SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
              Annual Report pursuant to Section 13 or 15 (d) of the
                         Securities Exchange Act of 1934
                   For the Fiscal Year Ended October 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 _X_  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

                                    $869,380

Aggregate  market  value  of the  voting  stock  held by  non-affiliates  of the
registrant  as of  January  20,  1999  (assuming  solely  for  purposes  of this
calculation  that all  directors and executive  officers of the  Registrant  are
affiliates).

                                   82,189,883

       Number of shares of common stock outstanding as of January 29, 1999

          Transitional Small Business Disclosure Format  Yes _X_  No ___

     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 December 1993, the Company acquired CAHS
(under its prior corporate name,  Advantage  Health Systems,  Inc.). 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. Through October 31,
1998, the Company had a cumulative deficit of $18,607,000.

      From its inception through October 31, 1995, CAI relied on PMDX to provide
the bulk of its working  capital.  In addition to providing  $6,000,000  for the
acquisition of CAHS, 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


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<PAGE>

$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 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.


                                       3
<PAGE>

      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 of Common
Stock 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.  There is currently  one (1) vacancy on the Board of Directors,
which  is one of  the  Company's  management  directorships.  The  Stockholders'
Agreement  prevents the Company from taking certain material actions without the
consent of Horizon  BCBSNJ  and/or CW  Ventures or their  respective  designated
directors.

      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.


                                       4
<PAGE>

      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 its 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.

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.


                                       5
<PAGE>

      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.

      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 progress and treatment plans of a patient are reviewed by
the  Company's  specific  disease  specialists  or advisors  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.


                                       6
<PAGE>

      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
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.


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<PAGE>

      For its services,  the Company is compensated  either:  (i) on a capitated
(fixed-fee) per subscriber  basis;  (ii) on a combination of both capitation 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
      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.

      Revenues from at-risk  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 states of Maine, Rhode Island, Vermont, New
York  and  New  Jersey  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 services  agreement with an affiliate of
NYCPIC,  HealthNow  New York  Inc.  (See Item 6 -  "Recent  Developments  of the
Business.")


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<PAGE>

      The Company  intends to expand the scope of its market 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
insured 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 capitated 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.

Competition

      The Company faces intense  competition  in a highly  fragmented  market of
managed care service 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 number 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.


                                       9
<PAGE>

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.")

      In order to receive compensation, 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


                                       10
<PAGE>

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 will likely be affected.  Aspects of certain of these  proposals,
such as reductions in Medicare and Medicaid payments, could adversely affect the
Company.  The Company is unable to predict what impact,  if any, further 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 112 contracted  physician  advisors,
the Company employed 8 full-time physicians as of October 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 October 31, 1998, in addition to its physicians, the Company employed a
total of 142 full-time  employees.  Of this total,  112 employees are engaged in
clinical   activities   including   on-site   nurse   reviewers   and   contract
administrators.  The 30 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.


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 a rent-free  operations office 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"),  and
approximately  300  square  feet of space in the Blue  Cross and Blue  Shield of
Maine  Westbrook  facility.   Additionally,   the  Company  maintains  rent-free
operation offices in New York and Vermont pursuant to informal arrangements with
these customers.


                                       11
<PAGE>

      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
            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, 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 with, among other things, the termination of Mr. Caruso's
            consulting   arrangement  with  the  Company.  The  complaint  seeks
            compensation  allegedly  due under the  consulting  arrangement  and
            other  general  and,  in one count,  treble,  damages.  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  Lawrence A. Whipple on September 10, 1998 and
            is unaware of any  written  claims  for  indemnification  by John J.
            Petillo or  Vincent M.  Achillare.  The  Company is unable,  at this
            early  stage of the  proceeding,  to  evaluate  the  merits  of this
            action.


                                       12
<PAGE>

[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 the Company was advised by its
      insurance  carrier 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.

[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.


                                       13
<PAGE>

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 fourth quarter of the fiscal year ended October 31, 1998.

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

                                     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 fiscal years.  The prices reflect  inter-dealer  prices,
            without  retail  mark-up,  mark-down  or  commission,  and  may  not
            represent actual transactions.

                                      1998                      1997
                                 ---------------           ---------------
            Quarter Ended        High       Low            High       Low  
                                 ----       ----           ----       ----
            January 31           $.26       $.23           $.47       $.31
            April 30             $.24       $.21           $.56       $.31
            July 31              $.27       $.21           $.38       $.31
            October 31           $.22       $.05           $.34       $.25
                                                    

      (b)   Holders - As of  January 6, 1999,  there  were  approximately  2,892
            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.


                                       14
<PAGE>

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.

      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.

      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


                                       15
<PAGE>

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
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.


                                       16
<PAGE>

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.

      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 91.56%
of the  outstanding  shares  of Common  Stock of the  Company.  Pursuant  to the
Stockholders Agreement, 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) two members 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.

      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. For fiscal
year 1998,  the  Company  has a working  capital  surplus at October 31, 1998 of
approximately  $1,077,000,  a capital  surplus 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 1997.

      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 91.56% of the Common Stock by two stockholders.


                                       17
<PAGE>

      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 worths 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.

Overview

      For  fiscal  years  prior to 1997,  the  Company  experienced  significant
operating losses on a consolidated  basis. For fiscal year 1998, the Company has
a  working  capital  at  October  31,  1998 of  approximately  $1,077,000  and a
stockholders  equity of $3,484,000,  which  includes 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 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.

