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, 1997
                         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. |_|

   The Registrant's revenues for its most recent fiscal year were $14,076,637

                                   $1,738,761

Aggregate  market  value  of the  voting  stock  held by  non-affiliates  of the
registrant  as of  January  20,  1998  (assuming  solely  for  purposes  of this
calculation  that all  directors and executive  officers of the  Registrant  are
affiliates).

                                   74,389,886

      Number of shares of common stock outstanding as of January 29, 1998

          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

General

      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 the statewide Blue Cross/Blue Shield health service organizations of
Rhode Island,  Maine,  Vermont,  Delaware,  New Jersey,  and in 1998 New York (a
division of New York Care Plus  Insurance  Company,  Inc.);  however,  effective
March 1, 1997 Blue Cross and Blue Shield of  Delaware  canceled  its  consulting
agreement with the Company.

      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,
1997, the Company had a cumulative deficit of $21,690,393.

      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,
Metropolitan  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 Blue Cross and Blue Shield of New
Jersey, Inc.  ("BCBSNJ").  The 


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<PAGE>

transactions  included  the  sale to CW  Ventures  of  3,903,201  shares  of the
Company's  common  stock  at a  purchase  price  of  $0.2562  per  share  (after
adjustment  for the "one (1) for six (6)" reverse  stock split of the  Company's
outstanding  common stock as discussed below) for an aggregate of $1,000,000 and
the issuance of a $2,000,000  principal amount 8% Exchangeable  Note maturing on
June 30, 1998 (the "CW Note"). On such date, CW Ventures is required to exchange
the CW Note for  shares of the  Company's  common  stock  absent  any  events of
default,  as defined in the CW Note.  The CW Note,  which is  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 so that 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
percent  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  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 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 CAHS' $3,600,000  principal amount 8% Exchangeable Note
maturing on June 30, 1998 in favor of EHC,  which was  subsequently  assigned to
BCBSNJ (the "BCBSNJ Note")  collateralized by substantially all of the assets of
the Company and its  subsidiaries.  The 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 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 as discussed below. 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  with BCBSNJ (see Note C[1] in the Notes to
the Financial Statements below).

      Pursuant  to the terms of the CW Note and the  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,  on February
27, 1997, the Company issued an aggregate 50,156,559 additional shares of common
stock to BCBSNJ and CW Ventures.


                                       3
<PAGE>

      The  Company,  BCBSNJ  and CW  Ventures  are  parties  to a  stockholders'
agreement dated February 22, 1996 (the  "Stockholders'  Agreement") whereby 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.  There is
currently one (1) vacancy on the Board of Directors, which vacancy is one of the
Company's  Management  Directorships.  The Stockholders'  Agreement prevents the
Company  from  taking  certain  material  actions  without the consent of 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 BCBSNJ Note, the stockholders of the
Company  approved an amendment to the  Company's  Certificate  of  Incorporation
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 BCBSNJ Note, the 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 outcomes 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   servicers   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  on
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 - Major 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 major case management services.  Patient evaluation
through pre-admission and concurrent review provide 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.

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

      Implementation  of a disease  management  program for a client begins with
disseminating  care  management  "critical  pathways" to, and then meeting with,
local specialists.  The Company provides chronic disease case management through
a review  process  whereby 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 to 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 medical cost 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 staff 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 major case management  services.  The Company's clinical staff
also plans for and coordinates the  out-patient  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 115 independent,
multi-specialty  physicians  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  the  meetings  with  groups of local  specialists  to
disseminate and implement the care management  "critical pathways" necessary for
effective  case  management.  The Company also deploys 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 out-patient 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 performance-based method whereby the
Company  shares in the  realized  cost  savings per member as  measured  against
certain  defined  benchmark(s);  (iii)  on the  basis of a  combination  of both
capitation  and  performance-based  fees; and (iv) 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 full risk  compensation  arrangements is recorded based upon
      the periodic monthly or quarterly interim payments, adjusted on a periodic
      basis to cost and  utilization  data  supplied  by the  client  to  assess
      performances  against established  targets.  Incentive  compensation based
      upon performance,  or reductions  thereto,  are recorded when such amounts
      can reasonably be determined.

(d)   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.


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<PAGE>

Customers and Marketing

      The Company  currently  provides its services to five statewide Blue Cross
and Blue Shield  ("BCBS")  organizations  in the states of Maine,  Rhode Island,
Vermont,  New York  (beginning  in 1998)  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 BCBSNJ, a 50% stockholder
of the Company,  for a substantial  portion of its  revenues,  gross margins and
cash  flows.  The loss of any one of these two  customers  would have a material
adverse impact on the company's cash flows and results of operations.

      Effective  March 1, 1997, a consulting  contract  with Blue Cross and Blue
Shield of Delaware ("BCBSDE") one of the Company's customers was terminated.

      Effective January 1, 1998 the Company has entered into a one year services
agreement with New York Care Plus Insurance Company,  Inc. ("NYCPIC"),  which is
attached hereto and  incorporated  herein by reference to exhibit 10.20.  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,  will provide both medical management  performance  support
and specialty care management performance support services to New York Care Plus
for its  approximately  650,000  indemnity  and  HMO  subscribers.  The  service
agreement,  the initial term of which expires on December 31, 1998, provides for
the payment of fixed compensation.

      During 1997, the Company successfully  re-negotiated contracts with two of
its major customers and executed  several other agreements as discussed below in
Item 6 "Management's  Discussion and Analysis of Financial Condition and Results
of Operations" under the caption "General Developments of the Business".

      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  (or
"ASO") 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. 


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<PAGE>

Competition

      The Company faces intense  competition  in a highly  fragmented  market of
managed care  services  firms.  Several  managed care  service  firms  currently
provide and  aggressively  market services which are in some respects similar to
the Company services. Management is aware of a significant number of independent
utilization  review  firms  currently  marketing   utilization  review  services
directly  to  employers,  small  insurers,  and third party  administrators.  In
addition to other  utilization  review and  medical  management  companies,  the
Company   competes   with   insurance   companies,   third  party   health  plan
administrators,   health   maintenance   organizations  and  preferred  provider
organizations  which 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.

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.")


                                       10
<PAGE>

      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.
However,  the Company has filed an  application to be certified as a Utilization
Review  Agent with the New York State  Departments  of  Insurance  and Health in
connection  with the Company's  Service  Agreement with NYPIC. It has of yet not
received  full  certification  from such  departments.  The Company is unable to
predict  what,  if any,  government  regulations  affecting  its business may be
enacted in the future or how existing or future  regulations may be interpreted.
To maintain future compliance, it may be necessary for the Company to modify its
services, products, structure or marketing methods. This could increase the cost
of compliance or otherwise adversely affect the Company's operations,  products,
profitability or business prospects.

      Proposed  Health Care Reform - If proposed  federal and state  health care
reform initiatives are enacted,  the payments for and the availability of health
care  services will likely be affected.  Aspects of certain of these  proposals,
such as reductions in Medicare and Medicaid payments, could adversely affect the
Company. Other aspects, such as universal health insurance coverage and coverage
of certain previously  uncovered  services,  could have a positive impact on the
Company's  business.  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 115 contracted  physician  advisors,
the Company employed 8 full-time physicians as of October 31, 1997. 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, 1997, in addition to its physicians, the Company employed a
total of 137  full-time  employees.  Of this  total,  one  hundred and ten (110)
employees are engaged in clinical  activities  including on-site nurse reviewers
and contract  administrators.  The twenty-seven (27) remaining employees include
executives,  administrative support, finance,  marketing,  training & education,
information systems and human resources  personnel.  The Company believes it has


                                       11
<PAGE>

satisfactory relations with it employees.

Item 2.  Description of Properties

      The Company's executive offices and operations,  comprising  approximately
28,000 square feet of office space,  are located in the  Metropolitan  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 its present facilities will
be adequate for its short-term needs and moderate expansion.

      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
such customers.

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

Item 3.  Legal Proceedings

Potential Uninsured Exposure to Litigation:

      On or about March 22, 1996, an action entitled Francis X. Bodino v. 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 BCBSNJ,  specifically  with respect to coverage for heart  transplantation.
The complaint also alleges that  representations  made on behalf of BCBSNJ by an
employee of CHCM led Mr. Bodino's surgeon to believe that contractually excluded
heart  transplant  coverage was  available.  The complaint  demands a variety of
money  damages,  as well as  punitive  damages,  against  both  defendants.  The
complaint  also  contains a claim for treble  damages and counsel fees under the
New Jersey Consumer Fraud Act.  BCBSNJ is presently  defending the Bodino Action
on behalf of itself and CHCM,  and has denied  liability in all respects and has
specifically  denied  that the policy  purchased  by Mr.  Bodino  covered  heart
transplantation  or that any  misrepresentations  or fraud occurred.  BCBSNJ and
CHCM have filed a motion for summary  judgment,  which remains pending as to all
claims and is subject to further discovery.  The Company,  based upon the advice
of its counsel,  has insufficient  information,  at present,  to evaluate CHCM's
potential exposure, if any, in this litigation.

