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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, 1999

  [ ]    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
   incorporation of organization)                      Identification No.)


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:

<TABLE>
<CAPTION>
                                                     Name of each exchange
   Title of each class                                on which registered
   -------------------                               ---------------------
<S>                                                  <C>
          None                                               None
</TABLE>

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

                          COMMON STOCK, $0.01 PAR VALUE
                                (Title of Class)

       Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes [X]   No [ ]

       Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

       The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on May 31,
1999 as reported on the Nasdaq National Market, was approximately $432,698,508.

       As of May 31, 1999, Registrant had outstanding 10,559,859 shares of
Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Registrant's 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III.


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ITEM 1.  BUSINESS

OVERVIEW

    We are a leading independent provider of health benefit management services,
providing pharmacy benefit management, disease management and clinical research
programs. Our mission is to improve the quality of care delivered to health plan
members while helping health plan sponsors reduce overall health benefit costs.
We generate revenues from providing services to two primary customer groups:
health plan sponsors and pharmaceutical manufacturers. We support a broad range
of health plan sponsors, including managed care organizations, third-party
health plan administrators, insurance companies, government agencies, employer
groups and labor union-based trusts through our pharmacy benefit management and
disease management services. We currently serve an estimated 27 million
individuals enrolled in our customers' plans. We provide our clinical research
services primarily to pharmaceutical manufacturers. We also work closely with
pharmaceutical manufacturers in negotiating lower drug costs for our health plan
sponsor customers.

    In the year ended March 31, 1999 ("fiscal year 1999"), we further enhanced
our health benefit management services with our acquisitions. On December 1,
1998, we acquired Baumel-Eisner Neuromedical Institute, Inc., a privately-held
clinical trials company based in South Florida. On March 31, 1999, we acquired
Foundation Health Pharmaceutical Services, Inc., the parent company of
Foundation Health Systems, Inc.'s pharmacy benefit management company,
Integrated Pharmaceutical Services.

INDUSTRY BACKGROUND

    Health care expenditures are expected to grow at a compound annual growth
rate of approximately 7.1% from $1.1 trillion in 1998 to $2.1 trillion in 2007,
according to the Health Care Financing Administration. Prescription drug costs
are expected to be one of the fastest growing components of health care costs,
and the Health Care Financing Administration has estimated that prescription
drugs will account for approximately 8.0% of United States health care
expenditures by 2007, up from 6.5% today. As a result, prescription drug sales
in the United States are expected to increase at a compound annual growth rate
of approximately 9.7%, from approximately $74.3 billion in 1998 to approximately
$171.1 billion in 2007. We believe a number of factors will contribute to this
trend, including:

    o increased expenditures on new drug development;

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

    o relatively higher prices for new drugs;

    o an aging population;

    o effective direct-to-consumer advertising by pharmaceutical manufacturers;



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

    o increased availability of pharmacy benefits to health plan members.

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

OUR STRATEGY

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

    o  Increase our core pharmaceutical benefit management customer base. We
        believe that increased size will allow us to achieve economies of scale
        and pass lower costs on to our customers. We have successfully increased
        the number of individuals served by our programs from an estimated 5.2
        million in 1995 to an estimated 27 million on April 1, 1999. We plan to
        continue to grow this customer base by marketing our comprehensive
        service offerings to a broader range of health plan sponsors.

    o  Expand our disease management services. We have two strategies for
        growing these services. First, we have the opportunity to cross-sell
        existing disease management services to our pharmacy benefit management
        customers. Second, we plan to develop and market new disease management
        programs, using our clinical expertise and information management
        capabilities.

    o  Develop additional clinical research capabilities. We believe we have a
        leading clinical trial operation in Alzheimer's studies. We also conduct
        studies for several other central nervous system disorders. We plan to
        expand our clinical research offerings by developing focused expertise
        in a select number of additional diseases.

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

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

        o enhance our disease management programs;



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        o augment our clinical research capabilities; or

        o expand our Internet offerings.

    To date, we have successfully completed a number of acquisitions including
    Innovative Medical Research, Inc., Baumel-Eisner Neuromedical Institute,
    Inc. and Foundation Health Pharmaceutical Services.

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

HEALTH BENEFIT MANAGEMENT SERVICES

    PHARMACY BENEFIT MANAGEMENT. We offer a broad range of clinical, data and
mail services to our customers through our pharmacy benefit management programs.
Our pharmacy benefit management customer base included over 1,000 health plan
sponsors at March 31, 1999. When the Foundation Health Pharmaceutical Services
acquisition is fully implemented, we expect to serve an estimated 27 million
individuals enrolled in our customers' health plans, and manage $5.0 billion in
gross drug expenditures and over 150 million pharmacy claims annually.

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

    We encourage formulary compliance by both patients and prescribing
physicians. Our customers' plans include features such as tiered copayments,
which require a health plan member to pay higher amounts for non-formulary drugs
in order to influence them to choose the drugs in the formulary. We attempt to
influence physician prescribing patterns by analyzing physicians' prescribing
behavior relative to physician peer groups and notifying them when their
practices differ from industry practice. We also provide our own educational
materials to plan physicians, pharmacists and health plan sponsors.

    DATA SERVICES. Through our data services operations, we process the
prescription claims for health plan sponsors. We have increased the number of
claims processed from approximately 1.5 million claims in fiscal year 1995 to
over 50 million claims in fiscal year 1999. We currently process approximately 5
million claims per month.




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    We administer a network of over 53,000 retail pharmacies that have agreed to
provide prescription drugs to individual members of our customers' health plans
at predetermined negotiated rates. Generally, we believe these rates are more
favorable than typical retail prices. The retail pharmacies in the network are
linked to us through our on-line claims processing system. Our on-line system
provides pharmacists with the following information:

    o an analysis of whether the individual is eligible for benefits;

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

    o the individual's co-payment obligation;

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

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

    MAIL SERVICES. Currently, our mail pharmacy operations dispense over 130,000
prescriptions per month, typically in the form of a three month supply of
medications for chronic conditions. We believe that our mail pharmacy reduces
costs to health plan sponsors by buying drugs at volume discounts and dispensing
generic and therapeutic drug substitutes when appropriate. In addition, our
control over the dispensing process allows us to improve patient compliance
through methods such as calling members when they neglect to refill important
prescriptions.

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

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

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

    We currently provide disease programs for cardiovascular secondary risk
reduction, asthma, diabetes, h. pylori, compliance and heart failure. We have
completed and are marketing programs in depression, hypertension and
gastrointestinal preservation, and we are developing new programs for HIV,
migraine, polypharmacy and dementia. Our disease management programs




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have five principal elements:

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

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

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

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

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

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

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

    We also integrate our customers' pharmacy claims with applicable medical and
laboratory claims and patient survey data, when available. This integrated
health care database complements the capabilities of ApotheQuery(R) by including
data relating to diagnosis and treatment of patients. This allows us and our
customers to identify problem areas for the health plan sponsor and implement
timely clinical solutions. The database further enhances our ability to complete
medical outcomes studies and to develop disease management programs.




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    CLINICAL RESEARCH. The two principal components of our current clinical
research capabilities are clinical trials and outcomes studies. We developed
these capabilities through our acquisition of Innovative Medical Research, Inc.
("IMR") in February 1998 and Baumel-Eisner Neuromedical Institute, Inc. in
December 1998. Our clinical research operations participated in 60 clinical
trials and 21 surveys during fiscal year 1999.

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

    We provide key functions in the clinical trials process including:

    o recruiting patients and physicians to participate in trials;

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

    o measuring the patients' results.

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

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

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

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

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

    o developing measurements for monitoring patient medical outcomes;

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

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

    o evaluating the direct and indirect costs of health care.


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

    We believe we are a leader in clinical research and have received strong
recognition in the clinical research arena. As of April 30, 1999, we employ 30
Medical Doctors, 2 Ph.D's., and 13 PharmDs. Many of our employees are on the
staff of leading university-affiliated medical health centers. We believe we are
leaders in Alzheimer's disease prevention and treatment research and are the
largest enroller in Alzheimer's research. We were one of the lead investigators
for the Excedrin Migraine(C) Program, and we recently conducted an asthma
research program with the Robert Wood Johnson Foundation.

INTERNET STRATEGY

    We are currently reviewing alternative approaches to enhance our existing
Internet-based services for covered individuals. Our current services include:

    o ordering refills of pharmaceuticals;

    o checking the status of pharmacy orders;

    o locating network pharmacies; and

    o reviewing formulary information.

We plan to develop our Internet capability beyond our current services for
covered individuals to support our customers and to enhance our program
offerings. Our future Internet initiatives may offer medical content to our
health plan sponsor customers for use on their Internet sites, empower consumers
by involving them more directly in their medical care and offer access to an
on-line drugstore. Our future Internet offerings may include some or all of the
following:

    o on-line drug store;

    o disease-specific chat rooms and information;

    o patient and member surveys;

    o personalized refill reminders;

    o monitoring of patient drug use; and

    o recruitment of patients and physicians for clinical trials.




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SALES, MARKETING AND CUSTOMER SERVICE

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

    Once we have signed up the customer for our services, we commit to provide
them with the highest level of customer support. For example, our benefits
design group works with the customers to design the pharmacy benefits that the
customers will provide to individuals in their plans. Once the plans are
established, each customer has a dedicated representative who acts as the
primary contact for the customer to call if there are any questions, concerns or
suggestions regarding their plans. This representative will also lead the effort
within our company to respond to customer requests, such as analyzing potential
formulary adjustments, performing data analysis and addressing member
eligibility issues. Finally, we commit to our customers that the individuals
enrolled in their plans will receive high quality customer service. To fulfill
this promise, we manage our own advanced call center with employees available to
answer incoming calls 24 hours a day, seven days a week. As of March 31, 1999,
we employ approximately 142 customer service representatives in this call
center.

CUSTOMERS

    A significant portion of our revenues result from contracts with customers.
These contracts typically provide for multi-year terms, with automatic 12-month
renewals unless either party terminates the contract by giving written notice
before the automatic renewal date. Some of our contracts are terminable by
either party on as little as 30 to 180 days notice. In fiscal year 1999, our top
five customers accounted for 52% of our revenues. One of our customers, the
United Mine Workers of America, accounted for approximately 18% of our revenues,
yet less than 8% of our total claims processed, in fiscal year 1999. No other
customer accounted for over 10% of our revenues in this period. We expect that
Foundation Health Systems will be our single largest customer in fiscal year
2000.

