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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

  X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
----- ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2000

      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-21447

                             ADVANCE PARADIGM, INC.
             (Exact name of registrant as specified in its charter)

                DELAWARE                                  75-2493381
    (State or other jurisdiction of        (I.R.S.  employer Identification No.)
     incorporation of organization)



 545 E. JOHN CARPENTER FREEWAY, SUITE 1570, IRVING, TX             75062
       (Address of principal executive offices)                  (Zip Code)

        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972)830-6199

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                       Name of each exchange
         Title of each class                           on which registered
         -------------------                           ---------------------
                None                                          None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          COMMON STOCK, $0.01 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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes [X] No [ ]

       Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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-K or any
amendment to this Form 10-K. |X|

       The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on May 31,
2000 as reported on the Nasdaq National Market, was approximately $284,751,492.

       As of May 31, 2000, Registrant had outstanding 21,520,572 shares of
Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Registrant's 2000 Annual Meeting of
Stockholders are incorporated by reference in Part III.


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ITEM 1.  BUSINESS

OVERVIEW

    Advance Paradigm, Inc. is a leading provider of health improvement services,
offering its clients a comprehensive array of pharmacy benefit management,
disease management, clinical trials and research, web-based marketing support
and other health-related programs. Our mission is to improve the quality of care
delivered to health plan members while helping health plan sponsors reduce
overall health benefit costs. We generate revenues from providing services to
two primary customer groups: health benefit plan sponsors and pharmaceutical
manufacturers. The broad range of health plan sponsors we market to includes
Blue Cross Blue Shield plans and other managed care organizations, third-party
administrators of health plans, insurance companies, government agencies,
employer groups and labor union-based trusts. We currently serve an estimated
27.5 million individuals enrolled in our customers' plans. We provide our
clinical research services primarily to pharmaceutical manufacturers. We also
work closely with pharmaceutical manufacturers in negotiating lower drug prices
for our health plan sponsor customers.

    In the year ended March 31, 2000 ("fiscal year 2000"), we further enhanced
our health benefit management services with an investment in Consumer Health
Interactive, a provider of web-based marketing and operational solutions for
health plan sponsors. During fiscal year 2000 we also completed the integration
of Foundation Health Pharmaceutical Services, a pharmacy benefit management
subsidiary of Foundation Health Systems that we acquired on March 31, 1999.

INDUSTRY BACKGROUND

    National health care expenditures are expected to total $2.2 trillion and
reach 16.2 percent of Gross Domestic Product by 2008, with growth in health
spending projected to average 1.8 percentage points above the growth rate of GDP
for the ten year period ending 2008, according to the Health Care Financing
administration.

    Prescription drug costs are expected to remain one of the fastest growing
components of health care costs. The Health Insurance Association of America, in
conjunction with the national BlueCross BlueShield Association, issued in April
2000 preliminary projections on pharmaceutical spending. Based on expenditure
data for the most frequently prescribed drugs from 1989 to 1998, the study
predicts that pharmaceutical spending will increase by more than 15 percent
annually over the next five years, from $105 billion in 1999 to $212 billion in
2004. The study predicts that $42.8 billion of the increase will be attributed
to drugs currently in development, and the remaining $64.2 billion will be
attributable to price increases and higher utilization of currently available
drugs.

    We believe a number of factors will contribute to this trend, including:

    o increased expenditures on new drug development;


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    o an increase in new drug introductions as a result of shorter approval
      cycles by the U.S. Food and Drug Administration;

    o relatively higher prices for new drugs;

    o an aging population;

    o increased direct-to-consumer advertising by pharmaceutical manufacturers
      including growing use of Internet as a promotional channel;

    o growing use of pharmaceuticals as first line of attack in disease
      treatment; and

    o increased availability of pharmacy benefits to health plan members.

    The concept of managed care originally developed in response to escalating
health care costs. Health plan sponsors hoped that by exercising more control
over health care delivery, they could control costs. Pharmacy benefit managers
emerged to offer health plan sponsors a more efficient and less costly means of
managing their members' drug use from both an economic (i.e., cost-savings) and
clinical quality of care perspective. In recent years, managed care has begun to
evolve from a short-term, cost driven model to a long-term, medical
outcomes-based model, where the overall cost and quality of patient care is
considered by the health plan sponsor. Health benefit managers like us have
emerged to assist health plan sponsors with the challenges of this new model of
member care.

OUR STRATEGY

    Our mission is to improve the quality of care delivered to health plan
members while helping plan sponsors reduce overall health benefit costs. Our
strategy is to develop and implement clinical programs that manage large patient
populations more efficiently and effectively than is possible for an individual
health plan. In order to implement our strategy, we plan to:

    o Increase our core pharmacy benefit management customer base. We believe
      that increased size will allow us to achieve economies of scale and pass
      lower costs on to our customers. We have successfully increased the number
      of individuals served by our programs from an estimated 5.2 million in
      1995 to an estimated 27.5 million on April 1, 2000. We plan to continue to
      grow this customer base by marketing our comprehensive service offerings
      to a broader range of health plan sponsors.

    o Expand our disease management services. We have two strategies for growing
      these services. First, we have the opportunity to cross-sell existing
      disease management services to our pharmacy benefit management customers.
      Second, we plan to enhance and expand our disease management programs,
      leveraging our clinical expertise and Internet capabilities.

    o Develop additional clinical research capabilities. We believe we have a
      leading clinical trial operation in Alzheimer's studies. We also conduct
      studies for several other central nervous


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        system disorders. We plan to expand our clinical research offerings by
        developing focused expertise in a select number of additional diseases.

    o   Pursue strategic acquisitions and alliances. We plan to selectively
        pursue acquisitions and alliances that either:

        o increase the size of our core pharmacy benefit management business;

        o enhance our disease management programs;

        o augment our clinical research capabilities; or

        o expand our Internet offerings.

    To date, we have successfully completed a number of acquisitions including
    Innovative Medical Research, Inc., Baumel-Eisner Neuromedical Institute,
    Inc. and Foundation Health Pharmaceutical Services. In addition, we acquired
    19 percent of Consumer Health Interactive, Inc., which provides web-based
    marketing and operational solutions for health plan sponsors.

    o   Develop our Internet capabilities. While we currently offer a basic set
        of services on the Internet, we plan to dramatically broaden these
        offerings and expand access to our Internet site. Our future Internet
        initiatives may offer expanded breadth and depth of medical content to
        our health plan sponsor customers for use on their Internet sites,
        additional on-line services for members and empower consumers by
        involving them more directly in their medical care.

HEALTH BENEFIT MANAGEMENT SERVICES

    PHARMACY BENEFIT MANAGEMENT. We offer a broad range of clinical, data and
mail services to our customers through our pharmacy benefit management programs.
Our pharmacy benefit management customer base included over 1,200 health plan
sponsors at March 31, 2000. In total, we managed over $6.0 billion in gross drug
expenditures and over 165 million drug claims during the fiscal year.

    CLINICAL SERVICES. Our clinical services professionals work closely with
health plan sponsors to design and administer pharmacy benefit plans that,
through the use of formularies and other techniques, promote clinically
appropriate drug usage while reducing drug costs. Formularies are lists of a
health plan's preferred pharmaceutical products. The use of a formulary can
reduce drug costs while preserving the same medical effect through substitution
of brand-name drugs with a cost effective generic alternative -- known as
generic substitution -- or substitution of a brand-name drug with another, lower
cost brand-name drug in the same therapeutic class -- known as therapeutic
substitution.

    We encourage formulary compliance by both patients and prescribing
physicians. Our customers' plans include features such as tiered copayments,
which require a health plan member to pay higher amounts for non-formulary drugs
in order to influence them to choose the drugs in


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the formulary. We attempt to influence physician prescribing patterns by
analyzing physicians' prescribing behavior relative to physician peer groups and
notifying them when their practices differ from peer group norms and medical
best practices. We also provide our own educational materials to plan
physicians, pharmacists and health plan sponsors.

    DATA SERVICES. Through our data services operations, we process the
prescription claims for health plan sponsors. We have increased the number of
claims processed from approximately 1.5 million claims in fiscal year 1995 to
over 81 million claims in fiscal year 2000.

    We administer a network of over 58,000 retail pharmacies that have agreed to
provide prescription drugs to individual members of our customers' health plans
at predetermined negotiated rates. Generally, we believe these rates are more
favorable than typical retail prices. The retail pharmacies in the network are
linked to us through our on-line claims processing system. Our on-line system
provides pharmacists with the following information:

    o verification of whether the individual is eligible for benefits;

    o the prescription benefits the individual's health plan has selected;

    o the individual's co-payment obligation;

    o the amount the pharmacy can expect to receive as reimbursement for its
      services;

    o an alert message to warn the pharmacist of possible interactions,
      including drug-drug, drug-food, drug-age, and drug-pregnancy interactions;
      and

    o whether the drug to be dispensed is included on the health plan's
      formulary.

    MAIL SERVICES. Currently, our mail pharmacy operations dispense over 140,000
prescriptions per month, typically in the form of a three month supply of
medications for chronic conditions. We believe that our mail pharmacy reduces
costs to health plan sponsors by buying drugs at volume discounts and dispensing
generic and therapeutic drug substitutes when appropriate. In addition, our
control over the dispensing process allows us to improve patient compliance
through methods such as calling members when they neglect to refill important
prescriptions.

    Our mail pharmacy operations are located in an approximately 38,000 square
foot building we own in Richardson, Texas. Our mail service dispensing process
is highly automated, featuring bar code and scanning technology to route and
track orders, computerized dispensing of many medications and computer-generated
mailing labels and invoices. To ensure accurate dispensing of prescriptions, our
mail service system is equipped with automated quality control features, and
each prescription is inspected by a registered pharmacist.

    While the vast majority of prescriptions are currently submitted by mail, we
are expanding our Internet capabilities to take advantage of the growth we
anticipate in this area. See "Internet strategy."


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    DISEASE MANAGEMENT. Our disease management programs are designed to help
health plan sponsors manage the cost and treatment of specific chronic diseases.
We believe our disease management programs help improve medical outcomes and
lower the cost of health care delivery for our customers through our interaction
with patients and physicians. These programs are designed to monitor the entire
contracted population and intervene when individuals demonstrate symptoms of a
disease or high risk indications.

    We currently market disease programs for cardiovascular secondary risk
reduction, asthma, diabetes, h. pylori, heart failure, depression and
hypertension as well as a program to promote drug therapy compliance in critical
therapeutic areas. Currently we have 8.6 million eligible members who are
enrolled in health plans participating in one or more of these programs. Our
disease management programs typically have five principal elements:

    o   Data integration. We compile and analyze medical, pharmacy and other
        relevant data for a particular group of health plan members.

    o   Case finding. We identify patients from this group who have the disease
        specified by the particular study and who we believe are at high risk
        for severe illness.

    o   Treatment assessment. We compare treatment received by identified
        patients with nationally accepted treatment guidelines.

    o   Targeted intervention. We intervene with identified patients by
        educating them about their disease and with physicians by providing
        information about treatment guidelines.

    o   Outcomes analysis. We measure the results of the intervention by
        tracking the identified patients' medical outcomes and monitoring
        ongoing compliance with their treatment programs.

    We differentiate our disease management programs from those of our
competitors with our outcomes assessment capabilities. We survey patients to
assess quality of life, quality of care and overall satisfaction with the
disease management program. We also assess the economic benefit of the program
to our customers. As recognition of our surveying expertise, we are certified to
administer HEDIS/CAHPS 2.OH member satisfaction surveys on behalf of health plan
sponsors. These surveys use a set of standardized measures that compare the
performance of health plans and allow consumers to draw comparisons across
health plans.

    DECISION SUPPORT SYSTEMS. We use our decision support system to monitor,
analyze and evaluate drug utilization for our health benefit management
customers. One of our decision-support systems, ApotheQuery(R), allows us to
identify cost-saving opportunities arising from the possible overuse or
inappropriate use of drugs, the use of high cost drugs and the use of drugs not
on the formulary. Our decision support systems have been developed using
commercially available technology and are not protected by any patents.

    We also integrate our customers' pharmacy claims with applicable medical and
laboratory claims and patient survey data, when available. This integrated
health care database complements


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the capabilities of ApotheQuery(R) by including data relating to diagnosis and
treatment of patients. This allows us and our customers to identify problem
areas for the health plan sponsor and implement timely clinical solutions. The
database further enhances our ability to complete medical outcomes studies and
to develop disease management programs.

    CLINICAL RESEARCH. The two principal components of our current clinical
research capabilities are clinical trials and outcomes studies. We developed
these capabilities through our acquisition of Innovative Medical Research, Inc.
("IMR") in February 1998 and Baumel-Eisner Neuromedical Institute, Inc. in
December 1998.

    Through our clinical research operations, we assist pharmaceutical
manufacturers in moving new drugs, or new uses for existing drugs, through the
laborious clinical trials process and into the market quickly and efficiently.
We provide an established vehicle for conducting studies that can document a
drug's economic and clinical benefits in a real world environment. In addition,
our surveying capabilities permit us to evaluate the effectiveness of disease
management strategies.

    We provide key functions in the clinical trials process including:

    o recruiting patients and physicians to participate in trials;

    o administering the trials as designed by the pharmaceutical manufacturers;
      and

    o measuring the patients' results.

    We use a call center and medically appropriate surveys to identify patients
eligible to participate in our clinical trials. This patient enrollment method
is designed to reduce drug development time, which permits sponsors of clinical
trials to introduce their products into the market faster and to maximize the
economic return for such products.

    Our current clinical trial initiatives are in the following areas:
Alzheimer's disease, analgesia and pain relief, migraine and tension headache,
mild cognitive impairment, major depressive orders, Parkinson's disease and
gastrointestinal motility.

    We also provide outcomes studies services to pharmaceutical manufacturers.
These services include:

    o conducting studies to further the understanding of the characteristics of
      diseases;

    o conducting studies to develop simple to use tools, such as questionnaires
      and decision trees, for diagnosing diseases;

    o developing measurements for monitoring patient medical outcomes;

    o determining how to best influence the health status of individuals;


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    o conducting surveys to evaluate physician knowledge and behavior in order
      to develop individualized educational materials for each physician; and

    o evaluating the direct and indirect costs of health care.

Our current outcomes studies initiatives are in the following areas: chronic
pain, dementia, impaired memory, urinary incontinence, irritable bowel syndrome,
asthma, vaccines, headache, osteoarthritis, gastrointestinal motility and
diabetes.

INTERNET STRATEGY

    During fiscal year 2000 we launched a major e-health portal,
BuildingBetterHealth.com. This internet-based offering includes our on-line
drugstore, AdvanceRx.com, which enables covered individuals to:

    o order refills of pharmaceuticals;

    o check the status of pharmacy orders;

    o locate network pharmacies; and

    o review formulary information.

    We expanded our on-line pharmacy's product offerings to include the ability
to order over-the-counter drugs, health and beauty products, vitamins and
similar products, encompassing approximately 12,000 different SKU's.

    More significantly, BuildingBetterHealth.com also enables our clients to
offer their members convenient access to medical and drug encyclopedias,
information about diseases, wellness, pregnancy and lifestyle, current news
articles about healthcare developments, and similar content. Through our
investment in Consumer Health Interactive and our BuildingBetterHealth platform,
we can provide our clients with a co-branded website or a completely customized,
private-label health-oriented website, with services ranging from site
development to pre- and post-launch marketing. Working with our clients, we
leverage the medical and drug data from their members' profiles to deliver
personalized, relevant health information and services. Our future Internet
initiatives may offer broader medical content to our health plan sponsor
customers for use on their Internet sites and empower consumers by involving
them more directly in their medical care via potential services such as:

    o disease-specific chat rooms and information;

    o patient and member surveys;

    o personalized refill reminders;

    o monitoring of patient drug use; and


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    o recruitment of patients and physicians for clinical trials.

SALES, MARKETING AND CUSTOMER SERVICE

    The sales process for health benefit management services usually lasts a
minimum of six to nine months, and sometimes can extend for a year or longer. We
initiate our sales process with our large customers at the most senior levels of
our company. A staff of 20 sales representatives with a local presence in
offices across the United States supports these senior level initiatives. We
also have proposal development and marketing groups, supported by our clinical
staff, that work with our team to prepare the analysis that supports our
person-to-person sales effort. With this team approach, we are able to work with
customers at multiple levels within their organizations and they have multiple
contacts within ours.

    Once we have signed up the customer for our services, we commit to provide
them with the highest level of customer support. For example, our benefits
design group works with the customers to design the pharmacy benefits that the
customers will provide to individuals in their plans. Once the plans are
established, each customer has a dedicated representative who acts as the
primary contact for the customer to call if there are any questions, concerns or
suggestions regarding their plans. This representative will also lead the effort
within our company to respond to customer requests, such as analyzing potential
formulary adjustments, performing data analysis and addressing member
eligibility issues. Finally, we commit to our customers that the individuals
enrolled in their plans will receive high quality customer service. To fulfill
this promise, we manage two advanced call centers with employees available to
answer incoming calls 24 hours a day, seven days a week. As of May 31, 2000, we
employ approximately 250 customer service representatives in these call centers.

CUSTOMERS

    A significant portion of our revenues result from contracts with customers.
These contracts typically provide for multi-year terms, with automatic 12-month
renewals unless either party terminates the contract by giving written notice
before the automatic renewal date. Some of our contracts are terminable by
either party on as little as 30 to 180 days notice. In fiscal year 2000, our top
five customers accounted for 59% of our revenues. One of our customers,
Foundation Health Systems, Inc. ("FHS"), accounted for approximately 38% of our
revenues in fiscal year 2000. No other customer accounted for over 10% of our
revenues in this period.

    Some of our major customers hold equity positions in our company in the form
of common stock and warrants, which fosters the development of long-term
strategic alliances. We believe this arrangement strengthens our ties to these
customers.

COMPETITION

    Many of our customers put their contracts out for competitive bidding prior
to renewal. We compete with a number of larger, national companies, including
Caremark Rx, Inc., Express Scripts, Inc., an affiliate of NYLIFE HealthCare
Management, Inc., Merck-Medco Managed


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Care, LLC, a subsidiary of Merck & Co., Inc., a pharmaceutical manufacturer, and
PCS Health Systems, Inc., a subsidiary of Rite-Aid Corporation, a national
pharmacy chain. These competitors are significantly larger than we are and
possess greater financial, marketing and other resources than we do. These
competitors may possess purchasing and other advantages over us that may allow
them to price competing services more aggressively than we can because of their
size or other aspects of their businesses.