      The  Company's  working  capital  as of  October  31,  1998  increased  by
approximately $3,564,000 from the October 31, 1997 deficit amount. This increase
is largely due to the conversion of the $2,000,000 CW Note for Common Stock,  as
well  as  the  realization  of  excess  performance   revenues  from  BCBSRI  of
approximately $1,300,000, an increase in revenues from Allied Health Group, Inc.
("Allied")  in the  approximate  amount of $900,000  and  increased  revenues of
approximately  $2,300,000  from the  re-negotiation  of the  Company's  existing
contracts during the last fiscal year. Management estimates the revenue realized
from BCBSRI during the fiscal year ended October 31, 1999 will be  approximately
$1,300,000 less than the amounts  received for the fiscal year ended October 31,
1998,  as  well  as a  reduction  of  approximately  $1,400,000  related  to the
cancellation  of the Allied  Agreement as more fully  explained  below under the
caption of  "General  Developments  of the  Business  During  Fiscal Year 1998".
Further, the Company realized net income of approximately $3,083,000 or $.04 per
share on revenues of approximately $18,903,000 for the fiscal year ended October
31, 1998 compared with a net income of approximately $7,000 or $.00 per share on
revenues of approximately $14,077,000 for the year ended October 31, 1997.

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 have 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  is of the opinion that 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.


                                       18
<PAGE>

Recent Developments of the Business:

      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 is  attached  hereto as Exhibit  10.35 and  incorporated
herein by reference, 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 services agreement, the initial term of which
expires on June 30, 1999, provides 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.

General Developments of the Business during Fiscal 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.
Management of the Company  estimates that its revenues and net income during the
next fiscal year will  decrease by  approximately  $1,432,000 as a result of the
cancellation of the Horizon  Healthcare Letter Agreement.  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  


                                       19
<PAGE>

Joint Services  Agreement,  the Company and CAHS deliver health care  management
services in the form of 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  fiscal  year  1999.   Additionally,   the  Company
re-negotiated the services 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 at stake for the Company.  Management
estimates the revenue  realized from this customer during the fiscal year to end
October  31,  1999 will be  approximately  $1,300,000  less  than the  aggregate
amounts of approximately  $3,100,000  received for the fiscal year ended October
31,  1998.  Management  plans to  replace  this  revenue by  entering  into more
contracts and expanding its customer base.  However,  there can be no assurances
that  management will be successful in expanding its customer base and replacing
this  non-recurring  revenue stream during fiscal year 1999. (See  "Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations-Cautionary Statements").

Results of Operations--1998 Compared to 1997

      Revenues:

<TABLE>
<CAPTION>
                                                                   Year Ended
                                               -------------------------------------------------
                                                        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>


                                       20
<PAGE>

      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  current  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 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 at-risk  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.

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 


                                       21
<PAGE>

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.

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


                                       22
<PAGE>

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.

      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 October 31, 1999.

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 Master Lease expires in 1999, and bears
interest at 11.39% per annum. The Company's  obligations under this Master Lease
arrangement are guaranteed by Horizon BCBSNJ.

      Pursuant to the BCBSNJ Note, the Company owes $1,863,000 to Horizon BCBSNJ
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.


                                       23
<PAGE>

      In connection with  management's  decision to more effectively  streamline
its  operations,  as well as  increased  emphasis on  developing  in-house  data
management  capabilities and training and educational  programs for its clinical
staff  and  customers,   the  Company  expects  to  incur  additional  leasehold
improvement,  software and computer  hardware  costs during the first and second
quarter of fiscal 1999 of approximately  $500,000. Such costs are expected to be
financed with the  Company's  current cash  reserves and future  operating  cash
flows.

      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  irrecovable  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 availablity 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

      In  connection  with Year 2000  compliance,  the Company has  assessed its
various  information and technology systems and does not believe that it will be
required to incur any significant costs to correct any Year 2000 deficiencies.


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.


                                       24
<PAGE>

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

      The Company's  directors,  executive  officers and control  persons are as
follows:

     Name                        Age    Positions with the Company
     ----                        ---    --------------------------
     William J. Marino (1)       55     Chairman of the Board of Directors
     Robert J. Pures (2)         53     Director
     Barry Weinberg (1)          60     Director
     David McDonnell (1) (2)     56     Director
     Walter Channing, Jr. (2)    58     Director
     Thomas P. Riley(3)          41     Director, President and Chief 
                                        Executive Officer
     Richard W. Freeman (4)      51     President and Chief Operating Officer
     David Noone (5)             45     Director, Chief Executive Officer
     Stephan D. Deutsch          55     Senior Vice President and National 
                                        Medical Director
     Elaine del Rossi            51     Senior Vice President, Marketing 
                                        and Sales
     David G. DeBoskey           33     Vice President, Finance and Accounting
                              
----------
(1)   Member of Compensation Committee
(2)   Member of Audit Committee
(3)   Resigned as President and Chief Executive  Officer  effective  October 30,
      1998. Resigned as director effective November 16, 1998.
(4)   Appointed  President and Chief  Operating  Officer  effective  October 30,
      1998.
(5)   Effective January 8, 1999.

      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
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.


                                       25
<PAGE>

      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.  There is  currently  one
vacancy  on  the  Board,  which  vacancy  is one  of  the  Company's  management
directorships.

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

      William J. Marino--Since  February 1996, a director of the Company.  Since
December 1993, a director of Contemporary  HealthCare  Management Systems,  Inc.
Since  January  1994,  President  and Chief  Executive  Officer and  director of
Horizon BCBSNJ.  From January 1992 through December 1993,  Senior Vice President
of Horizon  BCBSNJ.  Mr. Marino also  currently  serves as a director of Digital
Solutions, Inc.

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

      Barry  Weinberg--Since  May 1997, a director of the  Company.  Since 1981,
President of the CW Group,  Inc.,  a company  engaged in investing in the health
care  field.  Mr.  Weinberg  currently  serves  on the  Board  of  Directors  of
Autoimmune  Inc.,  as well as a number of privately  owned  companies,  and is a
general partner of CW Partners III, L.P. ("CW Partners").

