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                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                  FORM 10-K/A

  X        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 ---       EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997

           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)

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

        545 E. JOHN CARPENTER FREEWAY, SUITE 1900, IRVING, TX                                 75062
              (Address of principal executive offices)                                      (Zip Code)
</TABLE>

       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
30, 1997 as reported on the Nasdaq National Market, was approximately
$80,077,000.

   As of May 30, 1997, Registrant had outstanding 7,800,817 shares of Common
Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III.


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ITEM 1. BUSINESS

OVERVIEW

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

    The Company's PBM services include clinical and benefit design
consultation, formulary and rebate administration, electronic point-of-sale
pharmacy claims processing, mail pharmacy distribution, pharmacy network
management, drug utilization review ("DUR") and data information reporting
services. The Company administers a pharmacy network that includes over 50,000
retail pharmacies throughout the United States. In 1994, as a response to
increasing cost- containment pressures from payors, the Company began to
utilize its clinical and information systems capabilities to develop health
benefit management ("HBM") services. The Company's HBM services include disease
management, recommendation of clinical guidelines, patient and physician
profiling, case finding and compliance and outcome measurement. In 1995, the
Company began marketing its HBM services to health benefit plan sponsors,
pharmaceutical manufacturers and contract research organizations, and initiated
programs with selected customers. In addition, the Company intends to leverage
its existing capabilities and relationships by acquiring companies which have,
or are developing, innovative HBM services which will enable the Company to
provide a centralized care management alternative for its customers.

    The Company was incorporated in Delaware in July 1993 as a wholly owned
subsidiary of Advance Health Care ("AHC").  Immediately prior to the Company's
initial public offering in October 1996, AHC was merged with and into the
Company, with the Company being the surviving corporation. Currently, the
Company has three wholly owned subsidiaries, Advance Paradigm Mail Services,
Inc. ("Advance Mail"), Advance Paradigm Data Services, Inc. ("Advance Data")
and Advance Paradigm Clinical Services, Inc. ("Advance Clinical"). Advance Mail
was incorporated in 1986 and began operations in early 1987 as a mail order
pharmacy. In 1992, Advance Data was incorporated to provide plan participants
an alternative for purchasing prescriptions through a network of retail
pharmacies and to provide claims adjudication services. In August 1993, Advance
Health Care contributed all of the capital stock of Advance Data and Advance
Mail to the Company.  In December 1993, the Company acquired Advance Clinical,
formerly a wholly owned subsidiary of Blue Cross and Blue Shield of Maryland.


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INDUSTRY BACKGROUND

    In response to escalating health care costs, cost containment efforts in
the health care industry have led to rapid growth in managed care. Despite
these efforts, continued advances in medical technology and new drug
development have led to significant increases in drug utilization and related
costs, creating a need for more efficient, cost effective drug delivery
mechanisms. PBM services evolved to address this need. Through volume
discounts, retail pharmacy networks, mail pharmacy services, formulary
administration, claims processing and DUR, PBMs created an opportunity for
health benefit plan sponsors to deliver drugs to their members in a
cost-effective manner while improving patient compliance with recommended
guidelines.

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

THE ADVANCE PARADIGM SOLUTION

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

SERVICES

    PHARMACEUTICAL BENEFIT MANAGEMENT. The Company's PBM services include
clinical and benefit design consultation, formulary and rebate administration,
electronic point-of-sale pharmacy claims processing, mail pharmacy
distribution, pharmacy network management, DUR and data information reporting.
The Company administers a pharmacy network which includes over 50,000 retail
pharmacies throughout the United States. The Company currently provides PBM
services to over 300 health plan benefit sponsors covering over ten million
plan members





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enrolled in the Company's programs. The Company's PBM services are divided
among three divisions: Clinical Services, Data Services and Mail Pharmacy
Services.

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

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

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

    DATA SERVICES. The Company's retail pharmacy network and claims
adjudication services provide plan sponsors an efficient, automated claims
processing network that permits point-of-sale adjudication and data collection.
The Company administers a network of approximately 50,000 retail pharmacies
which are preferred providers of prescription drugs to members of the pharmacy
benefit plans managed by the Company (the "Advance Pharmacies"). The Advance
Pharmacies have agreed to accept payments at predetermined negotiated rates,
which the Company believes to be generally more favorable than typical retail
prices. The Company's claims adjudication services division is its most rapidly
growing division with the number of claims processed increasing from
approximately 816,000 claims in fiscal year 1994 to over 26.6 million claims
processed in fiscal year 1997, including over 8.3 million claims processed in
the quarter ended March 31, 1997.





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

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

    The Company's mail service pharmacy is located in approximately 38,000
square feet of leased space in Richardson, Texas and currently dispenses
approximately 15,000 prescriptions per week. The mail service dispensing
process is highly automated, featuring bar code and scanning technology to
route and track orders, computerized dispensing of many medications and
computer-generated mailing labels and invoices. To ensure accurate dispensing
of prescriptions, the mail service system is equipped with automated quality
control features, and each prescription is inspected by a registered
pharmacist.

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





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

    In January 1997, the Company announced a multi-year distribution, licensing
and development agreement with National Health. Under the agreement, the
Company will work with National Health to jointly develop fully integrated
personal care management products for the managed care marketplace. In
addition, the Company will license and distribute personal health management
services from National Health's Call Center Services division, allowing the
Company to expand its health benefit management product offering immediately.
With National Health, the Company's primary focus was selecting a strategic
partner in the development of technology and information products and services
designed to improve health and promote wellness. With over 700 clients
nationwide, National Health provides Medical Call Center-based products and
services to help improve consumer use of and satisfaction with health care
resources.

    DECISION SUPPORT SYSTEMS. In connection with the monitoring, analysis and
evaluation of drug utilization for its PBM customers and following years of
development, the Company introduced proprietary decision support systems. One of
the Company's proprietary decision support systems, ApotheQuery(R), enables the
Company to identify cost-saving opportunities arising from the possible overuse
or inappropriate use of drugs, the use of high cost drugs and the use of drugs
not on the formulary. The Company's decision support systems have been developed
using commercially available technology and are not protected by any patents.
The Company protects its decision support systems through physical security
measures as well as access security procedures.

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

STRATEGIC ALLIANCES

    The Company has successfully established strategic relationships with
certain large pharmaceutical manufacturers and major customers. In its
strategic relationships with drug manufacturers, the Company strives to create
collaborative relationships whereby the Company provides the manufacturers with
products and services that permit the manufacturers to benefit from the
Company's expertise in disease management and pharmacy and medical claims data
analysis, while the Company and its clients benefit from the marketing and
financial resources of





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the manufacturers. Through this type of relationship, the Company licenses
selected disease management programs to the manufacturers and provides other
related services. In its strategic relationships with certain major customers,
certain customers have assumed equity positions in the Company, which fosters
the development of long-term strategic alliances.  This arrangement allows for
increased information flow between the Company and customers to facilitate the
progressive development of solutions to meet the customers' unique PBM and HBM
service needs.

SALES, MARKETING AND CUSTOMER SERVICE

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

CUSTOMERS

    Two customers accounted for approximately 18% and 14%, respectively, of the
Company's revenues for the year ended March 31, 1997. A different Customer
accounted for approximately 27% and 18% of the Company's revenues for the years
ended March 31, 1995 and 1996, respectively. No other customer accounted for
over 10% of the Company's revenues in fiscal years 1995, 1996 or 1997.

COMPETITION

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

    The Company believes that the primary competitive factors in the PBM and
HBM industries include: independence from drug manufacturers and payors; the
quality, scope and costs of products and services offered to insurance
companies, HMOs, employers and other sponsors of health benefit plans and plan
participants; responsiveness to customers' demands; the ability to negotiate
favorable rebate and volume discounts from drug manufacturers; the ability to
identify and apply effective cost containment programs utilizing clinical
strategies; the ability to develop formularies; the ability to market PBM and
HBM services to health benefit plan sponsors; a





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strong managed care customer base which supports the development of HBM
products and services; and the commitment to providing flexible, clinically
oriented services to customers. The Company believes that its larger
competitors offer comprehensive PBM services and some form of HBM services. The
Company considers its principal competitive advantages to be its independence
from drug manufacturers and payors, strong managed care customer base which
supports the development of HBM services, and commitment to providing flexible,
clinically oriented services to its customers.

YEAR 2000 COMPLIANCE

    The Company has formed a Year 2000 project team to address the Year 2000
issue. The team is composed of both technical and non-technical individuals.
The scope of the Year 2000 project includes the review of all technical systems
such as hardware, software, programs, databases, phone systems, forms or any
other document with a pre-printed century date. The goal of the team is to
ensure Year 2000 compliance of all critical business systems of the Company and
its electronic partners by March 1999. A Year 2000 compliant system will be
able to (1) accept, process, calculate, sort, store and report dates using the
correct century and year (2) interface with other Year 2000 compliant systems
(3) automatically cross into the Year 2000 without date-related failures (4)
avoid premature expiration of security systems, licenses, or files due to Year
2000 crossover and (5) treat the Year 2000 as a leap year. The Company believes
that conversion will be completed by March 1999 and will not pose significant
operational problems. However, if such conversions are not completed in a
timely manner by all parties, the Year 2000 issue could have a material adverse
effect on the Company's systems and operations.