     At the  time  of the  events  underlying  the  Bodino  Action,  CHCM  was a
subsidiary  of BCBSNJ and had been  engaged by the  Company,  through  CAHS,  to
provide certain staff and assistance to CAHS in support of CAHS's  obligation to
provide  specified  services for BCBSNJ,  all in accordance with the terms of an
Interim Services Agreement dated as of April 1, 1995 by and among BCBSNJ,  CHCM,
the  Company  and CAHS (the  "Interim  Services  Agreement").  By  letter  dated


                                       12
<PAGE>

February 15, 1996, counsel for Mr. Bodino gave written notice to CHCM contesting
the denial of coverage and threatening  litigation  against CHCM and BCBSNJ. The
Company  and CAHS  purchased  CHCM on  February  22,  1996.  The Company did not
maintain  insurance  coverage  that would cover  claims  against  BCBSNJ or CHCM
arising from events occurring prior to February 22, 1996, which might constitute
a breach under the Interim Services Agreement.  The Company has been informed by
BCBSNJ  that  BCBSNJ has  notified  its carrier of the claim and the carrier has
advised  BCBSNJ that certain  policy  exclusions  may be  applicable to preclude
coverage for the claimed damages, either in whole or in part. BCBSNJ has further
asserted that it does not believe any such exclusions are applicable and that it
has furnished additional  information to the carrier in support of its position.
The  Company,  based  upon the  advice  of  counsel,  is not  presently  able to
determine  whether the Bodino  Action might result in any loss to the Company or
CHCM and, if so, whether any such loss would be material.

Termination of Employment:

      A  former  Medical  Director  of CAHS has  asserted  a claim  against  the
Company.  The former  Medical  Director was employed from September 1995 through
May 1996 when he voluntarily  resigned,  allegedly due to a change of control of
the  Company  in  February  1996.  He  contends  that he is  entitled  to: (i) a
severance  payment equal to one year annual base  compensation  ($190,000);  and
(ii) vesting in 75,000  qualified  stock  options at a strike price of $1.25 per
share.  The  former  Medical  Director  bases his claim on an  executed  written
agreement drafted by a placement firm, which  memorializes some, but not all, of
the terms and conditions of his  employment.  The Company  intends to vigorously
contest this matter on the grounds that the former  Medical  Director (i) is not
entitled to severance;  and (ii) has no entitlement to stock options as the plan
was never  approved by the  shareholders.  The former Medical  Director  alleges
claims of breach of contract and promissory estoppel; an action has not yet been
commenced  in any  court.  The  parties  have  agreed  to submit  this  claim to
arbitration before the American Arbitration Association in an effort to amicably
resolve  this matter  prior to  litigation.  At this time,  the  Company  cannot
predict the likelihood of a favorable or unfavorable outcome.

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.  


                                       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, 1997.


                                       14
<PAGE>

                                    PART II

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

(a)   Market  Information:  Since the Company's  effective  registration date of
      June  12,   1995,   the   Company's   Common   Stock  has  traded  in  the
      over-the-counter market and is currently quoted on the Electronic Bulletin
      Board  under the  symbol  CADV.  The  following  table  shows the range of
      closing  bid prices  for each  quarter of the  Company's  two most  recent
      fiscal years.  Where applicable,  prices have been adjusted to give effect
      to a 1-for-6  reverse stock split which was effective  September 30, 1996.
      The prices reflect inter-dealer prices, without retail mark-up,  mark-down
      or commission, and may not represent actual transactions.

                                  1997                          1996
                             ---------------              ---------------
      Quarter Ended          High       Low               High        Low
                             ----       ---               ----        ---
      January 31             $.47       $.31              $2.52      $0.96
      April 30               $.56       $.31              $2.34      $1.14
      July 31                $.38       $.31              $1.02      $0.06
      October 31             $.34       $.25              $1.02      $0.38

(b)   Holders:  As of December 10, 1997, there were approximately  2,868 holders
      of record  of the  Company's  common  stock.  No  shares of the  Company's
      preferred stock have been issued.  The Company believes that, in addition,
      there are a number of beneficial  owners of the Company,  whose shares are
      held in "Street Name."

(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.


                                       15
<PAGE>

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

Overview

      Certain  statements  in this Form  10KSB may  constitute  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of  1995,  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. Certain risk factors exist, such as
the  Company's  inability to prevent its  customers  from  terminating  existing
contracts by invoking standard  termination  clauses,  as well as other inherent
contractual risks, which are beyond the control of the Company.

      For fiscal years prior to 1997,  the Company has  experienced  significant
operating  losses on a consolidated  basis, and has a working capital deficit at
October 31, 1997 of approximately $2,487,000, a capital deficiency of $1,976,000
and an accumulated deficit of $21,690,000 since its inception.  By continuing to
provide  high  quality  health care cost  containment  services to its  existing
customer  base of four BCBS plans and pursuant to the Joint  Services  Agreement
with Allied Health Group,  Inc. (see "General  Developments  of the  Business"),
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 deficit as of October 31, 1997 decreased by
approximately  $1,704,000 from the October 31, 1996 deficit amount,  as a result
of the  successful  re-negotiation  of two (2) of its contracts  with BCBSNJ and
BCBSRI,  as well as the execution of other agreements more fully explained below
under the  caption of  "General  Developments  of the  Business".  Further,  the
Company  realized  net  income  of  approximately  $7,000  or $.00 per  share on
revenues  of  approximately  $14,077,000  for the year ended  October  31,  1997
compared with a net loss of  approximately  ($5,335,000)  or ($.08) per share on
revenues of  approximately  $11,792,000 for the ended October 31, 1996.  Results
for October 31, 1996 included a charge to operations of approximately $1,173,000
for  the  write-down  of the  service  agreement  with  BCBSNJ  which  arose  in
connection with the acquisition of Contemporary  Healthcare Management,  Inc. in
February 1996 (See Notes to the Financial Statements "Change in Control"), and a
charge of approximately  $213,000  relating to the write-off of certain software
development costs.


                                       16
<PAGE>

Reorganization

      As a result of the series of  transactions  consummated  by the Company in
February  1996 which  resulted  in a change in control  of the  Company  and the
acquisition of CHCM (see "Notes to Financial Statements-Change in Control"). 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 its 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 intends to pursue  alternatives to its internal  product and service
development  efforts by entering into strategic  alliances and joint ventures as
well as through acquisitions.

Recent Developments of the Business

          New Contract With New York Care Plus Insurance Company, Inc:

      Effective  January 1, 1998 the Company  entered  into a one year  services
agreement with New York Care Plus Insurance Company, Inc., 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 and  incorporated  herein by
reference to exhibit 10.20, the Company,through one or more of its subsidiaries,
will provide both medical  management  performance  support and  specialty  care
management   performance  support  services  to  New  York  Care  Plus  for  its
approximately 650,000 indemnity and HMO subscribers.  The Service Agreement, the
initial term of which expires on December 31, 1998,  provides for the payment of
fixed compensation.

      During 1997, the Company successfully  renegotiated  contracts with two of
its  major  customers  and  executed  several  other  agreements  as more  fully
explained below.

General Developments of the Business during Fiscal Year 1997:

            Blue Cross and Blue Shield of New Jersey, Inc.("BCBSNJ"):

      The Company  renegotiated  its  Services  Agreement  with BCBSNJ which was
attached as exhibit  10(b) to the  Company's  10-QSB for the quarter ended April
30, 1997 and is incorporated by reference herein. Under the terms of the revised
agreement,  the Company will continue to provide  specialized  cost  containment
services on behalf of BCBSNJ's indemnity and PPO subscribers. In accordance with
the restated services  agreement,  which expires on June 30, 2000 and supersedes
the original Services


                                       17
<PAGE>

Agreement  entered  into on  February  22,  1996,  the  Company  will  receive a
combination of fixed and  performance-based  compensation,  subject to the terms
of the  agreement.  Contemporaneously  with the  execution  of this  amended and
restated services  agreement,  the Company issued to BCBSNJ a promissory note in
the amount of $1,862,823 payable in equal monthly  installments of principal and
interest commencing October 1, 1998 through June 30, 2000 representing repayment
of cash received in excess of revenues earned from BCBSNJ during 1996. BCBSNJ is
a  principal  shareholder  of  CareAdvantage,  owning  approximately  50% of the
outstanding capital stock of the Company.

   Letter Agreement Between Medigroup of New Jersey, Inc., d/b/a HMO Blue, the
                     Company and Allied Health Group, Inc:

      Effective March 1, 1997 the Company has executed a letter  agreement among
itself,  Medigroup of New Jersey, Inc. (d/b/a HMO Blue) and Allied Health Group,
Inc.  ("Allied")  for the provision of certain  network  management  services to
Allied and HMO Blue which was attached as exhibit  10(e) to the  Company's  Form
10-QSB for the quarter  ended April 30, 1997 and is  incorporated  by  reference
herein. HMO Blue is a wholly-owned subsidiary of BCBSNJ. Under the terms of this
agreement,  the  Company  will  work  with  Allied  to  effect  cost  management
strategies  directed  toward  specialist  costs  in the  HMO.  The  term of this
agreement  runs from March 1, 1997 through  February 28, 2000 unless  terminated
earlier  pursuant to the terms of the agreement.  Effective  November 4,1997 the
Company  consented to the  assignment  by Allied of all of its rights under this
letter agreement to CMSF, Inc.

             Blue Cross and Blue Shield of Rhode Island ("BCBSRI"):

      The Company  completed  renegotiating  its 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.  Under the terms of
this agreement, effective January 1, 1997 through December 31, 1999, the Company
will provide utilization  management services to BCBSRI's indemnity subscribers.
The agreement  calls for a combination  of fixed fees with  additional  revenues
being recognized on a performance basis.

      Consulting Agreement Between Coordinated Health Partners, Inc., d/b/a
           "Blue Chip" and CareAdvantage Health Systems, Inc ("CAHS"):

      CAHS entered into a consulting agreement with Coordinated Health Partners,
Inc.  ("BlueCHiP"),  a Rhode Island health  maintenance  organization  which was
attached as exhibit  10(d) to the  Company's  Form 10-QSB for the quarter  ended
April 30, 1997 and is incorporated by reference herein. CAHS has been engaged to
provide various utilization review services including  prospective,  concurrent,
and  retrospective  requests for covered  services  for purposes of  determining
whether such services are  medically  appropriate.  Additionally,  the agreement
provides  that  CAHS  will  assist  in the  education  and  training  of  claims
administration and claims adjudication of BlueCHiP personnel.


