ADVANCE PARADIGM INC, S-1, 1996-06-26

ADVANCE PARADIGM INC
S-1, 1996-06-26

Previous: TRAVIS BOATS & MOTORS INC, POS AM, 1996-06-26

Next: PRECISION RESPONSE CORP, 8-A12G, 1996-06-26

<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1996.

REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
ADVANCE PARADIGM, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 8099 75-2493381
(State or other jurisdiction (Primary standard industrial (I.R.S. Employer
of classification code number) Identification
incorporation or organization) No.)
</TABLE>

545 EAST JOHN CARPENTER FREEWAY
SUITE 1900
IRVING, TEXAS 75062
TELEPHONE: (214) 830-6199
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

DAVID D. HALBERT
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
545 EAST JOHN CARPENTER FREEWAY
SUITE 1900
IRVING, TEXAS 75062
TELEPHONE: (214) 830-6199
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------

COPIES TO:

<TABLE>
<S> <C>
J. KENNETH MENGES, JR., P.C. CARMELO M. GORDIAN
AKIN, GUMP, STRAUSS, HAUER & FELD, S. MICHAEL DUNN
L.L.P.
SUITE 4100 BROBECK, PHLEGER & HARRISON LLP
1700 PACIFIC AVENUE 301 CONGRESS AVENUE, SUITE 1200
DALLAS, TX 75201-4618 AUSTIN, TX 78701
(214) 969-2800 (512) 477-5495
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
-------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) PER SHARE (2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value................ Shares $ $34,500,000 $11,897
<FN>
(1) Includes shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
</TABLE>

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ADVANCE PARADIGM, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K

<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION OR CAPTION IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus....................... Outside Front Cover Page

2. Inside Front and Outside Back Cover Pages of
Prospectus........................................... Inside Front Cover Page

3. Summary Information and Risk Factors................. Prospectus Summary; The Company; Risk Factors

4. Use of Proceeds...................................... Use of Proceeds

5. Determination of Offering Price...................... Outside Front Cover Page; Underwriters

6. Dilution............................................. Dilution

7. Selling Security Holders............................. Principal and Selling Stockholders

8. Plan of Distribution................................. Outside Front Cover Page; Underwriters

9. Description of Securities to be Registered........... Description of Capital Stock

10. Interests of Named Experts and Counsel............... Legal Matters; Experts

11. Information with Respect to the Registrant........... Prospectus Summary; The Company; Risk Factors;
Dividend Policy; Selected Consolidated Financial
Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Certain Transactions; Principal
and Selling Stockholders; Description of Capital
Stock; Shares Eligible for Future Sale; Consolidated
Financial Statements

12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 26, 1996

PROSPECTUS

[LOGO]

COMMON STOCK

Of the shares of Common Stock offered hereby, shares are being sold
by the Company and shares are being sold by the Selling Stockholders. The
Company will not receive any proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders."

Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
Application has been made to have the Common Stock approved for quotation on the
Nasdaq National Market under the symbol ADVP.
--------------

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON
PAGE 5.
-------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total(3)...................... $ $ $ $
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Before deducting expenses payable by the Company estimated at $500,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public set forth above. If all
such shares are purchased, the total Price to Public, Underwriting Discount
and Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
--------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, receipt and acceptance by them, and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for the shares will be available
for delivery on or about , 1996, at the offices of the agent of
Hambrecht & Quist LLC in New York, New York.

HAMBRECHT & QUIST

MONTGOMERY SECURITIES

J.P. MORGAN & CO.

, 1996
<PAGE>
ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. This Prospectus, which constitutes part of the Registration
Statement, omits certain of the information contained in the Registration
Statement and the exhibits and schedules thereto on file with the Commission
pursuant to the Securities Act and the rules and regulations of the Commission
thereunder. The Registration Statement, including exhibits and schedules
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at the Commission's regional offices at 7 World
Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and copies may be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. Such documents may also be obtained through
the Web Site maintained by the Commission at http://www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference.

The Company intends to furnish its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing consolidated unaudited financial information.

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

"Advance Rx-Registered Trademark-" and "ApotheQuery-Registered Trademark-"
are registered trademarks of the Company. All other trademarks and trade names
referred to in this Prospectus are the property of their respective owners.

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.

THE COMPANY

Advance ParadigM, Inc. (the "Company") is a leading independent provider of
pharmacy benefit management ("PBM") services to health benefit plan sponsors,
with over nine 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. 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. This encourages
physician and member conformance, improves compliance with recognized standards
and, in turn, improves member health while reducing cost of care.

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. The Company
administers a pharmacy network that includes over 46,000 retail pharmacies
throughout the United States. In 1994, in 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 as a
result, 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 in order to
provide a centralized care management alternative for its customers.

It is currently estimated that annual outpatient pharmaceutical expenditures
account for approximately 7% or $70 billion, of the $1 trillion health care
market, and that third-party prescriptions managed by PBMs represent a
significantly increasing proportion of this amount. In response to escalating
health care costs, cost containment efforts 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. In addition, there is rapidly growing demand among payors for
comprehensive disease management programs as cost containment becomes more
dependent on improvements in the quality of care. According to industry sources,
approximately 77% of large employers said they would likely adopt some form of
disease management program over the next two years. 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 Company believes its clinical expertise and information systems combined
with its PBM services provide a competitive advantage in the evolving market for
HBM services. The Company's strategy is to maintain its position as a leading
independent provider of PBM services and expand its presence as a provider of
HBM services by (i) expanding its core PBM customer base, (ii) expanding its HBM
services, (iii) pursuing strategic acquisitions and (iv) continuing to establish
strategic relationships with its major customers and suppliers.

3
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company............................ shares
Common Stock offered by the Selling Stockholders............... shares
Common Stock to be outstanding after the Offering.............. shares(1)
Use of proceeds................................................ For retirement of debt, capital expenditures,
possible acquisitions, working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol......................... ADVP
</TABLE>

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

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................................................... $ 23,372 $ 65,591 $ 87,722
Cost of revenues................................................................... 21,014 59,817 80,177
Selling, general and administrative expenses....................................... 2,330 4,963 6,158
Operating income................................................................... 28 811 1,387
Net income (loss).................................................................. $ (395) $ 24 $ 1,037
Pro forma:(2)
Net income per share............................................................. $ .16
Weighted average shares outstanding.............................................. 6,305
SUPPLEMENTAL DATA:(3)
Pharmacy network claims processed.................................................. 816 1,527 9,375
Mail pharmacy prescriptions filled................................................. 228 383 536
Estimated health plan members (at period end)...................................... 3,745 5,208 9,040
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA (4) AS ADJUSTED (5)
--------- ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................ $ 316 $ 10,316 $
Total assets........................................................... 57,681 67,681
Long-term debt to related parties...................................... 7,000 7,000 --
Series A redeemable preferred stock.................................... 11,896 --
Stockholders' equity (deficit)......................................... (1,498) 20,398
</TABLE>

- ------------------------------
(1) Excludes (i) 810,500 shares of Common Stock reserved for future issuance
pursuant to options outstanding under the Company's stock option plans with
a weighted average exercise price of $5.10 per share and (ii) 392,750 shares
of Common Stock underlying outstanding warrants with a weighted average
exercise price of $4.29 per share. See "Management--Stock Option Plans" and
"Description of Capital Stock--Warrants to Purchase Common Stock."
(2) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
(3) This data has not been audited.
(4) Gives effect to (i) the issuance of the Series B Preferred Stock and (ii)
the automatic conversion of each share of the Series A Preferred Stock into
250 shares of Common Stock immediately prior to the closing of this
Offering.
(5) Adjusted to give effect to the sale of Common Stock offered hereby at an
assumed initial public offering price of $ , and the application of the
net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
------------------------------
EXCEPT AS OTHERWISE NOTED HEREIN, ALL INFORMATION IN THIS PROSPECTUS (I)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) REFLECTS A
250-FOR-ONE STOCK SPLIT OF THE COMMON STOCK, PAR VALUE $.01 PER SHARE, OF THE
COMPANY (THE "COMMON STOCK") (AND A CORRESPONDING ADJUSTMENT IN THE CONVERSION
RATES OF THE SERIES A PREFERRED STOCK, PAR VALUE $.01 PER SHARE (THE "SERIES A
PREFERRED STOCK") AND THE SERIES B PREFERRED STOCK, PAR VALUE $.01 PER SHARE
(THE "SERIES B PREFERRED STOCK", AND TOGETHER WITH THE SERIES A PREFERRED STOCK,
THE "PREFERRED STOCK"), TO BE EFFECTED PRIOR TO THE CLOSING OF THIS OFFERING,
AND (III) REFLECTS THE CONVERSION OF ALL OF THE COMPANY'S OUTSTANDING SHARES OF
SERIES A PREFERRED STOCK INTO SHARES OF COMMON STOCK, WHICH WILL OCCUR
IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING. SEE "CAPITALIZATION,"
"DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."

4
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS.

LIMITED OPERATING HISTORY; RECENT LOSSES. The Company has a limited
operating history, as its predecessors began offering mail pharmacy services in
1987, clinical and formulary management services in 1991 and retail pharmacy
network and claims adjudication services in 1992. Through fiscal year 1994, the
Company incurred net operating losses. Although the Company was profitable in
fiscal years 1995 and 1996, there can be no assurance that such profitability
will continue in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

PRICE EROSION. Over the last several years, the PBM industry has
experienced significant erosion in the reimbursement for services. During 1994
and 1995, PBMs affiliated with pharmaceutical companies began to aggressively
price their services, thereby exacerbating the decreasing margins for the
industry. There can be no assurance that price erosion will not continue or that
the Company can adequately respond to such price erosion. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

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
have an adverse impact on the Company's stock price. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

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

EFFECTS OF CERTAIN PRICING AND REBATE LITIGATION. Groups of retail
pharmacies have filed several lawsuits against drug manufacturers and certain
PBMs in federal and state court challenging certain drug pricing practices that
they allege violate state and federal antitrust laws. The suits allege, among
other things, that certain drug manufacturers have offered, and certain PBMs
have accepted, discounts and rebates on purchases of drugs in violation of
federal antitrust laws. The federal judge overseeing the litigation recently
approved a $351 million settlement agreed to by the groups of retail pharmacies
and 11 drug manufacturers. Under the settlement, the drug manufacturers must
make the same discounts available to any institution, whether a managed care
group or a retail pharmacy, provided that such institution can cause market
share increases. The judge's decision does not affect the retail pharmacies'
continuing lawsuits against several other drug manufacturers who opted not to be
included in the settlement. This settlement or an adverse outcome in one or more
of these cases may result in drug manufacturers increasing the price of drugs
for companies such as the Company or the reduction or termination of drug rebate
programs. Although the Company and most of its competitors

5
<PAGE>
have not been named as a party in any such lawsuits, there can be no assurance
that in the future the Company will not be named as a defendant in these or
similar lawsuits challenging pricing, rebates or other aspects of the Company's
business.

MANAGEMENT OF GROWTH. The Company's business has grown rapidly in the last
three years, with total revenues increasing approximately 275% from $23.4
million in fiscal year 1994 to $87.7 million in fiscal year 1996. The Company's
recent expansion has resulted in substantial growth in the number of its
employees (from 117 at March 31, 1994 to 282 at March 31, 1996), 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "Management--Executive
Officers and Directors."

DEPENDENCE ON CERTAIN KEY CUSTOMERS. The Company depends on a limited
number of large customers for a significant portion of its consolidated
revenues. During the fiscal year ended March 31, 1996, the Company's two largest
customers, Blue Cross & Blue Shield of Texas, Inc. ("BCBS of Texas") and United
Insurance Company, Inc., accounted for approximately 11% and 16%, respectively,
of the Company's consolidated revenues. During this period, the Company's five
largest customers accounted for approximately 48% of the Company's revenues.
Loss of the Company's accounts with BCBS of Texas or United Insurance Company,
Inc., 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 REVENUE. A significant portion of the Company's
consolidated revenues is attributable to its arrangements with drug
manufacturers relating to volume-based rebate payments as well as fees 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. See
"Business-- Services--Pharmaceutical Benefit Management." 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. See
"--Effects of Certain Pricing and Rebate Litigation." 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 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

6
<PAGE>
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. See "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 is increasing
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 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. See "Business--Strategy."

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. The Company has entered into an employment
agreement with each of Drs. Filipek and Wright and Messrs. Sattler and
Cinquegrana. See "Management--Employment Agreements."

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 boards 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

7
<PAGE>
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 affect on the Company's business,
operating results and financial condition. See "Business--Government
Regulation."

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 programs may contain proposals to increase
government 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-driven 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,
Advance Health Care will merge with and into the Company, with the Company as
the surviving corporation (the "Merger"). Although the Merger will be structured
to be 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.

NO PRIOR PUBLIC MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE;
POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this Offering, there has been no
public market for the Company's Common Stock, and there can be no assurance that
following this Offering an active trading market will develop or be sustained.
The initial public offering price will be determined by negotiations between the
Company and the Representatives of the Underwriters. For a description of the
factors considered in determining the initial public offering price, see
"Underwriting." In addition, the stock market historically has experienced
volatility which has particularly affected the market prices of securities of
many companies in the health care industry.

ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS AND SERIES B PREFERRED
STOCK. Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") and Bylaws, certain sections of the
Delaware General Corporation Law, the ability of the Board of Directors to issue
shares of Preferred Stock and to establish the voting rights, preferences and
other terms thereof without further action by the stockholders, the division of
the Board of Directors into three classes and the voting terms of the Series B
Preferred Stock may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the Board of Directors and also could
delay or frustrate the removal of incumbent directors, even if such takeover or
removal would be beneficial to stockholders. These provisions also could
discourage or make

8
<PAGE>
more difficult a merger, tender offer or proxy contest, even if such events
would be beneficial to the interests of stockholders. The Delaware General
Corporation Law imposes restrictions upon certain acquirors (including their
affiliates and associates) of 15% or more of the Company's Common Stock. See
"Management--Board of Directors and Committees of the Board" and "Description of
Capital Stock--Preferred Stock."

SHARES ELIGIBLE FOR FUTURE SALE. Future sales of Common Stock in the public
market could adversely affect the prevailing market price of the Common Stock.
Of the shares of Common Stock outstanding following completion of this
Offering, the shares being sold hereby have been registered under the
Securities Act, and will be freely tradeable without restriction or registration
under the Securities Act, except for shares held by "affiliates" of the Company.
The remaining shares of Common Stock currently outstanding were issued and
sold by the Company in private transactions and may be publicly sold only if
registered under the Securities Act or sold in accordance with an exemption from
registration such as Rule 144 under the Securities Act. Beginning on ,
upon expiration of 180-day lock-up agreements entered into in connection with
this Offering, all of such shares of restricted Common Stock will be eligible
for sale. In addition, of the 810,500 shares of Common Stock issuable upon the
exercise of outstanding options, approximately 376,100 shares of Common Stock
are immediately issuable upon the exercise of vested options and will become
eligible for sale, if such options are exercised, after the date of this
Prospectus. The holders of such options will enter into 180-day lock-up
agreements in connection with this Offering. All of the Company's current
stockholders have the right to require the Company to register their shares for
sale under the Securities Act. See "Shares Eligible for Future Sale."

CONTROL BY EXISTING STOCKHOLDERS. After this Offering, officers and
directors of the Company and their affiliates will own beneficially
approximately % of the Company's outstanding Common Stock (approximately %
if the Underwriters' over-allotment option is exercised in full). As a result,
these stockholders will be able to elect the Company's Board of Directors and
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. See
"Principal and Selling Stockholders" and "Description of Capital Stock--Voting
Agreement."

DILUTION. Purchasers of Common Stock in this Offering will experience
immediate and substantial dilution in net tangible book value per share. See
"Dilution."

9
<PAGE>
THE COMPANY

The Company was incorporated in Delaware in July 1993 as a wholly owned
subsidiary of Advance Health Care, Inc. ("Advance Health Care"). 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., formerly known as ParadigM Pharmacy
Management, 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 BCBS of Maryland, Inc. ("BCBS of Maryland"). Immediately prior to the
Offering, Advance Health Care will merge with and into the Company, with the
Company being the surviving corporation. The Merger will have no effect on the
Company's financial position or results of operations and is intended to qualify
as a tax free reorganization. See "Certain Transactions -- Merger of Advance
Health Care with the Company." The Company's executive offices are located at
545 East John Carpenter Freeway, Suite 1900, Irving, Texas 75062, and its phone
number is (214) 830-6199.

USE OF PROCEEDS

The net proceeds to the Company from the sale of shares of Common Stock
offered hereby are estimated to be $ ($ if the Underwriters exercise the
over-allotment option in full), at an assumed initial public offering price per
share of $ , after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company. Of the net proceeds of this
Offering, approximately $7.0 million will be used to retire the note payable to
Whitney Subordinated Debt Fund, L.P., an affiliate of a principal stockholder of
the Company (the "Whitney Note"), $1.6 million will be used to provide further
automation of the Company's Richardson, Texas facility, including capital
improvements and equipment, and $1.8 million will be used to expand the
Company's claims processing system. The Whitney Note was issued by the Company
on December 8, 1993 in the original principal amount of $7.0 million, to finance
the acquisition of Advance Clinical and has a term of seven years with a fixed
rate of interest of 10.1% per annum. See "Certain Transactions." The balance of
the net proceeds will be used to fund working capital requirements, possible
acquisitions of similar or complementary businesses and general corporate
purposes. Although the Company has had preliminary discussions from time to time
regarding possible acquisition opportunities, the Company has no agreements,
understandings or commitments with respect to any such opportunity, nor has the
Company allocated any portion of the net proceeds for any specific acquisition.
There can be no assurance that any future acquisitions will be consummated.
Pending such uses, the Company intends to invest the net proceeds in short-term
U.S. government securities, high-grade commercial paper, short-term, interest
bearing securities, money market funds and bank deposits or other similar
instruments.

DIVIDEND POLICY

The Company has never declared or paid any dividends on its Common Stock.
The Company currently intends to retain future earnings, if any, to fund
development and growth of its business and does not anticipate paying any
dividends on its Common Stock in the foreseeable future.

10
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company at March
31, 1996, (i) on an actual basis, (ii) on a pro forma basis to reflect the
issuance of the Series B Preferred Stock, the 250-for-one stock split to be
effected prior to the Offering and the automatic conversion of each share of
Series A Preferred Stock into 250 shares of Common Stock immediately prior to
the closing of the Offering and (iii) on a pro forma as adjusted basis to
reflect the application of the estimated net proceeds from the sale of shares
of Common Stock offered hereby at an assumed initial public offering price of
$ per share. This table should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt to related parties............................................. $ 7,000 $ 7,000 --
Series A redeemable preferred stock, $.01 par value, 10,000 shares authorized,
10,000 shares issued and outstanding, none outstanding pro forma or as
adjusted..................................................................... 11,896 -- --
Stockholders' equity:
Series B Preferred Stock, $.01 par value, none authorized, issued and
outstanding, 3,000 shares authorized, 2,597 shares issued and outstanding
pro forma and as adjusted.................................................. -- -- --
Common Stock, $.01 par value, 7,500,000 shares authorized, 3,130,500 shares
outstanding, shares outstanding pro forma, shares outstanding as
adjusted (1)............................................................... -- --
Additional paid-in capital.................................................. 1,518 23,414
Accumulated deficit......................................................... (3,016) (3,016) (3,016)
--------- ----------- -----------
Total stockholders' equity (deficit)...................................... (1,498) 20,398
--------- ----------- -----------
Total capitalization.................................................... $ 17,398 $ 27,398
--------- ----------- -----------
--------- ----------- -----------
</TABLE>

- ------------------------
(1) Outstanding shares exclude (i) 810,500 shares of Common Stock reserved for
future issuance pursuant to options outstanding under the Company's stock
option plans with a weighted average exercise price of $5.10 per share and
(ii) 392,750 shares of Common Stock underlying outstanding warrants with a
weighted average exercise price of $4.29 per share. See "Management--Stock
Option Plans," "Description of Capital Stock" and Note 10 of Notes to
Consolidated Financial Statements.

11
<PAGE>
DILUTION

The pro forma deficit in net tangible book value (deficit) of the Common
Stock of the Company as of March 31, 1996, after giving effect to the
250-for-one stock split of the Common Stock to be effected prior to the Offering
and the automatic conversion of the Series A Preferred Stock to Common Stock
immediately prior to the closing of this Offering, was $(2,647,000), or $(.47)
per share. "Pro forma deficit in net tangible book value" per share of Common
Stock represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of the shares of Common Stock offered hereby at an
assumed initial public offering price of $ per share resulting in estimated
net proceeds to the Company of approximately $ , the pro forma net tangible
book value of the Company as of March 31, 1996, would have been $ , or $
per share. This represents an immediate increase in pro forma net tangible book
value of $ per share to the existing stockholders and an immediate dilution of
$ per share to new investors purchasing shares in the Offering. The following
table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
Pro forma deficit in net tangible book value per common share
prior to the Offering........................................... $ (.47)
Increase per share attributable to new investors.................
---------
Pro forma net tangible book value per common share after the
Offering..........................................................
---------
Dilution per share to new investors................................ $
---------
---------
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares purchased from the Company, the total consideration paid
and the average price per share paid by the existing stockholders and by new
investors purchasing shares in the Offering (at an assumed initial public
offering price of $ per share) before deduction of underwriting discounts and
estimated expenses related to the Offering:

<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
---------------------- ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 5,630,500 % $ 13,414,000 % $ 2.38
New investors...............................
---------- ----- ------------- -----
Total................................... 100.0% $ 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>

The foregoing computations assume no exercise of the Underwriters'
over-allotment option or of any outstanding options granted pursuant to the
Company's existing stock option plans and no exercise of outstanding warrants.
To the extent such options and warrants are exercised, there will be further
dilution to the new investors. As of March 31, 1996, there were outstanding (i)
options to purchase 810,500 shares of Common Stock at an average exercise price
of $5.10 per share and (ii) warrants to purchase 392,750 shares of Common Stock
at an exercise price of $4.29 per share. See "Management--Stock Option Plans"
and "Shares Eligible for Future Sale."

