  remediation  and testing and  certification  phases.  The Company  plans to
complete the remediation,  testing and certification of all of its IT systems by
the end of fiscal 1999. The Company leases most of the office space in which its
reliance  on Embedded  Systems  presents a  potential  problem and is  currently
working with the  respective  lessors to identify and correct any potential year
2000 problems related to these Embedded  Systems.  The Company believes that its
year 2000 projects generally are on schedule.

External Relationships:

 The Company also faces the risk that one or more of its  critical  suppliers or
customers  ("External  Relationships")  will  not be able to  interact  with the
Company due to the third party's  inability to resolve its own year 2000 issues,

                                       28
<PAGE>

including those associated with its own External  Relationships.  The Company is
attempting  to  determine  the  overall  year  2000  readiness  of its  External
Relationships.  In the  case  of  significant  customers  and  mission  critical
suppliers such as banks, telecommunications providers and other utilities and IT
vendors,  the Company is engaged in  discussions  with the third  parties and is
attempting to obtain  detailed  information as to those parties' year 2000 plans
and  state  of  readiness.  The  Company,  however,  does  not  have  sufficient
information  at the current time to predict  whether its External  Relationships
will be year 2000 ready.

                                       29
<PAGE>

Year 2000 Costs:

 Total costs incurred solely for remediation of potential year 2000 problems are
currently  estimated  to be  approximately  $100,000  in  fiscal  1999.  A large
majority of these costs are expected to be  incremental  expenses  that will not
recur in the year  2000 or  thereafter.  The  Company  expenses  these  costs as
incurred and funds these costs through operating cash flows. Year 2000 readiness
is critical to the Company.  The Company has  re-deployed  some  resources  from
non-critical  system  enhancements  to  address  year  2000  issues.  Due to the
importance  of IT systems to the  Company's  business,  management  has deferred
non-critical  systems  enhancements to become year 2000 ready.  The Company does
not expect these  redeployments  and deferrals to have a material  impact on the
Company's financial condition or results of operations.

Risks and Contingency/Recovery Planning:

 If the Company's year 2000 issues were unresolved,  the most reasonably  likely
worst case scenario would include,  among other possibilities,  the inability to
accurately  and  timely  authorize  and  process  benefits  and  medical  stays,
accurately  bill  customers,   assess  claims  exposure,   determine   liquidity
requirements,  report  accurate  data to  management,  stockholders,  customers,
regulators and others,  business  interruptions or shut downs, financial losses,
reputation harm, loss of significant customers, increased scrutiny by regulators
and litigation  related to year 2000 issues.  The Company is attempting to limit
the potential impact of the year 2000 by monitoring the progress of its own year
2000 project and those of its critical External  Relationships and by developing
contingency/recovery plans. The Company cannot guarantee that it will be able to
resolve all of its year 2000 issues. Any critical unresolved year 2000 issues at
the  Company  or its  External  Relationships,  however,  could  have a material
adverse effect on the Company's  results of  operations,  liquidity or financial
condition.  The Company has developed,  or is  developing,  contingency/recovery
plans aimed at ensuring the continuity of critical business functions before and
after December 31, 1999. As part of that process,  the Company has substantially
completed the  development of manual work  alternatives  to automated  processes
which will both ensure  business  continuity and provide a ready source of input
to affected  systems  when they are  returned to an  operational  status.  These
manual  alternatives  presume,   however,  that  basic  infrastructure  such  as
electrical power and telephone  service,  as well as purchased systems which are
advertised  to be year 2000  ready by their  manufacturers  (primarily  personal
computers and  productivity  software)  will remain  unaffected by the year 2000
problem.



                                       30
<PAGE>
Item 7.  Financial Statements and Supplementary Data

         The Financial  Statements and supplementary  data required by this item
appear under the caption "Index to  Consolidated  Financial  Statements" and are
included elsewhere herein.

Item 8.  Changes in and Disagreements with Accountants
         On Accounting and Financial Disclosure

    None.

                                       31

<PAGE>


                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons

The Company's directors,  executive officers and control persons, as of December
31, 1998, (except as otherwise noted) are as follows:
<TABLE>
<CAPTION>

   <S>                                  <C>                  <C>
   Name                                 Age                  Positions with the Company
   ----                                 ---                  --------------------------
   William J. Marino (1)(6)             55                   Chairman of the Board of Directors
   Robert J. Pures (2)(6)               53                   Director
   Barry Weinberg (1)(6)                60                   Director
   David McDonnell (1) (2)(6)           56                   Director
   Walter Channing, Jr. (2)(6)          58                   Director
   Richard W. Freeman(3)                51                   President and Chief Operating Officer
   David Noone(5)(6)                    45                   Director, Chief Executive Officer
   Stephan D. Deutsch                   55                   Senior Vice President and National Medical Director
   Elaine del Rossi(5)                  55                   Senior Vice President, Marketing and Sales
   David G. DeBoskey                    33                   Vice President, Finance and Accounting
-------------------------------------------------------------------------------
<FN>
(1)      Member of Compensation Committee
(2)      Member of Audit Committee
(3)      Appointed President and Chief Operating Officer effective October 30, 1998.
(4)      Effective January 8, 1999
(5)      Effective April 21, 1999, the Company terminated Ms. del Rossi's employment without cause.
(6)      Re-elected to the Board of Directors of the Company at the Company's Annual Meeting held on July 7, 1999.
</FN>
</TABLE>


         There is no family  relationship  between  any  Director  or  Executive
Officer of the Company. At a meeting of the Company's Board of Directors held on
January 14, 1997, a Compensation Committee and Audit Committee were formed.

         All  directors  of the Company are elected by the  stockholders  of the
Company  or, in the case of a  vacancy,  are  elected by the  directors  then in

                                       32

<PAGE>

office to hold  office  until the next  annual  meeting of  stockholders  of the
Company  and until  their  successors  are  elected  and  qualify or until their
earlier resignation or removal.

         The  Company,  Horizon  BCBSNJ  and  CW  Ventures  are  parties  to the
Stockholders'  Agreement,  pursuant to which Horizon BCBSNJ and CW Ventures have
agreed  that each of them shall be  entitled  to  designate  two  members of the
Board;  two members will be management of the Company  acceptable to CW Ventures
and Horizon BCBSNJ, and there shall be one non-employee  outside director who is
acceptable  to CW Ventures and Horizon  BCBSNJ (See  "Description  of Business -
Change in Control" above).  CW Ventures has designated Barry Weinberg and Walter
Channing,  Jr. as members of the Board. Horizon BCBSNJ has designated William J.
Marino and Robert J. Pures as members of the Board.

         The  following  sets forth  certain  information  with  respect to each
Director and Executive Officer of the Company:

         William J.  Marino has been a director of the  Company  since  February
1996, and a director of Contemporary  HealthCare  Management System,  Inc. since
December 1993. He has been President,  Chief Executive Officer and a director of
Horizon  BCBSNJ since January 1994,  and Senior Vice President of Horizon BCBSNJ
from January 1992 through  December 1993. Mr. Marino also currently  serves as a
director of Digital Solutions, Inc.

         Robert J. Pures has been a director of the Company since February 1996.
He has been Senior Vice President - Administration,  Chief Financial Officer and
Treasurer of Horizon BCBSNJ since 1995, and Vice President Finance and Treasurer
of Horizon BCBSNJ from October 1985 through July 1995.

         Barry  Weinberg has been a director of the Company  since May 1997.  He
has been President of the CW Group,  Inc., a company engaged in investing in the
health care field since 1981.  Mr.  Weinberg  currently  serves on the boards of
directors of Autoimmune  Inc. and several  privately owned  companies,  and is a
general partner of CW Partners.

         David J.  McDonnell  has been a director of the Company  since  January
1997.  He served  from  December  1993 to  February  1997 as a director of Value
Health,  Inc., a company engaged in the health care service  business.  Prior to
that, he was employed by Preferred  Health Care Ltd., a behavioral  managed care
company,  where he served as that company's Chief Executive Officer from 1988 to
1993, and its President from 1988 to 1992. Mr. McDonnell also served as Chairman
of Preferred Health Care Ltd.'s board of directors from 1991 to 1993.

         Walter Channing, Jr. has been a director of the Company since May 1997.
He has been Vice President of the CW Group, Inc., a Company engaged in investing
in the health care field since 1981. Mr. Channing currently serves on the boards
of directors of several  privately  owned companies and is general partner of CW
Partners.

                                       33
<PAGE>


         Richard W.  Freeman,  M.D has served as President  and Chief  Operating
Officer of the Company  since  October  1998,  and from  September  1997 through
October 1998 as Executive  Vice  President  of the  Company.  Prior to that,  he
served from April 1995 through  September 1997 as Senior Vice President of CAHS.
From 1994 to 1995,  Dr. Freeman served as  Vice-President  for Medical  Affairs,
Johns Hopkins  Bayview Medical Center,  a 667 bed academic  medical center,  and
from 1992 to 1994,  Director  Office of  Managed  Care  Programs  and  Physician
Support Services, Johns Hopkins Bayview Medical Center, The Johns Hopkins Health
System, Baltimore, Maryland.

         David Noone has been a director of the Company and CEO since January 8,
1999. Mr. Noone served from September 1995 to February 1997 as the President and
Chief  Executive  Officer of Value Health  International,  a subsidiary of Value
Health,  Inc., where he was responsible for the migration of Managed Health Care
strategies to emerging opportunity markets in Europe, Latin America and Asia and
from December 1993 to February 1995, as President and Chief Executive Officer of
Value Health Insurance Services Group,  another Value Health,  Inc.  subsidiary,
where he was responsible  for  development of a diversified  managed health care
company serving the property casualty,  group health and auto liability sectors.
Prior to that time, Mr. Noone served as President and Chief Operating Officer of
Preferred  Health Care Ltd.  from 1992 to 1993,  and in a variety of  capacities
with that company from 1987 to 1992.

         Stephan D.  Deutsch,  M.D. has been Senior Vice  President and National
Medical  Director since July 1995. Prior to that, Dr. Deutsch served as both the
President and Medical Director of a leading provider of outpatient  services for
the prevention,  treatment and management of work-related injuries and illnesses
in Rhode Island.

           Elaine del Rossi was Senior Vice  President  of  Marketing  and Sales
from April 1998  through  April 1999.  Prior to that,  she served as Senior Vice
President of Marketing  and Sales for a leading  provider of  preventive  health
programs.  From 1980 to 1994,  Ms. del Rossi served as an executive in marketing
and sales positions for two large insurance  companies where she was responsible
for the  introduction  and development of several new product lines, as well as,
overseeing global business and marketing plans for these organizations.

         David G. DeBoskey,  C.P.A.  has served as Vice President of Finance and
Accounting  of the Company  since  November  1997,  and from April 1996  through
November 1997, as Director of Finance and Accounting of the Company. From August
1992  through  April  1996,  Mr.  DeBoskey  served  as  Accounting  Manager  and
Subsidiary Controller for two New Jersey hospitals.


                                       34

<PAGE>

 Section 16(a) Beneficial Ownership Reporting Compliance:

         Section  16(a) of the  Securities  Exchange  Act of 1934,  as  amended,
requires the Company's officers and directors, and persons who own more than 10%
of a registered  class of the Company's  equity  securities,  to file reports of
ownership and changes in ownership with the  Securities and Exchange  Commission
and NASDAQ,  copies of which are required by  regulation  to be furnished to the
Company.



         Based  solely on review of the  copies of such forms  furnished  to the
Company,  the Company  believes that during fiscal 1998 its officers,  directors
and ten percent (10%)  beneficial  owners complied with all Section 16(a) filing
requirements,  with  the  exception  that the  annual  statement  of  beneficial
ownership (Form 5) was not filed by CW Ventures II, L.P. on a timely basis.
Appropriate corrective action is being taken by this entity.