    We believe that the primary competitive factors in the health benefit
management industry include:

    o independence from pharmaceutical manufacturers, retail pharmacies and
      health plan sponsors;

    o the quality, scope and costs of programs offered;

    o the size and financial strength of the company;

    o the ability to reduce customer costs by negotiating favorable rebates and
      volume discounts from pharmaceutical manufacturers;

    o the ability to use clinical strategies to improve patient outcomes and
      reduce costs; and

    o the ability to provide flexible, clinically oriented services to
      customers.

    We believe that all of our larger competitors offer comprehensive pharmacy
benefit management services and some form of disease management services. We
consider our principal competitive advantages to be our strong clinical
approach; our independence from pharmaceutical manufacturers, retail pharmacies
and health plan sponsors; and our strong managed care customer base, which
supports the development of health benefit management services.

GOVERNMENT REGULATION

    Various aspects of our businesses are governed by federal and state laws and
regulations and compliance is a significant operational requirement for our
company. We believe that we are in substantial compliance with all existing
legal requirements material to the operation of our business. However, the
application of complex standards to the detailed operation of our business
always creates areas of uncertainty. Moreover, regulation of the field is in a
state of flux. Numerous health care laws and regulations have been proposed at
the state and federal level, many of which could affect our business. We cannot
predict what additional federal or state legislation or regulatory initiatives
may be enacted in the future regarding health care, or the business of pharmacy
benefit management. It is possible that federal or state governments might
impose additional restrictions or adopt interpretations of existing laws that
could have a material adverse affect on our business or financial position.

    Among the federal and state laws and regulations that affect aspects of the
pharmacy benefit management business are the following:


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    FDA regulation. The U.S. Food and Drug Administration (the "FDA"), generally
has authority under the Federal Food, Drug and Cosmetic Act ("FDCA") to regulate
drug promotional materials that are disseminated "by or on behalf" of a
pharmaceutical manufacturer. In January 1998, the FDA issued a Draft Guidance
for Industry regarding the regulation of activities of pharmacy benefit managers
that are directly or indirectly controlled by pharmaceutical manufacturers. In
that draft guidance, the FDA purported to have the authority to hold
pharmaceutical manufacturers responsible for the promotional activities of
pharmacy benefit management companies, depending upon the nature and extent of
the relationship between the pharmaceutical manufacturer and the pharmacy
benefit management company. We and many other companies and associations
commented to the FDA in writing regarding its authority to regulate the
communications of pharmacy benefit management companies. In the fall of 1998,
FDA withdrew the draft guidance, and stated that it would reconsider the basis
for its issuance. To date, the FDA has not taken any further action on the
issue. Although it appears that the FDA has changed its position regarding its
ability to regulate the communications of pharmacy benefit management companies,
there is no assurance that it will not revisit the issue and seek to assert the
authority to regulate the communications of pharmacy benefit managers.

    FDA also regulates the conduct of clinical trials for drugs. In general, the
sponsor of the drug product which is being studied, or the manufacturer which
will have the right to market the drug product if it is approved by the FDA, has
the responsibility to comply with the laws and regulations that apply to the
conduct of the clinical trials. However, in providing services related to the
conduct of clinical trials, we may assume some or all of the sponsor's or
clinical investigator's obligations related to the study of the drug. For
example, in October 1998, the FDA announced that the agency would give
Institutional Review Boards, independent bodies that oversee the conduct of
clinical investigations, increased access to information pointing to violative
or potentially violative conduct on the part of the clinical investigators,
i.e., the physicians conducting the clinical trials.

    We believe that we meet all of our regulatory responsibilities with regard
to our involvement in clinical trials. However, the interpretation of the laws
and regulations relating to the conduct of clinical trials is complex and
sometimes subjective. We cannot assure that the FDA will not at some point
consider our compliance efforts to be inadequate and initiate administrative
enforcement actions against us. If we fail to successfully defend against an
administrative enforcement action, it could result in an administrative order
suspending, restricting or eliminating our ability to participate in the
clinical trial process, which would materially limit our business operations.
Moreover, some violations of the FDCA are punishable by civil and criminal
penalties against both the violating company and responsible individuals. If
warranted by the facts, we and our employees involved in the trials could face
civil and criminal penalties which include fines and imprisonment.

    Regulation of confidentiality of identifiable patient information.
Government regulation of the use of identifiable patient information may
increase in the near future. Numerous proposals have been circulated at the
state and federal level. The programs that we offer our health plan customers
are information based, and utilize aggregated and anonymous data, as well as
patient-


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specific information, depending upon the needs of the customer. Our risks in
this area arise from how Government restrictions on the use of patient
identifiable information could adversely affect our ability to conduct disease
management programs and outcomes studies, as well as the negative ramifications
on our business growth strategy based on these programs.

    Federal and state legislation has been proposed, and some state laws have
been enacted, to restrict the use and disclosure of identifiable medical
information. To our knowledge, no legislation has been enacted that would
prohibit our ability to conduct our current disease management or clinical
research programs. However, there is no assurance that this will not occur in
the future. In August of 1998, the Department of Health and Human Services
("HHS") issued proposed regulations, pursuant to the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"), that would set security
standards for safeguarding patient-specific information. The final rule has not
yet been published, but once in effect, it will impose an additional
administrative burden on entities that store, utilize and transmit patient
information, including pharmacy benefit managers.

    Moreover, in November of 1999, HHS proposed regulations pursuant to HIPAA
regarding the confidentiality of patient-specific information that is stored or
transmitted in electronic form. If finalized, the proposed regulations would
impose extensive restrictions on the way health care providers, health plans,
and health care information clearinghouses use and disclose individually
identifiable health information. HHS has received a large number of comments to
the proposed regulations and the timing and content of a final rule are not
known. When the regulations are finalized, there will be a two-year
implementation period within which industry must comply. Because of the complex
and controversial nature of the proposed regulations, we cannot at this time
predict what effect the final rule may have on us. There can be no assurance
that the restrictions and duties imposed will not have a material adverse effect
on our business, results of operations or financial condition.

    Anti-kickback laws. Subject to certain exceptions, federal law prohibits the
payment, offer, receipt or solicitation of any remuneration that is knowingly
and willfully intended to induce the referral of Medicare, Medicaid or other
federal health care program beneficiaries for the purchase, lease, ordering or
recommendation of the purchase, lease or ordering of items or services
reimbursable under federal health care programs. Several states also have
similar laws, known as "all payor" statutes, which apply anti-kickback
prohibitions beyond services for which federal health care program payment may
be made. Sanctions for violating these federal and state anti-kickback laws may
include criminal and civil sanctions and exclusion from participation in federal
health care programs. State anti-kickback laws vary, and have rarely been
addressed by courts. However, in several cases, courts have ruled that contracts
that violate anti-remuneration laws are void as a matter of public policy.

    The federal anti-kickback statute has been interpreted broadly by courts;
the Office of Inspector General ("OIG") within administrative tribunals. Courts
have ruled that a violation of the statute may occur even if only one of the
purposes of a payment arrangement is to induce patient referrals or purchases.
Among the practices that have been identified by the OIG as potentially improper
under the statute are "product conversion programs" in which benefits are given
by pharmaceutical manufacturers to pharmacists or physicians for changing a
prescription,


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or recommending or requesting such a change, from one drug to another. These
laws have been cited as a partial basis, along with the state consumer
protection laws discussed below, for investigations and multi-state settlements
relating to financial incentives provided by pharmaceutical manufacturers to
physicians or pharmacists in connection with such programs.

    Because of the federal statute's broad scope, federal regulations establish
some "safe harbors" from liability. Safe harbors exist for, among other things,
certain properly reported discounts received from vendors, certain investment
interests, certain properly disclosed payments made by vendors to group
purchasing organizations and certain managed care risk-sharing arrangements. A
practice that does not fall within a safe harbor is not necessarily unlawful,
but may be subject to scrutiny and challenge.

    We believe that we are in substantial compliance with the legal requirements
imposed by these laws and regulations, and we believe that there are material
differences between the drug-switching programs that have been highlighted by
the OIG and the programs we offer to our customers. To date, the anti-kickback
statutes have not been applied to pharmacy benefit managers with regard to their
negotiation of discounts, rebates and administrative fees from drug
manufacturers in connection with drug purchasing and formulary management
programs, or their contractual agreements with pharmacies that participate in
their networks, or their relationships with their health plan customers.
However, in June 1998, the Philadelphia United States Attorney's office
announced that it was investigating rebates and other payments made by
pharmaceutical manufacturers to pharmacy benefit managers, including whether
these payments may violate anti-remuneration laws. To date, no specific
prosecutions or settlements have been made public, but subpoenas have been
issued to a number of pharmacy benefit managers and pharmaceutical
manufacturers. We have not been served with a subpoena or otherwise been
contacted in connection with this investigation. We believe that our programs
are in compliance with the requirements imposed by the anti-kickback laws and
regulations. Nevertheless, we could be subject to scrutiny, investigation or
challenge under these laws and regulations, which could have a material adverse
effect upon us.

    OIG study. The OIG Office of Evaluation and Inspections, which seeks to
improve the effectiveness and efficiency of the Department of Health and Human
Services programs, issued a report on pharmacy benefit management arrangements
on April 15, 1997. The report was based primarily on a nationwide survey of HMOs
that use pharmacy benefit managers, and examined the benefits of, and concerns
raised by, the HMOs' relationships with pharmacy benefit managers.

    The report identified two major concerns, i.e., the potential for bias
resulting from alliances of pharmacy benefit managers and pharmaceutical
manufacturers and the lack of oversight by HMOs regarding the performance of
pharmacy benefit managers in delivering quality services to health plan members.
The report makes two main recommendations. First, the report recommended that
the Health Care Financing Administration ("HCFA") and state Medicaid programs
should include stronger oversight provisions in their risk contracts with HMOs
by requiring HMOs to review the performance of the pharmacy benefit managers
with which they contract. Second, the report recommended that the Health Care
Financing Administration ("HCFA"), the FDA and the Health Resources and Services
Administration, working with


                                       12
<PAGE>   14


outside organizations, should develop quality measures for pharmacy practices
that can be used in managed care settings.

    Managed care reform. Legislation is being debated on both the federal and
state level, and has been enacted in some states, aimed at improving the quality
of care provided to individuals enrolled in managed care plans. Some of these
initiatives would, among other things, require that health plan members have
greater access to drugs not included on a plan's formulary and give health plan
members the right to sue their health plans for malpractice when they have been
denied care. The scope of the managed care reform proposals under consideration
by Congress and state legislatures and enacted by states to date vary greatly,
and the extent to which future legislation may be enacted is uncertain. However,
these initiatives could greatly impact the managed care and pharmaceutical
industries and, therefore, could have a material impact on our business.

    Direct regulation of pharmacy benefit managers. To our knowledge, no state
has passed legislation that directly regulates pharmacy benefit managers in a
comprehensive manner. A number of states, including California, New Jersey,
Colorado, Texas and Virginia, have had such legislation introduced. If laws
imposing comprehensive regulation on pharmacy benefit managers were enacted in a
state where a significant portion of our business is located, they could
adversely affect our business and operations.

    ERISA regulation. We have agreements to provide pharmacy benefit management
services to a number of self-funded corporate health plans. These plans are
subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), which
regulates employee pension and health benefit plans. We believe that our
activities are sufficiently limited that we do not assume any of the plan
fiduciary responsibilities that would subject us to regulation under ERISA. Our
agreements with our self-funded corporate plan customers state that we are not
the fiduciary of the plan. However, the U.S. Department of Labor, which is the
agency that enforces ERISA, could assert that the fiduciary obligations imposed
by the statute apply to certain aspects of our operations. If we were deemed to
be a fiduciary, we could potentially be subject to claims over benefit denials.
In addition, we could also be subject to claims for breaching fiduciary duties
in connection with the services we provide to the plan.

    ERISA prohibits a "party in interest" to a plan from engaging in certain
types of transactions with the plan, including purchases, sales, and loans.
Violations are subject to civil and criminal liability. By providing services to
these plans, we are subject to the restrictions on a party in interest. We
believe that we are in substantial compliance with these provisions of ERISA.
However, there is no guarantee that the government would not challenge our
practices.

    Consumer protection laws. Most states have consumer protection laws that
have been the basis for investigations and multi-state settlements relating to
financial incentives provided by pharmaceutical manufacturers to retail
pharmacies in connection with drug switching programs. In addition, under a
settlement agreement entered into with 17 states on October 25, 1995,
Merck-Medco Managed Care, the pharmacy benefit management subsidiary of
pharmaceutical manufacturer Merck & Co., agreed to require pharmacists
affiliated with Merck-Medco Managed Care mail service pharmacies to disclose to
physicians and patients the financial relationships


                                       13
<PAGE>   15


between Merck & Co., Merck-Medco Managed Care and the mail service pharmacy when
such pharmacists contact physicians seeking to change a prescription from one
drug to another. We believe that our contractual relationships with
pharmaceutical manufacturers and retail pharmacies do not include the features
that were viewed by enforcement authorities as problematic in these settlement
agreements, and that our business practices are otherwise compliant with
consumer protection laws. However, we could be subject to scrutiny or challenge
under one or more of these laws.

    Network access legislation. A significant number of states have adopted some
form of legislation affecting our ability to limit access to pharmacy provider
networks or from removing network providers. Such legislation may require us,
and our health plan customers, to admit any retail pharmacy willing to meet the
plan's price and other terms for network participation; this legislation is
sometimes referred to as "any willing provider" legislation. To date, we have
not been materially affected by these statutes because we administer a large
network of over 58,000 retail pharmacies and will admit any licensed pharmacy
that meets our credentialing criteria, involving such matters as adequate
insurance coverage, minimum hours of operation, and the absence of disciplinary
actions by the relevant state agencies.

    Formulary restrictions. A number of states have begun to actively regulate
the management of prescription drug benefits. For example, some states have
passed laws mandating coverage for certain categories of drug products, such as
off-label uses of chemotherapeutic agents where those uses are recognized in
peer-reviewed medical journals or reference compendia. Other states have begun
to enact laws that regulate the establishment of formularies by insurers, HMOs
and other third party payors. These laws have included requirements on the
development, review and update of formularies, the role and composition of
pharmacy and therapeutics committees, availability of formulary listings, and a
process for allowing enrollees to obtain non-formulary drugs without additional
cost-sharing where they are medically necessary and the formulary drugs are
determined to be inappropriate. Increasing regulation of formularies by states
could significantly affect our ability to develop and administer formularies on
behalf of our insurer, HMO and other health plan customers.

    Legislation imposing plan design restrictions. Some states have legislation
that prohibits a health plan sponsor from implementing certain restrictive
design features. For example, some states provide that members of the plan may
not be required to use network providers, but must also be provided with
benefits even if they choose to use non-network providers. This legislation is
sometimes referred to as "freedom of choice" legislation. Other states mandate
coverage of certain benefits or conditions. This legislation does not generally
apply to us, but it may apply to some of our customers such as HMOs and
insurers. If similar legislation were to become widespread and broad in scope,
it could have the effect of limiting the economic benefits achievable through
health benefit management services.

    Licensure laws. Many states have licensure or registration laws governing
certain types of ancillary health care organizations, including preferred
provider organizations, third party administrators, and companies that provide
utilization review services. The scope of these laws differs significantly from
state to state, and the application of these laws to the activities of pharmacy
benefit managers is often unclear. We have registered under these laws in those
states


                                       14
<PAGE>   16


in which we have concluded, after discussion with the appropriate state agency,
that such registration is required.

    Legislation and regulation affecting drug prices. Some states have adopted
legislation or regulations providing that a pharmacy participating in the
state's Medicaid program must give the state the best price that the pharmacy
makes available to any third party plan. These requirements are sometimes
referred to as "most favored nation" payment systems. Other states have enacted
"unitary pricing" legislation, which mandates that all wholesale purchasers of
drugs within the state be given access to the same discounts and incentives.
Such legislation, if enacted in any state, may adversely affect our ability to
negotiate discounts from network pharmacies.

    Recently, the government has given increased attention to how drug
manufacturers develop pricing information, which in turn is used in setting
payments under the Medicare and Medicaid programs. One element common to most
payment formulas, Average Wholesale Price (AWP), has come under criticism as not
accurately reflecting prices actually charged and paid at the wholesale level.
The House Commerce Committee is currently investigating the use of AWP for
Medicaid reimbursement, and whether it has inflated drug expenditures by the
Medicaid and Medicare programs. In addition, the Clinton administration, along
with many states, has proposed changing the basis for calculating reimbursement
of certain drugs by the Medicaid and Medicare programs. Instead of AWP as
historically reported by First Data Bank, a company that specializes in the
compilation of drug pricing information, the Government would use a different
set of pricing data, also compiled by First Data Bank. These changes, and other
legislative or regulatory adjustments that may be made to the program for
reimbursement of drugs by Medicaid and Medicare, could affect our ability to
negotiate discounts with manufacturers. In addition it may affect our
relationships with pharmacies and with health plans. In some circumstances, they
might also impact the reimbursement that our mail-order pharmacy receives from
managed care organizations that contract with government health programs to
provide prescription drug benefits.

    Medicare prescription drug benefit. Medicare reimbursement and coverage of
prescription drugs could change significantly in the near future. Medicare
presently covers only a limited number of outpatient prescription drugs, but
legislative initiatives are being considered to expand Medicare coverage of
drugs, in some instances as part of a broad reform of the Medicare program. Some
proposals have included provisions for incorporating the services of pharmacy
benefit managers into the program to control costs. We cannot assess at this
stage whether such legislation will be approved or how it would address drug
coverage or costs. Enactment of legislation to expand Medicare drug coverage
could create broader markets for pharmacy benefit managers. Alternatively, it
could have an adverse impact upon our business.