12
<PAGE>
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 three-year period ended March 31, 1996, have been
derived from the Consolidated Financial Statements that have been audited by
Arthur Andersen LLP, independent public accountants, which are included
elsewhere in this Prospectus and are qualified by reference to such Consolidated
Financial Statements. The selected consolidated financial data as of and for
each of the years ended March 31, 1992 and March 31, 1993 are derived from
consolidated financial statements of the Company that have been audited by
Arthur Andersen LLP and which have not been included in this Prospectus. The
information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 7,045 $ 11,867 $ 23,372 $ 65,591 $ 87,722
Cost of operations:
Cost of revenues......................................... 6,761 11,196 21,014 59,817 80,177
Selling, general and administrative expenses............. 616 1,091 2,330 4,963 6,158
--------- --------- --------- --------- ---------
Total cost of operations............................... 7,377 12,287 23,344 64,780 86,335
--------- --------- --------- --------- ---------
Operating income (loss).................................... (332) (420) 28 811 1,387
Interest expense, net...................................... 23 26 423 787 350
--------- --------- --------- --------- ---------
Net income (loss).......................................... $ (355) $ (446) $ (395) $ 24 $ 1,037
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma: (1).............................................
Net income per share..................................... $ .16
Weighted average shares outstanding...................... 6,305
SUPPLEMENTAL DATA: (2)
Pharmacy network claims processed.......................... 816 1,527 9,375
Mail pharmacy prescriptions filled......................... 228 383 536
Estimated health plan members (at period end).............. 3,745 5,208 9,040
</TABLE>

<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 220 $ (465) $ 769 $ (453) $ 316
Total assets................................................ 1,296 1,761 29,014 36,845 57,681
Long-term debt to related parties........................... -- -- 6,928 7,000 7,000
Redeemable preferred stock.................................. -- -- 10,256 11,076 11,896
Stockholders' equity (deficit).............................. 436 (9) (936) (1,732) (1,498)
</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 years 1992 and
1993.

13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

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 ("fiscal year 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 46,000
retail pharmacies nationwide, and began to provide on-line claims adjudication
services. The Company records administrative fees as revenues derived from
claims adjudication services, and excludes ingredient costs of the
pharmaceuticals dispensed through its network. 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 creating 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 fiscal year 1996. Management believes that the Company will be able
to cross-sell these and other services to its existing customers, and that HBM
services will constitute a significantly increased proportion of the Company's
total revenues in the future.

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 Prospectus 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 Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed under "Risk Factors," as
well as those discussed elsewhere herein.

14
<PAGE>
RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1994 1995 1996
----------- ---------- ----------
<S> <C> <C> <C>
Revenues................................................................ 100.0% 100.0% 100.0%
Cost of operations:
Cost of revenues...................................................... 89.9 91.2 91.4
Selling, general and administrative expenses.......................... 10.0 7.6 7.0
----- ----- -----
Total cost of operations............................................ 99.9 98.8 98.4
----- ----- -----
Operating income........................................................ 0.1 1.2 1.6
Interest expense, net................................................... 1.8 1.2 0.4
----- ----- -----
Net income (loss)....................................................... (1.7)% 0.0 % 1.2%
----- ----- -----
----- ----- -----
</TABLE>

FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

REVENUES. Revenues for fiscal year 1996 increased by $22.1 million, or 34%,
compared to revenues for the fiscal year ended March 31, 1995, ("fiscal year
1995"). Approximately 61% 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 8% of the increase in
revenues was attributable to a six-fold increase in the number of pharmacy
claims processed during the fiscal year. Approximately 31% 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 $20.4
million, or 34%, 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 clinical services growth. As
a percentage of revenues, cost of revenues remained relatively constant at
approximately 91% 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 decreased from 8% in fiscal year 1995 to 7% in fiscal
year 1996 as the result of greater economies of scale. The Company believes that
if revenues continue to increase at the rate experienced to date, selling,
general and administrative expenses are expected to decrease as a percentage of
revenues in the future.

INTEREST EXPENSE, NET. Interest expense, net, 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. The Company anticipates an effective tax rate of
approximately 39% once the tax carryforwards are fully utilized.

FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994

REVENUES. Revenues for fiscal year 1995 increased by $42.2 million, or
181%, compared to revenues for the fiscal year ended March 31, 1994 ("fiscal
year 1994"). Approximately 31% of the increase was attributable to additional
sales of the Company's mail pharmacy services. This increase in mail pharmacy
revenue resulted from a 68% increase in the number of mail prescriptions
dispensed. The remaining 69% of the increase resulted from the increase in
clinical services revenue attributable to a full year of operations from the
acquisition of Advance Clinical, and increased enrollment of lives under
formulary management. Revenues for fiscal year 1994 included four months of
Advance Clinical revenue compared with twelve months in 1995.

15
<PAGE>
COST OF REVENUES. Cost of revenues for fiscal year 1995 increased by $38.8
million, or 185%, compared to fiscal year 1994. This increase was attributable
primarily to the expanded volume in the Company's mail pharmacy and the
additional costs associated with the inclusion of a full year of operations from
the acquisition of Advance Clinical. As a percentage of revenues, cost of
revenues increased from 90% in fiscal year 1994 to 91% in fiscal year 1995. This
increase resulted primarily from the Company's relocation of its mail pharmacy
operations from a 6,000 square foot facility to a 38,000 square foot dispensing
facility in December 1993. In addition, the Company expanded its claims
processing capabilities to accommodate additional growth from its managed care
customers.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal year 1995 increased by $2.6 million, or 113%,
compared to fiscal year 1994. This increase was the result of the Company's
expansion of its sales and marketing capabilities, as well as increases in
administrative and support staff levels and salaries and benefits in response to
volume growth in all product and service areas. Selling, general and
administrative expenses in fiscal year 1995 also include a full year of clinical
operations of Advance Clinical. As a percentage of revenues, selling, general
and administrative expenses decreased from 10% in fiscal year 1994 to 8% in
fiscal year 1995 as the result of greater economies of scale.

INTEREST EXPENSE, NET. Interest expense, net, for fiscal year 1995
increased by $364,000, or 86%, compared to fiscal year 1994. The increase
resulted from indebtedness incurred in December 1993 in connection with the
acquisition of Advance Clinical.

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. See "Risk
Factors--Fluctuations in Quarterly Operating Results; Lengthy Sales Cycle;
Future Results Uncertain." Results of operations for any particular quarter are
not necessarily indicative of results of operations for any future quarters.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1996
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................................ $ 17,683 $ 20,222 $ 22,964 $ 26,853
Cost of operations:
Cost of revenues.................................................. 16,436 18,338 20,877 24,526
Selling, general & administrative expenses........................ 1,442 1,481 1,516 1,719
--------- --------- --------- ---------
Total cost of operations........................................ 17,878 19,819 22,393 26,245
--------- --------- --------- ---------
Operating income (loss)............................................. (195) 403 571 608
Interest (expense) income, net...................................... (140) (134) (83) 7
--------- --------- --------- ---------
Net income (loss)................................................... $ (335) $ 269 $ 488 $ 615
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

During fiscal year 1996, the Company's continued growth resulted in net cash
provided by operating activities of $15.7 million. Historically, the Company has
been able to fund its operations and continued growth through cash from
operations. During fiscal year 1996, the Company's operating cash flow funded
its capital expenditures of $1.6 million, and its short term excess cash was
invested in money market funds. The Company anticipates its capital expenditures
of approximately $3.4 million for the year ending March 31, 1997 will primarily
consist of additional enhancements to the Company's claims processing systems,
and further automation of the Company's mail service facility. Management
believes that the net proceeds from the sale of the

16
<PAGE>
Common Stock offered hereby and the Series B Preferred Stock, along with
available cash flow from operations, will be sufficient to meet the Company's
operating requirements, including anticipated capital expenditures, for the next
12 months. See "Use of Proceeds."

RECENT PRONOUNCEMENTS

In October 1995, the Financial Accounting Standards Board issued Statement
123, "Accounting for Stock-Based Compensation" (SFAS 123). The Company will
adopt SFAS 123 through disclosure only, effective with the Company's 1997 fiscal
year. 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 year 1996, the
Company agreed to issue warrants to purchase shares of its Common Stock to a
customer contingent upon future expansion of member lives. As of March 31, 1996,
no stock was issued and no warrants were earned under the agreement. In
management's opinion, the fair value of the warrants at the date of the
agreement was not material and therefore had no material impact on the Company's
financial position or results of operations.

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.

17
<PAGE>
BUSINESS

OVERVIEW

Advance ParadigM is a leading independent provider of PBM services to health
benefit plan sponsors, with over nine 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. This encourages physician and member conformance,
improves compliance with recognized standards and, in turn, improves member
health while reducing cost of care.

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 services. The Company administers a pharmacy network
that includes over 46,000 retail pharmacies throughout the United States. In
1994, in response to increasing cost-containment pressures from payors, the
Company began to utilize its clinical and information systems capabilities to
develop 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 as a result, 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 in order to provide a centralized
care management alternative for its customers.

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. It is currently estimated that annual
outpatient pharmaceutical expenditures account for approximately 7%, or $70
billion, of the $1 trillion health care market, and that third-party
prescriptions managed by PBMs represent a significantly increasing proportion of
this amount.

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 rapidly growing demand among payors for
comprehensive disease management programs as cost containment becomes more
dependent on improvements in the quality of care. According to industry sources,
approximately 77% of large employers said they would likely adopt some form of
disease management program over the next two years. HBM services are being
developed to address this demand through the use of traditional PBM services
combined with clinical expertise and sophisticated information systems.

18
<PAGE>
THE ADVANCE PARADIGM SOLUTION

As a leading independent PBM, 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. The Company believes its clinical expertise and information systems
combined with its PBM services provide a competitive advantage in the evolving
market for HBM 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 cardiovascular risk,
congestive heart failure and diabetes, and has under development disease
management programs which address asthma, dyspepsia and otitis media (middle ear
infection).

STRATEGY

The Company's mission is to improve the quality of care delivered to plan
members while assisting plan sponsors in reducing overall health benefit costs.
The Company's strategy is to maintain its position as a leading provider of PBM
services and expand its presence as a provider of HBM services. Key elements of
this strategy include:

EXPAND CORE PBM CUSTOMER BASE. The Company believes that it will continue
to benefit from growth in the PBM market. From 1994 to 1996, the number of lives
for which the Company provided PBM services increased from approximately 3.7
million to 9.0 million. Of the nine million lives, the Company provides rebate
contracting services for approximately two million lives on behalf of other
PBMs. The Company intends to expand its market share by focusing on larger, more
sophisticated customers, such as BCBS plans, insurance companies and large
employer groups.

EXPAND HBM SERVICES. The Company believes that HBM services provide
significant opportunities for future growth. As a result, the Company is
presently integrating its PBM services, information systems and medical care
guidelines to create comprehensive HBM programs. The Company believes that it
can cross-sell HBM services to its existing customer base. In addition, the
Company intends to leverage its existing capabilities and relationships by
acquiring companies which have, or are developing, innovative HBM services in
order to provide a centralized, care management alternative for its customers.

PURSUE STRATEGIC ACQUISITIONS. The Company intends to continue pursuing
acquisition opportunities to expand the scope of its services and increase its
market share. For example, in December 1993, the Company complemented its mail
service and retail network pharmacy management services with the acquisition of
ParadigM Pharmacy Management Inc., a provider of sophisticated formulary
management services. Due to increasing competition within the PBM and HBM
services markets, the Company believes that there are significant opportunities
to acquire or consolidate businesses that will complement its existing service
offerings and allow it to realize additional economies of scale.

ESTABLISH STRATEGIC RELATIONSHIPS. The Company has successfully established
strategic relationships with certain 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 consulting and related 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 benefits from the marketing and
financial resources of the manufacturers. In its strategic relationships with
certain major customers, the customers assume equity positions in the Company
which fosters the development of long-term strategic alliances. To date, the
Company has established strategic collaborative relationships with five
pharmaceutical companies and strategic customer alliances with BCBS of Maryland
and BCBS of Texas, and has entered into a letter of intent to enter into such an
alliance with Principal Health Care, Inc.

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

19
<PAGE>
pharmacy distribution, pharmacy network management, DUR and data information
reporting. The Company administers a pharmacy network which includes over 46,000
retail pharmacies throughout the United States. The Company currently provides
PBM services to over 200 health plan benefit sponsors covering over nine million
plan members enrolled in the Company's programs, which includes rebate
contracting services for approximately two million lives on behalf of other
PBMs. 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 substitutes
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 46,000 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 9.3 million claims
processed in fiscal year 1996, with over 4.5 million claims processed in the
quarter ended March 31, 1996.

The Advance Pharmacies are linked to the Company's Advance Rx-Registered
Trademark- on-line claims adjudication and processing system, which contains
patient medication history, plan enrollment and eligibility data. The Advance
Rx-Registered Trademark- 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-Registered Trademark- 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-Registered Trademark- 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

20
<PAGE>
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 13,000 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. The Company has
developed disease management programs covering cardiovascular risk, congestive
heart failure and diabetes and has under development disease management programs
which address asthma, dyspepsia and otitis media. By analyzing patients' medical
and pharmacy claim patterns, the Company can assist payors and health care
providers in the early identification of patients whose care might be improved
through additional or alternative treatment or medication.

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

Upon identifying an "at-risk" patient, the Company, working closely with the
medical staff of its customer, recommends treatment protocols for the identified
disease. The Company's staff monitors the identified patient's compliance with
the suggested program, including prescription usage. If it appears, based upon
the staff's analysis of the patient's treatment, that the recommended protocol
is not being applied, the Company's staff will coordinate with its customers to
initiate direct telephone contact with the patient or physician, suggesting
additional treatment or testing.

In addition to identifying targeted patients for the physician, the
Company's case-finding algorithms are also designed to recognize trends in the
treatments and drugs prescribed by health care providers. Once a provider is
identified through the algorithm, the Company's staff prepares a physician
journal letter communicating the recommended clinical protocols for the
treatment of the identified disease. Physician performance and compliance with
the recommended protocols are monitored utilizing the Company's integrated
health care database, and additional communications such as "dear doctor"
letters and physician report cards are sent to physicians who would benefit from
intervention strategies. The Company has found physician response to these
materials to be positive. In general, the physicians appreciate the comparison
of their treatment activities to the latest practices in the treatment of the
targeted disease. This "clinical credibility" allows the Company's customers to
more ably influence physician treatment patterns.

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. The
Company's extensive database repository incorporates a series of interrelated
databases consisting of patient profiles, provider profiles, payor information,
and medical and pharmacy dictionaries of diagnosis codes, treatment codes, and
prescription drug information. One of the Company's proprietary

21
<PAGE>
decision support systems, ApotheQuery-Registered Trademark-, 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. ApotheQuery-Registered Trademark- organizes and analyzes data
by drug, physician specialty and/or various other criteria, or a combination of
criteria, enabling the Company to identify patient populations and physicians
who would benefit from intervention strategies and measures the effectiveness of
such strategies through outcomes and utilization review.

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-Registered Trademark- by including data points for diagnosis and
treatment codes. This integrated health care database facilitates querying
capability for not only pharmacy data but integrated pharmacy, medical, and lab
data as well. 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 effective disease management programs. The Company's medical staff has
incorporated algorithms based on nationally recognized "best practice"
guidelines for chronic and acute diseases into its proprietary databases. This
integrated health care database integrates medical, lab and pharmacy claims
data, and allows the Company to perform sophisticated outcomes analysis,
detailed physician and pharmacy provider profiling and utilization and
formulary/rebate analyses.

CUSTOMERS

The Company currently provides PBM services for over 200 health plan benefit
sponsors covering over nine million plan members enrolled in the Company's
programs, which includes rebate contracting services for approximately two
million lives on behalf of other PBMs. The Company's customer base is comprised
of Blue Cross and Blue Shield ("BCBS") plans, HMOs, health insurers, TPAs and
self-insured employers. Some of the Company's customers include the following
insurance companies and HMOs:

<TABLE>
<CAPTION>
INSURANCE COMPANIES HMOS
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
Arkansas BCBS Capital Health Plan
BCBS of Maryland CFS Health Group, Inc.
BCBS of Northeastern Pennsylvania George Washington University Health Plan
BCBS of the Rochester (New York) Area HealthGuard of Lancaster, Inc.
BCBS of Texas HMO Partners, Inc.
National Health Insurance Company Lifeguard Health Plan
Southwestern Life Insurance Company SelectCare Networks, Inc.
United Insurance Company, Inc.
</TABLE>

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 benefits from the marketing and financial resources
of the manufacturers. Through this type of relationship, the Company licenses
selected disease management programs to the manufacturers and provides other
related services. In its strategic relationships with certain major customers,
the customers assume 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. To date, the Company has established strategic collaborative
relationships with five pharmaceutical companies and strategic customer
alliances with BCBS of Maryland and BCBS of Texas, and has entered into a letter
of intent to enter into such an alliance with Principal Health Care, Inc. The
Company is implementing its cardiovascular risk reduction disease management
program on behalf of BCBS of Maryland and George Washington University Health
Plan. The Company has also licensed several of these programs to certain
pharmaceutical companies. See "Certain Transactions."

22
<PAGE>
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, Minneapolis and Dallas. 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.

The Company offers a toll-free telephone line staffed with trained customer
service representatives and pharmacists 14 hours each day and on-call 24 hours
each day. The Company continually monitors the member service phone desk to
ensure that incoming calls from members are answered in a timely and appropriate
manner. Further, the Company monitors the quality standards of its mail
services, including the dispensing of prescription orders through the mail
within two business days of receipt under ordinary circumstances.

COMPETITION

The Company competes with a number of larger, national companies, including
Caremark International Inc., Diversified Pharmaceutical Services, Inc. (a
subsidiary of SmithKline Beecham Corporation), Express Scripts, 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 a 50-50 joint venture with Baxter 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 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 all of the 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.

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 pharmacy benefit management business. Among these are the following:

23
<PAGE>
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 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. State 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 federal statute has been interpreted broadly by courts, the Office of
Inspector General ("OIG") within the Department of Health and Human Services
("HHS"), and administrative bodies. Because of the federal statute's broad
scope, federal regulations establish certain "safe harbors" from liability. Safe
harbors exist for certain properly reported discounts received from vendors,
certain investment interests, and certain properly disclosed payments made by
vendors to group purchasing organizations. A practice that does not fall within
a safe harbor is not necessarily unlawful, but may be subject to scrutiny and
challenge. In the absence of an applicable statutory exception or safe harbor, a
violation of the statute may occur even if only one of the purposes of a payment
arrangement is to induce patient referrals or purchases. Among the practices
that have been identified by the OIG as potentially improper under the statute
are certain "product conversion programs" in which benefits are given by drug
manufacturers to pharmacists or physicians for changing a prescription (or
recommending or requesting such a change) from one drug to another. Such laws
have been cited as a partial basis, along with the state consumer protection
laws discussed below, for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to retail pharmacists in
connection with such programs.

To the Company's knowledge, these anti-remuneration laws have not been
applied to prohibit PBMs from receiving amounts from drug manufacturers in
connection with drug purchasing and formulary management programs, to
therapeutic substitution programs conducted by independent PBMs, or to the
contractual relationships such as those the Company has with certain of its
customers. The Company believes that it is in substantial compliance with the
legal requirements imposed by such laws and regulations, and the Company
believes that there are material differences between drug-switching programs
that have been challenged under these laws and the programs offered by the
Company to its customers. However, there can be no assurance that the 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) currently is conducting a study of PBM arrangements particularly with
regard to the concerns and implications for Medicaid beneficiaries. The Company
cannot predict the outcome of the study or the impact, if any, that such study
might have 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.

24
<PAGE>
CONSUMER PROTECTION LAWS. Most states have consumer protection laws that
have been the basis for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to retail pharmacies in
connection with drug switching programs. In addition, pursuant to a settlement
agreement entered into with 17 states on October 25, 1995, Merck Medco Managed
Care, Inc. ("Medco"), the PBM subsidiary of pharmaceutical manufacturer Merck &
Co., agreed to require pharmacists affiliated with Medco mail service pharmacies
to disclose to physicians and patients the financial relationships between
Merck, 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 46,000 retail pharmacies and will admit any
licensed pharmacy that meets the Company's credentialling 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.

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, and in any event the Company provides
services to certain customers, such as union health and welfare funds and
government entities, that are not subject to the preemption provisions of ERISA.
Other state laws may be invalid in whole or in part as an

25
<PAGE>
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.
Federal statutes and regulations govern the labeling, packaging, advertising and
adulteration of prescription drugs and the dispensing of controlled substances.
The Federal Trade Commission requires mail order sellers of goods generally to
engage in truthful advertising, to stock a reasonable supply of the product to
be sold, to fill mail orders within thirty days, and to provide customers with
refunds when appropriate. The United States Postal Service has statutory
authority to restrict the transmission of drugs and medicines through the mail
to a degree that could have an adverse effect on the Company's mail service
operations. The U.S. Postal Service has exercised such statutory authority only
with respect to controlled substances. Alternative means of delivery are
available to the Company.

EMPLOYEES

As of March 31, 1996, the Company had 282 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.

FACILITIES

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 11,600 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. See Note 6 of Notes to Consolidated Financial Statements.

LITIGATION

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.

26
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding the executive
officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
David D. Halbert...................... 40 Chairman of the Board, President and Chief Executive Officer
Jon S. Halbert........................ 36 Executive Vice President, Chief Operating Officer and Director
Joseph J. Filipek, Jr. ............... 41 Executive Vice President
T. Danny Phillips..................... 36 Senior Vice President, Chief Financial Officer, Secretary and
Treasurer
John H. Sattler....................... 44 Senior Vice President, Sales and Marketing
Robert L. Cinquegrana................. 43 Senior Vice President, Strategic Planning and Business
Development
Alan T. Wright, M.D. ................. 39 Vice President and Chief Medical Officer
Mikel D. Faulkner (1), (2)............ 46 Director
Michael D. Ware (1), (2).............. 50 Director
Peter M. Castleman (2)................ 39 Director
Jeffrey R. Jay (1).................... 37 Director
Stephen L. Green (2).................. 45 Director
</TABLE>

- ------------------------
(1) Audit Committee Member
(2) Compensation Committee Member

DAVID D. HALBERT founded the Company in 1986. Mr. Halbert has continuously
served as Chairman of the Board, President and Chief Executive Officer of the
Company. From 1981 to 1985, Mr. Halbert served as Vice President of Finance and
Marketing for LaJet Energy Company, an energy company, and prior to 1981 he
served as Vice President and Chief Operating Officer of Sabian Corporation, a
metal fabrication company. David D. Halbert is the brother of Jon S. Halbert.