                                       18
<PAGE>

 Joint Services Agreement among Allied Health Group, Inc., CareAdvantage Health
                        Systems, Inc., and the Company:

      The Company executed a three-year agreement with Allied which was attached
as exhibit  10(c) to the  Company's  Form 10-QSB for the quarter ended April 30,
1997  and is  incorporated  by  reference  herein,  for the  joint  delivery  of
specialized  health  care cost  containment  services  in the form of  physician
management of specialty networks. The terms of the agreement provide for a close
working  relationship  between the two  companies  in the Blue Cross Blue Shield
marketplace,  with the Company  retaining  rights to provide,  in the second and
third year of the agreement, certain services currently being provided by Allied
Health Group to current and future Blue Cross Blue Shield customers.  Currently,
the  Company  has not yet entered  into any  agreements  with any such BCBS plan
under this  agreement.  However,  the  Company  continues  to  explore  possible
relationships  with its existing and new BCBS customers.  Effective  November 4,
1997 the Company consented to the assignment by Allied,  all of its rights under
this agreement to CMSF, Inc.

       The Company Secures A Credit Facility In The Amount of $3 Million:

      The Company has obtained a  $3,000,000  credit  facility  with Summit Bank
pursuant     to    a    Credit     Agreement     which    was     attached    as
exhibits10(f),(f1),(f2),(f3),(f4)  to the Company's  Form 10-QSB for the quarter
ended  April 30,  1997 and is  incorporated  by  reference  herein.  This credit
facility is comprised of a $1,500,000 working capital line and a $1,500,000 term
loan.  This credit  facility is  guaranteed by BCBSNJ and is  collateralized  by
pledged U.S. agency securities of BCBSNJ.  BCBSNJ is a principal  shareholder of
CareAdvantage,  owning approximately 50% of the outstanding capital stock of the
Company at October 31, 1997. There is currently no outstanding balance under the
Summit Bank credit facility.


                                       19
<PAGE>

Results of Operations

Revenues:

                                                     Year Ended
                                    --------------------------------------------
                                              1997                  1996
                                    ---------------------     ------------------
                                       Amount     Percent     Amount     Percent
                                       ------     -------     ------     -------
Revenues from fixed
  fee arrangements                  $12,969,797     92%    $10,910,988     93%

Revenues from performance-
  based arrangements                    833,795      6%        355,169      3%

Consulting revenues                     273,045      2%        526,000      4%
                                    -----------    ---     -----------    ---

          Total revenues            $14,076,637    100%    $11,792,157    100%
                                    ===========    ===     ===========    ===

      Total revenues for the fiscal years ended October 31, 1997 and October 31,
1996 were approximately $14,077,000 and $11,792,000,  respectively. The increase
in the current year was primarily  attributable to the re-negotiation of two (2)
key  contracts  with  BCBSNJ  and  BCBSRI as well as the  execution  of a letter
agreement with Medigroup of New Jersey,  Inc. d/b/a "HMO Blue",  the Company and
Allied (see above "General  Developments  of the Business").  Additionally,  the
current  period was  positively  impacted  by the fact that the  Company  earned
excess  performance  revenues  from Blue Cross and Blue Shield of Vermont in the
approximate  amount of $285,000 as a result of the Company's  performance  bonus
for the contract year ended March 31, 1997.

      These incremental  revenues are largely offset by (i) loss of revenue from
a contract which was terminated by a customer and converted to a Fee-for-Service
agreement  during the fourth quarter of the prior fiscal year and (ii) decreased
revenue  from  one  of  the  Company's  major  customers  as  a  result  of  its
re-negotiation  of the contract which has resulted in decreased  performance fee
revenues being recognized for the year ended October 31, 1997. Additionally, the
Company  has  experienced  a  shift  in  its  revenue  mix  as a  result  of the
re-negotiation  of two major  contracts  leading to  increased  Fixed Fees being
recognized for the year ended October 31, 1997 of approximately  $2,000,000 over
the amount in the corresponding 1996 period.

      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, 1997 and October
31,  1996  were  approximately  $7,937,000  and  $9,585,000,  respectively.  The
decrease in the cost of services of  


                                       20
<PAGE>

approximately  $1,648,000  is largely due to  decreases  in  personnel  costs of
approximately  $557,000,  professional  and  consulting  costs of  approximately
$269,000,  information and communication costs of approximately $217,000, travel
costs of approximately  $104,000 and approximately  $297,000 in depreciation and
amortization allocations.

Operating expenses

Selling, general and administrative:

      Selling,  general and  administrative  costs  during the fiscal year ended
October 31, 1997 were  $5,278,000  compared to  $4,487,000  in the prior  fiscal
year. The increase in selling, general and administrative costs of approximately
$789,000  is  largely  due to  increases  in  personnel  costs of  approximately
$569,000  including  bonuses and severance  costs paid to two senior officers in
the approximate amounts of $300,000 and $100,000, respectively,  during the year
ended  October 31, 1997,  travel costs of  approximately  $60,000,  and facility
costs of approximately  $99,000.  Selling and marketing costs during the periods
presented were minimal.

      While  management has taken and intends to take additional steps to reduce
general and  administrative  costs, any future reductions in costs may be offset
to some  extent,  by  anticipated  increases in selling,  marketing  and service
development  costs.  There is no assurance,  however,  that  management  will be
successful  in reducing  general  and  administrative  costs by any  significant
amount.

Depreciation and amortization:

      Depreciation and amortization aggregated $1,033,000,  of which $549,000 is
included in cost of services  and  $1,208,000  of which  $846,000 is included in
cost of  services  for the  fiscal  years  ended  October  31,  1997  and  1996,
respectively.  Depreciation and amortization for the year ended October 31, 1997
includes  amortization of intangible  assets other than the amount attributed to
the Services  Agreement of  approximately  $327,000,  amortization of the amount
attributed to the Services  Agreement arising in connection with the acquisition
of CHCM of $122,000 ( See "Notes to  Financial  Statements - Change in Control")
and depreciation of property and equipment of approximately $584,000.

Interest expense:

      Net  interest  expense  during the fiscal year ended  October 31, 1997 was
$371,000  compared  with net  interest  expense of  $582,000  for the year ended
October 31, 1996. The decrease in net interest expense of approximately $211,000
is related to the following  decreased  interest  costs of: (i) IBM master lease
agreement of approximately  $55,000 (ii) BCBSNJ Note of  approximately  $105,000
(iii) other interest costs of $3,000 (iv) a debt discount of $98,000 in the 1996
year for the value of the CW  Warrants  issued  in  connection  with the  bridge
financing by CW  Ventures,  offset by increased  interest  costs  related to the
following:  (i) CW Note of approximately $50,000 for a more detailed explanation
of the "CW Note", See "Notes to Financial Statements Change in Control".


                                       21
<PAGE>

      Pursuant to the terms of the CW Note issued in connection  with the change
in control,  interest  expense related to the CW Note will cease and any accrued
interest be contributed to capital should such debt instrument be exchanged into
shares of common stock of the Company pursuant to the terms of the CW Note.

      As of October 31, 1997 the Company has classified the CW Note as a current
liability  as it matures on June 30,  1998.  In the prior year,  the CW Note was
classified  as a current  liability  due to the fact that CHCM was in default of
the services agreement with BCBSNJ, and if BCBSNJ terminated this agreement, the
CW Note would have become payable upon demand.

Other costs:

      Other  costs of  $724,000  for the fiscal  year  ended  October  31,  1996
represent  costs  incurred in connection  with the change in control and related
reorganization  (see  "Reorganization"  above) that the Company does not deem as
recurring  operating  expenses,  however,  as discussed above,  certain expenses
within this component of the statement of operations may continue to be incurred
in the  future.  Expenses  reflected  in "Other  costs"  include  severance  and
separation  costs  related  to the  change  in  control  and  reorganization  of
approximately $367,000,  professional fees and other costs related to the change
in  control  of  approximately  $227,000,  and loss on  disposal  of  assets  of
$130,000.

Net Income from operations:

      Results of operations in the future are dependent on management's  ability
to increase  revenues  and reduce both direct  costs of services and general and
administrative  costs. While there can be no assurance that such efforts will be
successful,  management  believes that opportunities  exist to increase revenues
and reduce costs in areas that will not adversely  effect the  operations of the
Company.  Further,  based on the Company's  re-negotiation of two (2) of its key
contracts  and the  execution of other  agreements  as are more fully  explained
above under the  caption  "General  Developments  of the  Business",  management
anticipates that it will generate  positive  operating cash flows and results of
operations during fiscal year 1998.

Financial Condition

Liquidity and Capital Resources:

      At October 31,  1997,  the Company  had cash of  $1,038,000  and a working
capital  deficiency  of  approximately  $2,487,000.  At October  31,  1996,  the
Company's  cash balance was $1,167,000  and the working  capital  deficiency was
approximately  $4,191,000.   The  decrease  in  working  capital  deficiency  of
approximately  $1,704,000 is due to the Company's ability to generate cash flows
from  operations  during  the fiscal  year  ending  October  31,  1997,  and the
reclassification  of a note payable in the approximate amount of $1,863,000 as a
long-term liability,  which was previously classified as a short-term obligation
in the prior year, offset by capital expenditures.


                                       22
<PAGE>

      Net  cash   (used)/provided   from   operating   activities   amounted  to
approximately $1,117,000 and ($2,569,000) for the fiscal years ended October 31,
1997 and 1996, respectively.  This improvement is partially due to the increased
operating income generated during the fiscal year ended October 31, 1997.

