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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, 1998

[ ]   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. [ ]

      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,
1998 as reported on the Nasdaq National Market, was approximately $278,139,000.

      As of May 31, 1998, Registrant had outstanding 10,020,680 shares of Common
Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III.


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ITEM 1.  BUSINESS

OVERVIEW

     Advance Paradigm, Inc. (the "Company") is a leading independent provider of
pharmacy benefit management ("PBM") services to health benefit plan sponsors,
based on the over twelve million health plan members enrolled in the Company's
programs. The Company's primary focus is on the delivery of cost-effective, high
quality, integrated PBM services. In addition, the Company has developed and is
expanding its clinical expertise and disease management services to meet the
specialized needs of its plans' members, particularly those requiring costly,
long-term and recurring therapies. These services are designed to inform and
educate health benefit plan sponsors, their members and participating physicians
of nationally recognized practice guidelines for various disease states and to
encourage compliance with these guidelines.

     The Company's PBM services include clinical and benefit design
consultation, formulary and rebate administration, electronic point-of-sale
pharmacy claims processing, mail pharmacy distribution, pharmacy network
management, drug utilization review ("DUR") and data information reporting
services. The Company administers a pharmacy network that includes over 52,000
retail pharmacies throughout the United States. In response to increasing
cost-containment pressures of its clients, the Company utilized its clinical and
information systems capabilities to develop health benefit management ("HBM")
services. The Company's HBM services include disease management, recommendation
of clinical guidelines, patient and physician profiling, case finding,
compliance and outcome measurement and survey research. The Company markets its
HBM services to health benefit plan sponsors and pharmaceutical manufacturers,
and has initiated several programs with selected customers. In addition, the
Company intends to leverage its existing capabilities and relationships by
acquiring companies which have, or are developing, innovative HBM services which
will enable the Company to provide a centralized care management alternative for
its customers. In 1998, the Company further enhanced its HBM product offerings
by merging with Innovative Medical Research, Inc. ("IMR"), a privately held
clinical trial and survey research firm based in Towson, Maryland.

     The Company has four wholly owned subsidiaries, Advance Paradigm Mail
Services, Inc. ("Advance Mail"), Advance Paradigm Data Services, Inc. ("Advance
Data") Advance Paradigm Clinical Services, Inc. ("Advance Clinical") and IMR.
Advance Mail operates as a mail order pharmacy. Advance Data offers plan
participants an alternative for purchasing prescriptions through a network of
retail pharmacies and provides claims adjudication services. Advance Clinical,
formerly a wholly owned subsidiary of Blue Cross and Blue Shield of Maryland,
provides clinical and benefit design consultation, and formulary and rebate
administration. In February 1998, API merged with IMR, a privately held clinical
trial and survey research firm.

INDUSTRY BACKGROUND

     In response to escalating health care costs, cost containment efforts in
the health care industry have led to rapid growth in managed care. Despite these
efforts, continued advances in medical technology and new drug development have
led to significant increases in drug utilization and related costs, creating a
need for more efficient, cost effective drug delivery mechanisms. PBM services
evolved to address this need. Through volume discounts, retail pharmacy PPO
networks,


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mail pharmacy services, formulary administration, claims processing and DUR,
PBMs created an opportunity for health benefit plan sponsors to provide for drug
delivery to their members in a cost-effective manner while improving patient
compliance with recommended guidelines.

     Traditionally, PBMs focused primarily on cost containment by (i) generating
volume rebates from pharmaceutical companies, (ii) encouraging substitution of
generics for branded medications and (iii) obtaining price discounts through the
retail pharmacy network and mail distribution. Over the last several years, in
response to increasing payor demand, PBMs have begun to develop sophisticated
formulary management capabilities and comprehensive, on-line customer decision
support tools in an attempt to better manage the delivery of health care and
ultimately costs. Simultaneously, health benefit plan sponsors have begun to
focus on the quality and efficiency of care, emphasizing disease prevention, or
wellness, and care management. There is growing demand among payors for
comprehensive disease management programs as cost containment becomes more
dependent on improvements in the quality of care. HBM services have been
developed to address this demand through the use of traditional PBM services
combined with clinical expertise and sophisticated information systems.

THE ADVANCE PARADIGM SOLUTION

     The Company provides benefit design, formulary and rebate administration,
point-of-sale pharmacy claims processing, mail pharmacy services, pharmacy
network management, DUR and data information reporting services. Through its HBM
services, the Company utilizes its expertise in development of formulary
designs, recommends "best practices" guidelines, and has created patient and
physician profiling, clinical intervention strategies and proprietary case
finding techniques. The Company's proprietary decision support systems provide a
platform for the delivery of outcomes-based HBM services. As part of its HBM
services, which integrate the Company's decision support systems with its core
clinical expertise, the Company currently provides disease management programs
that address various disease states.

SERVICES

     PHARMACEUTICAL BENEFIT MANAGEMENT. The Company's PBM services include
clinical and benefit design consultation, formulary and rebate administration,
electronic point-of-sale pharmacy claims processing, mail pharmacy distribution,
pharmacy network management, DUR and data information reporting. The Company
administers a pharmacy network which includes over 52,000 retail pharmacies
throughout the United States. The Company currently provides PBM services to
over 600 health plan benefit sponsors covering over twelve million plan members
enrolled in the Company's programs.

     CLINICAL SERVICES. The Company develops and implements customized programs
of clinical and formulary management services to reduce drug benefit costs while
promoting clinically appropriate drug usage. The Company works closely with each
customer to determine the desired features of a benefit plan, such as which
drugs are covered, extent of generic substitution and co-payment levels. The
Company also develops customized formularies which recommend the most clinically
appropriate, cost-effective drugs to be prescribed. Formularies are listings of
drugs and treatment protocols to be followed by the prescribing physician that
are intended to reduce the costs of prescription drugs under a particular health
plan. Formularies reduce cost through the 


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use of generic substitution, therapeutic substitution and other techniques and
may also generate leverage for the Company to negotiate more favorable rebates
and other volume discounts from drug manufacturers.

     Formulary compliance can be encouraged by (i) plan design features such as
tiered co-payments, which require the member to pay a higher amount for the
non-preferred drug, (ii) prescriber education programs in which the Company or
the managed care customer actively seek to educate the prescribers about the
formulary preferences and (iii) therapeutic substitution programs that target
certain high-cost therapies for concentrated formulary compliance efforts. The
Company continually monitors the efficacy and therapeutic applications of
pharmaceutical products, the availability of new drugs and generic equivalents
and rebate and other pricing arrangements with drug manufacturers. The Company
works closely with each customer to develop a customized formulary based on the
customer's drug utilization patterns and member and physician populations.

     The Company employs several intervention strategies to promote formulary
compliance by altering physician prescribing patterns. The Company utilizes its
decision support software to analyze data and present reports to plan sponsors
or physicians that compare a physician's formulary compliance against his or her
peers in the plan. The Company provides proprietary educational materials to
plan physicians, pharmacists or the plan sponsor to promote general education
and formulary compliance.

     DATA SERVICES. The Company's retail pharmacy network and claims
adjudication services provide plan sponsors an efficient, automated claims
processing network that permits point-of-sale adjudication and data collection.
The Company administers a network of approximately 52,000 retail pharmacies
which are preferred providers of prescription drugs to members of the pharmacy
benefit plans managed by the Company (the "Advance Pharmacies"). The Advance
Pharmacies have agreed to accept payments at predetermined negotiated rates,
which the Company believes to be generally more favorable than typical retail
prices. The Company's claims adjudication services division is its most rapidly
growing division with the number of claims processed increasing from
approximately 816,000 claims in fiscal year 1994 to over 38.3 million claims
processed in fiscal year 1998, including over 11.0 million claims processed in
the quarter ended March 31, 1998.

     The Advance Pharmacies are linked to the Company's Advance Rx(TM) on-line
claims adjudication and processing system, which contains patient medication
history, plan enrollment and eligibility data. The Advance Rx(TM) on-line system
provides pharmacists with point-of-sale information including plan design, drugs
covered, negotiated price and co-payment requirements, as well as extensive drug
utilization evaluation capabilities. The Advance Rx(TM) system performs on-line
concurrent drug utilization evaluation at the point of sale including
verification of eligibility, and identifies potential drug interactions,
frequency of refills and other matters. Within seconds of submitting a
prescription to the Advance Rx(TM) system, the pharmacist receives a
computerized message as to whether the prescription will be accepted by the
Company for payment. In addition, the Company can alert the pharmacist that the
prescribed drug is not the preferred formulary drug, that therapeutic or generic
substitution opportunities are available, or as to the need to comply with prior
authorization programs.


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     MAIL PHARMACY SERVICES. The Company's mail pharmacy services enable plan
sponsors to realize further cost savings on maintenance medications, while
benefiting from the Company's automated claims adjudication and data collection
capabilities. Cost savings to plan sponsors result from promotion of formulary
compliance by the Company's in-house pharmacy, and price discounts to the
Company from volume purchases. The mail pharmacy typically dispenses up to
100-day supplies of medications for chronic conditions, thereby reducing
repetitive dispensing fees. The Company believes that its mail pharmacy services
reduce costs to plan sponsors because the Company's role as pharmacist allows
for direct enforcement of the formulary, generic and therapeutic substitution,
volume purchasing discounts, and lower dispensing fees than are typically
available through retail pharmacies. In addition, the Company's control over the
dispensing process permits it to ensure that formulary compliance programs are
followed, to perform DUR on each prescription and to reduce the potential for
submission of fraudulent, incorrect or ineligible claims. Plan sponsors also
benefit from the drug utilization review capabilities of the Company's
management information system, which assist in preventing potential abuse by
plan participants and help identify areas to be targeted for further cost
reductions.

     The Company's mail service pharmacy is located in approximately 38,000
square feet, in a building owned by the Company, in Richardson, Texas and
currently dispenses over 20,000 prescriptions per week. The 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, the mail service system is equipped with
automated quality control features, and each prescription is inspected by a
registered pharmacist.

     HEALTH BENEFIT MANAGEMENT. The Company's HBM services include disease
management, recommendation of clinical guidelines, patient and physician
profiling, case finding and compliance and outcomes measurement and clinical
trials and survey research. By analyzing patients' medical and pharmacy claim
patterns, the Company can assist payors and health care providers in the early
identification of patients whose care might be improved through additional or
alternative treatment or medication.

     The Company's disease management programs incorporate clinical protocols
based on specific medical treatments and "best treatment practices" from the
medical community. These protocols are represented as a series of algorithms or
rules contained in the Company's decision support systems. These algorithms are
updated continually by the Company based upon changes in nationally recognized
best treatment practices, clinical experience and review of current medical
literature.

     In 1998, the Company merged with IMR, a privately held clinical trials and
survey research firm based in Towson, Maryland. IMR provides comprehensive
clinical trial services which are the basis for obtaining regulatory approval
for drugs and medical devices. In addition, IMR offers proprietary survey
capabilities for biomedical and epidemiological studies with valuable
applications within the managed care and pharmaceutical industries. IMR utilizes
a call center and medically appropriate surveys to identify patients eligible to
participate in its clinical trials. This patient enrollment method is designed
to reduce drug development time which permits sponsors of clinical trials to get
their products into the market faster and to maximize the


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economic return for such products. Since the introduction of IMR's recruiting
system, in 1993, IMR has undertaken studies from many of the major
pharmaceutical companies in several therapeutic classes. Access to the Company's
decision support systems presents an opportunity to enhance IMR's capability in
surveying and trials recruiting.

     DECISION SUPPORT SYSTEMS. In connection with the monitoring, analysis and
evaluation of drug utilization for its PBM customers and following years of
development, the Company introduced proprietary decision support systems. One of
the Company's proprietary decision support systems, ApotheQuery(R), enables the
Company 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. The Company's decision support systems have been developed
using commercially available technology and are not protected by any patents.
The Company protects its decision support systems through physical security
measures as well as access security procedures.

     In 1994, the Company began to integrate its customers' pharmacy claims with
applicable medical and laboratory claims and patient survey data, when
available. This integrated health care database complements the capabilities of
ApotheQuery(R) by including data points for diagnosis and treatment codes. This
allows the Company and its customers to identify problem areas for the health
plan and implement timely clinical solutions. It further enhances the Company's
ability to complete meaningful outcomes studies and to develop disease
management programs.

STRATEGIC ALLIANCES

     The Company has successfully established strategic relationships with
certain large pharmaceutical manufacturers and major customers. In its strategic
relationships with drug manufacturers, the Company strives to create
collaborative relationships whereby the Company provides the manufacturers with
products and services that permit the manufacturers to benefit from the
Company's expertise in disease management and pharmacy and medical claims data
analysis, while the Company and its clients benefit from the marketing and
financial resources of the manufacturers. Through this type of relationship, the
Company licenses selected disease management programs to the manufacturers and
provides other related services. In its strategic relationships with certain
major customers, certain customers have assumed equity positions in the Company,
which fosters the development of long-term strategic alliances. This arrangement
allows for increased information flow between the Company and customers to
facilitate the progressive development of solutions to meet the customers'
unique PBM and HBM service needs.

SALES, MARKETING AND CUSTOMER SERVICE

     The Company markets and sells its services through a direct sales force
consisting of seven national sales and marketing representatives located in
Baltimore, Cleveland, New York, St. Louis, Scottsdale and Irving. Sales and
marketing representatives are supported by a staff of customer service
representatives in the Company's facilities located in the Baltimore and Dallas
areas. The Company's proposal development group and marketing staff also work
closely with the sales representatives. The typical sales cycle takes
approximately six to nine months.