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

COMPETITION

    Many of our customers put their contracts out for competitive bidding prior
to renewal. We compete with a number of larger, national companies, including
Caremark International Inc., a subsidiary of MedPartners, Inc., Express Scripts,
Inc., an affiliate of NYLIFE HealthCare Management, Inc., Merck-Medco Managed
Care, LLC, a subsidiary of Merck & Co., Inc., a pharmaceutical manufacturer, and
PCS Health Systems, Inc., a subsidiary of Rite-Aid




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Corporation, a national pharmacy chain. These competitors are significantly
larger than we are and possess greater financial, marketing and other resources
than we do. These competitors may possess purchasing and other advantages over
us that may allow them to price competing services more aggressively than we can
because of their size or other aspects of their businesses.

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

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

    o the quality, scope and costs of programs offered;

    o the size and financial strength of the company;

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

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

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

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

GOVERNMENT REGULATION

    Various aspects of our businesses are governed by federal and state laws and
regulations and compliance is a significant operational requirement for our
company. We believe that we are in substantial compliance with all existing
legal requirements material to the operation of our business.

    Certain federal and state laws and regulations affect aspects of our
pharmacy benefit management 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 pharmaceutical manufacturer. In January 1998, the FDA issued
a Draft Guidance for Industry regarding the regulation of activities of pharmacy
benefit managers that are directly or indirectly controlled by pharmaceutical
manufacturers. In that draft guidance, the FDA purported to have the authority
to hold pharmaceutical manufacturers responsible for the promotional activities
of pharmacy benefit management companies, depending upon the nature and extent
of the relationship between the pharmaceutical manufacturer and the pharmacy
benefit management



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company. We and many other companies and associations commented to the FDA in
writing regarding its authority to regulate the promotional activities of
pharmacy benefit management companies that are not owned by pharmaceutical
manufacturers. On July 1, 1998, the FDA responded to these comments by
reconsidering the matter and announcing its attention to create a new draft
guidance. To date, the FDA has not issued a new guidance. Although it appears
that the FDA has changed its position regarding the ability to regulate the
promotional activities of pharmacy benefit management companies that are not
owned by pharmaceutical manufacturers, the FDA could still adopt the current
draft guidance or an alternative guidance in which the FDA continues to assert
the authority to regulate the promotional activities of such pharmacy benefit
management companies.

    The conduct of clinical trials also is regulated by the FDA under the
authority of the Federal Food, Drug and Cosmetic Act and related regulations. In
general, the sponsor of the drug product which is being studied, or the
manufacturer which will have the right to market the drug product if it is
approved by the FDA, has the responsibility to comply with the laws and
regulations that apply to the conduct of the clinical trials. However, in
providing services related to the conduct of clinical trials, we may assume some
or all of the sponsor's or clinical investigator's obligations related to the
study of the drug. For example, in October 1998, the FDA announced that the
agency would give Institutional Review Boards, independent bodies that oversee
the conduct of clinical investigations, increased access to information pointing
to violative or potentially violative conduct on the part of clinical
investigators with whom they may be working. A clinical investigator is a
physician conducting a clinical trial. On February 2, 1999, a regulation that
requires clinical investigators to disclose certain financial information took
effect. If required financial information, such as the financial interest of
each investigator in the approval of the product, is not disclosed, or if any
investigator fails to properly certify that he or she has no financial interest
in the product under investigation, we could be subject to administrative, civil
or criminal penalties.

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

    The FDA recently has expressed concern regarding the potential impact of the
failure of companies in the pharmaceutical industry to remedy year 2000 computer
problems. While the FDA appears most concerned with potential manufacturing
problems, the FDA has recognized that year 2000 problems could cause errors in
product distribution and in the gathering of data in clinical studies. For
example, the FDA has stated that, in the worst case scenario, a year 2000
problem could cause the computers on which companies conducting clinical studies
rely to generate flawed data. To date, the FDA has not required companies to
make any formal submissions regarding efforts to remedy year 2000 problems.
However, if a year 2000 problem



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caused a drug product that we distributed to be adulterated, or caused our data
gathered in connection with a clinical study to be flawed, our business could be
adversely affected and we could be subject to administrative, civil or criminal
liability.

    Regulation of identifiable patient information. Increased government
regulation concerning the use of identifiable patient information may occur in
the near future. Through our disease management programs, we assist our health
plan sponsor customers in identifying individuals who will benefit most from the
programs and measuring the patients' improvement after enrollment in the
program. Government restrictions on the use of patient identifiable information
may adversely affect our ability to conduct disease management programs and
outcomes studies, as well as our business growth strategy based on these
programs. Federal and state legislation has been proposed, and some state laws
have been enacted, to restrict the use and disclosure of identifiable medical
information. To our knowledge, no legislation has been enacted that would
prohibit our ability to conduct our current disease management or clinical
research programs. However, under the Health Insurance Portability and
Accountability Act of 1996, Congress is required to establish standards to
govern the privacy of individually identifiable health information by August
1999. If Congress fails to act by that date, the Health Insurance Portability
and Accountability Act of 1996 requires that the Secretary of Health and Human
Services issue regulations by February 2000. Consequently, it appears likely
that federal legislation or regulations addressing the accessibility of
individually identifiable health information will be in place in the near
future.

    Anti-remuneration laws. Subject to certain exceptions, federal law prohibits
the payment, offer, receipt or solicitation of any remuneration that is
knowingly and willfully intended to induce the referral of Medicare, Medicaid or
other federal health care program beneficiaries or the purchase, lease, ordering
or recommendation of the purchase, lease or ordering of items or services
reimbursable under federal health care programs. Several states also have
similar laws which are not limited to services for which federal health care
program 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. Sanctions for violating these federal and state
anti-remuneration laws may include imprisonment, criminal and civil fines, and
exclusion from participation in federal health care programs. State
anti-remuneration laws vary, and courts have not frequently interpreted such
laws. However, the courts in several cases have ruled that contracts that
violate anti-remuneration laws are voidable.

    The federal anti-remuneration statute has been interpreted broadly by
courts; the Office of Inspector General, or OIG, within the Department of Health
and Human Services; and administrative bodies. Because of the federal statute's
broad scope, federal regulations establish some "safe harbors" from liability.
Safe harbors exist for, among other things, certain properly reported discounts
received from vendors, certain investment interests, certain properly disclosed
payments made by vendors to group purchasing organizations and certain managed
care risk-sharing arrangements. A practice that does not fall within a safe
harbor is not necessarily unlawful, but may be subject to scrutiny and
challenge. Courts have ruled that, 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



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

    We believe that we are in substantial compliance with the legal requirements
imposed by these laws and regulations, and we believe that there are material
differences between the drug-switching programs that have been highlighted by
the OIG and the programs we offer to our customers. However, in June 1998, the
Philadelphia United States Attorney's office announced that it was investigating
rebates and other payments made by pharmaceutical manufacturers to pharmacy
benefit managers, including whether these payments may violate anti-remuneration
laws. To date, no specific prosecutions have been made public. We could be
subject to scrutiny or challenge under these laws and regulations, which could
have a material adverse effect upon us.

    OIG study. The OIG Office of Evaluation and Inspections, which is not
responsible for investigations of potential violations of anti-remuneration
laws, but which seeks to improve the effectiveness and efficiency of the
Department of Health and Human Services programs, issued a report on pharmacy
benefit management arrangements on April 15, 1997. The report was based
primarily on a nationwide survey of HMOs that use pharmacy benefit managers, and
examined the benefits of, and concerns raised by, the HMOs' relationships with
pharmacy benefit managers.

    The report identified two major concerns, the potential for bias resulting
from alliances of pharmacy benefit managers and pharmaceutical manufacturers and
the lack of oversight by HMOs regarding the performance of pharmacy benefit
managers in delivering quality services to health plan members. The report makes
two main recommendations. First, the Health Care Financing Administration and
state Medicaid programs should include stronger oversight provisions in their
risk contracts with HMOs by requiring HMOs to review the performance of the
pharmacy benefit managers with which they contract. Second, the Health Care
Financing Administration, the FDA and the Health Resources and Services
Administration, working with outside organizations, should develop quality
measures for pharmacy practices that can be used in managed care settings. In
addition, legislation has been introduced in several states proposing to
specifically regulate pharmacy benefit management companies. To date, no such
legislation has passed. We intend to closely monitor these agency actions and
legislative proposals and whether these actions and proposals would have any
impact on our business.

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




                                       12
<PAGE>   14

legislation may be enacted is uncertain. However, these initiatives could
greatly impact the managed care and pharmaceutical industries and, therefore,
could have a material impact on our business.

    ERISA regulation. The Employee Retirement Income Security Act of 1974, or
ERISA, regulates certain aspects of employee pension and health benefit plans,
including self-funded corporate health plans with which we have agreements to
provide pharmacy benefit management services. The U.S. Department of Labor,
which is the agency that enforces ERISA, could assert that the fiduciary
obligations imposed by the statute apply to certain aspects of our operations.

    Consumer protection laws. Most states have consumer protection laws that
have been the basis for investigations and multi-state settlements relating to
financial incentives provided by pharmaceutical manufacturers to retail
pharmacies in connection with drug switching programs. In addition, under a
settlement agreement entered into with 17 states on October 25, 1995,
Merck-Medco Managed Care, the pharmacy benefit management subsidiary of
pharmaceutical manufacturer Merck & Co., agreed to require pharmacists
affiliated with Merck-Medco Managed Care mail service pharmacies to disclose to
physicians and patients the financial relationships between Merck & Co.,
Merck-Medco Managed Care and the mail service pharmacy when such pharmacists
contact physicians seeking to change a prescription from one drug to another. We
believe that our contractual relationships with pharmaceutical manufacturers and
retail pharmacies do not include the features that were viewed by enforcement
authorities as problematic in these settlement agreements. However, we could 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 our ability to limit access to pharmacy provider networks
or from removing network providers. Such legislation may require our customers
and us 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. We have not been materially affected by
these statutes because we administer a large network of over 53,000 retail
pharmacies and will admit any licensed pharmacy that meets our credentialing
criteria, involving such matters as adequate insurance coverage, minimum hours
of operation, and the absence of disciplinary actions by the relevant state
agencies.