      Net  cash   (used)/provided   from   investing   activities   amounted  to
approximately  ($623,000)  and $706,000  for the fiscal years ended  October 31,
1997 and 1996,  respectively.  This decrease of  approximately  ($1,329,000)  is
primarily due to the cash received from the acquisition of CHCM of approximately
($784,000)  during the fiscal year ended October 31, 1996 and increased  capital
expenditures   incurred   during  the  current  fiscal  year  of   approximately
($545,000).

      Net  cash   (used)/provided   from   financing   activities   amounted  to
approximately  ($623,000)  and $2,493,000 for the fiscal years ended October 31,
1997 and 1996,  respectively.  This decrease of  approximately  ($3,116,000)  is
primarily  due to the proceeds  received from the issuance of the CW Note in the
original  principal amount of $2,000,000 and the issuance of common stock with a
value of approximately $925,000 during the fiscal year ended October 31, 1996.

      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 the Summit Bank Credit  Agreement will provide  adequate  capital
resources to support the Company's anticipated cash needs for fiscal year ending
October 31, 1998.

Financing:

      Amounts payable pursuant to long-term financing arrangements as of October
31, 1997 were  approximately  $997,000  consisting of capital lease  obligations
pursuant  to a Master  Lease  Agreement  with  IBM  Credit  Corporation  for the
financing  of computer  and  telephone  equipment,  installation,  software  and
related system integration expenses.  The term of the Master Lease is four years
expiring  in 1999,  and  bears  interest  at 11.39%  per  annum.  The  Company's
obligations under this Master Lease arrangement are guaranteed by BCBSNJ.

      The Company has  provided  for  approximately  $1,863,000  to be repaid to
BCBSNJ due in equal  monthly  payments of principal  and interest  commencing on
October 1, 1998. The promissory note bears interest at a five-year U.S. treasury
yield,  adjusted quarterly,  and matures on June 30, 2000. While there can be no
assurances  that  future  operating  results  will be  sufficient  to fund  this
obligation of the Company,  such amounts are expected by management to be funded
through  operations.

      The  Company  has a  $2,000,000  principal  amount  8%  Exchangeable  Note
maturing  on June 30,  1998 due to CW  Ventures.  On such date,  CW  Ventures is
required to exchange  the note for shares of the  Company's  common stock absent
any events of default, as defined.

      In connection with management's  decision to adopt and implement a new and
more comprehensive  clinical software product,  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  software  and  computer  hardware  costs during the first and second
quarter of fiscal 1998 of approximately  $750,000. Such costs are expected to be
financed  with the future  operating  cash  flows of the  Company.  However  the
Company  may draw down the term loan from Summit  Bank of which  $1,500,000  was
available  at October 31,  1997.  The  remaining 


                                       23
<PAGE>

balance under the Summit Bank credit  facility is a $1,500,000  working  capital
revolver to be used for general working capital needs, resulting in an aggregate
available facility of $3,000,000 as of October 31, 1997.

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)              59       Director
David McDonnell (1) (2)         56       Director
Walter Channing, Jr. (2)        57       Director
Thomas P. Riley                 40       Director, President and Chief Executive
                                           Officer
Richard W. Freeman              50       Executive Vice President
Stephan D. Deutsch              54       Senior Vice President and National 
                                           Medical Director
David G. DeBoskey               32       Vice President, Finance and Accounting

-------------------------------------------------------------------------------
(1)   Member of Compensation Committee

(2)   Member of Audit Committee

      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 was 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.

      The  Company,  BCBSNJ and CW  Ventures  are  parties to the  Stockholders'
Agreement,  pursuant to which  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 BCBSNJ,  and there
shall be one non-employee  outside director who is acceptable to CW Ventures and
BCBSNJ. (See "Description of Business - Change in Control" 


                                       25
<PAGE>

above.) CW Ventures has designated  Barry Weinberg and Walter  Channing,  Jr. as
members of the  Board.  BCBSNJ has  designated  William J.  Marino and Robert J.
Pures as members of the Board.

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

      William J. Marino--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 Blue
Cross and Blue Shield of New Jersey,  Inc.  From January  1992 through  December
1993,  Senior Vice  President of Blue Cross and Blue Shield of New Jersey,  Inc.
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 Blue Cross and Blue Shield of New Jersey,  Inc.  From October 1985
through July 1995, Vice President - Finance and Treasurer of Blue Cross and Blue
Shield of New Jersey, Inc.

      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--Since  August  1996,  a  director,  President  and Chief
Executive Officer 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.

      Richard W. Freeman,  M.D.--Since  September 1997, Executive Vice President
of the Company. From April 1995 through September 1997, Senior Vice President of
CAHS,  Inc.(a  wholly-owned  subsidiary of the  Company).  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.

      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.


                                       26
<PAGE>

      David 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,  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 1997 its officers,  directors
and ten percent (10%)  beneficial  owners complied with all Section 16(a) filing
requirements.

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, 1997, to the individual  performing the function of Chief Executive  Officer
during such periods and each of the next four most highly compensated  executive
officers. None of the named individuals was employed by the Company prior to the
1995 fiscal year.


                                       27
<PAGE>

                           Summary Compensation Table
<TABLE>
<CAPTION>

                                                     Annual Compensation                          Long-Term Compensation
                                 --------------------------------------------------------------------------------------------

                                                                                  Other
                                   Year Ended                                    Annual          Number of      All Other
Name and Principal Position        October 31       Salary         Bonus     Compensation (3)     Options      Compensation
---------------------------        ----------       ------         -----     ----------------     -------      ------------

<S>                                   <C>            <C>          <C>            <C>              <C>           <C>        
Thomas P. Riley                       1997           $230,800     $300,000                                      $  4,115(4)
President  and Chief  Executive       1996           $127,500
Officer

Richard W. Freeman, M.D. (1)          1997           $254,000     $ 35,000       $25,000                        $  5,881(4)
Executive Vice President              1996           $245,000                                     250,000       $  2,498(4)
                                      1995           $106,346     $100,000

Stephan D. Deutsch, M.D. (2)          1997           $284,615     $ 69,231
Senior Vice President and Chief       1996           $259,615     $ 23,000                        250,000
Medical Director of CAHS              1995           $ 76,293     $ 38,461                         16,667
</TABLE>

-----------------------------------------------
(1)   Dr.  Freeman  joined the  Company on April 26,  1995 and is paid an annual
      salary of $257,000 under the terms of his employment agreement

(2)   Dr.  Deutsch  joined  the  Company  on July 1,  1995 and is paid an annual
      salary of $250,000 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.


                                       28
<PAGE>

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.

      A total of 1,933,334 options have been granted and 758,334 are outstanding
under  the  Stock  Plans.   Additional   non-plan  options  aggregate  1,094,585
outstanding  at October 31, 1997.  The table below  indicates  grants of options
that have been granted, to the named persons.

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

<TABLE>
<CAPTION>

                                                                         Number of               Value of
                                                                     Shares Underlying         Unexcerised
                                                                        Unexercised            In-the-Money
                                                                        Options at              Options at
                                    Shares to be                     October 31, 1997        October 31, 1997
                                    Acquired           Value            Exercisable/            Exercisable/
Name                                On Exercise(#)    Realized         Unexcerisable           Unexercisable
----                                --------------    --------         -------------           -------------
<S>                                   <C>                <C>          <C>                          <C>
Thomas P. Riley                             0            N/A          N/A                          N/A
Stephan D. Deutsch (2)                250,000             $0          111,112/138,888              $0/$0
Richard Freeman, M.D. (1)             250,000             $0          111,112/138,888              $0/$0
</TABLE>

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

Based upon the average  Bid and Asked  prices on the OTC  Bulletin  Board of the
Company's Common Stock on January 20, 1998.

(1)   Effective  July 24,  1996,  Dr.  Freeman was  awarded  options to purchase
      250,000 shares of Common Stock 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  (replacing  options to  purchase  16,667
      shares  previously  granted  to Dr.  Deutsch  during  fiscal  1995)  at an
      exercise price of $0.78 per share.


                                       29
<PAGE>

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
"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 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 person shall have twelve (12) months
from such 


                                       30
<PAGE>

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 person 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.

Employment  Contracts  and  Termination  of  Employment,  and  Change-in-Control
Arrangements

      Effective  as of June 11,  1997 the  Company  entered  into an  Employment
Agreement,  as  supplemented by a side agreement with CW and BCBSNJ of even date
therewith  with  Thomas P.  Riley,  its current  President  and Chief  Executive
Officer (the "Riley Employment Agreement"),  which 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 Riley Employment  Agreement provides for a
term  commencing  June 10, 1997 and ending on  December  31,  1998,  with annual
compensation  of $275,000  per annum.  The Riley  Employment  Agreement  further
provided  for  payment of a bonus in the  amount of  $100,000  if Mr.  Riley was
employed by the Company on June 30,  1997.  Accordingly,  the Company  paid this
bonus and has recorded a charge of $100,000 for the year ended October 31, 1997.
In addition,  the Riley Employment Agreement provides for a payment to Mr. Riley
in the event that on or prior to July 1, 1999,  (i) either BCBSNJ or CW Ventures
shall sell or otherwise dispose of 30% or more of the number of shares of common
stock of the  Company  beneficially  owned by it, or (ii) BCBSNJ and CW Ventures
shall sell or otherwise dispose of 50% or more of the aggregate number of shares
of common stock of the Company  beneficially owned by them,  providing in either
case that such  shares are sold or disposed of at a price of $.15 or greater per
share.  The  amount of such  payment  is  dependent  upon the price at which the
shares are sold or  disposed  of with a range of $150,000 if the shares are sold
or disposed of at $.15 per share up to a maximum  aggregate  payment of $550,000
if the shares are sold or disposed of at a price of $.25 or more.