LIABILITY INSURANCE

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

GOVERNMENT REGULATION

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

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





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    FDA REGULATION. The U.S. Food and Drug Administration ("FDA") generally has
authority to regulate drug promotional materials that are disseminated "by or
on behalf of" a drug manufacturer. In October 1995, the FDA held hearings to
determine whether and to what extent the activities of PBM companies should be
subject to FDA regulation. At this hearing, FDA officials expressed concern
about the efforts of PBMs that are owned by drug manufacturers to engage in
therapeutic switching programs and about the criteria used by such PBMs that
govern the inclusion and exclusion of particular drugs in formularies. Although
the FDA has not published any proposed rules to date on the regulation of PBMs,
there can be no assurance that the FDA will not seek to increase regulation
pertaining to the PBM industry, including with respect to companies that are
not owned by drug manufacturers.

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

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

    The federal statute has been interpreted broadly by courts, the Office of
Inspector General ("OIG") within the Department of Health and Human Services
("HHS"), and administrative bodies. Because of the federal statute's broad
scope, federal regulations establish certain "safe harbors" from liability.
Safe harbors exist for certain properly reported discounts received from
vendors, certain investment interests, and certain properly disclosed payments
made by vendors to group purchasing organizations. A practice that does not
fall within a safe harbor is not necessarily unlawful, but may be subject to
scrutiny and challenge. In the absence of an applicable statutory exception or
safe harbor, a violation of the statute may occur even if only one of the
purposes of a payment arrangement is to induce patient referrals or purchases.
Among the practices that have been identified by the OIG as potentially
improper under the statute are certain "product conversion programs" in which
benefits are given by drug manufacturers to pharmacists or physicians for
changing a prescription (or recommending or requesting such a change) from one
drug to another. Such laws have been cited as a partial basis, along with the
state consumer protection laws discussed below, for investigations and
multi-state settlements relating to financial incentives provided by drug
manufacturers to retail pharmacists in connection with such programs.

   




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

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

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

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

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

    CONSUMER PROTECTION LAWS. Most states have consumer protection laws that
have been the basis for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to retail pharmacies in
connection with drug switching programs. In addition, pursuant to a settlement
agreement entered into with 17 states on October 25, 1995, Merck Medco Managed
Care, Inc. ("Medco"), the PBM subsidiary of pharmaceutical manufacturer Merck &
Co., agreed to require pharmacists affiliated with Medco mail service
pharmacies to





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disclose to physicians and patients the financial relationships between Merck &
Co., Medco and the mail service pharmacy when such pharmacists contact
physicians seeking to change a prescription from one drug to another. The
Company believes that its contractual relationships with drug manufacturers and
retail pharmacies do not include the features that were viewed by enforcement
authorities as problematic in these settlement agreements. However, no
assurance can be given that the Company will not be subject to scrutiny or
challenge under one or more of these laws.

    NETWORK ACCESS LEGISLATION. A majority of states have adopted some form of
legislation affecting the ability of the Company to limit access to pharmacy
provider networks or from removing network providers. Such legislation may
require the Company or its customers to admit any retail pharmacy willing to
meet the plan's price and other terms for network participation; this
legislation is sometimes referred to as "any willing provider" legislation. The
Company has not been materially affected by these statutes because it
administers a large network of over 50,000 retail pharmacies and will admit any
licensed pharmacy that meets the Company's credentialing criteria, involving
such matters as adequate insurance coverage, minimum hours of operation, and
the absence of disciplinary actions by the relevant state agencies.

    LEGISLATION IMPOSING PLAN DESIGN RESTRICTIONS. Some states have legislation
that prohibits the plan sponsor from implementing certain restrictive design
features. For example, some states provide that members of the plan may not be
required to use network providers, but must also be provided with benefits even
if they choose to use non-network providers; this legislation is sometimes
referred to as "freedom of choice" legislation. Other states mandate coverage
of certain benefits or conditions. Such legislation does not generally apply to
the Company, but it may apply to certain of the Company's customers such as
HMOs and insurers. If such legislation were to become widespread and broad in
scope, it could have the effect of limiting the economic benefits achievable
through pharmacy benefit management.

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

    LEGISLATION AFFECTING DRUG PRICES. In the past, some states have adopted
legislation providing that a pharmacy participating in the state's Medicaid
program must give the state the best price that the pharmacy makes available to
any third party plan; this legislation is sometimes referred to as "most
favored nation" legislation. Such legislation, if enacted in any state, may
adversely affect the Company's ability to negotiate discounts in the future
from network pharmacies. Other states have enacted "unitary pricing"
legislation, which mandates that all wholesale purchasers of drugs within the
state be given access to the same discounts and incentives.





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

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

    Other statutes and regulations impact the Company's mail service
operations. The Health Care Financing Administration requires mail order
pharmacies to provide toll-free numbers for patient counseling of Medicaid
recipients residing out of state. Congressionally mandated goals to provide
useful information on prescription drugs to the American consumer may involve
participation by mail order pharmacies in assisting in the dissemination of
such information. Federal statutes and regulations govern the labeling,
packaging, advertising and adulteration of prescription drugs and the
dispensing of controlled substances. The Federal Trade Commission requires mail
order sellers of goods generally to engage in truthful advertising, to stock a
reasonable supply of the product to be sold, to fill mail orders within thirty
days, and to provide customers with refunds when appropriate. The United States
Postal Service has statutory authority to restrict the transmission of drugs
and medicines through the mail to a degree that could have an adverse effect on
the Company's mail service operations. The U.S. Postal Service has exercised
such statutory authority only with respect to controlled substances.
Alternative means of delivery are available to the Company.





                                       11
<PAGE>   13
EMPLOYEES

    As of May 31, 1997, the Company had 336 employees. None of the employees
are represented by a labor union. In the opinion of management, the Company's
relationship with its employees is good.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

    This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). All statements other than
statements of historical facts included in this Form 10-K, including without
limitation, statements under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" regarding the Company's
financial position, the Company's business strategy and the plans and
objectives of management of the Company for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations are disclosed under "Risk Factors", as well as elsewhere in this
Form 10-K. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by this section.

RISK FACTORS

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

    GROWTH OF HBM SERVICES. The Company is presently expending significant
resources to develop and expand its HBM services, and the Company anticipates
that it will continue to expend significant resources in the foreseeable
future.  The Company historically has experienced expense increases when
introducing new services. In addition, the Company's strategy for expanding its
HBM services entails the acquisition of HBM services providers, or other
transactions with such providers to acquire HBM services capabilities. Because
the HBM





                                       12
<PAGE>   14
services market is in an emerging stage, there can be no assurance that the
Company will be able to consummate such acquisitions or other transactions.
Moreover, there can be no assurance that HBM services developed or acquired by
the Company will be profitable or that the demand for such services will exist
in the future. See "-Risk of Acquisitions."

    MANAGEMENT OF GROWTH. The Company's business has grown rapidly in the last
three years, with total revenues increasing approximately 618% from $35.0
million in fiscal year 1994 to $251.6 million in fiscal year 1997. The
Company's recent expansion has resulted in substantial growth in the number of
its employees (from 117 at March 31, 1994 to 336 at May 31, 1997), the scope of
its operating and financial systems and the geographic distribution of its
operations and customers. This recent rapid growth has placed, and if such
growth continues will increasingly place, a significant strain on the Company's
management and operations. Accordingly, the Company's future operating results
will depend on the ability of its officers and other key employees to continue
implementing and improving its operations, customer support and financial
control systems, and to effectively expand, train and manage its employee base.
There can be no assurance that the Company will be able to manage any future
expansion successfully or provide the necessary management resources to
successfully manage its business, and any inability to do so would have a
material adverse effect on the Company's business, operating results and
financial condition.

    DEPENDENCE ON CERTAIN KEY CUSTOMERS. The Company depends on a limited
number of large customers for a significant portion of its consolidated
revenues. During fiscal year 1997, the Company's two largest customers,
Arkansas Blue Cross & Blue Shield ("Arkansas BCBS") and the State of Oklahoma,
accounted for approximately 18% and 14%, respectively, of the Company's
consolidated revenues. During this period, the Company's five largest customers
accounted for approximately 55% of the Company's revenues. Loss of the
Company's accounts with Arkansas BCBS or the State of Oklahoma, or of any other
customers which account for a substantial portion of the Company's business,
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business- Customers."

    POTENTIAL DECLINE IN REBATE REVENUE. Approximately 20% of the Company's
consolidated revenues is attributable to arrangements with drug manufacturers
relating to volume-based rebate payments as well as fees charged for other
products and services. The loss of the Company's account with any of the major
drug manufacturers under such arrangements or the failure of the Company to
meet certain conditions under such arrangements could have a material adverse
effect upon the Company's business, operating results and financial condition.
Over the next few years as patents expire covering many brand name drugs that
currently have substantial market share, generic products will be introduced
that may substantially reduce the market share of the brand name drugs.
Historically, manufacturers of generic drugs have not offered rebates on their
drugs. In addition, the Company is unable to predict the effect on rebate
arrangements that might result if the recent trend of consolidations and
alliances in the drug and managed care industry continues, particularly between
pharmaceutical manufacturers and PBMs, or that might result from an adverse
outcome in the lawsuits filed by retail pharmacies against drug manufacturers
and PBMs. The Company provides rebate contracting services for approximately
two million lives on behalf of other PBMs. If these other PBMs choose to
perform these services for





                                       13
<PAGE>   15
themselves or seek alternative suppliers, the Company's revenues with respect
to rebate contracting services would decline which could have a material
adverse effect on the Company's business, operating results and financial
condition.  There can be no assurance that the PBMs for whom the Company
provides rebate contracting services will not soon seek alternative suppliers
or acquire the capabilities to perform these services for themselves.