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




                                       13
<PAGE>   15




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

    Additionally, Medicare reimbursement and coverage of prescription drugs may
change significantly in the near future. Medicare presently covers only a
limited number of outpatient prescription drugs, and reimbursement of covered
drugs is generally based on a percentage of the drug's average wholesale price.
Legislation has been proposed to reduce Medicare drug reimbursement amounts,
although the prospects for enactment of such legislation are uncertain. At the
same time, legislative initiatives are being considered to expand Medicare
coverage of drugs, in some instances as part of a broad reform of the Medicare
program. We cannot assess at this stage whether such legislation will be
approved or how it would address drug costs. Enactment of legislation to reduce
Medicare drug reimbursement or to expand Medicare drug coverage may have an
adverse impact upon our business.

    Regulation of financial risk plans. Fee-for-service prescription drug plans
are not generally subject to financial regulation by the states. However, if a
pharmacy benefit manager offers to provide prescription drug coverage on a
capitated basis or otherwise accepts material financial risk in providing the
benefit, laws in various states may regulate the plan. These laws may require
that the party at risk establish reserves or otherwise demonstrate financial
responsibility. Laws that may apply in such cases include insurance laws, HMO
laws or limited prepaid health service plan laws. Many of these state laws may
be preempted in whole or in part by ERISA, which provides for comprehensive
federal regulation of employee benefit plans. However, the scope of ERISA
preemption is uncertain and is subject to conflicting court rulings. Other state
laws may be invalid in whole or in part as an unconstitutional attempt by a
state to regulate interstate commerce, but the outcome of challenges to these
laws on this basis is uncertain. Accordingly, compliance with state laws and
regulations is a significant operational requirement for us.

    Mail pharmacy regulation. Our mail pharmacy operations, located in
Richardson, Texas, distribute drugs throughout the country. Some of the drugs
that we distribute are classified as controlled substances, which are regulated
by federal and state drug enforcement authorities. We are licensed by both
United States and Texas authorities to do business as a pharmacy and distribute
controlled substances. Many of the states into which we deliver pharmaceuticals
and controlled substances also have laws and regulations that permit
out-of-state mail service pharmacies to distribute pharmaceuticals and





                                       14
<PAGE>   16

controlled substances into the state so long as the pharmacy is registered with
that state's board of pharmacy, or similar regulatory body. We have registered
in every state, which, to our knowledge, requires such registration. 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 us, we would be required to comply
with them.

    Other statutes and regulations also affect our mail pharmacy operations. The
Health Care Financing Administration requires mail order pharmacies to provide
toll-free numbers for patient counseling of Medicaid recipients residing out of
state. However, we do not currently receive reimbursements from any Medicaid
programs. Congressionally mandated goals to provide useful information on
prescription drugs to consumers 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 our mail service operations.
The United States Postal Service historically has exercised this statutory
authority only with respect to controlled substances. Alternative means of
delivery are available to us.

EMPLOYEES

    On May 31, 1999, we had 891 employees. None of our employees are represented
by a labor union. In the opinion of management, our relationship with our
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. All statements other than statements of historical facts
included in this Form 10-K, including without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" regarding our financial position, our business
strategy and our management's plans and objectives for future operations, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to have been correct. The cautionary statements
made in this Form 10-K should be read as being applicable to all related
forward-looking statements wherever they appear in this Form 10-K. Our actual
results could differ materially from those discussed herein, and important
factors that could cause actual results to differ materially from our
expectations are disclosed under "Risk Factors", as well as




                                       15
<PAGE>   17

elsewhere in this Form 10-K. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this section.

RISK FACTORS

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

    We depend on a limited number of large health plan sponsor customers for a
significant portion of our consolidated revenues. Our business, profitability
and growth prospects could be adversely affected if we were to lose one or more
of our significant customers. We could lose customers if we fail to win a
competitive bid at the time of contract renewal or if our customers are acquired
by companies who are not our customers. Our contracts with our customers
generally do not have terms of more than three years, and in some cases are
terminable by either party on as little as 30 to 180 days notice. Five customers
accounted for approximately 52% of our revenues in fiscal year 1999. During this
period, United Mine Workers of America accounted for approximately 18% of our
consolidated revenues, yet less than 8% of our total claims processed. In fiscal
2000, we expect that Foundation Health Services will become our largest
customer.

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

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

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

    The health benefit management industry is very competitive. If we don't
compete effectively, our profitability and growth prospects could be reduced or
eliminated. Our competitors include large, profitable and well-established
companies which have substantially greater financial, marketing and other
resources than we do. Some of our competitors in the pharmacy benefit management
business, such as Merck-Medco Managed Care, LLC and PCS Health Systems, Inc.,
are owned by large, profitable and well-established pharmaceutical manufacturers
or national drug store chains. Many of our customers put their contracts out for
competitive bidding prior to renewal. Our competitors may possess purchasing and
other advantages over us that may allow them to price competing services more
aggressively than we can because of their size or




                                       16
<PAGE>   18

other aspects of their business. We also expect to experience competition from
new sources in the future, such as Internet-based health care services
companies. We cannot be sure that we will continue to remain competitive, nor
can we be sure that we will be able to successfully market our health benefit
management services to customers at our current levels of profitability.

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

IF WE FAIL TO TRANSITION THE OPERATIONS OF FOUNDATION HEALTH PHARMACEUTICAL
SERVICES IN A TIMELY AND SUCCESSFUL MANNER, OUR BUSINESS, PROFITABILITY AND
GROWTH PROSPECTS COULD BE ADVERSELY AFFECTED

    We acquired Foundation Health Pharmaceutical Services, a large pharmacy
benefit management company, on March 31, 1999. If we fail to transition this new
business in a timely and successful manner, our business, profitability and
growth prospects could be adversely affected. This acquisition, along with the
service agreement signed with Foundation Health Systems, Inc., approximately
doubled the number of individuals enrolled in our programs. We have begun to
implement a plan to address items such as:

    o retaining the non-affiliated customers of Foundation Health Pharmaceutical
        Services;

    o transitioning the Foundation Health Systems, Inc. affiliated health plan
        onto our system; and

    o coordinating customer service between our two organizations.

    We cannot be sure that we will successfully combine Foundation Health
Pharmaceutical Services' operations with our own, or that the transaction will
meet our financial expectations. The Foundation Health Pharmaceutical Services
customers who were not part of health benefit plans affiliated with Foundation
Health Systems have contracts which allow them to terminate their relationship
with us with 60 to 90 days' notice. We believe that about half of the estimated
12 million new plan members we acquired fall under this type of contract. If a
large number of customers terminate their relationship with us, we may not be
able to achieve our customer retention goals. Because we placed a significant
level of importance on Foundation Health Pharmaceutical Services' customer base
when we decided to purchase the company, the loss of customers would adversely
affect our future business plans. It is also possible that during our
investigation of Foundation Health Pharmaceutical Services we failed to uncover
or appropriately address material problems with Foundation Health Pharmaceutical
Services' operations or financial condition, or failed to discover contingent
liabilities.





                                       17
<PAGE>   19




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

    Part of our growth strategy includes acquisitions and/or alliances involving
complementary services, technologies and businesses. If we are unable to
overcome the potential problems and inherent risks related to acquisitions and
alliances, our business, profitability and growth prospects could suffer. We
completed three acquisitions in the past 15 months, and we continually review
future acquisition opportunities. Our ability to continue to expand successfully
through acquisitions and alliances depends on many factors, including our
ability to identify acquisition/alliance prospects and negotiate and close
transactions. If we complete future acquisitions or alliances:

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

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

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

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

Many companies compete for acquisition and alliance opportunities in the health
benefit management industry. Some of our competitors are companies that have
significantly greater financial and management resources than we do. This may
reduce the likelihood that we will be successful in completing acquisitions and
alliances necessary to the future success of our business.

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

    If we are unable to manage future expansion successfully or are unable to
hire and retain the personnel needed to manage our business successfully, then
our business, profitability and growth prospects could be adversely affected.
Our business has grown rapidly in the last five years, with total revenues
increasing from approximately $91.3 million in fiscal year 1995 to $774.8
million in fiscal year 1999. If we continue to grow rapidly, we will need to
hire additional senior and line management, increase our investment in employee
recruitment and training, and expand our information processing and financial
control systems. Our future operating results will depend in part on the ability
of our officers and other key employees to continue to expand, train and
effectively manage our employees as well as to improve our operations, customer
support and financial control systems. Our future growth will also depend on our
ability to access capital.




                                       18
<PAGE>   20




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

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

    o the size and timing of our contract signings;

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

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

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

    o costs associated with additional Internet services;

    o the timing of our new service and program announcements;

    o market acceptance of our services and new programs;

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

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

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

    o personnel changes; and

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

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

    o our customers' financial objectives or constraints;

    o the timing of contract bids and renewals;

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

    o potential downturns in general economic conditions.

    Because of the factors listed above, we believe that our quarterly revenues,
expenses and operating results may vary significantly in the future and that
period-to-period comparisons of




                                       19
<PAGE>   21

our operating results are not necessarily meaningful. You should not rely on the
results of one quarter as a indication of our future performance. It is also
likely that in some future quarters, our operating results will fall below our
expectations or the expectations of market analysts and investors. If we do not
meet these expectations, the price of our common stock may decline
significantly.

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

    The closing price of our common stock has ranged from a low of $41.94 to a
high of $64.25 in the past three months, and has fluctuated as much as $14.25 in
five trading days. The quoted price of our common stock is subject to sudden and
material increases and decreases, and decreases could adversely affect
investments in our common stock. The quoted price of our common stock could
fluctuate widely in response to:

    o our quarterly operating results;

    o changes in earnings estimates by securities analysts;

    o changes in our business;

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

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

    o changes in general market or economic conditions.

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

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

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

    o we will be successful in developing Internet services;





                                       20
<PAGE>   22

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

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

    o anyone will demand Internet services in the future.