Compensation of Directors:

      The Company executed a consultation agreement dated October 1, 1997, which
is attached hereto and incorporated herein by reference to exhibit 10.21 with an
independent  director of the Company  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 has made one payment under
this agreement as of October 31, 1997.


                                       31
<PAGE>

      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,
1997. 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.


                                       32
<PAGE>

                    Beneficial Ownership of Common Stock by
                      Certain Stockholders and Management

                                              Number of Shares      Percent of
Name                                        Beneficially Owned(1)   Ownership(2)
----                                        ---------------------   ------------

Blue Cross and Blue Shield of
   New Jersey, Inc. (3)(4)(5)............        37,617,420            50.57
CW Ventures II, L.P.(5)(6)(7)............        37,784,087            45.88
William J. Marino(3).....................               334                *
Robert J. Pures(3).......................
David J. McDonnell(9) ...................
Walter Channing,Jr.(5)(6)(7)(8)..........        37,784,087            45.88
Charles Hartman(5)(6)(7)(8)..............        37,784,087            45.88
Barry Weinberg(5)(6)(7)(8)...............        37,784,087            45.88
Thomas P. Riley(10)......................
Stephen Deutsch, M.D.(1)(2)(10) .........           112,345                *
Richard Freeman, M.D.(1)(2)(10) .........           111,786                *

Current Directors and Executive Officers 
as a Group (seven persons)...............        38,008,552            46.15

-------------------------------------------------------------
*     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.  Unless
      otherwise  indicated,  the options for shares of Common Stock indicated as
      owned by the persons named above are exercisable within 60 days.

(2)   The  percent  beneficially  owned by any person or group who held  options
      exercisable  within  60 days of  December  23,  1997 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.


                                       33
<PAGE>

(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  issuable  upon  conversion of
      certain outstanding  convertible notes,  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, II L.P. has sole voting and
      disposition power over shares owned by it.

(8)   Includes 29,817,423 shares directly owned by CW Ventures and 7,799,997 and
      166,667  shares of Common Stock  issuable upon exercise of the CW Note and
      the CW Warrants, respectively.  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 485-C Route 1 South,  Iselin,  New
      Jersey, 08830


                                       34
<PAGE>

Item 12.  Certain Relationships and Related Transactions

      The Company has entered  into a series of  transactions  with  BCBSNJ.  In
February,  1996, the Company  issued the 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 BCBSNJ
24,242,337 shares of common stock on February 27, 1997. For further  description
of the BCBSNJ Note, see "Description of Business - Change in Control." Effective
June 13, 1997 the Services Agreement was amended and restated which 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,  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
1998 fiscal year.  As of December 23, 1997,  BCBSNJ is the  beneficial  owner of
37,617,420 shares of Common Stock, constituting 50.57% of the outstanding common
stock at October 31, 1997. In addition,  two of BCBSNJ officers are directors of
the Company:  Robert Pures, a director of the Company, is Senior Vice President,
Chief Financial  Officer and Treasurer of BCBSNJ;  William Marino, a director of
the Company and CHCM, is also a director,  President and Chief Executive Officer
of BCBSNJ.

      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  provides for exchange  into  7,799,997
shares of common stock and the issuance of an  additional  25,914,222  shares of
common  stock  for  failure  to meet  certain  revenue  and  income  thresholds.
Accordingly,  in  conjunction  with this  obligation  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."  As of December  23,  1997,  CW
Ventures  is  the  beneficial  owner  of  37,784,087  shares  of  common  stock,
constituting 45.88% of the outstanding common stock,  assuming conversion of the
CW Note and 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 is also a General Partner of "CW Partners".

      Effective as of June 13, 1997, CW Ventures  granted to BCBSNJ an option to
purchase  from it  10,031,238  shares  of common  stock at $0.38 per share  (the
'BCBSNJ Option"), as provided in the Option Agreement dated as of June 13, 1997,
between CW Ventures and BCBSNJ (the "Option Agreement") which was included as an
exhibit to the  Company's  Form 10QSB 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 BCBSNJ Option on the applicable
date of calculation, BCBSNJ may elect to pay such exercise price by surrendering
for cancellation a portion of the BCBSNJ Option and receiving a number of shares
of common stock  according to a formula set forth in the Option  Agreement.  The
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 


                                       35
<PAGE>

in the Option  Agreement.  Because the Company did not achieve certain financial
goals,  5,015,619 shares of the BCBSNJ Option are  non-exercisable as of October
31, 1997. In addition, exercisability of the BCBSNJ Option may be accelerated in
certain circumstances,  all as more fully set forth in the Option Agreement. The
option  was  granted  by CW  Ventures  to BCBSNJ in  consideration  of  BCBSNJ's
revision of its  Services  Agreement  with the  Company,  entering  into a joint
services  agreement  between BCBSNJ,  the Company and an unrelated party and the
agreement to guaranty the Summit Bank Credit Agreement (see Note K in the "Notes
to the  Financial  Statements").  The  option has been  valued at $15,000  which
amount  will be  amortized  over the  three-year  term of the  amended  Services
Agreement.


                                       36
<PAGE>

Item 13.   Exhibits and Reports on Form 10-KSB

   (a)    Exhibits

Exhibit No. Description of Exhibit

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

3.11      Amended and Restated  Certificate  of  Incorporation  incorporated  by
          reference to CAI's Registration Statement dated September, 1996.

3.2       Registrant's  By-Laws  incorporated  by reference to exhibit 3.2 filed
          with CAI's Registration Statement on Form S-1 (File No. 33-89176).

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 CAI'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 CAI's  Annual  Report on Form 10-KSB for the year
          ended October 31, 1995.
 
10.2      Lease  Agreement  dated April 14,  1995  between  the  Registrant  and
          Metropolitan  Life  Insurance  Company  incorporated  by  reference to
          exhibit  10.13  filed with CAI'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 CAI's Annual
          Report on Form 10-KSB for the year ended October 31, 1995.

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 CAI'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 CAI's Annual Report on Form 10-KSB for the year ended October 31,
          1996.


                                       37
<PAGE>

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  CAI'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 CAI'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 CAI'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  CAI'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 CAI's Form 10-QSB for the quarter ended April
          30, 1997.

10.11     Agreement,  dated as of  January 1, 1997  between  Blue Cross and Blue
          Shield of Rhode  Island  ("BCBSRI")  and CAHS,  Inc.  incorporated  by
          reference  to exhibit  10(a)  filed  with  CAI'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  CAI'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 CAI'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 CAI'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 CAI'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 CAI'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 CAI's Form  10-QSB for the
          quarter ended April 30, 1997. 


                                       38
<PAGE>

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 CAI'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 CAI'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.

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.

10.31     Settlement and Release  Agreement  dated December 19, 1997 between the
          Company and Vince Achilarre.

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


                                       39
<PAGE>

27        Financial Data Schedule


                                       40
<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, 1998                         By: /s/Thomas Riley
                                                   -----------------------------
                                               Thomas Riley, President and 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, 1998                         By: /s/Thomas Riley
                                                   -----------------------------
                                               Thomas Riley, President and Chief
                                               Executive Officer, Director
                                               (Principal Executive Officer)

Date: January 29, 1998                         By: /s/David G. DeBoskey
                                                   -----------------------------
                                               David G. DeBoskey, Vice President
                                               Finance (Principal Financial and
                                               Accounting Officer)

Date: January 29, 1998                         By: /s/William J. Marino
                                                   -----------------------------
                                               William J. Marino, Director

Date: January 29, 1998                         By: /s/Robert J. Pures
                                                   -----------------------------
                                               Robert J. Pures, Director

Date: January 29, 1998                         By: /s/Barry Weinberg
                                                   -----------------------------
                                               Barry Weinberg, Director

Date: January 29, 1998                         By: /s/Walter Channing, Jr.
                                                   -----------------------------
                                               Walter Channing, Jr., Director

Date: January 29, 1998                         By: /s/David McDonnell
                                                   -----------------------------
                                               David McDonnell, Director

                                       41
<PAGE>

                               CAREADVANTAGE, INC.

                                     PART II

             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, 1997

                                                                            Page

Included in Part II:

Report of Independent Public Accountants                                     F-2

Consolidated Balance Sheets at October 31, 1997 and October 31, 1996         F-3

Consolidated Statements of Operations for the years ended October 31, 1997

and October 31, 1996                                                         F-4

Consolidated Statements of Changes in Capital Deficiency for the

years ended October 31, 1997 and October 31, 1996                            F-5

Consolidated Statements of Cash Flows for the years ended October 31, 1997

and October 31, 1996                                                         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.

<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,  1997  and  1996  and  the  related
consolidated statements of operations, 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, 1997 and 1996, 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
---------------------------------------
    Richard A. Eisner & Company, LLP

New York, New York
November 21, 1997


                                                                             F-2
<PAGE>

CAREADVANTAGE, INC.

Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                                     October 31,
                                                            ---------------------------
                                                                1997            1996
                                                            -----------     -----------
<S>                                                         <C>             <C>         
ASSETS
Current assets:
   Cash and equivalents                                     $  1,038,190    $  1,167,147
   Accounts receivable-stockholder                             1,047,171         833,333
   Accounts receivable-other                                     408,348          90,000
   Other current assets                                          254,688         129,829
                                                            ------------    ------------
        Total current assets                                   2,748,397       2,220,309

Property and equipment, at cost less accumulated
  depreciation (Note D)                                        1,502,712       1,480,746
Intangible assets (Note C)                                     1,649,126       2,080,769
Other assets                                                      80,984          79,184
                                                            ------------    ------------
                                                            $  5,981,219    $  5,861,008
                                                            ============    ============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
   Current portion of long-term debt (Note E)               $    574,778    $    623,472
   Note payable-stockholder (Note A)                           2,000,000       2,000,000
   Accounts payable                                              350,893         569,346
   Due to customer                                                               485,594
   Due to stockholder (Note F)                                    88,705       1,525,694
   Accrued payroll and related benefits                          562,994         512,505
   Accrued expenses and other current liabilities              1,012,691         694,996
   Deferred revenue, current (Note B[2])                         645,160
                                                            ------------    ------------
        Total current liabilities                              5,235,221       6,411,607

Capital lease obligations, less current portion (Note H)         421,813         996,591
Due to stockholder, less current portion (Note F)              1,774,118         435,912
Deferred revenue and other liabilities, less current
  portion (Note B[2])                                            525,979
                                                            ------------    ------------
        Total liabilities                                      7,957,131       7,844,110
                                                            ------------    ------------
Capital deficiency (Note H)
   Preferred stock - par value $.10 per share;
     authorized 10,000,000 shares; none issued
     and outstanding
   Common stock - par value $.01 per share, authorized
     90,000,000 shares; issued and outstanding 74,389,886
     and 24,233,327                                               74,390          24,233
   Additional capital                                         19,640,091      19,690,248
   Accumulated deficit                                       (21,690,393)    (21,697,583)
                                                            ------------    ------------
        Total capital deficiency                              (1,975,912)     (1,983,102)
                                                            ------------    ------------
                                                            $  5,981,219    $  5,861,008
                                                            ============    ============
</TABLE>

See notes to financial statements     


                                                                             F-3
<PAGE>

CAREADVANTAGE, INC.

Consolidated Statements of Operations

                                                       Year Ended October 31,
                                                    ---------------------------
                                                       1997           1996
                                                    -----------    ------------
Net revenues                                        $14,076,637    $ 11,792,157
Cost of services                                      7,936,704       9,584,991
                                                    -----------    ------------
Gross profit                                          6,139,933       2,207,166
                                                    -----------    ------------
Operating expenses:
   Selling general and administrative                 5,277,848       4,487,496
   Depreciation and amortization                        483,620         362,289
   Write-down of intangible assets (Note C)                           1,386,451
   Other costs                                                          724,032
                                                    -----------    ------------
      Total operating expenses                        5,761,468       6,960,268

                                                    -----------    ------------
Interest                                                371,275         581,808
                                                    -----------    ------------
Net income (loss)                                   $     7,190    $ (5,334,910)
                                                    ===========    ============
Net income (loss) per share of common stock
  (Note B[4])                                       $      --      $      (0.08)
                                                    ===========    ============
Weighted average number of common
   shares outstanding (Note B[4])                    74,389,886      65,076,602
                                                    ===========    ============

See notes to financial statements                         


                                                                             F-4
<PAGE>

CAREADVANTAGE, INC.

Consolidated Statements of Capital Deficiency

<TABLE>
<CAPTION>

                                                     Common Stock
                                              -------------------------
                                               Number of      Par Value       Additional      Accumulated        Capital
                                                Shares          Amount         Capital         (Deficit)        Deficiency
                                                ------          ------         -------         ---------        ----------
<S>                    <C>                    <C>            <C>             <C>             <C>              <C>          
Balance as of November 1, 1995                41,726,510     $ 41,726        $15,658,333     $(16,362,673)    $   (662,614)
One-for-six reverse stock split              (34,772,092)     (34,772)            34,772
                                              ----------     --------        -----------     ------------     ------------ 
                                               6,954,418        6,954         15,693,105                          (662,614)
Issuance of common stock and warrants in
   connection with financing transactions
   (Note A)                                    3,903,201        3,903          1,019,093                         1,022,996
Issuance of common stock to employee                 625            1                 (1)
Exchange of BCBSNJ Note for common
   stock (Note A)                             13,375,083       13,375          2,978,051                         2,991,426
Net (loss) for the year ended October 31,
   1996                                                                                        (5,334,910)      (5,334,910)
                                              ----------     --------        -----------     ------------     ------------ 
                                                                                               
Balance as of October 31, 1996                24,233,327       24,233         19,690,248      (21,697,583)      (1,983,102)
Issuance of common stock to BCBSNJ
   and CW Ventures (Notes A and G[1])         50,156,559       50,157            (50,157)
Net income for the year ended October 31,
   1997                                                                                             7,190            7,190
                                              ----------     --------        -----------     ------------     ------------ 
Balance as of October 31, 1997                74,389,886     $ 74,390        $19,640,091     $(21,690,393)    $ (1,975,912)
                                             ===========     ========        ===========     ============     ============
</TABLE>

See notes to financial statements                         


                                                                             F-5
<PAGE>

CAREADVANTAGE, INC.

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                           Year Ended October 31,
                                                                        ---------------------------
                                                                           1997            1996
                                                                        -----------    -----------
<S>                                                                     <C>            <C>         
Cash flows from operating activities:
   Net income (loss)                                                    $     7,190    $(5,334,910)
   Adjustments to reconcile net income (loss) to net cash provided by
      (used in) operating activities:
        Depreciation and amortization                                     1,033,001      1,208,215
        Write-down of intangible assets                                                  1,386,451
        Expense associated with issuance of warrants and other                             241,539
        Changes in:
           Due to/from customers/stockholders                            (1,116,563)     1,610,446
           Other assets                                                    (126,658)       (52,873)
           Accounts payable                                                (218,453)      (695,873)
           Accrued expenses and other liabilities                           417,307       (932,046)
           Deferred revenue                                               1,121,521
                                                                        -----------    -----------
              Net cash provided by (used in) operating activities         1,117,345     (2,569,051)
                                                                        -----------    -----------
Cash flows from investing activities:
   Capital expenditures                                                    (622,830)       (77,275)
   Acquisition of CHCM (cash proceeds-net of transaction costs)                            783,527
                                                                        -----------    -----------
              Net cash provided by (used in) investing activities          (622,830)       706,252
                                                                        -----------    -----------
Cash flows from financing activities:
   Principal payments under long-term debt                                 (623,472)      (431,525)
   Proceeds from issuance of note payable and CW warrants                                2,000,000
   Net proceeds from issuance of common stock                                              925,000
                                                                        -----------    -----------
              Net cash provided by (used in) financing activities          (623,472)     2,493,475
                                                                        -----------    -----------
Net increase (decrease) in cash                                            (128,957)       630,676
Cash and equivalents - beginning of year                                  1,167,147        536,471
                                                                        -----------    -----------
Cash and equivalents - end of year                                      $ 1,038,190    $ 1,167,147
                                                                        ===========    ===========
Supplemental disclosure of cash flow information:
   Interest paid                                                        $   151,740    $   280,518
</TABLE>

See notes to financial statements.


                                                                             F-6
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

NOTE A - CHANGE IN CONTROL

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 Blue Cross and Blue Shield of New
Jersey, Inc.  ("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 maturing on June 30, 1998 (the "CW Note").
On such date,  CW Ventures  is  required to exchange  the note for shares of the
Company's  common stock absent any events of default,  as defined.  The CW Note,
which is  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 so that 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 percent was subsequently  adjusted as discussed  below). In addition,
in  connection  with a  $150,000  bridge  financing,  the  Company  issued to CW
Ventures for nominal consideration five-year 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  BCBSNJ  subsidiary.  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 BCBSNJ  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 CAHS' $3,600,000  principal amount 8% Exchangeable Note maturing on June 30,
1998 (the "BCBSNJ Note")  collateralized  by substantially  all of the assets of
the Company and its  subsidiaries.  The 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 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 as discussed below. 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 service contract with BCBSNJ (see Note C[1]).

Pursuant  to the terms of the CW Note and the BCBSNJ  Note,  because the Company
failed to realize at least $15  million in net  revenues or  specified  earnings
before taxes for its fiscal year ended  October 31, 1996,  on February 27, 1997,
the Company issued 50,156,559  additional shares of common stock resulting in an
increase of both BCBSNJ and CW Ventures  equity to 45% on a fully diluted basis.
As a result, as of October 31, 1996, the Company adjusted the carrying amount of
the CHCM purchase of  $3,000,000,  equal to the  consideration  received from CW
Ventures for its 45% interest in the Company.

The  Company,  BCBSNJ and CW Ventures are parties to a  stockholders'  agreement
dated February 22, 1996 (the  "Stockholders'  Agreement") whereby 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.


                                                                             F-7
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

NOTE A - CHANGE IN CONTROL  (CONTINUED)

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  BCBSNJ  Note,  the  stockholders  of the
Company approved an amendment to the Company  Certificate of Incorporation 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 BCBSNJ Note, the BCBSNJ Note was automatically exchanged on September 30,
1996 into 13,375,083 shares of common stock of the Company.

The  following  unaudited pro forma  statement of operations  for the year ended
October 31, 1996,  gives effect to the purchase of CHCM as though such  purchase
occurred at November 1, 1995, the beginning of the fiscal year.

The pro forma adjustments  principally  include  adjustments to reflect revenue,
amortization  of the cost of the  service  agreement,  interest  expense  on the
BCBSNJ Note and other  expenses  assuming that the Company's  current  agreement
with BCBSNJ was effective as of November 1, 1995.