      Walter  Channing,  Jr.--Since  May 1997, a director of the Company.  Since
1981 Vice President of the CW Group, Inc., a company engaged in investing in the
health care field.  Mr. Channing  currently serves as a director for a number of
privately owned companies, and is a general partner of CW Partners.

      Thomas P. Riley--From August 1996 through October 30, 1998,  President and
Chief Executive  Officer of the Company.  From August 1996 through  November 16,
1998, a director of the Company.  From February 1995 through February 1996, Vice
President  of Charter  Medical,  a company  engaged in the health care  services
business.  From April 1988 through February 1995,  President and Chief Executive
Officer of National  Mentor,  Inc., a company  engaged in the mental health care
services business.

      David J. McDonnell--Since  January 1997, a director of the Company.  Since
December 1993, a director of Value Health, Inc., a company engaged in the health
care service  business.  From September 1984 to December 1993,  Chief  Executive
Officer of Preferred  Health Care,  Inc., a company engaged in the mental health
care services business.


                                       26
<PAGE>

      Richard W.  Freeman,  M.D.--Since  October  30, 1998  President  and Chief
Operating  Officer of the Company.  From  September  1997 through  October 1998,
Executive Vice President of the Company. From April 1995 through September 1997,
Senior Vice  President  of CAHS.  From  1994-1995,  Vice  President  for Medical
Affairs,  Johns  Hopkins  Bayview  Medical  Center,  a 667 bed academic  medical
center. From 1992-1994,  Director, Office of Managed Care Programs and Physician
Support Services, Johns Hopkins Bayview Medical Center, The Johns Hopkins Health
System, Baltimore, Maryland.

      David Noone -- Since  January 8, 1999,  a director of the  Company.  Since
January 8, 1999,  Chief  Executive  Officer.  Mr.  Noone was most  recently  the
President and Chief Executive Officer of Value Health International where he was
responsible  for the  migration of Managed  Health Care  strategies  to emerging
opportunity markets in Europe, Latin America and Asia. Previously,  he served as
President  and Chief  Operating  Officer  of  Preferred  HealthCare,  one of the
largest  behavioral  managed care  organizations  in the United  States that was
acquired by Value Health,  Inc. in 1993,  upon which time he served as President
and Chief Executive Officer of Value Health,  Insurance  Services Group where he
was responsible for continued  development of a diversified  managed health care
company serving the property casualty, group health and auto liability sectors.

      Stephan D.  Deutsch,  M.D. - Since July 1995,  Senior Vice  President  and
National Medical Director of CAHS. Prior to 1995, 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 - Since April 1998,  Senior Vice  President  of Marketing
and Sales of the Company. From 1997-1998, 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.--Since November 1997, Vice President of Finance
and Accounting of the Company.  From April 1996 through November 1997,  Director
of Finance and  Accounting of the Company.  From August 1992 through April 1996,
Accounting  Manager and Subsidiary  Controller for two (2) New Jersey hospitals.
From March 1991 through  August  1992,  Accounting  Manager for a  Manufacturing
Company.  Prior  to 1991,  Mr.  DeBoskey  served  as a Staff  Accountant  for an
international  accounting  firm  where  he  served a number  of  healthcare  and
manufacturing clients.

Compliance with Section 16(a) of the Securities Exchange Act of 1934:

      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.

ITEM 10. EXECUTIVE COMPENSATION

      The following  table sets forth  information  concerning the  compensation
paid or accrued by the Company for each of the three fiscal years ended  October
31, 1998, to the individual  performing the function of Chief Executive  Officer
and each of the next four most highly

                                       27
<PAGE>

compensated   executive  officers  during  such  periods.   None  of  the  named
individuals was employed by the Company prior to the 1995 fiscal year.

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                          Annual Compensation                    Long-Term Compensation
                                                  ------------------------------------------    -------------------------
                                                                                               Securities
                                                                                Other          Underlying
                                   Year Ended                                  Annual         Options/SARs     All Other
Name and Principal Position        October 31      Salary       Bonus       Compensation (3)      (#s)       Compensation
---------------------------        ----------      ------       -----       ----------------     -------     ------------
<S>                                   <C>         <C>          <C>             <C>               <C>           <C>
Thomas P. Riley                       1998        $275,000                     $70,138                         $ 4,313 (4)
President and CEO                     1997        $230,800     $300,000                                        $ 4,115 (4)
                                      1996        $127,500

Richard W. Freeman, M.D. (1)          1998        $266,698     $ 35,000                                        $ 4,917 (4)
President and COO                     1997        $254,000     $ 35,000        $25,000                         $ 5,881 (4)
                                      1996        $245,000                                       250,000       $ 2,498 (4)

Stephan D. Deutsch, M.D. (2)          1998        $294,231     $ 31,538
Senior Vice President and             1997        $284,615     $ 69,231
National Medical Director of CAHS     1996        $259,615     $ 23,000                          250,000

Elaine del Rossi(5)                   1998        $ 80,000     $ 50,000
Senior Vice President
Marketing and Sales
</TABLE>

----------
(1)   Dr.  Freeman  joined the  Company on April 26,  1995 and is paid an annual
      salary of $275,000 under the terms of his amended and restated  employment
      agreement dated September 29, 1998.

(2)   Dr.  Deutsch  joined  the  Company  on July 1,  1995 and is paid an annual
      salary of $300,000 under the terms of his employment agreement.

(3)   Other Annual  Compensation  includes  taxable  fringe  benefits and unused
      accrued vacation days that were paid.