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

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

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

    o we fail to meet volume-related conditions;

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

    o pharmaceutical manufacturers choose not to offer formulary rebates.

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

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

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




                                       21
<PAGE>   23




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

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

IF WE DO NOT ADEQUATELY ADDRESS YEAR 2000 ISSUES, OUR BUSINESS MAY BE ADVERSELY
AFFECTED

    We have incurred internal and external personnel costs as well as other
expenses related to our efforts to insure our internal computer systems and
software products will function in the year 2000 and beyond. We cannot be sure
that our efforts to address internal year 2000 issues will be entirely
successful. In addition, we cannot be sure that the computer systems and
software of other companies with which we do business will become year 2000
compliant before January 1, 2000. If we or any of these other companies fail to
become year 2000 compliant, our systems and operations could be disrupted and
our business, profitability and growth prospects could be harmed.

    We have not developed a likely worst case year 2000 scenario. However, we
could experience a number of minor internal systems malfunctions and errors in
early year 2000 that we did not detect during our renovation and testing
process. In addition, some of our customers and vendors may not be year 2000
compliant. We have begun preparing contingency plans to handle these scenarios.
We intend to complete our contingency plans by the third quarter of calendar
year 1999. However, despite our compliance program, we may have overlooked or
otherwise not remedied year 2000 issues which may have a material adverse effect
on us.

    For additional information regarding year 2000 issues, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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

    During the past several years, the U.S. health care industry has been
subject to an increase in governmental regulation, on both the federal and state
level. We cannot predict what effect, if any, these proposals might have on our
business, profitability and growth prospects. Congress is currently considering
proposals to change Medicare drug coverage and reimbursement policies, and both
Congress and the states are considering legislation to increase governmental
regulation of managed care plans. These proposals may increase governmental
involvement in health care and health benefit management services and otherwise
change the way our customers do business. Health care organizations may react to
these proposals and the uncertainty surrounding such proposals by cutting back
or delaying the purchase of our health benefit management services.



                                       22
<PAGE>   24

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

    Through our disease management programs, we help our health plan sponsor
customers identify individuals who will most benefit from the programs.
Governmental restrictions on the use of patient identifiable information may
hamper our ability to conduct disease management programs and medical outcomes
studies and could adversely affect our business growth strategy based on these
programs. Federal and state legislation has been proposed, and some state laws
have been enacted, to restrict the use and disclosure of patient identifiable
medical information. To our knowledge, no legislation has been enacted that
would prohibit our ability to conduct our current disease management or clinical
research programs. However, under the Health Insurance Portability and
Accountability Act of 1996, Congress is required to establish standards to
govern the privacy of individually identifiable health information by August
1999. If Congress fails to act by that date, the Health Insurance Portability
and Accountability Act requires that the Secretary of Health and Human Services
issue regulations by February 2000. Consequently, it appears likely that federal
legislation or regulations addressing the accessibility of individually
identifiable health information will be in place in the near future. Even if new
legislation or regulations are not approved, individual health plan sponsor
customers could prohibit us from including their patients' medical information
in our various databases of medical data, or they could prohibit us from
providing services to our customers that involve the compilation of such
information.

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

    In January 1998, the U.S. Food and Drug Administration, or the FDA, issued a
Draft Guidance for Industry regarding the regulation of activities of pharmacy
benefit managers that are directly or indirectly controlled by pharmaceutical
manufacturers. If the FDA adopts this guidance in this form, it could have a
material adverse effect on our business, profitability and growth prospects. In
that draft guidance, the FDA purported to have the authority to hold
pharmaceutical manufacturers responsible for the promotional activities of
pharmacy benefit management companies, depending upon the nature and extent of
the relationship between the pharmaceutical manufacturer and the pharmacy
benefit management company. We and many other companies and associations
commented to the FDA in writing regarding its authority to regulate the
promotional activities of pharmacy benefit management companies that are not
owned by pharmaceutical manufacturers. On July 1, 1998 the FDA responded to
these comments by reconsidering the matter and announcing its attention to
create a new draft guidance. To date, the FDA has not issued a new guidance.
Although it appears that the FDA has changed its position regarding the ability
to regulate the promotional activities of pharmacy benefit management companies
that are not owned by pharmaceutical manufacturers, the FDA could still adopt
the current draft guidance or an alternative guidance in which the FDA continues
to assert the authority to regulate the promotional activities of such pharmacy
benefit management companies.




                                       23
<PAGE>   25

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

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

    The conduct of clinical trials is regulated by the FDA under the authority
of the Federal Food, Drug and Cosmetic Act and the related regulations. If
government laws or regulations are interpreted and enforced in a manner adverse
to our clinical research programs, we may be subject to administrative
enforcement actions, as well as civil and/or criminal liability. In general, the
sponsor of the drug product which is being studied, or the manufacturer which
will have the right to market the drug product if it is approved by the FDA, has
the responsibility to comply with the laws and regulations that apply to the
conduct of the clinical trials. However, in providing services related to the
conduct of clinical trials, we may assume some or all of the sponsor's or
clinical investigator's obligations related to the study of the drug. For
example, in October 1998, the FDA announced that the agency would give
Institutional Review Boards, which are independent bodies that oversee the
conduct of clinical investigations, increased access to information pointing to
violative or potentially violative conduct on the part of clinical investigators
with whom they may be working. A clinical investigator is a physician conducting
a clinical trial. On February 2, 1999, a regulation that requires clinical
investigators to disclose certain financial information took effect. If a
clinical investigator fails to disclose required financial information, such as
the financial interest of each investigator in the approval of the product, or
fails to properly certify that he or she has no financial interest in the
product under investigation, we could be subject to administrative, civil or
criminal penalties.

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



                                       24
<PAGE>   26

in the trials could face civil and criminal penalties which include fines and
imprisonment.

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

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

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

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

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

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

    At March 31, 1999, $105.0 million, or 38% of our total assets, consisted of
intangible assets, primarily goodwill. These intangible assets are being
amortized over an average period of 29




                                       25
<PAGE>   27

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

ITEM 2.  PROPERTIES


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                         SQUARE
USE                                   LOCATION                           FOOTAGE           LEASE/OWN
---------------------------------------------------------------------------------------------------------------
<S>                                   <C>                                <C>               <C>
Mail Service Pharmacy                 Richardson, Texas                  38,400            Own
---------------------------------------------------------------------------------------------------------------
Corporate Office                      Irving, Texas                      14,047            Lease expires 12/02
---------------------------------------------------------------------------------------------------------------
Data Services                         Dallas, Texas                      22,990            Lease expires 11/00
---------------------------------------------------------------------------------------------------------------
Call Center                           Richardson, Texas                  52,000            Lease expires 10/09
---------------------------------------------------------------------------------------------------------------
Clinical Services                     Hunt Valley, Maryland              20,733            Lease expires 08/99
---------------------------------------------------------------------------------------------------------------
Corporate Office and Clinic           Towson, Maryland                   16,322            Lease expires 06/03
---------------------------------------------------------------------------------------------------------------
Sales Office                          Stamford, Connecticut               1,522            Lease expires 05/01
---------------------------------------------------------------------------------------------------------------
Clinic                                Philadelphia, Pennsylvania          3,613            Lease expires 04/05
---------------------------------------------------------------------------------------------------------------
Clinic                                Catonsville, Maryland               3,535            Lease expires 12/02
---------------------------------------------------------------------------------------------------------------
Clinic                                Atlanta, Georgia                    3,262            Lease expires 03/03
---------------------------------------------------------------------------------------------------------------
Clinic                                Tamarac, Florida                    3,367            Lease expires 06/02
---------------------------------------------------------------------------------------------------------------
Clinic                                Miami Beach, Florida               12,000            Lease expires 03/04
---------------------------------------------------------------------------------------------------------------
Clinic                                Boca Raton, Florida                 3,129            Lease expires 05/03
---------------------------------------------------------------------------------------------------------------
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS

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

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

     No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.

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.



                                       26
<PAGE>   28


    Our common stock has been traded on the Nasdaq National Market under the
symbol ADVP since October 8, 1996. The following table sets forth the range of
quarterly high and low sales prices per share of our common stock as quoted on
the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                                              HIGH           LOW
                                                                           ----------       --------
<S>                                                                        <C>              <C>
          FISCAL YEAR ENDED MARCH 31, 1997:
          Third Quarter (from October 8, 1996)                             $   20 3/4       $  7 3/4
          Fourth Quarter...................                                    25 1/4         12 7/8

          FISCAL YEAR ENDED MARCH 31, 1998:
          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

          FISCAL YEAR ENDED MARCH 31, 1999:
          First Quarter....................                                $   43 1/2       $ 25 3/8
          Second Quarter...................                                    37             17
          Third Quarter....................                                    35 1/4         21 1/4
          Fourth Quarter...................                                    67 3/4         31 3/8
</TABLE>

    On March 31, 1999, there were approximately 4,000 beneficial owners of our
common stock represented by 106 holders of record.

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

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, 1999, have
been derived from the Consolidated Financial Statements that have been audited
by Arthur Andersen LLP, independent public accountants.