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CUSTOMERS

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

     One customer of the Company accounted for approximately 14% and 15% of the
Company's revenues for the years ended March 31, 1997 and 1998, respectively.
Another customer accounted for approximately 21% of the Company's revenues for
the year ended March 31, 1998. A third customer accounted for approximately 18%
of the Company's revenues for the year ended March 31, 1997, but revenues from
this customer did not exceed 10% of the Company's revenues for the year ended
March 31, 1998. A fourth customer accounted for approximately 18% of the
Company's revenues for the year ended March 31, 1996, but revenues from this
customer did not exceed 10% of the Company's revenues in either the year ended
March 31, 1997 or 1998. No other customer accounted for over 10% of the
Company's revenues in fiscal years 1996, 1997, or 1998.

COMPETITION

     The Company competes with a number of larger, national companies, including
Caremark International Inc. (a subsidiary of MedPartners, Inc.), Diversified
Pharmaceutical Services, Inc. (a subsidiary of SmithKline Beecham Corporation),
Express Scripts, Inc. (an affiliate of NYLIFE HealthCare Management, Inc.),
Merck Medco Managed Care, Inc., (a subsidiary of Merck & Co., Inc.), and PCS
Health Systems, Inc. (a subsidiary of Eli Lilly & Company). These competitors
are significantly larger than the Company and possess greater financial,
marketing and other resources than the Company. To the extent that competitors
are owned by pharmaceutical manufacturers, they may have pricing advantages that
are unavailable to the Company and other independent PBMs.

     The Company believes that the primary competitive factors in the PBM and
HBM industries include: independence from drug manufacturers and payors; the
quality, scope and costs of products and services offered to insurance
companies, HMOs, employers and other sponsors of health benefit plans and plan
participants; responsiveness to customers' demands; the ability to negotiate
favorable rebate and volume discounts from drug manufacturers; the ability to
identify and apply effective cost containment programs utilizing clinical
strategies; the ability to develop formularies; the ability to market PBM and
HBM services to health benefit plan sponsors; a strong managed care customer
base which supports the development of HBM products and services; and the
commitment to providing flexible, clinically oriented services to customers. The
Company believes that its larger competitors offer comprehensive PBM services
and some form of HBM services. The Company considers its principal competitive
advantages to be its independence from drug manufacturers and payors, strong
managed care customer base which supports the development of HBM services, and
commitment to providing flexible, clinically oriented services to its customers.


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YEAR 2000 COMPLIANCE

     The Company has formed a Year 2000 project team to address the Year 2000
issue. The team is composed of both technical and non-technical individuals. The
scope of the Year 2000 project includes the review of all technical systems such
as hardware, software, programs, databases, phone systems, forms or any other
document with a pre-printed century date. The goal of the team is to ensure Year
2000 compliance of all critical business systems of the Company and its
electronic partners by March 1999. A Year 2000 compliant system will be able to
accept, process, calculate, sort, store and report dates using the correct
century and year; interface with other Year 2000 compliant systems;
automatically cross into the Year 2000 without date-related failures; avoid
premature expiration of security systems, licenses, or files due to Year 2000
crossover; and treat the Year 2000 as a leap year. The Company believes that
conversion will be completed by March 1999 and will not pose significant
operational problems. However, if such conversions are not completed in a timely
manner by all parties, the Year 2000 issue could have a material adverse effect
on the Company's systems and operations.

LIABILITY INSURANCE

     Certain aspects of the Company's operations, including the dispensing of
pharmaceuticals and health benefit management services, may subject the Company
to claims for personal injuries, including those resulting from dispensing
errors, package tampering, product defects and clinical trials. The Company
carries the types of insurance customary in its industry, including
professional, general, and product liability insurance. The Company believes
that its insurance protection is adequate for its present business operations.
Although PBM and HBM companies in general have not, as yet, experienced any
unusual difficulty in obtaining insurance at an affordable cost, there can be no
assurance that the Company will be able to maintain its coverage at acceptable
costs in the future or, if it does, that the amount of such coverage would be
sufficient to cover all potential claims.

GOVERNMENT REGULATION

     Various aspects of the Company's businesses are governed by federal and
state laws and regulations and compliance is a significant operational
requirement for the Company. The Company believes that it is in substantial
compliance with all existing legal requirements material to the operation of its
business.

     Certain federal and related state laws and regulations affect aspects of
the Company's PBM business. Among these are the following:

     FDA REGULATION. The U. S. Food and Drug Administration (the "FDA")
generally has authority to regulate drug promotional materials that are
disseminated "by or on behalf" of a drug manufacturer. In January 1998, the FDA
issued a draft guidance concerning promotional activities by PBM companies that
are performed on behalf of sponsors of medical products. Because the guidance is
in draft form, it does not represent official agency policy; however it does
provide insight into the FDA's position on the issue. Under this draft guidance,
the FDA would hold medical products sponsors responsible for promotional
activities by subsidiary PBMs


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when such activities violate the Food Drug and Cosmetic Act. The guidance also
provides for product sponsor liability for the acts of certain nonsubsidiary
PBMs, depending upon the nature and extent of the relationship between the
sponsor and the PBM. Although serious questions surround the legal basis for the
FDA's position on the PBM regulation, the publication of the draft guidance
indicates increased agency interest in the area. In addition, the FDA has
regulatory authority over the conduct of clinical research and studies.

     ANTI-REMUNERATION LAWS. Medicare and Medicaid law prohibits, among other
things, an entity from paying or receiving, subject to certain exceptions and
"safe harbors", any remuneration to induce the referral of Medicare or Medicaid
beneficiaries or the purchase (or the arranging for or recommending of the
purchase) of items or services for which payment may be made under Medicare,
Medicaid or other federally-funded health care programs. Several states also
have similar laws which are not limited to services for which Medicare or
Medicaid payment may be made. Further, the Clinton administration has proposed
that anti-remuneration laws also be applied to services for which Medicare or
Medicaid payments are not made.

State anti-remuneration laws vary and have been infrequently interpreted by
courts or regulatory agencies. Sanctions for violating these federal and state
anti-remuneration laws may include imprisonment, criminal and civil fines, and
exclusion from participation in the Medicare and Medicaid programs. The courts
in several recent cases have ruled that contracts that violate anti-remuneration
laws are voidable.

     The federal statute has been interpreted broadly by courts, the Office of
Inspector General ("OIG") within the Department of Health and Human Services
("HHS"), and administrative bodies. Because of the federal statute's broad
scope, federal regulations establish certain "safe harbors" from liability. Safe
harbors exist for certain properly reported discounts received from vendors,
certain investment interests, and certain properly disclosed payments made by
vendors to group purchasing organizations. A practice that does not fall within
a safe harbor is not necessarily unlawful, but may be subject to scrutiny and
challenge. In the absence of an applicable statutory exception or safe harbor, 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 certain "product conversion programs" in which benefits are given by drug
manufacturers to pharmacists or physicians for changing a prescription (or
recommending or requesting such a change) from one drug to another. Such 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 drug manufacturers to retail pharmacists in
connection with such programs.

     To the Company's knowledge, these anti-remuneration laws have not been
applied to prohibit PBMs from receiving amounts from drug manufacturers in
connection with drug purchasing and formulary management programs, to
therapeutic substitution programs conducted by independent PBMs, or to the
contractual relationships such as those the Company has with certain of its
customers. The Company believes that it is in substantial compliance with the
legal requirements imposed by such laws and regulations, and the Company
believes that there are material differences between drug-switching programs
that have been challenged under these laws and the programs offered by the
Company to its customers. However, there can be no assurance that the


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Company will not be subject to scrutiny or challenge under such laws and
regulations, or that any such challenge would not have a material adverse effect
upon the Company.

     OIG STUDY. The OIG Office of Evaluation and Inspections (which is not
responsible for investigations of potential violations of anti-remuneration
laws, but which seeks to improve the effectiveness and efficiency of HHS
programs) issued a report on PBM arrangements on April 15, 1997. The report was
based primarily on a nationwide survey of HMOs that use PBMs, and examined the
benefits of, and concerns raised by, the HMOs' relationships with PBMs.

     The report identified two major concerns: (1) the potential for bias
resulting from alliances of PBMs and drug manufacturers and (2) the lack of
oversight by HMOs regarding the performance of PBMs in delivering quality
services to beneficiaries. The report makes two main recommendations. First, 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 PBMs with which they contract.
Second, HCFA, FDA and the Health Resources and Services Administration (HRSA),
working with outside organizations, should develop quality measures for pharmacy
practices that can be used in managed care settings.

     While the named agencies generally concurred with the report's conclusions,
as of yet they have not taken any formal actions with respect to the report. The
Company intends to closely monitor whether any such actions are taken and
whether such actions would have any impact on its business.

     ERISA REGULATION. The Employee Retirement Income Security Act of 1974
("ERISA") regulates certain aspects of employee pension and health benefit
plans, including self-funded corporate health plans with which the Company has
agreements to provide PBM services. There can be no assurance that the U.S.
Department of Labor, which is the agency that enforces ERISA, would not assert
that the fiduciary obligations imposed by the statute apply to certain aspects
of the Company's operations.

     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 drug manufacturers to retail pharmacies in
connection with drug switching programs. In addition, pursuant to a settlement
agreement entered into with 17 states on October 25, 1995, Merck Medco Managed
Care, Inc. ("Medco"), the PBM subsidiary of pharmaceutical manufacturer Merck &
Co., agreed to require pharmacists affiliated with Medco mail service pharmacies
to disclose to physicians and patients the financial relationships between Merck
& Co., Medco and the mail service pharmacy when such pharmacists contact
physicians seeking to change a prescription from one drug to another. The
Company believes that its contractual relationships with drug manufacturers and
retail pharmacies do not include the features that were viewed by enforcement
authorities as problematic in these settlement agreements. However, no assurance
can be given that the Company will not be subject to scrutiny or challenge under
one or more of these laws.

     NETWORK ACCESS LEGISLATION. A majority of states have adopted some form of
legislation affecting the ability of the Company to limit access to pharmacy
provider networks or from 


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removing network providers. Such legislation may require the Company or its
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. The Company has not been materially
affected by these statutes because it administers a large network of over 52,000
retail pharmacies and will admit any licensed pharmacy that meets the Company's
credentialing criteria, involving such matters as adequate insurance coverage,
minimum hours of operation, and the absence of disciplinary actions by the
relevant state agencies.

     LEGISLATION IMPOSING PLAN DESIGN RESTRICTIONS. Some states have legislation
that prohibits the 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. Such legislation does not generally apply to the
Company, but it may apply to certain of the Company's customers such as HMOs and
insurers. If such legislation were to become widespread and broad in scope, it
could have the effect of limiting the economic benefits achievable through PBM
and HBM services.

     LICENSURE LAWS. Many states have licensure or registration laws governing
certain types of ancillary health care organizations, including PPOs, TPAs, and
companies that provide utilization review services. The scope of these laws
differs significantly from state to state, and the application of such laws to
the activities of pharmacy benefit managers is often unclear. The Company has
registered under such laws in those states in which the Company has concluded,
after discussion with the appropriate state agency, that such registration is
required.

     LEGISLATION AFFECTING DRUG PRICES. In the past, some states have adopted
legislation 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; this legislation is sometimes referred to as "most favored
nation" legislation. Such legislation, if enacted in any state, may adversely
affect the Company's ability to negotiate discounts in the future from network
pharmacies. 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.

     REGULATION OF FINANCIAL RISK PLANS. Fee-for-service prescription drug plans
are not generally subject to financial regulation by the states. However, if the
PBM 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. Such 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, 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, 


                                       10

<PAGE>   12

compliance with state laws and regulations is a significant operational
requirement for the Company.

     MAIL PHARMACY REGULATION. The Company's mail service pharmacy is located in
Richardson, Texas and the Company is licensed to do business as a pharmacy in
Texas. Many of the states into which the Company delivers pharmaceuticals have
laws and regulations that require out-of-state mail service pharmacies to
register with the board of pharmacy or similar regulatory body in the state.
These states generally permit the mail service pharmacy to follow the laws of
the state within which the mail service pharmacy is located. The Company has
registered in every state in which, to the Company's knowledge, such
registration is required. In addition, various pharmacy associations and boards
of pharmacy have promoted enactment of laws and regulations directed at
restricting or prohibiting the operation of out-of-state mail service pharmacies
by, among other things, requiring compliance with all laws of certain states
into which the mail service pharmacy dispenses medications whether or not those
laws conflict with the laws of the state in which the pharmacy is located. To
the extent that such laws or regulations are found to be applicable to the
Company, the Company would be required to comply with them.

     Other statutes and regulations impact the Company's mail service
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. Congressionally mandated goals to provide
useful information on prescription drugs to the American consumer may involve
participation by mail order pharmacies in assisting in the dissemination of 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 the
Company's mail service operations. The U.S. Postal Service has exercised such
statutory authority only with respect to controlled substances. Alternative
means of delivery are available to the Company.

EMPLOYEES

     As of May 31, 1998, the Company had 697 employees. None of the employees
are represented by a labor union. In the opinion of management, the Company's
relationship with its employees is good.