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

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

    RISK OF ACQUISITIONS. Part of the Company's strategy for growth includes
acquisitions of complementary services, technologies or businesses that could
allow the Company to offer a set of integrated services, in addition to PBM
services, to better serve the needs of health benefit





                                       14
<PAGE>   16
plan sponsors. The Company's ability to expand successfully through
acquisitions depends on many factors, including the successful identification
and acquisition of services, technologies or businesses and management's
ability to effectively integrate and operate the acquired services,
technologies or businesses. There is significant competition for acquisition
opportunities in the PBM and HBM industries. The Company may compete for
acquisition opportunities with other companies that have significantly greater
financial and management resources. There can be no assurance that the Company
will be successful in acquiring or integrating any such services, technologies
or businesses or once acquired, that the Company will be successful in selling
or integrating such services, technologies or businesses.

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

    INTANGIBLE ASSETS. At March 31, 1997, approximately $12.7 million, or 12%
of the Company's total assets consisted of intangible assets. These intangible
assets are being amortized over a period of 40 years. In the event of any sale
or liquidation of the Company, there can be no assurance that the value of such
intangible assets will be realized. In addition, any significant decrease in
the value of such intangible assets could have a material adverse effect on the
Company's business, operating results and financial condition. See Note 2 of
Notes to Consolidated Financial Statements.

    GOVERNMENT REGULATION. The PBM industry is subject to extensive federal and
state laws and regulations, and compliance with such laws and regulations
imposes significant operational requirements for the Company. The regulatory
requirements with which the Company must comply in conducting its business vary
from state to state. Management believes that the Company is in substantial
compliance with all existing statutes and regulations material to the operation
of its business. The impact of future legislation and regulatory changes on the
Company's business cannot be predicted, and there can be no assurance that the
Company will be able to obtain or maintain the regulatory approvals required to
operate its business. From time to time, retail pharmacists have expressed
opposition to mail order pharmacies. Retail pharmacies, state pharmacy
associations or state board of pharmacies in some states have attempted to
secure the enactment or promulgation of statutes or regulations that could have
the effect of hindering or in some cases prohibiting the delivery of
prescription drugs into such state by a mail service pharmacy. The Company is
also aware of a Federal Trade Commission investigation relating to the
acquisition of companies in the PBM industry, although the Company is not, to
its knowledge, the subject of any such investigation. There can be no assurance
that such legislation or regulation, if subsequently adopted, or investigation,
if commenced, would not have a material adverse effect on the Company's
business, operating results and financial condition. See "Business-Government
Regulation."





                                       15
<PAGE>   17
    DEVELOPMENTS IN THE HEALTH CARE INDUSTRY. The health care industry is
subject to changing political, economic and regulatory influences that may
affect the procurement practices and operation of health care organizations.
The Company's services are designed to function within the structure of the
health care financing and reimbursement system currently being used in the
United States. The Company believes that the commercial value and appeal of its
services may be adversely affected if the current health care financing and
reimbursement system were to be materially changed.  During the past several
years, the United States health care industry has been subject to an increase
in governmental regulation of, among other things, reimbursement rates. Certain
proposals to reform the United States health care system are currently under
consideration by Congress. These proposals may increase governmental
involvement in health care and otherwise change the operating environment for
the Company's customers. Health care organizations may react to these proposals
and the uncertainty surrounding such proposals by curtailing or deferring
investments in cost containment tools and related technology such as the
Company's services. The Company cannot predict what effect, if any, such
factors might have on its business, operating results and financial condition.
In addition, many health care providers are consolidating to create integrated
health care delivery systems with greater regional market power. As a result,
these emerging systems could have greater bargaining power, which may lead to
price erosion of the Company's services.  The failure of the Company to
maintain adequate price levels would have a material adverse effect on the
Company's business, operating results and financial condition. Other
legislative or market-driver reforms could have unpredictable effects on the
Company's business, operating results and financial condition. See
"Business-Government Regulation."

    PROFESSIONAL AND GENERAL LIABILITY INSURANCE. Various aspects of the
Company's business, including the dispensing of pharmaceutical products, may
subject it to litigation and liability for damages. While the Company maintains
and intends to maintain professional and general liability insurance coverage,
there can be no assurance that the Company will be able to maintain such
insurance in the future or that such insurance will be available on acceptable
terms or will be adequate to cover any or all potential product or professional
liability claims. A successful product or professional liability claim in
excess of the Company's insurance coverage could have a material adverse effect
upon the Company's business, operating results and financial condition. See
"Business-Liability Insurance."

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

    CONTROL BY EXISTING STOCKHOLDERS. Officers and directors of the Company and
their affiliates own beneficially approximately 37.0% of the Company's
outstanding Common Stock. As a result, these stockholders may have the ability
to control the Company and influence its affairs and the conduct of its
business. Such concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of the Company.





                                       16
<PAGE>   18
ITEM 2. PROPERTIES

  The Company's corporate headquarters are located in approximately 8,000
square feet of leased space in Irving, Texas.  This lease expires November 30,
1997. The Company's clinical division is located in approximately 18,260 square
feet of leased space in Hunt Valley, Maryland. This lease expires March 31,
1999 with an option to renew for an additional five- year term. The Company's
data services division is located in approximately 23,000 square feet of leased
space in Dallas, Texas. This lease expires November 30, 1999. The Company's
mail service pharmacy is located in approximately 38,000 square feet of leased
space in Richardson, Texas. This lease expires May 31, 2001 and has a five-year
fixed rate renewal option and an option to purchase at any time during the term
of the lease. The Company has entered into negotiations to purchase this
pharmacy building.


ITEM 3. LEGAL PROCEEDING

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


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 1997.


                                    PART II

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

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

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

<TABLE>
<CAPTION>

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



                                       17
<PAGE>   19
    The Company's Common Stock was held by 122 stockholders of record as of May
30, 1997. The Company estimates that its shares were held by approximately
4,100 beneficial stockholders.

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


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

    The following tables summarize certain selected consolidated financial
data, which should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes related thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
included elsewhere herein. The selected consolidated financial data of the
Company as of and for each of the years in the five-year period ended March 31,
1997, have been derived from the Consolidated Financial Statements that have
been audited by Arthur Andersen LLP, independent public accountants.





                                       18
<PAGE>   20


<TABLE>
<CAPTION>

                                                          Year Ended March 31,
                                          ------------------------------------------------------
                                          1993        1994       1995         1996          1997
                                          ----        ----       ----         ----          ----
                                                         (In thousands, except per share data)
<S>                                    <C>         <C>         <C>         <C>          <C>      
STATEMENT OF OPERATIONS DATA:
   Revenues ........................   $ 11,867    $ 34,970    $ 91,306    $ 125,333    $ 251,562
   Cost of operations:
     Cost of revenues ..............     11,196      32,612      85,532      117,788      240,810
     Selling, general and
       administrative expenses .....      1,091       2,330       4,963        6,158        7,309
                                       --------    --------    --------    ---------    ---------
       Total cost of operations ....     12,287      34,942      90,495      123,946      248,119
                                       --------    --------    --------    ---------    ---------
   Operating income (loss) .........       (420)         28         811        1,387        3,443
   Interest income .................         --          --          91          366        1,560
   Interest expense ................        (26)       (423)       (878)        (716)        (379)
   Provision for  income taxes .....         --          --          --           --       (1,486)
                                       --------    --------    --------    ---------    ---------
   Net income (loss) ...............   $   (446)   $   (395)   $     24    $   1,037    $   3,138
                                       ========    ========    ========    =========    =========
   Pro forma: (1)
     Net income per share ..........                                       $     .25    $     .39
     Weighted average shares
         outstanding ...............                                           7,037        8,718
   Historical:
     Net income (loss) per share ...   $   (.08)   $   (.07)   $     --    $     .17    $     .38
     Weighted average shares
       outstanding .................      5,625       5,625       6,200        6,200        8,300
</TABLE>


<TABLE>
<CAPTION>


                                                                 March 31,
                                              ----------------------------------------------------
                                              1993        1994        1995        1996        1997
                                              ----        ----        ----        ----        ----
                                                                       (In thousands)
<S>                                        <C>        <C>         <C>         <C>         <C>     
BALANCE SHEET DATA:
   Working capital .....................   $  (465)   $    769    $   (453)   $    316    $ 24,864
   Total assets ........................     1,761      29,152      37,288      58,905     107,473
   Long-term debt to related
     parties ...........................        --       6,928       7,000       7,000          --
   Redeemable preferred stock ..........        --      10,256      11,076      11,896          --
   Stockholders' equity (deficit) ......        (9)       (936)     (1,732)     (1,498)     42,528
</TABLE>


                                      19
<PAGE>   21

<TABLE>
<CAPTION>



                                                       Year Ended March 31,
                                              -------------------------------
                                              1994      1995    1996     1997
                                              ----      ----    ----     ----
                                                            (In thousands)
<S>                                            <C>       <C>       <C>      <C> 
SUPPLEMENTAL DATA: (2)
   Pharmacy network claims
     processed ..........................      816     1,527   9,375   26,579
   Mail pharmacy prescriptions
     filled .............................      228       383     536      677
   Estimated health plan
     members (at period end) ............    3,745     5,208   9,040   10,200
</TABLE>

----------------------
(1) Computed on the basis described in Note 2 of Notes to Consolidated
    Financial Statements. 
(2) This data has not been audited and is unavailable for
    fiscal year 1993.