(4)   Represents   Company   matching   contributions   to   a   401(k)   profit
      sharing/savings plan.

(5)   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.

Compensation Plans

Stock Option Plans:

      On June 6, 1996 and July 24,  1996,  the Board of Directors of the Company
adopted and amended  (i) the 1996 Stock  Option Plan (the "1996  Plan") and (ii)
the 1996 Director Stock Option Plan (the "Director Plan" and,  together with the
1996 Plan, the "Stock Plans"). The Stock Plans were approved and ratified by the
majority  stockholders of the Company pursuant to a written consent in lieu of a
meeting  dated  August  23,  1996.  The key  features  of the  Stock  Plans  are
summarized below.

      Options covering a total of 1,933,334 shares have been granted and options
covering  758,334  shares  are  outstanding  under the Stock  Plans.  Additional
non-plan  options 667,919 shares in the aggregate are outstanding at October 31,
1998.


                                       28
<PAGE>

                 Aggregated Option Exercises in Last Fiscal Year
                       and Fiscal Year-End Option Values

                                               Number of           Value of
                                            Shares Underlying     Unexcerised
                                              Unexercised        In-the-Money
                                               Options at         Options at
                                            October 31, 1998   October 31, 1998
                                              Exercisable/        Exercisable/ 
Name                                          Unexercisable      Unexercisable 
----                                          -------------      ------------- 
Thomas P. Riley                               N/A                     N/A
Stephan D. Deutsch, M.D. (2)                  166,667/83,333          $0/$0
Richard W. Freeman, M.D. (1)                  166,667/83,333          $0/$0
Elaine del Rossi                              N/A                     N/A
----------                      
Based upon the average  Bid and Asked  prices on the OTC  Bulletin  Board of the
Company's Common Stock on January 20, 1999.

(1)   Effective  July 24,  1996,  Dr.  Freeman was  awarded  options to purchase
      250,000  shares of Common  Stock of the  Company at an  exercise  price of
      $0.78 per share.

(2)   Effective  July 24,  1996,  Dr.  Deutsch was  awarded  options to purchase
      250,000  shares of  Common  Stock of the  Company  (replacing  options  to
      purchase  16,667 shares  previously  granted to Dr.  Deutsch during fiscal
      1995) at an exercise price of $.78 per share.

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

Description of the Stock Plans:

      The 1996 Plan is  administered  by a committee,  which  consists of two or
more  disinterested  directors  of the Board of  Directors  of the Company  (the
"Compensation  Committee").  Pursuant  to  the  terms  of  the  1996  Plan,  the
Committee,  along with the Board,  will select persons to be granted options and
will  determine:  (i) whether the  respective  option is to be a  non-statutory,
non-qualified  option or an incentive  option;  (ii) the number of shares of the
Company's Common Stock  purchasable  under such option;  (iii) the time or times
when the option becomes exercisable,  except that no incentive or non-statutory,
non-qualified  option shall be exercised and sold by the recipient  prior to six
(6) months from the date of grant;  (iv) the exercise  price 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 10% 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  Options  may only be
granted to  employees  (including  officers)  of the  Company  and/or any of its
subsidiaries.  Non-statutory,  non-qualified  Options  may  be  granted  to  any
employees  (including  employees  who have been granted  Incentive  Options) and
other persons who the Board or the Committee may select.

      The Director Plan is administered  by the Board of Directors.  Pursuant to
the terms of the Director  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  166,667  shares of Common Stock;  (ii) at an exercise  price
which  cannot be less than 100% of the fair market  value of the Common 


                                       29
<PAGE>

Stock  on the  date of  grant;  (iii)  immediately  exercisable,  and (iv) for a
duration not to exceed ten (10) years from the date of grant.  Options under the
Director Plan may be granted only to Directors of the Company.

      All  options  granted  under  the  1996  Plan  and the  Director  Plan are
exercisable  during the option  holder's  lifetime only by the option holder (or
his or her legal  representative)  and only while such  option  holder is in the
Company's  employ or is a Company  director.  With respect to both the 1996 Plan
and the Director  Plan, in the event of  termination  of employment or of his or
her  directorship,  such  person  shall have three (3) months  from such date to
exercise 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. With
respect to the 1996 Plan, in the event of termination of employment due to death
or  disability of the option  holder,  such  beneficiary  shall have twelve (12)
months  from such date to  exercise  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.  With respect to the Director  Plan, in the event of
termination of the option holder's  directorship due to death,  such beneficiary
shall have twelve  (12)  months  from such date to  exercise  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.

      Both the 1996 Plan and the Director Plan contain  customary  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 adjust the  aggregate  number of shares of the Common  Stock  reserved for
issuance  under both plans.  In addition,  the aggregate  number of  outstanding
options   and  the   exercise   price  per  share  under  both  plans  shall  be
proportionately adjusted by the Board whose determination shall be conclusive.

      The Board of Directors has the  authority to terminate  both the 1996 Plan
and the Director Plan as well as to make changes in and additions to such plans.
In addition,  upon a merger of the Company,  the 1996 Plan shall terminate,  and
all options granted  thereunder  shall  terminate,  unless  provision be made in
writing in connection  with such merger for the  continuance of the 1996 Plan or
for the assumption of options theretofore  granted, or the substitution for such
options of options covering the stock of a successor employer corporation,  or a
parent or a subsidiary  thereof,  with appropriate  adjustments as to the number
and kind of  shares  and  prices,  in which  event  the  1996  Plan and  options
theretofore  granted  shall  continue  in the  manner  and  under  the  terms so
provided.  However,  with  respect to the 1996 Plan,  the Board may not,  unless
approved by the  stockholders  of the Company,  change the  aggregate  number of
shares  subject to the 1996 Plan,  terminate  modify or amend such plan so as to
adversely  affect the rights of option  holders  previously  granted  under such
plan, change the requirement of eligibility to such plan or materially  increase
the  benefits  accruing to  participants  under such plan.  With  respect to the
Director  Plan, the Board may not,  unless the option holder  thereof  consents,
materially impair the rights of such option holder under such plan.