                                                               Year Ended
                                                               October 31,
                                                                   1996
                                                               -----------
      Net revenues                                             $11,668,000
      Net loss                                                  (5,342,000)
      Net loss per share of common stock                          $(.08)
      Weighted average number of common shares outstanding      65,076,602


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

[1]   Principles of consolidation:

      The consolidated financial statements include the accounts of CAI, and its
      wholly-owned subsidiary,  CAHS and CAHS's wholly-owned  subsidiary,  CHCM.
      Significant intercompany accounts and transactions have been eliminated in
      consolidation.  References  herein to the "Company" refer to CAI, CAHS and
      CHCM, collectively.

[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.


                                                                             F-8
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[2]   Revenue recognition:  (continued)

      (c)  Revenue under full risk  compensation  arrangements is recorded based
           upon the periodic monthly or quarterly interim payments,  adjusted on
           a quarterly basis to cost and utilization data supplied by the client
           to assess performance  against  established  targets.  Incentives (or
           reductions) based upon performance are recorded when such amounts can
           reasonably be determined.

      (d)  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.

      As  of  October  31,  1997  revenue   received  in  connection   with  the
      renegotiating of two to the Company's contracts during the year then ended
      has been deferred over the term of the respective contracts. Additionally,
      the Company has deferred a portion of fees advanced in  connection  with a
      side letter  agreement  dated March 1, 1997.  The  agreement  provides for
      additional compensation based on exceeding a certain level of performance.
      The Company will recognize these fees when earned.

[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 3 to 7 years.  Leasehold  improvements  are
      amortized  using the  straight-line  method  over the six year term of the
      related lease.  Intangible assets are amortized over their expected useful
      lives  of 5 to 7  years  on the  straight-line  method.  Depreciation  and
      amortization  included  in cost  of  services  amounted  to  $549,381  and
      $845,926 for the years ended October 31, 1997 and 1996, respectively.

[4]   Per share data:

      Net  income  (loss)  per share  has been  computed  based on the  weighted
      average  number of shares  outstanding  during the year adjusted for the 1
      for 6 reverse stock split effected in September  1996.  Additional  shares
      issued to BCBSNJ in  February  1997,  pursuant  to the terms of the BCBSNJ
      Note have been included as if outstanding from November 1, 1995, as CHCM's
      results  of  operations  have been  included  in the  Company's  financial
      statements since April 30, 1995.  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 Venture's  investment
      in the Company. Accordingly, net loss per share for the year ended October
      31,  1996 has been  retroactively  restated  from  the  amount  previously
      reported.  Common stock  equivalents and  approximately  7,800,000  shares
      issuable upon exchange of the CW Venture's  convertible note 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
      will be effective for the first quarter of the Company's 1998 fiscal year.
      The  adoption of SFAS 128 will not have any effect on the  computation  of
      net income (loss) per share of common stock.


                                                                             F-9
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[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 trade  receivables.  The Company currently markets its services
      to Blue Cross and Blue Shield  companies.  The risk  associated  with this
      concentration is believed by the Company to be limited due to management's
      understanding that such entities are well capitalized. 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:

      Three of the Company's customers accounted for approximately 77% (BCBSNJ),
      11% and 6% of net  revenues in 1997 and 66%  (BCBSNJ),  14% and 12% of net
      revenues  in 1996.  The loss of any one of these  customers  would  have a
      material adverse impact on the Company's business.

[10]  Stock-based compensation:

      In October 1995, the Financial Accounting Standards Board issued Statement
      of Financial  Accounting  Standards No. 123 ("SFAS 123"),  "Accounting for
      Stock-Based  Compensation".  SFAS 123  encourages,  but does not  require,
      companies   to  record   compensation   cost  for   stock-based   employee
      compensation  plans at fair value.  The Company has elected to continue to
      account for its stock-based  compensation  plans using the intrinsic value
      method prescribed by Accounting  Principles Board Opinion No. 25 ("APB No.
      25"),  "Accounting  for Stock  Issued to  Employees"  and disclose the pro
      forma  effects on net income and  earnings per share had the fair value of
      options been expensed.  Under the  provisions of APB No. 25,  compensation
      cost for stock  options is measured  as the excess,  if any, of the quoted
      market price of the  Company's  common stock at the date of the grant over
      the amount an employee must pay to acquire the stock. (See Note G).


                                                                            F-10
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

NOTE C - INTANGIBLE ASSETS

Intangible assets net of accumulated amortization consist of the following:

                                                        October 31,
                                               -----------------------------
                                                   1997             1996
                                               -----------        ----------
          Service agreement                     $  977,780        $1,100,000
          License fees                             400,000           600,000
          Software development cost                271,346           380,769
                                                ----------        ----------
                                                $1,649,126        $2,080,769
                                                ==========        ==========

[1]   Service agreement:

      This amount  represents the Company's  service agreement with BCBSNJ which
      was recorded upon the acquisition of CHCM (Note A).

      As a result of management's  determination that the Company's  obligations
      under the original Service  Agreement between CHCM and BCBSNJ could not be
      performed   on  a  profitable   basis,   the  Company  took  a  charge  of
      approximately  $1,173,000  during the year ended  October 31, 1996 for the
      write-down of the Service Agreement with BCBSNJ based on the present value
      of estimated  future net cash flows.  The agreement was amended  effective
      March 1997.

[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 $126,923 and $236,816 for the years ended October 31, 1997 and
      1996, respectively.

      Both the service  agreement  write-down and the software  development cost
      write-off  charges are reflected in "Write-down  of intangible  assets" on
      the  consolidated  statements of operations for the year ended October 31,
      1996.


                                                                            F-11
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

NOTE D - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                             October 31,
                                                     --------------------------
                                                         1997          1996
                                                     -----------    -----------
    Computer equipment                               $   706,886    $   360,776
    Furniture and fixtures                               458,815        458,815
    Office machines and telephone equipment              227,284          5,791
    Construction in progress                              34,906
    Leasehold improvements                               104,449        101,631
    Equipment under capital lease, consisting of:
       Computer equipment                                860,042        860,042
       Telephone equipment                               156,385        156,384
       Leasehold improvements                            308,953        308,953
                                                     -----------    -----------
                                                       2,857,720      2,252,392
    Less accumulated depreciation and amortization    (1,355,008)      (771,646)
                                                     -----------    -----------
                                                     $ 1,502,712    $ 1,480,746
                                                     ===========    ===========
 
Amortization  in connection  with  equipment  under capital  leases  amounted to
$326,119 and $361,185 during 1997 and 1996, respectively.


NOTE E - CAPITAL LEASE OBLIGATION

The  following is a schedule by years of future  minimum  lease  payments  under
capital leases together with the present value of the net minimum lease payments
as of October 31, 1997:

  Fiscal Year Ending
     October 31,
  ------------------
         1998                                                    $   659,388
         1999                                                        440,163
                                                                ------------
      Total minimum lease payments                                 1,099,551
      Less amount representing interest                              102,960
                                                                ------------
      Present value of future net minimum lease payments             996,591
      Less current portion of obligations under capital lease        574,778
                                                                ------------
      Capital lease obligations, net of current portion          $   421,813
                                                                 ===========

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


                                                                            F-12
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

NOTE F - DUE TO STOCKHOLDER

Amount due to stockholders  represents cash advanced under the original  service
agreement  with  BCBSNJ  in  excess  of  revenues  earned.  This  liability  was
classified as primarily  short term as of October 31, 1996 based on the terms of
the Company's  original  services  agreement with BCBSNJ. In connection with the
re-negotiation of the amended and restated services agreement with BCBSNJ, which
was  completed  in June  1997,  the  Company  issued a  promissory  note for the
remaining  amount due in the  approximate  amount of  $1,863,000  to 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 a five-year U.S. treasury yield, adjusted quarterly,  and matures on
June 30, 2000.

NOTE G - CAPITAL DEFICIENCY

[1]   Issuance of common stock:

      On January 5, 1997, the Company became contractually obligated to issue CW
      Ventures and BCBSNJ  25,914,222 and  24,242,337  shares of common stock of
      the  Company,  respectively,  pursuant to the terms of the CW Note and the
      BCBSNJ  Note.  Such shares  were issued by the Company to CW Ventures  and
      BCBSNJ on February 27,  1997.  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  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  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.  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.

      Prior to October 1995, the Company  granted  options to acquire  1,187,725
      shares of common stock to officers,  employees,  directors and consultants
      under  various  stock  option  agreements.  Options  granted  under  these
      agreements are  exercisable for a period of up to (10) ten years from date
      of grant at an exercise price as stated in the agreements.



                                                                            F-13
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

NOTE G - CAPITAL DEFICIENCY  (CONTINUED)

[3]   Stock option plans:  (continued)

      The following is a summary of stock option activity during the years ended
      October 31, 1997 and October 31, 1996:

<TABLE>
<CAPTION>
                                                         1997                               1996
                                               -------------------------          -------------------------
                                                                Weighted                           Weighted
                                                                Average                             Average
                                                                Exercise                           Exercise
                                               Shares            Price             Shares            Price
                                               ------            -----             ------            -----
      <S>                                      <C>                <C>             <C>                 <C>  
      Outstanding at beginning of period       3,027,919          $1.35           1,187,725           $2.47
      Granted                                                                     2,366,668            1.12
      Cancelled                               (1,175,000)          1.13            (526,474)           3.74
                                               ---------          -----           ---------           -----
      Outstanding at end of period             1,852,919          $1.50           3,027,919           $1.35
                                               =========          =====           =========           =====
      Exercisable at end of period             1,433,476          $1.74           1,539,032           $1.66
                                               =========          =====           =========           =====
</TABLE>

      The  weighted-average  fair value at the date of grant for options granted
      during the year ended October 31, 1996 was $.33 per option. 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 loss for the years  ended  October  31, 1997 and 1996 would have
      been approximately  ($6,000) and ($5,967,000) or $ - and ($.09) per share,
      respectively.