                                       34
<PAGE>

Item 10. Executive Compensation

         The following table sets forth information  concerning the compensation
paid or  accrued  by the  Company  for each of the three  calendar  years  ended
December 31, 199X, to the individual  performing the function of Chief Executive
Officer and each of the next four most  highly  compensated  executive  officers
with compensation in excess of $100,000, during such periods.
<TABLE>
<CAPTION>
                                            Summary Compensation Table

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

                                                          Annual Compensation                       Long Term Compensation
---------------------------- -------------- ------------------------------------------------- -----------------------------------
---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
<S>                           <C>               <C>               <C>           <C>                  <C>            <C>
                                                                                                    Awards          Payouts
                                                                                                   Securities      All Other
Name and Principal            Year Ended        Salary            Bonus       Other Annual         Underlying      Compensation
        Position              December 31,                                  Compensation(2)       Options/SARs        ($)
                                                                                                     (#)


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

Thomas P. Riley, (3)             1998          $275,000          $  -0-          $ 70,138           -0-            $ 4,313 (1)
President &                      1997           272,885           300,000          -0-              -0-              4,115 (1)
Chief Executive Officer          1996           160,213             -0-            -0-              -0-               -0-


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

Richard W. Freeman, M.D.         1998        $  270,162 (4)       $ -0-           $ -0-             -0-            $ 4,800 (1)
President &                      1997           261,000          35,000           25,000            -0-              4,750 (1)
Chief Operating Officer          1996           265,731             -0-             -0-           250,000            3,888 (1)

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

Stephen D. Deutsch, M.D.         1998        $  300,000 (5)       $ -0-           $  -0-            -0-           $   -0-
Senior Vice President and        1997           267,307          92,308              -0-            -0-               -0-
National Director of CAHS        1996           250,028         118,269              -0-          250,000             -0-


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

Elaine del Rossi,                1998        $ 110,769 (6)      $55,000          $   -0-            -0-           $   -0-
Sr. Vice President,              1997             -0-             -0-                -0-            -0-               -0-
Marketing and Sales              1996             -0-             -0-                -0-            -0-               -0-


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

David DeBoskey, CPA              1998           $87,654         $25,000          $   -0-            -0-           $ 2,608 (1)
Vice President,                  1997            75,769          12,500              -0-            -0-             1,894 (1)
Finance and Accounting           1996            34,423           1,000              -0-            -0-               751 (1)


---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
<FN>
-----------------------------------------------------------

(1)   Represents   Company   matching   contributions   to   a   401(k)   profit
      sharing/savings plan.
(2)   Other Annual  Compensation  includes  taxable  fringe  benefits and unused
      accrued vacation days that were paid.
(3)   Effective  October 30, 1998,  Mr. Riley resigned his position as President
      and Chief Executive of the Company.
(4)   Dr.  Freeman is paid an annual  salary of $275,000  under the terms of his
      amended and restated employment agreement dated September 29, 1998.
(5)   Dr.  Deutsch is paid an annual  salary of $300,000  under the terms of his
      employment agreement
(6)   Ms. del Rossi  joined the  Company on March 25, 1998 and is paid an annual
      salary of $160,000 under the terms of her employment agreement. The salary
      and bonus set forth above  represents  compensation for partial year only.
      Ms. del Rossi's  employment with the Company was terminated  without cause
      on April 21, 1999.
</FN>
</TABLE>
                                       35

<PAGE>
Compensation Plans

1996 Stock Option Plan:

       The 1996 Stock Option Plan ("Stock  Option  Plan"),  which was adopted by
the Company  June 6, 1996,  and amended  July 24,  1996,  is  administered  by a
Committee of the Board of Directors  consisting  of at least two members who are
"outside  directors" as defined in Section  162(m) of the Internal  Revenue Code
who are also  "disinterested  persons"  as  defined  in  regulations  under  the
Securities  and Exchange Act of 1934.  Pursuant to the terms of the Stock Option
Plan,  the  Committee  will  select  persons  to be  granted  options  and  will
determine: (i) whether to grant a non-qualified stock option and/or an incentive
stock option;  (ii) the number of shares of the Company's  Common Stock that may
be purchased upon the exercise of such option;  (iii) the time or times when the
option becomes exercisable,  except that no stock received pursuant to an option
shall be sold by the recipient prior to six months from the date of grant;  (iv)
the exercise  price,  which cannot be less than 100% of the fair market value of
the  Common  Stock on the date of grant  (110% of such  fair  market  value  for
incentive options granted to a person who owns or who is considered to own stock
possessing  more than 110% of the total combined  voting power of all classes of
stock of the Company);  and (v) the duration of the option,  which cannot exceed
ten (10)  years.  Incentive  stock  options  may only be  granted  to  employees
(including   officers)   of  the  Company   and/or  any  of  its   subsidiaries.
Non-qualified stock options may be granted to any employees (including employees
who have  been  granted  incentive  stock  options)  and other  persons  who the
Committee may select.  Options,  which must be granted substantially in the form
prescribed by the Stock Option Plan, are not valid unless signed by the grantee.
Under the Stock Option Plan,  an  aggregate of 10% of the  Company's  authorized
number of shares of Common Stock (equal to 9,000,000  shares of Common Stock) is
reserved for issuance.

      All options granted under the Stock Option Plan are exercisable during the
option  grantee's  lifetime  only by the  option  holder  (or  his or her  legal
representative) and generally only while such option grantee is in the Company's
employ. In the event an option grantee's  employment is terminated other than by
death or  disability,  such  person  shall  have three  months  from the date of
termination to exercise such option to the extent the option was  exercisable at
such date, but in no event  subsequent to the option's  expiration  date. In the
event of  termination  of  employment  due to death or  disability of the option
grantee,  such  person (or such  person's  legal  representative)  shall have 12
months  from such date to  exercise  such  option to the  extent  the option was
exercisable  at the  date of  termination,  but in no  event  subsequent  to the
option's expiration date.

      The Stock Option Plan  contains  anti-dilution  provisions  which  provide
that, in the event of any change in the Company's  outstanding  capital stock by
reason of stock dividend,  recapitalization,  stock split, combination, exchange
of  shares  or  merger  or  consolidation,  the  Committee  or the  Board  shall
proportionately  adjust the number of shares  covered by each option granted and
the exercise price per share. The Committee's or Board's determinations in these
matters shall be conclusive.

      The Board of Directors  has the  authority  to terminate  the Stock Option
Plan as well as to make changes in and  additions  to such plans.  The plan will
terminate on June 6, 2006, unless previously  terminated by the Board.  However,
unless approved by the stockholders of the Company, the Board may not change the
aggregate number of shares subject to the Stock Option Plan,  terminate,  modify

                                       36

<PAGE>

or amend  such plan so as to  adversely  affect  the  rights  of option  holders
previously  granted under such plan,  change the  requirements of eligibility to
such plan or materially  increase the benefits  accruing to  participants  under
such plan.

         No options were granted to or exercised by the named executives  during
the year ended December 31, 1998.

<TABLE>
<CAPTION>

                 Aggregated Option Exercises in Last Fiscal Year
                        and Fiscal Year-End Option Values
<S>                                                         <C>                      <C>
                                                           Number of               Value of
                                                       Shares Underlying          Unexcerised
                                                          Unexercised            In-the-Money
                                                           Options at             Options at
                                                       December 31, 1998       December 31, 1998
                                                          Exercisable/           Exercisable/
Name                                                     Unexercisable         Unexercisable (1)
----                                                     -------------         -----------------
Thomas P. Riley                                                0                        0
Richard W. Freeman, M.D.                                 166,667/83,333               $0/$0
Stephan D. Deutsch, M.D.                                 166,667/83,333               $0/$0
Elaine del Rossi                                               0                        0
David G. DeBoskey, CPA                                         0                        0
<FN>

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

(1)Based upon the average Bid and Asked prices on the OTC Bulletin  Board of the
Company's Common Stock on July 31, 1999.
</FN>
</TABLE>


Resignations, Employment Contracts and Board Appointments

         Resignation of Chief Executive Officer, President and Director

         Pursuant to written  letter to the Board of Directors  dated  September
29, 1998,  Thomas P. Riley resigned as President and Chief Executive  Officer of
the Company, effective October 30, 1998. Mr. Riley resigned as a director of the
Company effective November 16, 1998.

         Noone Employment Agreement

         Effective as of January 8, 1999 the Company  entered into an Employment
Agreement and Confidentiality,  Invention and Non-Compete Agreement of even date
therewith with David Noone, its current Chief Executive  Officer  (collectively,
the "Noone Agreements"),  which were attached as Exhibits 10.32 and 10.33 in the
Company's  Form 10-KSB for the period ended  October 31, 1998 which was filed on
January 29, 1999 and are incorporated by reference herein.  The Noone Agreements
provide for a one-year term commencing January 8, 1999, with annual compensation
of $300,000 per annum. The Company will pay Mr. Noone a severance  payment equal
to six-month  salary if he is terminated  upon a "change of control" (as defined
below). In addition,  Mr. Noone is subject to a non-compete  restriction  during
the term of employment plus two years thereafter.  The Noone Agreements  further
provide for the issuance of stock options as of the commencement  date providing
Mr.  Noone with an option to purchase  Common  Stock in an amount  equal to four
(4%) of the Company's capitalization on such date, upon the terms and conditions

                                       37

<PAGE>

set forth therein. These options are subject to accelerated vesting, if: (a) the
Company's  Common Stock  reaches  certain  target levels or (b) if either of the
Company's two largest  shareholders,  Horizon  BCBSNJ and CW Ventures,  sells or
transfers  its shares of Common  Stock to a  non-affiliated  party  ("Change  of
Control")  for a price at least 300% higher than the average  sales price of the
Company's Common Stock, during the thirty (30) days prior to his employment with
the  Company,  as reported by Bloomberg  Business  Services.  For this  purpose,
Horizon BCBSNJ and CW shall not be considered affiliated with each other.

         Pursuant to  unanimous  written  consents  of each of the  Compensation
Committee of the Board of  Directors  and the Board of Directors of the Company,
dated January 8, 1999, David Noone was appointed a "management  director" of the
Board of  Directors  effective  as of January 8, 1999,  filling a vacancy on the
Board.

         Freeman Employment Agreement

         The Company entered into an Amended and Restated Employment  Agreement,
dated as of  September  29,  1998,  with  Richard  Freeman,  M.D.,  the  current
President  and Chief  Operating  Officer of the Company  and CAHS (the  "Freeman
Employment Agreement"). The Freeman Employment Agreement was attached as Exhibit
10.36 in the  Company's  Form 10-KSB for the period ended October 31, 1998 which
was filed on January 29, 1999 and is incorporated by reference herein.  The term
of the Freeman Employment  Agreement commenced on October 30, 1998 and continues
for a two-year  period,  with an additional  one-year  renewal.  Dr.  Freeman is
entitled to an annual salary of $275,000, plus other benefits set forth therein.
The  Freeman  Employment  Agreement  provides  for a cash bonus in the amount of
$95,000  in the  event of a "Change  in  Control  of the  Company"  (as  defined
therein).   The  Freeman  Employment   Agreement  also  contains  a  non-compete
restriction  during  the  term  of  Dr.  Freeman's  employment  plus  two  years
thereafter.

         del Rossi Employment Agreement

         Effective as of March 25, 1998 the Company  entered into an  Employment
Agreement (the "del Rossi Employment Agreement") and Confidentiality,  Invention
and  Non-Compete  Agreement  (the  "Confidentiality  Agreement")  of  even  date
therewith  with Elaine del Rossi,  a former Senior Vice  President for Marketing
and Sales of the Company,  which was attached as Exhibit  10.37 and 10.38 in the
Company's  Form 10-KSB for the period ended  October 31, 1998 which was filed on
January 29, 1999 and are incorporated by reference herein.  The terms of the del
Rossi  Employment  Agreement  commenced  on March 25, 1998 and  continued  until
April,  1999.  Ms. del Rossi was entitled to an annual salary of $160,000,  plus
other benefits set forth therein.  The del Rossi Employment  Agreement  provided
for a cash bonus of $50,000 upon Ms. del Rossi's commencement of employment with
the  Company.  In  addition,  Ms.  del  Rossi was  entitled  to  commissions  as
additional   compensation  if  certain  sales  goals  are  met.  The  del  Rossi
Confidentiality  Agreement contains a non-compete restriction during the term of
Ms. del Rossi's  employment plus one year thereafter.  Effective April 21, 1999,
the Company terminated Ms. del Rossi's employment without cause.