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

OVERVIEW

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

     The Company has historically generated revenues from a number of sources
including its mail pharmacy, its retail pharmacy network and claims
adjudication services and its clinical services. In addition, during the fiscal
year ended March 31, 1996, the Company began to generate revenues from its
newly developed HBM services.

     The Company derives mail pharmacy revenues from the sale of
pharmaceuticals to members of health benefit plans sponsored by the Company's
customers. These revenues include ingredient costs plus a dispensing fee. In
1992, the Company established a retail pharmacy network which currently
consists of over 50,000 retail pharmacies nationwide, and began to provide
on-line claims adjudication services. The Company contracts directly with the
retail pharmacies in its national network and is "at-risk" for the payment for
drugs dispensed. In addition, the Company manages networks of pharmacies that
are under direct contract with certain of its customers. When the Company has
an independent obligation to pay its own network of retail pharmacy providers,
the Company includes as revenues payments from plan sponsors for the drug cost
and the claims processing fees. Payments made by the Company to its pharmacy
providers are recorded as cost of revenues. For those plan sponsors which have




                                      20
<PAGE>   22


established their own pharmacy network, the Company administers the plan
sponsors' network pharmacy contracts. The plan sponsors have the independent
obligation to fund payment to those pharmacies under contract and are "at-risk"
for the payment for drugs dispensed, and the Company records as revenues only
the claims processing fees. In 1993, the Company acquired Advance Clinical,
formerly Paradigm Pharmacy Management, Inc., a subsidiary of BCBS of Maryland,
and began to offer clinical services to its customers. The Company's clinical
services revenues have historically been derived primarily from direct rebate
and volume discounts from pharmaceutical manufacturers. Cost of revenues
includes product costs and other direct costs associated with the dispensing of
prescription drugs through the mail pharmacy, retail pharmacy network and
claims adjudication services and clinical services.


     The acquisition of Advance Clinical has provided the Company with access
to large managed care organizations which created an opportunity for the
Company to cross-sell its mail and claims processing services. In addition, the
Company has continued to add additional managed care accounts. In order to
accommodate the large volume and complex reporting requirements of its managed
care customers, the Company acquired a highly sophisticated, state-of-the-art
claims processing system, which management believes will accommodate volume
levels significantly higher than those currently maintained by the Company.

     In response to the growing demand among payors for comprehensive disease
management programs, the Company recently established its HBM services. The
Company has developed a comprehensive health care database, integrating its
customers' pharmacy claims with applicable medical and laboratory claims data,
in order to perform meaningful outcomes studies to develop disease management
programs. These programs have served as an additional source of revenue for the
Company in the years ended March 31,1996 and 1997, and management believes that
the Company will be able to cross-sell these and other services to its existing
customers.

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

     Except for the historical information contained herein, the discussion in
this Form 10-K contains certain forward-looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Form 10-K
should be read as being applicable to all related forward-looking statements
wherever they appear in this Form 10-K. The Company's actual results could
differ materially from those discussed here.



                                      21
<PAGE>   23




RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                        Year Ended March 31,
                                     ------------------------
                                     1995      1996      1997
                                     ----      ----      ----  
<S>                                  <C>       <C>       <C>   
STATEMENT OF OPERATIONS DATA:
   Revenues ......................   100.0%    100.0%    100.0%
   Cost of operations:
     Cost of revenues ............    93.7      94.0      95.7
     Selling, general and
       administrative expenses ...     5.4       4.9       2.9
                                     -----     -----     -----
          Total cost of operations    99.1      98.9      98.6
                                     -----     -----     -----
   Operating income ..............     0.9       1.1       1.4
   Interest income (expense), net     (0.9)     (0.3)      0.4
   Provision for income taxes ....    --        --         0.6
                                     -----     -----     -----
   Net income ....................     0.0%      0.8%      1.2%
                                     =====     =====     =====
</TABLE>

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996

     REVENUES. Revenues for the year ended March 31, 1997 ("fiscal year 1997")
increased by $126.2 million, or 101%, compared to revenues for the fiscal year
ended March 31, 1996 ("fiscal year 1996")..The increase in revenues resulted
from new contracts signed throughout the year with new customers. The number of
lives managed by the Company continued to increase in 1997 as new customers
were obtained and the Company's current clients continued to increase their
membership and utilization levels. New client contracts resulted from increased
marketing efforts and the expansion of the Company's sales and marketing
department. Contracts with new customers in 1997 generally include all products
offered by the Company including claims processing, mail and clinical.

     Revenues from claims processing increased $101.0 million compared to the
prior year. The increase resulted from new client lives and an increase in
utilization from existing clients. The increase in new lives resulted in an
increase in pharmacy claims processed from 9.4 million in the year ended March
31, 1996 to 26.6 million in the year ended March 31, 1997, a 183% increase.
Virtually all of the new 1997 customer contracts utilize the Company's pharmacy
network which has shifted a larger percentage of the Company's total revenues
to claims processing. Revenues from mail pharmacy services increased $16.2
million compared to the prior year. The increase resulted primarily from the
new member lives added during the year ended March 31, 1997. The increase in
new lives resulted in an increase in mail prescriptions dispensed from 536,000
in the year ended March 31, 1996 to 677,000 in the year ended March 31, 1997, a
26% increase. Revenues from clinical services increased $9.0 million compared
to 



                                      22
<PAGE>   24

the prior year. The increase resulted primarily from the new member lives
added and the additional claims processed during the year ended March 31, 1997
compared to the prior year.

     COST OF REVENUES. Cost of revenues for fiscal year 1997 increased by
$123.0 million, or 104%, compared to the prior fiscal year. This increase was
attributable primarily to the additional costs associated with the Company's
claims processing growth. As a percentage of revenues, cost of revenues
increased from 94% in fiscal year 1996 to 96% in fiscal year 1997. This
increase resulted primarily from the increase in the Company's claims
processing revenues generated by new customers utilizing the Company's pharmacy
network. In cases in which the Company has an independent obligation to pay its
network pharmacy providers, the Company includes payments from its plan
sponsors for these benefits as revenues and payments to its pharmacy providers
as cost of revenues.

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

     INTEREST INCOME AND INTEREST EXPENSE. Interest income, net of interest
expense, for fiscal year 1997 increased $1.5 million compared to fiscal year
1996. The increase resulted from cash management programs which utilized the
Company's short-term excess cash to generate interest income through investment
in money market funds and high grade commercial paper. In addition, the
Company's cash balance in fiscal year 1997 included the $10 million proceeds
from the June 1996 issuance of its Series B Preferred Stock and the $19.1
million proceeds from the October 1996 initial public offering. A portion of
the proceeds were used to retire the note payable to Whitney Subordinated Debt
Fund, L.P., an affiliate of J.H. Whitney & Co., the largest stockholder of the
Company (the "Whitney Note") and, as a result, interest expense decreased
$337,000.

     INCOME TAXES. The Company had income tax loss carryforwards available to
offset income generated for fiscal year 1996 and, as a result, incurred no
federal income tax expense. For fiscal year 1997 the Company recorded income
tax expense of $1.5 million resulting from fully utilizing its remaining net
operating loss carryforwards in fiscal year 1997.



                                      23

<PAGE>   25



FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

     REVENUES. Revenues for fiscal year 1996 increased by $34.0 million, or
37%, compared to revenues for the fiscal year ended March 31, 1995 ("fiscal
year 1995"). Approximately 39% of the increase was attributable to additional
sales of the Company's mail pharmacy services, resulting from a 40% increase in
the number of mail prescriptions dispensed. Approximately 40% of the increase
in revenues was attributable to a six-fold increase in the number of pharmacy
claims processed during the fiscal year. Approximately 21% of the increase in
revenues resulted from an increase in clinical services revenues derived from
formulary and disease management services.

     COST OF REVENUES. Cost of revenues for fiscal year 1996 increased by $32.3
million, or 38%, compared to the prior fiscal year. This increase was
attributable primarily to the expanded volume in the Company's mail pharmacy
and the additional costs associated with the Company's claims processing
growth. As a percentage of revenues, cost of revenues remained relatively
constant at approximately 94% for both fiscal year periods.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal year 1996 increased by $1.2 million, or 24%,
compared to fiscal year 1995. This increase was the result of the Company's
expansion of its 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 services. As a percentage of revenues, selling, general
and administrative expenses remained relatively constant at approximately 5%
for both fiscal year periods.

     INTEREST INCOME AND INTEREST EXPENSE. Interest expense, net of interest
income, for fiscal year 1996 declined by $437,000, or 56%, compared to fiscal
year 1995. The decline resulted from cash management programs which utilized
the Company's short-term excess cash to generate interest income through
investment in money market funds.

     INCOME TAXES (BENEFITS). The Company had income tax loss carryforwards as
of March 31, 1996 of approximately $1.9 million, and as a result, incurred no
federal income tax expense.