      In January 1998,  the Company  cancelled  433,334  options in exchange for
      $.02 for each option held.

[4]   Warrants:

      The Company  issued 166,667  warrants  issued to CW Ventures in connection
      with  the  change  in  control,  in  the  year  ended  October  31,  1995.
      Additionally, the Company issued warrants to purchase 50,000 shares of the
      Company's  common stock at the 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 to one of its vendors.  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-14
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

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,
                                                     --------------------------
                                                         1997          1996
                                                     -----------    -----------
Deferred tax assets:
   Net operating loss carryforwards                  $ 4,801,000    $ 5,000,000
   Settlements accrued but not paid                       63,000         97,000
   Deferred revenue                                      398,000
                                                     -----------    -----------
                                                     $ 5,262,000    $ 5,097,000
                                                     ===========    ===========
Deferred tax liabilities:
   Excess of book over tax cost basis of fixed
      assets and software costs                      $   524,000    $    94,000
                                                     ===========    ===========
Net deferred tax asset                               $ 4,738,000    $ 5,003,000
Valuation allowance                                   (4,738,000)    (5,003,000)
                                                     -----------    -----------
                                                     $         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 $14,122,000 at October 31, 1997, 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  $265,000 for the year ended October 31, 1997 and
increased  by  approximately  $1,603,000  for the year ended  October 31,  1996,
respectively.

The  difference  between the  federal  statutory  rate of 34% and the  Company's
effective  tax  rate  of 0% is due to  utilization  of the  net  operating  loss
carryforward  for the year ended October 31, 1997 and no  recognition  of future
tax benefit related to the operating loss for the year ended October 31, 1996.

NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

[1]   Potential uninsured exposure to litigation:

      On or about March 22, 1996, an action entitled Francis X. Bodino v. 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 BCBSNJ,  specifically with respect to
      coverage  for heart  transplantation.  The  complaint  also  alleges  that
      representations  made on behalf of BCBSNJ by an  employee  of CHCM led Mr.
      Bodino's surgeon to believe that  contractually  excluded heart transplant
      coverage was available.  The complaint demands a variety of money damages,
      as well as punitive damages,  against both defendants.  The complaint also
      contains a claim for treble  damages and counsel fees under the New Jersey
      Consumer  Fraud Act.  BCBSNJ is presently  defending  the Bodino Action on
      behalf of itself and CHCM,  and has denied  liability  in all respects and
      has  specifically  denied that the policy  purchased by Mr. Bodino covered
      heart  transplantation or that any  misrepresentations  or fraud occurred.
      BCBSNJ and CHCM have filed a motion for summary  judgment,  which  remains
      pending as to all claims and is subject to further discovery. The Company,
      based upon the advice of its counsel,  has  insufficient  information,  at
      present,  to  evaluate  CHCM's  potential   exposure,   if  any,  in  this
      litigation.


                                                                            F-15
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

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

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

      At the  time of the  events  underlying  the  Bodino  Action,  CHCM  was a
      subsidiary of BCBSNJ and had been engaged by the Company, through CAHS, to
      provide  certain  staff  and  assistance  to CAHS  in  support  of  CAHS's
      obligation  to provide  specified  services for BCBSNJ,  all in accordance
      with the terms of an Interim Services  Agreement dated as of April 1, 1995
      by and among BCBSNJ,  CHCM,  the Company and CAHS (the  "Interim  Services
      Agreement").  By letter dated  February 15, 1996,  counsel for Mr.  Bodino
      gave  written  notice  to CHCM  contesting  the  denial  of  coverage  and
      threatening  litigation  against  CHCM and  BCBSNJ.  The  Company and CAHS
      purchased  CHCM on  February  22,  1996.  The  Company  did  not  maintain
      insurance  coverage that would cover claims against BCBSNJ or CHCM arising
      from events occurring prior to February 22, 1996, which might constitute a
      breach under the Interim Services Agreement. The Company has been informed
      by BCBSNJ  that  BCBSNJ  has  notified  its  carrier  of the claim and the
      carrier  has  advised  BCBSNJ  that  certain  policy   exclusions  may  be
      applicable to preclude  coverage for the claimed damages,  either in whole
      or in part.  BCBSNJ has further asserted that it does not believe any such
      exclusions are applicable and that it has furnished additional information
      to the carrier in support of its  position.  The  Company,  based upon the
      advice of counsel,  is not presently able to determine  whether the Bodino
      Action might result in any loss to the Company or CHCM and, if so, whether
      any such loss would be material.

[2]   Termination of employment:

      A  former  Medical  Director  of CAHS has  asserted  a claim  against  the
      Company.  The former  Medical  Director was employed from  September  1995
      through May 1996 when he voluntarily  resigned,  allegedly due to a change
      of control  of the  Company  in  February  1996.  He  contends  that he is
      entitled  to:  (i) a  severance  payment  equal  to one year  annual  base
      compensation  ($190,000);  and (ii)  vesting  in  75,000  qualified  stock
      options at a strike price of $1.25 per share.  The former Medical Director
      bases his claim on an executed  written  agreement  drafted by a placement
      firm, which memorializes some, but not all, of the terms and conditions of
      his employment.  The Company intends to vigorously  contest this matter on
      the  grounds  that the former  Medical  Director  (i) is not  entitled  to
      severance;  and (ii) has no  entitlement  to stock options as the plan was
      never approved by the  shareholders.  The former Medical  Director alleges
      claims of breach of contract and  promissory  estoppel;  an action has not
      yet been  commenced  in any court.  The parties have agreed to submit this
      claim to  arbitration  before the American  Arbitration  Association in an
      effort to amicably resolve this matter prior to litigation.  At this time,
      the Company  cannot  predict the  likelihood of a favorable or unfavorable
      outcome.

[3]   Professional liability:

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


                                                                            F-16
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

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

[4]   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 $445,408 with annual escalation based on
      increase in real estate taxes and operating expenses.

      Rent expense for the years ended  October 31, 1997,  and 1996 was $434,324
      and $475,316, respectively.

[5]   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 after three years of continuous service and
      employees' contributions are fully vested immediately.

      The  Company's  matching  contribution  was  $92,283 and $55,836 in fiscal
      years 1997 and 1996, respectively.

      At a special  meeting of the Board of Directors on December 19, 1995,  the
      directors   approved   the   full   vesting   in  the   Company's   401(k)
      profit-sharing/savings plan for all employees of the Company as of closing
      date of the bridge financing of CW Ventures.

      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.  The Company  offers a
      wide  variety  of health  and  welfare  benefits  which the  employee  can
      purchase using flexible benefit credits.

[6]   Settlement agreement:

      Effective  April 4, 1996, a settlement  agreement  was reached  between an
      employee  and  CAHS  and  was  guaranteed  by the  Company.  The  employee
      voluntarily  resigned  from his  employment  effective  April 11, 1996. In
      connection therewith, CAHS and the Company agreed to payments settling all
      claims  aggregating  $592,500.  The charge was included in other costs for
      the year ended  October 31, 1995.  The Company paid all payments  required
      under the settlement agreement on October 29, 1996.

NOTE J - SHAREHOLDER OPTION AGREEMENT

Effective  as of June 13,  1997,  CW  Ventures  granted  to  BCBSNJ an option to
purchase  from it  10,031,238  shares  of common  stock at $0.38 per share  (the
'BCBSNJ Option"), as provided in the Option Agreement dated as of June 13, 1997,
between CW Ventures  and BCBSNJ  (the  "Option  Agreement").  If the fair market
value per share of common stock is greater than the exercise price of the BCBSNJ
Option  on the  applicable  date of  calculation,  BCBSNJ  may elect to pay such
exercise price by surrendering  for  cancellation a portion of the BCBSNJ Option
and  receiving  a number of shares of common  stock  according  to a formula set
forth in the Option Agreement. The 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. In addition, exercisability
of the BCBSNJ Option may be  accelerated in certain  circumstances,  all as more
fully set forth in the Option Agreement. The option was granted by CW Ventures


                                                                            F-17
<PAGE>

CAREADVANTAGE, INC.

Notes to Consolidated Financial Statements
October 31, 1997 and 1996

NOTE J - SHAREHOLDER OPTION AGREEMENT (CONTINUED)

to BCBSNJ in consideration of BCBSNJ's  revision of its Services  Agreement with
the Company,  entering  into a joint  services  agreement  between  BCBSNJ,  the
Company and an  unrelated  party and the  agreement  to guaranty the Summit Bank
Credit  Agreement  (see Note K).  The option  has been  valued at $15,000  which
amount  will be  amortized  over the  three-year  term of the  amended  Services
Agreement.

NOTE K - ESTABLISHMENT OF CREDIT FACILITY

In June 1997,  the Company  entered into an agreement  (the "Credit  Agreement")
with Summit Bank, and BCBSNJ, as guarantor.  The Credit Agreement provides for a
working  capital  facility  in the amount of  $1,500,000  and a term loan in the
amount of $1,500,000.  The Company's  obligations under the Credit Agreement are
guaranteed by BCBSNJ, a principal  stockholder of the Company,  according to the
Guaranty  Agreement and are secured by pledged U.S. agency  securities of BCBSNJ
according to the Pledge Agreement.  The working capital and term loan facilities
bear  interest  at a 30, 60, or 90-day Libo rate,  plus 45 and 50 basis  points,
respectively,  with an option to convert  to a  base/prime  rate.  The term loan
matures on June 30, 2000 and the working  capital  facility  matures in 360 days
(one  year).  As of  October  31,  1997  there  were no  amounts  due under this
agreement.


                                                                            F-18