                                       38

<PAGE>


         Deutsch Employment Agreement

         Effective  as of April 28, 1998 the Company  and CAHS  entered  into an
Employment  Agreement  with Stephan D. Deutsch,  M.D.  (the "Deutsch  Employment
Agreement"),  the current  Senior Vice  President of CAHS and  National  Medical
Director of CAHS,  which was  attached as Exhibit  10.39 in the  Company's  Form
10-KSB for the period ended October 31, 1998 which was filed on January 29, 1999
and is  incorporated  by reference  herein.  The term of the Deutsch  Employment
Agreement  commenced on April 28, 1998 and continues for a two-year period, with
a successive  one-year renewal term. Dr. Deutsch is entitled to an annual salary
of  $250,000,  an annual  supplemental  salary of $50,000  for his  services  as
National Medical Director of CAHS, plus other benefits set forth therein.  Under
the Deutsch Employment Agreement,  Dr. Deutsch is entitled to participate in any
CAHS' Executive  Annual Bonus Incentive Plan as may be established by the Board.
The Deutsch  Employment  Agreement also contains  solicitation  and  non-compete
restrictions  during  the  term  of  Dr.  Deutsch's  employment  plus  one  year
thereafter.

Compensation of Directors:

Generally

         No member of the Board of Directors of the Company  presently  receives
annual remuneration for acting in that capacity,  except disinterested Directors
who  are  neither  officers  nor  associated  with  stockholders.  Disinterested
Directors  are paid  $1,000 for each  meeting  of the Board they  attend and are
eligible for the grants of options under the 1996  Directors  Stock Option Plan.
Directors are also reimbursed their reasonable  out-of-pocket  expenses for each
attended meeting of the Board or any committee thereof. As of December 31, 1998,
no director has been granted any options  pursuant to the 1996  Directors  Stock
Option Plan.

1996  Directors' Stock Option Plan

      The 1996 Directors'  Stock Option Plan  ("Directors'  Stock Option Plan"),
was adopted by the Company June 6, 1996, and amended July 24, 1996.  Pursuant to
the terms of the  Directors'  Stock  Option Plan,  the Board of Directors  shall
grant  non-employee  Directors  (other than certain  named  persons)  upon their
appointment as Directors  options to purchase (i) 166,667 shares of Common Stock
(as adjusted for a one-for-six  reverse stock split);  (ii) at an exercise price
equal to the fair market value of the Common  Stock on the date of grant;  (iii)
exercisably  ratably  over 36 months;  and (iv)  having a duration of five years
from the date of grant.  Option  grants,  which  must be  evidenced  by  written
agreements  substantially  in the form prescribed by the Directors' Stock Option
Plan,  are not valid unless signed by the grantee.  Under the  Directors'  Stock
Option Plan, and aggregate of 2% of the Company's authorized number of shares of
Common  Stock  (equal  to  1,800,000  shares of Common  Stock) is  reserved  for
issuance.

      All options granted under the Directors' Stock Option Plan are exercisable
during the option  grantee's  lifetime only by the option grantee (or his or her
legal  representative).  In the  event of  termination  of an  option  grantee's
directorship,  such  person  shall have three  months from such date to exercise

                                       39

<PAGE>

such  option  to the  extent  the  option  was  exercisable  as at the  date  of
termination,  but in no event subsequent to the option's expiration date. In the
event of  termination of an option  grantee's  directorship  due to death,  such
person's  legal  representative  shall have 12 months from such date to exercise
such option to the extent the option was  exercisable at the date of death,  but
in no event subsequent to the option's expiration date.

      The Directors' Stock Option Plan contains  anti-dilution  provisions which
provide  that in the event of any change in the  Company's  outstanding  capital
stock by reason of stock dividend,  recapitalization,  stock split, combination,
exchange of shares or merger or consolidation,  the Board shall equitably adjust
the  aggregate  number  and  kind  of  shares  reserved  for  issuance,  and for
outstanding  options,  the  number  of shares  covered  by each  option  and the
exercise prices per share.

      The Board of Directors has the authority to terminate the Directors' Stock
Option Plan with  respect to any shares of Common  Stock not at the time subject
to an option as well as to make changes in and additions to such plans. The plan
will  terminate  on June 6, 2006,  unless  previously  terminated  by the Board.
However,  the Board may not, unless approved by the stockholders of the Company,
change the aggregate  number of shares  subject to the  Directors'  Stock Option
Plan, terminate,  modify or amend such plan so as to adversely affect the rights
of option holders previously granted under such plan, change the requirements of
eligibility  to such  plan or  materially  increase  the  benefits  accruing  to
participants under such plan.



Item 11. Security Ownership of Certain Beneficial Owners and Management

         The  following  table  sets as of July  31,  1999  certain  information
regarding  the  beneficial  ownership of the  Company's  Common Stock by (i) all
persons  known to the  Company  who own more than 5% of the  outstanding  Common
Stock,  (ii) each  Director,  (iii) each of the executive  officers named in the
Summary  Compensation  Table, and (iv) all executive officers and Directors as a
group.  Unless  otherwise  indicated,  the persons named in the table below have
sole  voting and  investment  power with  respect to all shares of Common  Stock
shown as beneficially owned by them.

                                       40
<PAGE>

<TABLE>
<CAPTION>
                                       Beneficial Ownership of Common Stock by
                                         Certain Stockholders and Management


<S>                                                                        <C>                   <C>
Name                                                                       Number of Shares      Percent of
                                                                         Beneficially Owned(1)   Ownershipp(2)
Horizon Blue Cross and Blue Shield of
   New Jersey, Inc. (3)(4)(5)..................................               37,617,420            45.77
CW Ventures II, L.P.(5)(6)(7)..................................               37,784,087            45.88
William J. Marino(3)...........................................                      334                *
Robert J. Pures(3).............................................                        0                0
Walter Channing, Jr.(5)(6)(7)(8)...............................               37,784,087            45.88
Charles Hartman(5)(6)(7)(8)....................................               37,784,087            45.88
Barry Weinberg(5)(6)(7)(8).....................................               37,784,087            45.88
David J. McDonnell(9) .........................................                        0                *
Thomas P. Riley(10)(11)........................................                        0                *
Richard W. Freeman, M.D (12)(13)...............................                  254,050                *
Stephan Deutsch, M.D (12)(13).................................                   251,233                *
Elaine del Rossi (12)(13)(14).................................                         0                0
All Directors and executive officers as a Group (9                            38,289,704            46.21
persons) (8)(11)(13)
-------------------------------------------------------------
<FN>

*        Less than 1%

(1)      Beneficial  ownership is determined in accordance with the rules of the
         Securities  and  Exchange   Commission,   which   generally   attribute
         beneficial  ownership  of  securities  to persons who  possess  sole or
         shared  voting or  investment  power with respect to those  securities.
         Beneficial  ownership includes outstanding shares and shares subject to
         options exercisable within 60 days.

(2)      The percent  beneficially owned by any person or group who held options
         exercisable  within  60 days  has  been  calculated  assuming  all such
         options  have been  exercised  in full and  adding the number of shares
         subject  to such  options  to the total  number of  shares  issued  and
         outstanding.

(3)      The  business  address  of  such person or entity is 3 Penn Plaza East,
         Newark, New Jersey 07105.

(4)      In the event that the Services Agreement dated February 22, 1996, among
         the Company,  its  subsidiaries,  and Blue Cross and Blue Shield of New
         Jersey (now known as "Horizon  BCBS") is terminated by Horizon  BCBSNJ,
         CW Ventures II, L.P.  ("CW  Ventures")  will have the right to purchase
         Horizon BCBSNJ shares in accordance with the terms of the Stockholders'
         Agreement. See below, "Certain Relationships and Related Transactions."

(5)      Horizon  BCBSNJ  may be deemed a member of a  "group,"  as such term is
         used in  Section  13(d)  of the  Exchange  Act,  with CW  Ventures,  CW
         Partners III, L.P., the general partner of CW Ventures ("CW Partners"),
         and Walter  Channing,  Charles Hartman and Barry Weinberg,  the general
         partners  of CW  Partners.  Horizon  BCBSNJ  on the  one  hand,  and CW
         Ventures,  CW Partners and Messrs.  Channing,  Hartman and Weinberg, on
         the other,  disclaim  membership  in a group for the purpose of Section
         13(d) of the Exchange Act or for any other purpose.

                                       41

<PAGE>


(6)      The business address of such person or entity is 1041 Third Avenue, New
         York, New York 10021.

(7)      Includes  shares of  Common  Stock  issuable  upon  exercise  of the CW
         Warrants.CW  Ventures has sole voting and disposition power over shares
         owned by it.

(8)      Includes  37,617,420  shares  directly owned by CW Ventures and 166,667
         shares of Common  Stock  issuable  upon  exercise  of the CW  Warrants.
         Messrs.  Channing,  Hartman and Weinberg are the general partners of CW
         Partners, and as such may be deemed to beneficially own such shares and
         to have shared voting and disposition  power over such shares.  Messrs.
         Channing,  Hartman and Weinberg disclaim  beneficial  ownership of such
         shares  except to the extent of their  respective  direct and  indirect
         partnership interests in CW Ventures.

(9)      The business address of such person is 301 Aqua Court, Naples,  Florida
         34102.

(10)     The  business  address of such  person is 3 Long Ridge  Lane,  Ipswich,
         Massachusetts 01938.

(11)     Effective  October  30,  1998,  Mr.  Riley  resigned  his  position  as
         President  and Chief  Executive  Officer of the  Company,and  effective
         November 16, 1998, Mr. Riley resigned as a Director.

(12)     The business address of such person is 485-C Route 1 South, Iselin, New
         Jersey 08830.

(13)     250,000  of Dr.  Freeman's  shares  of  Common  Stock,  250,000  of Dr.
         Deutsch's  shares of Common Stock,  and 500,000 of the shares of Common
         Stock of all directors  and executive  officers as a group are issuable
         upon the exercise of stock  options to purchase  shares of Common Stock
         that are  exercisable  on July  31,  1999 or that  will be  exercisable
         within 60 days of such date.

(14)     Effective  April 21,  1999,  the  Company  terminated  Ms. del  Rossi's
         employment without cause.


</FN>
</TABLE>



Item 12.          Certain Relationships and Related Transactions

         The Company  has entered  into a series of  transactions  with  Horizon
BCBSNJ.  In February  1996,  the Company  issued the Horizon BCBSNJ Note, in the
original  principal  amount of $3,600,000,  which  provided for conversion  into
13,375,083  shares of Common Stock and the issuance of an additional  24,242,337
shares of Common  Stock for failure of the Company to meet  certain  revenue and
income thresholds.  Accordingly, in conjunction with this obligation the Company
issued to Horizon BCBSNJ 24,242,337 shares of Common Stock on February 27, 1997.
For further  description  of the BCBSNJ  Note,  see  "Description  of Business -
Introduction  and  Background."  As of July  31,  1999,  Horizon  BCBSNJ  is the
beneficial owner of 37,617,420  shares of Common Stock,  constituting  45.77% of
the outstanding  Common Stock at December 31, 1998.  Effective June 13, 1997 the
Services Agreement with Horizon BCBSNJ was amended and restated, which amendment
was attached as Exhibit 10(a) to the Company's Form 10-QSB for the quarter ended
April 30, 1997 and is incorporated by reference herein.  The First Amendment and
Restatement  of the Services  Agreement  requires,  among other things,  Horizon
BCBSNJ to pay a monthly "interim payment" based on current enrollment data which
is  adjusted  every  April and  October.  Currently,  the  Company is  receiving
approximately  $1,000,000 per month as a result of this agreement.  However, due

                                       42

<PAGE>

to the  enrollment  adjustments  called  for in this  agreement  there can be no
assurances  that the Company  will record  revenues at this level for the entire
1999 fiscal year. As of July 31, 1999, Horizon BCBSNJ is the beneficial owner of
37,617,420 shares of Common Stock, constituting 45.77% of the outstanding Common
Stock at  December  31,  1998.  In  addition,  two (2) of  BCBSNJ  officers  are
directors of the Company:  Robert  Pures,  a director of the Company,  is Senior
Vice President, Chief Financial Officer and Treasurer of Horizon BCBSNJ. William
Marino,  a director of the Company and CHCM,  is also a director,  President and
Chief Executive Officer of Horizon BCBSNJ.