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 (the "Exchange Act"). 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 the Company's financial
position, the Company's business strategy and the plans and objectives of
management 


                                       11
<PAGE>   13

of the Company for future operations, are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's 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 the Company or persons acting on
its behalf are expressly qualified in their entirety by this section.

RISK FACTORS

In addition to the other information set forth and incorporated by reference in
this Prospectus, prospective purchasers of the Shares should consider carefully
the following risk factors in evaluating an investment in the Company.

     FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; LENGTHY SALES CYCLE; FUTURE
RESULTS UNCERTAIN. The Company has experienced and may in the future experience
significant fluctuations in revenue and operating results from quarter to
quarter and from year to year due to a combination of factors, including: demand
for the Company's services; the size, timing of contract signings and
recognition of revenues from significant customer additions and losses;
increased competition; the Company's success in, and expense associated with,
developing and introducing new services; the availability of rebates from
pharmaceutical manufacturers; the length of the Company's sales cycles; the
Company's ability to increase staff to meet demand; economic conditions
generally or in specific industry segments; and other factors outside of the
control of the Company. As a result of all of these factors, there can be no
assurance that the Company will be profitable on a quarterly or annual basis.
Due to the foregoing, it is possible that the Company's operating results in
some future quarters will be below analysts' expectations, which in turn could
adversely affect the Company's stock price.

     GROWTH OF HBM SERVICES. The Company is presently expending significant
resources to develop and expand its HBM services, and the Company anticipates
that it will continue to expend significant resources in the foreseeable future.
The Company historically has experienced expense increases when introducing new
services. In addition, the Company's strategy for expanding its HBM services
entails the acquisition of HBM services providers, or other transactions with
such providers to acquire HBM services capabilities. Because the HBM services
market is in an emerging stage, there can be no assurance that the Company will
be able to consummate such acquisitions or other transactions. Moreover, there
can be no assurance that HBM services developed or acquired by the Company will
be profitable or that the demand for such services will exist in the future. See
"--Risk of Acquisitions."

     MANAGEMENT OF GROWTH. The Company's business has grown rapidly in the last
four years, with total revenues increasing from $35.0 million in fiscal year
1994 to $476.7 million in fiscal year 1998. The Company's recent expansion has
resulted in substantial growth in the number of its employees (from 117 at March
31, 1994 to 655 at March 31, 1998), the scope of its operating and financial
systems and the geographic distribution of its operations and customers. This
recent rapid growth has placed, and if such growth continues will increasingly
place, a significant strain on the Company's management and operations.
Accordingly, the Company's future operating results will depend on the ability
of its officers and other key employees to continue 


                                       12

<PAGE>   14

implementing and improving its operations, customer support and financial
control systems, and to effectively expand, train and manage its employee base.
There can be no assurance that the Company will be able to manage any future
expansion successfully or provide the necessary management resources to
successfully manage its business, and any inability to do so would have a
material adverse effect on the Company's business, operating results and
financial condition.

     DEPENDENCE ON CERTAIN KEY CUSTOMERS. The Company depends on a limited
number of large customers for a significant portion of its consolidated
revenues. During fiscal year 1998, the Company's two largest customers, United
Mine Workers of America ("UMW") and the State of Oklahoma, accounted for
approximately 21% and 15%, respectively, of the Company's consolidated revenues.
During this period, the Company's five largest customers accounted for
approximately 57% of the Company's revenues. Loss of the Company's accounts with
UMW or the State of Oklahoma, or of any other customers which account for a
substantial portion of the Company's business, could have a material adverse
effect on the Company's business, operating results and financial condition.

     POTENTIAL DECLINE IN REBATE REVENUE. Approximately 15% of the Company's
consolidated revenues is attributable to arrangements with drug manufacturers
relating to volume-based rebate payments as well as fees charged for other
products and services. The loss of the Company's account with any of the major
drug manufacturers under such arrangements or the failure of the Company to meet
certain conditions under such arrangements could have a material adverse effect
upon the Company's business, operating results and financial condition. 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 rebates on their drugs. In
addition, the Company is unable to predict the effect on rebate arrangements
that might result if the recent trend of consolidations and alliances in the
drug and managed care industry continues, particularly between pharmaceutical
manufacturers and PBMs.

     CONSOLIDATION AMONG CUSTOMERS. Over the past several years, insurance
companies, HMOs and managed care companies have experienced significant
consolidation. The Company's managed care customers have been and may continue
to be subject to consolidation pressures. Although the Company may benefit from
certain consolidations in the industry, there can be no assurance that
additional customers will not be lost as a result of acquisitions and no
assurance that such activity will not have a material adverse effect upon the
Company's business, operating results and financial condition. Consolidation,
strategic alliances and in general continued intense competition in the PBM
industry have resulted in the past, and may result in the future, in the loss of
certain of the Company's customers. There can be no assurance that new and
renewal contracts will offset the revenues lost from customers electing not to
renew their contracts with the Company. The Company's contracts with its
customers typically provide for multi-year terms, with automatic 12-month
renewals thereafter unless terminated by either party to any given contract upon
written notice delivered prior to the annual renewal date. See "--Dependence on
Certain Key Customers."

     COMPETITION. The PBM industry has become very competitive. The Company's
competitors include large, profitable and well established companies with
substantially greater financial, marketing and other resources than the Company.
Several competitors in the PBM business are 


                                       13
<PAGE>   15

owned by pharmaceutical manufacturers and may possess purchasing and other
advantages over the Company by virtue of such ownership. Price competition in
the PBM market has resulted in reduced margins for many PBMs, including the
Company. The Company believes that the primary competitive factors include:
independence from drug manufacturers and payors; the quality, scope and costs of
products and services offered to insurance companies, HMOs, employers and other
sponsors of health benefit plans ("plan sponsors" or "customers") and plan
participants; responsiveness to customers' demands; the ability to negotiate
favorable rebates and volume discounts from drug manufacturers; the ability to
identify and apply effective cost containment programs utilizing clinical
strategies; the ability to develop formularies; the ability to market PBM and
HBM services to health benefit plan sponsors; a strong managed care customer
base which supports the development of HBM products and services; and the
commitment to providing flexible, clinically oriented services to customers.
There can be no assurance that the Company will continue to remain competitive
with respect to the foregoing factors or successfully market integrated PBM or
HBM services to new customers. There can be no assurance that consolidation and
alliances within the PBM industry will not adversely impact the operations and
prospects for independent PBMs such as the Company.

     RISK OF ACQUISITIONS. Part of the Company's strategy for growth includes
acquisitions of complementary services, technologies or businesses that could
allow the Company to offer a set of integrated services, in addition to PBM
services, to better serve the needs of health benefit plan sponsors. The Company
completed the merger with IMR in February 1998 and will continue to review
future acquisition opportunities. The Company's ability to expand successfully
through acquisitions depends on many factors, including the successful
identification and acquisition of services, technologies or businesses. In
addition, acquisitions, once consummated, involve many risks including
difficulties in the assimilation of the operations, services and products of the
acquired company; the diversion of management's attention from other business
concerns; and the potential loss of key employees of the acquired company. There
is significant competition for acquisition opportunities in the PBM and HBM
industries. The Company may compete for acquisition opportunities with other
companies that have significantly greater financial and management resources.
There can be no assurance that the Company will be successful in acquiring or
integrating any such services, technologies or businesses or once acquired, that
the Company will be successful in selling or integrating such services,
technologies or businesses.

     DEPENDENCE ON KEY MANAGEMENT. The Company believes that its continued
success will depend to a significant extent upon the continued services of its
senior management, in particular David D. Halbert, Chairman of the Board, Chief
Executive Officer and President of the Company. The loss of the services of Mr.
David D. Halbert or other persons in senior management could have a material
adverse effect on the Company's business.

     INTANGIBLE ASSETS. At March 31, 1998, approximately $12.4 million, or 8% of
the Company's total assets consisted of intangible assets. These intangible
assets are being amortized over a period of 40 years. In the event of any sale
or liquidation of the Company, there can be no assurance that the value of such
intangible assets will be realized. In addition, any significant decrease in the
value of such intangible assets could have a material adverse effect on the
Company's business, operating results and financial condition.


                                       14
<PAGE>   16

     GOVERNMENT REGULATION. The PBM industry is subject to extensive federal and
state laws and regulations, and compliance with such laws and regulations
imposes significant operational requirements for the Company. The regulatory
requirements with which the Company must comply in conducting its business vary
from state to state. Management believes that the Company is in substantial
compliance with all existing statutes and regulations material to the operation
of its business. The impact of future legislation and regulatory changes on the
Company's business cannot be predicted, and there can be no assurance that the
Company will be able to obtain or maintain the regulatory approvals required to
operate its business. From time to time, retail pharmacists have expressed
opposition to mail order pharmacies. Retail pharmacies, state pharmacy
associations or state board of pharmacies in some states have attempted to
secure the enactment or promulgation of statutes or regulations that could have
the effect of hindering or in some cases prohibiting the delivery of
prescription drugs into such state by a mail service pharmacy. In January 1998,
the U.S. Food and Drug Administration ("FDA") issued a Notice and Draft Guidance
regarding the regulation of certain activities of PBMs that are directly or
indirectly controlled by drug manufacturers. On April 6, 1998, the Company
submitted written comments to the FDA wherein the Company stated its position
that the proposed regulations should not apply to PBMs which are not owned by
drug manufacturers. There can be no assurance that such legislation or
regulation, if subsequently adopted, would not have a material adverse effect on
the Company's business, operating results and financial condition.

     DEVELOPMENTS IN THE HEALTH CARE INDUSTRY. The health care industry is
subject to changing political, economic and regulatory influences that may
affect the procurement practices and operation of health care organizations. The
Company's services are designed to function within the structure of the health
care financing and reimbursement system currently being used in the United
States. The Company believes that the commercial value and appeal of its
services may be adversely affected if the current health care financing and
reimbursement system were to be materially changed. During the past several
years, the United States health care industry has been subject to an increase in
governmental regulation of, among other things, reimbursement rates. Certain
proposals to reform the United States health care system are currently under
consideration by Congress. These proposals may increase governmental involvement
in health care and pharmacy benefit management services and otherwise change the
operating environment for the Company's customers. Health care organizations may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments in cost containment tools and related
technology such as the Company's services. The Company cannot predict what
effect, if any, such factors might have on its business, operating results and
financial condition. In addition, many health care providers are consolidating
which may result in greater bargaining power and lead to price erosion of the
Company's services. The failure of the Company to maintain adequate price levels
would have a material adverse effect on the Company's business, operating
results and financial condition. Other legislative or market-driven reforms
could have unpredictable effects on the Company's business, operating results
and financial condition.

     POTENTIAL LIABILITY AND INSURANCE. Various aspects of the Company's
business, including the dispensing of pharmaceutical products and performance of
clinical trials and HBM services, may subject it to litigation and liability for
damages. Clinical research services involve a risk of liability for personal
injury or death due to, among other reasons, possible unforeseen adverse


                                       15
<PAGE>   17
side effects or improper administration of a new drug. Although the Company
believes that its risk is reduced by contractual indemnification provisions and
insurance maintained by the Company and the trial sponsors, the Company could be
materially and adversely affected if it were required to pay damages or incur
defense costs in connection with a claim that is outside the scope of its
indemnity or insurance coverage, or if the indemnity, although applicable, is
not performed in accordance with its terms. While the Company maintains and
intends to maintain professional and general liability insurance coverage, there
can be no assurance that the Company will be able to maintain such insurance in
the future or that such insurance will be available on acceptable terms or will
be adequate to cover any or all potential product or professional liability
claims. A successful product or professional liability claim in excess of the
Company's insurance coverage could have a material adverse effect upon the
Company's business, operating results and financial condition.

     RISKS ASSOCIATED WITH CLINICAL TRIALS BUSINESS. In February 1998, the
Company completed the merger with IMR, a clinical trials and outcomes research
business. IMR has derived, and may in the future derive a significant portion of
its revenue from a relatively limited number of major projects or customers.
Most of IMR's contracts are terminable upon 60 to 90 days notice by the
trial/survey sponsor. The loss, delay or termination of any major project or
customer could have a material adverse effect on this business. In addition, the
clinical trials operations could be materially and adversely affected by a
general economic decline in the pharmaceutical or biotechnology industries or by
a reduction in the outsourcing of clinical trials expenditures. The clinical
trials business is dependent upon the extensive governmental regulation of the
drug development process, and the failure of IMR to comply with applicable
regulations could result in the termination of ongoing clinical research or the
disqualification of data for submission to regulatory authorities, either of
which could have a material adverse effect on the clinical trials business. The
continued success of IMR is dependent upon its founding executive officers,
Richard B. Lipton, M.D. and Walter Stewart, Ph.D., M.P.H., the loss of whom
could have a material adverse effect on IMR.

     TAX RISKS ASSOCIATED WITH 1996 MERGER. Immediately prior to the Company's
initial public offering in October 1996, AHC was merged (the "Merger") with and
into the Company. Although the Merger was structured as a tax free event, if the
Company were to be audited, there can be no assurance that the Internal Revenue
Service would not successfully challenge the tax free treatment, which could
have a material adverse effect upon the Company's business, operating results
and financial condition.

     CONTROL BY EXISTING STOCKHOLDERS. Executive officers and directors of the
Company and their affiliates own beneficially approximately 27% of the Company's
outstanding Common Stock. As a result, these stockholders may have the ability
to control the Company and influence its affairs and the conduct of its
business. Such concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of the Company.