JON S. HALBERT joined the Company in January 1988 and has continuously
served as a director and as an executive officer of the Company since such date.
Mr. Halbert currently serves as Executive Vice President and Chief Operating
Officer of the Company. Prior to joining the Company, he worked as a registered
representative of Bear, Stearns & Co. Inc., an investment banking firm. Jon S.
Halbert is the brother of David D. Halbert.

JOSEPH J. FILIPEK, JR., P.D., currently serves as the Executive Vice
President of the Company. Prior to joining the Company in December 1993, Dr.
Filipek founded Advance Clinical in 1991 as a wholly owned subsidiary of BCBS of
Maryland and has continuously served as its Chief Executive Officer and
President. From 1985 to 1990, he served as Director of Pharmacy for FreeState
Health Plan, and from 1982 to 1984, he held various managerial positions in the
Department of Pharmacy, University of Maryland.

T. DANNY PHILLIPS joined the Company in February 1992, and currently serves
as Senior Vice President, Chief Financial Officer, Secretary and Treasurer of
the Company and its subsidiaries. Prior to joining the Company, Mr. Phillips
served as Chief Financial Officer of Aloha Petroleum, Ltd., a retail gasoline
company, beginning in April 1991 until February 1992. From 1985 to April 1991,
Mr. Phillips served in various financial management positions for Harken Energy
Corporation, a publicly held company, and its then wholly owned subsidiary E-Z
Serve, Inc. Prior to 1985, Mr. Phillips, a certified public accountant, was with
the accounting firm of Condley and Company.

27
<PAGE>
JOHN H. SATTLER, R.PH., joined the Company in 1994, and serves as the Senior
Vice President, Sales and Marketing of the Company. Prior to joining the
Company, Mr. Sattler served as Vice President, Sales and Marketing for Health
Care Pharmacy Providers, Inc. from September 1992 to November 1994. Prior to
1992, he served as Manager of Third Party Marketing for American Drug Stores,
Inc.

ROBERT L. CINQUEGRANA currently serves as the Senior Vice President,
Strategic Planning and Business Development of the Company. Prior to joining the
Company in December 1993, Mr. Cinquegrana served as Chief Operating Officer and
Vice President of Advance Clinical since its inception in 1991. From 1987 to
1991, Mr. Cinquegrana was associated with BCBS of Maryland, including service as
Vice President of Strategic Planning and Chief Financial Officer for Columbia
FreeState Health System, a managed care subsidiary of BCBS of Maryland.

ALAN T. WRIGHT, MD, M.P.H., joined the Company in April 1994 and currently
serves as Vice President and Chief Medical Officer of the Company. Dr. Wright
has been serving as the Vice President and Chief Medical Officer of the Company
since February 15, 1996. From 1992 to April 1994, he served as Associate
Corporate Medical Director at BCBS of Maryland. Prior to 1992, he served as
Medical Director for Aetna Health Plans of the Mid-Atlantic Region. Dr. Wright
practices emergency medicine on a part time basis at Carr County General
Hospital in Westminister, Maryland. He currently serves as a diplomat to the
American Board of Internal Medicine and the National Board of Medical Examiners.

MIKEL D. FAULKNER has served as a director of the Company since August 1993.
Since 1982, Mr. Faulkner has served as Chief Executive Officer of Harken Energy
Corporation, a publicly held company. He has been a director of Harken Energy
Corporation since 1982, serving as Chairman of the Board since February 1991.
From 1982 until February 1993, he served as President of Harken Energy
Corporation.

MICHAEL D. WARE has served as a director of the Company since August 1993.
Mr. Ware is a co-founder of Advance Capital Markets, Inc., a private investment
firm, and has served as Managing Director since January 1989. Prior to founding
Advance Capital Markets, Inc., Mr. Ware was the President of Reliance Energy
Services, Inc.

PETER M. CASTLEMAN has served as a director of the Company since August
1993. Mr. Castleman has been a General Partner of J.H. Whitney & Co., a private
investment firm, since January 1989, and has served as the Managing Partner of
J.H. Whitney & Co. since December 1992. He is also a director of a number of
private companies and the following public companies: The North Face, Inc.,
UtiliMed, Inc. and Brothers Gourmet Coffees, Inc.

JEFFREY R. JAY, M.D., has served as a director of the Company since August
1993. Since 1993, he has been a General Partner of J.H. Whitney & Co., a private
investment firm. From 1988 to 1993, Dr. Jay was employed by Canaan Partners, a
venture capital firm. Dr. Jay currently is a national advisory member of the
American Medical Association's Physician Capital Source Committee and is a
director of the following public companies: CRA Managed Care, Inc., UtiliMed,
Inc. and Nitinol Medical Technologies.

STEPHEN L. GREEN has served as a director of the Company since August 1993.
Mr. Green currently serves as a General Partner of Canaan Partners, a principal
stockholder of the Company. Prior to joining Canaan Partners in November 1991,
Mr. Green served as Managing Director in GE Capital's Corporate Finance Group
for more than five years. Mr. Green currently serves on the Board of Directors
of the following public companies: CapMAC Holdings Inc., Chartwell Re
Corporation and Suiza Foods Corporation.

BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

The Board of Directors of the Company is divided into three classes as
nearly equal in number as possible. Messrs. Faulkner, Green and Ware serve in
the class whose term expires in 1996; Dr. Jay and Mr. Castleman in the class
whose term expires in 1997; and Messrs. D. Halbert and J. Halbert serve in the
class whose term expires in 1998. The directors of each class elected after the
expiration of the above terms of office for such class will serve a term of
three years. See "Description of Capital Stock--Certain Provisions of the
Company's Restated Certificate and Bylaws." Officers serve at the discretion of
the Board of Directors.

28
<PAGE>
The Board of Directors has a compensation committee (the "Compensation
Committee") consisting of Messrs. Castleman (Chairman), Faulkner, Green and
Ware. The functions of the Compensation Committee are to review executive
compensation and approve grants of options to Company officers and employees, as
well as renew, approve and recommend to the Board of Directors the terms and
conditions of all stock option plans or changes thereto.

The Board of Directors has an audit committee (the "Audit Committee")
composed of directors who are neither employees nor affiliates of the Company.
Messrs. Faulkner (Chairman) and Ware and Dr. Jay currently comprise the Audit
Committee. The Audit Committee recommends to the Board (for approval by the
stockholders) a public accounting firm to conduct the annual audit of the
accounts of the Company. The Audit Committee meets with the Chief Financial
Officer and the accounting firm at the conclusion of the audit to review the
audited financial statements, and to discuss the results of the audit, any
significant recommendations by the accounting firm for improvement of the
Company's accounting systems and controls, and the quality and depth of staffing
in the accounting and financial departments of the Company.

DIRECTORS COMPENSATION

Directors do not currently receive compensation for serving as directors of
the Company. The Company reimburses directors for out-of-pocket expenses
incurred in connection with attending Board and Committee meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION

In fiscal year 1996, decisions with respect to the compensation of the
Company's executive officers and other employees were made by a Compensation
Committee consisting of Messrs. Castleman, Faulkner, Green and Ware. None of the
members of the Compensation Committee have ever been officers of the Company.

The Company and Advance Capital Markets, Inc. ("ACM") entered into an
agreement dated October 1, 1993, pursuant to which ACM agreed to use its
reasonable best efforts to secure financing for the Company and to act as
financial advisor and investment banker for the acquisition of Advance Clinical.
Pursuant to this agreement, the Company paid ACM an aggregate amount of $150,000
which included reimbursement payments for expenses incurred and financial
advisory and third party consulting fees paid by ACM. Mr. D. Halbert, Chairman
of the Board, Chief Executive Officer and President of the Company, serves on
the Board of Directors of ACM. Mr. Ware, a member of the Company's Board of
Directors and the Compensation and Audit Committees, is the Managing Director of
ACM. Each of Messrs. D. Halbert and Ware participates in the determination of
ACM's executive officer compensation.

29
<PAGE>
EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information with respect to the compensation
paid or awarded by the Company to the Chief Executive Officer and the four most
highly compensated executive officers whose cash compensation exceeded $100,000
(the "Named Executives") for services rendered in all capacities for fiscal year
1996.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS
- ---------------------------------------------------------------------------- ---------- ----------- -------------
<S> <C> <C> <C>
David D. Halbert............................................................ $ 150,000 $ 52,500 --
Chairman of the Board, President and Chief Executive Officer
Jon S. Halbert.............................................................. 140,000 46,200 --
Executive Vice President and Chief Operating Officer
Joseph J. Filipek, Jr....................................................... 124,200 39,306 --
Executive Vice President
John H. Sattler............................................................. 125,000 37,500 56,250
Senior Vice President--Sales and Marketing
Alan T. Wright.............................................................. 124,200 32,755 18,750
Vice President--Chief Medical Officer
</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information regarding the stock option grants
made by the Company to the Named Executives during fiscal year ended March 31,
1996.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ------------------------------------------ ----------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David D. Halbert.......................... -- -- -- -- -- --
Jon S. Halbert............................ -- -- -- -- -- --
Joseph J. Filipek, Jr..................... -- -- -- -- -- --
John H. Sattler (2)....................... 56,250 28.8% $ 11.00 11/14/04 $ 389,129 $ 986,128
Alan T. Wright (3)........................ 18,750 9.6% $ 11.00 02/15/06 $ 129,709 $ 328,709
</TABLE>

- ------------------------
(1) The options reflected in this table were all granted under the Company's
1993 Incentive Stock Option Plan. The date of grant is 10 years prior to the
expiration date listed. For additional material terms of the incentive
option, see "--Stock Option Plans."

(2) Mr. Sattler's option is partially vested and exercisable as to 11,250
shares, and will vest and become exercisable in cumulative installments of
11,250 shares on each of the next four anniversaries of the date of grant so
long as Mr. Sattler remains an employee of the Company or its affiliates on
such anniversaries.

(3) Dr. Wright's option vests and becomes exercisable in cumulative installments
of one-fifth of the number of shares of Common Stock upon the first five
anniversaries of the date of grant so long as Dr. Wright remains an employee
of the Company or its affiliates on such anniversaries.

(4) These amounts represent only certain assumed rates of appreciation based on
the grant date value of $11.00 per share in accordance with the Commission's
executive compensation rules. Actual gains, if any, on stock option
exercises will depend on future performance of the Common Stock. No
assurance can be given that the values reflected in these columns will be
achieved.

30
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

The following table summarizes pertinent information concerning the number
and value of any options held by the Named Executives at March 31, 1996. No
options were exercised by the Named Executives in fiscal year 1996.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR END IN-THE-MONEY OPTIONS
(#) AT FISCAL YEAR END ($)
---------------------------- --------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
(1) (2)
---------------------------- --------------------------
<S> <C> <C>
David D. Halbert........................................ 68,250/102,500 $
Jon S. Halbert.......................................... 68,500/102,500
Joseph J. Filipek, Jr................................... 30,000/45,000
John H. Sattler......................................... 11,250/45,000
Alan T. Wright.......................................... 2,500/28,750
</TABLE>

- ------------------------
(1) Upon the occurrence of the following events, the vesting of the options will
accelerate: (i) as to the option held by Mr. D. Halbert, if the Common Stock
is publicly traded, the option will vest in cumulative installments of
one-third of the number of shares upon the first three anniversaries of the
date of grant; (ii) as to the options held by Messrs. D. and J. Halbert,
upon the consummation of any transaction in which an outside entity gains
more than 50% ownership of the Company, the options will vest immediately
prior to such transaction; (iii) as to the options held by Dr. Filipek, Mr.
Sattler and Dr. Wright, upon a sale of substantially all of the Common Stock
or assets of the Company or a merger in which the Company is not the
surviving entity, the options will vest immediately prior to such
transaction.

(2) The value of the options is based upon the difference between the exercise
price and an assumed market value of $ per share, the midpoint of the
range of the estimated initial public offering price set forth on the cover
of this Prospectus.

EMPLOYMENT AGREEMENTS

On August 4, 1993, each of Messrs. D. Halbert, J. Halbert and Phillips
entered into nondisclosure/ noncompetition Agreements with the Company pursuant
to which each agreed during the term of his employment, and for two years
thereafter, not to compete with the Company in the continental United States
and, for the one-year period following termination, not to solicit or interfere
with the Company's relationship with any person or entity doing business with
the Company, or offer employment to any of the Company's employees.

In connection with the Advance Clinical acquisition, Advance Clinical
entered into three-year employment agreements with each of Dr. Filipek and Mr.
Cinquegrana. Dr. Filipek, employed as President and Chief Executive Officer of
Advance Clinical, is entitled to an annual base salary of $120,000, subject to
annual increases in the discretion of the Advance Clinical Board of Directors.
Mr. Cinquegrana, employed as Vice President and Chief Operating Officer of
Advance Clinical, is entitled to an annual base salary of $110,000, subject to
annual increases in the discretion of the Advance Clinical Board of Directors.
In addition, the employment agreements provide that each of Dr. Filipek and Mr.
Cinquegrana are entitled to participate in any bonus, insurance, 401(k) or other
plans generally available to Advance Clinical's employees. See "--Incentive
Compensation Plan." Further, the respective employment agreements grant 75,000
qualified stock options to each of Dr. Filipek and Mr. Cinquegrana, which vest
at a rate of 15,000 options on each of the first five anniversaries of the
respective employment agreements. See "--Stock Option Plans." The employment
agreements contain confidentiality, noncompetition and non-solicitation
provisions effective during the term of employment and for one year after
employment has terminated, unless employment is terminated for cause, in which
case the noncompetition provision will survive for two years.

Effective as of November 14, 1994, the Company entered into a two-year
employment agreement with Mr. Sattler to serve as the Company's Senior Vice
President, Sales and Marketing. Mr. Sattler is entitled to receive an annual
base salary of $125,000, subject to annual increases at the discretion of the
Company's Board of Directors. In addition, the employment agreement provides
that Mr. Sattler is entitled to participate in any bonus and benefit plans of
the Company. Further, the employment agreement grants 56,250 qualified stock

31
<PAGE>
options to Mr. Sattler which will vest at a rate of 20% of the total options on
each of the first five anniversaries of the employment agreement. See "--Stock
Option Plans." The employment agreement contains confidentiality, noncompetition
and non-solicitation provisions effective during the term of employment and for
one year after employment has terminated.

Effective as of February 15, 1996, the Company entered into a three-year
employment agreement with Dr. Wright to serve as Vice President and Chief
Medical Officer of the Company. Dr. Wright is entitled to an annual base salary
of $165,000 for the fiscal year ending March 31, 1997, $175,000 for the fiscal
year ending March 31, 1998 and $185,000 for the fiscal year ending March 31,
1999. In addition, the employment agreement provides that Dr. Wright is entitled
to participate in any bonus or benefit plans of the Company. Further, the
employment agreement grants 18,750 qualified stock options to Dr. Wright, which
will vest at a rate of 20% of the total options on each of the first five
anniversaries of his employment agreement. See "--Stock Option Plans." The
employment agreement contains confidentiality, noncompetition and
non-solicitation provisions effective during the term of employment and for one
year after employment has terminated, unless employment is terminated for cause,
in which case the noncompetition provision will survive for two years.

STOCK OPTION PLANS

On July 30, 1993, the Board of Directors and the stockholders of the Company
adopted the 1993 Incentive Stock Option Plan (the "Plan") which provides for the
grant of incentive options to officers and key employees of the Company. The
purpose of the Plan is to assist the Company in attracting and retaining key
employees. A total of 679,250 shares of Common Stock has been reserved for
issuance under the Plan. As of March 31, 1996, options to purchase 631,750
shares of Common Stock have been granted thereunder. The options granted under
the Plan are incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986.

The Plan is administered by the Compensation Committee of the Board of
Directors, which is comprised of directors who are not participants in the Plan.
Subject to the provisions of the Plan, the Compensation Committee has the
authority to administer the Plan and determine, among other things, the
interpretation of any provision of the Plan, the eligible employees who are to
be granted stock options, the number of shares which may be issued and the
option exercise price. In no event will options be granted at prices less than
the greater of (i) $3.20 per share (as adjusted) and (ii) the fair market value
of the Common Stock on the date of grant. No option can be granted for a term of
more than ten years. The Company has not granted any outstanding options at less
than fair market value.

In addition, on December 1, 1993, in connection with the Advance Clinical
acquisition, the Board of Directors of the Company adopted a second incentive
stock option plan, the terms and provisions of which are identical to those of
the Plan. A total of 178,750 shares of Common Stock were reserved for issuance
under this second incentive stock option plan, all of which have been issued to
employees of Advance Clinical.

At the meeting of the Board of Directors of the Company held on February 15,
1996, the Board of Directors, after review of relevant financial analysis,
indication of interest for sale of the Common Stock and comparisons of similarly
situated companies, determined that the fair market value of the Common Stock
was $11.00 per share. Accordingly, the Board of Directors determined that it
would be in the best interest of the Company to cancel the 151,750 options that
had been granted to employees at a higher exercise price. The Board of Directors
canceled these options and re-issued, effective as of February 15, 1996, the
same number of options to each employee, with a strike price of $11.00 per
share.

In connection with the Merger, the Advance Health Care incentive stock
option plan will be merged with and into the Plan. Holders of options under the
Advance Health Care incentive stock option plan will receive options to purchase
Common Stock under the Plan. See "Certain Transactions--Merger of Advance Health
Care with the Company."

Options are not transferable other than by will or under the laws of descent
and distribution, and are exercisable during the lifetime of the optionee only
by the optionee or his guardian or legal representative. Upon termination of the
optionee's employment with the Company, the period of time during which the
stock options are exercisable is restricted to three months. The Board of
Directors has the right to amend, suspend or

32
<PAGE>
terminate the Plan at any time, but no such action after the Plan becomes
effective can affect or impair the rights of any optionee under any options
granted prior to such action. Certain amendments must be approved by the holders
of Common Stock.

INCENTIVE COMPENSATION PLAN

Employees of the Company who hold director-level positions or higher are
eligible to receive annual incentive-based bonus payments if the Company meets
or exceeds certain predetermined annual performance goals. The bonuses payable
under the incentive compensation plan are based on a percentage of each
employee's salary. One-half of the bonus is payable upon the Company meeting the
predetermined performance goals, with the other one-half subject to the
satisfaction of certain performance goals as determined by management for such
individual.

401(K) PLAN

The Company has established a tax-qualified employee savings and retirement
plan (the "401(k) Plan"). All employees who have been employed by the Company
for at least three months are eligible to participate. Employees may contribute
to the 401(k) Plan subject to a statutorily prescribed annual limit. The Company
is required to make contributions to the 401(k) Plan of at least 50% of the
first 6% of salary deferral contributed by each participant.

33
<PAGE>
CERTAIN TRANSACTIONS

WHITNEY DEBT FUND FINANCING

On December 8, 1993, the Company and an affiliate of J.H. Whitney & Co.,
Whitney Subordinated Debt Fund L.P. (the "Whitney Debt Fund"), entered into a
Note and Warrant Purchase Agreement pursuant to which the Whitney Debt Fund paid
the Company $7 million in exchange for the Whitney Note and a warrant (the
"Whitney Warrant") to purchase up to 336,500 shares of Common Stock. The Whitney
Note bears interest at the rate of 10.1% per annum, payable quarterly. Although
the Whitney Note has a seven-year term, the Company is obligated to prepay the
indebtedness, without penalty or premium, upon consummation of a public
offering. See "Use of Proceeds." The Whitney Warrant grants the Whitney Debt
Fund the right to purchase an aggregate of 336,500 shares of Common Stock at an
exercise price of $4.00 per share until December 8, 2003. The warrant contains
certain demand and piggy-back registration rights with respect to the underlying
Common Stock. See "Share Eligible for Future Sale--Registration Rights."

TRANSACTION FEES RELATING TO THE ADVANCE CLINICAL ACQUISITION

In connection with the acquisition of Advance Clinical in 1993, the Company
agreed to pay a fee of $250,000 each to two officers of Advance Clinical for
services relating to the acquisition. The total $500,000 fee is included as part
of the Advance Clinical purchase price. The Company paid $100,000 of this fee
upon closing of the acquisition and $200,000 in each of February 1995 and
February 1996.

MANAGEMENT RELATIONSHIP WITH ADVANCE HEALTH CARE

Prior to the consummation of the Merger of Advance Health Care and the
Company, as described below, certain management employees of the Company
provided administrative and management services to Advance Health Care. During
fiscal year 1994, the Company paid fees to Advance Health Care for the use of
the office space. See Note 12 of Notes to Consolidated Financial Statements.
Each of Mr. D. Halbert, the Chairman of the Board, President and Chief Executive
Officer of the Company, and Mr. J. Halbert, Executive Vice President and Chief
Operating Officer of the Company, serve in the same positions for Advance Health
Care. Additionally, Mr. Phillips, the Company's Senior Vice President, Chief
Financial Officer, Secretary and Treasurer served as Chief Financial Officer and
Vice President of Accounting for Advance Health Care. Further, Messrs. D.
Halbert, J. Halbert, Faulkner and Ware served on the Board of Directors of
Advance Health Care.

As of August 1, 1993, the Company and Advance Health Care entered into an
agreement for the provision of mail pharmacy and claims adjudication services
for the benefit of employees of certain subsidiaries of Advance Health Care.
During fiscal year 1996, Advance Health Care paid the Company approximately
$56,000 (the fair market value as determined by the Board of Directors) for
these services. This agreement had an initial one-year term and renews
automatically for 12-month periods unless terminated by either party upon
written notice delivered 90 days prior to the expiration of any term.