         On or about March 22,  1996,  an action  entitled  Francis X. Bodino v.
Horizon  BCBSNJ and CHCM (the "Bodino  Action") was filed in the Law Division of
the  Superior  Court of New  Jersey  in Hudson  County.  The  complaint  alleged
misrepresentations  with respect to the type and amount of coverage  afforded by
Mr. Bodino's policy with Horizon BCBSNJ,  specifically  with respect to coverage
for heart transplantation.  The complaint also alleged that representations made
on behalf of Horizon BCBSNJ by an employee of CHCM led Mr.  Bodino's  surgeon to
believe that contractually excluded heart transplant coverage was available. The
complaint  demanded a variety of money  damages,  as well as  punitive  damages,
against both defendants. The complaint also contained a claim for treble damages
and counsel fees under the New Jersey Consumer Fraud Act.

         On or about June 29,  1998,  a  Settlement  and Release  Agreement  was
entered into among Horizon BCBSNJ, the Company,  CAHS, CHCM,  Enterprise Holding
Company,  Inc. ("EHC"), a subsidiary of Horizon BCBSNJ,  and CW Ventures.  Under
this  agreement,  Horizon  BCBSNJ has agreed to indemnify the Company,  CAHS and
CHCM from any losses or  obligations  in connection  with the claims,  facts and
circumstances that are the subject of the Bodino Action except for an amount not
to exceed $50,000. In addition, Horizon BCBSNJ and EHC, on the one hand, and the
Company,  CAHS and CHCM, on the other hand, granted mutual releases with respect
to the  claims,  facts and  circumstances  which are the  subject  of the Bodino
Action.

         The  Company has also  entered  into a series of  transactions  with CW
Ventures.  In February  1996,  the Company  issued the CW Note,  in the original
principal  amount of  $2,000,000,  which  provided for exchange  into  7,799,997
shares of Common Stock and the issuance of an  additional  25,914,222  shares of
Common Stock failed to meet certain revenue and income thresholds.  Accordingly,
the Company issued to CW Ventures  25,914,222 shares of Common Stock on February
27, 1997 for failure to meet such thresholds.  For further description of the CW
Note,  see  "Description  of Business - Change in Control." In February 1996 the
Company also issued to CW Ventures the CW Warrants.  For further  description of
the CW Warrants,  see  "Description of Business - Change in Control."  Effective
June 30, 1998, the CW Note was automatically  converted into 7,799,997 shares of
Common Stock.  As of December 31, 1998, CW Ventures is the  beneficial  owner of
37,784,087 shares of Common Stock, constituting 45.79% of the outstanding Common
Stock,  assuming the exercise of the CW Warrants  only.  Also, two of CW Venture
officers  are  directors  of the  Company:  Barry  Weinberg is a director of the
Company,  CAHS and CHCM and is also a General  Partner  of CW  Partners;  Walter
Channing,  Jr., a director of the  Company  and is also a General  Partner of CW
Partners.

         Effective  June 13, 1997,  CW  Ventures  granted  to  Horizon BCBSNJ an

                                       43

<PAGE>


option to purchase from it 10,031,238  shares of Common Stock at $0.38 per share
(the "Horizon BCBSNJ  Option"),  as provided in the Option Agreement dated as of
June 13, 1997,  between CW Ventures and Horizon BCBSNJ (the "Option  Agreement")
which was  included as an Exhibit to the  Company's  Form 10-QSB for the Quarter
ended July 31, 1997 and is incorporated by reference  herein. If the fair market
value  per share of  Common  Stock is  greater  than the  exercise  price of the
Horizon BCBSNJ Option on the applicable date of calculation,  Horizon BCBSNJ may
elect to pay such exercise price by surrendering  for  cancellation a portion of
the  Horizon  BCBSNJ  Option and  receiving  a number of shares of Common  Stock
according  to a formula set forth in the Option  Agreement.  The Horizon  BCBSNJ
Option is  exercisable  in the  event the  Company  achieves  certain  goals for
defined  periods  through  February 28, 2000, all as more fully set forth in the
Option  Agreement.  Because the Company did not achieve certain financial goals,
5,015,619 shares subject to the Horizon BCBSNJ Option were non-exercisable as of
October 31, 1998. The remaining  shares subject to the Horizon BCBSNJ Option are
exercisable  if the  aggregate  fees  received by the Company  under the Horizon
Healthcare  Letter  Agreement  meet  certain  targets  set forth in the  Opinion
Agreement  for  the  period  through   February  28,  2000.   However,   if  the
Administrative  Service Agreement or the Horizon Healthcare Letter Agreement are
terminated  at any time after  October 31,  1997 by Allied  without  cause,  the
target date is  accelerated.  As of December  1998,  at the  termination  of the
Horizon  Healthcare  Letter  Agreement,  the Company did not meet these  revenue
targets.   The  option  was  granted  by  CW  Ventures  to  Horizon   BCBSNJ  in
consideration  of Horizon BCBSNJ's  revision of its Services  Agreement with the
Company,  entering into a joint services  agreement between Horizon BCBSNJ,  the
Company and an  unrelated  party and the  agreement  to guaranty the Summit Bank
Credit  Agreement (see Note J in the "Notes to the Financial  Statements").  The
Horizon  BCBSNJ Option has been valued at $15,000 which amount will be amortized
over the three-year term of the amended Services Agreement.

                                       44
<PAGE>



Item 13. Exhibits and Reports on Form 10-KSB

         (a)      Exhibits

Exhibit No.       Description of Exhibit

2.1      Deposit  Agreement  dated  October 31, 1994 among  Midlantic  Bank,
         N.A., PMDX and the Registrant  incorporated by reference to exhibit 2.1
         filed with the Company's  Registration  Statement on Form S-1 (File No.
         33-89176).

2.2      Certificate of Merger of Care Advantage Health Systems (f/k/a Advantage
         Health Systems,  Inc.), a Georgia corporation into CareAdvantage Health
         Systems,  Inc.,  a Delaware  corporation  incorporated  by reference to
         exhibit 2.2 filed with the Company's Registration Statement on Form S-1
         (File No. 33-89176).

3.1(a)   Registrant's     Certificate   of    Incorporation   incorporated   by
         reference to exhibit 3.1 filed   with   the   Company's   Registration
         Statement on Form S-1 (File No. 33-89176).

3.1(b)   Amended  and  Restated   Certificate  of  Incorporation    incorporated
         by reference to the Company's  Information Statement filed on September
         6, 1996.

3.2      Registrant's  By-Laws  incorporated  by reference to  exhibit 3.2 filed
         with the Company's  Registration  Statement on Form S-1(File No.  33-89
         176).

10.1(a)  Letter of intent dated  September 30, 1994 between the  Registrant  and
         New Jersey BCBS,  amendments thereto of December 29, 1994, February 27,
         1995 and April 4, 1995 and Interim  Services  Agreement  as of April 1,
         1995  between  the  Registrant  and New  Jersey  BCBS  incorporated  by
         reference  to  exhibit  10.12  filed  with the  Company's  Registration
         Statement on Form S-1 (File No.
         33-89176).

10.1(b)  December  22, 1995 Letter  Agreement  between  the  Registrant  and New
         Jersey  BCBS  extending  the  Letter of  Intent  and  Interim  Services
         Agreement  to March 31,  1996  incorporated  by  reference  to  exhibit
         10.12(a) filed with the Company's  Annual Report on Form 10-KSB for the
         year ended October 31, 1996.

10.2     Lease  Agreement  dated  April 14,  1995  between  the  Registrant  and
         Metropolitan  Life  Insurance  Company  incorporated  by  reference  to
         exhibit 10.13 filed with the Company's  Registration  Statement on Form
         S-1 (File No. 33-89176).

10.3     Letter of Intent  dated  January 2, 1996  between CW Ventures II, L.P.,
         the Registrant and its CareAdvantage  Health Systems,  Inc.  subsidiary
         incorporated  by  reference to exhibit  10.14 filed with the  Company's
         Annual Report on Form 10-KSB for the year ended October 31, 1996.

                                       45

<PAGE>


10.4     Securities   Purchase  Agreement  dated  February  22,  1996  among  CW
         Ventures,  CAHS and the Registrant incorporated by reference to exhibit
         10.15  filed with the  Company's  Annual  Report on Form 10-KSB for the
         year ended October 31, 1996.

10.5     CW  Exchangeable   Note   incorporated   by  reference to exhibit10.16
         filed with the Company's  Annual Report on Form 10-KSB for
         the year ended October 31, 1996.

10.6     Stock  Acquisition  Agreement  dated February 22, 1996 among EHC, CHCM,
         CAHS and the  Registrant  incorporated  by reference  to exhibit  10.17
         filed  with the  Company's  Annual  Report on Form  10-KSB for the year
         ended October 31, 1996.

10.7     EHC  Exchangeable   Note   incorporated  by  reference to exhibit 10.18
         filed with the  Company's  Annual  Report  on  Form 10-KSB for the year
         ended October 31, 1996.

10.8     Services Agreement dated February 22, 1996 among BCBSNJ, CHCM, CAHS and
         the  Registrant  incorporated  by reference to exhibit 10.19 filed with
         the  Company's  Annual Report on Form 10-KSB for the year ended October
         31, 1996.

10.9     Stockholders'  Agreement dated February 22, 1996 among EHC, CW Ventures
         and the  Registrant  incorporated  by reference to exhibit  10.20 filed
         with the  Company's  Annual  Report on Form  10-KSB  for the year ended
         October 31, 1996.

10.10    Joint  Services  Agreement,  dated May 29, 1997,  among  Allied  Health
         Group,  Inc.,  CAHS, Inc. and the Company  incorporated by reference to
         exhibit  10(c)  filed with the  Company's  Form  10-QSB for the quarter
         ended April 30, 1997.

10.11    Agreement,  dated  as  of   January   1, 1997  between  Blue  Cross and
         Blue  Shield of  Rhode  Island  ("BCBSRI")  and CAHS,  Inc.incorporated
         by reference to  exhibit 10(a) filed with the Company's Form 10-QSB for
         the quarter ended July 31, 1997.

10.12    Consultant  Agreement dated March 17, 1997, between  Coordinated Health
         Partners,  Inc.  d/b/a  Blue  Chip,  and  CAHS,  Inc.  incorporated  by
         reference to exhibit 10(d) filed with the Company's Form 10-QSB for the
         quarter ended April 30, 1997.

10.13    Letter Agreement,  dated as of March 1, 1997,  between Medigroup of New
         Jersey,  Inc. d/b/a HMO Blue, the Company and Allied Health Group, Inc.
         incorporated  by  reference to exhibit  10(e) filed with the  Company's
         Form 10-QSB for the quarter ended April 30, 1997.

10.14    First Amendment and Restatement of Services Agreement, dated as of June
         13, 1997, among CAHS,  Inc., CHCM, the Company and BCBSNJ  incorporated
         by reference to exhibit 10(b) filed with the Company's  Form 10-QSB for
         the quarter ended April 30, 1997.

10.15    Credit  Agreement  among  Summit  Bank,  the Company and BCBSNJ, dated
         June 13, 1997  incorporated  by  reference  to  exhibit 10(f)filed with
         the Company's Form 10-QSB for the quarter ended April 30, 1997.

                                       46

<PAGE>


10.16    Revolving  Credit Note,  dated June 13, 1997 by the Company in favor of
         Summit Bank in the original principal amount of $1,500,000 incorporated
         by reference to exhibit  10(f)(1)  filed with the Company's Form 10-QSB
         for the quarter ended April 30, 1997.

10.17    Term Note,  dated June 13, 1997, by the Company in favor of Summit Bank
         in  the  original  principal  amount  of  $1,500,000   incorporated  by
         reference to exhibit  10(f)(2) filed with the Company's Form 10-QSB for
         the quarter ended April 30, 1997.

10.18    Promissory Note and Security Agreement, dated April 1, 1997, by CHCM in
         favor  of  BCBSNJ,  in the  original  principal  amount  of  $1,862,823
         incorporated by reference to exhibit  10(f)(3) filed with the Company's
         Form 10-QSB for the quarter ended April 30, 1997.

10.19    Employment  Agreement between the Company and Thomas Riley,  dated June
         10, 1997, as  supplemented  by a side agreement with CW and BCBSNJ,  of
         even date  therewith  incorporated  by reference to exhibit 10(a) filed
         with the Company's Form 10-QSB for the quarter ended April 30, 1997.