     VOLATILITY OF MARKET PRICE. The quoted price of the Common Stock could
fluctuate widely in response to variations in the Company's quarterly operating
results, changes in earnings estimates by securities analysts, changes in the
Company's business and changes in general market or economic conditions. In
addition, in recent years, the stock market has experienced extreme price and
volume fluctuations which have significantly affected the quoted prices of the


                                       16
<PAGE>   18

securities of many growth companies without regard to their specific operating
performance. Such market fluctuations could have a material adverse effect on
the quoted price of the Common Stock.

     POSSIBLE ADVERSE EFFECT IN MARKET PRICE OF FUTURE SALES OF THE COMMON
STOCK. Future sales of Common Stock, or the perception that such sales could
occur, could adversely affect the market price of the Company's Common Stock.
There can be no assurance as to when, and how many of, the Shares will be sold
and the effect such sales may have on the market price of the Company's Common
Stock. As of May 31, 1998, the Company has registered under the Securities Act
an aggregate of 5,381,931 shares (including 2,337,750 shares issued or available
for issuance under the Company's stock option plans). In addition, 4,938,195
shares of the Company's Common Stock, which includes shares issuable upon the
exercise of certain warrants, may be sold to the public, subject to certain
statutory and contractual resale restrictions. In the event of the issuance and
subsequent resale of a substantial number of shares of the Company's Common
Stock, or a perception that such sales could occur, there could be a material
adverse effect on the prevailing market price of the Company's Common Stock.

     NO DIVIDENDS. The Company has never paid cash dividends on its Common
Stock, and the Company's Board of Directors does not anticipate paying cash
dividends in the foreseeable future. The Company currently intends to retain
future earnings to finance the ongoing operations and growth of the business.
The payment of dividends in the future will depend upon business decisions that
will be made by the Board of Directors of the Company from time to time based
upon the results of operations and financial condition of the Company and its
subsidiaries and such other considerations as the Board of Directors considers
relevant.

ITEM 2.  PROPERTIES

   The Company's corporate headquarters are located in approximately 11,400
square feet of leased space in Irving, Texas. This lease expires December 31,
2002. The Company's clinical division is located in approximately 18,260 square
feet of leased space in Hunt Valley, Maryland. This lease expires March 31, 1999
with an option to renew for an additional five-year term. The Company's data
services division is located in approximately 23,000 square feet of leased space
in Dallas, Texas. This lease expires November 30, 1999. The Company's mail
service pharmacy is located in approximately 38,000 square feet in a building
owned by the Company in Richardson, Texas. The Company's IMR subsidiary is
located in approximately 13,800 square feet of leased space in Towson, Maryland.
This lease expires June 30, 2003.


ITEM 3.  LEGAL PROCEEDING

     The Company is party to routine legal and administrative proceedings
arising in the ordinary course of its business. The proceedings now pending are
not, in the Company's opinion, material either individually or in the aggregate.


                                       17
<PAGE>   19

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 1998.

                                     PART II

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

     On October 8, 1996 the Company sold 2,397,067 shares of its Common Stock at
$9.00 per share in an initial public offering. Prior to that time, there was no
public market for the Company's Common Stock.

     The Company's Common Stock is traded on the Nasdaq National Market tier of
the Nasdaq Stock Market under the Symbol "ADVP". The following table sets forth
for the periods indicated the high and low sale prices for the Company's Common
Stock as reported by NASDAQ.

          Fiscal Year 1997             High              Low
          ----------------             ----              ---
          First Quarter              N/A               N/A
          Second Quarter             N/A               N/A
          Third Quarter              $20 3/4           $ 7 3/4
          Fourth Quarter             $25 1/4           $12 7/8

          Fiscal Year 1998             High              Low
          ----------------             ----              ---
          First Quarter              $18 7/8           $10 7/8
          Second Quarter             $24 1/4           $18
          Third Quarter              $33 1/4           $18 7/8
          Fourth Quarter             $40 3/4           $26 3/8

     The Company's Common Stock was held by 111 stockholders of record as of May
31, 1998. The Company estimates that its shares were held by approximately 4,000
beneficial stockholders.

     The Company intends to retain its earnings, if any, to finance the growth
and development of its business and does not anticipate paying cash dividends on
its Common Stock in the foreseeable future. The payment of any future dividends
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, the future earnings, operations, capital requirements
and financial condition of the Company.

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, 1998, have
been derived from the Consolidated Financial Statements that have been audited
by Arthur Andersen LLP, independent public accountants.


                                       18
<PAGE>   20

<TABLE>
<CAPTION>
                                                                     Year Ended March 31,
                                          -------------------------------------------------------------------------
                                              1994            1995           1996           1997           1998
                                              ----            ----           ----           ----           ----
                                                          (In thousands, except per share data)

STATEMENT OF OPERATIONS DATA:
<S>                                       <C>             <C>            <C>            <C>             <C>        
   Revenues...........................    $    34,970     $    91,306    $   127,871    $   256,450     $   476,664
   Cost of operations:
     Cost of revenues.................         32,612          85,532        120,334        245,466         455,847
     Selling, general and
       administrative expenses........          2,330           4,963          6,158          7,309          10,083
                                          -----------     -----------    -----------    -----------     -----------
       Total cost of operations.......         34,942          90,495        126,492        252,775         465,930
                                          -----------     -----------    -----------    -----------     -----------
   Operating income...................             28             811          1,379          3,675          10,734
   Interest income....................             --              91            366          1,560           2,814
   Interest expense...................           (423)           (878)          (732)          (445)            (67)
   Merger costs.......................             --              --           --             --              (689)
   Provision for  income taxes........             --              --           --           (1,564)         (4,861)
                                          -----------     -----------    ------------   -----------     -----------
   Net income (loss)..................    $      (395)    $        24    $     1,013    $     3,226     $     7,931
                                          ===========     ===========    ===========    ===========     ===========
   Basic:
     Net income (loss) per share......    $      (.19)    $      (.19)   $       .05    $       .43     $       .88
     Weighted average shares
         outstanding..................          4,007           4,007          4,007          6,265           8,756
   Diluted:
     Net income (loss) per share......     $     (.19)    $      (.19)   $       .05    $       .35     $       .70
     Weighted average shares
       outstanding....................          4,007           4,007          4,576          9,176          11,351


                                                                           March 31,
                                          ----------- --------------- ---------------------------------------------
                                              1994            1995           1996           1997           1998
                                              ----            ----           ----           ----           ----
                                                                        (In thousands)

BALANCE SHEET DATA:
   Working capital....................    $       769     $      (453)   $       269    $    24,575     $    28,362
   Total assets.......................         29,152          37,288         59,861        108,914         154,909
   Long-term debt to related
     parties..........................          6,928           7,000          7,000            --             --
   Redeemable preferred stock.........         10,256          11,076         11,896            --             --
   Stockholders' equity (deficit)                (936)         (1,747)        (1,537)        42,577          50,564
</TABLE>


                                       19
<PAGE>   21

<TABLE>
<CAPTION>
                                                              Year Ended March 31,
                                                -----------------------------------------------
                                                  1994      1995      1996     1997      1998
                                                  ----      ----      ----     ----      ----
                                                                 (In thousands)
<S>                                                <C>      <C>       <C>      <C>       <C>
SUPPLEMENTAL DATA: (1)
   Pharmacy network claims
     processed........................             816      1,527     9,375    26,579    38,319
   Mail pharmacy prescriptions 
     filled...........................             228        383       536       677       839
   Estimated health plan
     members (at period end)..........           3,745      5,208     9,040    10,200    12,500
</TABLE>

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

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

OVERVIEW

     Advance Paradigm, Inc. is a leading independent provider of PBM services to
health benefit plan sponsors, with over twelve million health plan members
enrolled in its programs. The Company's primary focus is on the delivery of
cost-effective, high quality, integrated PBM services. In addition, the Company
has developed and is expanding its clinical expertise and disease management
services to meet the specialized needs of its plan members, particularly those
requiring costly, long-term and recurring therapies.

     The Company has historically generated revenues from a number of sources
including its mail pharmacy, its retail pharmacy network and claims adjudication
services and its clinical services. In addition, the Company markets HBM
products to certain health plans, pharmaceutical manufacturers, Fortune 500
employers and managed care organizations.

     The Company derives mail pharmacy revenues from the sale of pharmaceuticals
to members of health benefit plans sponsored by the Company's customers. These
revenues include ingredient costs plus a dispensing fee. In 1992, the Company
established a retail pharmacy network which currently consists of over 52,000
retail pharmacies nationwide, and began to provide on-line claims adjudication
services. The Company contracts directly with the retail pharmacies in its
national network and is "at-risk" for the payment for drugs dispensed. In
addition, the Company manages networks of pharmacies that are under direct
contract with certain of its customers. When the Company has an independent
obligation to pay its own network of retail pharmacy providers, the Company
includes as revenues payments from plan sponsors for the drug cost and the
claims processing fees. Payments made by the Company to its pharmacy providers
are recorded as cost of revenues. For those plan sponsors which have established
their own pharmacy network, the Company administers the plan sponsors' network
pharmacy contracts. The plan sponsors have the independent obligation to fund
payment to those pharmacies under contract and are "at-risk" for the payment for
drugs dispensed, and the Company records as revenues only the claims processing
fees. The Company also offers clinical


                                       20
<PAGE>   22
products to its customers. The Company's clinical revenues have historically
been derived primarily from direct rebate and volume discounts from
pharmaceutical manufacturers. Certain of these revenues are based on estimates
which are subject to final settlement with the contract party. Cost of revenues
includes product costs and other direct costs associated with the dispensing of
prescription drugs through the mail pharmacy, retail pharmacy network and claims
adjudication services and clinical services.

     In response to the growing demand among payors for comprehensive disease
management programs, the Company established its HBM products. The Company has
developed a comprehensive health care database, integrating its customers'
pharmacy claims with applicable medical and laboratory claims data, in order to
identify appropriate patients and perform meaningful outcomes studies for the
Company's disease management programs. These programs have served as an
additional source of revenue for the Company, and management believes that the
Company will be able to cross-sell these and other products to its existing
customers. The merger with IMR in February 1998 added to the Company's offerings
of HBM products. IMR is a clinical trial and survey research firm based in
Towson, Maryland.

     As a result of its competitive environment, the Company is continuously
susceptible to margin pressures. In recent years, competing PBM providers owned
by large pharmaceutical manufacturers began aggressively pricing their products
and services. This aggressive pricing resulted in reduced margins for the
Company's traditional PBM services. While the environment for the provision of
traditional services remains competitive, margins realized for the provision of
these services have stabilized in recent quarters.

     Except for the historical information contained herein, the discussion in
this Form 10-K contains certain forward-looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. 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. The Company's actual results could
differ materially from those discussed herein.


                                       21
<PAGE>   23

RESULTS OF OPERATIONS

     The following table sets forth certain consolidated financial data of the
Company, for the periods indicated, as a percentage of revenues.

<TABLE>
<CAPTION>
                                                     Year Ended March 31,
                                               ---------------------------------
                                                1996          1997         1998
                                                ----          ----         ----
<S>                                            <C>           <C>          <C>   
STATEMENT OF OPERATIONS DATA:
   Revenues...........................         100.0%        100.0%       100.0%
   Cost of operations:
     Cost of revenues.................          94.1          95.7         95.6
     Selling, general and
       administrative expenses........           4.8           2.9          2.1
                                               -----         -----        -----
          Total cost of operations....          98.9          98.6         97.7
                                               -----         -----        -----
   Operating income...................           1.1           1.4          2.3
   Interest income (expense), net.....          (0.3)          0.5          0.6
   Merger costs.......................            --            --         (0.2)
   Provision for income taxes.........            --          (0.6)        (1.0)
                                               -----         -----        -----
   Net income.........................           0.8%          1.3%         1.7%
                                               =====         =====        =====
</TABLE>


FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997

     REVENUES. Revenues for the year ended March 31, 1998 ("fiscal year 1998")
increased by $220.2 million, or 86%, compared to revenues for the fiscal year
ended March 31, 1997 ("fiscal year 1997"). The increase in revenues resulted
from new contracts signed throughout the year with new customers. The number of
lives managed by the Company continued to increase in fiscal year 1998 as new
customers were obtained and the Company's current clients continued to increase
their membership and utilization levels. New client contracts resulted from
increased marketing efforts and the expansion of the Company's sales and
marketing department. Contracts with new customers in fiscal year 1998 generally
include all PBM products offered by the Company including claims processing,
mail and clinical.

     Revenues from claims processing increased $175.8 million compared to the
prior year. The increase resulted from new client lives and an increase in
utilization from existing clients. The increase in new lives resulted in an
increase in pharmacy claims processed from 26.6 million in fiscal year 1997 to
38.3 million in fiscal year 1998, a 44% increase. Virtually all of the new 1998
customer contracts utilize the Company's pharmacy network which has shifted a
larger percentage of the Company's total revenues to claims processing. Revenues
from mail pharmacy services increased $18.4 million compared to the prior year.
The increase resulted primarily from the new member lives added during fiscal
year 1998. The increase in new lives resulted in an increase in mail
prescriptions dispensed from 677,000 in fiscal year 1997 to 839,000 in fiscal
year 1998, a 24% increase. Revenues from clinical services increased $26.1
million compared to the prior year. The increase resulted primarily from the new
member lives added and the additional claims processed during fiscal year 1998
compared to the prior year.