    Regulation of financial risk plans. Fee-for-service prescription drug plans
are not generally subject to financial regulation by the states. However, if a
pharmacy benefit manager offers to provide prescription drug coverage on a
capitated basis or otherwise accepts material financial risk in providing the
benefit, laws in various states may regulate the plan. These laws may require
that the party at risk establish reserves or otherwise demonstrate financial
responsibility. Laws that may apply in such cases include insurance laws, HMO
laws or limited prepaid health service plan laws. Many of these state laws may
be preempted in whole or in part by ERISA,


                                       15
<PAGE>   17


which provides for comprehensive federal regulation of employee benefit plans.
However, the scope of ERISA preemption is uncertain and is subject to
conflicting court rulings. Other state laws may be invalid in whole or in part
as an unconstitutional attempt by a state to regulate interstate commerce, but
the outcome of challenges to these laws on this basis is uncertain. Accordingly,
compliance with state laws and regulations is a significant operational
requirement for us, and could limit our flexibility to adopt alternative and
novel fee arrangements with our customers.

    Mail pharmacy regulation. Our mail pharmacy operation distributes drugs
throughout the country. The fulfillment center is presently located in
Richardson, Texas, with an additional facility under construction in
Pennsylvania. These pharmacies and their staff are or will be licensed in each
state where our pharmacies are located. Many of the states into which we deliver
pharmaceuticals and controlled substances have laws and regulations that require
out-of-state mail service pharmacies to register with that state's board of
pharmacy, or similar regulatory body, in order to mail drugs into the state. We
have registered in every state, which, to our knowledge, requires such
registration. In addition, some states require out-of-state mail service
pharmacies to have a pharmacist at the mail order location who is licensed in
the state to which the drugs are shipped, as well as meeting other standards. To
the extent that such laws or regulations are applicable to us, we believe that
we are in compliance with them.

     Some of the drugs that we distribute are classified as controlled
substances, which are regulated by federal and state drug enforcement
authorities. We are licensed by both United States and Texas authorities to do
business as a pharmacy and distribute controlled substances. For our
Pennsylvania facility, we will obtain such licensing as is required from that
state.

    Other statutes and regulations also affect our mail pharmacy operations. The
Health Care Financing Administration requires mail order pharmacies to provide
toll-free numbers for patient counseling of Medicaid recipients residing out of
state. However, we do not currently receive reimbursements from any state
Medicaid programs. Congressional directives to provide useful information on
prescription drugs to consumers may involve participation by mail order
pharmacies in disseminating such information. Federal statutes and regulations
govern the labeling, packaging, advertising and adulteration of prescription
drugs and the dispensing of controlled substances. The Federal Trade Commission
requires mail order sellers of goods generally to engage in truthful
advertising, to stock a reasonable supply of the product to be sold, to fill
mail orders within thirty days, and to provide customers with refunds when
appropriate. The United States Postal Service has statutory authority to
restrict the transmission of drugs and medicines through the mail to a degree
that could have an adverse effect on our mail service operations. The United
States Postal Service historically has exercised this statutory authority only
with respect to controlled substances. Alternative means of delivery are
available to us.

EMPLOYEES

    On May 31, 2000, we had 1,370 employees. None of our employees are
represented by a labor union. In the opinion of management, our relationship
with our employees is good.


                                       16
<PAGE>   18


DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

     This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended. All statements other than statements of historical facts
included in this Form 10-K, including without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" regarding our financial position, our business
strategy and our management's plans and objectives for future operations, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to have been correct. The cautionary statements
made in this Form 10-K should be read as being applicable to all related
forward-looking statements wherever they appear in this Form 10-K. Our actual
results could differ materially from those discussed herein, and important
factors that could cause actual results to differ materially from our
expectations are disclosed under "Risk Factors", as well as elsewhere in this
Form 10-K. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by this section.

RISK FACTORS

IF WE LOSE KEY HEALTH PLAN SPONSOR CUSTOMERS, OUR BUSINESS COULD BE ADVERSELY
AFFECTED

    We depend on a limited number of large health plan sponsor customers for a
significant portion of our consolidated revenues. Our business, profitability
and growth prospects could be adversely affected if we were to lose one or more
of our significant customers. We could lose customers if we fail to win a
competitive bid at the time of contract renewal or if our customers are acquired
by companies who are not our customers. Our contracts with our customers
generally do not have terms of more than three years, and in some cases are
terminable by either party on as little as 30 to 180 days notice. Five customers
accounted for approximately 59% of our revenues in fiscal year 2000. During this
period, FHS accounted for approximately 38% of our consolidated revenues.

    We cannot be sure that revenues from new customers will offset the revenues
which may be lost from customers who terminate contracts because they are
acquired by, or acquire, companies which are not our customers. Over the past
several years, insurance companies, health maintenance organizations, or HMOs,
and managed care companies have experienced significant consolidation. Our
customers have been, and may continue to be, subject to consolidation pressures.
We may lose some customers as a result of acquisitions, which could have a
material adverse effect on our business, profitability and growth prospects.

    Many participants in the health care industry, including our customers, are
under severe financial pressures due to rising claims and costs. If the
financial condition of any of our significant customers deteriorates, which
could occur for many reasons including adverse changes in governmental or
private reimbursement programs, it could have an adverse effect on us.


                                       17
<PAGE>   19


IF WE CANNOT RESPOND ADEQUATELY TO COMPETITION IN OUR INDUSTRY, OUR
PROFITABILITY AND GROWTH PROSPECTS COULD BE REDUCED OR ELIMINATED

    The health benefit management industry is very competitive. If we don't
compete effectively, our profitability and growth prospects could be reduced or
eliminated. Our competitors include large, profitable and well-established
companies which have substantially greater financial, marketing and other
resources than we do. Some of our competitors in the pharmacy benefit management
business, such as Merck-Medco Managed Care, LLC and PCS Health Systems, Inc.,
are owned by large, profitable and well-established pharmaceutical manufacturers
or national drug store chains. Many of our customers put their contracts out for
competitive bidding prior to renewal. Our competitors may possess purchasing and
other advantages over us that may allow them to price competing services more
aggressively than we can because of their size or other aspects of their
business. We also expect to experience competition from new sources in the
future, such as Internet-based health care services companies. We cannot be sure
that we will continue to remain competitive, nor can we be sure that we will be
able to successfully market our health benefit management services to customers
at our current levels of profitability.

    Over the last several years, the competitive pressures described above have
caused health benefit management companies, including us, to reduce the prices
charged to customers for basic pharmacy benefit management services and share a
larger portion of the rebate revenues received from pharmaceutical manufacturers
with our customers. Our gross margin may decline as we continue to attract
larger customers, which typically have greater bargaining power than smaller
customers and may require us to sell our services at decreased prices.

IF WE ARE UNABLE TO OVERCOME THE PROBLEMS AND RISKS RELATED TO OUR ACQUISITION
AND ALLIANCE STRATEGY, OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS COULD
SUFFER

    Part of our growth strategy includes acquisitions and/or alliances involving
complementary services, technologies and businesses. If we are unable to
overcome the potential problems and inherent risks related to acquisitions and
alliances, our business, profitability and growth prospects could suffer. Our
ability to continue to expand successfully through acquisitions and alliances
depends on many factors, including our ability to identify acquisition/alliance
prospects and negotiate and close transactions. If we complete future
acquisitions or alliances:

    o we could fail to successfully integrate the operations, services and
      products of any acquired company;

    o we could fail to select the best alliance partners or fail to effectively
      plan and manage any alliance strategy;

    o our management's attention could be diverted from other business concerns;
      and

    o we could lose key employees of the acquired company or alliance business.

Many companies compete for acquisition and alliance opportunities in the health
benefit management industry. Some of our competitors are companies that have
significantly greater


                                       18
<PAGE>   20


financial and management resources than we do. This may reduce the likelihood
that we will be successful in completing acquisitions and alliances necessary to
the future success of our business.

IF OUR BUSINESS CONTINUES TO GROW RAPIDLY AND WE ARE UNABLE TO MANAGE THIS
GROWTH, OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS COULD SUFFER

    If we are unable to manage future expansion successfully or are unable to
hire and retain the personnel needed to manage our business successfully, then
our business, profitability and growth prospects could be adversely affected.
Our business has grown rapidly in the last five years, with total revenues
increasing from approximately $91.3 million in fiscal year 1995 to $2.0 billion
in fiscal year 2000. If we continue to grow rapidly, we will need to hire
additional senior and line management, increase our investment in employee
recruitment and training, and expand our information processing and financial
control systems. Our future operating results will depend in part on the ability
of our officers and other key employees to continue to expand, train and
effectively manage our employees as well as to improve our operations, customer
support and financial control systems. Our future growth will also depend on our
ability to access capital.

IF OUR QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, THE
PRICE OF OUR COMMON STOCK MAY BE VOLATILE

    Our revenues and operating results may in the future vary significantly from
quarter to quarter. If our quarterly results fluctuate, it may cause our stock
price to be volatile. We believe that a number of factors could cause these
fluctuations, including:

    o the size and timing of our contract signings;

    o the expiration or termination of our contracts with significant customers;

    o changes in our revenues due to our entry into different types of customer
      contracts;

    o the number of covered individuals in our customers' health plans;

    o costs associated with additional Internet services;

    o the timing of our new service and program announcements;

    o market acceptance of our services and new programs;

    o changes in our pricing policies or in our competitors' pricing policies;

    o the introduction by competitors of new services which make ours obsolete
      or less valuable;

    o changes in our operating expenses and our investment in infrastructure;


                                       19
<PAGE>   21


    o personnel changes; and

    o conditions in the health care industry and the economy in general.

    It can take a year or more to sell our services to a new customer. Our long
sales cycle adds to the unpredictability of our revenues, which could cause
substantial volatility in the price of our common stock. Our sales cycle varies
substantially from customer to customer because of a number of factors over
which we have little or no control. These factors include:

    o our customers' financial objectives or constraints;

    o the timing of contract bids and renewals;

    o changes in our customers' budgetary or purchasing priorities; and

    o potential downturns in general economic conditions.

    Because of the factors listed above, we believe that our quarterly revenues,
expenses and operating results may vary significantly in the future and that
period-to-period comparisons of our operating results are not necessarily
meaningful. You should not rely on the results of one quarter as an indication
of our future performance. It is also likely that in some future quarters, our
operating results will fall below our expectations or the expectations of market
analysts and investors. If we do not meet these expectations, the price of our
common stock may decline significantly.

IF THE PRICE OF OUR COMMON STOCK CONTINUES TO FLUCTUATE SIGNIFICANTLY,
INVESTMENTS COULD BE ADVERSELY AFFECTED

    The price of our common stock has ranged from a low of $11.13 to a high of
$34.75 in the year ended March 31, 2000, and has fluctuated as much as $16.25 in
five trading days. The quoted price of our common stock is subject to sudden and
material increases and decreases, and decreases could adversely affect
investments in our common stock. The quoted price of our common stock could
fluctuate widely in response to:

    o our quarterly operating results;

    o changes in earnings estimates by securities analysts;

    o changes in our business;

    o changes in the market's perception of the Internet component of our
      business;

    o changes in the businesses, earnings estimates or market perceptions of our
      competitors; and

    o changes in general market or economic conditions.


                                       20
<PAGE>   22


In addition, the stock market has experienced extreme price and volume
fluctuations in recent years that have significantly affected the quoted prices
of the securities of many companies. The changes often appear to occur without
regard to specific operating performance. The quoted price of our common stock
could increase or decrease based upon factors that have little or nothing to do
with our company and these fluctuations could materially reduce our quoted stock
price.

IF OUR INTERNET STRATEGY IS NOT SUCCESSFUL, OUR BUSINESS, PROFITABILITY AND
GROWTH PROSPECTS COULD BE ADVERSELY AFFECTED

    If our Internet strategy is not successful, our business, profitability and
growth prospects could be adversely affected. We believe it is important for us
to further develop our Internet presence, and we are currently reviewing
alternative strategies to broaden our Internet-based services. Historically, we
have experienced expense increases when introducing or expanding services. We
anticipate that we will need to expend significant resources to develop our
Internet services in the future, which may adversely impact our profitability.
In addition, the structure of our Internet business is evolving and could
involve joint ventures, acquisitions, strategic alliances or other collaborative
arrangements. We cannot be certain that:

    o we will be successful in developing Internet services;

    o we will select the best partners or will effectively plan and manage any
      alliance or acquisition;

    o the additional Internet services we develop will be profitable; or

    o anyone will demand Internet services in the future.

IF WE LOSE RELATIONSHIPS WITH ONE OR MORE KEY PHARMACEUTICAL MANUFACTURERS, OUR
BUSINESS, PROFITABILITY AND GROWTH PROSPECTS COULD BE ADVERSELY AFFECTED

    Approximately 15% of our consolidated revenues is attributable to our
arrangements with pharmaceutical manufacturers. They provide us with formulary
rebate payments based on drug use by health plan members, as well as fees for
other services. Although we pass a majority of these rebates on to our health
plan sponsor customers, we believe our business, profitability and growth
prospects may suffer if:

    o we lose relationships with one or more key pharmaceutical manufacturers;

    o we fail to meet volume-related conditions;

    o legal restrictions are imposed on the ability of pharmaceutical
      manufacturers to offer formulary rebates; or

    o pharmaceutical manufacturers choose not to offer formulary rebates.


                                       21
<PAGE>   23


Over the next few years, as patents expire covering many brand name drugs that
currently have substantial market share, generic products will be introduced
that may substantially reduce the market share of the brand name drugs.
Historically, manufacturers of generic drugs have not offered formulary rebates
on their drugs. If the use of newly-approved, brand name drugs added to our
formulary does not offset the use of brand name drugs whose patents expire, our
profitability could be reduced.

IF WE LOSE PHARMACY NETWORK AFFILIATIONS, OUR BUSINESS COULD BE ADVERSELY
AFFECTED

    Our contracts with retail pharmacies, which are non-exclusive, are generally
terminable by either party on relatively short notice. If one or more of the top
pharmacy chains elects to terminate its relationship with us, our members'
access to retail pharmacies and our business could be significantly impaired. In
addition, Rite-Aid Corporation owns one of our major pharmacy benefit manager
competitors, and other large retail pharmacy chains either own pharmacy benefit
managers today or could attempt to acquire a pharmacy benefit manager in the
future. Ownership of pharmacy benefit managers by retail pharmacy chains could
have material adverse effects on our relationships with these pharmacy chains
and on our business, profitability and growth prospects.

IF WE LOSE KEY EMPLOYEES ON WHOM WE DEPEND, IN PARTICULAR DAVID D. HALBERT, OUR
BUSINESS COULD BE ADVERSELY AFFECTED

    We believe that our continued success will depend to a significant extent
upon retaining the services of our senior management. Our business could be
materially and adversely affected if we were to lose the services of Mr. David
D. Halbert, who is our Chairman of the Board and Chief Executive Officer, or
other persons in senior management. Any of our senior management
could seek other employment at any time. If we cannot attract, motivate and
retain key employees, our business, profitability and growth prospects could
suffer.

IF THERE ARE CHANGES IN FEDERAL OR STATE FINANCING AND REGULATION OF THE HEALTH
CARE INDUSTRY, OUR CUSTOMERS MAY DELAY OR REDUCE THE PURCHASE OF OUR SERVICES

    During the past several years, the U.S. health care industry has been
subject to an increase in governmental regulation, on both the federal and state
level. We cannot predict what effect, if any, these proposals might have on our
business, profitability and growth prospects. Congress is currently considering
proposals to change Medicare drug coverage and reimbursement policies, and both
Congress and the states are considering legislation to increase governmental
regulation of managed care plans. In addition, there is new attention to the
pricing of prescription drug products, and how they are reimbursed by government
programs. Changes have been put forward that would alter the calculation of drug
prices for Federal programs, and likely reduce expenditures. These proposals may
increase governmental involvement in health care and health benefit management
services and otherwise change the way our customers do business. Health care
organizations may react to these proposals and the uncertainty surrounding them
by cutting back or delaying the purchase of our health benefit management
services.


                                       22
<PAGE>   24


IF LEGISLATIVE OR REGULATORY INITIATIVES RESTRICT OUR ABILITY TO USE PATIENT
IDENTIFIABLE MEDICAL INFORMATION, OUR CLINICAL PROGRAMS AND OUR BUSINESS GROWTH
STRATEGY BASED ON THESE SERVICES COULD BE ADVERSELY AFFECTED

    Through our disease management programs, we help our health plan sponsor
customers identify individuals who will most benefit from the programs.
Governmental restrictions on the use of patient identifiable information may
hamper our ability to conduct disease management programs and medical outcomes
studies and could adversely affect our business growth strategy based on these
programs. Federal and state legislation has been proposed, and some state laws
have been enacted, to restrict the use and disclosure of patient identifiable
medical information. To our knowledge, no legislation has been enacted that
would prohibit our ability to conduct our current disease management or clinical
research programs. However, in August of 1998, the Department of Health and
Human Services ("HHS") published proposed regulations setting standards for the
security of patient-specific information. In November of 1999, HHS published
proposed regulations on patient confidentiality, as required by the Health
Insurance Portability and Accountability Act of 1996. The proposed rule would
impose extensive restrictions on the way health care providers, health plans,
and health care information clearinghouses use and disclose individually
identifiable health information. The proposal has been controversial, and HHS
has received a large number of comments. The provisions of the final rule may
differ substantially from those that were proposed. The date at which a final
rule will be published is not known.

    If the final rule substantially limits our ability to use and disclose
individually-identifiable health care information, it could reduce or even
eliminate our ability to offer disease management programs and other
information-based products to our customers. Alternatively, if we can continue
to offer these programs, the burden of regulatory compliance may increase
significantly.

    Even without new legislation or regulations, individual health plan sponsor
customers could prohibit us from including their patients' medical information
in our various databases of medical data. They could also prohibit us from
offering services that involve the compilation of such information.