                                       27
<PAGE>   29

<TABLE>
<CAPTION>
                                                            Year Ended March 31,
                                    ------------------------------------------------------------------
                                       1995          1996          1997          1998          1999
                                    ----------    ----------    ----------    ----------    ----------
                                                   (In thousands, except per share data)
<S>                                 <C>           <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
Revenues ........................   $   91,306    $  127,871    $  256,450    $  476,664    $  774,822
Cost of operations:
  Cost of revenues ..............       85,532       120,334       245,466       455,847       743,084
  Selling, general and
    administrative expenses .....        4,963         6,158         7,309        10,083        13,949
                                    ----------    ----------    ----------    ----------    ----------
    Total cost of operations ....       90,495       126,492       252,775       465,930       757,033
                                    ----------    ----------    ----------    ----------    ----------
Operating income ................          811         1,379         3,675        10,734        17,789
Interest income .................           91           366         1,560         2,814         2,685
Interest expense ................         (878)         (732)         (445)          (67)         --
Merger costs (2) ................         --            --            --            (689)         --
Provision for  income taxes .....         --            --          (1,564)       (4,861)       (7,780)
                                    ----------    ----------    ----------    ----------    ----------
Net income ......................   $       24    $    1,013    $    3,226    $    7,931    $   12,694
                                    ----------    ----------    ----------    ----------    ----------
Basic:
  Net income (loss) per share ...   $     (.19)   $      .05    $      .43    $      .88    $     1.24
  Weighted average shares
      outstanding ...............        4,007         4,007         6,265         8,756        10,252
Diluted:
  Net income (loss) per share ...   $     (.19)   $      .05    $      .35    $      .70    $     1.09
  Weighted average shares
    outstanding .................        4,007         4,576         9,176        11,351        11,688
</TABLE>


<TABLE>
<CAPTION>
                                                                 March 31,
                                    ------------------------------------------------------------------
                                       1995          1996          1997          1998          1999
                                    ----------    ----------    ----------    ----------    ----------
                                                               (In thousands)
<S>                                 <C>           <C>           <C>          <C>          <C>
BALANCE SHEET DATA:
Working capital .................   $     (453)   $      269    $   24,575   $   28,362   $    1,111
Total assets ....................       37,288        59,861       108,914      154,909      276,833
Long-term debt ..................        7,000         7,000          --           --         50,000
Redeemable preferred stock ......       11,076        11,896          --           --           --
Stockholders' equity (deficit) ..       (1,747)       (1,537)       42,577       50,564       69,061
</TABLE>


<TABLE>
<CAPTION>
                                                            Year Ended March 31,
                                    ------------------------------------------------------------------
                                       1995          1996          1997          1998          1999
                                    ----------    ----------    ----------    ----------    ----------
                                                              (In thousands)
<S>                                 <C>           <C>           <C>          <C>          <C>
SUPPLEMENTAL DATA: (1)
   Pharmacy network claims
     processed ..................        1,527        9,375       26,579       38,319       50,588
   Mail pharmacy prescriptions
     filled .....................          383          536          677          839        1,289
   Estimated health plan
     members (at period end) ....        5,208        9,040       10,200       12,500       15,000
</TABLE>

----------

 (1) This data has not been audited.

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


                                       28
<PAGE>   30

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

OVERVIEW

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

    o   Data services. In 1992, we established a retail pharmacy network, that
        currently consists of over 53,000 retail pharmacies nationwide, and
        began to provide on-line claims processing services. Under some of our
        customer contracts, we contract directly with the retail pharmacies in
        our national network. When we have an independent obligation to pay our
        own network of retail pharmacy providers for the drugs dispensed,
        meaning we are "at risk," we include payments from plan sponsors for the
        drug cost and the claims processing fees as revenues. We record payments
        we make to our retail pharmacy providers as cost of revenues. Under
        other contracts, we manage a network of pharmacies that are under direct
        contract with certain of our customers. For those plan sponsors that
        have established their own pharmacy network, we administer the plan
        sponsors' network pharmacy contracts. The plan sponsors have the
        independent obligation to fund payment to those pharmacies under
        contract and the plan sponsors are "at-risk" for the payment for drugs
        dispensed; we record only the claims processing fees as revenues. New
        customers that use our network, where we record both claims processing
        fees and costs of drugs as revenues, will generate higher revenues than
        new customers that use their own networks, where we only record claims
        processing fees as revenues. Thus, while a customer who uses our network
        may contribute the same gross profit in terms of dollars as a customer
        that uses its own network, gross profit as a percentage of revenue will
        be lower for customers using our network because of the higher level of
        revenue we recognize.

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

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

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




                                       29
<PAGE>   31


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                      YEAR ENDED MARCH 31,
                                           ----------------------------------------
                                              1997           1998           1999
                                           ----------     ----------     ----------
<S>                                        <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
  Data services ........................         55.2%          66.6%          67.2%
  Mail services ........................         23.4           16.4           16.4
  Clinical services ....................         21.4           17.0           16.4
                                           ----------     ----------     ----------
          Total revenues ...............        100.0          100.0          100.0
Cost of operations:
  Cost of revenues .....................         95.7           95.6           95.9
  Selling, general and administrative
    expenses ...........................          2.9            2.1            1.8
                                           ----------     ----------     ----------
          Total cost of operations .....         98.6           97.7           97.7
                                           ----------     ----------     ----------
Operating income .......................          1.4            2.3            2.3
Interest income (expense), net .........          0.5            0.6            0.3
Merger costs ...........................         --             (0.2)          --
Provision for income taxes .............         (0.6)          (1.0)          (1.0)
                                           ----------     ----------     ----------
Net income .............................        1.3 %          1.7 %          1.6 %
                                           ==========     ==========     ==========
</TABLE>

FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998

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

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



                                       30
<PAGE>   32

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

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

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

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

FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997

    REVENUES. Our revenues for fiscal year 1998 increased by $220.2 million, or
86%, compared to revenues for fiscal year 1997. The number of individuals we
managed continued to increase in fiscal year 1998 as we obtained new customers
and our current customers continued to increase their membership and utilization
levels. New customer contracts resulted from increased marketing efforts and the
expansion of our sales and marketing department. Contracts with new customers in
fiscal year 1998 generally included all pharmacy benefit management products we
offer, including claims processing, mail and clinical.

    Our revenues from claims processing increased $175.8 million, or 124%,
compared to the prior year. The increase resulted from the addition of new
individuals and an increase in use of our services by existing customers. The
increase in new individuals resulted in an increase in pharmacy claims processed
from 26.6 million in fiscal year 1997 to 38.3 million in fiscal year 1998, a 44%
increase. Virtually all of the new fiscal year 1998 customer contracts use our
pharmacy network which has shifted a larger percentage of our total revenues to
claims processing. Revenues from mail services increased $18.4 million, or 31%,
compared to the prior




                                       31
<PAGE>   33

year. The increase resulted primarily from the new individuals added during
fiscal year 1998. The increase in new individuals 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, or 48%, compared to the prior year. The increase resulted
primarily from the new individuals added and the additional claims processed
during fiscal year 1998 compared to the prior year.

    COST OF REVENUES. Our cost of revenues for fiscal year 1998 increased by
$210.4 million, or 86%, compared to the prior fiscal year. This increase
primarily resulted from the additional costs associated with our claims
processing growth. As a percentage of revenues, cost of revenues was 95.6% in
fiscal year 1998 compared to 95.7% in fiscal year 1997.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our 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 our expansion of
our sales and marketing capabilities, as well as increases in administrative and
support staff functions in response to volume growth in all programs. In spite
of the dollar increase, our selling, general and administrative expenses as a
percentage of revenues decreased from 2.9% in fiscal year 1997 to 2.1% in fiscal
year 1998 as the result of greater economies of scale and due to the increase in
revenues associated with our claims processing services. Additional revenues
generated by customers using our network pharmacy providers generally do not
result in an increase in selling, general and administrative expenses.

    INTEREST INCOME AND INTEREST EXPENSE. Our 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 used our
short-term excess cash to generate interest income through investment in money
market funds and high grade commercial paper. In addition, our cash balance
throughout fiscal year 1998 included the $10.0 million proceeds from the June
1996 issuance of our Series B preferred stock and the $19.1 million net proceeds
from our October 1996 initial public offering. A portion of the proceeds was
used to retire debt and, as a result, interest expense decreased by $378,000. In
fiscal year 1997, the proceeds from the offerings were available for only a
portion of the year.

    MERGER COSTS. In February 1998, we completed a merger with Innovative
Medical Research, Inc. and issued 876,078 shares and options to purchase 23,922
shares of our common stock in exchange for all the outstanding shares and
options of Innovative Medical Research, Inc. The merger was accounted for as a
pooling of interests and, accordingly, prior period consolidated financial
statements were restated to include the combined results of operations,
financial position and cash flows of Innovative Medical Research, Inc. as though
it had always been a part our company. In connection with the merger, we
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. We had income tax loss carryforwards available to partially
offset income generated for fiscal year 1997 and, as a result, we recorded
income tax expense of $1.6 million or 33% of income before income taxes. For
fiscal 1998, we recorded tax expense of $4.9 million at



                                       32
<PAGE>   34

a rate of 38% of income before income taxes. The tax loss carryforwards were
fully utilized prior to fiscal year 1998.

LIQUIDITY AND CAPITAL RESOURCES

    As of March 31, 1999, we had working capital of $1.1 million. While we have
$149.0 million of accounts payable, the majority of these obligations are not
due until cash is collected from our customers. Our net cash provided by
operating activities was $15.4 million, $14.5 million and $29.0 million for the
fiscal years ended 1997, 1998 and 1999, respectively. The significant increases
in net cash provided by operating activities resulted primarily from the income
we generated and due to the timing of receivables and payables resulting from
our continued growth. Cash we used in investing activities was $3.1 million,
$6.5 million and $97.3 million for the fiscal years ended 1997, 1998 and 1999,
respectively. Such investing activities included purchases of property, plant
and equipment associated with growth and expansion of our facilities, as well as
cash paid for acquisitions. In December 1998, we used $24.7 million, net of cash
acquired, for the acquisition of Baumel-Eisner Neuromedical Institute, Inc. In
March 1999, we used $65.0 million, net of $5.0 million cash acquired, for the
acquisition of Foundation Health Pharmaceutical Services.

    Historically, we have been able to fund our operations and continued growth
through cash flow from operations. In fiscal years 1997, 1998 and 1999, our
operating cash flow funded our capital expenditures and our short-term excess
cash was invested in money market funds and high grade commercial paper. We
anticipate that cash flow from operations, combined with our current cash
balances and amounts available under our credit facility, will be sufficient to
meet our internal operating requirements and expansion programs, including
capital expenditures, for at least the next 18 months. However, if we
successfully continue our expansion, acquisition and alliance plans, we may be
required to seek additional debt or equity financing in order to achieve these
plans.

CREDIT FACILITY

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

    Interest on the credit facility accrues at a specified margin above the
London Interbank Offered Rate, or LIBOR, or an alternate base rate. The
alternate base rate is the bank's prime rate or the federal funds rate plus
0.5%. For LIBOR loans the applicable margin is 1.75% per annum as of April 1,
1999.