                                       22
<PAGE>   24

     COST OF REVENUES. Cost of revenues for fiscal year 1998 increased by $210.4
million, or 86%, compared to the prior fiscal year. This increase was
attributable primarily to the additional costs associated with the Company's
claims processing growth. As a percentage of revenues, cost of revenues was 96%
in fiscal year 1998 and 1997.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal year 1998 increased by $2.8 million, or 38%,
compared to fiscal year 1997. This increase was the result of the Company's
expansion of its sales and marketing capabilities, as well as increases in
administrative and support staff functions in response to volume growth in all
product lines. In spite of the dollar increase, selling, general and
administrative expenses as a percentage of revenues decreased from 3% in fiscal
year 1997 to 2% in fiscal year 1998 as the result of greater economies of scale
and due to the increase in revenues associated with the Company's claims
processing services. Additional revenues generated by clients utilizing the
Company's network pharmacy providers generally do not result in an increase in
selling, general and administrative expenses.

     INTEREST INCOME AND INTEREST EXPENSE. Interest income, net of interest
expense, for fiscal year 1998 increased $1.6 million compared to fiscal year
1997. The increase resulted from cash management programs which utilized the
Company's short-term excess cash to generate interest income through investment
in money market funds and high grade commercial paper. In addition, the
Company's cash balance throughout fiscal year 1998 included the $10 million
proceeds from the June 1996 issuance of its Series B Preferred Stock and the
$19.1 million proceeds from the October 1996 initial public offering. A portion
of the proceeds were used to retire debt of the Company and, as a result,
interest expense decreased by $378,000. In fiscal 1997, the proceeds from the
offerings were available for only a portion of the year.

     MERGER COSTS. In February 1998, the Company completed a merger with IMR and
issued 876,078 shares and options to purchase 23,922 shares of its Common Stock
in exchange for all the outstanding shares and options of IMR. The merger has
been accounted for as a pooling of interests and, accordingly, prior period
consolidated financial statements 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. In connection with the merger, the Company
recorded a charge to operating expenses of $689,000 ($427,000 after taxes, or
$.04 per common share on a dilutive basis) for professional fees and other
merger-related costs pertaining to the transaction.

     INCOME TAXES. The Company had income tax loss carryforwards available to
partially offset income generated for fiscal year 1997 and, as a result, the
Company recorded income tax expense of $1.6 million or 32.7% of income before
income taxes. For fiscal 1998, the Company recorded tax expense of $4.9 million
at a rate of 38.0% of income before income taxes. The tax loss carryforwards
were fully utilized prior to fiscal year 1998.


                                       23
<PAGE>   25

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996

     REVENUES. Revenues for the year ended March 31, 1997 ("fiscal year 1997")
increased by $128.6 million, or 101%, compared to revenues for the fiscal year
ended March 31, 1996 ("fiscal year 1996"). The increase in revenues resulted
from new contracts signed throughout the year with new customers. The number of
lives managed by the Company continued to increase in fiscal year 1997 as new
customers were obtained and the Company's current clients continued to increase
their membership and utilization levels. New client contracts resulted from
increased marketing efforts and the expansion of the Company's sales and
marketing department. Contracts with new customers in fiscal year 1997 generally
include all PBM products offered by the Company including claims processing,
mail and clinical.

     Revenues from claims processing increased $101.0 million compared to the
prior year. The increase resulted from new client lives and an increase in
utilization from existing clients. The increase in new lives resulted in an
increase in pharmacy claims processed from 9.4 million in fiscal year 1996 to
26.6 million in fiscal year 1997, a 183% increase. Virtually all of the new 1997
customer contracts utilize the Company's pharmacy network which has shifted a
larger percentage of the Company's total revenues to claims processing. Revenues
from mail pharmacy services increased $16.2 million compared to the prior year.
The increase resulted primarily from the new member lives added during fiscal
year 1997. The increase in new lives resulted in an increase in mail
prescriptions dispensed from 536,000 in fiscal year 1996 to 677,000 in fiscal
year 1997, a 26% increase. Revenues from clinical services increased $11.4
million compared to the prior year. The increase resulted primarily from the new
member lives added and the additional claims processed during fiscal year 1997
compared to the prior year.

     COST OF REVENUES. Cost of revenues for fiscal year 1997 increased by $125.1
million, or 104%, compared to the prior fiscal year. This increase was
attributable primarily to the additional costs associated with the Company's
claims processing growth. As a percentage of revenues, cost of revenues
increased from 94% in fiscal year 1996 to 96% in fiscal year 1997. This increase
resulted primarily from the increase in the Company's claims processing revenues
generated by new customers utilizing the Company's pharmacy network. In cases in
which the Company has an independent obligation to pay its network pharmacy
providers, the Company includes payments from its plan sponsors for these
benefits as revenues and payments to its pharmacy providers as cost of revenues.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal year 1997 increased by $1.2 million, or 19%,
compared to fiscal year 1996. This increase was the result of the Company's
expansion of its administrative and support staff functions in response to
volume growth in all services. In spite of the dollar increase, selling, general
and administrative expenses as a percentage of revenues decreased from 5% in
fiscal year 1996 to 3% in fiscal year 1997 as the result of greater economies of
scale and due to the increase in revenues associated with the Company's claims
processing services. Additional revenues generated by clients utilizing the
Company's network pharmacy providers do not result in an increase in selling,
general and administrative expenses.


                                       24
<PAGE>   26

     INTEREST INCOME AND INTEREST EXPENSE. Interest income, net of interest
expense, for fiscal year 1997 increased $1.5 million compared to fiscal year
1996. The increase resulted from cash management programs which utilized the
Company's short-term excess cash to generate interest income through investment
in money market funds and high grade commercial paper. In addition, the
Company's cash balance in fiscal year 1997 included the $10 million proceeds
from the June 1996 issuance of its Series B Preferred Stock and the $19.1
million proceeds from the October 1996 initial public offering. A portion of the
proceeds were used to retire the note payable to Whitney Subordinated Debt Fund,
L.P., an affiliate of J.H. Whitney & Co., the largest stockholder of the Company
at that time (the "Whitney Note") and, as a result, interest expense decreased
$287,000.

     INCOME TAXES. The Company had income tax loss carryforwards available to
offset income generated for fiscal year 1996 and, as a result, incurred no
federal income tax expense. For fiscal year 1997, the Company recorded income
tax expense of $1.6 million resulting from fully utilizing its remaining net
operating loss carryforwards in fiscal year 1997.

LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 1998 the Company had working capital of $28.4 million. The
increase in working capital at March 31, 1998 as compared to March 31, 1997
resulted primarily from the income generated by the Company in fiscal year 1998.
The Company's net cash provided by operating activities was $15.4 million, $15.4
million and $14.5 million for the years ended March 31, 1996, 1997 and 1998,
respectively. The significant increases in net cash provided by operating
activities were due primarily to the timing of receivables and payables
resulting from the Company's continued growth. Cash used in investing activities
was $1.8 million, $3.1 million and $6.5 million for the years ended March 31,
1996, 1997 and 1998, respectively. Cash used in investing activities was used
for purchases of property, plant and equipment associated with growth and
expansion of the Company's facilities. In particular, $2.1 million was used to
expand the automation and capacity of the Company's mail pharmacy facility. In
addition, the mail pharmacy facility, previously leased, was purchased for $1.5
million during the year. For the year ended March 31, 1998, the Company borrowed
$708,000 under a line of credit associated with IMR and repaid $1.6 million
during the year.

     During fiscal year 1998, the Company's continued growth resulted in net
cash provided by operating activities of $14.5 million. Historically, the
Company has been able to fund its operations and continued growth through cash
flow from operations. During fiscal year 1998, the Company's operating cash flow
funded its capital expenditures of $6.5 million, and its short-term excess cash
was invested in money market funds and high grade commercial paper. The Company
anticipates its capital expenditures of approximately $6 million for the year
ending March 31, 1999 will primarily consist of additional enhancements to the
Company's claim processing systems and further expansion of the Company's
facilities. The Company anticipates that cash flow from operations, combined
with its current cash balances, will be sufficient to meet the Company's
internal operating requirements and expansion programs, including capital
expenditures, for at least the next 18 months; however, the Company expects that
additional funds may be required in the future to successfully continue its
expansion and acquisition plans. The Company may be required to raise additional
funds through sales of its equity or debt securities or seek financing from
financial institutions. Currently, the Company has no 


                                       25
<PAGE>   27
borrowings from financial institutions, and none of its assets are pledged as
collateral. There can be no assurance, however, that credit financing will be
available on terms that are favorable to the Company or, if obtained, will be
sufficient for the Company's expansion needs.

RECENT PRONOUNCEMENTS

     The Company will adopt 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. Upon adoption, comprehensive
income and the cumulative other comprehensive income will be reported in a
consolidated statement of stockholders' equity.

     The Company will adopt 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 will require companies to select segments based on their
internal reporting system. Management is currently assessing the requirements of
this pronouncement and the effect it will have, if any, on the Company's
disclosure.

     The Company will adopt 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, the
Company does not have any pension or postretirement benefit plans, thus
management does not expect that the adoption of SFAS 132 will have a material
impact on the Company's disclosures.

IMPACT OF INFLATION

     Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals dispensed by the Company affects its cost of revenues.
Historically, the Company has been able to pass the effect of such price changes
to its customers under the terms of its agreements. As a result, changes in
pharmaceutical prices due to inflation have not adversely affected the Company.

YEAR 2000 ISSUES

     The Company has formed a Year 2000 project team to address the Year 2000
issue. The Company will incur internal costs as well as external consulting
expenses in order to prepare its systems for the new century. The Company is
still evaluating the magnitude of these costs, but the Company does not believe
the costs associated with the Year 2000 project will be material to the
Company's results of operations or financial condition. However, there can be no
assurance that the Company's efforts to address the Year 2000 issue will be
entirely successful. In addition, there can be no assurance that the software
and systems of other companies from which


                                       26
<PAGE>   28

the Company transacts business will become Year 2000 compliant in a timely
manner. Any such failures could have a material adverse effect on the Company's
systems and operations.

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 the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders to be filed with the Commission not later than 120 days following
the Company's 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. The Company filed a report on Form 8-K dated
February 9, 1998, relating to the merger with IMR.
     (c)  Exhibits Required by Item 601 of S-K: See index to exhibits on pages
28-31.


                                       27
<PAGE>   29

Exhibits and Financial Statement Schedules


<TABLE>
<CAPTION>
EXHIBIT NO.                     EXHIBITS
-----------                     --------
<S>             <C>  
3.1*            --- Amended and Restated Certificate of Incorporation of the Company.

3.2*            --- Amended and Restated Bylaws of the Company.

3.3*            --- Certificate of Incorporation of Advance Pharmacy Services, Inc.

3.4*            --- Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy Services, Inc.

3.5*            --- Certificate of Correction to the Certificate of Amendment to the Certificate of Incorporation
                    of Advance Pharmacy Services, Inc.

3.6*            --- Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy Services, Inc.

3.7*            --- Certificate of Amendment to the Certificate of Incorporation of Advance Paradigm, Inc.

3.8*            --- Certificate of Correction to the Amendment to the Certificate of Incorporation of Advance
                    Paradigm, Inc.

3.9*            --- Bylaws of Advance Pharmacy Services, Inc.

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

4.2*            --- Preferred Stock Purchase Agreement dated as of August 4, 1993, among the Company and Canaan
                    LP, Canaan Offshore, Stephen L. Green, Jeffrey R. Jay, Quai Ltd., J.H. Whitney, and Whitney
                    Fund.

4.3*            --- Amendment No. 1 to Preferred Stock Purchase Agreement dated as of December 7, 1993, by and
                    among Advance Data and the Purchasers.

4.4*            --- Amendment No. 2 to Preferred Stock Purchase Agreement dated as of December 8, 1993, by and
                    among APS, the Purchasers and Whitney Debt Fund.

4.5*            --- Voting, Co-Sale and Right of First Refusal Agreement dated as of August 4, 1993,  among the
                    Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips and the
                    Purchasers.
</TABLE>


                                       28
<PAGE>   30

<TABLE>
<CAPTION>
EXHIBIT NO.                EXHIBITS
-----------                --------
<S>             <C>
 4.6*           --- Amendment No. 1 to Voting, Co-Sale and Right of First Refusal Agreement dated as of December 8,
                    1993, among the Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips,
                    the Purchasers and Whitney Debt Fund.

 4.7*           --- Note and Warrant Purchase Agreement dated December 8, 1993, between the Company and Whitney
                    Debt Fund.

 4.8*           --- Promissory Note dated December 8, 1993, made by the Company payable to the order of Whitney
                    Debt Fund in the original principal amount of $7,000,000.

 4.9*           --- Common Stock Purchase Warrant dated December 8, 1993, made by the Company in favor of Whitney
                    Debt Fund.

 4.10**         --- Termination Agreement dated as of October 8, 1996, among the Company, Advance Health Care,
                    David D. Halbert, Jon S. Halbert, Danny Phillips, the Purchasers and Whitney Debt Fund.

 4.11*          --- Warrant for Purchase of Shares of Common Stock of the Company dated December 8, 1993, in
                    favor of BCBS of Maryland.

 4.12*          --- Stock Purchase Agreement dated as of June 25, 1996, by and between the Company and BCBS of
                    Texas.

 4.13*          --- Warrant Agreement dated as of November 25, 1995, by and between the Company and BCBS of Texas.