                                       30
<PAGE>

Resignations, Employment Contracts and Board Appointments

  Resignation of Chief Executive Officer, President and Directors

      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 are attached as Exhibit 10.32 and 10.33 hereto,
respectively  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-months  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 per
cent  (4%) of the  Company's  capitalization  on such  date,  upon the terms and
conditions set forth therein.  These options are subject to accelerated vesting,
if: (a) the Company's  Common Stock reaches  certain target levels or (b) 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 is attached as Exhibit
10.36 hereto 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, the current Senior Vice President for Marketing
and Sales of the Company,  which are attached as Exhibit 10.37 and 10.38 hereto,
respectively,  and are  incorporated  by reference  herein.  The term of the del
Rossi  Employment  Agreement  commenced  on March 25, 1998 and  continues  for a
one-year  period,  with  successive  one-year  renewal  terms.  Ms. del Rossi is
entitled to an annual salary of $160,000, plus other benefits set forth therein.
The del Rossi Employment Agreement provides for a cash bonus of $50,000 upon Ms.
del Rossi's  commencement of employment with the Company.  In addition,  Ms. del
Rossi is 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.

  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 is attached as Exhibit 10.39 hereto 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. Deutsh 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.


                                       31
<PAGE>

Compensation of Directors:

      The Company executed a Consultation Agreement dated October 1, 1997, which
was attached as Exhibit 10.21 to the Company's  Form 10-KSB for the period ended
October 31, 1997 and is  incorporated by reference  herein,  with an independent
director of the Company, David McDonnell,  providing for compensation of $25,000
per month for the last three months of calendar year 1997 (October 1997-December
1997) for an aggregate  amount of $75,000.  The Company paid $50,000  during the
fiscal year ended October 31, 1998 under the terms of this agreement.

      All other  members  of the Board of  Directors  of the  Company  presently
receive  no  annual  remuneration  for  acting  in that  capacity.  The  Company
anticipates   that  its   non-employee   directors   will  be  paid   reasonable
out-of-pocket  expenses for each attended  meeting of the Board or any committee
thereof.  Certain  members of the Board of Directors of the Company will also be
eligible  for the grant of  options  under  the  Director  Plan  that  currently
provides for each non-employee Director to receive an annual grant of options to
purchase  166,667  shares of the  Company's  Common  Stock.  None of the current
directors  have been  granted any options  pursuant to the Director  Plan.  (See
"Compensation Plans - Description of Stock Plans" above.)

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The  following  table  sets  forth  certain   information   regarding  the
beneficial ownership of the 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 executive  officer named in the Summary  Compensation  Table,  and (iv) all
executive  officers and  Directors as a group,  in each case, as of December 23,
1998. 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.

                     Beneficial Ownership of Common Stock by
                       Certain Stockholders and Management

<TABLE>
<CAPTION>
                                                                       Number of Shares       Percent of
Name                                                                 Beneficially Owned(1)   Ownership(2)
----                                                                 ---------------------   ------------
<S>                                                                       <C>                   <C>  
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            45.79
                                                                        
William J. Marino(3)...........................................                  334                *
                                                                                   
Robert J. Pures(3).............................................                    0              n/a
                                                                        
David J. McDonnell(9)..........................................                    0              n/a
                                                                        
Walter Channing, Jr.(5)(6)(7)(8)...............................           37,784,087            45.79
                                                                        
Charles Hartman(5)(6)(7)(8)....................................           37,784,087            45.79
                                                                        
Barry Weinberg(5)(6)(7)(8).....................................           37,784,087            45.79
                                                                      
Thomas P. Riley(10) (11).......................................                    0              n/a
</TABLE>


                                       32
<PAGE>

<TABLE>
<CAPTION>
                                                                       Number of Shares       Percent of
Name                                                                 Beneficially Owned(1)   Ownership(2)
----                                                                 ---------------------   ------------
<S>                                                                          <C>                     
Stephan Deutsch, M.D(1)(2)(12).................................              166,667                *
                                                                    
Richard W. Freeman, M.D(1)(2)(12)..............................              166,667                *
                                                                    
Elaine del Rossi (12)..........................................                    0              n/a     
                                                                    
David Noone (12)...............................................                    0              n/a     

Current Directors and Executive Officers as                         
a Group (seven persons)........................................           38,117,421            46.19
</TABLE>                                                          

----------
*   Less than one percent.

(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.  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 of  December  23,  1998 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)   Includes  24,242,337  shares of Common  Stock  issued  by the  Company  on
      February  27,  1997  for  failure  to  meet  certain  revenue  and  income
      thresholds.  In the event that the  Services  Agreement is  terminated  by
      BCBSNJ,  CW  Ventures  will have the right to  purchase  BCBSNJ  shares in
      accordance with the terms of the Stockholders' Agreement.

(5)   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. 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.

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

(7)   Includes 7,799,997 shares of Common Stock issued upon conversion of the CW
      Note,  25,914,222 shares of Common Stock issued by the Company on February
      27, 1997 for failure to meet  certain  revenue and income  thresholds  and
      166,667  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.


                                       33
<PAGE>

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

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

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 January 11, 1999,  Horizon  BCBSNJ is the
beneficial owner of 37,617,420  shares of Common Stock,  constituting  45.77% of
the  outstanding  Common Stock at October 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
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. In addition,  two (2) of BCBSNJ  officers are directors of the
Horizon  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  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.