IF GOVERNMENT LAWS OR REGULATIONS RELATING TO THE FINANCIAL RELATIONSHIPS
BETWEEN PHARMACY BENEFIT MANAGERS AND PHARMACEUTICAL MANUFACTURERS ARE
INTERPRETED AND ENFORCED IN A MANNER ADVERSE TO OUR PHARMACY BENEFIT MANAGEMENT
AND DISEASE MANAGEMENT PROGRAMS, WE MAY BE SUBJECT TO ENFORCEMENT ACTIONS AND
OUR BUSINESS OPERATIONS COULD BE MATERIALLY LIMITED

    In January 1998, the U.S. Food and Drug Administration ("FDA"), issued a
Draft Guidance for Industry regarding the regulation of activities of pharmacy
benefit managers that are directly or indirectly controlled by pharmaceutical
manufacturers. In that draft guidance, the FDA purported to have the authority
to hold pharmaceutical manufacturers responsible for the promotional activities
of pharmacy benefit management companies, depending upon the nature and extent
of the relationship between the pharmaceutical manufacturer and the pharmacy
benefit management company. We and many other companies and associations
commented to the FDA in writing regarding its authority to regulate the
communications of pharmacy benefit management companies that are not owned by
pharmaceutical manufacturers. In the fall of 1998,


                                       23
<PAGE>   25


FDA withdrew the guidance and stated that it would reconsider the basis for its
issuance. To date, the FDA has not taken any further action. Although it appears
that the FDA has changed its position regarding the ability to regulate the
communications of pharmacy benefit management companies, there is no assurance
that it will not re-examine the issue and seek to assert the authority to
regulate the communications of such pharmacy benefit management companies.

    If our business arrangements are challenged under federal or state
anti-kickback laws, it could have a material adverse effect upon our business,
profitability and growth prospects. Federal anti-kickback laws generally
prohibit the receipt or solicitation of payment in return for purchasing or
ordering, or arranging for or recommending the purchasing or ordering of, items
and services reimbursable by federal health care programs. To date, these laws
have not been applied to prohibit the types of business arrangements we have
with pharmaceutical manufacturers and health plan customers. However, courts and
enforcement authorities that administer the anti-kickback laws have historically
interpreted these laws broadly. Moreover, at least one United States Attorney's
office has announced that it is investigating whether rebates and other payments
made by pharmaceutical manufacturers to pharmacy benefit managers and health
plans may violate the anti-kickback laws. In addition, anti-kickback laws have
been used as a partial basis for investigations and lawsuits against other
pharmacy benefit managers relating to financial incentives provided by
pharmaceutical manufacturers.

IF GOVERNMENT LAWS OR REGULATIONS ARE INTERPRETED AND ENFORCED IN A MANNER
ADVERSE TO OUR CLINICAL RESEARCH PROGRAMS, WE MAY BE SUBJECT TO ADMINISTRATIVE
ENFORCEMENT ACTIONS, AS WELL AS CIVIL AND/OR CRIMINAL LIABILITY

    The conduct of clinical trials is regulated by the FDA under the authority
of the Federal Food, Drug and Cosmetic Act and the related regulations. If
government laws or regulations are interpreted and enforced in a manner adverse
to our clinical research programs, we may be subject to administrative
enforcement actions, as well as civil and/or criminal liability. In general, the
sponsor of the drug product which is being studied, or the manufacturer which
will have the right to market the drug product if it is approved by the FDA, has
the responsibility to comply with the laws and regulations that apply to the
conduct of the clinical trials. However, in providing services related to the
conduct of clinical trials, we may assume some or all of the sponsor's or
clinical investigator's obligations related to the study of the drug. For
example, in October 1998, the FDA announced that the agency would give
Institutional Review Boards, which are independent bodies that oversee the
conduct of clinical investigations, increased access to information pointing to
violative or potentially violative conduct on the part of clinical
investigators, i.e., the physicians who conduct the clinical trials.

    Because the interpretation and enforcement of these laws and regulations
relating to the conduct of clinical trials is uncertain, the FDA may consider
our compliance efforts to be inadequate and initiate administrative enforcement
actions against us. If we fail to successfully defend against an administrative
enforcement action, it could result in an administrative order suspending,
restricting or eliminating our ability to participate in the clinical trial
process, which would materially limit our business operations. Moreover, some
violations of the Federal Food, Drug and Cosmetic Act are punishable by civil
and criminal penalties against both the violating company and responsible
individuals. If warranted by the facts, we and our employees involved in the
trials could face civil and criminal penalties which include fines and
imprisonment.


                                       24
<PAGE>   26



    As a consequence of the severe penalties we and our employees potentially
could face, we must devote significant operational and managerial resources to
comply with these laws and regulations. Although we believe that we
substantially comply with all existing statutes and regulations material to the
operation of our business, regulatory authorities may disagree and initiate
enforcement or other actions against us. In addition, we cannot predict the
impact of future legislation and regulatory changes on our business or assure
you that we will be able to obtain or maintain the regulatory approvals required
to operate our business.

IF WE BECOME SUBJECT TO LIABILITY CLAIMS WHICH ARE NOT COVERED BY OUR INSURANCE
POLICIES, WE MAY BE LIABLE FOR DAMAGES AND OTHER EXPENSES WHICH COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS

    A successful product or professional liability claim in excess of our
insurance coverage could have a material adverse effect on our business,
profitability and growth prospects. While we intend to maintain professional and
general liability insurance coverage at all times, we cannot assure you that we
will be able to maintain insurance in the future, that insurance will be
available on acceptable terms or that insurance will be adequate to cover any or
all potential product or professional liability claims.

    Various aspects of our business, including the dispensing of pharmaceutical
products; the performance of clinical trials, pharmacy benefit management
services and disease management services; and the operation of our call center
and Internet site, may subject us to litigation and liability for damages. For
example, our clinical research services involve the risk of liability for
personal injury or death from unforeseen adverse side effects or improper
administration of a new drug. We could be materially and adversely affected if
we were required to pay damages, incur defense costs or face negative publicity
in connection with a claim that is outside the scope of our contractual
indemnity or insurance coverage, or if the indemnity, although applicable, is
not performed in accordance with its terms.

    Since 1993, retail pharmacies have filed over 100 separate lawsuits against
pharmaceutical manufacturers, wholesalers and other pharmacy benefit managers.
We are not a party to any of these proceedings. However, at this time we cannot
assess whether we will be made a party to this type of lawsuit. Court decisions
or terms of any settlements relating to these lawsuits could materially and
adversely affect us in the future. These lawsuits challenge brand name drug
pricing practices under various state and federal antitrust laws. These suits
also allege in part that the pharmaceutical manufacturers offered, and some
pharmacy benefit managers accepted, rebates and discounts on brand name
prescription drugs that violate the federal Robinson-Patman Act and the federal
Sherman Act. Some pharmaceutical manufacturers have settled certain of these
actions.

IF WE SOLD OR LIQUIDATED OUR COMPANY, THE VALUE OF OUR INTANGIBLE ASSETS MAY NOT
BE REALIZED

    At March 31, 2000, $101.2 million, or 26% of our total assets, consisted of
intangible assets, primarily goodwill. These intangible assets are being
amortized over an average period of 29


                                       25
<PAGE>   27


years. If we were to face a sale or liquidation, we cannot be sure that the
value of our intangible assets will be realized. In addition, if the value of
our intangible assets were to decrease significantly, the resulting write-offs
could have a material adverse effect on our business, profitability and growth
prospects.

ITEM 2.  PROPERTIES

<TABLE>
<CAPTION>
------------------------------------- ----------------------------------- ----------------- --------------------------
USE                                   LOCATION                            SQUARE FOOTAGE    LEASE/OWN
------------------------------------- ----------------------------------- ----------------- --------------------------
<S>                                   <C>                                 <C>               <C>
Mail Service Pharmacy                 Richardson, Texas                   38,400            Own
------------------------------------- ----------------------------------- ----------------- --------------------------
Mail Service Pharmacy                 Wilkes-Barre, Pennsylvania          31,667            Lease Expires 02/15
------------------------------------- ----------------------------------- ----------------- --------------------------
Corporate Office                      Irving, Texas                       14,047            Lease expires 12/02
------------------------------------- ----------------------------------- ----------------- --------------------------
Corporate Office                      Irving, Texas                       24,000            Lease expires 04/09
------------------------------------- ----------------------------------- ----------------- --------------------------
Data Services                         Dallas, Texas                       22,990            Lease expires 11/00
------------------------------------- ----------------------------------- ----------------- --------------------------
Data Services                         Richardson, Texas                   48,312            Lease expires 11/11
------------------------------------- ----------------------------------- ----------------- --------------------------
Call Center                           Richardson, Texas                   52,000            Lease expires 10/09
------------------------------------- ----------------------------------- ----------------- --------------------------
Call Center                           Rancho Cordova, California          16,061            Lease expires 07/04
------------------------------------- ----------------------------------- ----------------- --------------------------
Clinical Services                     Hunt Valley, Maryland               20,733            Lease expires 04/06
------------------------------------- ----------------------------------- ----------------- --------------------------
Corporate Office and Clinic           Towson, Maryland                    16,322            Lease expires 06/03
------------------------------------- ----------------------------------- ----------------- --------------------------
Sales Office                          Stamford, Connecticut                1,522            Lease expires 05/01
------------------------------------- ----------------------------------- ----------------- --------------------------
Sales Office                          Atlanta, Georgia                     2,301            Lease expires 09/02
------------------------------------- ----------------------------------- ----------------- --------------------------
Clinic                                Catonsville, Maryland                3,535            Lease expires 12/02
------------------------------------- ----------------------------------- ----------------- --------------------------
Clinic                                Atlanta, Georgia                     3,262            Lease expires 03/03
------------------------------------- ----------------------------------- ----------------- --------------------------
Clinic                                Tamarac, Florida                     3,367            Lease expires 06/02
------------------------------------- ----------------------------------- ----------------- --------------------------
Clinic                                Miami Beach, Florida                12,000            Lease expires 03/04
------------------------------------- ----------------------------------- ----------------- --------------------------
Clinic                                Boca Raton, Florida                  3,129            Lease expires 05/03
------------------------------------- ----------------------------------- ----------------- --------------------------
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS

    We are a party to routine legal and administrative proceedings arising in
the ordinary course of our business. The proceedings currently pending are not,
in our opinion, material either individually or in the aggregate.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.


                                       26
<PAGE>   28


PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     On October 8, 1996, the Company sold 4,794,134 shares of its common stock
at $4.50 per share in an initial public offering. Prior to that time, there was
no public market for the Company's common stock.

    Our common stock has been traded on the Nasdaq National Market under the
symbol ADVP since October 8, 1996. The following table sets forth the range of
quarterly high and low sales prices per share of our common stock as quoted on
the Nasdaq National Market. On October 12, 1999, we announced a two-for-one
stock split, effected in the form of a stock dividend of our common stock. The
record date was November 11, 1999 and the date of payment was November 30, 1999.
Financial information and stock prices contained throughout the Form 10-K have
been adjusted to reflect the impact of the stock split.

<TABLE>
<CAPTION>
                                                                              HIGH             LOW
                                                                           ----------      -----------
<S>                                                                        <C>             <C>
          FISCAL YEAR ENDED MARCH 31, 1998:
          First Quarter....................                                $    9 7/16     $   5 7/16
          Second Quarter...................                                    12 1/8          9
          Third Quarter....................                                    16 5/8          9 7/16
          Fourth Quarter...................                                    20 3/8         13 3/16

          FISCAL YEAR ENDED MARCH 31, 1999:
          First Quarter....................                                $   21 3/4      $  12 11/16
          Second Quarter...................                                    18 1/2          8 1/2
          Third Quarter....................                                    17 5/8         10 5/8
          Fourth Quarter...................                                    33 7/8         15 11/16

          FISCAL YEAR ENDED MARCH 31, 2000:
          First Quarter....................                                $   32 1/2      $  20 1/8
          Second Quarter...................                                    34 3/4         24
          Third Quarter....................                                    31 1/2         18 1/16
          Fourth Quarter...................                                    28 3/4         11 1/8
</TABLE>

    On March 31, 2000, there were approximately 4,000 beneficial owners of our
common stock represented by 104 holders of record.

    We have never paid any cash dividends on our common stock and do not expect
to pay cash dividends in the foreseeable future. In the past we have paid cash
dividends on our preferred stock; however, we no longer have any preferred stock
outstanding. We intend to retain future earnings to finance the ongoing
operations and growth of our business.


                                       27
<PAGE>   29


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

     The following tables summarize certain selected consolidated financial
data, which should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes related thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere herein. The selected consolidated financial data of the Company as of
and for each of the years in the five-year period ended March 31, 2000, have
been derived from the Consolidated Financial Statements that have been audited
by Arthur Andersen LLP, independent public accountants.

<TABLE>
<CAPTION>
                                                                     Year Ended March 31,
                                          -----------------------------------------------------------------------
                                             1996            1997          1998           1999           2000
                                          -----------    -----------    -----------    -----------    -----------
                                                           (In thousands, except per share data)
<S>                                       <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
   Revenues.............................  $   127,871    $   256,450    $   476,664    $   774,822    $ 1,968,406
   Cost of operations:
     Cost of revenues...................      120,334        245,466        455,847        743,084      1,909,461
     Selling, general and
       administrative expenses..........        6,158          7,309         10,083         13,949         22,656
                                          -----------    -----------    -----------    -----------    -----------
       Total cost of operations.........      126,492        252,775        465,930        757,033      1,932,117
                                          -----------    -----------    -----------    -----------    -----------
   Operating income.....................        1,379          3,675         10,734         17,789         36,289
   Interest income......................          366          1,560          2,814          2,685            807
   Interest expense.....................         (732)          (445)           (67)            --         (3,943)
   Merger costs (2).....................           --             --           (689)            --             --
   Provision for  income taxes..........           --         (1,564)        (4,861)        (7,780)       (12,598)
                                          -----------    -----------    -----------    -----------    -----------
   Net income...........................  $     1,013    $     3,226    $     7,931    $    12,694    $    20,555
                                          ===========    ===========    ===========    ===========    ===========
   Basic:
     Net income per share...............  $       .03    $       .21    $       .44    $       .62    $       .97
     Weighted average shares
       outstanding......................        8,013         12,529         17,512         20,504         21,260
   Diluted:
     Net income per share...............  $       .02    $       .18    $       .35    $       .54    $       .85
     Weighted average shares
       outstanding......................        9,153         18,352         22,702         23,376         24,237
</TABLE>


<TABLE>
<CAPTION>
 ........................................                                  March 31,
                                          -----------------------------------------------------------------------
 ........................................     1996            1997          1998           1999           2000
                                          -----------    -----------    -----------    -----------    -----------
                                                                       (In thousands)
<S>                                       <C>            <C>            <C>            <C>            <C>

BALANCE SHEET DATA:
   Working capital......................      $   269       $ 24,575       $ 28,362       $  1,111      $  14,045
   Total assets.........................       59,861        108,914        154,909        276,833        387,935
   Long-term debt ......................        7,000             --             --         50,000         50,000
   Redeemable preferred stock...........       11,896             --             --             --             --
   Stockholders' equity (deficit).......       (1,537)        42,577         50,564         69,061         99,508
</TABLE>


                                       28
<PAGE>   30



<TABLE>
<CAPTION>
                                                                     Year Ended March 31,
                                          -----------------------------------------------------------------------
                                             1996            1997          1998           1999           2000
                                          -----------    -----------    -----------    -----------    -----------
                                                                      (In thousands)
<S>                                       <C>            <C>            <C>            <C>            <C>
SUPPLEMENTAL DATA: (1)
   Pharmacy network claims
     Processed........................          9,375         26,579         38,319         50,588         81,225
   Mail pharmacy prescriptions
     Filled...........................            536            677            839          1,289          1,674
   Estimated health plan
     Members (at period end)..........          9,040         10,200         12,500         15,000         27,500
</TABLE>

----------
(1) This data has not been audited.

(2) Merger costs relate to the acquisition of IMR.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

    We group the revenues from our health benefit management services into three
categories: data, mail and clinical services.

    o   Data services. In 1992, we established a retail pharmacy network, that
        currently consists of over 58,000 retail pharmacies nationwide, and
        began to provide on-line claims processing services. Under some of our
        customer contracts, we contract directly with the retail pharmacies in
        our national network. When we have an independent obligation to pay our
        own network of retail pharmacy providers for the drugs dispensed,
        meaning we are "at risk," we include payments from plan sponsors for the
        drug cost and the claims processing fees as revenues. We record payments
        we make to our retail pharmacy providers as cost of revenues. Under
        other contracts, we manage a network of pharmacies that are under direct
        contract with certain of our customers. For those plan sponsors that
        have established their own pharmacy network, we administer the plan
        sponsors' network pharmacy contracts. The plan sponsors have the
        independent obligation to fund payment to those pharmacies under
        contract and the plan sponsors are "at-risk" for the payment for drugs
        dispensed; we record only the claims processing fees as revenues. New
        customers that use our network, where we record both claims processing
        fees and costs of drugs as revenues, will generate higher revenues than
        new customers that use their own networks, where we only record claims
        processing fees as revenues. Thus, while a customer who uses our network
        may contribute the same gross profit in terms of dollars as a customer
        that uses its own network, gross profit as a percentage of revenue will
        be lower for customers using our network because of the higher level of
        revenue we recognize.

    o   Mail services. We derive mail services revenues from the sale of
        pharmaceuticals to members of our customers' health plans. These
        revenues include the cost of the pharmaceuticals plus a dispensing fee.


                                       29
<PAGE>   31


    o   Clinical services. We have historically derived our clinical revenues
        primarily from formulary rebates and volume discounts received from
        pharmaceutical manufacturers. Some of these revenues are based on
        estimates that are subject to final settlement with the manufacturer. In
        addition, we generate clinical revenues from our comprehensive disease
        management programs. We also include our newly acquired clinical trial
        and medical outcomes research businesses in our clinical services
        revenues.

Our cost of revenues includes product costs and other direct costs associated
with the dispensing of prescription drugs and the provision of claims processing
and clinical services.

RESULTS OF OPERATIONS

    The following table sets forth certain consolidated financial data as a
percentage of revenues.