10.20    Services  Agreement as of January 5, 1998, by and between New York Care
         Plus Insurance Company,  Inc. and the Company incorporated by reference
         to exhibit  10.20 filed with the  Company's  Form 10-KSB for the fiscal
         year ended October 31, 1997.

10.21    Consultation Agreement dated October 1, 1997 by and between the Company
         and  David   McDonnell,   an   independent   director  of  the  Company
         incorporated  by  reference to exhibit  10.21 filed with the  Company's
         Form 10-KSB for the fiscal year ended October 31, 1997.

10.22    Mutual  Release  Agreement  dated as of  January  6, 1998  between  the
         Company and MEDecision,  Inc incorporated by reference to exhibit 10.22
         filed with the Company's  Form 10-KSB for the fiscal year ended October
         31, 1997.

10.23    Separation   Agreement   dated  April 20,  1995  between  PMDX  and the
         Registrant  incorporated  by reference to exhibit 10.1 filed with the
         Company's Registration Statement on Form S-1 (File No. 33-89176).

10.24    Agreement  dated as of  January 1, 1995,  between  Maine  BCBS and CAHS
         incorporated  by  reference  to  exhibit  10.2 filed with the Company's
         Registration Statement on Form S-1 (File No. 33-89176).

10.25    Products  and  Services   Agreement  dated  November  7,  1994  between
         MEDecision,  Inc.  and CAHS  incorporated  by reference to exhibit 10.3
         filed with the Company's  Registration  Statement on Form S-1 (File No.
         33-89176).

                                       47

<PAGE>


10.26    Registrant's  1995  Comprehensive  Stock  Incentive  Plan  incorporated
         by reference to exhibit 4.2  filed  with  the   Company's  Registration
         Statement on Form S-1 (File No. 33-89176).

10.27    Registrant's  1996  Stock  Option Plan incorporated by reference to the
         Company's Information Statement  filed September 6,1996.

10.28    Registrant's  1996 Director Stock Option Plan incorporated by reference
         to the Company's Information Statement filed September 6,1996.

10.29    Option  Agreement  between  CW  Ventures  and BCBSNJ   incorporated  by
         reference   to   exhibit  5  of   Schedule   13(d) of BCBSNJ respecting
         beneficial ownership of Common Stock of the Company dated June 1997.

10.30    Settlement  and Release  Agreement  dated  January 13, 1998 between the
         Company and John Petillo  incorporated  by  reference to Exhibit  10.30
         filed with the  Company's  Form  10-KSB for the year ended  October 31,
         1997.

10.31    Settlement  and Release  Agreement  dated December 19, 1997 between the
         Company and Vince Achilarre  incorporated by reference to Exhibit 10.31
         filed with the  Company's  Form  10-KSB for the year ended  October 31,
         1997.

10.32    Employment   Agreement   between  the  Company  and David Noone,  dated
         January 8, 1999  incorporated by reference to  exhibit 10.32 filed with
         the Company's Form 10-KSB for the fiscal year ended October 31, 1998.

10.33    Confidentiality,  Invention,  and  Non-Compete  Agreement  between  the
         Company and David Noone,  dated as of January 8, 1999  incorporated  by
         reference to exhibit 10.33 filed with the Company's Form 10-KSB for the
         fiscal year ended October 31, 1998.

10.34    Settlement and Release Agreement entered into among Horizon BCBSNJ, the
         Company,  CAHS, and CHCM,  Enterprise Holding Company, Inc. ("EHC") and
         CW Ventures,  incorporated by reference to Exhibit 10(a) filed with the
         Company Form 10-QSB for the quarter ended July 31, 1998.

10.35    Services  Agreement  dated  as of  January  1,  1999,  by  and  between
         HealthNow  New York,  Inc.  ("HNNY")  and the Company  incorporated  by
         reference to exhibit 10.35 filed with the Company's Form 10-KSB for the
         fiscal year ended October 31, 1998.

10.36    Amended and Restated  Employment  Agreement,  dated as of September 29,
         1998, with Richard W. Freeman, M.D., CAHS and the Company (the "Freeman
         Employment Agreement") incorporated by reference to exhibit 10.36 filed
         with the  Company's  Form 10-KSB for the fiscal year ended  October 31,
         1998.

                                       48

<PAGE>



10.37    Employment  Agreement,  dated as of March 25, 1997,  by and between the
         Company and Elaine del Rossi incorporated by reference to exhibit 10.37
         filed with the Company's  Form 10-KSB for the fiscal year ended October
         31, 1998.

10.38    Confidentiality,  Invention and Non-Compete Agreement dated as of March
         25,  1998  between the  Company  and Elaine del Rossi  incorporated  by
         reference to exhibit 10.38 filed with the Company's Form 10-KSB for the
         fiscal year ended October 31, 1998.

10.39    Employment  Agreement,  effective  as of April 28,  1998,  by and among
         Stephan  D.  Deutsch,  M.D.,  the  Company  and  CAHS  incorporated  by
         reference to exhibit 10.39 filed with the Company's Form 10-KSB for the
         fiscal year ended October 31, 1998.

16       Letter  regarding  change in  accountants,  incorporated by reference
         to exhibit 16.1 filed on the Company Form 8-K dated June 6, 1996.

27       Financial Data Schedule
                  --------------------------------------------

                                       49
<PAGE>



                                   SIGNATURES

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

                                          CareAdvantage, Inc.
                                          (Registrant)

Date: September 2, 1999                    By:   /s/ David Noone
      -------------------                  ------------------------------------
                                           David Noone, Chief Executive Officer,
                                           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:

Date: September 2, 1999                    By: /s/ David Noone
      ------------------                   ------------------------------------
                                           David Noone, Chief Executive Officer,
                                           Director
                                           (Principal Executive Officer)

Date: September 2, 1999                    By: /s/ David G. DeBoskey
      -------------------                  ------------------------------------
                                           David G. DeBoskey, Vice President
                                           Finance
                                           (Principal Financial and Accounting
                                           Officer)

Date: September 2, 1999                    By: /s/ William J. Marino
      --------------------                 ------------------------------------
                                           William J. Marino, Director

Date: September 2, 1999                    By: /s/ Robert J. Pures
      ---------------------                ------------------------------------
                                           Robert J. Pures, Director

Date: September 2, 1999                    By: /s/ Barry Weinberg
      --------------------                 ------------------------------------
                                           Barry Weinberg, Director

Date: September 2, 1999                    By  /s/ Walter Channing, Jr.
      --------------------                 ------------------------------------
                                           Walter Channing, Jr., Director

Date: September 2, 1999                    By: /s/ David McDonnell
      --------------------                 ------------------------------------
                                           David McDonnell, Director

                                       50
<PAGE>


CAREADVANTAGE, INC. AND SUBSIDIARIES


<TABLE>
<CAPTION>
    Contents                                                                                                            Page


Consolidated Financial Statements

<S>                                                                                                                     <C>
   Independent auditors' report                                                                                         F-2

   Balance sheets as of December 31, 1998 and October 31, 1998                                                          F-3

   Statements of operations for the two-month periods ended December 31, 1998
      and 1997 (unaudited) and the years ended October 31, 1998 and 1997                                                F-4

   Statements of stockholders' equity (capital deficiency) for the two-month period
      ended December 31, 1998 and the years ended October 31, 1998 and 1997                                             F-5

   Statements of cash flows for the two-month periods ended December 31, 1998
      and 1997 (unaudited) and the years ended October 31, 1998 and 1997                                                F-6

   Notes to financial statements                                                                                        F-7
</TABLE>


                                                                             F-1
<PAGE>



INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors
CareAdvantage, Inc.
New York, New York


We have audited the accompanying  consolidated  balance sheets of CareAdvantage,
Inc.  and  subsidiaries  as of  December  31,  1998 and October 31, 1998 and the
related  consolidated  statements of operations,  stockholders'  equity (capital
deficiency)  and cash flows for the two months  ended  December 31, 1998 and for
the  years  ended  October  31,  1998 and  1997.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements  enumerated above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
CareAdvantage,  Inc.  and  subsidiaries  as of December 31, 1998 and October 31,
1998, and the consolidated  results of their operations and their cash flows for
the  periods  indicated  in  conformity  with  generally   accepted   accounting
principles.


                                           /s/ Richard A. Eisner & Company, LLP
                                           ------------------------------------
                                               Richard A. Eisner & Company, LLP


New York, New York
July 30, 1999


                                       F-2
<PAGE>


CAREADVANTAGE, INC. AND SUBSIDIARIES

See notes to financial statements
Consolidated Balance Sheets

<TABLE>
<CAPTION>
<S>                                                                                            <C>               <C>
                                                                                              December 31,       October 31,
                                                                                                  1998               1998

ASSETS
Current assets:
    Cash and cash equivalents                                                                  $3,354,000       $ 3,745,000
    Accounts receivable for services:
        Stockholder                                                                             1,080,000         1,080,000
        Other                                                                                     315,000           667,000
    Other current assets                                                                          159,000            75,000
                                                                                                ---------         ---------

           Total current assets                                                                 4,908,000         5,567,000

Property and equipment, at cost less accumulated depreciation                                   1,279,000         1,374,000
Intangible assets                                                                               1,695,000         1,768,000
Other assets                                                                                      243,000            91,000
                                                                                                ---------         ---------

                                                                                               $8,125,000       $ 8,800,000
                                                                                                =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Capital lease obligation                                                                    $ 319,000       $   422,000
    Accounts payable                                                                              193,000           163,000
    Due to stockholder                                                                          1,153,000         1,153,000
    Due to customer                                                                               902,000           902,000
    Accrued payroll and related benefits                                                          959,000         1,211,000
    Accrued expenses and other current liabilities                                                483,000           455,000
    Deferred revenue, current                                                                     184,000           184,000
                                                                                                ---------         ---------

           Total current liabilities                                                            4,193,000         4,490,000

Due to stockholder, less current portion                                                          429,000           710,000
Deferred revenue and other liabilities, less current portion                                       87,000           116,000
                                                                                                 --------          --------

                                                                                                4,709,000         5,316,000

Commitments and contingencies

Stockholders' equity:
    Preferred stock - par value $.10 per share; authorized 10,000,000
        shares; none issued
    Common stock - par value $.001 per share, authorized 90,000,000
        shares; issued and outstanding 82,189,883                                                  82,000            82,000
    Additional capital                                                                         22,009,000        22,009,000
    Accumulated deficit                                                                       (18,675,000)      (18,607,000)
                                                                                              -----------        ----------

                                                                                                3,416,000         3,484,000

                                                                                               $8,125,000       $ 8,800,000
                                                                                                =========         =========
</TABLE>

                                                                             F-3
<PAGE>

<TABLE>
<CAPTION>
Consolidated Statements of Operations


                                                                   Two Months Ended
                                                                     December 31,                  Year Ended October 31,
<S>                                                             <C>              <C>                <C>              <C>

                                                                1998              1997              1998             1997
                                                                              (unaudited)

Net revenues                                                 $2,742,000      $ 2,644,000       $ 18,903,000     $ 14,077,000
Cost of services                                              1,414,000        1,319,000          7,903,000        7,937,000
                                                              ---------        ---------         ----------        ---------

Gross profit                                                  1,328,000        1,325,000         11,000,000        6,140,000
                                                              ---------        ---------         ----------        ---------

Operating expenses:
Selling general and administrative                            1,251,000          944,000          6,842,000        5,278,000
Depreciation and amortization                                   125,000           85,000            605,000          484,000
                                                              ---------        ---------          ---------        ---------

Total operating expenses                                      1,376,000        1,029,000          7,447,000        5,762,000
                                                              ---------        ---------          ---------        ---------

Operating income                                                (48,000)         296,000          3,553,000          378,000
Interest expense                                                 20,000           61,000            305,000          371,000
                                                              ---------        ---------          ---------        ---------

Income (loss) before provision for income tax                   (68,000)         235,000          3,248,000            7,000
Provision for income tax                                                          12,000            165,000
                                                              ---------        ---------          ---------        ---------

Net income (loss)                                             $ (68,000)       $ 223,000        $ 3,083,000          $ 7,000
                                                              =========         ========          =========          =======