      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 23, 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.


                                       34
<PAGE>

      Effective  June 13, 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"),  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 Option 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.

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            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).

3.11           Amended and Restated Certificate of Incorporation incorporated by
               reference to the Company's Information Statement dated September,
               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. 33-89176).


                                       35
<PAGE>

10.1           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(a)        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
               Koll 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.

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 exhibit 10.16
               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.


                                       36
<PAGE>

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.

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.

10.21          Consultation  Agreement  dated October 1, 1997 by and between the
               Company  and David  McDonnell,  an  independent  director  of the
               Company.

10.22          Mutual Release  Agreement dated as of January 6, 1998 between the
               Company and MEDecision, Inc.


                                       37
<PAGE>

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

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

10.27          Registrant's  1996 Stock Option Plan incorporated by reference to
               CAI's Information Statement dated September 1996.

10.28          Registrant's  1996  Director  Stock Option Plan  incorporated  by
               reference to CAI's Information Statement dated September 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, 1998.

10.32          Employment  Agreement between the Company and David Noone,  dated
               as of January 8, 1999.

10.33          Confidentiality, Invention, and Non-Compete Agreement between the
               Company and David Noone,  dated as of January 8, 1999. 

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 CAI's Form 10-QSB for the quarter ended
               July 31, 1998.


                                       38
<PAGE>

10.35          Services Agreement dated as of January 1, 1999,  by  and  between
               HealthNow New York, Inc. ("HNNY") and the Company.

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").

10.37          Employment  Agreement, dated as of March 25, 1997, by and between
               the Company and Elaine del Rossi.

10.38          Confidentiality,  Invention  and  Non-Compete  Agreement dated as
               March 25, 1998 between the Company and Elaine del Rossi.

10.39          Employment  Agreement,  effective as  of April  28, 1998,  by and
               among Stephan D. Deutsch, M.D., the Company and CAHS.

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

27             Financial Data Schedule

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


                                       39
<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: January 29, 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: January 29, 1999                 By:   /s/ David Noone
      ----------------                       ------------------------
                                       David Noone, Chief Executive Officer,
                                       Director
                                       (Principal Executive Officer)

Date: January 29, 1999                 By:   /s/ David G. DeBoskey
      ----------------                       ------------------------
                                       David G. DeBoskey, Vice President Finance
                                       (Principal Financial and Accounting
                                       Officer)

Date: January 29, 1999                 By:   /s/ William J. Marino
      ----------------                       ------------------------
                                       William J. Marino, Director

Date: January 29, 1999                 By:   /s/ Robert J. Pures
      ----------------                       ------------------------
                                       Robert J. Pures, Director

Date: January 29, 1999                 By:   /s/ Barry Weinberg
      ----------------                       ------------------------
                                       Barry Weinberg, Director

Date: January 29, 1999                 By    /s/ Walter Channing, Jr.
      ----------------                       ------------------------
                                       Walter Channing, Jr., Director

Date: January 29, 1999                 By:   /s/ David McDonnell
      ----------------                       ------------------------
                                       David McDonnell, Director


                                       40
<PAGE>

                               CAREADVANTAGE, INC.

             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
           FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-KSB

                   For the Fiscal Year Ended October 31, 1998

                                                                           Page
                                                                           ----

Included in Part II:

Report of Independent Public Accountants                                    F-2

Consolidated Balance Sheets as of October 31, 1998 and October 31, 1997     F-3

Consolidated Statements of Operations for the years ended 
October 31, 1998, and October 31, 1997                                      F-4

Consolidated Statements of Changes in Stockholders Equity 
(Capital Deficiency) for the Years ended October 31, 1998 
and October 31, 1997                                                        F-5

Consolidated Statements of Cash Flows for the years ended 
October 31, 1998 and October 31, 1997                                       F-6

Notes to Consolidated Financial Statements                      F-7 through F-18

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

Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
financial statements filed, including the notes thereto.


                                                                             F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying  consolidated  balance sheets of CareAdvantage,
Inc.  and  subsidiaries  as at  October  31,  1998  and  1997  and  the  related
consolidated statements of operations, stockholders' equity (capital deficiency)
and cash flows for the years then ended. 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 at October 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.


/s/ Richard A. Eisner & Company, LLP

New York, New York
November 25, 1998

With respect to Note N
January 26, 1999


                                                                             F-2
<PAGE>

CAREADVANTAGE, INC.

                           Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                         October 31,
                                                                    1998            1997
                                                                ------------    ------------
                                  ASSETS
<S>                                                             <C>             <C>         
Current assets:
   Cash and cash equivalents                                    $  3,745,000    $  1,038,000
   Accounts receivable for services:
      Stockholder                                                  1,080,000       1,047,000
      Other                                                          667,000         408,000
   Other current assets                                               75,000         255,000
                                                                ------------    ------------
        Total current assets                                       5,567,000       2,748,000

Property and equipment, at cost less accumulated depreciation      1,374,000       1,468,000

Intangible assets                                                  1,768,000       1,684,000
Other assets                                                          91,000          81,000
                                                                ------------    ------------
                                                                $  8,800,000    $  5,981,000
                                                                ============    ============

         LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)

Current liabilities:
   Current portion of capital lease obligation                  $    422,000    $    575,000
   Note payable-stockholder                                                        2,000,000
   Accounts payable                                                  163,000         351,000
   Due to stockholder                                              1,153,000          89,000
   Due to customer                                                   902,000
   Accrued payroll and related benefits                            1,211,000         563,000
   Accrued expenses and other current liabilities                    455,000       1,012,000
   Deferred revenue, current                                         184,000         645,000
                                                                ------------    ------------
        Total current liabilities                                  4,490,000       5,235,000