 4.14***        --- Amended and Restated Incentive Stock Option Plan.

 4.15***        --- Incentive Stock Option Plan.

 4.16*          --- Warrant Agreement dated as of September 12, 1996, by and between the Company and VHA, Inc.

 4.17*          --- Form of Agreement and Plan of Merger.

 4.18****       --- 1997 Nonstatutory Stock Option Plan

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

10.2*           --- Nondisclosure/Noncompetition Agreement dated August 4, 1993,between the Company, Advance Data,
                    Advance Mail and David D. Halbert.
</TABLE>


                                       29
<PAGE>   31

<TABLE>
<CAPTION>
EXHIBIT NO.                EXHIBITS
-----------                --------
<S>             <C>
10.3*           --- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Mail,
                    Advance Data and Jon S. Halbert.

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

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

10.7**          --- Employment Agreement effective as of November 14, 1996, by and between the Company and John H. Sattler.

10.8**          --- Employment Agreement effective as of June 17, 1996, by and between the Company and Ernest Buys.

10.9*           --- Employment Agreement effective as of February 15, 1996, by and between the Company and Alan T. Wright.

10.10*          --- Form of Health Benefit Management Services Agreement.

10.11*          --- Sublease dated May 2, 1996, between Lincoln National Life Insurance Company and Advance Data.

10.12*          --- Lease dated March 6, 1994, by and between Hill Management Services, Inc. and Advance Clinical
                    (formerly ParadigM).

10.13*          --- 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.

10.14*          --- Assignment, Assumption, Bill of Sale and Consent Agreement dated as of October 20, 1993, between
                    Medco Containment Services, Inc., the Company and Trinity Properties, Ltd.

10.15*          --- Managed Pharmacy Benefit Services Agreement dated September 1, 1995, between the Company and
                    BCBS of Texas.

10.16*****      --- Agreement and Plan of Merger, dated February 9, 1998, by and among Advance Paradigm, Inc., 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.
</TABLE>


                                       30
<PAGE>   32

<TABLE>
<S>             <C>
10.17******     --- Employment Agreement effective as of May 1, 1998, by and between the Company and Anthony J. Pino.

11******        --- Statement regarding computation of per share earnings.

21******        --- Subsidiaries of the Company.

23******        --- Consent of Arthur Andersen LLP.

27.1******      --- Financial Data Schedule.

27.2******      --- Restated Financial Data Schedule
</TABLE>



<TABLE>
<S>   <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.

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

***   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.

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

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

******Filed herewith.
</TABLE>


                                       31
<PAGE>   33

         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 22, 1998 on its behalf by the undersigned, thereunto duly authorized.

                                       ADVANCE PARADIGM, INC.



                                       By:  /s/ David D. Halbert
                                            ------------------------------------
                                            David D. Halbert
                                            Chairman of the Board, President 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, President       June 22, 1998
--------------------------------------      and Chief Executive Officer          
David D. Halbert                            (Principal Executive Officer)



/s/ Jon S. Halbert                          Executive Vice President, Chief        June 22, 1998
--------------------------------------      Operating Officer and Director       
Jon S. Halbert                              



/s/ T. Danny Phillips                       Senior Vice President, Chief           June 22, 1998
--------------------------------------      Financial Officer, Secretary and     
T. Danny Phillips                           Treasurer (Principal Financial
                                            and Accounting Officer)
</TABLE>


                                       32
<PAGE>   34

<TABLE>
<S>                                         <C>                <C>
/s/ Peter M. Castleman                      Director           June 22, 1998
--------------------------------------                        
Peter M. Castleman



/s/ Rogers K. Coleman                       Director           June 22, 1998
--------------------------------------                        
Rogers K. Coleman, M.D.



/s/ Stephen L. Green                        Director           June 22, 1998
--------------------------------------                        
Stephen L. Green



/s/ Jeffrey R. Jay                          Director           June 22, 1998
--------------------------------------                        
Jeffrey R. Jay, M.D.



/s/ Kenneth J. Linde                        Director           June 22, 1998
--------------------------------------                        
Kenneth J. Linde



/s/ Michael D. Ware                         Director           June 22, 1998
--------------------------------------                        
Michael D. Ware
</TABLE>



                                       33
<PAGE>   35
                          INDEX TO FINANCIAL STATEMENTS

                     Advance Paradigm, Inc. and Subsidiaries


<TABLE>
<S>                                                                                                         <C>
Report of Independent Public Accountants....................................................................F-2

Consolidated Balance Sheets--March 31, 1997 and 1998........................................................F-3

Consolidated Statements of Operations for the Years Ended March 31, 1996, 1997 and 1998.....................F-4

Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1996, 1997 and 1998...........F-5

Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1997 and 1998.....................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 and Reserves for the Years Ended March 31, 1996,
  1997 and 1998.............................................................................................S-2
</TABLE>




                                      F-1
<PAGE>   36

                    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, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1998. 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 generally accepted auditing
standards. 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, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with generally accepted accounting principles.



                                              ARTHUR ANDERSEN LLP

Dallas, Texas,
May 15, 1998


                                      F-2
<PAGE>   37

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                             March 31,
                                                                                  --------------------------------
                                                                                      1997                1998
                                                                                  -----------        -------------
<S>                                                                               <C>                <C>
                                                    ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                      $51,172,000        $  58,342,000
   Accounts receivable, net of allowance for doubtful accounts of
     $192,000 and $247,000, respectively                                           36,269,000           68,335,000
   Inventories                                                                      1,859,000            2,887,000
   Prepaid expenses and other                                                         427,000            1,487,000
                                                                                 ------------         ------------
     Total current assets                                                          89,727,000          131,051,000

PROPERTY AND EQUIPMENT, net of accumulated depreciation
   and amortization of $3,540,000 and $5,574,000, respectively                      6,001,000           10,494,000
INTANGIBLE ASSETS, net of accumulated amortization of
   $1,154, 000 and $1,501,000, respectively                                        12,699,000           12,353,000
OTHER ASSETS                                                                          487,000            1,011,000
                                                                                 ------------         ------------
     Total assets                                                                $108,914,000         $154,909,000
                                                                                 ============         ============

                                   LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                               $59,857,000        $  97,495,000
   Accrued salaries and benefits                                                    1,991,000            2,966,000
   Income taxes payable                                                               712,000               32,000
   Other accrued expenses                                                           1,692,000            2,196,000
   Debt to related parties                                                            900,000                 --
                                                                                 ------------         ------------
     Total current liabilities                                                     65,152,000          102,689,000
NONCURRENT LIABILITIES:
   Deferred income taxes                                                              844,000            1,285,000
   Other noncurrent liabilities, less current portion                                 341,000              371,000
                                                                                 ------------         ------------
     Total liabilities                                                             66,337,000          104,345,000
                                                                                 ------------         ------------
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK:
   Preferred stock, $.01 par value,
     4,995,000 shares authorized, none issued and outstanding                            --                   --
                                                                                 ------------         ------------

STOCKHOLDERS' EQUITY:
   Series B convertible preferred stock, $.01 par value; 5,000
     shares authorized, 4,444 shares issued and outstanding                              --                   --
   Common stock, $.01 par value; 25,000,000 shares authorized,
     8,676,895 and 8,904,472 shares issued and outstanding at
     March 31, 1997 and 1998, respectively                                             87,000               89,000
   Additional paid-in capital                                                      42,888,000           43,142,000
   Accumulated earnings (deficit)                                                    (398,000)           7,333,000
                                                                                 ------------         ------------
     Total stockholders' equity                                                    42,577,000           50,564,000
                                                                                 ------------         ------------
     Total liabilities and stockholders' equity                                  $108,914,000         $154,909,000
                                                                                 ============         ============
</TABLE>

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


                                      F-3
<PAGE>   38
                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                           Year Ended March 31,
                                           ------------------------------------------------
                                               1996               1997             1998
                                           ------------      ------------      ------------
<S>                                        <C>               <C>               <C>
REVENUES                                   $127,871,000      $256,450,000      $476,664,000
                                           ------------      ------------      ------------
COST OF OPERATIONS:
   Cost of revenues                         120,334,000       245,466,000       455,847,000
   Selling, general and
     administrative expenses                  6,158,000         7,309,000        10,083,000
                                           ------------      ------------      ------------
         Total cost of operations           126,492,000       252,775,000       465,930,000
                                           ------------      ------------      ------------
   Operating income                           1,379,000         3,675,000        10,734,000
INTEREST INCOME                                 366,000         1,560,000         2,814,000
INTEREST EXPENSE                               (732,000)         (445,000)          (67,000)
MERGER COSTS                                       --                --            (689,000)
                                           ------------      ------------      ------------

INCOME BEFORE INCOME TAXES                    1,013,000         4,790,000        12,792,000
PROVISION FOR INCOME TAXES                         --           1,564,000         4,861,000
                                           ------------      ------------      ------------

NET INCOME                                 $  1,013,000      $  3,226,000      $  7,931,000
                                           ============      ============      ============

BASIC:
   NET INCOME AVAILABLE
     TO COMMON STOCKHOLDERS                $    213,000      $  2,673,000      $  7,731,000
   NET INCOME PER SHARE                    $       0.05      $       0.43      $       0.88
   WEIGHTED AVERAGE SHARES OUTSTANDING        4,006,578         6,264,521         8,755,754

DILUTED:
   NET INCOME AVAILABLE
     TO COMMON STOCKHOLDERS                $    213,000      $  3,226,000      $  7,931,000
   NET INCOME PER SHARE                    $       0.05      $       0.35      $       0.70
   WEIGHTED AVERAGE SHARES OUTSTANDING        4,576,265         9,176,127        11,350,919
</TABLE>



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


                                      F-4
<PAGE>   39

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998


<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, 1995            4,001,078    $  40,000       --       $ --       $ 1,467,000     $(3,254,000)     $ (1,747,000)
                                   ---------    ---------     -----      ----       -----------     -----------      ------------ 
   Net income                           --           --         --         --              --         1,013,000         1,013,000
   Dividends and accretion on
     Series A Preferred Stock           --           --         --         --              --          (820,000)         (820,000)
                                                                                                                         
   Issuance of Common Stock
     in connection with the
     exercise of employee
     stock options                     5,500         --         --         --            17,000            --              17,000
                                   ---------    ---------      -----     ----       -----------     -----------      ------------

BALANCE, March 31, 1996            4,006,578       40,000       --         --         1,484,000      (3,061,000)       (1,537,000)
   Net income                           --           --         --         --              --         3,226,000         3,226,000
   Issuance of Common Stock
     in connection with the
     exercise of employee
     stock options                     3,000         --         --         --            12,000            --              12,000
   Issuance of Series B
     Preferred Stock                    --           --        4,444       --        10,000,000            --          10,000,000
   Dividends and accretion on
     Series A Preferred Stock           --           --         --         --              --          (410,000)         (410,000)
   Issuance of Common Stock
     in connection with an 
     initial public offering       2,397,067       24,000       --         --        19,111,000            --          19,135,000
   Issuance of Common Stock
     in connection with the
     conversion of Series A
     Preferred Stock               2,500,000       25,000       --         --        12,279,000            --          12,304,000
   Reduction of Common Stock
     outstanding in connection
     with the merger with AHC       (229,750)      (2,000)      --         --             2,000            --                --
   Dividends on Series B
     Preferred Stock                    --           --         --         --              --          (153,000)         (153,000)
                                   ---------    ---------      -----     ----       -----------     -----------      ------------

BALANCE, March 31, 1997            8,676,895       87,000      4,444       --        42,888,000        (398,000)       42,577,000
   Net Income                           --           --         --         --              --         7,931,000         7,931,000
   Issuance of Common Stock
     in connection with the
     exercise of stock options
     and warrants                    227,577        2,000       --         --           254,000            --             256,000
   Dividends on Series B
     Preferred Stock                                                                                   (200,000)         (200,000)
                                   ---------    ---------      -----     ----       -----------     -----------      ------------
BALANCE, March 31,1998             8,904,472    $  89,000      4,444     $ --       $43,142,000     $ 7,333,000      $ 50,564,000
                                   =========    =========      =====     ====       ===========     ===========      ============
</TABLE>


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


                                      F-5
<PAGE>   40

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                         Year Ended March 31,
                                                           ------------------------------------------------
                                                               1996              1997              1998
                                                           ------------      ------------      ------------
<S>                                                        <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                              $  1,013,000      $  3,226,000      $  7,931,000
   Adjustments to reconcile net income to net
     cash provided by operating activities--
         Depreciation and amortization                        1,313,000         1,705,000         2,378,000
         Provision for doubtful accounts                         23,000            12,000            74,000
         Change in certain assets and liabilities--
             Accounts receivable                             (7,543,000)      (12,612,000)      (32,139,000)
             Inventories                                       (367,000)         (261,000)       (1,028,000)
             Prepaid expenses and other assets                  (70,000)         (256,000)       (1,584,000)
             Accounts payable, accrued expenses
                and other noncurrent liabilities             20,985,000        23,571,000        38,907,000
                                                           ------------      ------------      ------------
             Net cash provided by operating activities       15,354,000        15,385,000        14,539,000
                                                           ------------      ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                       (1,762,000)       (3,147,000)       (6,525,000)
                                                           ------------      ------------      ------------
             Net cash used in investing activities           (1,762,000)       (3,147,000)       (6,525,000)
                                                           ------------      ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from sale of preferred stock                       --          10,000,000              --
   Net proceeds from issuance of Common Stock                    17,000        19,147,000           256,000
   Proceeds from borrowings                                     600,000         1,000,000           708,000
   Payments on long-term obligations                           (244,000)       (7,650,000)       (1,608,000)
   Payment of preferred stock dividend                             --            (153,000)         (200,000)
                                                           ------------      ------------      ------------
             Net cash provided by (used in) financing
               activities                                       373,000        22,344,000          (844,000)
                                                           ------------      ------------      ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                    13,965,000        34,582,000         7,170,000
CASH AND CASH EQUIVALENTS, beginning of year                  2,625,000        16,590,000        51,172,000
                                                           ------------      ------------      ------------
CASH AND CASH EQUIVALENTS, end of year                     $ 16,590,000      $ 51,172,000      $ 58,342,000
                                                           ============      ============      ============
</TABLE>


SUPPLEMENTARY INFORMATION:

   Cash paid for interest totaled approximately $732,000, $445,000 and $67,000
     in 1996, 1997 and 1998, respectively.