Net income (loss) per share of common
stock - basic and diluted                                         $(.00)            $.00               $.04             $.00
                                                                  =====             ====               ====             ====

Weighted average number of common shares
outstanding - basic and diluted                              82,190,000       74,390,000        76,990,000        74,390,000
                                                             ==========       ==========        ==========        ==========
</TABLE>
See notes to financial statements


                                                                             F-4

<PAGE>


<TABLE>
<CAPTION>

                                      Consolidated Statements of Stockholders' Equity (Capital Deficiency)


                                                          Common Stock
<S>                                                   <C>              <C>        <C>               <C>              <C>
                                                                                                                    Stockholders'
                                                      Number           Par                                             Equity
                                                        of            Value       Additional       Accumulated        (Capital
                                                      Shares          Amount        Capital          Deficit         Deficiency)




Balance as of November 1, 1996                      24,233,327        $24,000   $   19,690,000  $   (21,697,000)  $   (1,983,000)
Issuance of common stock to Horizon BCBSNJ
    and CW Ventures                                                                                                            0
                                                    50,156,559         50,000          (50,000)
Net income for the year ended October31,
    1997                                                                                                  7,000            7,000

                                                   -----------        -------     ------------       ----------       -----------
Balance as of October 31, 1997
                                                    74,389,886         74,000       19,640,000      (21,690,000)      (1,976,000)
Exchange of CW Ventures note for common
    stock                                                                                                              2,377,000
                                                     7,799,997          8,000        2,369,000
Net income for the year ended October 31
    1998                                                                                              3,083,000        3,083,000
                                                                                                    -----------      -----------
Balance as of October 31, 1998                      82,189,883         82,000       22,009,000      (18,607,000)       3,484,000

Net loss for the two-month period ended
    December 31, 1998                                                                                   (68,000)         (68,000)
                                                   -----------        -------      -----------     ------------     ------------

Balance as of December 31, 1998                     82,189,883        $82,000     $ 22,009,000     $(18,675,000)     $ 3,416,000
                                                   ===========        =======      ===========     ============     ============

</TABLE>

                                                                             F-5
<PAGE>

<TABLE>
<CAPTION>


Consolidated Statements of Cash Flows


                                                                        Two Months Ended
                                                                          December 31,              Year Ended October 31,
<S>                                                                    <C>             <C>             <C>           <C>
                                                                       1998           1997           1998            1997
                                                                                   (unaudited)

Cash flows from operating activities:
    Net income                                                    $  (68,000)    $   223,000    $  3,083,000      $   7,000
    Adjustments to reconcile net income to net cash provided by
        operating activities:
           Depreciation and amortization                             215,000         175,000       1,143,000      1,033,000
           Changes in:
               Due to/from stockholder                                                               (33,000)    (1,117,000)
               Due to/from customer                                  352,000        (267,000)       (259,000)
               Other assets                                         (236,000)         23,000         170,000       (127,000)
               Accounts payable                                       30,000         219,000        (188,000)      (218,000)
               Accrued expenses and other current liabilities       (224,000)       (294,000)        468,000        417,000
               Deferred revenue                                      (29,000)        298,000          31,000      1,122,000
                                                                   ---------        --------        --------      ---------

                  Net cash provided by operating activities           40,000         377,000       4,415,000      1,117,000
                                                                      ------         -------       ---------      ---------

Cash flows from investing activities:
    Capital expenditures                                             (47,000)       (182,000)     (1,133,000)      (623,000)
                                                                     -------        --------      ----------      ---------

Cash flows from financing activities:
    Principal payments under long-term debt                         (103,000)        (91,000)       (575,000)      (623,000)
    Principal payments under note payable, stockholder              (281,000)
                                                                    --------

                  Net cash used in financing activities             (384,000)        (91,000)       (575,000)      (623,000)
                                                                    --------        --------       ---------      ---------

Net increase (decrease) in cash and cash equivalents                (391,000)        104,000       2,707,000       (129,000)
Cash and equivalents - beginning of year                           3,745,000       1,038,000       1,038,000      1,167,000
                                                                   ---------       ---------       ---------      ---------

Cash and equivalents - end of year                               $ 3,354,000     $ 1,142,000     $ 3,745,000    $ 1,038,000
                                                                   =========       =========       =========      =========

Noncash operating activity:
    Reclassification of deferred revenue to due to customer as a
        result of cancellation of contract                                                         $ 902,000

Noncash financing activities:
    Effective June 30, 1998, the  $2,000,000  principal  amount 8%
        exchangeable note  (plus  $377,000  accrued  interest)
        issued by the  Company  to CW Ventures  II  L.P.  was
        automatically   cancelled  and  converted  into
        7,799,997 shares of the Company's common stock.

Supplemental disclosures of cash flow information:
    Interest paid                                                    $27,000        $ 19,000       $  85,000      $ 152,000
    Income taxes paid                                                                              $ 115,000
</TABLE>



                                                                             F-6
<PAGE>


CAREADVANTAGE, INC. AND SUBSIDIARIES

Notes to Financial Statements
December 31, 1998 and October 31, 1998
(Information  with  respectto December 31, 1997 and the two months then ended is
 unaudited)



NOTE A - INTRODUCTION AND BACKGROUND

CareAdvantage,  Inc.  ("CAI"  or the  "Company"),  is a holding  company  which,
through its  subsidiaries,  CareAdvantage  Health  Systems,  Inc.  ("CAHS")  and
Contemporary  HealthCare  Management,  Inc.  ("CHCM"),  operates in one business
segment, providing health care cost containment services to health care insurers
and other health service  organizations  to reduce the costs of medical services
provided to their subscribers.

On February 22, 1996,  the Company  completed a series of  transactions  with CW
Ventures II, L.P. ("CW Ventures") and with Horizon Blue Cross and Blue Shield of
New Jersey  (formerly Blue Cross and Blue Shield of New Jersey,  Inc.) ("Horizon
BCBSNJ").  The  transactions  included the sale to CW Ventures of (i)  3,903,201
shares of the  Company's  common stock at a purchase  price of $0.2562 per share
for an  aggregate  of  $1,000,000;  and (ii) a  $2,000,000  principal  amount 8%
Exchangeable  Note which  matured on June 30,  1998 (the "CW Note") and was then
converted into 7,799,997 shares of the Company's common stock.

Concurrently  with the  February  22, 1996  closing of the  transaction  with CW
Ventures,  CAHS  purchased all of the  outstanding  capital stock of CHCM from a
wholly owned Horizon BCBSNJ subsidiary.  The CHCM stock was acquired in exchange
for CAHS's $3,600,000  principal amount 8% Exchangeable Note which, in turn, was
exchanged on September 30, 1996 for  13,375,000  shares of the Company's  common
stock.

Pursuant to the terms of the CW Note and the Horizon  BCBSNJ  Note,  because the
Company  failed to realize at least $15  million in net  revenues  or  specified
earnings  before taxes for its fiscal year ended  October 31, 1996,  on February
27,  1997,  the Company  issued  50,156,559  additional  shares of common  stock
resulting in an increase of both Horizon BCBSNJ and CW Ventures equity to 45% on
a fully diluted basis.

The  Company,  Horizon  BCBSNJ and CW Ventures  are  parties to a  stockholders'
agreement dated February 22, 1996 (the  "Stockholders'  Agreement") whereby each
of  Horizon  BCBSNJ and CW  Ventures  have  agreed to vote  their  shares in the
Company with respect to the election of the  Company's  Board of Directors  for:
(i) two designees of CW Ventures;  (ii) two designees of Horizon  BCBSNJ;  (iii)
two members of the  Company's  management  acceptable to CW Ventures and Horizon
BCBSNJ; and (iv) one non-employee outside director acceptable to CW Ventures and
Horizon BCBSNJ.  The  Stockholders'  Agreement  prevents the Company from taking
certain  material  actions without Horizon BCBSNJ's and/or CW Ventures' or their
designated directors' consent.

On June 8, 1999, the Company  changed its fiscal year from one ending October 31
to a calendar year ending December 31.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

[1] Principles of consolidation:

      The consolidated financial statements include the accounts of CAI, and its
      wholly owned subsidiary,  CAHS and CAHS's wholly owned  subsidiary,  CHCM.
      Significant intercompany accounts and transactions have been eliminated in
      consolidation.

                                       F-7
<PAGE>


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[2] Revenue recognition:

     For its  services,  the  Company is  compensated  either (i) on a capitated
     (fixed-fee)  per  subscriber  basis;  (ii)  on a  performance-based  method
     whereby  the  Company  shares in the  realized  cost  savings per member as
     measured  against  certain  defined  benchmarks;  (iii)  on the  basis of a
     combination of both  capitation and  performance-based  fees; and (iv) on a
     fee-for-service  and  consulting  fee basis.  Accordingly,  the Company has
     adopted the following  accounting  policies for revenue  recognition  under
     each contract category:

(a)        Revenue  under  the  fixed-fee  arrangements  is  recognized  as  the
           services are provided and the related costs of services are incurred.
           Although  the  fixed  fee  arrangements  are not  subject  to any fee
           adjustment  based upon the attainment of target  utilization  levels,
           such  contracts  may still expose the Company to potential  operating
           losses, particularly in the inception stages thereof.

(b)        Revenue under the partial fixed fee/incentive agreements is initially
           recognized  for the monthly fixed fee component  only as services are
           provided and related costs of services are incurred.  Incentives  (or
           reductions) based upon performance are recorded when such amounts can
           reasonably be determined.

(c)        Revenue under  fee-for-service  arrangements  is recorded for special
           projects or the review of cases assigned to the Company on a per case
           or hourly basis.

Effective  August  27,  1998,  the  Company  received  notice  from  one  of its
customers, that it has decided to resume internal network management that it had
been outsourcing. Revenues for the Company from this contract were approximately
$1,432,000 for the  twelve-month  period ended October 31, 1998. The Company has
provided  approximately $902,000 to cover possible repayment of advances related
to this contract (see Note I[4]).

[3] Depreciation and amortization:

Depreciation  is  computed  by the  straight-line  method  and is  based  on the
estimated  useful  lives  of the  various  assets.  Estimated  useful  lives  of
depreciable assets range from three to seven years.  Leasehold  improvements are
amortized using the straight-line  method over the remaining term of the related
lease.  Intangible assets are amortized over their expected useful lives of five
to seven  years  on the  straight-line  method.  Depreciation  and  amortization
included in cost of services  amounted to $538,000  and  $549,000  for the years
ended October 31, 1998 and 1997, respectively and approximately $90,000 for each
of the two months ended December 31, 1998 and 1997.

[4] Per share data:

      Net  income  per share has been  computed  based on the  weighted  average
      number of shares outstanding during the periods.  Additional shares issued
      to Horizon  BCBSNJ in February  1997 pursuant to the terms of a promissory
      note by CAHS in favor of Horizon  BCBSNJ dated February 22, 1996 have been
      included as if outstanding from November 1, 1996. Additional shares issued
      to CW  Ventures  in  February  1997  pursuant  to the CW Note,  have  been
      included  as if  outstanding  since  February  22,  1996,  the  date of CW
      Ventures' investment in the Company. 7,799,997 additional shares of common
      stock,  which were issued to CW Ventures upon exchange and cancellation of
      the CW Note as of June 30, 1998,  have been  included from the date of the
      exchange.  Common stock  equivalents have not been included since they are
      not dilutive.

                                       F-8
<PAGE>


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[4] Per share data:  (continued)

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"),  "Earnings per Share". This
new standard  requires dual presentation of basic and diluted earnings per share
("EPS") on the face of the  statement of income and requires  reconciliation  of
the numerators and the  denominators of the basic and diluted EPS  calculations.
This statement  became effective for the fiscal year ended October 31, 1998. The
adoption of SFAS 128 did not have any effect on the computation of income (loss)
on the Company's earnings per share of common stock.

[5] Cash equivalents:

For purposes of the  statement of cash flows,  the Company  considers all highly
liquid money market  instruments with original  maturity of three months or less
to be cash equivalents.

[6] Concentration of credit risk:

Financial  instruments  that  potentially  subject  the  Company to credit  risk
consist of accounts  receivable.  The Company  currently markets its services to
Blue Cross and Blue Shield companies. Collateral is not required.