<TABLE>
<CAPTION>
                                                                                YEAR ENDED MARCH 31,
                                                                           -----------------------------
                                                                            1998        1999       2000
                                                                           ------      ------     ------
<S>                                                                        <C>         <C>        <C>
             STATEMENT OF OPERATIONS DATA:
             Revenues:
               Data services......................................           66.6%       67.2%      76.3%
               Mail services......................................           16.4        16.4        9.4
               Clinical services..................................           17.0        16.4       14.3
                                                                           ------      ------     ------
                       Total revenues.............................          100.0       100.0      100.0
             Cost of operations:
               Cost of revenues...................................           95.6        95.9       97.0
               Selling, general and administrative
                 expenses.........................................            2.1         1.8        1.2
                                                                           ------      ------     ------
                       Total cost of operations...................           97.7        97.7       98.2
                                                                           ------      ------     ------
             Operating income.....................................            2.3         2.3        1.8
             Interest income (expense), net.......................            0.6         0.3       (0.2)
             Merger costs.........................................           (0.2)         --         --
             Provision for income taxes...........................           (1.0)       (1.0)      (0.6)
                                                                           ------      ------     ------
             Net income...........................................            1.7%        1.6%       1.0%
                                                                           ======      ======     ======
</TABLE>

FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999

    REVENUES. Our revenues for fiscal year 2000 increased by $1.2 billion, or
154%, compared to revenues for fiscal year 1999. The number of individuals we
managed continued to increase in fiscal year 2000 as we obtained new customers
including our largest customer, FHS, whose service agreement began April 1,
1999. In addition, our current customers continued to increase their membership
and utilization levels. New customer contracts resulted from increased marketing
efforts and the expansion of our sales and marketing department. Contracts with
new customers in fiscal year 2000 generally included all pharmacy benefit
management products we offer, including claims processing, mail and clinical
services.

    Our revenues from claims processing increased $981.8 million, or 189%,
compared to the prior year. The increase resulted from the addition of new
contracts including the service


                                       30
<PAGE>   32


agreement with FHS and an increase in use of our services by existing customers.
The increase in new individuals resulted in an increase in pharmacy claims
processed from 50.6 million in fiscal year 1999 to 81.2 million in fiscal year
2000, a 60% increase. Virtually all of the new fiscal year 2000 customer
contracts use our pharmacy network including FHS, which has shifted a larger
percentage of our total revenues to claims processing. Revenues from mail
services increased $56.8 million, or 45%, compared to the prior year. The
increase resulted primarily from the new individuals added during fiscal year
2000. The increase in new individuals resulted in an increase in mail
prescriptions dispensed from 1.3 million in fiscal year 1999 to 1.7 million in
fiscal year 2000, a 30% increase. Revenues from clinical services increased
$154.9 million, or 122%, compared to the prior year. The increase resulted
primarily from the new individuals added and the additional claims processed
during fiscal year 2000 compared to the prior year.

    COST OF REVENUES. Our cost of revenues for fiscal year 2000 increased by
$1.2 billion, or 157%, compared to the prior fiscal year. This increase
primarily resulted from the additional costs associated with our claims
processing growth and the new customers, including FHS, that are using our
retail pharmacy network. As a percentage of revenues, cost of revenues was 97.0%
in fiscal year 2000 compared to 95.9% in fiscal year 1999.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expense for fiscal year 2000 increased by $8.7 million, or 62%,
compared to fiscal year 1999. This increase was primarily the result of our
acquisition of FHPS and the related amortization expense associated with the
intangible assets acquired. In addition, further expansion in management, sales
and marketing contributed to the increase. In spite of the increase, selling,
general and administrative expenses as a percentage of revenues decreased from
1.8% in fiscal year 1999 to 1.2% in fiscal year 2000 as the result of greater
economies of scale and due to the increase in revenues associated with our
claims processing services. Additional revenues generated by customers using our
network pharmacy providers typically do not result in an increase in selling,
general and administrative expenses.

    INTEREST INCOME AND INTEREST EXPENSE. Our interest expense, net of interest
income, was $3.1 million in fiscal year 2000. We incurred no interest expense in
fiscal year 1999 since we had no outstanding indebtedness until March 31, 1999
and had $2.7 million in interest income. Interest expense increased as the
result of the acquisition of FHPS on March 31, 1999, and the related bank
borrowings throughout fiscal year 2000.

    INCOME TAXES. In fiscal years 2000 and 1999, our income tax expense
approximated an effective tax rate of 38%.

FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998

    REVENUES. Our revenues for fiscal year 1999 increased by $298.2 million, or
63%, compared to revenues for fiscal year 1998. The number of individuals we
managed continued to increase in fiscal year 1999 as we obtained new customers
and our current customers continued to increase their membership and utilization
levels. New customer contracts resulted from increased marketing efforts and the
expansion of our sales and marketing department. Contracts with new customers in
fiscal year 1999 generally included all pharmacy benefit management products we
offer, including claims processing, mail and clinical services.


                                       31
<PAGE>   33


    Our revenues from claims processing increased $203.5 million, or 64%,
compared to the prior year. The increase resulted from the addition of new
individuals and an increase in use of our services by existing customers. The
increase in new individuals resulted in an increase in pharmacy claims processed
from 38.3 million in fiscal year 1998 to 50.6 million in fiscal year 1999, a 32%
increase. Virtually all of the new fiscal year 1999 customer contracts use our
pharmacy network, which has shifted a larger percentage of our total revenues to
claims processing. Revenues from mail services increased $48.9 million, or 63%,
compared to the prior year. The increase resulted primarily from the new
individuals added during fiscal year 1999. The increase in new individuals
resulted in an increase in mail prescriptions dispensed from 839,000 in fiscal
year 1998 to 1.3 million in fiscal year 1999, a 54% increase. Revenues from
clinical services increased $45.8 million, or 57%, compared to the prior year.
The increase resulted primarily from the new individuals added and the
additional claims processed during fiscal year 1999 compared to the prior year.

    COST OF REVENUES. Our cost of revenues for fiscal year 1999 increased by
$287.2 million, or 63%, compared to the prior fiscal year. This increase
primarily resulted from the additional costs associated with our claims
processing growth and the new customers that are using our retail pharmacy
network. As a percentage of revenues, cost of revenues was 95.9% in fiscal year
1999 compared to 95.6% in fiscal year 1998.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expense for fiscal year 1999 increased by $3.9 million, or 38%,
compared to fiscal year 1998. This increase was the result of our expansion of
our sales and marketing activities, as well as increases in administrative and
support staff levels and salaries and benefits in response to volume growth in
all programs. In spite of the increase, selling, general and administrative
expenses as a percentage of revenues decreased from 2.1% for in fiscal year 1998
to 1.8% in fiscal year 1999 as the result of greater economies of scale and due
to the increase in revenues associated with our claims processing services.
Additional revenues generated by customers using our network pharmacy providers
typically do not result in an increase in selling, general and administrative
expenses.

    INTEREST INCOME AND INTEREST EXPENSE. Our interest income, net of interest
expense, was $2.7 million in both fiscal years 1999 and 1998. We incurred no
interest expense in fiscal year 1999 since we had no outstanding indebtedness
until March 31, 1999. We maintained higher cash balances during the first eight
months of fiscal year 1999 compared to fiscal year 1998. In December 1998, we
purchased Baumel-Eisner Neuromedical Institute for $25.0 million. Therefore,
interest income declined in the fourth quarter of fiscal year 1999 compared to
the first three quarters. We invest our excess cash in money market funds and
high-grade commercial paper.

    INCOME TAXES. In fiscal years 1999 and 1998, our income tax expense
approximated an effective tax rate of 38%.


                                       32
<PAGE>   34


LIQUIDITY AND CAPITAL RESOURCES

    As of March 31, 2000, we had working capital of $14.0 million. While we have
$224.9 million of accounts payable, the majority of these obligations are not
due until cash is collected from our customers. Our net cash provided by
operating activities was $14.5 million, $29.0 million and $28.7 million for the
fiscal years ended 1998, 1999 and 2000, respectively. The significant increases
in net cash provided by operating activities resulted primarily from the income
we generated and due to the timing of receivables and payables resulting from
our continued growth. Cash we used in investing activities was $6.5 million,
$97.3 million and $22.6 million for the fiscal years ended 1998, 1999 and 2000,
respectively. Such investing activities included purchases of property, plant
and equipment associated with growth and expansion of our systems and
facilities, as well as cash paid for acquisitions. In December 1998, we used
$24.7 million, net of cash acquired, for the acquisition of Baumel-Eisner
Neuromedical Institute, Inc. In March 1999, we used $65.0 million, net of $5.0
million cash acquired, for the acquisition of Foundation Health Pharmaceutical
Services.

    Historically, we have been able to fund our operations and continued growth
through cash flow from operations. In fiscal years 1998, 1999 and 2000, our
operating cash flow funded our capital expenditures and our short-term excess
cash was invested in money market funds and high grade commercial paper. We
anticipate that cash flow from operations, combined with our current cash
balances and amounts available under our credit facility, will be sufficient to
meet our internal operating requirements and expansion programs, including
capital expenditures, for at least the next 18 months. However, if we
successfully continue our expansion, acquisition and alliance plans, we may be
required to seek additional debt or equity financing in order to achieve these
plans.

CREDIT FACILITY

    On March 31, 1999, we entered into a senior revolving credit facility with a
group of lenders. The credit facility consists of a $75.0 million, three year
revolving credit facility. On March 31, 1999, we borrowed $50.0 million under
the credit facility to fund the acquisition of Foundation Health Pharmaceutical
Services. Each of our subsidiaries has guaranteed the credit facility. The
lenders received a first priority security interest in our subsidiaries' capital
stock and negative pledges on accounts receivable and other assets.

    Interest on the credit facility accrues at a specified margin above the
London Interbank Offered Rate, or LIBOR, or an alternate base rate. The
alternate base rate is the bank's prime rate or the federal funds rate plus
0.5%. For LIBOR loans the applicable margin is 1.375% per annum as of March 31,
2000 and the effective interest rate is 7.435%.

    The credit facility contains usual and customary affirmative and negative
covenants, including limitations on liens, debts, dividends, capital
expenditures, mergers, acquisitions and sale of assets. Covenants also include a
specified minimum net worth, maximum leverage ratio and a minimum interest
coverage ratio. The credit facility contains customary events of default
including:


                                       33
<PAGE>   35


    o nonpayment of principal, interest, fees or other amounts;

    o violation of covenants;

    o inaccuracy of representations and warranties;

    o default under other indebtedness;

    o bankruptcy and other insolvency events;

    o material judgements;

    o ERISA matters; and

    o change of control without the lender's prior written consent.

    In fiscal 2000, the Company exceeded the limit for capital expenditures as
required by covenant. The Company received a waiver from the lenders for this
covenant violation.

RECENT ACCOUNTING PRONOUNCEMENTS

    We adopted Statement of Financial Accounting Standards ("SFAS") 130,
"Reporting Comprehensive Income," effective April 1, 1998. SFAS 130 established
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Comprehensive income is
defined as the total of net income and all other non-owner changes in equity. We
do not have any non-owner changes in equity other than net income. Comprehensive
income will be reported in our consolidated statement of stockholders' equity.

    We adopted SFAS 131, "Disclosure about Segments of an Enterprise and Related
Information," effective April 1, 1998. This pronouncement changes the
requirements under which public businesses must report segment information. The
objective of the pronouncement is to provide information about a company's
different types of business activities and different economic environments. SFAS
131 requires companies to select segments based on their internal reporting
system. We provide integrated health benefit management services to our
customers, and these services account for substantially all of our net revenues.
Such services are typically negotiated under one contract with the customer.
Therefore, our operations will continue to be reported in one segment.

    We adopted SFAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," as of April 1, 1998. This pronouncement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans; however, it does
require additional information on changes in the benefit obligations and fair
values of plan assets in order to facilitate financial analysis. Currently, we
do not have any pension or postretirement benefit plans; thus, the adoption of
SFAS 132 has not had a material impact on our disclosures.


                                       34
<PAGE>   36


    In June 1998, Financial Accounting Standards Board Statement 133, Accounting
for Derivative Instruments and Hedging Activities SFAS 133 was issued. SFAS 133
requires all derivatives to be recognized as either assets or liabilities in the
statement of financial position and measured at fair value. In addition, SFAS
133 specifies the accounting for changes in the fair value of a derivative based
on the intended use of the derivative and the resulting designation. We do not
have any derivatives and SFAS 133 does not have a material impact on our
financial position or disclosures. SFAS 133, as amended by SFAS 137 and SFAS
138, is effective beginning in fiscal year March 31, 2002.

IMPACT OF INFLATION

    Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals we dispense affect our cost of revenues. Historically, we have
been able to pass the effect of such price changes to our customers under the
terms of our agreements. As a result, changes in pharmaceutical prices due to
inflation have not adversely affected our company.

YEAR 2000 READINESS DISCLOSURE

    Our operations require our computer systems and information technology to
work effectively. In fiscal year 1998, we began addressing the year 2000 issue
by forming a year 2000 project team. The year 2000 issue is the result of
computer programs written using two digits rather than four digits to define
"date" fields. Information systems have time-sensitive operations that, as a
result of this date field limitation, could disrupt business activities in the
normal business cycle. For example, some computers that are not year 2000
compliant may interpret the year 2000 as the year 1900. This treatment could
result in significant miscalculations when processing critical date-sensitive
information relating to dates after December 31, 1999.

    As of the date of this filing, we have experienced no year 2000 issues that
have materially impacted our results of operations or financial condition.
However, we will continue to monitor all year 2000 related issues.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not engage in trading market risk sensitive instruments and do not
purchase as investments, as hedges, or for purposes "other than trading"
instruments that are likely to expose us to market risk, whether it be from
interest rate, foreign currency exchange, commodity price or equity price risk.
We have issued no debt instruments, entered into no forward or futures
contracts, purchased no options and entered into no swaps.

     Our primary market risk exposure is that of interest rate risk. A change in
LIBOR or the Prime Rate as set by NationsBank, N.A., would affect the rate at
which we could borrow funds under our credit facility.


                                       35
<PAGE>   37
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is found on pages F-1 through F-21
hereof.

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

     None.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item will be incorporated by reference
from our definitive proxy statement for our 2000 annual meeting of stockholders
to be filed with the Securities and Exchange Commission not later than 120 days
following our fiscal year pursuant to Regulation 14A (the "Proxy Statement").

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this item will be incorporated by reference
from the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item will be incorporated by reference
from the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item will be incorporated by reference
from the Proxy Statement.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) The response to this portion of Item 14 is submitted as a separate
section of this report on page F-1.

     (b) Reports on Form 8-K.

     (c) Exhibits Required by Item 601 of S-K: See index to exhibits on pages
37 - 40.


                                       36
<PAGE>   38


Exhibits and Financial Statement Schedules

<TABLE>
<CAPTION>
Exhibit No.                            Exhibits
-----------                            --------
<S>             <C>
2.1(a)  ---     Stock Purchase Agreement, dated effective as of December 1,
                1998, by and among Advance Paradigm, Inc. (the "Company"),
                Baumel-Eisner Neuromedical Institute, Inc., Barry Baumel, M.D.
                and Larry S. Eisner, M.D.

2.2(b)  ---     Purchase Agreement, dated as of February 26, 1999, among
                Foundation Health Systems, Inc., Foundation Health Corporation,
                Foundation Health Pharmaceutical Services, Inc., Integrated
                Pharmaceutical Services, Inc. and the Company.

3.1(c)  ---     Amended and Restated Certificate of Incorporation of the
                Company.

3.2(c)  ---     Certificate of Amendment to the Certificate of Incorporation of
                the Company.

3.3(c)  ---     Certificate of Correction to the Amendment to the Certificate of
                Incorporation of the Company.

3.4(c)  ---     Amended and Restated Bylaws of the Company.

3.5(c)  ---     Certificate of Incorporation of Advance Pharmacy Services, Inc.

3.6(c)  ---     Certificate of Amendment to the Certificate of Incorporation of
                Advance Pharmacy Services, Inc.

3.7(c)  ---     Certificate of Correction to the Certificate of Amendment to the
                Certificate of Incorporation of Advance Pharmacy Services, Inc.

3.8(c)  ---     Certificate of Amendment to the Certificate of Incorporation of
                Advance Pharmacy Services, Inc.

3.9(c)  ---     Bylaws of Advance Pharmacy Services, Inc.

4.1(d)  ---     Specimen Certificate for shares of Common Stock, $0.01 par
                value, of the Company.

4.2(e)  ---     Amended and Restated Incentive Stock Option Plan.

4.3(e)  ---     Incentive Stock Option Plan.

4.4(c)  ---     Warrant Agreement, dated as of September 12, 1996, by and
                between the Company and VHA, Inc.

4.5(c)  ---     Form of Agreement and Plan of Merger.
</TABLE>


                                       37
<PAGE>   39


<TABLE>
<S>             <C>
4.6(f)   ---    1997 Nonstatutory Stock Option Plan.

4.7(b)   ---    Warrant Agreement, dated as of February 26, 1999, by and between
                the Company and Foundation Health Systems, Inc.

4.8(i)   ---    Warrant Agreement, dated as of February 25, 1999, by and between
                the Company and Arkansas BlueCross BlueShield.

4.9(i)   ---    Warrant Agreement, dated as of June 12, 1998, by and between the
                Company and Wellmark, Inc.

10.1(c)  ---    Managed Pharmaceutical Agreement, dated November 1, 1993, by and
                between Advance Data and the Mega Life & Health Insurance
                Company.

10.2(c)  ---    Nondisclosure/Noncompetition Agreement, dated August 4, 1993,
                between the Company, Advance Data, Advance Mail and David D.
                Halbert.

10.3(c)  ---    Nondisclosure/Noncompetition Agreement, dated August 4, 1993,
                between the Company, Advance Mail, Advance Data and Jon S.
                Halbert.

10.4(c)  ---    Nondisclosure/Noncompetition Agreement, dated August 4, 1993,
                between the Company, Advance Mail, Advance Data and Danny
                Phillips.

10.5(d)  ---    Employment Agreement, effective as of December 1, 1996, by and
                between Advance Clinical (formerly ParadigM) and Joseph J.
                Filipek, Jr. and, for the limited purposes of Sections 3(d),
                3(g) and 3(h) thereof, the Company.

10.6(d)  ---    Employment Agreement, effective as of November 14, 1996, by and
                between the Company and John H. Sattler.

10.7(d)  ---    Employment Agreement, effective as of June 17, 1996, by and
                between the Company and Ernest Buys.

10.8(c)  ---    Employment Agreement, effective as of February 15, 1996, by and
                between the Company and Alan T. Wright.

10.9(c)  ---    Form of Health Benefit Management Services Agreement.