   The Company made income tax payments of $0, $19,000 and $5,100,000 in 1996,
     1997 and 1998, respectively.


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


                                      F-6
<PAGE>   41

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    GENERAL:

      Advance Paradigm, Inc. ("API"), a Delaware corporation formerly named
Advance Pharmacy Services, Inc., was formed as a wholly owned subsidiary of
Advance Health Care, Inc. ("AHC") in July 1993. The accompanying consolidated
financial statements include the accounts of API and its four wholly owned
subsidiaries, Advance Paradigm Mail Services, Inc. ("Advance Mail"), Advance
Paradigm Data Services, Inc. ("Advance Data"), Advance Paradigm Clinical
Services, Inc. ("Advance Clinical"), and Innovative Medical Research, Inc.
("IMR"), which collectively are referred to as "the Company".

      The Company offers an integrated program of pharmacy benefit management.
Clinical, rebate and formulary products are provided through Advance Clinical.
Claims processing for prescription drugs purchased at the Company's network of
retail pharmacies is provided through Advance Data. The dispensing of
prescription drugs through the mail is provided through Advance Mail. The
Company markets health benefit management services ("HBM Services") to certain
health plans, pharmaceutical manufacturers, and other research and managed care
organizations, and programs for disease management services with selected
customers. In February 1998, API merged with IMR, a privately held clinical
trial and survey research firm.


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 generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. 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>   42
                     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 represent the excess of cost over the fair value of
tangible net assets acquired (goodwill) in connection with the acquisition of
Advance Clinical. Goodwill is amortized on a straight-line basis over 40 years.
Amortization expense was $346,000 in each of the years ended March 31, 1996,
1997 and 1998.

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.


                                      F-8
<PAGE>   43
                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

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.

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. Revenues from certain
disease management and health benefit management products are reimbursed at
predetermined contractual rates based on the achievement of certain milestones.
Revenues are recognized as billed and based on the completion of the milestone
measurements.

Cost of Revenues

      Cost of revenues includes product costs, pharmacy claims payments and
other direct costs associated with the sale and dispensing of prescriptions.

Federal Income Taxes

      The Company files a consolidated federal income tax return which includes
the parent and all of its wholly owned subsidiaries.


                                      F-9
<PAGE>   44
                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

Net Income Per Share

      In February 1997, the Financial Accounting Standards Board issued
Statement 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 is effective for
financial statements for both interim and annual periods ending after December
15, 1997. SFAS 128 requires the calculation of "Basic" earnings per share which
is computed by dividing net income by the weighted average number of shares of
Common Stock outstanding during the period. In addition, SFAS 128 requires the
calculation of "Diluted" earnings per common share which is computed using the
weighted average number of shares of Common Stock and all other dilutive
securities. Other dilutive securities include stock options, stock warrants and
the Company's Series A and B preferred stock and are included in the "Diluted"
calculation only if the result is dilutive. A reconciliation of the numerators
and denominators of the basic and diluted per-share computations follows:

<TABLE>
<CAPTION>
                                                      Year Ended March 31,
                                         ----------------------------------------------
                                             1996             1997             1998
                                         ------------     ------------     ------------
<S>                                       <C>             <C>              <C>
BASIC
Numerator:

Net income                               $  1,013,000     $  3,226,000     $  7,931,000
Preferred stock dividends                     800,000          553,000          200,000
                                         ------------     ------------     ------------
                                         $    213,000     $  2,673,000     $  7,731,000
                                         ============     ============     ============
Denominator:

Weighted average common
   stock outstanding                        4,006,578        6,264,521        8,755,754
                                         ============     ============     ============
Net income per share                     $       0.05     $       0.43     $       0.88
                                         ============     ============     ============

DILUTED
Numerator:

Net income                               $  1,013,000     $  3,226,000     $  7,931,000
Preferred stock dividends                     800,000             --               --
                                         ------------     ------------     ------------
                                         $    213,000     $  3,226,000     $  7,931,000
                                         ============     ============     ============
Denominator:

Weighted average common                     4,006,578        6,264,521        8,755,754
   stock outstanding

Other Dilutive Securities:
Series A preferred stock                         --          1,250,000             --
Series B preferred stock                         --            833,333        1,111,111
Options and warrants using the
  treasury stock method                       569,687          828,273        1,484,054
                                         ------------     ------------     ------------
Weighted average shares outstanding         4,576,265        9,176,127       11,350,919
                                         ============     ============     ============

Net income per share                     $       0.05     $       0.35     $       0.70
                                         ============     ============     ============
</TABLE>



The conversion of the Series A preferred stock was anti-dilutive in 1996 and,
therefore, was not an other dilutive security.


                                      F-10
<PAGE>   45
                     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 will adopt 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. Upon adoption, comprehensive
income and the cumulative other comprehensive income will be reported in a
consolidated statement of stockholders' equity.

     The Company will adopt 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 will require companies to select segments based on their
internal reporting system. Management is currently assessing the requirements of
this pronouncement and the effect it will have, if any, on the Company's
disclosure.

     The Company will adopt 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, the
Company does not have any pension or postretirement benefit plans, thus
management does not expect that the adoption of SFAS 132 will have a material
impact on the Company's disclosures.

3.   BUSINESS COMBINATION

     In February 1998, the Company completed a merger with IMR, a privately held
clinical trial and survey research firm based in Towson, Maryland. The Company
issued 876,078 shares and options to purchase 23,922 shares of its Common Stock
in exchange for all the outstanding shares and options of IMR.


                                      F-11
<PAGE>   46
                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.   BUSINESS COMBINATION: (CONTINUED)

     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.

     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,
                                                         1996                1997               1998
                                                      ---------           ---------          ---------
                                                                           (000's)
<S>                                                   <C>                 <C>                <C>
Revenues:
API                                                   $ 125,333           $ 251,562          $ 468,287
IMR                                                       2,538               4,888              8,377
                                                      ---------           ---------          ---------
Combined                                              $ 127,871           $ 256,450          $ 476,664
                                                      ---------           ---------          ---------
Net income:
API                                                   $   1,037           $   3,138          $   7,165
IMR                                                         (24)                 88                766
                                                      ---------           ---------          ---------
Combined                                              $   1,013           $   3,226          $   7,931
                                                      =========           =========          =========
</TABLE>

     In connection with the merger, the Company recorded in the fourth quarter a
charge to operating expenses of $689,000 ($427,000 after taxes, or $.04 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,
                                                                  ----------------------------
                                                                      1997            1998
                                                                  ------------    ------------
<S>                                                               <C>             <C>         
Machinery and equipment.....................................      $  1,033,000    $  3,521,000
Computer equipment and software.............................         6,567,000       8,591,000
Furniture and equipment.....................................         1,149,000       1,381,000
Leasehold improvements......................................           792,000       1,017,000
Land and buildings..........................................              --         1,558,000
                                                                  ------------    ------------
                                                                     9,541,000      16,068,000
Less--Accumulated depreciation and amortization.............        (3,540,000)     (5,574,000)
                                                                  ------------    ------------
                                                                  $  6,001,000    $ 10,494,000
                                                                  ============    ============
</TABLE>


                                      F-12
<PAGE>   47
                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.   DEBT:

     On July 1, 1996, IMR entered into a $1,000,000 line of credit agreement
with an officer and shareholder of IMR. As of March 31, 1997, $900,000 was
outstanding under the line of credit arrangement. Interest payments were due
quarterly and accrued at the prime rate. In addition, other officers and
shareholders of IMR made working capital loans to IMR during the periods
presented. Interest expense was $16,000, $66,000 and $67,000 in the years ended
March 31, 1996, 1997 and 1998, respectively. After the merger, the remaining
balance of the line of credit was paid and the credit arrangement was
terminated.

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, 1998, as follows:

   Years Ending
     March 31,
   ------------
       1999...........................................         $3,016,000
       2000...........................................          2,575,000
       2001...........................................          1,996,000
       2002...........................................          1,479,000
       2003...........................................            239,000
                                                               ----------
            Total minimum lease payments..............         $9,305,000
                                                               ==========

     Total rent expense incurred in the years ended March 31, 1996, 1997 and
1998 was $1,185,000, $2,313,000 and $3,096,000, respectively.

7.   COMMITMENTS AND CONTINGENCIES:

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


                                      F-13
<PAGE>   48
                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.   COMMITMENTS AND CONTINGENCIES:  (CONTINUED)

     The pharmacy industry is governed by extensive federal and state laws and
regulations. The regulatory requirements with which the Company must comply in
conducting its business vary from state to state. Management believes the
Company is in substantial compliance with, or is in the process of complying
with, all existing laws and regulations material to the operation of its
business. In management's opinion, any events of noncompliance would not have a
material adverse effect on the results of operations or financial condition of
the Company.


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 five years with
renewal options.

     One customer of the Company accounted for approximately 14% and 15% of the
Company's revenues for the years ended March 31, 1997 and 1998, respectively.
Another customer accounted for approximately 21% of the Company's revenues for
the year ended March 31, 1998. A third customer accounted for approximately 18%
of the Company's revenues for the year ended March 31, 1997, but revenues from
this customer did not exceed 10% of the Company's revenues for the year ended
March 31, 1998. A fourth customer accounted for approximately 18% of the
Company's revenues for the year ended March 31, 1996, but revenues from this
customer did not exceed 10% of the Company's revenues in either the year ended
March 31, 1997 or 1998. No other customer accounted for over 10% of the
Company's revenues in fiscal years 1996, 1997, or 1998.

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
may be converted by the holder into 250 fully-paid and non-assessable shares of
Common Stock. Holders of the Series B Preferred Stock are not entitled to vote
on any matter. Holders of the Series B Preferred Stock are entitled to receive,
out of funds legally available therefor, cumulative dividends, calculated
without compounding, equal to $45.00 per share per annum. Such cumulative
dividends accrue and accumulate from the date of issuance and are payable on


                                      F-14
<PAGE>   49
                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.   STOCK TRANSACTIONS: (CONTINUED)

March 31 of each year. Furthermore, holders of the Series B Preferred Stock are
entitled to any dividends that the Board of Directors may declare to be payable
on shares of Common Stock as if the shares of Series B Preferred Stock had been
converted into shares of Common Stock. Upon the liquidation, dissolution or
winding up of the Company, holders of the Series B Preferred Stock have the
right, prior to any existing or future classes of capital stock, to receive
$10.0 million plus all accrued and unpaid dividends of Series B Preferred Stock
and to participate equally and ratably with holders of the Common Stock in the
net assets of the Company available for distribution to stockholders. The
Company, in its sole discretion, may redeem any or all of such holders' shares
at a price equal to the original price paid per share, plus accrued and unpaid
dividends. The Company has the right to convert the Series B Preferred Stock
into Common Stock at any time after the fifth anniversary of issuance. If the
Company forces such a conversion, holders of the Series B Preferred Stock will
be entitled to piggy-back registration rights in connection with future
registered offerings of shares of Common Stock.

     On April 13, 1998, the Company was notified by the holders of the Series B
Preferred Stock that they were electing to convert all of the shares into Common
Stock. Subsequently, the shares were converted into 1,111,111 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 ("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.

     On October 8, 1996, the Company completed the Offering of its Common Stock.
On November 7, 1996, the Underwriters exercised the over-allotment option of the
Offering. Including the over-allotment option, the Company sold 2,397,067 shares
of its Common Stock at a price of $9.00 per share, prior to underwriting
discount and other offering expenses. In connection with the Offering, the
Company's redeemable Series Accumulative convertible preferred stock ("Series A
Preferred Stock") automatically converted into 2,500,000 shares of Common Stock.