[7] Estimates:

Preparation of these financial  statements in conformity with generally accepted
accounting principles require the use of management's estimates.  Actual results
could differ from such estimates.

The values of  intangible  assets are based on  management's  best  estimates of
future revenues and cash flows to be derived from such assets.

[8] Fair value of financial instruments:

The fair value of financial instruments approximates their carrying amount.

[9] Major customers:

Two of the Company's  customers accounted for approximately 67% (Horizon BCBSNJ)
and 17% of net  revenues for the year ended  October 31, 1998 and  approximately
77%  (Horizon  BCBSNJ) and 11% of net  revenues  for the year ended  October 31,
1997. Two of the Company's  customers  accounted for  approximately 80% (Horizon
BCBSNJ) and 9% of net revenues  for the two months  ended  December 31, 1998 and
approximately  80%  (Horizon  BCBSNJ) and 9% of net  revenues for the two months
ended  December 31, 1997.  The loss of any one of these  customers  would have a
material adverse impact on the Company's business.

[10]    Stock-based compensation:

The Financial  Accounting  Standard  Board's  Statement of Financial  Accounting
Standards  No. 123  ("SFAS  123"),  "Accounting  for  Stock-Based  Compensation"
encourages,  but does not  require,  companies to record  compensation  cost for
stock-based  employee  compensation plans at fair value. The Company has elected
to  continue  to  account  for its  stock-based  compensation  plans  using  the
intrinsic value method prescribed by Accounting  Principles Board Opinion No. 25
("APB No. 25"),  "Accounting for Stock Issued to Employees" and disclose the pro
forma effects on net income and earnings per share had the fair value of options
been expensed.  Under the provisions of APB No. 25,  compensation cost for stock
options is  measured as the excess,  if any, of the quoted  market  price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock. (See Note G).


                                       F-9
<PAGE>


NOTE C - INTANGIBLE ASSETS

     Intangible assets net of accumulated amortization consist of the following:

                                                  December 31,      October 31,
                                                      1998              1998

        Service agreement                            $835,000        $ 855,000
        License fees                                  167,000          200,000
        Software development cost                     693,000          713,000
                                                 ------------      -----------

                                                   $1,695,000    $   1,768,000
                                                    =========      ===========


[1] Service agreement:

      This amount  represents  the  Company's  service  agreement  with  Horizon
BCBSNJ, which was recorded upon the acquisition of CHCM.

[2] License agreement:

         The Company  signed a five (5) year  agreement  commencing  November 1,
         1994  for  products  and  services  (the  "License  Agreement")  with a
         software  development company.  Pursuant to the License Agreement,  the
         Company  was  granted  a  perpetual  license  for  100  users  under  a
         non-exclusive  five  year  license  for  the  use of  certain  existing
         software,  as well as, a  non-exclusive  five year license for use of a
         new   generation   of   customer   service,   utilization   review  and
         medical/surgical  case management  software to be developed with CAHS's
         assistance.

         The License Agreement required an advance payment by CAHS of $1,000,000
         constituting  a  prepayment  of all  license  fees  for  the  100  user
         perpetual  license and all  maintenance  fees for the initial five year
         term of the License Agreement commencing November 1, 1994.

[3] Software development costs:

          Software development costs are capitalized when project  technological
          feasibility  is established  and concluding  when the product is ready
          for  release.  Research  and  development  costs  related to  software
          development  are  expensed  as  incurred.   Amortization  of  software
          development  costs  amounted to $135,000  and  $127,000  for the years
          ended  October  31,  1998 and  1997,  respectively  and  approximately
          $50,000 and $21,000 for the two-month  periods ended December 31, 1998
          and 1997, respectively.

                                      F-10
<PAGE>


NOTE D - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>

Property and equipment consist of the following:
<S>                                                 <C>                  <C>

                                                   December 31,         October 31,
                                                      1998                 1998

Computer equipment                                $1,300,000       $     1,284,000
Furniture and fixtures                               466,000               466,000
Office machines and telephone equipment              231,000               231,000
Leasehold improvements                               118,000               106,000
Equipment under capital lease, consisting of:
    Computer equipment                               860,000               860,000
    Telephone equipment                              156,000               156,000
    Leasehold improvements                           309,000               309,000
                                                   ---------             ---------

                                                   3,440,000             3,412,000
Less accumulated depreciation and amortization    (2,161,000)           (2,038,000)
                                                   ---------             ---------

                                                  $1,279,000            $1,374,000
                                                   =========             =========
</TABLE>


Amortization  in connection  with  equipment  under capital  leases  amounted to
$321,000  and  $326,000  for  the  years  ended   October  31,  1998  and  1997,
respectively  and $50,000 and $49,000 for the two-month  periods ended  December
31, 1998 and 1997, respectively.


NOTE E - CAPITAL LEASE OBLIGATION

The following is a schedule of the present value of minimum lease payments under
capital  leases as of December 31, 1998 and October 31,  1998,  all of which are
due in the ensuing year:
<TABLE>
<CAPTION>

        <S>                                                                  <C>              <C>
                                                                            December 31,      October 31,
                                                                                1998             1998

        Balance due                                                         $ 330,000        $440,000
        Less amount representing interest                                      11,000          18,000
                                                                             --------         -------

        Present value of minimum lease payments                             $ 319,000        $422,000
                                                                             ========         =======
</TABLE>

The Company's obligations under the agreement are guaranteed by Horizon BCBSNJ.


NOTE F - DUE TO STOCKHOLDER

The  amount due to  stockholder  represents  cash  advanced  under the  original
service  agreement  with  Horizon  BCBSNJ  in excess of  revenues  earned.  This
liability was subsequently  restructured as a promissory note in the approximate
amount of $1,863,000 to Horizon BCBSNJ with interest accruing beginning in April
1997 and equal monthly payments of principal and interest  commencing on October
1, 1998.  The  promissory  note bears  interest at the five-year  U.S.  treasury
yield, adjusted quarterly, and matures on June 30, 2000.

                                      F-11
<PAGE>


NOTE G - STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
[1] Issuance of common stock:

      On June 30, 1998, the Company became contractually  obligated to issue and
      did issue  approximately  7,800,000  shares of common stock to CW Ventures
      pursuant to the terms of the CW Note.  The offer and sale of these  shares
      were not registered under the Securities Act of 1933, as amended.

[2] Preferred stock:

The  preferred  stock is  issuable  in such  series and with such  designations,
preferences, conversion rights, cumulative, relative, participating, optional or
other  rights,   including   voting  rights,   qualifications,   limitations  or
restrictions  thereof as determined by the Board of Directors of the Company. As
such,  the Board of Directors  of the Company will be entitled to authorize  the
creation and  issuance of  10,000,000  shares of preferred  stock in one or more
series  with such  limitations  and  restrictions  as may be  determined  in the
Board's sole discretion,  with no further authorization by stockholders required
for the creation and issuance thereof.

[3] Stock option plans:

The Board of  Directors of the Company  administers  the 1996 Stock Option Plan.
Pursuant  to the terms of the 1996 Stock  Option  Plan,  the Board  will  select
persons to be granted options and will determine the terms of the options, which
must have an exercise  price of not less than 100% of the fair  market  value of
the common stock on the date of grant and must have a duration not to exceed ten
(10)  years.  Under the 1996  Stock  Option  Plan,  an  aggregate  of 10% of the
Company's  authorized  number of shares of common stock or 9,000,000  shares has
been reserved for issuance.

The Board of Directors of the Company also  administers  the 1996 Director Stock
Option Plan.  Pursuant to the terms of the 1996 Director  Stock Option Plan, the
Board may select non-employee  individual Directors to be granted options.  Each
such  option  grant  shall be (i) in the amount to  purchase  167,000  shares of
common  stock;  (ii) at an exercise  price which cannot be less than 100% of the
fair market  value of the common stock on the date of grant;  (iii)  immediately
exercisable,  and (iv) for a duration  of ten (10) years from the date of grant.
An aggregate of 1,800,000 shares has been reserved for issuance  pursuant to the
1996 Director Stock Option Plan.

No current  member of the Board of Directors  has been granted any options under
the 1996 Director Stock Option Plan. When such options are granted,  the Company
will incur a charge to operations equal to their fair value.

The  following  is a summary of stock  option  activity  during the years  ended
October 31, 1998 and 1997:
<TABLE>
<CAPTION>

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

    Outstanding at beginning of period                 1,853,000        $1.50          3,028,000        $1.35
                                                                        =====                           =====
    Cancelled                                           (433,000)       $1.67         (1,175,000)       $1.13
                                                    ------------        =====      -------------        =====
    Outstanding at end of period                       1,420,000        $1.44          1,853,000        $1.50
                                                    ============        =====      =============        =====

    Exercisable at end of period                       1,170,000        $1.58          1,433,000        $1.74
                                                    ============        =====      =============        =====
</TABLE>

      No options  were  granted  or  cancelled  in the  two-month  period  ended
December 31, 1998.

                                                                            F-12
<PAGE>


NOTE G - STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (CONTINUED)

[3] Stock option plans:  (continued)

      The fair  value  of  options  at date of grant  was  estimated  using  the
      Black-Scholes  Option Pricing model  utilizing the following  assumptions:
      dividend  yield of 0%,  volatility  of 67.67%,  risk-free  interest  rates
      ranging from 6.8% to 6.95% and expected life of 10 years.

      Had the Company elected to recognize  compensation  cost based on the fair
      value of the options at the date of grant as  prescribed  by SFAS 123, pro
      forma net income  (loss) for the years  ended  October  31,  1998 and 1997
      would have been  approximately  $3,070,000 and ($6,000) or $.04 and $0 per
      share, respectively.  Pro forma net income (loss) for the two months ended
      December  31, 1998 and 1997 would have been  approximately  ($70,000)  and
      $233,000 or $0 per share, respectively.

[4] Warrants:

In addition to 166,667  warrants  issued to CW  Ventures  in  connection  with a
bridge  financing  in a prior  year,  the  Company  issued to one of its vendors
warrants to purchase 50,000 shares of the Company's  common stock at a per share
price equal to eighty  percent of the average  closing  sales price of the stock
for the sixty  consecutive  business days  preceding  the date of exercise.  The
warrants  expire  upon the  earlier  of the  termination  of the  Agreement  for
Products and Services between the Company and the vendor or October 31, 1999. In
January  1998,  the Company  cancelled  the 50,000  warrants in exchange for the
vendor canceling the Company's warrant to purchase shares of the vendor's stock.


NOTE H -INCOME TAX

The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>

<S>                                                                          <C>              <C>
                                                                            December 31,      October 31,
                                                                                1998              1998
        Deferred tax assets:
           Net operating loss carryforwards                               $ 3,999,000       $  3,984,000
           Accrued liabilities                                                 56,000             56,000
           Deferred revenue                                                   105,000            115,000
           Alternative minimum tax credit                                      50,000             50,000
                                                                           ----------         ----------

                                                                            4,210,000          4,205,000

        Deferred tax liabilities:
           Excess of book over tax cost basis of fixed
              assets and software costs                                       474,000            490,000
                                                                           ----------         ----------

        Net deferred tax asset                                              3,736,000          3,715,000
        Valuation allowance                                                (3,736,000)        (3,715,000)
                                                                           ----------         ----------

                                                                          $         0        $         0
                                                                           ==========         ==========

</TABLE>

                                      F-13
<PAGE>


NOTE H - INCOME TAX (CONTINUED)
The  Company's  deferred  tax  asset  has been  fully  reserved,  as its  future
realization   cannot  be   determined.   The  Company  has  net  operating  loss
carryforwards   of   approximately   $11,762,000   at  December   31,  1998  and
approximately  $11,718,000 at October 31, 1998,  expiring through 2012. Pursuant
to Section 382 of the Internal  Revenue Code, the  carryforwards  are subject to
limitations on annual utilization based upon an ownership change that took place
during 1996. It is reasonably  possible  that the Internal  Revenue  Service may
reduce  the  amount  of  the  carryforward  and  its  annual   utilization  upon
examination.  The  valuation  allowance  on the  Company's  deferred  tax  asset
increased  approximately  $21,000 for the two months ended December 31, 1998 and
decreased approximately $1,023,000 for the year ended October 31, 1998.