WARRANTS TO BCBS OF TEXAS

On November 25, 1995, the Company granted to BCBS of Texas the right to earn
up to four warrants, each representing the right to acquire 66,750 shares of
Common Stock, in consideration of BCBS of Texas causing additional lives to be
enrolled in the Company's PBM programs (the "BCBS of Texas Warrants"). BCBS of
Texas' right to earn the BCBS of Texas Warrants expires November 25, 2000. Each
BCBS of Texas Warrant will not be exercisable until the first annual anniversary
of its issuance. At such time, the BCBS of Texas Warrant will be exercisable in
whole during a four-year term at an exercise price of $11.00 per share. See
"Description of Capital Stock--Warrants to Purchase Common Stock." As of the
date of this Prospectus, none of the BCBS of Texas Warrants has been earned or
issued.

MERGER OF ADVANCE HEALTH CARE WITH AND INTO THE COMPANY

34
<PAGE>
interests in Advance Health Care (collectively referred to the "AHC
Stockholders"). Immediately prior to the Merger, Advance Health Care will
distribute the stock of certain subsidiaries of Advance Health Care, operating
in businesses unrelated to the Company, to the Advanced Health Care
Stockholders. Prior to such spin-off, certain indebtedness owed by Advance
Health Care to several of its stockholders will be exchanged for additional
shares of common stock in Advance Health Care. Also prior to such spin-off,
certain indebtedness of Advance Health Care will be assumed by an existing
stockholder of Advance Health Care in exchange for additional shares of common
stock. After the spin-off, exchange of indebtedness, and assumption of
indebtedness referred to above are effected, Advance Health Care will have no
operations, known liabilities, or assets of its own other than its investment in
the Company. The stockholders of Advance Health Care who exchange their
indebtedness for additional shares and the stockholder who assumes certain
indebtedness for additional shares are among the Selling Stockholders in the
Offering, including D. Halbert, J. Halbert, and Dr. Worley. See "Principal and
Selling Stockholders." In connection with the Merger, the Advance Health Care
incentive stock option plan will be merged with the Plan, and holders of options
under the Advance Health Care incentive stock option plan will receive options
to purchase Common Stock under the Plan.

ISSUANCE OF SERIES B PREFERRED STOCK

On June 25, 1996, the Company and BCBS of Texas entered into a stock
purchase agreement (the "Series B Stock Purchase Agreement") pursuant to which
BCBS of Texas purchased an aggregate of 2,597 shares of the Series B Preferred
Stock at an effective purchase price of $3,850 per share. Upon consummation of
this Offering, the number of shares of Series B Preferred Stock will be adjusted
to shares (at an effective price of $ per share). BCBS of Texas has
certain registration rights in connection with its shares. As of the date of
sale, the conversion rate of the Series B Preferred Stock was one-to-one.
Following the stock split of the Common Stock in connection with this Offering,
each share of Series B Preferred Stock will be convertible into 250 shares of
Common Stock.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and its
officers, directors, principal stockholders and affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.

35
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of Common Stock as of April 30, 1996 adjusted on a pro forma basis to
reflect (i) the automatic conversion of each share of Series A Preferred Stock
into one share of Common Stock, (ii) the 250-for-one stock split of the Common
Stock and (iii) as adjusted to reflect the sale of the shares offered hereby for
(a) each person who is known to own more than 5% of any voting class of capital
stock, (b) each director and each Named Executive and (c) all executive officers
and directors of the Company as a group. Except as otherwise indicated below,
each of the entities or persons named in the table has sole voting and
investment power with respect to all shares of Common Stock beneficially owned.
No effect has been given to shares reserved for issuance under outstanding stock
options except where otherwise indicated.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING (1) NUMBER OFFERING (2)
----------------------- OF SHARES -----------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
---------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Advance Health Care (3)(4)................................. 3,125,000 55.5 -- -- --
545 East Carpenter Freeway
Suite 1900
Irving, TX 75062
Canaan Capital Partners L.P. (5)........................... 1,090,750 19.4 -- 1,090,750 --
105 Rowayton Avenue
Rowayton, CT 06853
J.H. Whitney & Co. (6)..................................... 1,586,500 26.6 -- 1,586,500 --
630 Fifth Avenue
Suite 3200
New York, NY 10111
David D. Halbert (7)....................................... 170,750 2.9 -- -- --
Jon S. Halbert (8)......................................... 102,600 1.8 -- -- --
Joseph J. Filipek (9)...................................... 30,000 * -- 30,000 *
John H. Sattler (10)....................................... 11,250 * -- 11,250 *
Alan T. Wright (11)........................................ 5,000 * -- 5,000 *
Michael D. Ware............................................ -- * -- -- *
Mikel D. Faulkner.......................................... -- * -- -- *
Peter M. Castleman (12).................................... 1,586,500 26.6 -- 1,586,500 --
Stephen L. Green (13)...................................... 1,106,250 19.6 -- 1,106,250 --
Jeffrey R. Jay (14)........................................ 1,605,250 28.5 -- 1,605,250 --
All directors and executive officers as a group
(13 persons).............................................. 3,098,150 48.8% -- -- --
</TABLE>

- ------------------------
* Less than 1%

(1) Pursuant to the rules of the Commission, certain shares of the Company's
Common Stock which a person has the right to acquire within 60 days of
August 1, 1996, the assumed effective date of the Offering (the "Assumed
Effective Date"), pursuant to the exercise of options or warrants are deemed
to be outstanding for the purposes of computing the percentage ownership of
such person but are not deemed outstanding for the purposes of computing the
percentage ownership of any other person.

(2) Assumes that the Underwriters' over-allotment option is not exercised.

(3) Excludes shares issuable in connection with the Merger of Advance Health
Care with and into the Company. Upon consummation of the Merger, certain AHC
stockholders intend to include shares for sale in this Offering.

(4) The executive officers and directors of Advance Health Care are John Steven
Arthur, Charles M. Bruce, Mikel D. Faulkner, David D. Halbert, Jon S.
Halbert, T. Danny Phillips and Michael D. Ware. Such persons

36
<PAGE>
in such capacities may be deemed beneficial owners of the shares held by
Advance Health Care, but each disclaims such beneficial ownership except to
the extent of his respective pecuniary interest in Advance Health Care.

(5) Includes 117,000 shares of Common Stock owned by Canaan L.P. and 973,750
shares of Common Stock owned by Canaan Capital Offshore Limited Partnership
C.V. ("Canaan Offshore"). Canaan Capital Limited Partnership ("Canaan L.P.")
exercises sole investment and voting power with respect to the shares of
Common Stock owned by such entities. Mr. Green, a director of the Company,
is a General Partner of Canaan L.P. Does not include 125,000 shares held by
Quai Ltd., as to which Canaan L.P. disclaims beneficial ownership.

(6) Includes 250,000 shares of Common Stock owned by J.H. Whitney & Co.,
1,000,000 shares of Common Stock owned by the Whitney 1990 Equity Fund, L.P.
(the "Whitney Fund") and 336,500 shares of Common Stock issuable upon
exercise of the Whitney Warrant held by the Whitney Debt Fund. The General
Partners of J.H. Whitney & Co., who are also the General Partners of the
Whitney Fund, exercise sole investment and voting power with respect to the
shares of Common Stock owned by such entities. Mr. Castleman and Dr. Jay,
each a director of the Company, serve as Managing Partner and General
Partner, respectively, of J.H. Whitney & Co.

(7) Includes 170,750 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date.

(8) Includes 102,600 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date.

(9) Includes 30,000 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date.

(10) Includes 11,250 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date.

(11) Includes 5,000 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date.

(12) Includes no shares held directly by Mr. Castleman. Mr. Castleman, a
director of the Company, is a General Partner of J.H. Whitney & Co., the
General Partner of the Whitney Fund and the Whitney Debt Fund and therefore
may be deemed to share beneficial ownership of the shares held by the
Whitney Investors. J.H. Whitney, the Whitney Fund and the Whitney Debt Fund
are collectively referred to as the "Whitney Investors."

(13) Includes 15,500 shares held directly by Mr. Green. Mr. Green, a director of
the Company, is a General Partner of Canaan Partners, the General Partner of
Canaan L.P. and Canaan Offshore and therefore may be deemed to share
beneficial ownership of the shares held by the Canaan Investors other than
125,000 shares held by Quai Ltd., as to which Mr. Green disclaims beneficial
ownership. Canaan L.P., Canaan Offshore, Quai Ltd., Dr. Jay and Mr. Green
are collectively referred to as the "Canaan Investors."

(14) Includes 18,750 shares held directly by Dr. Jay. Dr. Jay, a director of the
Company, is a General Partner of J.H. Whitney & Co., the General Partner of
the Whitney Fund and the Whitney Debt Fund and therefore may be deemed to
share beneficial ownership of the shares held by the Whitney Investors.

37
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of (i) 7,500,000 shares of
Common Stock, (ii) 10,000 shares of Series A Preferred Stock and (iii) 3,000
shares of Series B Preferred Stock. After giving effect to the Offering,
shares of Common Stock, no shares of Series A Preferred Stock and shares of
Series B Preferred Stock will be outstanding. Assuming the underwriters'
over-allotment option is exercised in full, upon consummation of the Offering,
shares of Common Stock will be outstanding.

The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the Restated Certificate of the Company and the Bylaws of
the Company that are included as exhibits to the registration statement of which
this Prospectus forms a part and by the provisions of applicable law.

COMMON STOCK

After giving effect to the Merger as if it had occurred on March 31, 1996,
there were 5,630,500 shares of Common Stock outstanding which were held of
record by 53 stockholders, as adjusted to reflect the (i) 250-for-one stock
split effected prior to the closing of this Offering and (ii) the conversion of
the Series A Preferred Stock upon the closing of this Offering. Common Stock is
not redeemable, does not have any conversion rights and is not subject to call.
Holders of shares of Common Stock have no preemptive, redemption, conversion or
other subscription rights. Holders of shares of Common Stock are entitled to one
vote per share on any matter submitted to a vote of stockholders of the Company.
Cumulative voting is prohibited in the election of directors. The holders of
Common Stock are entitled to receive dividends, if any, as and when declared
from time to time by the Board of Directors of the Company out of funds legally
available therefor. See "Dividend Policy." Subject to the rights of the holders
of Preferred Stock, upon liquidation, dissolution or winding up of the affairs
of the Company, the holders of Common Stock will be entitled to participate
equally and ratably, in proportion to the number of shares held, in the net
assets of the Company available for distribution to holders of Common Stock. The
shares of Common Stock currently outstanding are, and the shares of Common Stock
offered hereby when issued will be, validly issued, fully paid and
nonassessable.

PREFERRED STOCK

Upon consummation of this Offering, all shares of the Series A Preferred
Stock will convert automatically into shares of Common Stock at a 250-for-one
conversion rate. All of the shares of the Series A Preferred Stock issued and
outstanding are held by the Canaan Investors and the Whitney Investors. The
holders of the Series A Preferred Stock are entitled to one vote per share on
matters submitted to a vote of the stockholders and, except as otherwise
provided by law, vote together with the holders of Common Stock as a single
class.

Holders of the Series A Preferred Stock are entitled to receive, out of
funds legally available therefor, cumulative dividends, calculated without
compounding, equal to $80 per share per annum. Such cumulative dividends accrue
and accumulate from the date of issuance and are payable if, as and when
declared by the Board of Directors of the Company. Further, the holders of the
Series A 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 the Series A Preferred Stock had been converted into shares of Common Stock.
Upon the liquidation, dissolution or winding up of the Company, the holders of
the Series A Preferred Stock have the right, prior to any existing or future
classes of capital stock, to receive $1,000 plus all accrued and unpaid
dividends for each outstanding share of Series A Preferred Stock and to
participate equally and ratably with the Common Stock holders in the net assets
of the Company available for distribution to stockholders. On or after August 4,
1999, the holders of 60% of the outstanding shares of Series A Preferred Stock
may require the Company to redeem any or all of such holders' shares at a price
equal to the greater of (i) the original price paid per share, plus accrued and
unpaid dividends, and (ii) the fair market value of such shares. The payment of
the redemption price, if any, will be made in three equal, annual installments.
Upon the consummation of this Offering and the conversion of all outstanding
shares of Series A Preferred Stock into Common Stock, all accrued but unpaid
dividends on the Series A Preferred Stock dividends will be forfeited.

Holders of the Series B Preferred Stock are not entitled to vote on any
matter. The holders of the Series B Preferred Stock are entitled to receive, out
of funds legally available therefor, cumulative dividends, calculated

38
<PAGE>
without compounding, equal to $ per share per annum. Such cumulative dividends
accrue and accumulate from the date of issuance and are payable on March 31 of
each year. Further, the holders of the Series B Preferred Stock are entitled to
any dividends that the Board of Directors may declare to be payable on shares of
Common Stock as if the shares of Series B Preferred Stock had been converted
into shares of Common Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of the Series B Preferred Stock have the right, prior
to any existing or future classes of capital stock, but after the Series A
Preferred Stock, to receive $ plus all accrued and unpaid dividends for each
outstanding share of Series B Preferred Stock and to participate equally and
ratably with the Common Stock holders in the net assets of the Company available
for distribution to stockholders. On or after June 25, 1998, 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
conversion rate for the Series B Preferred Stock will be proportionately
adjusted for the 250-for-one stock split. 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, the 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.

WARRANTS TO PURCHASE COMMON STOCK

Effective December 8, 1993, in connection with the Advance Clinical
acquisition, the Company issued to the Whitney Debt Fund a warrant to purchase
336,500 shares of Common Stock, exercisable in whole or in part during a
ten-year term, at an exercise price of $4.00 per share. In addition, in
connection with the Advance Clinical acquisition, effective December 8, 1993,
the Company issued to BCBS of Maryland a warrant to purchase 56,250 shares of
Common Stock, exercisable in whole during a four-year term at an aggregate
exercise price of $337,500. The warrants contain certain demand and piggy-back
registration rights relating to the Common Stock underlying the warrants. See
"Shares Eligible for Future Sale--Registration Rights."

On November 25, 1995, the Company granted to BCBS of Texas the right to earn
the BCBS of Texas Warrants, each representing the right to acquire 66,750 shares
of Common Stock, in consideration of BCBS of Texas causing additional lives to
be enrolled in the Company's PBM programs. BCBS of Texas' right to earn the BCBS
of Texas Warrants expires November 25, 2000. Each BCBS of Texas Warrant will not
be exercisable until the first annual anniversary of its issuance. At such time,
the BCBS of Texas Warrant will be exercisable in whole during a 4-year term at a
per share exercise price of $11.00.

The foregoing description of the warrants issued by the Company is qualified
in its entirety by reference to such warrants which have been filed as exhibits
to the Registration Statement of which this Prospectus constitutes a part.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Chemical Mellon
Shareholder Services.

VOTING AGREEMENTS

In connection with the Canaan and Whitney capital investment, Advance Health
Care, the Canaan Investors, the Whitney Investors and Messrs. D. Halbert, J.
Halbert and Phillips entered into a Voting, Co-Sale and Right of First Refusal
Agreement dated as of August 4, 1993 (the "Voting Agreement"). In the Voting
Agreement, the stockholders agreed to vote all of their shares in favor of a
nine member Board of Directors consisting of two persons designated by the
Whitney Investors, two persons designated by the Canaan Investors and five
additional persons, at least two of whom may not be employees or officers of the
Company, designated by Advance Health Care and the Company. Further, the
stockholders agreed to establish an Audit Committee consisting of three members,
at least one of whom will be a director nominated by the Canaan Investors and
the Whitney Investors, and a Compensation Committee consisting of four members,
at least two of whom will be directors nominated by the Canaan and Whitney
Investors. The parties to the Voting Agreement have agreed to terminate such
agreement effective upon consummation of this Offering (the "Termination
Agreement.")

Holders of the Series B Preferred Stock are not entitled to vote on any
matter. Pursuant to the Series B Stock Purchase Agreement, the holders of the
Series B Preferred Stock (or the holders of Common Stock

39
<PAGE>
obtained upon conversion of the Series B Preferred Stock) agree to consent to
and execute any documents in connection with any proposed merger of the Company
where the Company would not be the surviving entity, the sale of a majority of
the capital stock of the Company, or the sale of all or substantially all of its
assets.

The foregoing descriptions of the Voting Agreement, Termination Agreement
and Series B Stock Purchase Agreement are qualified in their entirety by
reference to the Voting Agreement and Termination Agreement which have been
filed as exhibits to the Registration Statement of which this Prospectus
constitutes a part.

CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE AND BYLAWS

Pursuant to the Restated Certificate, the members of the Board of Directors
are divided into three classes of directors serving staggered three-year terms,
with the number of directors in each class to be as nearly equal as possible.
The term of office of the members in the first class will expire at the next
annual meeting of the stockholders, the second class will expire one year
thereafter, and the third class will expire one year thereafter. The Board of
Directors has no current plans to formulate or effect additional measures that
could have an anti-takeover effect.

Section 102(b)(7) of the Delaware General Corporation Law provides that a
Delaware corporation may include in its certificate of incorporation a provision
eliminating or limiting the personal liability of directors to the corporation
or its stockholders for monetary damages for breach of their fiduciary duty
including acts constituting gross negligence, except under certain
circumstances, including breach of the director's duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law or any transaction from which the director derived improper
personal benefit. The Company's Restated Certificate provides that the Company's
directors are not liable to the Company or its stockholders for monetary damages
for breach of their fiduciary duties, subject to the exceptions specified by
Delaware law.

The Company's Restated Certificate and Bylaws also provide that the Company
will indemnify its directors and officers to the fullest extent permitted by
Delaware law. The Company is generally required to indemnify its directors and
officers for all judgments, fines, loss, liability, settlements, legal fees and
other expenses incurred in connection with pending or threatened legal
proceedings because of the director's or officer's position with the Company or
another entity that the director or officer serves at the Company's request,
subject to certain conditions, and to advance funds to its directors and
officers to enable them to defend against such proceedings. To receive
indemnification, the director or officer must have been successful in the legal
proceeding or acted in good faith and in what he reasonably believed to be a
lawful manner and the Company's best interest.

40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have shares of Common
Stock outstanding, assuming no exercise of options after April 30, 1996 and
after giving effect to the issuance of 2,500,000 shares of Common Stock upon
automatic conversion of all shares of Series A Preferred Stock at the closing of
this Offering. Of these shares, the shares of Common Stock sold in this
Offering will be freely tradeable without restriction or further registration
under the Securities Act except for any shares purchased by "affiliates" of the
Company as that term is defined in the Securities Act. The remaining shares
of Common Stock outstanding upon completion of this Offering are restricted
securities as that term is defined in Rule 144 under the Securities Act ("Rule
144"). All of these shares will be subject to "lock-up" agreements which
prohibit their sale for a period of 180 days following the date of this
Prospectus without the prior consent of Hambrecht & Quist LLC.

Upon expiration of the 180-day lock-up period, an aggregate of shares of
Common Stock will be eligible for sale without restriction pursuant to Rule
144(k) (as described below), and shares will be eligible for sale subject to
the volume, manner of sale and other applicable restrictions of Rule 144. In
addition, of the 810,500 shares of Common Stock issuable upon the exercise of
outstanding options, approximately 376,100 shares of Common Stock are
immediately issuable upon the exercise of vested options and will become
eligible for sale, if such options are exercised, after the date of this
Prospectus. The holders of such options are expected to enter into 180-day
lock-up agreements in connection with this Offering.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) whose restricted securities have
been outstanding for at least two years, including a person who may be deemed an
"affiliate" of the Company, may only sell a number of shares within any
three-month period which does not exceed the greater of (i) one percent of the
then outstanding shares of the Company's Common Stock (approximately shares
after this Offering) or (ii) the average weekly trading volume in the Company's
Common Stock in the four calendar weeks immediately preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner of
sale, notice and the availability of current public information about the
Company. A person who is not an affiliate of the issuer, has not been an
affiliate within three months prior to the sale and has owned the restricted
securities for at least three years is entitled to sell such shares under Rule
144(k) without regard to any of the limitations described above.

Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon the exercise of options granted by the Company or acquired
pursuant to the Plan prior to the date of this Prospectus will also be eligible
for sale in the public market pursuant to Rule 701 under the Act. In general,
Rule 701 permits resales of shares issued pursuant to certain compensatory
benefit plans and contracts commencing 90 days after the issuer becomes subject
to the reporting requirements of the Securities Exchange Act of 1934, as
amended, in reliance upon Rule 144, but without compliance with certain
restrictions of Rule 144, including the holding period requirements. As of April
30, 1996, the Company has granted options covering 434,400 shares of Common
Stock which have not been exercised and which become exercisable at various
times in the future. Any shares of Common Stock issued upon the exercise of
these options will be eligible for sale pursuant to Rule 701.

Prior to this Offering, there has been no market for the Common Stock and no
prediction can be made as to the effect, if any, that market sales of shares or
the availability of such shares for sale will have on the market price of the
Common Stock. Nevertheless, sales of substantial amounts of Common Stock in the
public market may adversely affect the market price and may impair the Company's
future ability to raise capital through the public sale of its Common Stock.

REGISTRATION RIGHTS

Substantially all of the current stockholders of the Company, as well as the
BCBS of Maryland and the Whitney Debt Fund upon exercise of their warrants and
BCBS of Texas, as the holder of Series B Preferred Stock and the BCBS of Texas
Warrants (collectively, the "Rights Holders"), are entitled to include in any
registration of the Company's Common Stock in a public offering, whether for its
own account or for the account of another security holder up to a total of
approximately 6,672,500 shares of outstanding Common Stock, assuming conversion
of all outstanding Preferred Stock into Common Stock and the full exercise of
the outstanding warrants (the "Registrable Shares"). Subject to certain
limitations, the holders of at least 60% of the

41
<PAGE>
shares held by the Canaan Investors, the Whitney Investors and Advance Health
Care and their assigns may require, at any time commencing six months after the
date of this Prospectus, on two occasions, that the Company cause their shares
to be registered under the Securities Act. Such a demand by the Canaan Investors
and the Whitney Investors must include at least 50% of the outstanding shares
issued to them. The managing underwriter of any offering in which Rights Holders
participate may limit the number of Registrable Shares to be included in the
registration; provided that the Canaan Investors and Whitney Investors will be
entitled to register on a pro-rata basis among such holders two shares for every
one share held by Advance Health Care that is included in a registration. In
addition, the holders of at least 60% of the shares held by the Canaan
Investors, the Whitney Investors and Advance Health Care and their assigns may
require the Company, on three occasions, to cause their shares to be registered
on a Form S-3 registration statement (or other form with similar requirements)
under the Securities Act at any time such form is available to the Company, but
in no event more than seven years after the date of this Prospectus. In
connection with the Merger, the registration rights of Advance Health Care will
be assigned to the stockholders of Advance Health Care. All of the Rights
Holders entitled to registration rights, other than the Selling Stockholders,
have waived such rights in connection with this Offering.