10.10(c) ---    Sublease, dated May 2, 1996, between Lincoln National Life
                Insurance Company and Advance Data.

10.11(c) ---    Lease, dated March 6, 1994, by and between Hill Management
                Services, Inc. and Advance Clinical (formerly ParadigM).
</TABLE>


                                       38
<PAGE>   40


<TABLE>
<S>             <C>
10.12(c) ---    Lease Agreement, dated as of February 24, 1989, as amended
                November 30, 1992, and December __, 1992, by and between TRST
                Las Colinas, Inc. and Advance Health Care.

10.13(c) ---    Managed Pharmacy Benefit Services Agreement, dated September 1,
                1995, between the Company and BCBS of Texas.

10.14(g) ---    Agreement and Plan of Merger, dated February 9, 1998, by and
                among the Company, IMR, Inc. and Innovative Medical Research,
                Inc., Walter Stewart, Richard Lipton, The Lianna Lipton Trust,
                The Justin Lipton Trust, Stuart Bell, The Curren Bell Trust, The
                Kylie Bell Trust and The Ian Bell Trust.

10.15(h) ---    Consulting Agreement, effective as of December 15, 1998, by and
                between the Company and David A. George.

10.16(b) ---    Pharmacy Benefit Services Agreement, effective as of April 1,
                1999, by and between the Company, Foundation Health Systems,
                Inc. and Integrated Pharmaceutical Services, Inc.

10.17(b) ---    Credit Agreement, dated as of March 31, 1999, among the Company,
                the banks named in the Credit Agreement, NationsBanc Montgomery
                Securities LLC and NationsBank, N.A.

10.18(b) ---    Guaranty, dated as of March 31, 1999, by each subsidiary of the
                Company, in favor of NationsBank, N.A.

10.19(i) ---    Commercial Lease Agreement, commencing November 1, 1998, by and
                between Crin-Richardson I, L.P. and the Company.

11.1(j)  ---    Statement regarding computation of per share earnings.

21.1(j)  ---    Subsidiaries of the Company.

23.1(j)  ---    Consent of Arthur Andersen LLP.

27.1(j)  ---    Financial Data Schedule.
</TABLE>


----------

(a)     Previously filed in connection with the Company's Current Report on Form
        8-K, dated December 29, 1998, and incorporated herein by reference.

(b)     Previously filed in connection with the Company's Current Report on Form
        8-K, dated April 12, 1999, and incorporated herein by reference.

(c)     Previously filed in connection with the Company's Registration Statement
        on Form S-1 filed October 8, 1996 (No. 333-06931), and incorporated
        herein by reference.


                                       39
<PAGE>   41


(d)     Previously filed in connection with the Company's Form 10-K for the year
        ended March 31, 1997, and incorporated herein by reference.

(e)     Previously filed in connection with the Company's Registration Statement
        on Form S-8 filed September 5, 1997 (No. 333-34999), and incorporated
        herein by reference.

(f)     Previously filed in connection with the Company's Form 10-Q for the
        three months ended June 30, 1997, and incorporated herein by reference.

(g)     Previously filed in connection with the Company's Current Report on Form
        8-K, dated February 9, 1998, and incorporated herein by reference.

(h)     Previously filed in connection with the Company's Form 10-Q for the
        three months ended December 31, 1998, and incorporated herein by
        reference.

(i)     Previously filed in connection with the Company's Form 10-K for the year
        ended March 31, 1999, and incorporated herein by reference.

(j)     Filed herewith.


                                       40
<PAGE>   42


         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
June 28, 2000 on its behalf by the undersigned, thereunto duly authorized.

                                             ADVANCE PARADIGM, INC.



                                             By:   /s/ David D. Halbert
                                                 -------------------------------
                                                 David D. Halbert
                                                 Chairman of the Board and Chief
                                                 Executive Officer

         Each person whose signature appears below hereby authorizes David D.
Halbert and Danny Phillips or either of them, as attorneys-in-fact to sign on
his behalf, individually, and in each capacity stated below and to file
amendments and/or supplements to the Annual Report on Form 10-K.

         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
Company and in the capacities and on the dated indicated.

<TABLE>
<CAPTION>
         Signature                                   Title                                   Date
         ---------                                   -----                                   ----


<S>                                         <C>                                         <C>
 /s/  David D. Halbert                      Chairman of the Board                       June 28, 2000
----------------------------------          and Chief Executive Officer
David D. Halbert                            (Principal Executive Officer)


 /s/  Jon S. Halbert                        Vice Chairman, e-Business                   June 28, 2000
----------------------------------          & Technology and Director
Jon S. Halbert


 /s/  David A. George                       President and Director                      June 28, 2000
----------------------------------
David A. George


 /s/  T. Danny Phillips                     Senior Vice President, Chief                June 28, 2000
----------------------------------          Financial Officer, Secretary and
T. Danny Phillips                           Treasurer (Principal Financial
                                            and Accounting Officer)
</TABLE>


                                       41
<PAGE>   43


<TABLE>
<CAPTION>
<S>                                         <C>                                         <C>
 /s/  Rogers K. Coleman, M.D.               Director                                    June 28, 2000
----------------------------------
Rogers K. Coleman, M.D.



 /s/  Stephen L. Green                      Director                                    June 28, 2000
----------------------------------
Stephen L. Green



 /s/  Jeffrey R. Jay, M.D.                  Director                                    June 28, 2000
----------------------------------
Jeffrey R. Jay, M.D.



 /s/  Michael D. Ware                       Director                                    June 28, 2000
----------------------------------
Michael D. Ware
</TABLE>


                                       42
<PAGE>   44


                          INDEX TO FINANCIAL STATEMENTS

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES



<TABLE>
<S>                                                                                 <C>
Report of Independent Public Accountants                                            F-2
Consolidated Balance Sheets--March 31, 1999 and 2000                                F-3
Consolidated Statements of Operations for the Years Ended
  March 31, 1998, 1999 and 2000                                                     F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
  March 31, 1998, 1999 and 2000                                                     F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1998,
  1999 and 2000                                                                     F-6
Notes to Consolidated Financial Statements                                          F-7
Report of Independent Public Accountants on Financial Statement Schedule            S-1
Schedule II.  Valuation and Qualifying Accounts for the
  Years Ended March 31, 1998, 1999 and 2000                                         S-2
</TABLE>



                                      F-1
<PAGE>   45



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders of
Advance Paradigm, Inc.:

     We have audited the accompanying consolidated balance sheets of Advance
Paradigm, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1999
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advance Paradigm, Inc. and
subsidiaries as of March 31, 1999 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2000, in conformity with accounting principles generally accepted in the United
States.



                                              ARTHUR ANDERSEN LLP

Dallas, Texas,
May 17, 2000


                                      F-2
<PAGE>   46




                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                         ASSETS

                                                                                                March 31,
                                                                                       ---------------------------
                                                                                           1999           2000
                                                                                       ------------   ------------
<S>                                                                                    <C>            <C>
CURRENT ASSETS:
   Cash and cash equivalents                                                           $ 42,492,000   $ 50,111,000
   Accounts receivable, net of allowance for doubtful accounts of
     $371,000 and $368,000, respectively                                                107,582,000    187,124,000
   Inventories                                                                            4,015,000      5,965,000
   Prepaid expenses and other                                                             1,651,000      3,229,000
                                                                                       ------------   ------------
     Total current assets                                                               155,740,000    246,429,000

PROPERTY AND EQUIPMENT, net of accumulated depreciation
   and amortization of $8,540,000 and $13,679,000, respectively                          15,155,000     32,619,000
INTANGIBLE ASSETS, net of accumulated amortization of
   $2,191,000 and $6,078,000, respectively                                              105,041,000    101,154,000
OTHER ASSETS                                                                                897,000      7,733,000
                                                                                       ------------   ------------
     Total assets                                                                      $276,833,000   $387,935,000
                                                                                       ============   ============

                                           LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                                    $148,979,000   $224,891,000
   Accrued salaries and benefits                                                          3,780,000      5,386,000
   Other accrued expenses                                                                 1,870,000      2,107,000
                                                                                       ------------   ------------
     Total current liabilities                                                          154,629,000    232,384,000

NONCURRENT LIABILITIES:
   Long-term debt                                                                        50,000,000     50,000,000
   Deferred income taxes                                                                  2,597,000      3,904,000
   Other noncurrent liabilities                                                             546,000      2,139,000
                                                                                       ------------   ------------
     Total liabilities                                                                  207,772,000    288,427,000
                                                                                       ------------   ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Preferred stock, $.01 par value;
     4,995,000 shares authorized, none issued and outstanding                                    --             --
   Series B convertible preferred stock, $.01 par value; 5,000
     shares authorized, no shares issued and outstanding                                         --             --
   Common stock, $.01 par value; 50,000,000 shares authorized,
     21,056,898 and 21,517,154 shares issued and outstanding at
     March 31, 1999 and 2000, respectively                                                  211,000        215,000
   Additional paid-in capital                                                            48,822,000     58,710,000
   Accumulated earnings                                                                  20,028,000     40,583,000
                                                                                       ------------   ------------
     Total stockholders' equity                                                          69,061,000     99,508,000
                                                                                       ------------   ------------
     Total liabilities and stockholders' equity                                        $276,833,000   $387,935,000
                                                                                       ============   ============
</TABLE>

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


                                      F-3
<PAGE>   47



                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                             Year Ended March 31,
                                              ----------------------------------------------------
                                                   1998               1999              2000
                                              ---------------    ---------------   ---------------
<S>                                           <C>                <C>               <C>
REVENUES                                      $   476,664,000    $   774,822,000   $ 1,968,406,000
                                              ---------------    ---------------   ---------------

COST OF OPERATIONS:
   Cost of revenues                               455,847,000        743,084,000     1,909,461,000
   Selling, general and
     administrative expenses
                                                   10,083,000         13,949,000        22,656,000
                                              ---------------    ---------------   ---------------
         Total cost of operations                 465,930,000        757,033,000     1,932,117,000
                                              ---------------    ---------------   ---------------
   Operating income                                10,734,000         17,789,000        36,289,000
INTEREST INCOME                                     2,814,000          2,685,000           807,000
INTEREST EXPENSE                                      (67,000)                --        (3,943,000)
MERGER COSTS                                         (689,000)                --                --
                                              ---------------    ---------------   ---------------
INCOME BEFORE INCOME TAXES                         12,792,000         20,474,000        33,153,000
PROVISION FOR INCOME TAXES                          4,861,000          7,780,000        12,598,000
                                              ---------------    ---------------   ---------------
NET INCOME                                    $     7,931,000    $    12,694,000   $    20,555,000
                                              ===============    ===============   ===============

BASIC:
   NET INCOME AVAILABLE
     TO COMMON STOCKHOLDERS                   $     7,731,000    $    12,694,000   $    20,555,000
   NET INCOME PER SHARE                       $          0.44    $          0.62   $          0.97
   WEIGHTED AVERAGE SHARES OUTSTANDING             17,511,508         20,504,290        21,260,163

DILUTED:
   NET INCOME AVAILABLE
     TO COMMON STOCKHOLDERS                   $     7,931,000    $    12,694,000   $    20,555,000
   NET INCOME PER SHARE                       $          0.35    $          0.54   $          0.85
   WEIGHTED AVERAGE SHARES OUTSTANDING             22,701,838         23,376,202        24,237,216
</TABLE>


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


                                      F-4
<PAGE>   48



                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000


<TABLE>
<CAPTION>
                                                                     Series B Preferred
                                                Common Stock                Stock
                                           ----------------------   --------------------    Additional   Accumulated
                                            Number of               Number of                Paid-In      Earnings
                                              Shares      Amount      Shares      Amount     Capital      (Deficit)        Total
                                           -----------  ---------   ---------    -------   ------------  -----------   ------------
<S>                                        <C>          <C>         <C>          <C>       <C>           <C>           <C>
BALANCE, March 31, 1997 ................    17,353,790  $ 174,000       4,444    $    --   $ 42,801,000  $  (398,000)  $ 42,577,000
   Comprehensive income:
   Net income ..........................            --         --          --         --             --     7,931,000     7,931,000
   Issuance of Common Stock
     in connection with the
     exercise of stock options
     and warrants ......................       455,154      5,000          --         --        251,000            --       256,000
   Dividends on Series B
     Preferred Stock ...................            --         --          --         --             --      (200,000)     (200,000)
                                           -----------  ---------   ---------    -------   ------------  ------------   -----------

BALANCE, March 31,1998 .................    17,808,944    179,000       4,444         --     43,052,000     7,333,000    50,564,000
    Comprehensive income:
    Net income .........................            --         --          --         --             --    12,694,000    12,694,000
    Issuance of Common Stock
     in connection with the
     conversion of Series B
     Preferred Stock ...................     2,222,222     22,000      (4,444)        --        (22,000)           --            --
   Issuance of Common Stock
     in connection with the
     exercise of stock options
     and warrants ......................     1,025,732     10,000          --         --      2,415,000            --     2,425,000
   Tax benefit relating to exercise
     of employee stock options
     and other .........................            --         --          --         --        877,000         1,000       878,000
   Issuance of warrants ................            --         --          --         --      2,500,000            --     2,500,000
                                           -----------  ---------   ---------    -------   ------------  ------------   -----------

BALANCE, March 31,1999 .................    21,056,898    211,000          --         --     48,822,000    20,028,000    69,061,000
   Comprehensive income:
   Net income ..........................            --         --          --         --             --    20,555,000    20,555,000
   Issuance of Common Stock
     in connection with the
     exercise of stock options
     and warrants ......................       228,372      2,000          --         --      1,567,000            --     1,569,000
   Tax benefit relating to exercise
     of employee stock options
     and other .........................            --         --          --         --      3,323,000            --     3,323,000
   Investment in CHI ...................       231,884      2,000          --         --      4,998,000            --     5,000,000
                                           -----------  ---------   ---------    -------   ------------  ------------   -----------

BALANCE, March 31, 2000 ................    21,517,154  $ 215,000          --    $    --   $ 58,710,000  $ 40,583,000   $99,508,000
                                           ===========  =========   =========    =======   ============  ============   ===========
</TABLE>


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


                                      F-5
<PAGE>   49



                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                           Year Ended March 31,
                                                              --------------------------------------------
                                                                  1998            1999            2000
                                                              ------------    ------------    ------------
<S>                                                           <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                 $  7,931,000    $ 12,694,000    $ 20,555,000
   Adjustments to reconcile net income to net
     cash provided by operating activities--
         Depreciation and amortization                           2,378,000       3,656,000       9,026,000
         Provision for doubtful accounts                            74,000          24,000          24,000
         Deferred income taxes                                     441,000       1,312,000       1,307,000
         Change in certain assets and liabilities--
             Accounts receivable                               (32,139,000)    (38,391,000)    (79,566,000)
             Inventories                                        (1,028,000)     (1,128,000)     (1,950,000)
             Prepaid expenses and other assets                  (1,584,000)       (922,000)       (640,000)
             Accounts payable, accrued expenses
                and other noncurrent liabilities                38,466,000      51,749,000      79,895,000
                                                              ------------    ------------    ------------
             Net cash provided by operating activities          14,539,000      28,994,000      28,651,000
                                                              ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                          (6,525,000)     (7,568,000)    (22,603,000)
   Purchase of subsidiaries, net of cash acquired                       --     (89,701,000)             --
                                                              ------------    ------------    ------------
             Net cash used in investing activities              (6,525,000)    (97,269,000)    (22,603,000)
                                                              ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from issuance of Common Stock                      256,000       2,425,000       1,571,000
   Proceeds from borrowings                                        708,000      50,000,000      37,000,000
   Payments on long-term obligations                            (1,608,000)             --     (37,000,000)
   Payment of preferred stock dividend                            (200,000)             --              --
                                                              ------------    ------------    ------------
             Net cash provided by (used in) financing
               activities                                         (844,000)     52,425,000       1,571,000
                                                              ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                                                  7,170,000     (15,850,000)      7,619,000
CASH AND CASH EQUIVALENTS, beginning of year                    51,172,000      58,342,000      42,492,000
                                                              ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, end of year                        $ 58,342,000    $ 42,492,000    $ 50,111,000
                                                              ============    ============    ============

SUPPLEMENTARY INFORMATION:

    Cash paid for interest totaled approximately $67,000, $0 and $3,943,000 in
      1998, 1999 and 2000, respectively.

    The Company made income tax payments of $5,100,000, $5,900,000 and $7,000,000
      in 1998, 1999 and 2000, respectively.
</TABLE>

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


                                      F-6
<PAGE>   50



                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   GENERAL:

     Advance Paradigm, Inc. (the "Company" or "API"), a Delaware corporation, is
a leading independent provider of health benefit management services, providing
integrated pharmacy benefit management, disease management, clinical trials and
research and web-based marketing support and other health related programs. The
Company markets its services to managed care organizations, third-party health
plan administrators, insurance companies, government agencies, employer groups
and labor union-based trusts. In addition, the Company transacts business with
pharmaceutical manufacturers as both suppliers and customers. During the year
ended March 31, 1999, the Company purchased two companies for cash. Foundation
Health Pharmaceutical Services, Inc. ("FHPS") was acquired on March 31, 1999 for
$70 million. FHPS was the pharmacy benefit management business of Foundation
Health Systems, Inc. ("FHS"). On December 1, 1998, Baumel-Eisner Neuromedical
Institute ("Baumel-Eisner") was acquired for $25 million. Baumel-Eisner was a
privately held clinical trials company based in South Florida. (See Note 3)


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Consolidation

     The accompanying consolidated financial statements include the accounts of
API and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Use of Estimates

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

     Cash and cash equivalents include overnight investments, money market
accounts and high-grade commercial paper with original maturities of three
months or less.


                                      F-7
<PAGE>   51



                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

Inventories

     Inventories consist of purchased pharmaceuticals stated at the lower of
cost or market under the first-in, first-out method.

Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method over
estimated useful lives ranging from three to twenty years. Amortization of
leasehold improvements is computed over the lives of the assets or the lease
terms, whichever is shorter. Major renewals and betterments are added to the
property and equipment accounts while costs of repairs and maintenance are
charged to operating expenses in the period incurred. The cost of assets
retired, sold or otherwise disposed of and the applicable accumulated
depreciation are removed from the accounts, and the resultant gain or loss, if
any, is reflected in the statement of operations.