                                      24
<PAGE>   26




SELECTED QUARTERLY FINANCIAL RESULTS

     The following table represents unaudited selected quarterly statement of
operations data for each of the quarters indicated and, in the opinion of
management, includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data. The Company has
experienced fluctuations in revenue and operating results from quarter to
quarter and from year to year due to a combination of factors, including demand
for the Company's services and the size, timing of contract signings and
recognition of revenues from significant customer additions and losses. Future
quarterly results may fluctuate, depending on these and other factors. Results
of operations for any particular quarter are not necessarily indicative of
results of operations for any future quarters.

<TABLE>
<CAPTION>

                                                   Three Months Ended
                                     ------------------------------------------------
                                     Mar. 31   June 30   Sept. 30  Dec. 31    Mar. 31
                                       1996      1996      1996      1996      1997
                                     -------   -------   --------  -------    -------
                                                      (In thousands)
<S>                                  <C>       <C>       <C>       <C>       <C>    
STATEMENT OF OPERATIONS DATA:
   Revenues                          $37,313   $49,809   $58,019   $70,025   $73,709
   Cost of operations:
     Cost of revenues                 34,986    47,454    55,540    67,186    70,630
     Selling, general and adminis-
       trative expenses                1,719     1,714     1,781     1,890     1,924
                                     -------   -------   -------   -------   -------
       Total cost of operations       36,705    49,168    57,321    69,076    72,554
                                     -------   -------   -------   -------   -------
   Operating income                      608       641       698       949     1,155
   Interest income, net of expense         7        28       120       467       566
                                     -------   -------   -------   -------   -------
   Net income before taxes           $   615   $   669   $   818   $ 1,416   $ 1,721
                                     =======   =======   =======   =======   =======
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 1997 the Company had working capital of $24.9 million. The
increase in working capital at March 31, 1997 as compared to March 31, 1996
resulted primarily from two equity offerings completed in fiscal year 1997. In
June 1996, the Company received $10.0 million from the sale of its Series B
Preferred Stock in a private placement. In October 1996, the Company completed
an initial public offering of its Common Stock. The Company received net
proceeds of approximately $19.1 million, after deducting underwriting discount
and expenses. The Company used $7.0 million to repay the Whitney Note, and the
balance of the funds were invested in money market funds and high-grade
commercial paper.

     The Company's net cash provided by operating activities was $3.7 million,
$15.7 million and $15.4 million for the years ended March 31, 1995, 1996 and
1997, respectively. The significant increases in net cash provided by operating
activities were due primarily to the timing of receivables and payables
resulting from the Company's continued growth. Cash used in investing
activities was $2.2 million, $1.6 million and $2.9 million for the years ended
March 31, 1995,


                                      25
<PAGE>   27


1996 and 1997, respectively. Cash used in investing activities was used for
purchases of property, plant and equipment associated with growth and expansion
of the Company's facilities. For the year ended March 31, 1997, the Company
received $10.0 million from the sale of its Series B Preferred Stock and
approximately $19.1 million from the sale of Common Stock. Of the proceeds from
the sale of Common Stock, $7.0 million was used to retire debt.

     During fiscal year 1997, the Company's continued growth resulted in net
cash provided by operating activities of $15.4 million. Historically, the
Company has been able to fund its operations and continued growth through cash
from operations. During fiscal year 1997, the Company's operating cash flow
funded its capital expenditures of $2.9 million, and its short-term excess cash
was invested in money market funds and high grade commercial paper. The Company
anticipates its capital expenditures of approximately $6 million for the year
ending March 31, 1998 will primarily consist of additional enhancements to the
Company's claim processing systems, and further automation of the Company's
mail service facility. In addition, the Company has the opportunity to purchase
its mail service building which has previously been leased under a long-term
arrangement. The Company anticipates that cash from operations, combined with
the proceeds remaining from its initial public offering will be sufficient to
meet the Company's internal operating requirements and expansion programs,
including capital expenditures, for at least the next 18 months; however, the
Company expects that additional funds may be required in the future to
successfully continue its expansion and acquisition plans. The Company may be
required to raise additional funds through sales of its equity or debt
securities or seek financing from financial institutions. Currently, the
Company has no borrowings from financial institutions, and none of its assets
are pledged as collateral. There can be no assurance, however, that credit
financing will be available on terms that are favorable to the Company or, if
obtained, will be sufficient for the Company's expansion needs.

RECENT PRONOUNCEMENTS

     In October 1995, the Financial Accounting Standards Board issued Statement
123, "Accounting for Stock-Based Compensation" (SFAS 123). The Company has
adopted the provisions of SFAS 123 with respect to options granted to employees
through disclosure only, effective with the Company's fiscal year ending March
31, 1997. SFAS 123 also requires that all stock and warrants issued to
nonemployees be accounted for based upon the fair value of the consideration
received or the fair value of the equity instruments issued. During fiscal
years 1996 and 1997, the Company agreed to issue warrants to purchase shares of
its Common Stock to two customers contingent upon future expansion of member
lives. As of March 31, 1997, no stock was issued and no warrants were earned
under the agreements. In management's opinion, the fair value of the warrants
at the date of the agreements was not material and therefore had no material
impact on the Company's financial position or results of operations.

     In February 1997, the Financial Accounting Standards Board issued
Statement 128, "Earnings Per Share" (SFAS 128). SFAS 128 is effective for
financial statements for both interim and annual periods ending after December
31, 1997, with early application prohibited. The computation of fully diluted
earnings per share under SFAS 128 will not be significantly different than the
Company's historical earnings per share computation.


                                      26
<PAGE>   28


IMPACT OF INFLATION

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

YEAR 2000 ISSUES

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is found on pages F-1 through F-19
hereof.


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

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item will be incorporated by reference
from the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders to be filed with the Commission not later than 120 days following
the Company's fiscal year pursuant to Regulation 14A (the "Proxy Statement").


ITEM 11.  EXECUTIVE COMPENSATION

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


                                      27
<PAGE>   29


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. No reports on Form 8-K were filed during the
quarter ended March 31, 1997.
     (c) Exhibits Required by Item 601 of S-K: See index to exhibits on pages
29-31.




                                      28
<PAGE>   30





Exhibits and Financial Statement Schedules

<TABLE>
<CAPTION>



EXHIBIT NO.                         EXHIBITS
-----------                         --------

<S>           <C>                                                                 
3.1*     ---  Amended and Restated Certificate of Incorporation of the Company.

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

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

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

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

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

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

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

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

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

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

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

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

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

</TABLE>


                                      29
<PAGE>   31


<TABLE>
<CAPTION>



EXHIBIT NO.                EXHIBITS
-----------                --------

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

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

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

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

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

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

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

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

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

4.15*    ---  Incentive Stock Option Plan.

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

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

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

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

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

</TABLE>


                                      30
<PAGE>   32

<TABLE>
<CAPTION>


EXHIBIT NO.                EXHIBITS
-----------                --------

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

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

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

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

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

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

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

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

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

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

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

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

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

27**     ---  Financial Data Schedule.
</TABLE>

--------------
*    Previously filed in connection with the Company's Registration Statement
     on Form S-1 filed October 8, 1996 (No. 333-06931), and incorporated herein
     by reference.
**   Previously filed with the Company's Form 10-K for the year ended March
     31, 1997.



                                      31
<PAGE>   33






         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this amendment to be signed
on May 29,1998 on its behalf by the undersigned, thereunto duly authorized.

                                      ADVANCE PARADIGM, INC.



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

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

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dated indicated.

<TABLE>
<CAPTION>

         Signature                                   Title                                   Date
         ---------                                   -----                                   ----
<S>                                        <C>                                        <C> 
/s/ David D. Halbert                        Chairman of the Board, President              May 29, 1998
----------------------------------          and Chief Executive Officer                   ------
David D. Halbert                            (Principal Executive Officer)
                         



/s/ Jon S. Halbert*                         Executive Vice President, Chief               May 29, 1998
----------------------------------          Operating Officer and Director                ------
Jon S. Halbert                              



/s/ T. Danny Phillips*                      Senior Vice President, Chief                  May 29, 1998
----------------------------------          Financial Officer, Secretary and              ------
T. Danny Phillips                           Treasurer (Principal Financial
                                            and Accounting Officer)
</TABLE>


                                      32
<PAGE>   34

<TABLE>

<S>                                       <C>                                           <C> 
/s/ Peter M. Castleman*                     Director                                      May 29, 1998
----------------------------------                                                        ------
Peter M. Castleman



/s/ Rogers K. Coleman*                      Director                                      May 29, 1998
----------------------------------                                                        ------
Rogers K. Coleman, M.D.



/s/ Stephen L. Green*                       Director                                      May 29, 1998
----------------------------------                                                        ------
Stephen L. Green



/s/ Jeffrey R. Jay*                         Director                                      May 29, 1998
----------------------------------                                                        ------
Jeffrey R. Jay, M.D.