42
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
Montgomery Securities and J.P. Morgan Securities Inc., have severally agreed to
purchase from the Company and the Selling Stockholders the following respective
numbers of shares of Common Stock.

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Hambrecht & Quist LLC.............................................................
Montgomery Securities.............................................................
J.P. Morgan Securities Inc........................................................

----------
Total.........................................................................
----------
----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and the Selling
Stockholders, their counsel and the Company's independent auditors. The nature
of the Underwriters' obligation is such that they are committed to purchase all
shares of Common Stock offered hereby if any such shares are purchased.

The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. The
Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority. After the initial public offering of the shares, the
offering price and other selling terms may be changed by the Representatives of
the Underwriters.

The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.

The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

43
<PAGE>
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.

The Selling Stockholders and certain existing stockholders of the Company,
including the Company's directors and executive officers, who will own in the
aggregate shares of Common Stock after the Offering, have agreed that they
will not, without the prior written consent of Hambrecht & Quist LLC, directly
or indirectly, sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any other rights to purchase or acquire Common Stock beneficially owned
by them during the 180 day period following the effective date of the
Registration Statement. In addition, the Company has agreed that, without the
prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters,
the Company will not, directly or indirectly, sell, offer, contract to sell,
make any short sale, pledge, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to purchase
or otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock, or enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences or ownership of Common
Stock, during the 180 day period following the effective date of the
Registration Statement, except that the Company may issue, and grant options to
purchase, shares of Common Stock under its current stock option plans and may
issue shares of Common Stock in connection with certain acquisition
transactions, provided such shares are subject to the 180-day lock-up agreement.
Sales of such shares in the future could adversely affect the market price of
the Common Stock. Hambrecht & Quist LLC may, in its sole discretion, release any
of the shares subject to the lock-up agreements at any time without notice.

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company, the Selling Stockholders and the Representatives.
Among the factors to be considered in determining the initial public offering
price will be prevailing market and economic conditions, revenues and earnings
of the Company, market valuations of other companies engaged in activities
similar to those of the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant.

LEGAL MATTERS

The validity of the Common Stock being offered hereby will be passed upon
for the Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P. Certain legal
matters, in connection with this Offering, will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, Austin, Texas.

EXPERTS

The Consolidated Financial Statements as of March 31, 1995 and 1996 and for
each of the three years in the period ended March 31, 1996, included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.

44
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets--March 31, 1995 and 1996.................................. F-3
Consolidated Statements of Operations for the Years Ended March 31, 1994, 1995 and
1996................................................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years ended March
31, 1994, 1995 and 1996.............................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1994, 1995 and
1996................................................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7

PARADIGM PHARMACY MANAGEMENT, INC.

Report of Independent Public Accountants.............................................. F-15
Statement of Operations for the Eleven Months Ended November 30, 1993................. F-16
Statement of Stockholder's Equity for the Eleven Months Ended November 30, 1993....... F-17
Statement of Cash Flows for the Eleven Months Ended November 30, 1993................. F-18
Notes to Financial Statements......................................................... F-19
</TABLE>

F-1
<PAGE>
After the 250-for-one stock split discussed in Note 15 to the Company's
Consolidated Financial Statements is effected, we expect to be in a position to
render the following audit report.

ARTHUR ANDERSEN LLP

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, 1995 and 1996, 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, 1996. 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, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996, in conformity with generally accepted accounting principles.

Dallas, Texas,
May 6, 1996 (except with respect to the
matters discussed in Note 15, as to which
the date is , 1996)

F-2
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 1995 AND 1996

ASSETS

<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 2,625,000 $ 16,457,000
Accounts receivable, net of allowance for doubtful accounts of $141,000 and
$130,000, respectively........................................................... 15,554,000 21,854,000
Inventories....................................................................... 1,231,000 1,598,000
Prepaid expenses and other........................................................ 400,000 449,000
------------- -------------
Total current assets............................................................ 19,810,000 40,358,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $980,000
and $1,935,000, respectively....................................................... 3,442,000 4,080,000
INTANGIBLE ASSETS, net of accumulated amortization of $461,000 and $808,000,
respectively....................................................................... 13,392,000 13,045,000
OTHER ASSETS, net of accumulated amortization of $136,000 and $49,000,
respectively....................................................................... 201,000 198,000
------------- -------------
Total assets.................................................................... $ 36,845,000 $ 57,681,000
------------- -------------
------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Accounts payable.................................................................. $ 18,637,000 $ 37,776,000
Accrued salaries and benefits..................................................... 873,000 1,283,000
Other accrued expenses............................................................ 509,000 934,000
Current portion of other noncurrent liabilities................................... 244,000 49,000
------------- -------------
Total current liabilities....................................................... 20,263,000 40,042,000
NONCURRENT LIABILITIES:
Long-term debt to related parties................................................. 7,000,000 7,000,000
Other noncurrent liabilities, less current portion................................ 238,000 241,000
------------- -------------
Total liabilities............................................................... 27,501,000 47,283,000
------------- -------------
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, 1995 and 1996, with aggregate
liquidation preference of $11,159,000 and $11,959,000, respectively.............. 11,076,000 11,896,000
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value; 7,500,000 shares authorized, 3,125,000 and 3,130,500
shares issued and outstanding at March 31, 1995 and 1996, respectively........... -- --
Additional paid-in capital........................................................ 1,501,000 1,518,000
Accumulated deficit............................................................... (3,233,000) (3,016,000)
------------- -------------
Total stockholders' equity (deficit)............................................ (1,732,000) (1,498,000)
------------- -------------
Total liabilities and stockholders' equity (deficit)............................ $ 36,845,000 $ 57,681,000
------------- -------------
------------- -------------
</TABLE>

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

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

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED MARCH 31, 1994, 1995, AND 1996

<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES............................................................ $ 23,372,000 $ 65,591,000 $ 87,722,000
------------- ------------- -------------
COST OF OPERATIONS:
Cost of revenues.................................................. 21,014,000 59,817,000 80,177,000
Selling, general, and administrative expenses..................... 2,330,000 4,963,000 6,158,000
------------- ------------- -------------
Total cost of operations........................................ 23,344,000 64,780,000 86,335,000
------------- ------------- -------------
Operating income................................................ 28,000 811,000 1,387,000
INTEREST EXPENSE, net............................................... 423,000 787,000 350,000
------------- ------------- -------------
NET INCOME (LOSS)................................................... $ (395,000) $ 24,000 $ 1,037,000
------------- ------------- -------------
------------- ------------- -------------
PRO FORMA NET INCOME PER SHARE...................................... $ .16
-------------
-------------
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING....................... 6,304,500
-------------
-------------
</TABLE>

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

F-4
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED MARCH 31, 1994, 1995, AND 1996

<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL
NUMBER OF PAID-IN ACUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1993....................... 3,125,000 $ -- $ 1,661,000 $ (1,670,000) $ (9,000)
Assumption of note payable in conjunction
with the formation of API.................. -- -- (500,000) -- (500,000)
Capital contribution from Parent............ -- -- 173,000 -- 173,000
Issuance of 1,346 Common Stock warrants
valued at $124 per warrant................. -- -- 167,000 -- 167,000
Net loss.................................... -- -- -- (395,000) (395,000)
Dividends ($35.90 per share) and accretion
on Redeemable Preferred
Stock...................................... -- -- -- (372,000) (372,000)
---------- ---------- ------------ ------------ ------------
BALANCE, March 31, 1994....................... 3,125,000 -- 1,501,000 (2,437,000) (936,000)
Net income.................................. -- -- -- 24,000 24,000
Dividends ($80.00 per share) and accretion
on Redeemable 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 ($80.00 per share) and accretion
on Redeemable 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)
---------- ---------- ------------ ------------ ------------
---------- ---------- ------------ ------------ ------------
</TABLE>

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

F-5
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MARCH 31, 1994, 1995, AND 1996

<TABLE>
<CAPTION>
1994 1995 1996
-------------- ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................. $ (395,000) $ 24,000 $ 1,037,000
Adjustments to reconcile net income (loss) to net cash provided by
operating activities--
Depreciation and amortization................................... 319,000 969,000 1,313,000
Noncash interest expense........................................ 215,000 162,000 --
Provision for doubtful accounts................................. 27,000 58,000 23,000
Change in certain assets and liabilities, net of effects from
acquisition of subsidiary--
(Increase) decrease in accounts receivable.................... 342,000 (5,028,000) (6,323,000)
Increase in inventories....................................... (697,000) (183,000) (367,000)
Increase in prepaid expenses and other assets................. (172,000) (324,000) (58,000)
Increase in accounts payable, accrued expenses, and other
noncurrent liabilities....................................... 1,397,000 7,980,000 20,028,000
-------------- ------------ -------------
Net cash provided by operating activities..................... 1,036,000 3,658,000 15,653,000
-------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................... (1,270,000) (2,245,000) (1,594,000)
Acquisition of subsidiary, net of cash received................... (14,134,000) -- --
-------------- ------------ -------------
Net cash used in investing activities......................... (15,404,000) (2,245,000) (1,594,000)
-------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of Redeemable Preferred Stock.............. 9,884,000 -- --
Net proceeds from issuance of long-term debt...................... 6,623,000 -- --
Net proceeds from issuance of Common Stock and warrants........... 167,000 -- 17,000
Net payments on line of credit and long-term obligations.......... (359,000) (245,000) (244,000)
Payment of note payable transferred from AHC...................... (500,000) -- --
-------------- ------------ -------------
Net cash provided by (used in) financing activities........... 15,815,000 (245,000) (227,000)
-------------- ------------ -------------
NET INCREASE IN CASH................................................ 1,447,000 1,168,000 13,832,000
CASH AND CASH EQUIVALENTS, beginning of year........................ 10,000 1,457,000 2,625,000
-------------- ------------ -------------
CASH AND CASH EQUIVALENTS, end of year.............................. $ 1,457,000 $ 2,625,000 $ 16,457,000
-------------- ------------ -------------
-------------- ------------ -------------
</TABLE>

SUPPLEMENTARY INFORMATION:

Cash paid for interest expense, net, totaled approximately $208,000,
$625,000, and $350,000 in 1994, 1995, and 1996, respectively.

The Company made no income tax payments in 1994, 1995, and 1996.

The Company incurred a capital lease obligation of $138,000 in 1994.

The Company received noncash capital contributions from AHC of $173,000 in
1994. It also assumed a $500,000 note payable in conjunction with the
formation of API in 1994.

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

F-6
<PAGE>
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 (see Note 12) 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 (see Note 8). The
operating results for Advance Clinical are included for the period since its
acquisition by API.

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.

The Company is currently in the process of an initial public offering (the
Offering) of its $.01 par value Common Stock. The Company plans to use the net
proceeds from the Offering (i) to retire the note payable to Whitney
Subordinated Debt Fund, L.P., an affiliate of a principal stockholder of the
Company, in the amount of $7.0 million, (ii) to provide further automation of
the Company's Richardson, Texas facility, including capital improvements and
equipment (which are estimated to be approximately $1.6 million), and (iii) to
expand the Company's claims processing system (which are estimated to be
approximately $1.8 million). The balance in net proceeds available to the
Company will be used to fund working capital, possible acquisitions of similar
or complementary businesses and general corporate purposes.

In connection with the Offering, the Company's redeemable Series A Preferred
Stock will automatically be converted into 2,500,000 shares of Common Stock. The
pro forma information below gives effect to such conversion.

<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------------------
AS STATED PRO FORMA (UNAUDITED)
------------------------- -------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Redeemable Series A Preferred Stock..................... 10,000 $ 11,896,000 -- $ --

Stockholders' equity (deficit)--
Common stock.......................................... 3,130,500 $ -- 5,630,500 $ --
Additional paid-in capital............................ -- 1,518,000 -- 13,414,000
Accumulated deficit................................... -- (3,016,000) -- (3,016,000)
------------- -------------
Total stockholders' equity (deficit).................. $ (1,498,000) $ 10,398,000
------------- -------------
------------- -------------
</TABLE>

F-7
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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 and money market
accounts.

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 (see Note 8). Goodwill is amortized on a straight-line basis
over forty 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
$115,000, $346,000, and $347,000 in 1994, 1995, and 1996, respectively.

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 may warrant
revision or that the remaining balance of an asset may not be recoverable. The
measurement of possible impairment is based on the ability to recover the
balance of assets from expected future operating cash flows on an undiscounted
basis. In the opinion of management, no such impairment existed as of March 31,
1995 or 1996.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash, receivables, payables, and accrued liabilities
approximate the fair values of these instruments because of their short-term
maturities. The carrying value of the Company's debt also approximates fair
value as interest rates on the Company's existing debt approximates market.

REVENUE RECOGNITION

Revenues from the dispensing of pharmaceuticals are recognized when each
prescription is shipped. Claims processing service fees are recognized when the
claims are adjudicated. Clinical, formulary, rebate, and disease management
service revenues are recognized as the services are performed and rebates earned
in accordance with contractual agreements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.

PRO FORMA NET INCOME PER SHARE

Pro forma net income per share gives effect to the conversion of the
redeemable Series A Preferred Stock to Common Stock and is computed using the
weighted average number of common and common equivalents shares outstanding
during the year which include stock options and warrants. As required by 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 primary and
fully diluted per share amounts were the same as the effect of potentially
dilutive securities was antidilutive.

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,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Machinery and equipment..................................................... $ 651,000 $ 709,000
Computer equipment and software............................................. 2,668,000 3,963,000
Furniture and equipment..................................................... 707,000 924,000
Leasehold improvements...................................................... 396,000 419,000
------------ ------------
4,422,000 6,015,000
Less--Accumulated depreciation and amortization............................. (980,000) (1,935,000)
------------ ------------
$ 3,442,000 $ 4,080,000
------------ ------------
------------ ------------
</TABLE>

4. DEBT:
Long-term debt at March 31, 1995 and 1996, consisted of a balance due under
a $7,000,000 Note and Warrant Purchase Agreement (the Agreement) dated December
8, 1993. The note is unsecured, bears interest at 10.101% per annum, payable
quarterly, and is due December 8, 2000. The Agreement obligates 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 note carries certain restrictive covenants which, among other things,
limit the ability of the Company to incur additional indebtedness, create liens,
pay dividends, sell assets, make acquisitions, engage in mergers,
consolidations, or reorganizations, or enter into transactions with certain
related parties, including holders of 10% or more of any capital stock of the
Company or its affiliates. Additionally, the Company is required to maintain
certain net worth and interest coverage ratios. The Company was in compliance
with all covenants of the Agreement at March 31, 1996.

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 10).
The warrants are exercisable for a period of 10 years.

F-9
<PAGE>
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,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Capital lease obligation............................................. $ 93,000 $ 49,000
Other liabilities.................................................... 389,000 241,000
---------- ----------
482,000 290,000
Less--Current portion................................................ (244,000) (49,000)
---------- ----------
$ 238,000 $ 241,000
---------- ----------
---------- ----------
</TABLE>

The Company's capital lease obligation bears interest at 9.5%, and is
payable in monthly installments. The lease is collateralized by the leased
equipment. The lease terminates in March 1997 (see Note 6).

Other liabilities is comprised of deposits held for the benefit of certain
customers in connection with pharmacy benefit contracts, and, at March 31, 1995,
included amounts due to certain officers of Advance Clinical (see Note 12).

6. LEASES:
The Company leases office and dispensing facility space, equipment, and
automobiles under various operating and capital leases. The Company was
obligated to make future minimum payments under capital lease obligations and
noncancelable operating lease agreements as of March 31, 1996, as follows:

<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
MARCH 31, LEASES LEASES
- -------------------------------------------------------- --------- ---------
<S> <C> <C>
1997.................................................. $ 51,000 $1,063,000
1998.................................................. -- 732,000
1999.................................................. -- 255,000
2000.................................................. -- --
2001.................................................. -- --
--------- ---------
Total minimum lease payments........................ 51,000 $2,050,000
--------- ---------
---------
Less--Amounts representing interest................. (2,000)
---------
Present value of future minimum lease payments (see
Note 5)............................................ $ 49,000
---------
---------
</TABLE>

Total rent expense incurred in 1994, 1995, and 1996 was $221,000, $714,000,
and $1,135,000, respectively.

7. COMMITMENTS AND CONTINGENCIES:
The Company entered into 3-year employment agreements with certain
management employees of Advance Clinical. These employment agreements, which
expire in December 1996, 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.

F-10
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. ACQUISITION OF ADVANCE CLINICAL:
In December 1993, the Company acquired the outstanding stock of Advance
Clinical, formerly Paradigm Pharmacy Management, Inc., for a total consideration
of $16,748,000. Assuming the Advance Clinical acquisition had occurred at the
beginning of fiscal year 1994, condensed unaudited pro forma combined results of
operations for the year ended March 31, 1994, are as follows:

<TABLE>
<S> <C>
Revenues....................................................... $34,128,000
Net income..................................................... 197,000
</TABLE>

9. CONCENTRATION OF BUSINESS:
Two customers accounted for approximately 26.8% of the Company's 1996
revenues. One customer accounted for approximately 23.1% of the Company's 1995
revenues. No other customer accounted for over 10% of the Company's 1996 or 1995
revenues. Three customers accounted for approximately 59.8% of the Company's
1994 revenues. On a pro forma basis, assuming the Advance Clinical acquisition
had occurred on April 1, 1993, these three customers would have accounted for
approximately 51.1% of the Company's 1994 revenues.

10. REDEEMABLE PREFERRED STOCK AND COMMON STOCK:

REDEEMABLE SERIES A PREFERRED STOCK

In August and December 1993, the Company issued a total of 10,000 shares of
$.01 par, redeemable Series A Preferred Stock under a Preferred Stock Purchase
Agreement. The holders of the Series A Preferred Stock are entitled to certain
rights, as described below:

CUMULATIVE DIVIDENDS--Holders of the redeemable Series A Preferred Stock are
entitled to cumulative dividends calculated at an annual rate of 8% per
share of the original issuance price of $1,000, or $80 per share. Such
cumulative dividends accrue and accumulate day to day from the date of
original issuance whether or not earned or declared. As of March 31, 1996,
the cumulative undeclared and unpaid dividends were $1,959,000 and are
included in redeemable Series A Preferred Stock in the accompanying balance
sheet. Upon conversion of the redeemable Series A Preferred Stock to Common
Stock, all such accrued and unpaid cumulative dividends shall be forfeited.

RIGHT OF FIRST OFFER--The Company must first offer to the holders of
preferred shares, and any holder of more than 3% of the capital stock of the
Company, any future offering of equity securities, convertible securities,
or debt-equity security combinations. This right does not apply to any stock
dividends, conversion share issuances, stock grants of up to 569,500 shares
pursuant to the stock option plan, or stock grants of up to 415,500 shares
in connection with the acquisition of another entity.

CONVERSION RIGHTS--The redeemable Series A Preferred Stock is convertible at
any time at the option of the holder into fully paid and nonassessable
shares of Common Stock at a conversion rate equal to the issuance price
divided by the Applicable Conversion Value, as defined, giving effect to any
adjustments. At March 31, 1996, the conversion rate was 250-for-one.

The redeemable Series A Preferred Stock is automatically convertible
immediately prior to the closing of an underwritten public offering on a
firm commitment basis filed on Form S-1 of the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for which proceeds (net
of underwriters' discounts and commissions but before calculation of
expenses) equal or exceed $10,000,000 and at a price per share greater than
twice the original issuance price of the redeemable Series A Preferred
Stock, as adjusted for dilutive issuances of capital stock, stock dividends,
stock splits, and reverse stock splits.

PARTICIPATING DIVIDENDS--The redeemable Series A Preferred Stock has a
participating feature whereby if dividends, other than stock dividends, are
declared on the Common Stock, the holders of the redeemable Series A
Preferred Stock are entitled to receive an amount of dividends equal to that
which would be payable on the number of common shares into which the
redeemable Series A Preferred Stock is then convertible.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. REDEEMABLE PREFERRED STOCK AND COMMON STOCK: (CONTINUED)
REDEMPTION RIGHTS--If on or after August 4, 1999, the Company has earnings
after interest, but before taxes, of at least $1,500,000 for the 12-month
period preceding the month of the request for redemption, the holders of 60%
of the then outstanding shares of redeemable Series A Preferred Stock may
request the Company to redeem such number of shares of stock outstanding.
The redemptions shall be made in three equal annual installments at a price
which is the greater of (1) the original issue price of the redeemable
Series A Preferred Stock, as adjusted, plus all accrued and unpaid
dividends, or (2) the fair market value, as defined.

COMMON STOCK

The Company is authorized to issue 7,500,000 shares of $.01 par value Common
Stock, of which 3,125,000 and 3,130,500 shares are issued and outstanding at
March 31, 1995 and 1996, respectively. The holders of the Company's Common Stock
are entitled to a right of first offer consistent with holders of the redeemable
Series A Preferred Stock. The Company has reserved shares of Common Stock at
March 31, 1996, for the following:

<TABLE>
<S> <C>
Conversion of Series A Preferred Stock........................... 2,500,000
Exercise of stock options........................................ 858,000
Exercise of warrants............................................. 659,750
---------
4,017,750
---------
---------
</TABLE>

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, 1996, the Company
agreed to issue warrants to purchase 267,000 shares of its Common Stock at a
price of $11.00 per share to a customer contingent upon future expansion of
member lives. As of March 31, 1996, no warrants have been earned. In
management's opinion, the fair value of the warrants at the date of the
agreement was not material.