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




                                       33
<PAGE>   35

minimum interest coverage ratio. The credit facility contains customary events
of default including:

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

    o violation of covenants;

    o inaccuracy of representations and warranties;

    o default under other indebtedness;

    o bankruptcy and other insolvency events;

    o material judgements;

    o ERISA matters; and

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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



                                       34
<PAGE>   36

IMPACT OF INFLATION

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

YEAR 2000 READINESS DISCLOSURE

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

    In the quarter ending June 30, 1998, we completed the "inventory" portion of
our year 2000 project. We documented all internal hardware, software or
equipment that was date-sensitive. In the quarter ending September 30, 1998, we
completed the second stage of the year 2000 project, which involved assessing
all of the items that had been "inventoried" to determine whether they were year
2000 compliant. This assessment stage also included surveying all external
vendors and customers with whom we transact business to determine whether their
systems were year 2000 compliant. In the quarter ending December 31, 1998, we
completed the third stage of the year 2000 project, which involved the
development of code to convert systems that are not year 2000 compliant to year
2000 compliant systems. We successfully completed the implementation phase on
March 31, 1999 via upgrade or replacement of all non-compliant systems. While
all core systems are currently considered to be compliant, further maintenance
testing and certifications will continue throughout 1999.

    The potential impact of the year 2000 issue depends not only on the
corrective measures we have undertaken, but also on the ways in which the year
2000 issue is addressed by third parties with whom we interact or upon whom we
are dependent, including individual retail pharmacies, health plan sponsors and
pharmaceutical manufacturers. We believe that our greatest risk with respect to
year 2000 issues relates to failures by third parties to be year 2000 compliant.
We have received responses from approximately 25% of the over 20,000 third
parties we contacted. We cannot make any assurance that the software and systems
of other companies with which we transact business will become year 2000
compliant in a timely manner. Any such failures could have a material adverse
effect on our systems and operations. With respect to the systems we directly
use, we believe our greatest exposure to the year 2000 issue involves our claims
processing operations, which rely on computers to process prescription claims.
We have installed a vendor upgrade and have substantially completed compliance
testing on the upgrade. However, any failure of these systems to be year 2000
compliance may have a material adverse effect on us.



                                       35
<PAGE>   37

    Our costs, as of March 31, 1999, related to our year 2000 project and
related compliance efforts, total approximately $300,000. We have expensed these
costs as incurred in fiscal 1999. We expect our total costs, both internal and
external, associated with our year 2000 readiness process will range from
$500,000 to $600,000. We anticipate funding these costs with cash generated from
operations. We do not believe that these costs are or will be material to our
results of operations or financial condition.

    Although we have substantially completed our compliance testing and
remediation, we have not developed a likely worst case year 2000 scenario. We
are, however, in the process of developing contingency plans for the risks of
our failure, or the failure of third parties, to be year 2000 compliant. We
intend to complete the contingency plans for the year 2000 issue during the
third quarter of calendar year 1999. Due to the inability to predict all of the
potential problems that may arise from the year 2000 issue, we cannot be sure
that we will be able to anticipate all contingencies.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is found on pages F-1 through F-20
hereof.

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

     None.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item will be incorporated by reference
from our definitive proxy statement for our 1999 annual meeting of stockholders
to be filed with the Securities and Exchange Commission not later than 120 days
following our fiscal year pursuant to Regulation 14A (the "Proxy Statement").



                                       36
<PAGE>   38

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. We filed reports on
Form 8-K and Form 8-K/A dated March 31, 1999, relating to its acquisition of
Foundation Health Pharmaceutical Services, Inc. (c) Exhibits Required by Item
601 of S-K: See index to exhibits on pages 37 - 40.

Exhibits and Financial Statement Schedules

Exhibit No.                                    Exhibits

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

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

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

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



                                       37
<PAGE>   39

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

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

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

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

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

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

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

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

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

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

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

4.5(c)            ---      Form of Agreement and Plan of Merger.

4.6(f)            ---      1997 Nonstatutory Stock Option Plan.

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

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

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

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

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



                                       38
<PAGE>   40

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

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

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

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

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

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

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

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

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

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

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

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

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

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





                                       39
<PAGE>   41

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

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

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

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

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

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

27.1(i)           ---      Financial Data Schedule.

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

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

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

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

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

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

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

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

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

(i)      Filed herewith.


                                       40
<PAGE>   42




         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
June 23, 1999 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 23, 1999
--------------------------------------      and Chief Executive Officer
David D. Halbert                            (Principal Executive Officer)



 /s/  Jon S. Halbert                        Executive Vice President, Chief             June 23, 1999
--------------------------------------      Operating Officer and Director
Jon S. Halbert


/s/  David A. George                        Executive Vice President,                   June 23, 1999
--------------------------------------      and Director
David A. George


 /s/  T. Danny Phillips                     Senior Vice President, Chief                June 23, 1999
--------------------------------------      Financial Officer, Secretary and
T. Danny Phillips                           Treasurer (Principal Financial
                                            and Accounting Officer)

</TABLE>



                                       41
<PAGE>   43



<TABLE>

<S>                                         <C>                                         <C>
 /s/  Rogers K. Coleman, M.D.               Director                                    June 23, 1999
--------------------------------------
Rogers K. Coleman, M.D.



 /s/  Stephen L. Green                      Director                                    June 23, 1999
--------------------------------------
Stephen L. Green



 /s/  Jeffrey R. Jay, M.D.                  Director                                    June 23, 1999
--------------------------------------
Jeffrey R. Jay, M.D.



 /s/  Kenneth J. Linde                      Director                                    June 23, 1999
--------------------------------------
Kenneth J. Linde



 /s/  Michael D. Ware                       Director                                    June 23, 1999
--------------------------------------
Michael D. Ware
</TABLE>



                                       42
<PAGE>   44


                          INDEX TO FINANCIAL STATEMENTS

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES


<TABLE>

<S>                                                                                                           <C>
Report of Independent Public Accountants....................................................................F-2
Consolidated Balance Sheets--March 31, 1998 and 1999........................................................F-3
Consolidated Statements of Operations for the Years Ended March 31, 1997,
   1998 and 1999............................................................................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
   March 31, 1997, 1998 and 1999............................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1997,
   1998 and 1999............................................................................................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, 1997, 1998 and 1999................................................................S-2
</TABLE>






                                      F-1
<PAGE>   45





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

     We have audited the accompanying consolidated balance sheets of Advance
Paradigm, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1998
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1999. 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, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999, in conformity with generally accepted accounting principles.



                                                ARTHUR ANDERSEN LLP

Dallas, Texas,
May 17, 1999




                                      F-2
<PAGE>   46





                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                   March 31,
                                                                         ---------------------------
                                                                             1998           1999
                                                                         ------------   ------------
<S>                                                                      <C>            <C>
CURRENT ASSETS:
   Cash and cash equivalents .........................................   $ 58,342,000   $ 42,492,000
   Accounts receivable, net of allowance for doubtful accounts of
     $247,000 and $371,000, respectively .............................     68,335,000    107,582,000
   Inventories .......................................................      2,887,000      4,015,000
   Prepaid expenses and other ........................................      1,487,000      1,651,000
                                                                         ------------   ------------
     Total current assets ............................................    131,051,000    155,740,000

PROPERTY AND EQUIPMENT, net of accumulated depreciation
   and amortization of $5,574,000 and $8,540,000, respectively .......     10,494,000     15,155,000
INTANGIBLE ASSETS, net of accumulated amortization of
   $1,501,000 and $2,191,000, respectively ...........................     12,353,000    105,041,000
OTHER ASSETS .........................................................      1,011,000        897,000
                                                                         ------------   ------------
     Total assets ....................................................   $154,909,000   $276,833,000
                                                                         ============   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                      $ 97,495,000   $148,979,000
   Accrued salaries and benefits                                            2,966,000      3,780,000
   Other accrued expenses                                                   2,228,000      1,870,000
                                                                         ------------   ------------
     Total current liabilities                                            102,689,000    154,629,000

NONCURRENT LIABILITIES:
   Long-term debt                                                                --       50,000,000
   Deferred income taxes                                                    1,285,000      2,597,000
   Other noncurrent liabilities                                               371,000        546,000
                                                                         ------------   ------------
     Total liabilities                                                    104,345,000    207,772,000
                                                                         ------------   ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
    Preferred stock, $.01 par value;
     4,995,000 shares authorized, none issued and outstanding                    --             --
   Series B convertible preferred stock, $.01 par value; 5,000
     shares authorized, 4,444 and 0 shares issued and outstanding
     at March 31, 1998 and 1999, respectively                                    --             --
   Common stock, $.01 par value; 25,000,000 shares authorized,
     8,904,472 and 10,528,449 shares issued and outstanding at
     March 31, 1998 and 1999, respectively                                     89,000        105,000
   Additional paid-in capital                                              43,142,000     48,928,000
   Accumulated earnings                                                     7,333,000     20,028,000
                                                                         ------------   ------------
     Total stockholders' equity                                            50,564,000     69,061,000
                                                                         ------------   ------------
     Total liabilities and stockholders' equity                          $154,909,000   $276,833,000
                                                                         ============   ============
</TABLE>

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



                                      F-3
<PAGE>   47




                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS




<TABLE>
<CAPTION>
                                                            Year Ended March 31,
                                             --------------------------------------------------
                                                 1997               1998              1999
                                             --------------    --------------    --------------
<S>                                          <C>               <C>               <C>
REVENUES                                     $  256,450,000    $  476,664,000    $  774,822,000
                                             --------------    --------------    --------------

COST OF OPERATIONS:
   Cost of revenues                             245,466,000       455,847,000       743,084,000
   Selling, general and
     administrative expenses
                                                  7,309,000        10,083,000        13,949,000
                                             --------------    --------------    --------------
         Total cost of operations               252,775,000       465,930,000       757,033,000
                                             --------------    --------------    --------------
   Operating income                               3,675,000        10,734,000        17,789.000
INTEREST INCOME                                   1,560,000         2,814,000         2,685,000
INTEREST EXPENSE                                   (445,000)          (67,000)             --
MERGER COSTS                                           --            (689,000)             --
                                             --------------    --------------    --------------
INCOME BEFORE INCOME TAXES                        4,790,000        12,792,000        20,474,000
PROVISION FOR INCOME TAXES                        1,564,000         4,861,000         7,780,000
                                             --------------    --------------    --------------
NET INCOME                                   $    3,226,000    $    7,931,000    $   12,694,000
                                             ==============    ==============    ==============