/s/ Kenneth J. Linde*                       Director                                      May 29, 1998
----------------------------------                                                        ------
Kenneth J. Linde



/s/ Michael D. Ware*                        Director                                      May 29, 1998
----------------------------------                                                        ------
Michael D. Ware

*By: /s/ David D. Halbert
     -----------------------------
         David D. Halbert
         Attorney in Fact
</TABLE>



                                      33

<PAGE>   35

                         INDEX TO FINANCIAL STATEMENTS

                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>


<S>                                                                                                         <C>
Report of Independent Public Accountants....................................................................F-2
Consolidated Balance Sheets--March 31, 1996 and 1997........................................................F-3
Consolidated Statements of Operations for the Years Ended March 31, 1995,
   1996 and 1997............................................................................................F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years ended
   March 31, 1995, 1996 and 1997............................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1995,
   1996 and 1997............................................................................................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, 1995, 1996 and 1997................................................................S-2

</TABLE>


                                      F-1

<PAGE>   36

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

     We have audited the accompanying consolidated balance sheets of Advance
Paradigm, Inc. (a Delaware corporation formerly known as Advance Pharmacy
Services, Inc.) and subsidiaries as of March 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended March 31, 1997. 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, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting principles.



                                                           ARTHUR ANDERSEN LLP

Dallas, Texas,
May 12, 1997


                                      F-2

<PAGE>   37

                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                       March 31,
                                                                            -----------------------------
                                                                                1996            1997
                                                                            ------------    -------------

<S>                                                                         <C>             <C>          

CURRENT ASSETS:
 Cash and cash equivalents                                                  $ 16,457,000    $  51,086,000
 Accounts receivable, net of allowance for doubtful accounts of
  $130,000 and $142,000, respectively                                         23,078,000       35,343,000
 Inventories                                                                   1,598,000        1,859,000
 Prepaid expenses and other                                                      449,000          426,000
                                                                            ------------    -------------
  Total current assets                                                        41,582,000       88,714,000

PROPERTY AND EQUIPMENT, net of accumulated depreciation
  and amortization of $1,935,000 and $3,292,000, respectively                  4,080,000        5,576,000
INTANGIBLE ASSETS, net of accumulated amortization of
  $808,000 and $1,154,000, respectively                                       13,045,000       12,699,000
OTHER ASSETS, net of accumulated amortization of $49,000
 and $0, respectively                                                            198,000          484,000
                                                                            ------------    -------------
  Total assets                                                              $ 58,905,000    $ 107,473,000
                                                                            ============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
 Accounts payable                                                           $ 39,000,000    $  59,782,000
 Accrued salaries and benefits                                                 1,283,000        1,991,000
 Income taxes payable                                                                 --          712,000
 Other accrued expenses                                                          934,000        1,365,000
 Current portion of other noncurrent liabilities                                  49,000               --
                                                                            ------------    -------------
  Total current liabilities                                                   41,266,000       63,850,000

NONCURRENT LIABILITIES:
 Long-term debt to related parties                                             7,000,000               --
 Deferred income taxes                                                                --          755,000
 Other noncurrent liabilities, less current portion                              241,000          340,000
                                                                            ------------    -------------
  Total liabilities                                                           48,507,000       64,945,000
                                                                            ------------    -------------


COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
 Series A cumulative convertible preferred stock, $.01 par value, 10,000
  shares authorized, issued and outstanding at
  March 31, 1996, converted in October 1996                                   11,896,000               --   
                                                                            ------------    -------------
STOCKHOLDERS' EQUITY (DEFICIT):
 Series B convertible preferred stock, $.01 par value; 5,000 shares
  authorized, 0 and 4,444 shares issued and outstanding
  at March 31,1996 and 1997, respectively                                             --               --   
  Common stock, $.01 par value; 25,000,000 shares authorized, 3,130,500 and
  7,800,817 shares issued and outstanding at
  March 31, 1996 and 1997, respectively                                               --           78,000
 Additional paid-in capital                                                    1,518,000       42,891,000
 Accumulated deficit                                                          (3,016,000)        (441,000)
                                                                            ------------    -------------
  Total stockholders' equity (deficit)                                        (1,498,000)      42,528,000
                                                                            ------------    -------------
  Total liabilities and stockholders' equity (deficit)                      $ 58,905,000    $ 107,473,000
                                                                            ============    =============
</TABLE>

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


                                      F-3
<PAGE>   38


                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                        Year Ended March 31,
                                         ---------------------------------------------
                                             1995             1996            1997
                                         ------------    -------------    ------------
<S>                                      <C>             <C>              <C>         
REVENUES                                 $ 91,306,000    $ 125,333,000    $251,562,000
                                         ------------    -------------    ------------

COST OF OPERATIONS:
   Cost of revenues                        85,532,000      117,788,000     240,810,000
   Selling, general and
     administrative expenses                4,963,000        6,158,000       7,309,000
                                         ------------    -------------    ------------
        Total cost of operations           90,495,000      123,946,000     248,119,000
                                         ------------    -------------    ------------
   Operating income                           811,000        1,387,000       3,443,000
INTEREST INCOME                                91,000          366,000       1,560,000
INTEREST EXPENSE                             (878,000)        (716,000)       (379,000)
                                         ------------    -------------    ------------
INCOME BEFORE INCOME TAXES                     24,000        1,037,000       4,624,000
PROVISION FOR INCOME TAXES                         --               --       1,486,000
                                         ------------    -------------    ------------
NET INCOME                               $     24,000    $   1,037,000    $  3,138,000
                                         ============    =============    ============

HISTORICAL:
   NET INCOME PER SHARE                  $         --    $        0.17    $       0.38
                                         ============    =============    ============
   WEIGHTED AVERAGE SHARES OUTSTANDING      6,200,187        6,200,187       8,300,049
                                         ============    =============    ============

HISTORICAL NET INCOME                    $     24,000    $   1,037,000    $  3,138,000
   PRO FORMA REDUCTION OF INTEREST
   EXPENSE ON DEBT RETIRED                                     707,000         299,000
                                                         -------------    ------------
PRO FORMA NET INCOME                                     $   1,744,000    $  3,437,000
                                                         =============    ============

PRO FORMA:
   NET INCOME PER SHARE                                  $        0.25    $       0.39
                                                         =============    ============
   WEIGHTED AVERAGE SHARES OUTSTANDING                       7,036,507       8,718,209
                                                         =============    ============


</TABLE>




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



                                      F-4
<PAGE>   39


                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

               FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>



                                                                   Series B Preferred
                                               Common Stock              Stock
                                        -----------------------    ------------------    Additional
                                         Number of                 Number of              Paid In       Accumulated
                                          Shares        Amount      Shares     Amount     Capital         Deficit          Total
                                        -----------    --------    ---------   ------   ------------    ------------    -----------
<S>                                        <C>         <C>              <C>        <C>         <C>       <C>             <C>       
BALANCE, March 31, 1994 .............     3,125,000    $     --           --   $   --   $  1,501,000    $ (2,437,000)   $  (936,000)
   Net income .......................            --          --           --       --             --          24,000         24,000
   Dividends and accretion on
     Series A Preferred Stock .......            --          --           --       --             --        (820,000)      (820,000)
                                        -----------    --------    ---------   ------   ------------    ------------    -----------

BALANCE, March 31, 1995 .............     3,125,000          --           --       --      1,501,000      (3,233,000)    (1,732,000)
   Net income .......................            --          --           --       --             --       1,037,000      1,037,000
   Dividends and accretion on
     Series A Preferred Stock .......            --          --           --       --             --        (820,000)      (820,000)
   Issuance of Common Stock
     in connection with the
     exercise of employee
     stock options ..................         5,500          --           --       --         17,000              --         17,000
                                        -----------    --------    ---------   ------   ------------    ------------    -----------

BALANCE, March 31, 1996 .............     3,130,500          --           --       --      1,518,000      (3,016,000)    (1,498,000)
   Net income .......................            --          --           --       --             --       3,138,000      3,138,000
   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
   Effect of stock split ............            --      31,000           --       --        (31,000)             --             --
   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 .............     7,800,817    $ 78,000        4,444   $   --   $ 42,891,000    $   (441,000)   $42,528,000
                                        ===========    ========    =========   ======   ============    ============    ===========

</TABLE>




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




                                      F-5
<PAGE>   40



                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                         Year Ended March 31,
                                                           --------------------------------------------
                                                               1995           1996             1997
                                                           ------------    ------------    ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                      <C>             <C>             <C>         
   Net income                                             $     24,000    $  1,037,000    $  3,138,000
   Adjustments to reconcile net income to net
     cash provided by operating activities--
         Depreciation and amortization                         969,000       1,313,000       1,704,000
         Noncash interest expense                              162,000              --              --
         Provision for doubtful accounts                        58,000          23,000          12,000
         Change in certain assets and liabilities--
             Accounts receivable                            (5,333,000)     (7,104,000)    (12,277,000)
             Inventories                                      (183,000)       (367,000)       (261,000)
             Prepaid expenses and other assets                (324,000)        (58,000)       (265,000)
             Accounts payable, accrued expenses
                and other noncurrent liabilities             8,285,000      20,809,000      23,387,000
                                                          ------------    ------------    ------------
             Net cash provided by operating activities
                                                             3,658,000      15,653,000      15,438,000
                                                          ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                      (2,245,000)     (1,594,000)     (2,853,000)
                                                          ------------    ------------    ------------
             Net cash used in investing activities          (2,245,000)     (1,594,000      (2,853,000)
                                                          ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from sale of preferred stock                        --              --      10,000,000
   Net proceeds from issuance of Common Stock                       --          17,000      19,147,000
   Payments on long-term obligations                          (245,000)       (244,000)     (6,950,000)
   Payment of preferred stock dividend                              --              --        (153,000)
                                                          ------------     -----------     -----------
             Net cash provided by (used in) financing
               activities                                     (245,000)       (227,000)     22,044,000
                                                          ------------    ------------     -----------

NET INCREASE IN CASH                                         1,168,000      13,832,000      34,629,000
CASH AND CASH EQUIVALENTS, beginning of year                 1,457,000       2,625,000      16,457,000
                                                          ------------    ------------     -----------
CASH AND CASH EQUIVALENTS, end of year                    $  2,625,000    $ 16,457,000    $ 51,086,000
                                                          ============    ============    ============
</TABLE>


SUPPLEMENTARY INFORMATION:

   Cash paid for interest totaled approximately $716,000, $716,000 and $379,000
     in 1995, 1996 and 1997, respectively.