11. 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, 1996, the number of shares of
Common Stock issuable under the Plans may not exceed 858,000 shares. The Company
has reserved 858,000 shares of Common Stock for such issuance. The Plans are
administered by a compensation committee appointed by the Board of Directors of
the Company.

The stock options generally vest over 5-year periods. In the event of an
initial public offering, the vesting period of one management employee
accelerates to 3 years. 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, 1996, 276,750 options
were vested at exercise prices of $3.20 to $11.00 per share.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. STOCK OPTION PLAN: (CONTINUED)
The following is a summary of stock option activity:

<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Options outstanding at March 31, 1993............................ -- -
Options granted.................................................. 636,750 $ 3.20-$ 4.80
---------
Options outstanding at March 31, 1994............................ 636,750 $ 3.20-$ 4.80
Options granted.................................................. 146,750 $10.80-$30.00
---------
Options outstanding at March 31, 1995............................ 783,500 $ 3.20-$30.00
Options granted.................................................. 195,500 $11.00-$30.00
Options exercised................................................ (5,500) $3.20
Options terminated............................................... (163,000) $ 3.20-$30.00
---------
Options outstanding at March 31, 1996............................ 810,500 $ 3.20-$11.00
---------
---------
</TABLE>

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. Such disclosure requirements are
effective beginning with the Company's 1997 fiscal year.

12. RELATED PARTY TRANSACTIONS:
The long-term debt of the Company is payable to an affiliate of certain
holders of Preferred Stock. In connection with the issuance of this debt, the
Company paid a placement fee of $210,000 to a preferred stockholder.

Prior to 1995, the Company occupied space in an office facility leased by
AHC. In addition, certain management employees of AHC provided administrative
and management services to the Company. In connection with the use of the
facility and the services provided, AHC charged the Company $607,000 during
1994. No such amounts were charged in 1995 and 1996. In July 1993, as part of
the formation of API, AHC transferred a debt obligation of $500,000 to API. API
retired this obligation in August 1993.

In connection with the acquisition of Advance Clinical, the Company agreed
to pay a fee of $250,000 each to two officers of Advance Clinical for services
relating to the acquisition. The total fee of $500,000 is included as part of
the Advance Clinical purchase price. The Company paid $100,000 of this fee upon
closing of the acquisition and $200,000 in February 1995 and February 1996.

The Company entered into an agreement with Advance Capital Markets (ACM) in
October 1993, pursuant to which ACM agreed to use its reasonable best efforts to
secure financing for the Company and to act as financial advisor and investment
banker for the acquisition of Advance Clinical. In exchange for these
professional services, the Company paid ACM a fee of $150,000, which is
equivalent to or less than similar fees incurred in arm's-length transactions.
The Chief Executive Officer and President of the Company also serves on the
board of directors of ACM.

13. RETIREMENT PLAN AND POSTRETIREMENT BENEFITS:
The Company sponsors a retirement plan for all eligible employees. The plan
is qualified under Section 401(k) of the Internal Revenue Code. Compensation
expense associated with the Company's plan amounted to approximately $0 in 1994,
$50,000 in 1995, and $102,000 in 1996. Effective in 1995, the Company is
required to contribute at least 50% of the first 6% of salary deferral
contributed by each participant.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. INCOME TAXES:
The Company's net income in 1996 was offset by net operating loss
carryforwards. The Company had losses for tax purposes in 1994 and 1995 and had
remaining net operating loss carryforwards for both financial reporting and
federal income tax purposes. The Company had approximately $1,918,000 in net
operating loss carryforwards for federal income tax purposes at March 31, 1996.
The net operating loss carryforwards will expire in the years 2002 through 2010
if not previously utilized.

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,
1995 CHANGES 1996
---------- ---------- ----------
<S> <C> <C> <C>
Gross deferred tax asset:
Net operating loss carryforwards.......................................... $ 836,000 $ (184,000) $ 652,000
Other accruals............................................................ 47,000 95,000 142,000
Other..................................................................... 48,000 (4,000) 44,000
---------- ---------- ----------
931,000 (93,000) 838,000
Gross deferred tax liability:
Amortization of goodwill.................................................. (261,000) (197,000) (458,000)
Depreciation.............................................................. (95,000) (98,000) (193,000)
---------- ---------- ----------
575,000 (388,000) 187,000
Valuation allowance....................................................... (575,000) 388,000 (187,000)
---------- ---------- ----------
Net deferred tax asset.................................................... $ -- $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

Because of the uncertainty of the realization of the net deferred tax asset
caused by historical operating losses, the Company recorded a valuation reserve
equal to its net deferred tax asset at March 31, 1995 and 1996. Management will
evaluate the appropriateness of the valuation reserve in the future based upon
historical and anticipated operating results of the Company. The deferred tax
assets arising from the Advance Clinical acquisition, if subsequently
recognized, will be allocated to reduce the goodwill attributable to the
acquisition.

15. SUBSEQUENT EVENTS (UNAUDITED):
On June 25, 1996, the Company sold an aggregate of 2,597 shares at its
Series B Preferred Stock to a customer at a price of $3,850 per share.

Immediately prior to the consummation of the Offering, Advance Health Care
will merge with and into the Company. Such Merger will be consummated as a means
of simplifying the corporate structure of the Company and Advance Health Care
and is intended to qualify as a tax free reorganization. Prior to the Merger,
Advance Health Care holds 3,125,000 shares of Common Stock representing all of
the outstanding Common Stock of the Company. In the Merger, the Company will
cancel the shares held by Advance Health Care and issue shares of Common Stock
directly to the Advance Health Care stockholders based upon their proportionate
ownership interests in Advance Health Care (collectively referred to as the "AHC
Stockholders"). Immediately prior to the Merger, Advance Health Care will
distribute the stock of certain subsidiaries of Advance Health Care, operating
in businesses unrelated to the Company, to the Advanced Health Care
Stockholders. Prior to such spin-off, certain indebtedness owed by Advance
Health Care to several of its stockholders will be exchanged for additional
shares of common stock in Advance Health Care. Also prior to such spin-off,
certain indebtedness of Advance Health Care will be assumed by an existing
stockholder of Advance Health Care in exchange for additional shares of common
stock. After the spin-off, exchange of indebtedness, and assumption of
indebtedness referred to above are effected, Advance Health Care will have no
operations, known liabilities, or assets of its own other than its investment in
the Company. The stockholders of Advance Health Care who exchange their

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
indebtedness for additional shares and the stockholder who assumes certain
indebtedness for additional shares are among the Selling Stockholders in the
Offering, including D. Halbert, J. Halbert, and Dr. Worley. See "Principal and
Selling Stockholders." In connection with the Merger, the Advance Health Care
incentive stock option plan will be merged with the Plan, and holders of options
under the Advance Health Care incentive stock option plan will receive options
to purchase Common Stock under the Plan.

F-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholder of
ParadigM Pharmacy Management, Inc.:

We have audited the accompanying statements of operations, stockholder's
equity, and cash flows of ParadigM Pharmacy Management, Inc. (a Maryland
corporation whose name was subsequently changed to Advance ParadigM Clinical
Services, Inc.) for the eleven months ended November 30, 1993. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of its operations and its cash flows of
ParadigM Pharmacy Management, Inc. for the eleven months ended November 30,
1993, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Dallas, Texas,
April 15, 1994

F-15
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

STATEMENT OF OPERATIONS

FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1993

<TABLE>
<S> <C>
REVENUES....................................................................... $14,312,000
COST OF OPERATIONS:
Cost of revenues............................................................. 10,553,000
Selling, general and administrative expenses................................. 1,945,000
----------
Total cost of operations................................................... 12,498,000
Operating income........................................................... 1,814,000

INTEREST INCOME................................................................ 69,000
----------
Income before provision for income taxes................................... 1,883,000

PROVISION FOR INCOME TAXES..................................................... 750,000
----------
Net income................................................................. $1,133,000
----------
----------
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-16
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

STATEMENT OF STOCKHOLDER'S EQUITY

FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1993

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992................................... $ -- $ 654,000 $ 840,000 $1,494,000
Net income................................................. -- -- 1,133,000 1,133,000
Additional capitalization from Parent...................... -- 593,000 -- 593,000
--- ------------ ------------ ------------
BALANCE, November 30, 1993................................... $ -- $ 1,247,000 $ 1,973,000 $3,220,000
--- ------------ ------------ ------------
--- ------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-17
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

STATEMENT OF CASH FLOWS

FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1993

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $1,133,000
Adjustments to reconcile net income to net cash (used in) provided by
operating activities--
Depreciation expense........................................................ 36,000
Increase in receivables..................................................... (5,847,000)
Decrease in due from/to affiliates, net..................................... 248,000
Increase in prepaid expenses and other current assets....................... (3,000)
Increase in deferred income taxes........................................... (20,000)
Increase in accounts payables............................................... 3,926,000
Increase in accrued salaries and benefits................................... 480,000
Increase in other accrued expenses.......................................... 313,000
Decrease in deferred revenue................................................ (473,000)
----------
Net cash used in operating activities....................................... (207,000)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................... (212,000)
----------
Net cash used in investing activities....................................... (212,000)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional capitalization from Parent......................................... 593,000
----------
Net cash provided by financing activities................................... 593,000
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS....................................... 174,000
CASH AND CASH EQUIVALENTS, beginning of period.................................. 1,840,000
----------
CASH AND CASH EQUIVALENTS, end of period........................................ $2,014,000
----------
----------
SUPPLEMENTAL DISCLOSURE OF INCOME TAXES PAID.................................... $ 113,000
----------
----------
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-18
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION:
ParadigM Pharmacy Management, Inc. (PPM), a Maryland corporation (name
subsequently changed to Advance ParadigM Clinical Services, Inc.), provides
pharmacy management services to a variety of healthcare companies including
Health Maintenance Organizations, Preferred Provider Organizations and other
employee benefit plans.

PPM began operations on January 1, 1991. During the period from January 1,
1991, through November 30, 1993, PPM was a wholly owned subsidiary of Blue Cross
and Blue Shield of Maryland, Inc. (Parent) and operated under common management
with CFS Health Group, Inc. (CFS), another wholly owned subsidiary of Blue Cross
and Blue Shield of Maryland, Inc.

Effective after the close of business on November 30, 1993, Advance Pharmacy
Services, Inc. (APS), whose name has been subsequently changed to Advance
ParadigM, Inc., acquired all of the outstanding capital stock of PPM. The
accompanying financial statements do not include any accounting to reflect the
purchase transaction.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include overnight investments and short-term notes
with maturities of 60 days or less.

REVENUE RECOGNITION

Clinical, formulary, and rebate service revenues are recognized as the
services are performed and rebates earned in accordance with contractual
agreements. A portion of the rebates earned is shared with the Company's
customers in accordance with contractual agreements. Such amounts are included
in cost of revenues in the accompanying financial statements.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. PPM depreciates property and
equipment on a straight-line basis over the following estimated useful lives:

<TABLE>
<S> <C>
Computer equipment and software............................ 3 years
Furniture and fixtures..................................... 5 years
</TABLE>

DEFERRED REVENUE

Deferred revenue represents the unamortized portion of one-time payments to
PPM by pharmaceutical suppliers during 1992 as an incentive for PPM to obtain a
specific customer in a new line of business. This incentive was deferred and is
being amortized over the 24 months of the initial customer's contract through
June 30, 1994. The amortization of this payment is included in revenues in the
accompanying statements of operations.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

In connection with the acquisition of PPM by APS, PPM agreed to pay $195,000
of the legal and underwriting costs related to the transaction. These costs are
included in selling, general and administrative expenses in the accompanying
statement of operations for the eleven months ended November 30, 1993.

3. INCOME TAXES:
The results of PPM's operations are included in the consolidated tax return
of the Parent for federal income tax purposes. PPM files a separate Maryland
state income tax return and records its tax provision or benefit accordingly.

A provision for income taxes of $750,000 has been provided for financial
reporting purposes for the eleven months ended November 30, 1993. The provision
for income taxes includes deferred taxes resulting from temporary differences in
income for financial accounting and tax purposes, using the liability method.

F-20
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. INCOME TAXES: (CONTINUED)
The provision (benefit) for income taxes consists of the following:

<TABLE>
<S> <C>
Current--
Federal......................................................... $ 671,000
State, net of federal income tax effect......................... 99,000

Deferred--
Federal......................................................... (17,000)
State, net of federal income tax effect......................... (3,000)
---------
$ 750,000
---------
---------
</TABLE>

The differences between the recorded income tax provision and the "expected"
tax provision based on statutory federal income tax rates is as follows:

<TABLE>
<S> <C>
Computed federal tax provision at statutory rates................. $ 640,000
State income taxes, net of federal income tax effect.............. 94,000
Other............................................................. 16,000
---------
$ 750,000
---------
---------
</TABLE>

PPM maintained a federal tax sharing agreement with its Parent. Under this
agreement, the Parent allocated federal tax expense of $39,000 to PPM for the
eleven months ended November 30, 1993. PPM's income tax provision has been
recorded as if it were a stand-alone company. The differences between the
federal tax allocations from its Parent and the federal tax provision recorded
in the accompanying statement of operations have been recorded as additional
capitalization from its Parent in the accompanying statement of stockholder's
equity.

4. CONCENTRATION OF BUSINESS:
During the eleven months ended November 30, 1993, the Parent and CFS
collectively constituted 32% of PPM's revenues. A non-related customer
constituted approximately 18% of PPM's revenues during the eleven months ended
November 30, 1993.

During the eleven months ended November 30, 1993, two pharmaceutical
suppliers constituted approximately 27% of rebates.

Between November 30, 1993 and January 1, 1994, four customers constituting
approximately 38% of revenues for the eleven months ended November 30, 1993, did
not renew their contracts with PPM. Beginning January 1994, PPM contracted with
three new customers. These new customers represented approximately 37% of the
recorded revenues for the quarter ended March 31, 1994. One of the new customers
is APS, PPM's new parent. APS represented approximately 17% of the recorded
revenues for the quarter ended March 31, 1994. Management believes that the
impact of the customer terminations, when coupled with the impact of new
customers, will not have a material adverse effect on PPM's financial position
or results of operations.

5. RELATED-PARTY TRANSACTIONS:
Through November 30, 1993, PPM had an operating relationship with CFS,
whereby CFS paid certain administrative costs and performed certain
administrative services on behalf of PPM. PPM reimbursed CFS for the costs paid
on PPM's behalf.

PPM provided clinical, administrative and various reporting services to its
Parent during the eleven months ended November 30, 1993. Charges for these
services were approximately $307,000. This amount is included in revenues in the
accompanying statement of operations.

F-21
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. RELATED-PARTY TRANSACTIONS: (CONTINUED)
PPM leases administrative office facilities from CFS. Rent expense for the
eleven months ended November 30, 1993, was approximately $85,000. The lease
expired on June 30, 1994, unless sooner terminated pursuant to terms of the
lease. Total remaining payments under this lease at November 30, 1993, are
approximately $54,000.

Through November 30, 1993, PPM participated in its Parent's noncontributory
retirement plan and defined contribution savings and retirement plan. The
allocated expense for both plans was not material to PPM.

6. POSTRETIREMENT BENEFITS:
Until November 30, 1993, PPM's employees participated in its Parent's
postretirement benefits. Substantially all employees subject to certain
requirements became eligible for those benefits when they reached normal
retirement age while working for PPM and had at least ten years of service.

In December 1990, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 106 (SFAS 106) "Employer's Accounting for
Postretirement Benefits Other Than Pensions". This standard requires that the
expected cost of these benefits must be charged to expense during the years that
the employees render service. PPM adopted the standard, effective January 1,
1993, on a prospective basis, as permitted. The effect of this adoption was not
material to the accompanying financial statements.

7. COMMITMENTS AND CONTINGENCIES:
Effective with the sale of PPM by Blue Cross and Blue Shield of Maryland,
Inc. on November 30, 1993, PPM's employees no longer participated in its
retirement, defined contribution and postretirement benefit plans. Management of
PPM intends to implement new benefit plans which will also cover the employees'
unvested benefits under the former Blue Cross and Blue Shield of Maryland, Inc.
plans. Accordingly, management has provided a reserve on the balance sheet
related to the assumption of the unvested accumulated benefits as of November
30, 1993.

8. SUBSEQUENT EVENT:
Effective December 1, 1993, the Company entered into employment agreements
with two key executives, through November 1996, aggregating base compensation of
$690,000 over their term. The contracts also provide for additional incentive
payments, subject to performance standards.

F-22
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR
THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Additional Information............................... 2
Prospectus Summary................................... 3
Risk Factors......................................... 5
The Company.......................................... 10
Use of Proceeds...................................... 10
Dividend Policy...................................... 10
Capitalization....................................... 11
Dilution............................................. 12
Selected Consolidated Financial Data................. 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 14
Business............................................. 18
Management........................................... 27
Certain Transactions................................. 34
Principal and Selling Stockholders................... 36
Description of Capital Stock......................... 38
Shares Eligible for Future Sale...................... 41
Underwriting......................................... 43
Legal Matters........................................ 44
Experts.............................................. 44
Index to Consolidated Financial Statements........... F-1
</TABLE>

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

[LOGO]
COMMON STOCK
--------------

PROSPECTUS
--------------

HAMBRECHT & QUIST

MONTGOMERY SECURITIES

J.P. MORGAN & CO.
, 1996

- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions, are set forth in the following table. All of such expenses will be
borne by Advance ParadigM, Inc. (the "Company").

<TABLE>
<S> <C>
SEC registration fees................................................... $ 11,897
NASD filing fees........................................................ $ 3,950
Nasdaq National Market System application and listing fees.............. $ *
Printing and engraving expenses......................................... $ *
Legal fees and expenses................................................. $ *
Accounting fees and expenses............................................ $ *
Blue sky fees and expenses.............................................. $ *
Transfer agent and registrar fees and expenses.......................... $ *
Miscellaneous........................................................... $ *
---------
Total................................................................. $ 500,000
---------
---------
</TABLE>

- ------------------------
*To be filed by amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company, a Delaware corporation, is empowered by Section 145 of the
Delaware General Corporation Law (the "Delaware Act"), subject to the procedures
and limitations stated therein, to indemnify certain parties. Section 145 of the
Delaware Act provides in part that a corporation shall have the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Similar indemnity is authorized for such persons against
expenses (including attorneys' fees) actually and reasonably incurred in defense
or settlement of any threatened, pending or completed action or suit by or in
the right of the corporation, if such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and provided further that (unless a court of competent jurisdiction
otherwise provides) such person shall not have been adjudged liable to the
corporation. Any such indemnification may be made only as authorized in each
specific case upon a determination by the stockholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct. Where an officer or a director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually or reasonably incurred. Section 145 provides further that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise.

Article 10 of the Company's Certificate of Incorporation, as amended (the
"Certificate") provides that the Company shall indemnify any and all persons
whom it has the power to indemnify under Section 145 of the Delaware Act to the
fullest extent permitted under such section, and such indemnity shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person.

II-1
<PAGE>
Article 9 of the Company's Certificate eliminates the personal liability of
the Company's directors to the fullest extent permitted under Section 102(b)(7)
of the Delaware Act, as amended. Such section permits a company's certificate of
incorporation to eliminate or limit the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director: (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware Act (which addresses director
liability for unlawful payment of a dividend or unlawful stock purchase or
redemption) or (iv) for any transaction from which the director derived an
improper personal benefit.

As set forth below, Article 8 of the bylaws of the Company (the "Bylaws")
provides for indemnification of directors and officers, and Section 8.8 of the
Bylaws provides for the authority to purchase insurance with respect to
indemnification of directors and officers.

Article 8 of the Bylaws provides that the Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) by reason of the fact that he is or was a director, officer, employee
or agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding to the
fullest extent permitted by Delaware law.

The right to indemnification under Article 8 of the Bylaws is a contract
right which includes, with respect to directors, officers, employees and agents,
the right to be paid by the Company the expenses incurred in defending a civil
or criminal action, suit or proceeding in advance of its disposition; provided,
however, that (i) the payment of such expenses incurred by a director or officer
in advance of the final disposition of such action, suit or proceeding shall be
made only upon delivery to the Company of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under Article 8 of the Bylaws or otherwise and (ii) advances for
expenses incurred by other employees and agents may be paid upon such terms and
conditions that the Board of Directors of the Company deems appropriate.

Section 7 of the Underwriting Agreement among the Company, the Underwriters
and the Selling Stockholders, a copy of which is filed herein as Exhibit 1,
provides for the indemnification by the Company of the Underwriters and each
person, if any, who controls any Underwriter against certain liabilities and
expenses, as stated therein, which may include liabilities under the Securities
Act of 1933, as amended. The Underwriting Agreement also provides that the
Underwriters shall similarly indemnify the Company, its directors, officers and
controlling persons, as set forth therein.

The Company intends to apply for a directors and officers insurance policy.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The Company issued 3,125,000 shares of its Common Stock to Advance Health
Care, Inc. ("Advance Health Care") in July 1993 in exchange for all of the
issued and outstanding common stock of and certain debt attributable to Advance
ParadigM Mail Services, Inc. ("Advance Mail") and Advance ParadigM Data
Services, Inc. ("Advance Data").