BASIC:
   NET INCOME AVAILABLE
     TO COMMON STOCKHOLDERS                  $    2,673,000    $    7,731,000    $   12,694,000
   NET INCOME PER SHARE                      $         0.43    $         0.88    $         1.24
   WEIGHTED AVERAGE SHARES OUTSTANDING            6,264,521         8,755,754        10,252,145

DILUTED:
   NET INCOME AVAILABLE
     TO COMMON STOCKHOLDERS                  $    3,226,000    $    7,931,000    $   12,694,000
   NET INCOME PER SHARE                      $         0.35    $         0.70    $         1.09
   WEIGHTED AVERAGE SHARES OUTSTANDING            9,176,127        11,350,919        11,688,101
</TABLE>






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





                                      F-4
<PAGE>   48




                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999


<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, 1996 ...........  4,006,578      $ 40,000         --    $   --   $  1,484,000    $ (3,061,000)   $ (1,537,000)
   Comprehensive income:
   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
   Comprehensive income:
   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
   Comprehensive income:
   Net income .....................         --            --         --        --             --      12,694,000      12,694,000
   Issuance of Common Stock
      in connection with the
      conversion of Series B
      Preferred Stock .............  1,111,111        11,000     (4,444)       --        (11,000)             --              --
   Issuance of Common Stock
     in connection with the
     exercise of stock options
     and warrants .................    512,866         5,000         --        --      2,420,000              --       2,425,000
   Tax benefit relating to exercise
     of employee stock options
     and other ....................         --            --         --        --        877,000           1,000         878,000
     Issuance of warrants .........         --            --         --        --      2,500,000              --       2,500,000
                                    ----------      --------    -------    ------   ------------    ------------    ------------


BALANCE, March 31,1999 ............ 10,528,449      $105,000         --    $   --   $ 48,928,000    $ 20,028,000    $ 69,061,000
                                    ==========      ========    =======    ======   ============    ============    ============
</TABLE>



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



                                      F-5
<PAGE>   49

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                          Year Ended March 31,
                                                              -----------------------------------------------
                                                                 1997              1998             1999
                                                              -------------    -------------    -------------
<S>                                                           <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                 $   3,226,000    $   7,931,000    $  12,694,000
   Adjustments to reconcile net income to net
     cash provided by operating activities--
         Depreciation and amortization                            1,705,000        2,378,000        3,656,000
         Provision for doubtful accounts                             12,000           74,000           24,000
         Deferred income taxes                                      844,000          441,000        1,312,000
         Change in certain assets and liabilities--
             Accounts receivable                                (12,612,000)     (32,139,000)     (38,391,000)
             Inventories                                           (261,000)      (1,028,000)      (1,128,000)
             Prepaid expenses and other assets                     (256,000)      (1,584,000)        (922,000)
             Accounts payable, accrued expenses
                and other noncurrent liabilities                 22,727,000       38,466,000       51,749,000
                                                              -------------    -------------    -------------
             Net cash provided by operating activities           15,385,000       14,539,000       28,994,000
                                                              -------------    -------------    -------------


CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                           (3,147,000)      (6,525,000)      (7,568,000)
    Purchase of subsidiaries, net of cash acquired                     --               --        (89,701,000)
                                                              -------------    -------------    -------------
             Net cash used in investing activities               (3,147,000)      (6,525,000)     (97,269,000)
                                                              -------------    -------------    -------------


CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from sale of preferred stock                     10,000,000             --               --

   Net proceeds from issuance of Common Stock                    19,147,000          256,000        2,425,000
   Proceeds from borrowings                                       1,000,000          708,000       50,000,000
   Payments on long-term obligations                             (7,650,000)      (1,608,000)            --
   Payment of preferred stock dividend                             (153,000)        (200,000)            --
                                                              -------------    -------------    -------------
             Net cash provided by (used in) financing
               activities                                        22,344,000         (844,000)      52,425,000
                                                              -------------    -------------    -------------

NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                                                  34,582,000        7,170,000      (15,850,000)
CASH AND CASH EQUIVALENTS, beginning of year                     16,590,000       51,172,000       58,342,000
                                                              -------------    -------------    -------------
CASH AND CASH EQUIVALENTS, end of year                        $  51,172,000    $  58,342,000    $  42,492,000
                                                              =============    =============    =============
</TABLE>

SUPPLEMENTARY INFORMATION:

   Cash paid for interest totaled approximately $445,000, $67,000 and $0 in
     1997, 1998 and 1999, respectively.

   The Company made income tax payments of $19,000, $5,100,000 and $5,900,000 in
    1997, 1998 and 1999, respectively.






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




                                      F-6
<PAGE>   50

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL:

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Consolidation

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

Use of Estimates

     The preparation of financial statements in conformity with 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>   51


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

Inventories

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

Property and Equipment

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

Intangible Assets

     Intangible assets consist of goodwill, customer contracts acquired and
non-compete agreements. Goodwill represents the excess of cost over the
estimated fair value of tangible net assets acquired. Goodwill is amortized on a
straight-line basis over periods from 25 to 40 years with a weighted average of
29 years. Customer contracts and non-compete agreements are amortized over 10 to
15 years. Amortization expense was $346,000 in each of the years ended March 31,
1997 and 1998 and $691,000 the year ended March 31, 1999 and is included in
selling, general and administrative expenses.


Impairment of Long-Lived Assets

     The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets, including
goodwill, may warrant revision or that the remaining balance of an asset may not
be recoverable. The assessment of possible impairment is based on the ability to
recover the carrying amount of the asset from expected future cash flows on an
undiscounted basis. If the assessment indicates that the carrying amount of the
asset exceeds the undiscounted cash flows, an impairment has occurred. The
impairment is calculated as the total by which the carrying amount of the asset
exceeds its fair value. The fair value of long-lived assets and goodwill is
estimated based on quoted market prices, if available, or the expected total
value of the cash flows, on a discounted basis. The Company recorded no
impairment charges in fiscal 1997, 1998 or 1999.



                                      F-8
<PAGE>   52


                     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. The Company's bank debt was borrowed on March 31, 1999 and,
therefore, the estimated fair value and the carrying value is the same.

Other Noncurrent Liabilities

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

Revenue Recognition

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

Cost of Revenues

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





                                      F-9
<PAGE>   53




                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

Net Income Per Share

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

<TABLE>
<CAPTION>
                                                              YEAR ENDED MARCH 31,
                                          --------------------------------------------------------------
                                               1997                   1998                    1999
                                          ----------------      ----------------        ----------------
<S>                                       <C>                   <C>                     <C>
BASIC
Numerator:

Net income                                $      3,226,000      $      7,931,000        $     12,694,000
Preferred stock dividends                          553,000               200,000                     ---
                                          ----------------      ----------------        ----------------
                                          $      2,673,000      $      7,731,000        $     12,694,000
                                          ================      ================        ================
Denominator:

Weighted average common
   stock outstanding                             6,264,521             8,755,754              10,252,145
                                          ================      ================        ================

Net income per share                      $           0.43      $           0.88        $           1.24
                                          ================      ================        ================


DILUTED
Numerator:

Net income                                $      3,226,000      $      7,931,000        $     12,694,000
                                          ================      ================        ================

Denominator:

Weighted average common                          6,264,521             8,755,754              10,252,145
   stock outstanding

Other Dilutive Securities:
Series A preferred stock                         1,250,000                   ---                     ---
Series B preferred stock                           833,333             1,111,111                  36,630
Options and warrants using the
  treasury stock method                            828,273             1,484,054               1,399,326
                                          ----------------      ----------------        ----------------
Weighted average shares outstanding              9,176,127            11,350,919              11,688,101
                                          ================      ================        ================

Net income per share                      $           0.35      $           0.70        $           1.09
                                          ================      ================        ================
</TABLE>






                                      F-10
<PAGE>   54



                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

Reclassification

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

Recent Accounting Pronouncements

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

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

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

3. ACQUISITIONS

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




                                      F-11
<PAGE>   55

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. ACQUISITIONS: (CONTINUED)

     On March 31, 1999, the Company acquired the outstanding stock of FHPS for
$70 million in cash and warrants to purchase 200,000 shares of its $0.01 par
value common stock ("Common Stock"). The Company valued such warrants at fair
market value based upon the Black Scholes valuation model. Such warrants are
valued at $2.5 million. The acquisition has been accounted for using the
purchase method of accounting. FHPS' results have not been included in the
Company's results because the transaction occurred on the last day of the
Company's fiscal year. The purchase price was allocated to Goodwill and other
intangible assets. Goodwill was valued at approximately $68.3 and is being
amortized on a straight-line basis over 30 years. The purchase price allocation
used in the preparation of the accompanying financial statements is preliminary.
The Company's management is assessing the net realizable value of certain
contracts acquired and reviewing the assets acquired for other intangible
assets. As a result, the purchase price allocation may be subsequently revised.

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

<TABLE>
<CAPTION>
                                                    1998          1999
                                                -----------   -----------
<S>                                             <C>           <C>
Revenues                                        $   530,016   $   855,810
Net income                                      $     4,286   $    12,783
Net income per share:
  Basic                                         $      0.47   $      1.25
  Diluted                                       $      0.38   $      1.09
Weighted average shares outstanding:
  Basic                                           8,755,754    10,252,145
  Diluted                                        11,350,919    11,688,101
</TABLE>

     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. The merger
constituted a tax-free reorganization and has been accounted for as a pooling of
interests under Accounting Principles Board Opinion No. 16 ("APB 16").
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of IMR as though it had always been a part of the Company.