   The Company made no income tax payments in 1995 and 1996.

   The Company made income tax payments of $19,000 in 1997.






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


                                      F-6
<PAGE>   41


                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   GENERAL:

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

     API was formed when AHC contributed its wholly owned subsidiaries Advance
Mail and Advance Data subject to a $500,000 note payable in exchange for all of
the then outstanding shares of API's Common Stock. The transaction was
accounted for as a reorganization of entities under common control in a manner
similar to a pooling of interests. Accordingly, the accounts of Advance Mail
and Advance Data are based on historical cost, and operations of Advance Mail
and Advance Data are included from the date of their formation by AHC. In
December 1993, API acquired all of the outstanding stock of Advance Clinical in
a business combination accounted for as a purchase.

     In October 1996, AHC was merged with and into the Company. This merger was
consummated as a means of simplifying the corporate structure of the Company
and was intended to qualify as a tax free reorganization (see Note 9).

     The Company offers an integrated program of pharmacy benefit management.
Clinical, rebate and formulary services are provided through Advance Clinical.
Claims processing for prescription drugs purchased at the Company's network of
retail pharmacies is provided through Advance Data. The dispensing of
prescription drugs through the mail is provided through Advance Mail.

     In the year ended March 31, 1996, the Company began marketing health
benefit management services ("HBM Services") to certain health plans,
pharmaceutical manufacturers, and other research and managed care
organizations, and began programs for disease management services with selected
customers.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Consolidation

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

                                      F-7
<PAGE>   42



                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

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.

Inventories

     Inventories consist of 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 ten years. Amortization of
leasehold improvements is computed over the lives of the assets or the lease
terms, whichever is shorter. Major renewals and betterments are added to the
property and equipment accounts while costs of repairs and maintenance are
charged to operating expenses in the period incurred. The cost of assets
retired, sold or otherwise disposed of and the applicable accumulated
depreciation are removed from the accounts, and the resultant gain or loss, if
any, is reflected in the statement of operations.

Intangible Assets

     Intangible assets represent the excess of cost over the fair value of
tangible net assets acquired (goodwill) in connection with the acquisition of
Advance Clinical. Goodwill is amortized on a straight-line basis over 40 years.
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining balance of goodwill may not be recoverable
or the useful life may be impaired. Amortization expense was $346,000 in the
years ended March 31, 1995, 1996 and 1997, respectively.

                                      F-8
<PAGE>   43



                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

Impairment of Long-Lived Assets

     The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets, including
goodwill, may warrant revision or that the remaining balance of an asset may
not be recoverable. The assessment of possible impairment is based on the
ability to recover the carrying amount of the asset from expected future cash
flows on an undiscounted basis. If the assessment indicates that the carrying
amount of the asset exceeds the undiscounted cash flows, 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.

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.

Revenue Recognition

     Revenues from the dispensing of pharmaceuticals from the Company's mail
service pharmacy are recognized when each prescription is shipped. Revenue 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. Clinical, formulary, rebate and disease management
service revenues are recognized as the services are performed

                                      F-9
<PAGE>   44



                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

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

Federal Income Taxes

     Prior to the formation of API in July 1993, Advance Mail and Advance Data
were included in the consolidated tax return of AHC. For activities subsequent
to the formation of API, the Company has filed consolidated federal income tax
returns separate from AHC. The Company has calculated its tax provision on a
stand-alone basis for all reported periods.


Net Income Per Share

     Pro forma net income per share gives effect to (i) the conversion of the
redeemable Series A preferred stock to Common Stock, (ii) the issuance of
836,320 shares of Common Stock in the Company's October 1996 initial public
offering (the "Offering"), the net proceeds of which were used to retire the
$7.0 million note payable to Whitney Subordinated Debt Fund, L.P., (iii) a
reduction of interest expense by the amount of interest on the $7.0 million
note payable, and (iv) the impact to shares and options outstanding of the
merger of AHC with and into API (see Note 9). As required by the Securities
Exchange Commission (the "Commission") rules, all warrants, options, and shares
issued during the year immediately preceding the initial public offering are
assumed to be outstanding for purposes of calculating pro forma net income per
share. The Company's Series B Preferred Stock is considered to be a common
stock equivalent and is included in the weighted average shares outstanding for
the year ended March 31, 1997.

     Historical net income per share gives effect to the conversion of the
redeemable Series A preferred stock to Common Stock and the impact to shares
and options outstanding of the merger of AHC with and into API. Net income per
share is computed using the weighted average number of common and common
equivalent shares outstanding during the year which include stock options and
warrants. As the effect of potentially dilutive securities was antidilutive,
there was no difference between primary and fully diluted net income per share.

                                     F-10
<PAGE>   45




                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


   In February 1997, the Financial Accounting Standards Board issued Statement
128, "Earnings Per Share" (SFAS 128). SFAS 128 is effective for financial
statements for both interim and annual periods ending after December 31, 1997,
with early application prohibited. The computation of fully diluted earnings
per share under SFAS 128 will not be significantly different than the Company's
historical earnings per share computation.

Reclassification

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


3. PROPERTY AND EQUIPMENT:

     Property and equipment consisted of the following:
<TABLE>
<CAPTION>

                                                           March 31,
                                                  --------------------------
                                                      1996           1997
                                                  -----------    -----------

<S>                                               <C>            <C>        
Machinery and equipment .......................   $   709,000    $   834,000
Computer equipment and software ...............     3,963,000      6,232,000
Furniture and equipment .......................       924,000      1,071,000
Leasehold improvements ........................       419,000        731,000
                                                  -----------    -----------
                                                    6,015,000      8,868,000
Less--Accumulated depreciation and amortization    (1,935,000)    (3,292,000)
                                                  -----------    -----------
                                                  $ 4,080,000    $ 5,576,000
                                                  ===========    ===========
</TABLE>


4.   DEBT:

     Long-term debt at March 31, 1996, consisted of a balance due under a
$7,000,000 Note and Warrant Purchase Agreement (the "Agreement") dated December
8, 1993. The Agreement obligated the Company to prepay the indebtedness,
without penalty or premium, upon the consummation of a public offering of any
of the Company's securities pursuant to a registration statement filed with the
Commission. The balance due was paid during the year ended March 31, 1997.

     In connection with the Agreement, the Company granted the holder of the
note warrants to purchase 336,500 shares of the Company's Common Stock (see
Note 9). The warrants are exercisable for a period of 10 years.

                                     F-11
<PAGE>   46



                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



5.   OTHER NONCURRENT LIABILITIES:

     Other noncurrent liabilities consisted of the following:
<TABLE>
<CAPTION>

                                                 March 31,
                                           ---------------------
                                              1996        1997
                                           ---------    --------
<S>                                        <C>          <C>     
Capital lease obligation ...............   $  49,000    $     --
Other liabilities ......................     241,000     340,000
                                           ---------    --------
                                             290,000     340,000
Less--Current portion ..................     (49,000)         --
                                           ---------    --------
                                           $ 241,000    $340,000
                                           =========    ========
</TABLE>

     The Company's capital lease terminated in March 1997. Other liabilities is
comprised of deposits held for the benefit of certain customers in connection
with pharmacy benefit contracts.


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, 1997, as follows:
<TABLE>
<CAPTION>

<S>                                                                    <C>
   Years Ending                                                         Operating
      March 31,                                                            Leases

       1998...................................................         $2,393,000
       1999...................................................          2,228,000
       2000...................................................          1,847,000
       2001...................................................            560,000
       2002...................................................             81,000
                                                                       ----------
            Total minimum lease payments......................         $7,109,000
                                                                       ==========
</TABLE>

Total rent expense incurred in the years ended March 31, 1995, 1996 and 1997
was $714,000, $1,135,000 and $2,204,000, respectively.

                                     F-12
<PAGE>   47




                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



7.   COMMITMENTS AND CONTINGENCIES:

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

     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 existing noncompliance will not have a
material adverse effect on the results of operations or financial condition of
the Company.


8.   CONCENTRATION OF BUSINESS:


     Two customers accounted for approximately 18% and 14%, respectively, of
the Company's revenues for the year ended March 31, 1997. A different customer
accounted for approximately 27% and 18% of the Company's revenues for the years
ended March 31, 1995, and 1996, respectively. No other customer accounted for
over 10% of the Company's revenues in fiscal years 1995, 1996 or 1997.