The difference  between the federal  statutory rate and the Company's  effective
tax rate is as follows:
<TABLE>
<CAPTION>

          <S>                                                               <C>                  <C>
                                                                            December 31,             October 31,
                                                                                1998                    1998

           Income taxes at federal statutory rate                          $(23,000)             $   1,104,000
           Net operating loss carryforward benefit                                                    (913,000)
           State income tax, net of federal income tax benefit                                         110,000
           Alternative minimum tax                                                                      55,000
           Permanent differences                                              2,000
           Change in valuation reserve                                       21,000                   (191,000)
                                                                           --------                  ---------

                                                                           $      0              $     165,000
                                                                            =======                  =========
</TABLE>


NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

[1] Potential uninsured exposure to litigation:

a.         On or about March 22, 1996, an action  entitled  Francis X. Bodino v.
           Horizon  BCBSNJ and CHCM (the  "Bodino  Action") was filed in the Law
           Division of the Superior  Court of New Jersey in Hudson  County.  The
           complaint  alleges  misrepresentations  with  respect to the type and
           amount of coverage  afforded  by Mr.  Bodino's  policy  with  Horizon
           BCBSNJ,   specifically   with   respect   to   coverage   for   heart
           transplantation. The complaint also alleges that representations made
           on behalf of Horizon  BCBSNJ by an employee of CHCM led Mr.  Bodino's
           surgeon to  believe  that  contractually  excluded  heart  transplant
           coverage was  available.  The  complaint  demanded a variety of money
           damages,  as well as punitive damages,  against both defendants.  The
           complaint  also contained a claim for treble damages and counsel fees
           under the New Jersey Consumer Fraud Act.

           On or about June 29,  1998, a Settlement  and Release  Agreement  was
           entered  into  among  Horizon  BCBSNJ,   the  Company,   CAHS,  CHCM,
           Enterprise  Holding  Company,  Inc.  ("EHC") a subsidiary  of Horizon
           BCBSNJ  and  CW  Ventures.  Under  this  agreement,   Horizon  BCBSNJ
           indemnifies the Company, CAHS and CHCM from any losses or obligations
           in connection with the claims,  facts and circumstances which are the
           subject  of the  Bodino  Action  except  for an amount  not to exceed
           $50,000.  In addition,  Horizon  BCBSNJ and EHC, on the one hand, and
           the  Company,  CAHS and  CHCM,  on the  other  hand,  granted  mutual
           releases with respect to the claims,  facts and circumstances,  which
           are the subject of the Bodino Action.

b.         The Company has been named as a party in an action entitled Robert T.
           Caruso v.  Care  Advantage,   Inc.,  John  J.  Petillo,   Vincent  M.
           Achillare,  Lawrence A. Whipple,  Horizon BCBSNJ  et al.,  which  was
           filed in Superior Court of New  Jersey.  Messrs.  Petillo,  Achillare
           and Whipple were officers of the Company and

                                      F-14
<PAGE>


NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)

[1] Potential uninsured exposure to litigation:  (continued)

b.         may  have  claims  for  indemnification  for  expenses  and  for  any
           judgments  against them.  Mr. Caruso was a consultant to the Company.
           The  complaint  alleges  breach  of  contract,   fraud,   conspiracy,
           promissory  estoppel and  negligent  misrepresentation  in connection
           with, among other things, the termination of Mr. Caruso's  consulting
           arrangement  with the Company.  The plaintiff  seeks treble and other
           damages for an  unspecified  amount and claims actual  damages in the
           approximate  amount of $1.8-2.0  million.  On September  15, 1998 and
           October  30,  1998,  the  Company  received  notice  from  two of its
           insurance carriers that they have denied coverage on this matter, but
           the Company plans to vigorously contest these coverage decisions. The
           Company has received written claims for indemnification from Whipple,
           Petillo and Achillare.  The parties to this  litigation are currently
           taking  discovery,  and no trial  date has been set.  The  Company is
           unable, at this early stage of the proceeding, to evaluate the merits
           of this  action,  but  intends to defend the  matter  vigorously.  No
           amounts have been accrued for this claim as of December 31, 1998.

[2] Termination of employment:

     On or about  January 16, 1998, an action  entitled  Mary  DeStefano v. CAI,
     Carol Manzella,  and Thomas P. Riley (the "DeStefano  Action") was filed in
     the  Superior  Court of New  Jersey.  The  complaint  alleges  that (i) the
     plaintiff  was  terminated   from  her  employment   with  the  Company  in
     retaliation for her complaints  regarding  alleged  violations of state and
     federal  labor  laws and (ii) the  Company  violated  the New  Jersey  Wire
     tapping and  Electronic  Surveillance  Control Act. The  complaint  did not
     demand an amount of specific monetary  damages.  The defendants have denied
     liability in all respects.  On July 7, 1998 its insurance  carrier  advised
     the Company that it will provide a defense to all  defendants  named in the
     complaint.  However,  the Company's insurance carrier has also advised that
     it will not pay any judgment  adverse to the insured which  establishes the
     act of deliberate dishonesty committed by the insured with actual dishonest
     purpose and intent and material to the cause of the action so  adjudicated.
     Under the terms of the  policy,  "insured"  includes  the  Company  and its
     Officers  and  Directors.  The Company  has  retained  separate  counsel to
     represent it in the  litigation for purposes of this  exclusion.  Plaintiff
     has advised  that her damages are  believed to exceed  $250,000 and she has
     also  asserted a claim for punitive  damages.  The Company is continuing to
     contest  this  lawsuit  vigorously.  The  parties  to this  litigation  are
     currently taking discovery, and no trial date has been set. Until discovery
     has been completed,  the Company has insufficient information regarding its
     potential exposure in this matter.

[3] Professional liability:

      In providing utilization review and case management services,  the Company
      makes recommendations regarding benefit plan coverage based upon judgments
      and  established  protocols  as to the  appropriateness  of  the  proposed
      medical  treatment.   Consequently,   the  Company  could  have  potential
      liability for adverse medical results. The Company could become subject to
      claims  based upon the denial of health care  benefits  and claims such as
      malpractice   arising   from  the  acts  or   omissions   of  health  care
      professionals.  Although  the Company  does not believe that it engages in
      the practice of medicine or that it delivers medical services directly, no
      assurance  can be given that the Company will not be subject to litigation
      or  liability  which may  adversely  affect its  financial  condition  and
      operations  in  a  material   manner.   Although  the  Company   maintains
      comprehensive  general  liability  and  professional  liability  insurance
      coverage,   including  coverage  for  liability  in  connection  with  the
      performance of medical  utilization  review services and typically obtains
      indemnification  from its customers,  no assurances can be given that such
      coverage will be adequate in the event the Company  becomes subject to any
      of the above described claims.

                                      F-15
<PAGE>


NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)

[4] Contract termination:

In November 1998, the Company  received written notice from one of its customers
that the  customer  terminated  its contract  with the Company.  Counsel for the
Company  informed the customer that the notice was null and void and of no legal
effect since the agreement did not provide for  termination  without cause prior
to the end of the term.  The  Company  and the  customer  have  since  commenced
binding arbitration. In July 1999, the Company received a second notice from the
customer pursuant to which the customer has purportedly  terminated the contract
due to the Company's  material breach. The Company vigorously denies that it has
breached the contract and continues to pursue its rights against the customer in
the arbitration proceeding (see Note B[2]).

[5] Settlement agreement:

A former  Medical  Director of CAHS  asserted a claim  against the Company.  The
former Medical Director resigned in February 1996,  allegedly due to a change in
control of the Company, and alleged,  among other things, breach of contract. As
of October  31,  1997,  the  Company had  accrued  $150,000  for this claim.  In
February 1998, the claim was settled for $110,000.

[6] Operating leases:

The Company leases facilities and equipment under operating leases.

On April 14, 1995, the Company entered into a noncancelable  operating lease for
approximately  28,000  square feet of office space  commencing on June 15, 1995.
The term of the lease is for six years and  provides for annual base rent in the
amount of $445,000 with annual escalation based on increase in real estate taxes
and operating expenses.

On October 1, 1998, the Company entered into a noncancelable operating lease for
various computer equipment.  The term of the lease is for two years and provides
for annual base rent in the approximate amount of $192,000.

Rent expense  for  the years ended  October 31, 1998,  and 1997 was $463,000 and
$434,000,  respectively.  Rent expense  for each  of the two-month periods ended
December 31, 1998 and 1997 was $77,000.

[7] Employee benefit plans:

Effective  January 1, 1995, the Company  adopted a  profit-sharing/savings  plan
pursuant  to Section  401(k) of the  Internal  Revenue  Code,  whereby  eligible
employees may contribute on a tax deferred  basis a percentage of  compensation,
but not in excess of the maximum  allowable by tax law. The plan  provides for a
matching  contribution  by the Company up to a maximum  level,  which in no case
exceeds  3% of the  employees'  compensation.  Company  contributions  are fully
vested immediately.

The Company's matching  contribution was $163,000 and $148,000 in  fiscal  years
1998  and  1997 respectively,  and $31,000 and $25,000 for the two-month periods
ended December 31, 1998 and 1997, respectively.

Effective  October 29,  1997 the  Company  established  under  Internal  Revenue
Section 125 a cafeteria  plan  whereby  employees  may choose  between  cash and
qualified  benefits.  Additionally,  this plan allows  employees to pay all or a
portion of their premiums with pre-tax dollars.

                                      F-16
<PAGE>


NOTE J - CREDIT FACILITY

The Company has a working  capital  facility in the amount of $1,500,000,  which
bears  interest at a 30, 60, or 90-day LIBO rate,  plus 45 basis  points with an
option to convert to a base prime rate.  As of December 31 and October 31, 1998,
there were no amounts outstanding under the working capital facility.


NOTE K - STAND BY LETTER OF CREDIT

In September 1998, the Company obtained an irrevocable letter of credit in favor
of a vendor as security  for the  Company's  obligations  under a  noncancelable
operating lease dated October 1, 1998 in the amount of $250,000;  such letter of
credit is issued under the Company's credit facility with Summit Bank. (See Note
J)

NOTE L - SHAREHOLDER OPTION AGREEMENT

In June 1997, CW Ventures  granted to Horizon  BCBSNJ an option to purchase from
it  10,031,238  shares of common stock at $0.38 per share (the " Horizon  BCBSNJ
Option"). If the fair market value per share of common stock is greater than the
exercise  price  of  the  Horizon  BCBSNJ  Option  on  the  applicable  date  of
calculation, Horizon BCBSNJ may elect to pay such exercise price by surrendering
for  cancellation  a portion of the Horizon BCBSNJ Option and receiving a number
of  shares of  common  stock  according  to a  formula  set forth in the  Option
Agreement.  The Horizon  BCBSNJ Option is  exercisable  in the event the Company
achieves  certain  goals for defined  periods  through  February  28,  2000.  In
addition,  exercisability  of the Horizon  BCBSNJ Option may be  accelerated  in
certain circumstances, none of which have occurred. The option was granted by CW
Ventures to Horizon BCBSNJ in  consideration  of Horizon BCBSNJ  revision of its
Services  Agreement with the Company,  entering into a joint services  agreement
between Horizon BCBSNJ, the Company and an unrelated party, and the agreement to
guaranty the Summit Bank Credit Agreement.


NOTE M - RELATED PARTY TRANSACTION

Consulting fees of  approximately  $50,000 were paid to a member of the Board of
Directors for the year ended October 31, 1998.


NOTE N - SUBSEQUENT EVENT

On January 8, 1999, the Board of Directors of the Company  granted stock options
for 3,600,000  shares of common stock of the Company to its new Chief  Executive
Officer ("CEO") in connection with the CEO's  employment  agreement.  All of the
options have an exercise price of $.03 per share, a term of 10 years,  and vest,
subject to the terms therein over a period of 6 years.

On January  26,  1999,  the Board of  Directors  of the  Company  granted  stock
options,   subject  to  shareholder  approval,   constituting  an  aggregate  of
10,556,000  shares of common  stock of the  Company,  to  various  employees,  a
director  and a former  employee of the  Company.  The options  have an exercise
price of $.08 per share and a term of 10 years  subject to  earlier  termination
upon certain events. A portion of the options vest immediately and the remainder
vest over 3 years.

                                      F-17