                                      F-12
<PAGE>   56


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. ACQUISITIONS: (CONTINUED)

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

<TABLE>
<CAPTION>
                                                    Year Ended March 31,
                                                -----------------------------
                                                    1997            1998
                                                -------------   -------------
<S>                                             <C>             <C>
Revenues:
API                                             $ 251,562,000   $ 468,287,000
IMR                                                 4,888,000       8,377,000
                                                -------------   -------------
Combined                                        $ 256,450,000   $ 476,664,000
                                                -------------   -------------

Net income:
API                                             $   3,138,000   $   7,165,000
IMR                                                    88,000         766,000
                                                -------------   -------------
Combined                                        $   3,226,000   $   7,931,000
                                                =============   =============
</TABLE>

     In connection with the merger, the Company recorded in the fourth quarter
of fiscal 1998 a charge to operating expenses of $689,000 ($427,000 after taxes,
or $.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,
                                                                                --------------------------------
                                                                                     1998              1999
                                                                                ---------------  ---------------
<S>                                                                             <C>              <C>
Machinery and equipment...................................................      $     3,521,000  $     4,208,000
Computer equipment and software...........................................            8,591,000       12,840,000
Furniture and equipment...................................................            1,381,000        2,324,000
Leasehold improvements....................................................            1,017,000        2,765,000
Land and buildings........................................................            1,558,000        1,558,000
                                                                                ---------------  ---------------
                                                                                     16,068,000       23,695,000
Less--Accumulated depreciation and amortization...........................           (5,574,000)      (8,540,000)
                                                                                ---------------  ---------------
                                                                                $    10,494,000  $    15,155,000
                                                                                ===============  ===============
</TABLE>




                                      F-13
<PAGE>   57




                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.   DEBT:

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

     Interest on the credit facility accrues at a specified margin above the
London Interbank Offered Rate, or LIBOR, or an alternate base rate. The
alternate base rate is the bank's prime rate or the federal funds rate plus
0.5%. For LIBOR loans the applicable margin is 1.75% per annum as of April 1,
1999.

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

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, 1999, as follows:

<TABLE>
<CAPTION>
   Years Ending
      March 31,
   -------------
<S>                                                                   <C>
       2000...................................................        $ 4,061,000
       2001...................................................          3,585,000
       2002...................................................          2,735,000
       2003...................................................          1,419,000
       2004...................................................            962,000
                                                                      -----------
            Total minimum lease payments......................        $12,762,000
                                                                      ===========
</TABLE>


     Total rent expense incurred in the years ended March 31, 1997, 1998 and
1999 was approximately $2,313,000, $3,096,000 and $ 4,018,000, respectively.

7.   COMMITMENTS AND CONTINGENCIES:

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




                                      F-14
<PAGE>   58


                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 21% and 18% of the
Company's revenues for the years ended March 31, 1998 and 1999, respectively.
Another customer accounted for approximately 15% of the Company's revenues for
the year ended March 31, 1998, but revenues from this customer did not exceed
10% of the Company's revenues for the year ended March 31, 1999. No other
customer accounted for over 10% of the Company's revenues in fiscal years 1998
or 1999. Effective April 1, 1999, the Company entered into a Pharmacy Benefit
Services Agreement with Foundation Health Systems, Inc. ("FHS"). Under the terms
of the Service Agreement the Company will provide pharmacy services to FHS'
affiliated health plans. In fiscal 2000, we expect that FHS will become the
Company's largest customer.

9.   STOCK TRANSACTIONS:

Series B Preferred Stock

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




                                      F-15
<PAGE>   59

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9. STOCK TRANSACTIONS: (CONTINUED)

     On October 8, 1996, the Company completed the offering ("Offering") of its
Common Stock. 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 A cumulative
convertible preferred stock ("Series A Preferred Stock") automatically converted
into 2,500,000 shares of Common Stock.

     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.

Warrants to Purchase Common Stock

     The Company has issued warrants to four of our key health plan sponsor
customers representing the right to purchase up to a total of 357,180 shares of
our Common Stock at prices per share ranging from $8.10 to $35.50. The right to
exercise each warrant vests in equal installments on the first five
anniversaries of the date of grant so long as the customer's service agreement
remains in effect. In addition, during the year ended March 31, 1997, the
Company agreed to issue warrants to purchase 281,250 shares of its Common Stock
to one customer contingent upon future expansion of member lives. As of March
31, 1999, none of these warrants have been earned or issued.

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

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




                                      F-16
<PAGE>   60

                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9. STOCK TRANSACTIONS: (CONTINUED)

     The Company has reserved shares of Common Stock at March 31, 1999, for the
following:

<TABLE>

<S>                                                                                     <C>
     Exercise of stock options..................................................            2,430,432
     Exercise of warrants.......................................................              638,430
                                                                                        -------------
                                                                                            3,068,862
                                                                                        =============
</TABLE>

10. STOCK OPTION PLAN:

     At March 31, 1999, 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, 1999, 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, 1999, 907,600 options were vested at exercise prices of $.65 to $35.63
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>
                                               1997                           1998                              1999
                                 ------------------------------------------------------------------------------------------------
                                                      Wtd. Avg.                      Wtd. Avg.                         Wtd. Avg.
                                      Shares          Ex. Price       Shares         Ex. Price         Shares          Ex. Price
                                 --------------      ----------  --------------     ------------   --------------      ----------
<S>                                   <C>            <C>          <C>               <C>            <C>                 <C>
Outstanding at beginning of year      1,040,250      $     4.26       1,457,750     $       6.02        2,023,745      $    10.54
Granted                                 445,000           10.34         614,375            21.25          525,500           31.42
Transferred from IMR                         --              --          23,922             1.18               --              --
Exercised                                (3,000)           3.20         (43,052)            5.26         (355,766)           6.79
Canceled                                (24,500)          10.75         (29,250)            9.78          (90,896)          29.02
                                 --------------      ----------  --------------     ------------   --------------      ----------
Outstanding at end of year            1,457,750            6.02       2,023,745            10.54        2,102,583           15.86
                                 ==============      ==========  ==============     ============   ==============      ==========
Exercisable at end of year              632,850            2.95         879,382             4.40          907,600            6.68
Price range                      $.65 to $19.75                  $.65 to $33.13                    $.65 to $41.38
Weighted average fair value
   of options granted            $         3.31                  $         7.94                    $        14.64
</TABLE>






                                      F-17
<PAGE>   61

                     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
2,102,583 options outstanding as of March 31, 1999.

<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        204,674    $      .98          2.5         196,700        $     .98
$    3.20  to  $   4.80        424,850    $     3.24          4.8         424,850        $    3.24
$    9.00  to  $  12.50        689,200    $    11.26          7.4         225,667        $   11.67
$   16.63  to  $  23.75         54,670    $    19.72          8.5           9,003        $   19.33
$   24.50  to  $  31.62        484,000    $    29.80          9.1           6,000        $   29.13
$   33.13  to  $  41.38        245,189    $    34.67          9.0          45,380        $   33.34
</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, 1997, 1998 and 1999,
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>
                                                     1997             1998             1999
                                                     ----             ----             ----
<S>                                               <C>              <C>             <C>
Net income:
  As reported                                     $3,226,000       $7,931,000      $12,694,000
  Pro forma                                       $3,065,000       $7,382,000      $11,121,000

Basic net income per share:
  As reported                                     $     0.43       $     0.88      $      1.24
  Pro forma                                       $     0.40       $     0.82      $      1.08

Diluted net income per share:
  As reported                                     $     0.35       $     0.70      $      1.09
  Pro forma                                       $     0.33       $     0.65      $      0.95
</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-18
<PAGE>   62



                     ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


11.  RELATED PARTY TRANSACTIONS:

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

12. RETIREMENT PLAN BENEFITS:

     The Company sponsors a retirement plan for all eligible employees, as
defined in the plan document. The plan is qualified under Section 401(k) of the
Internal Revenue Code. The Company is required to contribute at least 50% of the
first 6% of salary deferral contributed by each participant. The Company's
contributions to the plan amounted to approximately $129,000, $177,000 and
$268,000 for the years ended March 31, 1997, 1998 and 1999, respectively.

13. INCOME TAXES:

     The provision for income taxes for the years ended March 31, 1997, 1998 and
1999 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>
                                           1997                         1998                        1999
                                      ---------------             ----------------             ---------------
<S>                                   <C>                         <C>                            <C>
     Tax at U.S. federal              $     1,629,000             $      4,349,000               $   6,961,000
       income tax rate
     State taxes                                  ---                      457,000                     666,000
     Benefit of operating                     (89,000)                         ---
       loss carryforwards
     Other, net                                24,000                       55,000                     153,000
                                      ---------------             ----------------             ---------------
     Provision for income taxes       $     1,564,000             $      4,861,000                  $7,780,000
                                      ===============             ================             ===============
</TABLE>

     Of the $7,780,000 provision for income taxes in 1999, $1,312,000 represents
deferred income taxes and $6,468,000 represents the current portion.


                                      F-19
<PAGE>   63



                     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,
                                               1998          Changes          1999
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>
Gross deferred tax assets:
     Accruals ..........................   $     57,000    $     96,000    $    153,000
     Other .............................         50,000          76,000         126,000
                                           ------------    ------------    ------------
                                                107,000         172,000         279,000
                                           ------------    ------------    ------------
Gross deferred tax liabilities:
     Amortization of goodwill ..........       (850,000)       (197,000)     (1,047,000)
     Depreciation ......................       (542,000)       (158,000)       (700,000)
     Conversion from cash
         basis of acquired entities ....           --        (1,129,000)     (1,129,000)
                                           ------------    ------------    ------------
                                             (1,392,000)     (1,484,000)     (2,876,000)
                                           ------------    ------------    ------------

     Net deferred tax liability ........   $ (1,285,000)   $ (1,312,000)   $ (2,597,000)
                                           ============    ============    ============

</TABLE>




                                      F-20
<PAGE>   64


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                         ON FINANCIAL STATEMENT SCHEDULE



         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 17, 1999. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic 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 17, 1999



                                      S-1
<PAGE>   65



                             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, 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

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


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

(1) Uncollectible accounts written off, net of recoveries

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





                                      S-2
<PAGE>   66

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4.5(c)            ---      Form of Agreement and Plan of Merger.

4.6(f)            ---      1997 Nonstatutory Stock Option Plan.

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

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

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

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

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


<PAGE>   67

<TABLE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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


<PAGE>   68

<TABLE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(i)      Filed herewith.