In a two-step transaction, the Company sold an aggregate of 10,000 shares of
its Series A Preferred Stock in a private financing at an effective price of
$1,000 per share (collectively, the "Canaan/Whitney Capital Investment") as
follows: On August 4, 1993, the Company sold (i) a total of 1,945 shares of
Series A Preferred Stock to Canaan Capital Limited Partnership ("Canaan LP"),
Canaan Capital Offshore Limited Partnership C.V. ("Canaan Offshore") and Quai
Ltd., (ii) a total of 2,000 shares of Series A Preferred Stock to J.H. Whitney &
Co. ("J.H. Whitney") and Whitney 1990 Equity Fund, L.P. ("Whitney Fund"), (iii)
30 shares of Series A Preferred Stock to Jeffrey R. Jay, M.D., and (iv) 25
shares of Series A Preferred Stock to Stephen L. Green; and on December 7, 1993,
in contemplation of the closing of the Advance ParadigM Clinical Services, Inc.
("Advance

II-2
<PAGE>
Clinical") acquisition, the Canaan Investors, the Whitney Investors, Dr. Jay and
Mr. Green purchased an additional 2,918 shares, 3,000 shares, 45 shares and 37
shares, respectively, of the Company's Series A Preferred Stock. Both Dr. Jay
and Mr. Green are members of the Board of Directors. The Canaan and Whitney
Investors have certain registration rights in connection with their shares. For
purposes of this Registration Statement and the descriptions of the Company's
related parties contained herein, (i) Canaan LP, Canaan Offshore, Quai Ltd., Dr.
Jay and Mr. Green are collectively referred to as the "Canaan Investors" and
(ii) J.H. Whitney, the Whitney Fund and the Whitney Debt Fund (as defined below)
are collectively referred to as the "Whitney Investors". All shares of the
Preferred Stock issued in the Canaan/Whitney Capital Investment automatically
convert into shares of Common Stock upon the consummation of this Offering. As
of the date of this registration statement, the conversion rate is one share of
Series A Preferred Stock for 250 shares of Common Stock.

On December 8, 1993, the Company and Whitney Subordinated Debt Fund L.P.
(the "Whitney Debt Fund") entered into a Note and Warrant Purchase Agreement
pursuant to which the Whitney Debt Fund paid the Company $7 million in exchange
for a note payable to the Whitney Debt Fund, in the original principal amount of
$7.0 million (the "Whitney Note") and a warrant to purchase up to 336,500 shares
of common stock of the Company, par value $0.01 (the "Common Stock") (the
"Whitney Warrant"). The Whitney Note bears interest on its original principal
amount of $7 million at the rate of 10.1% per annum, payable quarterly. Although
the Whitney Note has a seven-year term, the Company is obligated to prepay the
indebtedness, without penalty or premium, upon consummation of a public offering
filed with the Commission. The Whitney Warrant grants the Whitney Debt Fund the
right to purchase an aggregate of 336,500 shares of Common Stock at an exercise
price of $4.00 per share until December 8, 2003. The warrant contains certain
demand and piggy-back registration rights relating to the Common Stock
underlying it.

Effective December 8, 1993, in connection with the Advance Clinical
acquisition, the Company sold to Blue Cross and Blue Shield of Maryland ("BCBS
of Maryland") a warrant to purchase 56,250 shares of Common Stock, exercisable
in whole during a four-year term at an aggregate exercise price of $337,500. The
warrant contains certain piggy-back registration rights relating to the Common
Stock underlying it.

In June 1995 an option holder exercised his option and purchased 5,500
shares of Common Stock.

On November 25, 1995, in connection with the Warrant Agreement by and
between the Company and BCBS of Texas, the Company granted to BCBS of Texas the
right to earn up to four warrants, each representing the right to acquire 66,750
shares of Common Stock, in consideration of BCBS of Texas causing additional
lives to be enrolled in the Company's PBM programs, which the Company has
estimated the value to be less than $100,000 (the "BCBS of Texas Warrants").
BCBS of Texas' right to earn the BCBS of Texas Warrants expires November 25,
2000. Each BCBS of Texas Warrant will not be exercisable until the first annual
anniversary of its issuance. At such time, the BCBS of Texas Warrant will be
exercisable in whole during a four-year term at an exercise price of $11.00 per
share.

Immediately prior to the consummation of the Offering, the Company intends
to issue shares of Common Stock to the stockholders of Advance Health Care in a
merger of Advance Health Care with and into the Company (the "Merger"). Prior to
the Merger, and assuming conversion of the Series A Preferred Stock into shares
of Common Stock, Advance Health Care held 3,125,000 shares of Common Stock,
representing 55.5% of the outstanding capital stock of the Company.

On June 25, 1996, the Company sold an aggregate of 2,597 shares of its
Series B Preferred Stock, par value $.01 per share, in a private financing to
BCBS of Texas at an effective price of $3,850 per share. As of the date of this
registration statement, the conversion rate is one share of Series B Preferred
Stock for 250 shares of Common Stock.

Each of the foregoing issuances is exempt from registration under Section
4(2) of the Securities Act of 1933, as amended.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
- ---------- --------------------------------------------------------------------------------------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Certificate of Incorporation of the Company.
3.2* -- Amended and Restated Bylaws of the Company.
4.1* -- Specimen Certificate for shares of Common Stock, $.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.
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 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 July ,1996, among the Company, Advance Health Care, David D.
Halbert, Jon S. Halbert, Danny Phillips, the Purchasers and Whitney Debt Fund.
5* -- Opinion and Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1* -- Purchase and Sale Agreement dated as of December 8, 1993, between BCBS of Maryland and the
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.
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, 1993 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, 1993, 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, 1994, by and between the Company and John H.
Sattler.
</TABLE>

II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
- ---------- --------------------------------------------------------------------------------------------------
<C> <C> <S>
10.8 -- Employment Agreement effective as of February 15, 1996, by and between the Company and Alan T.
Wright.
10.9* -- Form of Consulting Agreement.
10.10 -- Sublease dated May 2, 1996, between Lincoln National Life Insurance Company and Advance Data.
10.11 -- Lease dated March 16, 1994, by and between Hill Management Services, Inc. and Advance Clinical
(formerly ParadigM).
10.12 -- Lease Agreement dated as of February 24, 1989, as amended November 30, 1992, and December , 1992,
by and between TRST Las Colinas, Inc. and Advance Health Care.
10.13 -- 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.
10.14* -- Stock Purchase Agreement dated as of June 25, 1996, by and between the Company and BCBS of Texas.
10.15* -- Managed Pharmaceutical Agreement dated November 1, 1993, by and between Advance Data and the Mega
Life & Health Insurance Company.
10.16* -- Managed Pharmacy Benefit Services Agreement dated September 1, 1995, between the Company and BCBS
of Texas.
10.17* -- Warrant Agreement dated as of November 25, 1995, by and between the Company and BCBS of Texas.
23.1 -- Consent of Arthur Andersen LLP.
23.2* -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its opinion filed as Exhibit 5
hereto).
</TABLE>

- ------------------------
* To be filed by amendment

(b) Financial Statement Schedules

The following financial statement schedule is included in Part II of the
registration statement:

Schedule II--Valuation and Qualifying Accounts

All other schedules have been omitted because they are not required, are not
applicable or the information is included in the Consolidated Financial
Statements or Notes thereto.

ITEM 17. UNDERTAKINGS

(a) Undertaking related to equity offerings of nonreporting registrants:

The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

(b) Undertaking related to acceleration of effectiveness:

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the

II-5
<PAGE>
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a registration
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective.

(2) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the Offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

II-6
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on June 26, 1996.

ADVANCE PARADIGM, INC.

By: /s/ DAVID D. HALBERT

-----------------------------------
David D. Halbert
CHIEF EXECUTIVE OFFICER, CHAIRMAN
OF THE BOARD AND PRESIDENT

The undersigned directors and officers of Advance ParadigM, Inc. hereby
constitute and appoint David D. Halbert and Danny Phillips and each of them,
with full power to act without the other and with full power of substitution and
resubstitution, our true and lawful attorneys-in-fact with full power to execute
in our name and behalf in the capacities indicated below any and all amendments
(including post-effective amendments and amendments thereto) to this
Registration Statement and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Commission and hereby ratify and
confirm all that such attorneys-in-fact, or either of them, or their substitutes
shall lawfully do or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Act of 1933, this Registration Statement on Form
S-1 has been signed by the following persons in the capacities indicated on June
26, 1996.

NAME TITLE
- ----------------------------------- -----------------------------------

/s/ DAVID D. HALBERT Chief Executive Officer, Chairman
- ----------------------------------- of the Board and President
David D. Halbert (Principal Executive Officer)

/s/ JON S. HALBERT
- ----------------------------------- Chief Operating Officer, Executive
Jon S. Halbert Vice President and Director

Chief Financial Officer, Senior
/s/ DANNY PHILLIPS Vice President, Secretary and
- ----------------------------------- Treasurer (Principal Financial and
Danny Phillips Accounting Officer)

/s/ PETER M. CASTLEMAN
- ----------------------------------- Director
Peter M. Castleman

/s/ MIKEL D. FAULKNER
- ----------------------------------- Director
Mikel D. Faulkner

/s/ STEPHEN L. GREEN
- ----------------------------------- Director
Stephen L. Green

/s/ JEFFREY R. JAY
- ----------------------------------- Director
Jeffrey R. Jay

/s/ MICHAEL D. WARE
- ----------------------------------- Director
Michael D. Ware

II-7
<PAGE>
After the 250-for-one stock split discussed in Note 15 to the Company's
Consolidated Financial Statements is effected, we expect to be in a position to
render the following report.

ARTHUR ANDERSEN LLP

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 registration statement and have issued our report thereon dated
May 6, 1996 (except with respect to the matters discussed in Note 15, as to
which the date is , 1996). Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. Schedule II is
presented for purposes of complying with the Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

Dallas, Texas
May 6, 1996

S-1
<PAGE>
ADVANCE PARADIGM, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO (1) END OF
YEAR EXPENSES DEDUCTIONS YEAR
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended March 31, 1994:
Allowance for doubtful accounts receivable................... $ 75,000 $ 27,000 $ (11,000) $ 91,000
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
</TABLE>

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

S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
- ---------- ------------------------------------------------------------------------------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Certificate of Incorporation of the Company.
3.2* -- Amended and Restated Bylaws of the Company.
4.1* -- Specimen Certificate for shares of Common Stock, $.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.
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 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 July ,1996, among the Company, Advance Health Care,
David D. Halbert, Jon S. Halbert, Danny Phillips, the Purchasers and Whitney Debt Fund.
5* -- Opinion and Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1* -- Purchase and Sale Agreement dated as of December 8, 1993, between BCBS of Maryland and the
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.
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, 1993 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, 1993, 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, 1994, by and between the Company and
John H. Sattler.

<PAGE>
EXHIBIT
NO. EXHIBITS
- ---------- ------------------------------------------------------------------------------------------
10.8 -- Employment Agreement effective as of February 15, 1996, by and between the Company and
Alan T. Wright.
10.9* -- Form of Consulting Agreement.
10.10 -- Sublease dated May 2, 1996, between Lincoln National Life Insurance Company and Advance
Data.
10.11 -- Lease dated March 16, 1994, by and between Hill Management Services, Inc. and Advance
Clinical (formerly ParadigM).
10.12 -- Lease Agreement dated as of February 24, 1989, as amended November 30, 1992, and December
, 1992, by and between TRST Las Colinas, Inc. and Advance Health Care.
10.13 -- 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.
10.14* -- Stock Purchase Agreement dated as of June 25, 1996, by and between the Company and BCBS of
Texas.
10.15* -- Managed Pharmaceutical Agreement dated November 1, 1993, by and between Advance Data and
the Mega Life & Health Insurance Company.
10.16* -- Managed Pharmacy Benefit Services Agreement dated September 1, 1995, between the Company
and BCBS of Texas.
10.17* -- Warrant Agreement dated as of November 25, 1995, by and between the Company and BCBS of
Texas.
23.1 -- Consent of Arthur Andersen LLP.
23.2* -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its opinion filed as
Exhibit 5 hereto).

</TABLE>
- ------------------------
* To be filed by amendment

<PAGE>

EXHIBIT 1

ADVANCE PARADIGM, INC.

___________ SHARES(1)

COMMON STOCK

UNDERWRITING AGREEMENT

_______________ , 1996

HAMBRECHT & QUIST LLC
J. P. MORGAN SECURITIES INC.
MONTGOMERY SECURITIES
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104

Ladies and Gentlemen:

Advance ParadigM, Inc. , a Delaware corporation (herein called the
Company), proposes to issue and sell ___________ shares of its authorized but
unissued Common Stock, $.01 par value (herein called the Common Stock) and the
stockholders of the Company named in Schedule II hereto (herein collectively
called the Selling Securityholders) propose to issue and sell an aggregate of
_________ shares of the Common Stock, (said ___________ shares of Common Stock
to be sold by the Company and the Selling Securityholders being herein called
the Underwritten Stock). The Company proposes to grant to the Underwriters (as
hereinafter defined) an option to purchase up to ___________ additional shares
of Common Stock (herein called the Option Stock and with the Underwritten Stock
herein collectively called the Stock). The Common Stock is more fully described
in the Registration Statement and the Prospectus hereinafter mentioned.

The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.

1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-_____), including the related Preliminary Prospectus referred
to below, for the registration under the Securities Act of 1933, as amended
(herein called the Securities Act), of the Stock. Copies of such registration
statement and of each amendment thereto, if any, including the related
Preliminary Prospectus referred to below (meeting the requirements of Rule 430A
of the rules and regulations of the Commission) heretofore filed by the Company
with the Commission have been delivered to you.

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

(1) Plus an option to purchase from the Company up to ________ additional
shares to cover over-allotments.

1
<PAGE>

The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.

The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.

2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDERS.

(a) Each of the Company and the Selling Securityholders named in Part A of
Schedule II hereby severally represents and warrants as follows:

(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus and as
currently being conducted, and is duly qualified as a foreign corporation
and in good standing in all jurisdictions in which the character of the
property owned or leased or the nature of the business transacted by it
makes qualification necessary (except where the failure to be so qualified
would not have a material adverse effect on the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole).

(ii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
material adverse change in the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of
business, neither the Company nor any of its subsidiaries has entered into
any material transaction not referred to in the Registration Statement and
the Prospectus.

(iii) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that none of the representations and warranties in this
paragraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance

2
<PAGE>

upon and in conformity with information herein or otherwise furnished in
writing to the Company by or on behalf of the Underwriters for use in the
Registration Statement or the Prospectus.

If the registration statement relating to the Stock has been declared
effective under the Securities Act by the Commission, the Company will
prepare and promptly file with the Commission the information omitted from
the registration statement pursuant to Rule 430A(a) of the Rules and
Regulations pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the
registration statement (including a final form of prospectus). If the
registration statement relating to the Stock has not been declared
effective under the Securities Act by the Commission, the Company will
prepare and promptly file an amendment to the registration statement,
including a final form of prospectus.

(iv) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and is a valid and binding agreement on the part of the Company,
enforceable in accordance with its terms, except as rights to
indemnification and contribution hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any bond, debenture, note or other evidence
of indebtedness, or under any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of its subsidiaries or any of their respective properties may be bound,
(ii) the charter or bylaws of the Company or any of its subsidiaries, or
(iii) any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries or
over their respective properties. No consent, approval, authorization or
order of or qualification with any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any
of its subsidiaries or over their respective properties is required for the
execution and delivery of this Agreement and the consummation by the
Company of the transactions herein contemplated, except such as may be
required under the Securities Act, by the National Association of
Securities Dealers, Inc. (the NASD) or under state or other securities or
blue sky laws, all of which requirements have been satisfied in all
material respects.

(v) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company
or any subsidiary of the Company or any of their respective officers or any
of the Company's or its subsidiaries' respective properties, assets or
rights before any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any subsidiary
of the Company or over their respective officers or properties or otherwise
which (i) might result in any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company or its subsidiaries, taken as a whole, or might
materially and adversely affect their respective properties, assets or
rights, (ii) might prevent consummation of the transactions contemplated
hereby or (iii) is required to be disclosed in the Registration Statement
or Prospectus and is not so disclosed; and there are no agreements,
contracts, leases or documents of the Company or any subsidiary of the
Company of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Securities Act or the Rules and Regulations
which have not been accurately described in all material respects or
referred to in the Registration Statement or Prospectus or filed as
exhibits to the Registration Statement.

(vi) The Stock is duly and validly authorized, is (or in the case of
shares of the Stock to be sold by the Company, will be), when issued and
sold to the Underwriters as provided herein, duly and validly issued, fully
paid and nonassessable and conforms to the description thereof in the
Prospectus. No further

3
<PAGE>

approval or authority of the stockholders or the Board of Directors of the
Company will be required for the issuance and sale of the Stock to be sold
by the Company or the transfer and sale of the Stock to be sold by the
Selling Securityholders as contemplated herein.

(vii) Arthur Andersen, L.L.P., which has examined the consolidated
financial statements of the Company, together with the related schedules
and notes, as of March 31, 1996, March 31, 1995 and March 31, 1994, filed
with the Commission as a part of the Registration Statement, which are
included in the Prospectus, are independent accountants within the meaning
of the Securities Act and the Rules and Regulations; the audited
consolidated financial statements of the Company, together with the related
schedules and notes, and the unaudited financial information, forming part
of the Registration Statement and Prospectus, fairly present the financial
position and the results of operations of the Company at the dates and for
the periods to which they apply; and all audited financial statements of
the Company, together with the related schedules and notes, and the
unaudited consolidated financial information, filed with the Commission as
part of the Registration Statement, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout
the periods involved except as may be otherwise stated therein. The
selected and summary financial and statistical data included in the
Registration Statement present fairly the information shown therein and
have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules
are required to be included in the Registration Statement.

(viii) Except as set forth in the Registration Statement and
Prospectus, (A) the Company and each of its subsidiaries has good and
indefeasible title to all properties and assets described in the Prospectus
as respectively owned by them, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries, considered as one enterprise, (B) the
agreements to which the Company or any of its subsidiaries is a party as
described in the Prospectus are valid agreements, enforceable by the
Company or its subsidiary (as applicable), except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles and, to
their knowledge, the other contracting party or parties thereto are not in
material breach or material default under any of such agreements, and
(C) the Company and each of its subsidiaries has valid and enforceable
leases for all properties described in the Prospectus as respectively
leased by it, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration
Statement and Prospectus, the Company and its subsidiaries (as applicable)
own or lease all such properties as are necessary to its respective
operations as now conducted or as proposed to be conducted.

(ix) Each of the Company and its subsidiaries has filed all necessary
federal, state and foreign income and franchise tax returns and has paid
all taxes shown thereon as due, and there is no tax deficiency that has
been or, to the best of the Company's knowledge, might be asserted against
the Company or its subsidiaries that might have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries, considered as
one enterprise; and all tax liabilities are adequately provided for on the
books of the Company.

(x) The Company and its subsidiaries maintain insurance with
reputable insurers of the types and in the amounts generally deemed
adequate for their respective businesses and consistent with insurance
coverage maintained by similar companies in similar businesses, including,
but not limited to, insurance covering real and personal property owned or
leased by the Company or its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect; and the
Company currently has any no reason to believe that either it or its
subsidiaries will not be able to renew their respective existing insurance
coverage as and when

4
<PAGE>

such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue their respective business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries, considered as one enterprise.

(xi) To the best of the Company's knowledge, no labor disturbance by
the employees of the Company or any of its subsidiaries exists or is
imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers or
international distributors that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
subsidiaries, considered as one enterprise. No collective bargaining
agreement exists with any of the Company's or its subsidiaries' respective
employees and, to the best of the Company's knowledge, no such agreement is
imminent.

(xii) Except as disclosed in the Prospectus, each of the Company and
its subsidiaries owns or possesses adequate rights to use all patents,
patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names and copyrights which are necessary to conduct their
respective businesses as described in the Prospectus; the expiration of any
patents, patent rights, trade secrets, trademarks, service marks, trade
names or copyrights would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries, considered as one
enterprise; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of
others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries, considered as one
enterprise.

(xiii) The Company is not, and after giving effect to the offering
and sale of the Stock, will not be, an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.\

(xiv) The Company has not distributed and will not distribute prior
to the later of (A) the Closing Date and (B) completion of the distribution
of the Stock any offering material in connection with the offering and sale
of the Stock other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the
Securities Act.

(xv) Neither the Company nor any of its subsidiaries has, at any time
during the last five years, (A) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution
in violation of law, or (B) made any payment to any federal or state
governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by
the laws of the United States or any jurisdiction thereof.

(xvi) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Stock.

(xvii) Each officer, director and beneficial owner of one percent
(1%) or more shares of Common Stock has agreed in writing that such person
will not, for a period of 180 days after the effective date of the
Registration Statement, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any other rights to purchase or acquire
Common Stock, otherwise than (A) as a bona fide gift or gifts, including
without limitation transfers to beneficiaries or trusts for estate planning
purposes, PROVIDED the donee or donees thereof agree in writing to be bound

5
<PAGE>

by this restriction, (B) as a distribution to limited partners or
stockholders of such person, PROVIDED that the distributees thereof agree
in writing to be bound by the terms of this restriction, or (C) with the
prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters. Furthermore, such person will also agree and consent to the
entry of stop transfer instructions with the Company's transfer agent
against the transfer of the securities held by such person except in
compliance with this restriction. The Company has provided to counsel for
the Underwriters a complete and accurate list of all security holders of
the Company and the number and type of securities held by each security
holder. The Company has provided to counsel for the Underwriters true,
accurate and complete copies of all of the agreements pursuant to which its
officers, directors and stockholders have agreed not to offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of Common Stock, any options or warrants
to purchase any shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock (collectively, the Lock-Up
Agreements) presently in effect. The Company hereby represents and
warrants that it will not release any of its officers, directors or
stockholders from any Lock-Up Agreements currently existing or hereafter
effected without the prior written consent of Hambrecht & Quist LLC on
behalf of the Underwriters.

(xviii) Except as set forth in the Registration Statement and
Prospectus, (A) each of the Company and its subsidiaries is in compliance,
in all material respects, with all rules, laws and regulations relating to
the use, treatment, storage and disposal of toxic substances and protection
of health or the environment (Environmental Laws) which are applicable to
their respective businesses, (B) the Company has received no notice from
any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the
Registration Statement, (C) neither the Company nor any of its subsidiaries
will be required to make future material capital expenditures to comply
with Environmental Laws and (D) no property which is owned, leased or
occupied by the Company or any of its subsidiaries has been designated as a
Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. Section 9601, ET SEQ.), or
otherwise designated as a contaminated site under applicable state or local
law.

(xix) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific
authorizations, (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (C) access
to assets is permitted only in accordance with management's general or
specific authorization, and (D) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.

(xx) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of
them, except as properly disclosed in the Registration Statement.