Capital lease obligations, less current portion                                      422,000
Due to stockholder, less current portion                             710,000       1,774,000
Deferred revenue and other liabilities, less current portion         116,000         526,000
                                                                ------------    ------------
                                                                   5,316,000       7,957,000
                                                                ------------    ------------
Commitments and contingencies

Stockholders' equity (capital deficiency):
   Preferred stock - par value $.10 per share;
      authorized 10,000,000 shares; none issued
   Common stock - par value $.01 per share, authorized
      90,000,000 shares; issued and outstanding
      82,189,883 and 74,389,886                                       82,000          74,000
   Additional capital                                             22,009,000      19,640,000
   Accumulated deficit                                           (18,607,000)    (21,690,000)
                                                                ------------    ------------
                                                                   3,484,000      (1,976,000)
                                                                ------------    ------------
                                                                $  8,800,000    $  5,981,000
                                                                ============    ============
</TABLE>

See notes to financial statements                                            F-3
<PAGE>

CAREADVANTAGE, INC.

                     Consolidated Statements of Operations

                                                        Year Ended October 31,
                                                      --------------------------
                                                          1998           1997
                                                      -----------    -----------

Net revenues                                          $18,903,000    $14,077,000
Cost of services                                        7,903,000      7,937,000
                                                      -----------    -----------

Gross profit                                           11,000,000      6,140,000
                                                      -----------    -----------
Operating expenses:
   Selling general and administrative                   6,842,000      5,278,000
   Depreciation and amortization                          605,000        484,000
                                                      -----------    -----------

      Total operating expenses                          7,447,000      5,762,000
                                                      -----------    -----------

Operating income                                        3,553,000        378,000

Interest expense                                          305,000        371,000
                                                      -----------    -----------

Income before provision for income tax                  3,248,000          7,000
Provision for income taxes                                165,000
                                                      -----------    -----------
         Net income                                   $ 3,083,000    $     7,000
                                                      ===========    ===========
Net income per share of common stock - basic
 and diluted                                          $       .04    $       .00
                                                      ===========    ===========
    Weighted average number of common shares
       outstanding -  basic and diluted                76,990,000     74,390,000
                                                      ===========    ===========


See notes to financial statements                                            F-4
<PAGE>

CAREADVANTAGE, INC.

      Consolidated Statements of Stockholders' Equity (Capital Deficiency)

<TABLE>
<CAPTION>
                                                       Common Stock
                                                  ----------------------
                                                    Number        Par                                           Stockholders'
                                                      of         Value        Additional       Accumulated     Equity (Capital
                                                    Shares       Amount         Capital          Deficit          Deficiency)
                                                ------------    --------     ------------    -------------     ---------------
<S>                                               <C>           <C>          <C>             <C>                 <C>         
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                                50,156,559      50,000          (50,000)                                 0
Net income for the year ended October 31,                                                            7,000             7,000
   1997
                                                ------------    --------     ------------    -------------     -------------
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                                           7,799,997       8,000        2,369,000                          2,377,000
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
                                                ============    ========     ============    =============     =============
</TABLE>


See notes to financial statements                                            F-5
<PAGE>

CAREADVANTAGE, INC.

                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                         Year Ended October 31,
                                                                       --------------------------
                                                                           1998           1997
                                                                       -----------    -----------
<S>                                                                    <C>            <C>        
Cash flows from operating activities:
   Net income                                                          $ 3,083,000    $     7,000
   Adjustments to reconcile net income to net cash
     provided by operating activities:
      Depreciation and amortization                                      1,143,000      1,033,000
      Changes in:
        Due to/from stockholder                                            (33,000)    (1,117,000)
        Due to/from customers                                             (259,000)
        Other assets                                                       170,000       (127,000)
        Accounts payable                                                  (188,000)      (218,000)
        Accrued expenses and other liabilities                             468,000        417,000
        Deferred revenue                                                    31,000      1,122,000
                                                                       -----------    -----------
           Net cash provided by operating activities                     4,415,000      1,117,000

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

Cash flows from financing activities:
   Principal payments under long-term debt                                (575,000)      (623,000)
                                                                       -----------    -----------

                Net increase (decrease) in cash and cash equivalents     2,707,000       (129,000)
Cash and equivalents - beginning of year                                 1,038,000      1,167,000
                                                                       -----------    -----------
                  Cash and equivalents - end of year                   $ 3,745,000    $ 1,038,000
                                                                       ===========    ===========
Noncash operating activity:
   Reclassification of deferred revenue 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                                                       $    85,000    $   152,000
   Income taxes paid                                                   $   115,000
</TABLE>


See notes to financial statements                                            F-6
<PAGE>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

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 (the "Horizon BCBSNJ
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 an aggregate of 50,156,559  additional  shares of
common stock to these  stockholders,  which  increased the beneficial  ownership
percentage of each of Horizon BCBSNJ and CW Ventures to  approximately  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.


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'  wholly owned  subsidiary,  CHCM.
      Significant intercompany accounts and transactions have been eliminated in
      consolidation.


                                                                             F-7
<PAGE>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

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.

In August of 1998 the Company received notice from one of its customers, that it
had decided to resume internal  network  management that it had been outsourcing
indirectly to the Company.  Accordingly,  a letter agreement between the Company
and this customer was terminated  effective in December  1998.  Revenues for the
Company from this contract were  approximately  $1,432,000 for the  twelve-month
period ended October 31, 1998. The Company has deferred  approximately  $902,000
to cover the re-payment of performance penalties related to this contract.

[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.


                                                                             F-8
<PAGE>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[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 the Horizon
      BCBSNJ Note 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.