Intangible Assets

     Intangible assets consist of goodwill, customer contracts acquired and
non-compete agreements. Goodwill represents the excess of cost over the
estimated fair value of tangible net assets acquired. Goodwill is amortized on a
straight-line basis over periods from 25 to 40 years with a weighted average of
29 years. Customer contracts and non-compete agreements are amortized over 10 to
15 years. Amortization expense was approximately $346,000, $691,000 and
$3,887,000 in the years ended March 31, 1998, 1999 and 2000, respectively, and
is included in selling, general and administrative expenses.

Other Assets

     In the year ended March 31, 2000, the Company issued 231,884 shares of its
Common Stock to acquire a 19 percent interest in Consumer Health Interactive,
Inc. ("CHI"). The $5,000,000 investment is reflected in other assets.


                                      F-8
<PAGE>   52



                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

Impairment of Long-Lived Assets

     The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets, including
goodwill, may warrant revision or that the remaining balance of an asset may not
be recoverable. The assessment of possible impairment is based on the ability to
recover the carrying amount of the asset from expected future cash flows on an
undiscounted basis. If the assessment indicates that the carrying amount of the
asset exceeds the undiscounted cash flows, an impairment has occurred. The
impairment is calculated as the total by which the carrying amount of the asset
exceeds its fair value. The fair value of long-lived assets and goodwill is
estimated based on quoted market prices, if available, or the expected total
value of the cash flows, on a discounted basis. The Company recorded no
impairment charges in fiscal 1998, 1999 or 2000.

Fair Value of Financial Instruments

     The carrying values of cash, receivables, payables and accrued liabilities
approximate the fair values of these instruments because of their short-term
maturities. The fair value of the Company's bank debt, which approximates the
carrying value, was estimated at current rates for similar debt with similar
maturity.

Other Noncurrent Liabilities

     Other liabilities is comprised of deposits from certain customers in
connection with pharmacy benefit contracts.

Revenue Recognition

     Revenues from the dispensing of pharmaceuticals from the Company's mail
service pharmacy are recognized when each prescription is shipped. Revenues from
sales of prescription drugs by pharmacies in the Company's nationwide network
and claims processing fees are recognized when the claims are adjudicated. At
the point-of-sale, the pharmacy claims are adjudicated using the Company's
on-line claims processing system. When the Company has an independent obligation
to pay its network pharmacy providers, the Company includes payments from plan
sponsors for these benefits as revenues and payments to its pharmacy providers
as cost of revenues. If the Company is only administering plan sponsors' network
pharmacy contracts, the Company records the claims processing service fees as
revenues. Rebate revenues are recognized as they are earned in accordance with
contractual agreements. Certain of these revenues are based on estimates which
are subject to final settlement with the contract party. These estimates are
reviewed and revised as settled. Revenues from certain disease management and
health benefit management products are reimbursed at predetermined contractual
rates based on the achievement of certain milestones.


                                      F-9
<PAGE>   53


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

Cost of Revenues

     Cost of revenues includes product costs, pharmacy claims payments and other
direct costs associated with the sale and dispensing of prescriptions. Certain
of these expenses are recognized based on estimates which are subject to final
settlement with the contract party. These estimates are reviewed and revised as
settled.

Stock Split

    On October 12, 1999, the Company announced a two-for-one stock split,
effected in the form of a stock dividend of our common stock. The record date
was November 11, 1999 and the date of payment was November 30, 1999. Financial
information and stock prices contained throughout the Form 10-K have been
retroactively adjusted to reflect the impact of the stock split in all periods
presented.

Net Income Per Share

     Net income per share is computed using the weighted average number of
common and dilutive shares outstanding during the period. A reconciliation of
the numerators and denominators of the basic and diluted per-share computations
follows:

<TABLE>
<CAPTION>
                                                       YEAR ENDED MARCH 31,
                                           ---------------------------------------
                                               1998         1999           2000
                                           -----------   -----------   -----------
<S>                                        <C>           <C>           <C>
BASIC
Numerator:
Net income                                 $ 7,931,000   $12,694,000   $20,555,000
Preferred stock dividends                      200,000            --            --
                                           -----------   -----------   -----------
                                           $ 7,731,000   $12,694,000   $20,555,000
                                           ===========   ===========   ===========
Denominator:
Weighted average common
   stock outstanding                        17,511,508    20,504,290    21,260,163
                                           ===========   ===========   ===========

Net income per share                       $      0.44   $      0.62   $      0.97
                                           ===========   ===========   ===========

DILUTED
Numerator:
Net income                                 $ 7,931,000   $12,694,000   $20,555,000
                                           ===========   ===========   ===========

Denominator:
Weighted average common                     17,511,508    20,504,290    21,260,163
   stock outstanding
Other Dilutive Securities:
Series B preferred stock                     2,222,222        73,260            --
Options and warrants using the
  treasury stock method                      2,968,108     2,798,652     2,977,053
                                           -----------   -----------   -----------
Weighted average shares outstanding         22,701,838    23,376,202    24,237,216
                                           ===========   ===========   ===========

Net income per share                       $      0.35   $      0.54   $      0.85
                                           ===========   ===========   ===========
</TABLE>


                                      F-10
<PAGE>   54


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

Reclassification

     Certain prior year amounts have been reclassified to conform with current
year presentation.

Recent Accounting Pronouncements

     The Company adopted Statement of Financial Accounting Standards ("SFAS")
130, "Reporting Comprehensive Income," effective April 1, 1998. SFAS 130
established standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is defined as the total of net income and all other non-owner changes in
equity. The Company does not have any non-owner changes in equity other than net
income. Comprehensive income has been reported in the consolidated statement of
stockholders' equity.

     The Company has adopted SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information," effective April 1, 1998. This pronouncement
changes the requirements under which public businesses must report segment
information. The objective of the pronouncement is to provide information about
a company's different types of business activities and different economic
environments. SFAS 131 requires companies to select segments based on their
internal reporting system. The Company provides integrated health benefit
management services to our customers, and these services account for
substantially all of the Company's revenues. Such services are typically
negotiated under one contract with the customer. Therefore, the Company's
operations will continue to be reported in one segment.

     The Company adopted SFAS 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," as of April 1, 1998. This pronouncement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans, however, it does
require additional information on changes in the benefit obligations and fair
values of plan assets in order to facilitate financial analysis. The Company
does not have any pension or postretirement benefit plans, therefore the
adoption of SFAS 132 did not have a material impact on the Company's
disclosures.

     In June 1998, Financial Accounting Standards Board Statement 133,
Accounting for Derivative Instruments and Hedging Activities SFAS 133 was
issued. SFAS 133 requires all derivatives to be recognized as either assets or
liabilities in the statement of financial position and measured at fair value.
In addition, SFAS 133 specifies the accounting for changes in the fair value of
a derivative based on the intended use of the derivative and the resulting
designation. The Company does not have any derivatives and SFAS 133 does not
have a material impact on the Company's financial position or disclosures. SFAS
133, as amended by SFAS 137 and SFAS 138, is effective beginning in fiscal year
March 31, 2002.


                                      F-11
<PAGE>   55


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. ACQUISITIONS

     In December 1998, the Company acquired the outstanding stock of
Baumel-Eisner for $25 million in cash. The acquisition has been accounted for
using the purchase method of accounting. Baumel-Eisner's results have been
included in the Company's consolidated statements of operations since December
1998. The purchase price was allocated to the net assets acquired, primarily
goodwill, based on their estimated fair values. The excess of the purchase price
over the fair value of the net assets acquired (goodwill) was approximately
$24.2 million and is being amortized on a straight-line basis over 25 years.

     On March 31, 1999, the Company acquired the outstanding stock of FHPS for
$70 million in cash and warrants to purchase 400,000 shares of its $0.01 par
value common stock ("Common Stock"). The Company valued such warrants at fair
market value based upon the Black-Scholes valuation model. Such warrants are
valued at $2.5 million. The acquisition has been accounted for using the
purchase method of accounting. The purchase price was allocated to goodwill,
certain customer contracts and other intangible assets. Goodwill was valued at
approximately $61.3 million and is being amortized on a straight-line basis over
30 years. Customer contracts were valued at $7.0 million and are being amortized
over 15 years.

     The following unaudited pro forma information presents the results of
operations of the Company as if the FHPS acquisition had taken place at the
beginning of the periods presented (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                1998          1999
                                                ----          ----
<S>                                         <C>           <C>
Revenues                                    $   530,016   $   855,810
Net income                                  $     4,053   $    12,550
Net income per share:
  Basic                                     $      0.23   $      0.61
  Diluted                                   $      0.18   $      0.54
Weighted average shares outstanding:
  Basic                                      17,511,508    20,504,290
  Diluted                                    22,701,838    23,376,202
</TABLE>

     In February 1998, the Company completed a merger with Innovative Medical
Research, Inc. ("IMR"), a privately held clinical trial and survey research firm
based in Towson, Maryland. The Company issued 1,752,156 shares and options to
purchase 47,844 shares of its Common Stock in exchange for all the outstanding
shares and options of IMR. The merger constituted a tax-free reorganization and
has been accounted for as a pooling of interests under Accounting Principles
Board Opinion No. 16 ("APB 16"). Accordingly, all prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position and cash flows of IMR as though it had
always been a part of the Company.


                                      F-12
<PAGE>   56


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. ACQUISITIONS: (CONTINUED)

The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements follow.

<TABLE>
<CAPTION>
                                  Year Ended March 31,
                                          1998
                                  --------------------
<S>                                   <C>
Revenues:
API                                   $468,287,000
IMR                                      8,377,000
                                      ------------
Combined                              $476,664,000
                                      ------------

Net income:
API                                   $  7,165,000
IMR                                        766,000
                                      ------------
Combined                              $  7,931,000
                                      ============
</TABLE>

     In connection with the merger, the Company recorded in the fourth quarter
of fiscal 1998 a charge to operating expenses of $689,000 ($427,000 after taxes,
or $.02 per common share on a dilutive basis) for professional fees and other
merger-related costs pertaining to the transaction.

4. PROPERTY AND EQUIPMENT:

     Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                                            March 31,
                                                                  ----------------------------
                                                                     1999            2000
                                                                  -------------  -------------
<S>                                                               <C>            <C>
Machinery and equipment......................................     $   4,208,000  $   6,332,000
Computer equipment and software..............................        12,840,000     28,716,000
Furniture and equipment......................................         2,324,000      4,763,000
Leasehold improvements.......................................         2,765,000      4,813,000
Land and buildings...........................................         1,558,000      1,674,000
                                                                  -------------  -------------
                                                                     23,695,000     46,298,000
Less--Accumulated depreciation and amortization..............        (8,540,000)   (13,679,000)
                                                                  -------------  -------------
                                                                  $  15,155,000  $  32,619,000
                                                                  =============  =============
</TABLE>


                                      F-13
<PAGE>   57


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.   DEBT:

     On March 31, 1999, the Company entered into a senior credit facility with a
group of lenders. The credit facility consists of a $75 million, 3-year
revolving credit facility. On March 31, 1999, the Company borrowed $50 million
under the credit facility to fund the acquisition of FHPS. As of March 31, 2000,
$50 million is outstanding under the credit facility. Outstanding borrowings
will mature on March 31, 2002. Each of the Company's subsidiaries has guaranteed
the credit facility. The lenders received a first priority security interest in
the subsidiaries' capital stock and negative pledges on accounts receivable and
other assets.

     Interest on the credit facility accrues at a specified margin above the
London Interbank Offered Rate, or LIBOR, or an alternate base rate. The
alternate base rate is the bank's prime rate or the federal funds rate plus
0.5%. For LIBOR loans the applicable margin is 1.375% per annum as of March 31,
2000 and the effective interest rate is 7.435%.

     The credit facility contains usual and customary affirmative and negative
covenants, including limitations on liens, debts, dividends, capital
expenditures, mergers, acquisitions and sale of assets. Covenants also include a
specified minimum net worth, maximum leverage ratio and a minimum interest
coverage ratio. In fiscal 2000, the Company exceeded the limit for capital
expenditures as required by covenant. The Company received a waiver from the
lenders for this covenant violation.

6.   LEASES:

     The Company leases office and dispensing facility space, equipment, and
automobiles under various operating leases. The Company was obligated to make
future minimum payments under noncancelable operating lease agreements as of
March 31, 2000, as follows:

<TABLE>
<CAPTION>
   Years Ending
     March 31,
   ------------
<S>                                                               <C>
       2001...................................................    $  7,343,000
       2002...................................................       6,929,000
       2003...................................................       5,515,000
       2004...................................................       4,487,000
       2005...................................................       3,831,000
                                                                  ------------
            Total minimum lease payments......................    $ 28,105,000
                                                                  ============
</TABLE>

     Total rent expense incurred in the years ended March 31, 1998, 1999 and
2000 was approximately $3,096,000, $4,018,000 and $5,703,000, respectively.


                                      F-14
<PAGE>   58


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.   COMMITMENTS AND CONTINGENCIES:

     We are a party to routine legal and administrative proceedings arising in
the ordinary course of our business. The proceedings currently pending are not,
in our opinion, material either individually or in the aggregate.

     The Company has entered into long-term employment and non-compete
agreements with certain management employees. These employment agreements
provide for certain minimum payments should the agreements be terminated.

     Various aspects of our businesses are governed by federal and state laws
and regulations and compliance is a significant operational requirement for our
company. We believe that we are in substantial compliance with all existing
legal requirements material to the operation of our business. However, the
application of complex standards to the detailed operation of our business
always creates areas of uncertainty. Moreover, regulation of the field is in a
state of flux. Numerous health care laws and regulations have been proposed at
the state and federal level, many of which could affect our business. We cannot
predict what additional federal or state legislation or regulatory initiatives
may be enacted in the future regarding health care, or the business of pharmacy
benefit management. It is possible that federal or state governments might
impose additional restrictions or adopt interpretations of existing laws that
could have a material adverse affect on our business or financial position.

8.   CONCENTRATION OF BUSINESS:

     A significant portion of the Company's revenues result from contracts with
customers. These contracts normally have terms from one to ten years with
renewal options.

     Effective April 1, 1999, the Company entered into a Pharmacy Benefit
Services Agreement with FHS. Under the terms of this ten year Service Agreement
the Company provides pharmacy services to FHS' affiliated health plans. FHS
accounted for 38% of the Company's revenues for the year ended March 31, 2000.
Another customer of the Company accounted for approximately 21%, 18% and 8% of
the Company's revenues for the years ended March 31, 1998, 1999 and 2000,
respectively. Another customer accounted for approximately 15% of the Company's
revenues for the year ended March 31, 1998, but revenues from this customer did
not exceed 10% of the Company's revenues for the year ended March 31, 1999 or
2000. No other customer accounted for over 10% of the Company's revenues in
fiscal years 1998, 1999 or 2000.


                                      F-15
<PAGE>   59


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.   STOCK TRANSACTIONS:

Series B Preferred Stock

     On June 25, 1996, the Company issued a total of 4,444 shares of $.01 par
value, Series B convertible preferred stock ("Series B Preferred Stock") to a
customer at a price of $2,250 per share. Shares of the Series B Preferred Stock
could be converted by the holder into 500 fully-paid and non-assessable shares
of Common Stock. On April 13, 1998, the holders of the Series B Preferred Stock
converted all of the shares into 2,222,222 shares of Common Stock.

Common Stock

     On October 7, 1996, the Company amended and restated its Certificate of
Incorporation to, among other things, increase the number of authorized shares
of its $.01 par value Common Stock to 25,000,000 and the number of shares of its
preferred stock to 5,000,000, of which 5,000 shares are designated as Series B
Preferred Stock. On October 8, 1996, the Company effected a 250-for-one stock
split of the Company's Common Stock. Accordingly, all share and per share
amounts have been adjusted to reflect the stock split as though it had occurred
at the beginning of the initial period presented.

     At the 1999 Annual Meeting of Stockholders the Company amended and restated
the Certificate of Incorporation to increase the number of authorized shares of
its Common Stock to 50,000,000.

    On October 12, 1999, the Company announced a two-for-one stock split,
effected in the form of a stock dividend of our Common Stock. The record date
was November 11, 1999 and the date of payment was November 30, 1999. Financial
information and stock prices contained throughout the financial statements have
been adjusted to retroactively reflect the impact of the stock split.

     On October 8, 1996, the Company completed the offering ("Offering") of its
Common Stock. The Company sold 4,794,134 shares of its Common Stock at a price
of $4.50 per share, prior to underwriting discount and other offering expenses.
In connection with the Offering, the Company's redeemable Series A cumulative
convertible preferred stock ("Series A Preferred Stock") automatically converted
into 5,000,000 shares of Common Stock.

     In connection with the IMR merger, the Company issued 1,752,156 shares of
its Common Stock in exchange for all the outstanding shares of IMR. Under the
provisions of APB 16, the shares are reflected as outstanding as though IMR had
always been a part of the Company.

     On December 8, 1999 the Company issued 231,884 shares of its Common Stock
to acquire a 19 percent interest in CHI.


                                      F-16
<PAGE>   60


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9. STOCK TRANSACTIONS: (CONTINUED)

Warrants to Purchase Common Stock

     The Company has issued warrants to four of our key health plan sponsor
customers representing the right to purchase up to a total of 691,610 shares of
our Common Stock at prices per share ranging from $16.31 to $21.13. The right to
exercise each warrant vests in equal installments on the first five
anniversaries of the date of grant so long as the customer's service agreement
remains in effect. In addition, during the year ended March 31, 1997, the
Company agreed to issue warrants to purchase 562,500 shares of its Common Stock
to one customer contingent upon future expansion of member lives. As of March
31, 2000, none of these warrants have been earned or issued.

     Prior to November of 1997, the Company accounted for these warrant
agreements under the provisions of SFAS 123 and the related Emerging Issues Task
Force ("EITF") 96-3. These pronouncements require that all stock issued to
non-employees be accounted for based on the fair value of the consideration
received or the fair value of equity instruments issued. In addition, they
require that the fair value be measured on the date the parties come to a
"mutual understanding of the terms of the arrangement and agree to a binding
contract" (i.e. the grant date). If the number of equity instruments is
contingent upon the outcome of future events, the number of instruments that
should be accounted for when determining the fair value of the transaction
should be based on the best available estimate of the number of instruments
expected to be issued. In management's opinion, the fair value of the warrants
at the date of the agreements was not material.