                                      F-15
<PAGE>   50
                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.   STOCK TRANSACTIONS: (CONTINUED)

     Immediately prior to the consummation of the Offering, AHC was merged with
and into the Company (the "AHC Merger"). The AHC Merger was accounted for as a
reorganization of entities under common control in a manner similar to a pooling
of interests. Accordingly, the accounts of the predecessor were based on
historical cost, and its operations are included from the date of its formation.
Prior to the AHC Merger, AHC held 3,125,000 shares of the Company's Common
Stock. In connection with the AHC Merger, the AHC incentive stock option plan
was merged with the Company's Incentive Stock Option Plan, and holders of
options under the AHC incentive stock option plan received options to purchase
Common Stock under the Company's Incentive Stock Option Plan. In the AHC Merger,
the Company canceled the shares held by AHC and issued shares of Common Stock
directly to the AHC stockholders (the "AHC Stockholders") based upon their
fully-diluted proportionate ownership interests in AHC after giving
consideration to the new shares of AHC to be issued in repayment of debt as
indicated below. After the AHC Merger, there were 2,903,750 shares of Common
Stock outstanding and 229,750 additional options outstanding at exercise prices
ranging from $0.65 to $2.71 per share. Immediately prior to the AHC Merger, AHC
distributed the stock of certain subsidiaries of AHC, operating in businesses
unrelated to the Company, to the AHC Stockholders. Prior to such spin-off,
certain indebtedness owed by AHC to several of its stockholders (including
certain indebtedness of AHC payable to an affiliate of a preferred stockholder
of the Company which was assumed by an AHC stockholder) was exchanged for
additional shares of AHC common stock. The spin-off and exchange of indebtedness
did not impact the number of shares of the Company's Common Stock outstanding.

     In connection with the IMR merger, the Company issued 876,078 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. Therefore, the Company has 8,676,895 and
8,904,472 shares of Common Stock issued and outstanding at March 31, 1997 and
1998, respectively.

Warrants

     During the year ended March 31, 1994, the Company issued warrants to
purchase 336,500 and 56,250 shares of its Common Stock at prices per share of
$4.00 and $6.00, respectively. During the year ended March 31, 1998, warrants to
purchase 158,573 and 56,250 shares at prices per share of $4.00 and $6.00,
respectively, were exercised.


                                      F-16
<PAGE>   51

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.   STOCK TRANSACTIONS: (CONTINUED)

     During the year ended March 31, 1997, the Company agreed to issue to a
customer warrants to purchase 84,500 shares of its Common Stock at a price of
$8.10 per share. During the years ended March 31, 1996 and 1997, the Company
agreed to issue warrants to purchase 548,250 shares of its Common Stock at
prices ranging from $8.10 to $11.00 per share to two customers contingent upon
future expansion of member lives. As of March 31, 1998, no warrants have been
earned or issued.

     In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company
accounted for these warrant agreements under the provisions of FASB 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, 1998, for the
following:

     Conversion of Series B Preferred Stock............        1,111,111
     Exercise of stock options.........................        2,793,948
     Exercise of warrants..............................          810,677
                                                               ---------
                                                               4,715,736
                                                               =========


                                      F-17
<PAGE>   52
                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10.  STOCK OPTION PLAN:

     At March 31, 1998 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, 1998, the number of shares of Common Stock
issuable under the Plans may not exceed 2,837,750 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, 1998, 879,382 options were vested at exercise prices of $.65 to $19.75
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>
                                             1996                        1997                          1998
                                    --------------------------------------------------------------------------------
                                      Shares     Wtd. Avg.        Shares     Wtd. Avg.        Shares       Wtd. Avg.
                                                 Ex. Price                   Ex. Price                     Ex. Price
                                     --------    ---------      ---------    ---------       ---------     ---------
<S>                                   <C>          <C>            <C>         <C>            <C>            <C>    
Outstanding at beginning of year      783,500      $ 7.80         810,500     $  5.15        1,457,750      $  6.02
Granted                               195,500       12.82         445,000       10.34          614,375        21.25
Transferred from AHC                     --         --            229,750        1.12             --          --
Transferred from IMR                     --         --               --          --             23,922         1.18
Exercised                              (5,500)       3.20          (3,000)       3.20          (43,052)        5.26
Canceled                             (163,000)      27.12         (24,500)      10.75          (29,250)        9.78
                                     --------      ------       ---------     -------        ---------      -------
Outstanding at end of year            810,500        5.15       1,457,750        6.02        2,023,745        10.54
                                     ========      ======       =========     =======        =========      =======
Exercisable at end of year            276,500        5.84         632,850        2.95          879,382         4.40
Price range                       $3.20 to $11.00             $.65 to $19.75               $.65 to $33.13
Weighted average fair value
   of options granted                  $3.88                        $3.31                      $ 7.94
</TABLE>


                                      F-18

<PAGE>   53

                     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
2,023,745 options outstanding as of March 31, 1998.

<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>
$   .65   to  $  2.71        248,670      $     1.14           3.7           224,748        $ 1.13
$  3.20   to  $  4.80        580,200      $     3.26           5.4           460,500        $ 3.25
$  9.00   to  $ 12.50        877,875      $    11.12           8.6           192,467        $10.84
$ 16.63   to  $ 20.75         64,000      $    19.55           9.3             1,667         19.75
$ 29.13   to  $ 33.13        253,000      $    32.21           9.9              --           --
</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, 1996, 1997 and 1998,
respectively: risk-free interest rates of 4.8% to 6.5%; expected lives of three
to five years; expected volatility of 30% to 50%. 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>
                                        1996              1997              1998
                                        ----              ----              ----
<S>                                  <C>               <C>               <C>
Net income:
  As reported                        $1,013,000        $3,226,000        $7,931,000
  Pro forma                          $1,003,000        $3,065,000        $7,382,000

Basic net income per share:
  As reported                        $     0.05        $     0.43        $     0.88
  Pro forma                          $     0.05        $     0.40        $     0.82

Diluted net income per share:
  As reported                        $     0.05        $     0.35        $     0.70
  Pro forma                          $     0.04        $     0.33        $     0.65
</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>   54
                     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
IMR transaction. In exchange for these professional services, the Company paid
ACM a fee of $150,000, which is 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 $102,000, $129,000 and
$177,000 for the years ended March 31, 1996, 1997 and 1998, respectively.


13.  INCOME TAXES:

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

<TABLE>
<CAPTION>
                                          1996            1997              1998
                                      ----------       ----------        ----------
     <S>                              <C>              <C>               <C>
     Tax at U.S. federal              $  344,000       $1,629,000        $4,349,000
       income tax rate
     State taxes                            --               --             457,000
     Benefit of operating               (382,000)         (89,000)             --
       loss carryforwards
     Other, net                           38,000           24,000            55,000
                                      ----------       ----------        ----------
     Provision for income taxes       $     --         $1,564,000        $4,861,000
                                      ==========       ==========        ==========
</TABLE>

     Of the $4,861,000 provision for income taxes in 1998, $441,000 represents
deferred income taxes and $4,420,000 represents the current portion.


                                      F-20
<PAGE>   55
                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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,
                                                               1997           Changes             1998
                                                          -------------    -------------     ------------- 
<S>                                                       <C>              <C>               <C>
Gross deferred tax asset:
     Other accruals..................................     $      50,000    $       7,000     $      57,000
     Other...........................................            48,000            2,000            50,000
                                                          -------------    -------------     ------------- 
                                                                 98,000            9,000           107,000
                                                          -------------    -------------     ------------- 
Gross deferred tax liability:
     Amortization of goodwill........................          (654,000)        (196,000)         (850,000)
     Depreciation....................................          (288,000)        (254,000)         (542,000)
                                                          -------------    -------------     ------------- 
                                                               (942,000)        (450,000)       (1,392,000)
                                                          -------------    -------------     ------------- 
     Net deferred tax liability......................     $    (844,000)   $    (441,000)    $  (1,285,000)
                                                          =============    =============     ============= 
</TABLE>


                                      F-21
<PAGE>   56
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULES


     We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Advance Paradigm, Inc. and subsidiaries
included in this Form 10-K and have issued our report thereon dated May 15,
1997. Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. Schedule II is presented for purposes of complying
with the Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic 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 financial statements taken as a whole.




                                                ARTHUR ANDERSEN LLP


Dallas, Texas
May 15, 1998


                                      S-1

<PAGE>   57
                             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, 1996:
     Allowance for doubtful accounts receivable.............       $191,000         $23,000       $(34,000)        $180,000

Year ended March 31, 1997:
     Allowance for doubtful accounts receivable.............       $180,000         $12,000       $   --           $192,000

Year ended March 31, 1998:
     Allowance for doubtful accounts receivable.............       $192,000         $74,000       $ 19,000         $247,000
</TABLE>




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


                                      S-2
<PAGE>   58
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO.                     DESCRIPTION
-----------                     -----------
<S>             <C>  
3.1*            --- Amended and Restated Certificate of Incorporation of the Company.

3.2*            --- Amended and Restated Bylaws of the Company.

3.3*            --- Certificate of Incorporation of Advance Pharmacy Services, Inc.

3.4*            --- Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy Services, Inc.

3.5*            --- Certificate of Correction to the Certificate of Amendment to the Certificate of Incorporation
                    of Advance Pharmacy Services, Inc.

3.6*            --- Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy Services, Inc.

3.7*            --- Certificate of Amendment to the Certificate of Incorporation of Advance Paradigm, Inc.

3.8*            --- Certificate of Correction to the Amendment to the Certificate of Incorporation of Advance
                    Paradigm, Inc.

3.9*            --- Bylaws of Advance Pharmacy Services, Inc.

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

4.2*            --- Preferred Stock Purchase Agreement dated as of August 4, 1993, among the Company and Canaan
                    LP, Canaan Offshore, Stephen L. Green, Jeffrey R. Jay, Quai Ltd., J.H. Whitney, and Whitney
                    Fund.

4.3*            --- Amendment No. 1 to Preferred Stock Purchase Agreement dated as of December 7, 1993, by and
                    among Advance Data and the Purchasers.

4.4*            --- Amendment No. 2 to Preferred Stock Purchase Agreement dated as of December 8, 1993, by and
                    among APS, the Purchasers and Whitney Debt Fund.

4.5*            --- Voting, Co-Sale and Right of First Refusal Agreement dated as of August 4, 1993,  among the
                    Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips and the
                    Purchasers.
</TABLE>

<PAGE>   59

<TABLE>
<CAPTION>
EXHIBIT NO.                     DESCRIPTION
-----------                     -----------
<S>             <C>
 4.6*           --- Amendment No. 1 to Voting, Co-Sale and Right of First Refusal Agreement dated as of December 8,
                    1993, among the Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips,
                    the Purchasers and Whitney Debt Fund.

 4.7*           --- Note and Warrant Purchase Agreement dated December 8, 1993, between the Company and Whitney
                    Debt Fund.

 4.8*           --- Promissory Note dated December 8, 1993, made by the Company payable to the order of Whitney
                    Debt Fund in the original principal amount of $7,000,000.

 4.9*           --- Common Stock Purchase Warrant dated December 8, 1993, made by the Company in favor of Whitney
                    Debt Fund.

 4.10**         --- Termination Agreement dated as of October 8, 1996, among the Company, Advance Health Care,
                    David D. Halbert, Jon S. Halbert, Danny Phillips, the Purchasers and Whitney Debt Fund.

 4.11*          --- Warrant for Purchase of Shares of Common Stock of the Company dated December 8, 1993, in
                    favor of BCBS of Maryland.

 4.12*          --- Stock Purchase Agreement dated as of June 25, 1996, by and between the Company and BCBS of
                    Texas.

 4.13*          --- Warrant Agreement dated as of November 25, 1995, by and between the Company and BCBS of Texas.

 4.14***        --- Amended and Restated Incentive Stock Option Plan.

 4.15***        --- Incentive Stock Option Plan.

 4.16*          --- Warrant Agreement dated as of September 12, 1996, by and between the Company and VHA, Inc.

 4.17*          --- Form of Agreement and Plan of Merger.

 4.18****       --- 1997 Nonstatutory Stock Option Plan

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

10.2*           --- Nondisclosure/Noncompetition Agreement dated August 4, 1993,between the Company, Advance Data,
                    Advance Mail and David D. Halbert.
</TABLE>



<PAGE>   60

<TABLE>
<CAPTION>
EXHIBIT NO.                     DESCRIPTION
-----------                     -----------
<S>             <C>
10.3*           --- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Mail,
                    Advance Data and Jon S. Halbert.

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

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

10.7**          --- Employment Agreement effective as of November 14, 1996, by and between the Company and John H. Sattler.

10.8**          --- Employment Agreement effective as of June 17, 1996, by and between the Company and Ernest Buys.

10.9*           --- Employment Agreement effective as of February 15, 1996, by and between the Company and Alan T. Wright.

10.10*          --- Form of Health Benefit Management Services Agreement.

10.11*          --- Sublease dated May 2, 1996, between Lincoln National Life Insurance Company and Advance Data.

10.12*          --- Lease dated March 6, 1994, by and between Hill Management Services, Inc. and Advance Clinical
                    (formerly ParadigM).

10.13*          --- 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.

10.14*          --- Assignment, Assumption, Bill of Sale and Consent Agreement dated as of October 20, 1993, between
                    Medco Containment Services, Inc., the Company and Trinity Properties, Ltd.

10.15*          --- Managed Pharmacy Benefit Services Agreement dated September 1, 1995, between the Company and
                    BCBS of Texas.

10.16*****      --- Agreement and Plan of Merger, dated February 9, 1998, by and among Advance Paradigm, Inc., 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.
</TABLE>



<PAGE>   61

<TABLE>
<S>             <C>
10.17******     --- Employment Agreement effective as of May 1, 1998, by and between the Company and Anthony J. Pino.

11******        --- Statement regarding computation of per share earnings.

21******        --- Subsidiaries of the Company.

23******        --- Consent of Arthur Andersen LLP.

27.1******      --- Financial Data Schedule.

27.2******      --- Restated Financial Data Schedule
</TABLE>




<TABLE>
<S>   <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.

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

***   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.

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

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

******Filed herewith.
</TABLE>