9.   STOCK TRANSACTIONS:

Series B Preferred Stock

     On June 25, 1996, the Company issued a total of 4,444 shares of $.01 par
value, Series B convertible preferred stock ("Series B Preferred Stock") to a
customer at a price of $2,250 per share. Shares of the Series B Preferred Stock
may be converted by the holder into 250 fully-paid and non-assessable shares of
Common Stock. Holders of the Series B Preferred Stock are not entitled to vote
on any matter. Holders of the Series B Preferred Stock are entitled to receive,
out of funds legally available therefor, cumulative dividends, calculated
without compounding, equal to $45.00 per share per annum. Such cumulative
dividends accrue and accumulate from the date of issuance and are payable on
March 31 of each year. Furthermore, holders of the Series B

                                     F-13
<PAGE>   48




                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9. STOCK TRANSACTIONS: (CONTINUED)

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

Common Stock

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

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

                                     F-14
<PAGE>   49



                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



9. STOCK TRANSACTIONS: (CONTINUED)

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

     The Common Stock outstanding as of March 31, 1997 resulted from the
following transactions:
<TABLE>
<CAPTION>

<S>                                                                                         <C>      
     Shares outstanding after the Merger........................................            2,903,750
     Shares sold in the offering................................................            2,397,067
     Shares issued from the conversion of Series A Preferred Stock..............            2,500,000
                                                                                            ---------
                                                                                            7,800,817
                                                                                            =========
</TABLE>

     The Company has 3,130,500 and 7,800,817 shares of Common Stock issued and
outstanding at March 31, 1996 and 1997, respectively. The Company has reserved
shares of Common Stock at March 31, 1997, for the following:
<TABLE>
<CAPTION>

<S>                                                                                         <C>      
     Conversion of Series B Preferred Stock ....................................            1,111,111
     Exercise of stock options .................................................            2,037,750
     Exercise of warrants ......................................................            1,025,500
                                                                                            ---------
                                                                                            4,174,361
                                                                                            =========
</TABLE>


                                     F-15
<PAGE>   50



                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



9. STOCK TRANSACTIONS: (CONTINUED)

     During the year ended March 31, 1994, the Company issued warrants to
purchase 336,500 and 56,250 shares of its Common Stock at prices per share of
$4.00 and $6.00, respectively. During the year ended March 31, 1997, the
Company agreed to issue to a customer warrants to purchase 84,500 shares of its
Common Stock at a price of $8.10 per share. During the years ended March 31,
1996 and 1997, the Company agreed to issue warrants to purchase 548,250 shares
of its Common Stock at prices ranging from $8.10 to $11.00 per share to two
customers contingent upon future expansion of member lives. As of March 31,
1997, no warrants have been earned or issued. In management's opinion, the fair
value of the warrants at the date of the agreements was not material.

     The Company accounted for these warrant agreements under the provisions of
FASB 123 and the related 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 should 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.

     Subsequent to November 20, 1997, the Company will follow the guidance of
EITF 96-18, under which the measurement date will be 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.

10. STOCK OPTION PLAN:

     During 1993, the Board of Directors and the stockholders of the Company
adopted the 1993 Incentive Stock Option Plan and the Incentive Stock Option
Plan (the "Plans"), which provide for the granting of qualified stock options
and incentive options to officers and key 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, 1997, the number of
shares of Common Stock issuable under the Plans may not exceed 2,037,750
shares. The Company has reserved 2,037,750 shares of Common Stock for such
issuance. The Plans are administered by a compensation committee appointed by
the Board of Directors of the Company.

                                     F-16
<PAGE>   51




                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10. STOCK OPTION PLAN:  (CONTINUED)

     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, 1997, 632,850 options were vested at exercise prices of $.65 to
$19.75 per share.

     In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123
establishes a fair value-based method of accounting for stock-based
compensation. The Company has decided 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>

                                               1995                          1996                            1997
                                     ----------------------------------------------------------------------------------------
                                        Shares       Wtd. Avg.         Shares      Wtd. Avg.          Shares       Wtd. Avg.
                                                     Ex. Price                     Ex. Price                       Ex. Price
                                     ----------------------------------------------------------------------------------------

<S>                                    <C>           <C>            <C>             <C>            <C>             <C>        
Outstanding at beginning of year       636,750      $      3.28         783,500    $      7.80         810,500    $      5.15
Granted                                146,750            27.38         195,500          12.82         445,000          10.34
Transferred from AHC                        --               --              --             --         229,750           1.12
Exercised                                   --               --          (5,500)          3.20          (3,000)          3.20
Canceled                                    --               --        (163,000)         27.12         (24,500)         10.75
                                      --------      -----------        --------    -----------       ---------    -----------
Outstanding at end of year             783,500             7.80         810,500           5.15       1,457,750           6.02
                                      ========      ===========        ========    ===========       =========    ===========
Exercisable at end of year             127,500             3.28         276,500           5.84         632,850           2.95
Price range                       $3.20 to $30.00                  $3.20 to $11.00                 $.65 to $19.75
Weighted average fair value
   of options granted              $     --                            $   3.88                       $   3.31

</TABLE>

                                     F-17

<PAGE>   52




                    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
1,457,750 options outstanding as of March 31, 1997.

<TABLE>
<CAPTION>

                                       Options Outstanding                    Options Exercisable
                                       ----------------------------------  -------------------------------            
                                            Weighted        Wtd. Avg.                         Weighted
                                         Avg. Exercise      Contractual                     Avg. Exercise
<S>                          <C>             <C>            <C>               <C>             <C>
Exercise Price Range          Shares         Price          Life (yrs.)       Shares           Price
----------------------------------------------------------------------------------------------------------

$   .65     to  $  2.71         229,750    $     1.12          4.1            229,750          $ 1.12
$   3.20    to  $  4.80         610,000    $     3.29          6.5            366,000          $ 3.29
$   9.00    to  $  12.50        608,000    $    10.37          7.1             37,100          $10.97
$   18.75   to  $  19.75         10,000    $    19.25          9.8                 --              --

</TABLE>

     The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average ranges of assumptions for the years ended March 31, 1996 and 1997,
respectively: risk-free interest rates of 4.8% to 5.0%; expected lives of three
to five years; expected volatility of 30% to 50%. The Company continues to
account for stock based compensation under APB No. 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
earnings per share would have been reduced to the following pro forma amounts:


<TABLE>
<CAPTION>
                                                                1996                              1997
                                                                ----                              ----
<S>                                                           <C>                               <C>
Net income:
  As reported                                                 $1,037,000                       $3,138,000
  Pro forma                                                    1,021,000                        2,977,000

Historical net income per share:
  As reported                                                      $0.17                            $0.38
  Pro forma                                                         0.16                             0.36

</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>   53




                    ADVANCE PARADIGM, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



11. 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. Compensation expense associated with the Company's plan
amounted to approximately $50,000, $102,000 and $129,000 for the years ended
March 31, 1995, 1996 and 1997, respectively. The Company is required to
contribute at least 50% of the first 6% of salary deferral contributed by each
participant.


12. INCOME TAXES:

     The provision for income taxes for the year ended March 31, 1997 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>

                               1995         1996          1997
                             --------    ---------    -----------

<S>                          <C>         <C>          <C>        
Tax at U.S. federal          $  8,000    $ 353,000    $ 1,572,000
  income tax rate
Benefit of operating          (16,000)    (382,000)       (89,000)
  loss carryforwards
Other, net                      8,000       29,000          3,000
                             --------    ---------    -----------
Provision for income taxes   $     --    $      --    $ 1,486,000
                             ========    =========    ===========

</TABLE>

     Of the $1,486,000 provision for income taxes in 1997, $755,000 represents
deferred income taxes, $19,000 has been paid in the current year, with the
remainder of $712,000 currently due.

                                     F-19
<PAGE>   54



                    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,
                                          1996       Changes         1997
                                        ---------    ---------     --------
<S>                                     <C>          <C>          <C>      

Gross deferred tax asset:
  Net operating loss carryforwards...   $ 652,000    $(652,000)   $      --
  Other accruals ....................     142,000       (3,000)     139,000
  Other .............................      44,000        4,000       48,000
                                        ---------    ---------     --------
                                          838,000     (651,000)     187,000
Gross deferred tax liability:
  Amortization of goodwill ..........    (458,000)    (196,000)    (654,000)
  Depreciation ......................    (193,000)     (95,000)    (288,000)
                                        ---------    ---------    ---------
                                         (651,000)    (291,000)    (942,000)

  Valuation allowance ...............    (187,000)     187,000           --
                                        ---------    ---------    ---------
  Net deferred tax liability ........   $      --    $(755,000)   $(755,000)
                                        =========    =========    =========
</TABLE>

                                     F-20


<PAGE>   55
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULES


     We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Advance Paradigm, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon
dated May 12, 1997. Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. Schedule II is presented for purposes of
complying with the CommissionOs 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.




                                          /s/ ARTHUR ANDERSEN LLP


Dallas, Texas
May 12, 1997



                                      S-1


<PAGE>   56









                             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, 1995:
     Allowance for doubtful accounts receivable .......   $ 91,000     $58,000     $ (8,000)      $141,000

Year ended March 31, 1996:
     Allowance for doubtful accounts receivable .......   $141,000     $23,000     $(34,000)      $130,000

Year ended March 31, 1997:
     Allowance for doubtful accounts receivable .......   $130,000     $12,000     $     --       $142,000

</TABLE>



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



                                      S-2