     Subsequent to November 20, 1997, the Company follows the guidance of EITF
96-18, under which the measurement date is the earlier of the performance
commitment date or completed performance date. The Company chose not to
retroactively apply EITF 96-18 to the eligible warrants, but chose to apply this
EITF prospectively to new arrangements and any modifications of existing
arrangements.

     The Company has reserved shares of Common Stock at March 31, 2000, for the
following:

<TABLE>
<S>                                                       <C>
     Exercise of stock options....................          6,164,658
     Exercise of warrants.........................          1,254,110
                                                          -----------
                                                            7,418,768
                                                          ===========
</TABLE>


                                      F-17
<PAGE>   61


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10. STOCK OPTION PLAN:

     At March 31, 2000, the Company has three stock-based compensation plans:
Incentive Stock Option Plan, Amended and Restated Incentive Stock Option Plan
and the 1997 Nonstatutory Stock Option Plan (the "Plans"). The Plans provide for
the granting of qualified stock options and incentive options to officers,
directors, advisors and employees of the Company. The options must be granted
with exercise prices which equal or exceed the market value of the Common Stock
at the date of grant. As of March 31, 2000, the number of shares of Common Stock
issuable under the Plans may not exceed 7,675,500 shares. The Plans are
administered by a compensation committee appointed by the Board of Directors of
the Company.

     The stock options generally vest over 5-year periods. In the event of the
sale or merger with an outside corporation gaining 50% or greater ownership,
options granted to certain employees become 100% vested. The options are
exercisable for a period not to exceed 10 years from the date of grant. As of
March 31, 2000, 2,488,092 options were vested at exercise prices of $.49 to
$20.68 per share.

     SFAS 123 establishes a fair value-based method of accounting for
stock-based compensation. The Company has elected to adopt SFAS 123 through
disclosure with respect to employee stock-based compensation. The following
table summarizes the Company's stock option activity.

<TABLE>
<CAPTION>
                                               1998                          1999                        2000
                                    --------------------------    ---------------------------  --------------------------
                                                     Wtd. Avg.                      Wtd. Avg.                   Wtd. Avg.
                                         Shares      Ex. Price        Shares        Ex. Price      Shares       Ex. Price
                                    --------------   ---------    --------------    ---------  --------------   ---------
<S>                                  <C>             <C>          <C>               <C>         <C>               <C>
Outstanding at beginning of year         2,887,500   $    3.01         4,123,490    $    5.27       4,553,276   $    8.61
Granted                                  1,304,750       10.63         1,392,300        15.71       1,418,200       20.98
Transferred from IMR                        47,844        0.59                --           --              --          --
Exercised                                  (86,104)       2.63          (726,644)        3.40        (177,734)       6.23
Canceled                                   (30,500)       4.89          (235,870)       14.51        (233,990)      14.82
                                    --------------   ---------    --------------    ---------  --------------   ---------
Outstanding at end of year               4,123,490        5.27         4,553,276         8.61       5,559,752       11.58
                                    ==============   =========    ==============    =========  ==============   =========
Exercisable at end of year               1,758,764        2.20         1,815,200         3.34       2,488,092        5.42
Price range                         $.33 to $16.57                $.33 to $20.69               $.49 to $29.08
Weighted average fair value
   of options granted                       $ 3.97                         $7.32                       $10.58
</TABLE>


                                      F-18
<PAGE>   62


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10. STOCK OPTION PLAN: (CONTINUED)

     The following table reflects the weighted average exercise price and
weighted average contractual life of various exercise price ranges of the
5,559,752 options outstanding as of March 31, 2000.

<TABLE>
<CAPTION>
                                        Options Outstanding                         Options Exercisable
                              -----------------------------------------       ------------------------------
                                            Weighted        Wtd. Avg.                            Weighted
                                         Avg. Exercise      Contractual                        Avg. Exercise
Exercise Price Range           Shares        Price          Life (yrs.)        Shares              Price
------------------------      ---------  -------------      -----------       ---------        -------------
<S>         <C> <C>          <C>           <C>              <C>             <C>               <C>
$     .49   to  $   4.50      1,631,272    $     2.16          3.9            1,437,272        $        1.84
$    5.40   to  $   9.38        846,100    $     6.17          6.4              593,500        $        6.10
$   10.38   to  $  14.69        804,800    $    14.29          8.2              178,000        $       14.20
$   15.44   to  $  19.50      1,630,880    $    17.63          9.1              266,320        $       16.63
$   20.16   to  $  24.25        375,000    $    22.43          9.1               13,000        $       20.68
$   25.38   to  $  29.08        271,700    $    25.70          9.4                    0        $           0
------------------------      ---------    ----------          ---            ---------        -------------
$     .49   to  $  29.08      5,559,752    $    11.58          7.0            2,488,092        $        5.42
</TABLE>

     The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
ranges of assumptions for the years ended March 31, 1998, 1999 and 2000,
respectively: risk-free interest rates of 4.8% to 6.3%; expected lives of three
to five years; expected volatility of 30% to 60%. The Company continues to
account for stock based compensation under APB 25, "Accounting for Stock Issued
to Employees", as allowed by SFAS 123. Had compensation cost for these plans
been determined consistent with SFAS 123, the Company's net income and net
income per share would have been reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
                                             1998                1999                    2000
                                             ----                ----                    ----
<S>                                       <C>                <C>                     <C>
Net income:
  As reported                             $ 7,931,000        $ 12,694,000            $ 20,555,000
  Pro forma                               $ 7,382,000        $ 11,121,000            $ 17,028,000

Basic net income per share:
  As reported                             $      0.44        $       0.62            $       0.97
  Pro forma                               $      0.41        $       0.54            $       0.80

Diluted net income per share:
  As reported                             $      0.35        $       0.54            $       0.85
  Pro forma                               $      0.33        $       0.47            $       0.70
</TABLE>

Because SFAS 123 method of accounting has not been applied to options granted
prior to April 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.


                                      F-19
<PAGE>   63


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


11.  RELATED PARTY TRANSACTIONS:

     In fiscal 1998, the Company entered into an agreement with Advance Capital
Markets ("ACM") pursuant to which ACM agreed to act as financial advisor for the
Company. In exchange for these professional services, the Company paid ACM a fee
of $150,000 in 1998 in connection with the IMR transaction and $85,000 in
connection with the Baumel-Eisner transaction. The fees paid are equivalent to
or less than similar fees incurred in arm's-length transactions. The Managing
Director of ACM is also a Director of the Company.

12.  RETIREMENT PLAN BENEFITS:

     The Company sponsors a retirement plan for all eligible employees, as
defined in the plan document. The plan is qualified under Section 401(k) of the
Internal Revenue Code. The Company is required to contribute at least 50% of the
first 6% of salary deferral contributed by each participant. The Company's
contributions to the plan amounted to approximately $177,000, $268,000 and
$623,000 for the years ended March 31, 1998, 1999 and 2000, respectively.

13. INCOME TAXES:

     The provision for income taxes for the years ended March 31, 1998, 1999 and
2000, differed from the amounts computed by applying the U.S. federal tax rate
of 34 percent in 1998 and 1999 and 35 percent in 2000 to pretax earnings as a
result of the following:

<TABLE>
<CAPTION>
                                           1998                         1999                         2000
                                      ---------------             ----------------             ---------------
<S>                                   <C>                         <C>                          <C>
     Tax at U.S. federal              $     4,349,000             $      6,961,000             $    11,604,000
       income tax rate
     State taxes                              457,000                      666,000                     540,000
     Other, net                                55,000                      153,000                     454,000
                                      ---------------             ----------------             ---------------
     Provision for income taxes       $     4,861,000             $      7,780,000             $    12,598,000
                                      ===============             ================             ===============
</TABLE>


<TABLE>
<CAPTION>
                                            1998                        1999                        2000
                                      ---------------             ----------------             ---------------
<S>                                   <C>                         <C>                          <C>
     Current                          $     4,420,000             $      6,468,000             $    11,291,000
     Deferred                                 441,000                    1,312,000                   1,307,000
                                      ---------------             ----------------             ---------------
                                      $     4,861,000             $      7,780,000             $    12,598,000
                                      ===============             ================             ===============
</TABLE>


                                      F-20
<PAGE>   64


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13. INCOME TAXES: (CONTINUED)

     Deferred income taxes reflect the tax consequences on future years of
temporary differences between the tax bases of assets and liabilities and their
financial reporting bases and the potential benefits of certain tax
carryforwards. The significant deferred tax assets and liabilities and the
changes in those assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                            March 31,                     March 31,
                                              1999          Changes          2000
                                           -----------    -----------    -----------
<S>                                        <C>            <C>            <C>
Gross deferred tax assets:
     Accruals ..........................   $   153,000    $   168,000    $   321,000
     Other .............................       126,000         14,000        140,000
                                           -----------    -----------    -----------
                                               279,000        182,000        461,000
                                           -----------    -----------    -----------
Gross deferred tax liabilities:
     Amortization of goodwill ..........    (1,047,000)    (1,118,000)    (2,165,000)
     Depreciation ......................      (700,000)      (773,000)    (1,473,000)
     Conversion from cash
         basis of acquired entities ....    (1,129,000)       402,000       (727,000)
                                           -----------    -----------    -----------
                                            (2,876,000)    (1,489,000)    (4,365,000)
                                           -----------    -----------    -----------

     Net deferred tax liability ........   $(2,597,000)   $(1,307,000)   $(3,904,000)
                                           ===========    ===========    ===========
</TABLE>


                                      F-21
<PAGE>   65


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                         ON FINANCIAL STATEMENT SCHEDULE



         We have audited in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements of Advance
Paradigm, Inc. and subsidiaries included in this Form 10-K and have issued our
report thereon dated May 17, 2000. Our audit was made for the purpose of forming
an opinion on the basic consolidated financial statements taken as a whole.
Schedule II is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.



                                                  ARTHUR ANDERSEN LLP



Dallas, Texas
 May 17, 2000


                                      S-1
<PAGE>   66


                             ADVANCE PARADIGM, INC.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS



<TABLE>
<CAPTION>
                                                Balance at       Additions                    Balance at
                                                Beginning        Charged to        (1)          End of
                                                 of Year          Expenses      Deductions       Year
                                               -----------       ----------     ----------    ----------
<S>                                            <C>               <C>            <C>           <C>
Year ended March 31, 1998:
Allowance for doubtful accounts receivable     $   192,000       $   74,000     $   19,000    $  247,000

Year ended March 31, 1999:
Allowance for doubtful accounts receivable     $   247,000       $  124,000(2)  $       --    $  371,000

Year ended March 31, 2000:
Allowance for doubtful accounts receivable     $   371,000       $   24,000     $   27,000    $  368,000
</TABLE>

----------
(1)  Uncollectible accounts written off, net of recoveries

(2)  Includes $100,000 reflected in the acquisition of Baumel-Eisner


                                      S-2
<PAGE>   67


                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
EXHIBIT
NUMBER          DESCRIPTION
-------         -----------
<S>             <C>
2.1(a)  ---     Stock Purchase Agreement, dated effective as of December 1,
                1998, by and among Advance Paradigm, Inc. (the "Company"),
                Baumel-Eisner Neuromedical Institute, Inc., Barry Baumel, M.D.
                and Larry S. Eisner, M.D.

2.2(b)  ---     Purchase Agreement, dated as of February 26, 1999, among
                Foundation Health Systems, Inc., Foundation Health Corporation,
                Foundation Health Pharmaceutical Services, Inc., Integrated
                Pharmaceutical Services, Inc. and the Company.

3.1(c)  ---     Amended and Restated Certificate of Incorporation of the
                Company.

3.2(c)  ---     Certificate of Amendment to the Certificate of Incorporation of
                the Company.

3.3(c)  ---     Certificate of Correction to the Amendment to the Certificate of
                Incorporation of the Company.

3.4(c)  ---     Amended and Restated Bylaws of the Company.

3.5(c)  ---     Certificate of Incorporation of Advance Pharmacy Services, Inc.

3.6(c)  ---     Certificate of Amendment to the Certificate of Incorporation of
                Advance Pharmacy Services, Inc.

3.7(c)  ---     Certificate of Correction to the Certificate of Amendment to the
                Certificate of Incorporation of Advance Pharmacy Services, Inc.

3.8(c)  ---     Certificate of Amendment to the Certificate of Incorporation of
                Advance Pharmacy Services, Inc.

3.9(c)  ---     Bylaws of Advance Pharmacy Services, Inc.

4.1(d)  ---     Specimen Certificate for shares of Common Stock, $0.01 par
                value, of the Company.

4.2(e)  ---     Amended and Restated Incentive Stock Option Plan.

4.3(e)  ---     Incentive Stock Option Plan.

4.4(c)  ---     Warrant Agreement, dated as of September 12, 1996, by and
                between the Company and VHA, Inc.

4.5(c)  ---     Form of Agreement and Plan of Merger.
</TABLE>


<PAGE>   68


<TABLE>
<S>             <C>
4.6(f)   ---    1997 Nonstatutory Stock Option Plan.

4.7(b)   ---    Warrant Agreement, dated as of February 26, 1999, by and between
                the Company and Foundation Health Systems, Inc.

4.8(i)   ---    Warrant Agreement, dated as of February 25, 1999, by and between
                the Company and Arkansas BlueCross BlueShield

4.9(i)   ---    Warrant Agreement, dated as of June 12, 1998, by and between the
                Company and Wellmark, Inc.

10.1(c)  ---    Managed Pharmaceutical Agreement, dated November 1, 1993, by and
                between Advance Data and the Mega Life & Health Insurance
                Company.

10.2(c)  ---    Nondisclosure/Noncompetition Agreement, dated August 4, 1993,
                between the Company, Advance Data, Advance Mail and David D.
                Halbert.

10.3(c)  ---    Nondisclosure/Noncompetition Agreement, dated August 4, 1993,
                between the Company, Advance Mail, Advance Data and Jon S.
                Halbert.

10.4(c)  ---    Nondisclosure/Noncompetition Agreement, dated August 4, 1993,
                between the Company, Advance Mail, Advance Data and Danny
                Phillips.

10.5(d)  ---    Employment Agreement, effective as of December 1, 1996, by and
                between Advance Clinical (formerly ParadigM) and Joseph J.
                Filipek, Jr. and, for the limited purposes of Sections 3(d),
                3(g) and 3(h) thereof, the Company.

10.6(d)  ---    Employment Agreement, effective as of November 14, 1996, by and
                between the Company and John H. Sattler.

10.7(d)  ---    Employment Agreement, effective as of June 17, 1996, by and
                between the Company and Ernest Buys.

10.8(c)  ---    Employment Agreement, effective as of February 15, 1996, by and
                between the Company and Alan T. Wright.

10.9(c)  ---    Form of Health Benefit Management Services Agreement.

10.10(c) ---    Sublease, dated May 2, 1996, between Lincoln National Life
                Insurance Company and Advance Data.

10.11(c) ---    Lease, dated March 6, 1994, by and between Hill Management
                Services, Inc. and Advance Clinical (formerly ParadigM).
</TABLE>


<PAGE>   69


<TABLE>
<S>             <C>
10.12(c) ---    Lease Agreement, dated as of February 24, 1989, as amended
                November 30, 1992, and December __, 1992, by and between TRST
                Las Colinas, Inc. and Advance Health Care.

10.13(c) ---    Managed Pharmacy Benefit Services Agreement, dated September 1,
                1995, between the Company and BCBS of Texas.

10.14(g) ---    Agreement and Plan of Merger, dated February 9, 1998, by and
                among the Company, IMR, Inc. and Innovative Medical Research,
                Inc., Walter Stewart, Richard Lipton, The Lianna Lipton Trust,
                The Justin Lipton Trust, Stuart Bell, The Curren Bell Trust, The
                Kylie Bell Trust and The Ian Bell Trust.

10.15(h) ---    Consulting Agreement, effective as of December 15, 1998, by and
                between the Company and David A. George.

10.16(b) ---    Pharmacy Benefit Services Agreement, effective as of April 1,
                1999, by and between the Company, Foundation Health Systems,
                Inc. and Integrated Pharmaceutical Services, Inc.

10.17(b) ---    Credit Agreement, dated as of March 31, 1999, among the Company,
                the banks named in the Credit Agreement, NationsBanc Montgomery
                Securities LLC and NationsBank, N.A.

10.18(b) ---    Guaranty, dated as of March 31, 1999, by each subsidiary of the
                Company, in favor of NationsBank, N.A.

10.19(i) ---    Commercial Lease Agreement, commencing November 1, 1998, by and
                between Crin-Richardson I, L.P. and the Company.

11.1(j)  ---    Statement regarding computation of per share earnings.

21.1(j)  ---    Subsidiaries of the Company.

23.1(j)  ---    Consent of Arthur Andersen LLP.

27.1(j)  ---    Financial Data Schedule.
</TABLE>


----------

(a)     Previously filed in connection with the Company's Current Report on Form
        8-K, dated December 29, 1998, and incorporated herein by reference.

(b)     Previously filed in connection with the Company's Current Report on Form
        8-K, dated April 12, 1999, and incorporated herein by reference.

(c)     Previously filed in connection with the Company's Registration Statement
        on Form S-1 filed October 8, 1996 (No. 333-06931), and incorporated
        herein by reference.


<PAGE>   70


(d)     Previously filed in connection with the Company's Form 10-K for the year
        ended March 31, 1997, and incorporated herein by reference.

(e)     Previously filed in connection with the Company's Registration Statement
        on Form S-8 filed September 5, 1997 (No. 333-34999), and incorporated
        herein by reference.

(f)     Previously filed in connection with the Company's Form 10-Q for the
        three months ended June 30, 1997, and incorporated herein by reference.

(g)     Previously filed in connection with the Company's Current Report on Form
        8-K, dated February 9, 1998, and incorporated herein by reference.

(h)     Previously filed in connection with the Company's Form 10-Q for the
        three months ended December 31, 1998, and incorporated herein by
        reference.

(i)     Previously filed in connection with the Company's Form 10-K for the year
        ended March 31, 1999, and incorporated herein by reference.

(j)     Filed herewith.