      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 first quarter of the Company's 1998 fiscal year.
      The  adoption  of SFAS 128 did not have any effect on the  computation  of
      income (loss) on the Company's 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 in 1998 and  approximately  77% (Horizon BCBSNJ) and 11%
of net  revenues in 1997.  The loss of any one of these  customers  would have a
material adverse impact on the Company's business.


                                                                             F-9
<PAGE>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[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).

NOTE C - INTANGIBLE ASSETS

Intangible assets net of accumulated amortization consist of the following:

                                                        October 31,
                                              ------------------------------
                                                   1998             1997
                                              ------------     -------------
          Service agreement                   $    855,000     $     978,000
          License fees                             200,000           400,000
          Software development cost                713,000           306,000
                                              ------------     -------------
                                              $  1,768,000     $   1,684,000
                                              ============     =============

[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.


                                                                            F-10
<PAGE>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

NOTE D - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                             October 31,
                                                     --------------------------
                                                         1998           1997
                                                     -----------    -----------
   
   Computer equipment                                $ 1,284,000    $   707,000
   Furniture and fixtures                                466,000        459,000
   Office machines and telephone equipment               231,000        227,000
   Leasehold improvements                                106,000        105,000
   Equipment under capital lease, consisting of:
      Computer equipment                                 860,000        860,000
      Telephone equipment                                156,000        156,000
      Leasehold improvements                             309,000        309,000
                                                     -----------    -----------
                                                       3,412,000      2,823,000
   Less accumulated depreciation and amortization     (2,038,000)    (1,355,000)
                                                     -----------    -----------
                                                     $ 1,374,000    $ 1,468,000
                                                     ===========    ===========

Amortization  in connection  with  equipment  under capital  leases  amounted to
$321,000 and $326,000 during 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 October 31, 1998, all of which are due in the ensuing year:

     Fiscal year ending October 31, 1999                     $ 440,000
     Less amount representing interest                          18,000
                                                             ---------
     Present value of future minimum lease payments          $ 422,000
                                                             =========

The Company's  obligations  under the lease  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>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

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 1996 Stock  Option Plan is  administered  by the Board of  Directors  of the
Company.  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  1996  Director  Stock  Option  Plan is also  administered  by the  Board of
Directors  of the  Company.  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.


                                                                            F-12
<PAGE>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

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

[3]   Stock option plans: (continued)

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

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

<S>                                             <C>             <C>       <C>             <C>  
      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>

      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.

[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  cancelling  the  Company's  warrant to purchase  shares of the  vendor's
stock.


                                                                            F-13
<PAGE>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

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:

                                                            October 31,
                                                     --------------------------
                                                         1998           1997
                                                     -----------    -----------
Deferred tax assets:
   Net operating loss carryforwards                  $ 3,984,000    $ 4,801,000
   Accrued liabilities                                    56,000         63,000
   Deferred revenue                                      115,000        398,000
   Alternative minimum tax credit                         50,000
                                                     -----------    -----------
                                                       4,205,000      5,262,000

Deferred tax liabilities:
   Excess of book over tax cost basis of fixed
      assets and software costs                          490,000        524,000
                                                     -----------    -----------

Net deferred tax asset                                 3,715,000      4,738,000
Valuation allowance                                   (3,715,000)    (4,738,000)
                                                     -----------    -----------
                                                     $         0    $         0
                                                     ===========    ===========

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 $11,718,000 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 amount of the
carryforward  and its annual  utilization may be reduced upon examination by the
Internal Revenue Service.  The valuation allowance on the Company's deferred tax
asset  decreased  approximately  $1,023,000  and  $265,000  for the years  ended
October 31, 1998 and 1997, respectively.

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

                                                             October 31,
                                                      ------------------------
                                                          1998         1997
                                                      -----------  -----------
           Income taxes at federal statutory rate     $ 1,104,000  $     2,000
           Net operating loss carryforward benefit       (913,000)      (2,000)
           State income tax, net of federal income 
              tax benefit                                 110,000
           Alternative minimum tax                         55,000
           Change in valuation reserve                   (191,000)
                                                      -----------    -----------
                                                      $   165,000  $         0
                                                      ===========  ===========


                                                                            F-14
<PAGE>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

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 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.  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 complaint seeks  compensation  allegedly  due
            under the  consulting  arrangement  and other  general  and,  in one
            count, treble,  damages. On September 15, 1998 and October 30, 1998,
            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 Lawrence A. Whipple on September 10,
            1998 and is unaware of any  written  claims for  indemnification  by
            John J. Petillo, or Vincent M. Achillare.  The Company is unable, at
            this early stage of the  proceeding,  to evaluate the merits of this
            action.

[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 the Company was advised by its
      insurance  carrier 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


                                                                            F-15
<PAGE>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

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

[2]   Termination of employment: (continued)

      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.

[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 was still in effect. The arbitration  process has
      commenced and the parties are currently  selecting the  arbitrator to hear
      this matter.


                                                                            F-16
<PAGE>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

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

[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.

[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.

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.

NOTE J - CREDIT FACILITY

The  Company  has a  working  capital  facility  with a bank  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 October 31,  1998,
there were no amounts outstanding under the working capital facility, other than
the reserve for the letter of credit discussed in Note K.

NOTE K - STAND BY LETTER OF CREDIT

In September 1998, a bank issued an irrevocable letter of credit for the account
of the Company 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.  Accordingly,  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.  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 Option  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.


                                                                            F-17
<PAGE>

CAREADVANTAGE, INC.

Notes to Financial Statements
October 31, 1998 and 1997

NOTE L - SHAREHOLDER OPTION AGREEMENT - (CONTINUED)

The  Horizon  BCBSNJ  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 3 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-18