(xxi) Prior to the Closing Date the Stock to be issued and sold by
the Company will be approved for designation on The National Association of
Securities Dealers Automated Quotation (Nasdaq) National Market upon
official notice of issuance.

(b) Each of the Selling Securityholders, severally and not jointly, hereby
represents and warrants as follows:

(i) Such Selling Securityholder has good and marketable title to all
the shares of Stock to be sold by such Selling Securityholder hereunder,
free and clear of all liens, encumbrances, equities, security interests and
claims whatsoever, with full right and authority to deliver the same
hereunder, subject, in the case of each Selling Securityholder, to the
rights of _________________, as Custodian (herein called the Custodian),
and that upon the delivery of and payment for such shares of the Stock
hereunder, the several

6
<PAGE>

Underwriters will receive good and marketable title thereto, free and clear
of all liens, encumbrances, equities, security interests and claims
whatsoever.

(ii) Certificates in negotiable form for the shares of the Stock to
be sold by such Selling Securityholder have been placed in custody with the
Custodian under a Custody Agreement for delivery under this Agreement; such
Selling Securityholder specifically agrees that the shares of the Stock
represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the several Underwriters and
the Company, that the arrangements made by such Selling Securityholder for
such custody, including the Power of Attorney provided for in such Custody
Agreement, are to that extent irrevocable, and that the obligations of such
Selling Securityholder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by the death or incapacity
of such Selling Securityholder (or, in the case of a Selling Securityholder
that is not an individual, the dissolution or liquidation of such Selling
Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur
before the delivery of such shares of the Stock hereunder, certificates for
such shares of the Stock shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death,
incapacity, dissolution, liquidation or other event had not occurred,
regardless of whether the Custodian shall have received notice of such
death, incapacity, dissolution, liquidation or other event.

(iii) To the extent that any statements (or omissions) made in the
Registration Statement or Prospectus, or any amendment or supplement
thereto, are made in reliance upon or in conformity with, written
information furnished to the Company by such Selling Securityholder for
inclusion therein, such Selling Securityholder hereby confirms that nothing
has come to the attention of such Selling Securityholder that would lead
such Selling Securityholder to believe that, on the Effective Date, the
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on
the Effective Date the Prospectus contained and, on the Closing Date and
any later date on which Option Stock is to be purchased, contains any
untrue statement of a material fact or omitted or omits to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
None of the representations and warranties in this paragrph (iii) shall
apply to the statements in, or omissions from, the Registration Statement
or the Prospectus made in reliance upon and in conforming with information
furnished in writing to the Company by or on behalf of the Underwriters for
use in the Registration Statement or the Prospectus.

3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.

(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
____________ shares of the Underwritten Stock to the several Underwriters,
and the Selling Securityholders, severally and not jointly agree to
transfer and sell the respective aggregate number of shares of the
Underwritten Stock set forth opposite his or her respective name in
Schedule II to the several Underwriters, and each of the Underwriters
agrees to purchase from the Company and the Selling Securityholders the
respective aggregate number of shares of Underwritten Stock set forth
opposite its name in Schedule I. The price at which such shares of
Underwritten Stock shall be sold by the Company and the Selling
Securityholders and purchased by the several Underwriters shall be
$____ per share. The obligation of each Underwriter to the Company
and the Selling Securityholders shall be to purchase from the Company
and the Selling Securityholders that number of shares of the
Underwritten Stock which represents the same proportion of the total
number of shares of the Underwritten Stock to be sold by the Company
and the Selling Securityholders pursuant to this Agreement as the
number of shares of the Underwritten Stock set forth opposite the name
of such Underwriter in Schedule I hereto represents of the total number
of shares of the Underwritten Stock to be purchased by all Underwriters
pursuant to this Agreement, as adjusted by you in such manner as you
deem advisable to avoid fractional shares. In making this Agreement,
each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 3, the agreement of
each Underwriter is to purchase only the respective number of shares
of the Underwritten Stock specified in Schedule I.

7
<PAGE>

(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination
of this Agreement under the provisions of Section 8 or 9 hereof) to
purchase and pay for the number of shares of the Stock agreed to be
purchased by such Underwriter or Underwriters, the Company shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such
notice to purchase, or procure one or more other Underwriters to purchase,
in such proportions as may be agreed upon between you and such purchasing
Underwriter or Underwriters and upon the terms herein set forth, all or any
part of the shares of the Stock which such defaulting Underwriter or
Underwriters agreed to purchase. If the non-defaulting Underwriters fail
so to make such arrangements with respect to all such shares and portion,
the number of shares of the Stock which each non-defaulting Underwriter is
otherwise obligated to purchase under this Agreement shall be automatically
increased on a pro rata basis to absorb the remaining shares and portion
which the defaulting Underwriter or Underwriters agreed to purchase;
PROVIDED, HOWEVER, that the non-defaulting Underwriters shall not be
obligated to purchase the shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate number of
such shares of the Stock exceeds 10% of the total number of shares of the
Stock which all Underwriters agreed to purchase hereunder. If the total
number of shares of the Stock which the defaulting Underwriter or
Underwriters agreed to purchase shall not be purchased or absorbed in
accordance with the two preceding sentences, the Company or the Selling
Securityholders, as the case may be, shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements
with other underwriters or purchasers satisfactory to you for purchase of
such shares and portion on the terms herein set forth. In any such case,
either you or the Company shall have the right to postpone the Closing Date
determined as provided in Section 5 hereof for not more than seven business
days after the date originally fixed as the Closing Date pursuant to said
Section 5 in order that any necessary changes in the Registration
Statement, the Prospectus or any other documents or arrangements may be
made. If neither the non-defaulting Underwriters nor the Company or
Selling Securityholders, as the case may be, shall make arrangements within
the 24-hour periods stated above for the purchase of all the shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase
hereunder, this Agreement shall be terminated without further act or deed
and without any liability on the part of the Company or the Selling
Securityholders to any non-defaulting Underwriter and without any liability
on the part of any non-defaulting Underwriter to the Company or the Selling
Securityholders. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.

(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase up to
___________ shares in the aggregate of the Option Stock from the Company at
the same price per share as the Underwriters shall pay for the Underwritten
Stock. Said option may be exercised only to cover over-allotments in the
sale of the Underwritten Stock by the Underwriters and may be exercised in
whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares
of the Option Stock as to which the several Underwriters are exercising the
option. Delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made as provided in Section 5 hereof. The
number of shares of the Option Stock to be purchased by each Underwriter
shall be the same percentage of the total number of shares of the Option
Stock to be purchased by the several Underwriters as such Underwriter is
purchasing of the Underwritten Stock, as adjusted by you in such manner as
you deem advisable to avoid fractional shares.

4. OFFERING BY UNDERWRITERS.

(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after
the closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.

8
<PAGE>

(b) The information set forth in the last paragraph on the front cover
page and under "Underwriting" in the Registration Statement, any
Preliminary Prospectus and the Prospectus relating to the Stock filed by
the Company (insofar as such information relates to the Underwriters)
constitutes the only information furnished by the Underwriters to the
Company for inclusion in the Registration Statement, any Preliminary
Prospectus, and the Prospectus, and you on behalf of the respective
Underwriters represent and warrant to the Company that the statements made
therein are correct.

5. DELIVERY OF AND PAYMENT FOR THE STOCK.

(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 a.m., San Francisco time, on the date
two business days preceding the Closing Date), and payment therefor, shall
be made at the office of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 1700
Pacific Avenue, Suite 4100, Dallas, Texas 75201, at 7:00 a.m., San
Francisco time, on the third business day after the date of this Agreement
or, if the shares of the Stock are priced after 4:30 P.M., Washington D.C.
time on the date of this Agreement, then on the fourth business day after
the date of this Agreement, or at such other time or on such other day, not
later than seven full business days after such third or fourth business
day, as the case may be, as shall be agreed upon in writing by the Company,
the representatives of the Selling Securityholders and you. The date and
hour of such delivery and payment (which may be postponed as provided in
Section 3(b) hereof) are herein called the Closing Date.

(b) If the option granted by Section 3(c) hereof shall be exercised after
7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Akin, Gump, Strauss, Hauer
& Feld, L.L.P., 1700 Pacific Avenue, Suite 4100, Dallas, Texas 75201, at
7:00 a.m., San Francisco time, on the third business day after the exercise
of such option.

(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the
Selling Securityholders, in each case by one or more certified or official
bank check or checks in same day funds. Such payment shall be made upon
delivery of certificates for the Stock to you for the respective accounts
of the several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in
such name or names and shall be in such denominations as you may request at
least one business day before the Closing Date, in the case of Underwritten
Stock, and at least one business day prior to the purchase thereof, in the
case of the Option Stock. Such certificates will be made available to the
Underwriters for inspection, checking and packaging at the offices of Lewco
Securities Corporation, 2 Broadway, New York, New York 10004 on the
business day prior to the Closing Date or, in the case of the Option Stock,
by 3:00 p.m., New York time, on the business day preceding the date of
purchase.

It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the
Company and the Selling Securityholders for shares to be purchased by any
Underwriter whose check shall not have been received by you on the Closing
Date or any later date on which Option Stock is purchased for the account
of such Underwriter. Any such payment by you shall not relieve such
Underwriter from any of its obligations hereunder.

6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
Each of the Company and the Selling Securityholders severally covenants and
agrees as follows:

(a) The Company will (i) prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule
430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been
advised and furnished with a

9
<PAGE>

copy or to which you shall have reasonably objected in writing or which is
not in compliance in all material respects with the Securities Act or the
rules and regulations of the Commission.

(b) The Company will promptly notify you in the event of (i) the request
by the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement, (iii) the institution or notice of intended
institution of any action or proceeding for that purpose, (iv) the receipt
by the Company of any notification with respect to the suspension of the
qualification of the Stock for sale in any jurisdiction, or (v) the receipt
by it of notice of the initiation or threatening of any proceeding for such
purpose. The Company and the Selling Securityholders will make every
reasonable effort to prevent the issuance of such a stop order and, if such
an order shall at any time be issued, to obtain the withdrawal thereof at
the earliest possible moment.

(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of
each post-effective amendment, if any, to the Registration Statement
(together with, in each case, all exhibits thereto unless previously
furnished to you) and will also deliver to you, for distribution to the
Underwriters, a sufficient number of additional conformed copies of each of
the foregoing (but without exhibits) so that one copy of each may be
distributed to each Underwriter, (ii) as promptly as possible deliver to
you and send to the several Underwriters, at such office or offices as you
may designate, as many copies of the Prospectus as you may reasonably
request, and (iii) thereafter from time to time during the period in which
a prospectus is required by law to be delivered by an Underwriter or
dealer, likewise send to the Underwriters as many additional copies of the
Prospectus and as many copies of any supplement to the Prospectus and of
any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.

(d) If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the reasonable
opinion of counsel for the Company or of counsel for the Underwriters, to
supplement or amend the Prospectus in order to make the Prospectus not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser of the Stock, the Company will forthwith prepare
and file with the Commission a supplement to the Prospectus or an amended
prospectus so that the Prospectus as so supplemented or amended will not
contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time such Prospectus is
delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason
of changes in general market conditions or otherwise, you will advise the
Company in writing of the proposed variation, and, if in the reasonable
opinion either of counsel for the Company or of counsel for the
Underwriters such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file
with the Commission a supplement to the Prospectus or an amended
prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by
the several Underwriters to use the Prospectus, as from time to time
amended or supplemented, in connection with the sale of the Stock in
accordance with the applicable provisions of the Securities Act and
the applicable rules and regulations thereunder for such period.

(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.

10
<PAGE>

(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period
in which a prospectus is required by law to be delivered by an Underwriter
or dealer, in keeping such qualifications in good standing under said
securities or blue sky laws; PROVIDED, HOWEVER, that the Company shall not
be obligated to file any general consent to service of process or to
qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to
continue such qualifications in effect for so long a period as you may
reasonably request for distribution of the Stock.

(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to
stockholders of the Company and of all information, documents and reports
filed with the Commission (including the Report on Form SR required by Rule
463 of the Commission under the Securities Act).

(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule
158 thereunder.

(i) The Company and the Selling Securityholders jointly and severally
agree to pay all costs and expenses incident to the performance of their
obligations under this Agreement, including all costs and expenses incident
to (i) the preparation, printing and filing with the Commission and the
NASD of the Registration Statement, any Preliminary Prospectus and the
Prospectus, (ii) the furnishing to the Underwriters of copies of any
Preliminary Prospectus and of the several documents required by
paragraph (c) of this Section 6 to be so furnished, (iii) the printing of
this Agreement and related documents delivered to the Underwriters,
(iv) the preparation, printing and filing of all supplements and amendments
to the Prospectus referred to in paragraph (d) of this Section 6, (v) the
furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees. The
Selling Securityholders will pay any transfer taxes incident to the
transfer to the Underwriters of the shares the Stock being sold by the
Selling Securityholders.

(j) The Company and the Selling Securityholders jointly and severally
agree to reimburse you, for the account of the several Underwriters, for
blue sky fees and related disbursements (including counsel fees and
disbursements and cost of printing memoranda for the Underwriters) paid by
or for the account of the Underwriters or their counsel in qualifying the
Stock under state securities or blue sky laws and in the review of the
offering by the NASD.

(k) The provisions of paragraphs (i) and (j) of this Section are intended
to relieve the Underwriters from the payment of the expenses and costs
which the Company and the Selling Securityholders hereby agree to pay and
shall not affect any agreement which the Company and the Selling
Securityholders may make, or may have made, for the sharing of any such
expenses and costs.

(l) The Company agrees to use its best efforts to cause all directors,
officers, and stockholders owning one percent (1%) or more of the Common
Stock to agree that, without the prior written consent of Hambrecht & Quist
LLC on behalf of the Underwriters, such person or entity will not, for a
period of 180 days following the effective date of the Registration
Statement, directly or indirectly, sell, offer, contract to sell, transfer
the economic risk of ownership in, make any short sale, pledge or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any other rights to purchase or acquire
Common Stock. The foregoing sentence shall not apply to (A) the Stock to
be sold by the Selling Securityholders to the Underwriters pursuant to this
Agreement, (B) shares transferred as a bona fide gift or gifts, including
without limitation transfers to beneficiaries or trusts for

11
<PAGE>

estate planning purposes, PROVIDED the donee or donees thereof agree in
writing to be bound by this restriction, or (C) shares of Common Stock
distributed to affiliates limited partners or stockholders of such
person, PROVIDED that the distributees thereof agree in writing to be
bound by the terms of this restriction.

(m) The Company agrees that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not,
for a period of 180 days following the effective date of the Registration
Statement, directly or indirectly, (i) sell, offer, contract to sell, make
any short sale, pledge, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for or any
rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Stock to be sold by the Company to the
Underwriters pursuant to this Agreement, (B) shares of Common Stock issued
by the Company upon the exercise of options granted under the stock option
plans of the Company as described in the Prospectus (the Option Plans)
pursuant to the terms of such options in effect as of the date of this
Agreement, (C) options to purchase Common Stock granted under the Option
Plans, PROVIDED, that the recipients of such options shall agree in
writing that the shares of Common Stock which may be purchased upon the
exercise of such options shall not be resold or otherwise transferred or
disposed of for a period of not less than 180 days following the Closing
Date or (D) shares of capital stock issued to customers of the Company
in connection with service agreements entered into with such customers or
shares of capital stock issued by the Company in connection with the
acquisition of the assets or capital stock of another person or entity, or
of technology or products from another person or entity, if in any event,
the terms of such issuance provide that the issued shares shall not be
resold or otherwise transferred or disposed of for a period of not less
than 180 days following the Closing Date.

(n) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after
written notice from you advising the Company to the effect set forth above,
forthwith prepare, consult with you concerning the substance of, and
disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event.

7. INDEMNIFICATION AND CONTRIBUTION.

(a) The Company and the Selling Securityholders jointly and severally
agree to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof) who controls any Underwriter
within the meaning of Section 15 of the Securities Act from and against any
and all losses, claims, damages or liabilities, joint or several, to which
such indemnified parties or any of them may become subject under the
Securities Act, the Securities Exchange Act of 1934, as amended (herein
called the Exchange Act), the common law or otherwise, and the Company and
the Selling Securityholders jointly and severally agree to reimburse each
such Underwriter and controlling person for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified
parties, in each case arising out of or based upon (i) any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any
Rule 462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented

12
<PAGE>

if the Company shall have filed with the Commission any amendment thereof
or supplement thereto) or the omission or alleged omission to state therein
a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that (1) the indemnity agreements of the Company and the
Selling Securityholders contained in this paragraph (a) shall not apply to
any such losses, claims, damages, liabilities or expenses if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company
by or on behalf of any Underwriter for use in any Preliminary Prospectus or
the Registration Statement or the Prospectus or any such amendment thereof
or supplement thereto, (2) the indemnity agreement contained in this
paragraph (a) with respect to any Preliminary Prospectus shall not inure to
the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages, liabilities or expenses purchased the Stock which
is the subject thereof (or to the benefit of any person controlling such
Underwriter) if at or prior to the written confirmation of the sale of such
Stock a copy of the Prospectus (or the Prospectus as amended or
supplemented) was not sent or delivered to such person and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented) unless the failure is the result of noncompliance by the
Company with paragraph (c) of Section 6 hereof, and (3) each Selling
Securityholder (other than the Selling Securityholders named in Part A of
Schedule II) shall only be liable under this paragraph with respect to (A)
information pertaining to such Selling Securityholder furnished by or on
behalf of such Selling Securityholder expressly for use in any Preliminary
Prospectus or the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto or (B) facts that would constitute
a breach of any representation or warranty of such Selling Securityholder
set forth in Section 2(b) hereof. The indemnity agreements of the Company
and the Selling Securityholders contained in this paragraph (a) and the
representations and warranties of the Company and the Selling
Securityholders contained in Section 2 hereof shall remain operative and in
full force and effect regardless of any investigation made by or on behalf
of any indemnified party and shall survive the delivery of and payment for
the Stock.

(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each
other Underwriter and each person (including each partner or officer
thereof) who controls the Company or any such other Underwriter within the
meaning of Section 15 of the Securities Act, and the Selling
Securityholders from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act, the
common law or otherwise and to reimburse each of them for any legal or
other expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the
respective indemnified parties, in each case arising out of or based upon
(i) any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading or (ii) any untrue statement or alleged untrue statement of a
material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, if
such statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to
the Company by or on behalf of such indemnifying Underwriter for use in the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto. The indemnity agreement of each Underwriter contained
in this paragraph (b) shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the Stock.

13
<PAGE>

(c) Each party indemnified under the provision of paragraphs (a) and (b)
of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it
or upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in
such paragraphs, it will promptly give written notice (herein called the
Notice) of such service or notification to the party or parties from whom
indemnification may be sought hereunder. No indemnification provided for
in such paragraphs shall be available to any party who shall fail so to
give the Notice if the party to whom such Notice was not given was unaware
of the action, suit, investigation, inquiry or proceeding to which the
Notice would have related and was prejudiced by the failure to give the
Notice, but the omission so to notify such indemnifying party or parties of
any such service or notification shall not relieve such indemnifying party
or parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of such indemnity
agreement. Any indemnifying party shall be entitled at its own expense to
participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt
of the Notice by giving written notice (herein called the Notice of
Defense) to the indemnified party, to assume (alone or in conjunction with
any other indemnifying party or parties) the entire defense of such
action, suit, investigation, inquiry or proceeding, in which event such
defense shall be conducted, at the expense of the indemnifying party or
parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; PROVIDED,
HOWEVER, that (i) if the indemnified party or parties reasonably determine
that there may be a conflict between the positions of the indemnifying
party or parties and of the indemnified party or parties in conducting the
defense of such action, suit, investigation, inquiry or proceeding or that
there may be legal defenses available to such indemnified party or parties
different from or in addition to those available to the indemnifying party
or parties, then counsel for the indemnified party or parties shall be
entitled to conduct the defense to the extent reasonably determined by such
counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties
participate in, but not conduct, the defense. If, within a reasonable time
after receipt of the Notice, an indemnifying party gives a Notice of
Defense and the counsel chosen by the indemnifying party or parties is
reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a)
through (c) of this Section 7 for any legal or other expenses subsequently
incurred by the indemnified party or parties in connection with the defense
of the action, suit, investigation, inquiry or proceeding, except that
(A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred
to in clause (i) of the proviso to the preceding sentence and (B) the
indemnifying party or parties shall bear such other expenses as it or they
have authorized to be incurred by the indemnified party or parties. If,
within a reasonable time after receipt of the Notice, no Notice of Defense
has been given, the indemnifying party or parties shall be responsible for
any legal or other expenses incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding.

(d) If the indemnification provided for in this Section 7 is unavailable
or insufficient to hold harmless an indemnified party under paragraph (a)
or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims,
damages or liabilities referred to in paragraph (a) or (b) of this Section
7 (i) in such proportion as is appropriate to reflect the relative benefits
received by each indemnifying party from the offering of the Stock or (ii)
if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the relative
fault of each indemnifying party in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, or
actions in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the
Selling Securityholders on the one hand and the Underwriters on the other
shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of the

14
<PAGE>

Stock received by the Company and the Selling Securityholders and the total
underwriting discount received by the Underwriters, as set forth in the
table on the cover page of the Prospectus, bear to the aggregate public
offering price of the Stock. Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by each indemnifying party
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.

The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro
rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to in the first sentence of
this paragraph (d). The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities, or actions in respect thereof,
referred to in the first sentence of this paragraph (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigation, preparing to defend or defending
against any action or claim which is the subject of this paragraph (d).
Notwithstanding the provisions of this paragraph (d), no Underwriter shall
be required to contribute any amount in excess of the underwriting discount
applicable to the Stock purchased by such Underwriter. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion
to their respective underwriting obligations and not joint.

Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly
give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or
parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in paragraph (c) of this
Section 7).

(e) Neither the Company nor the Selling Securityholders will, without the
prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action,
suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not such Underwriter or any person who controls such
Underwriter within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling person
from all liability arising out of such claim, action, suit or proceeding.

[(f) Notwithstanding anything to the contrary herein, the aggregate
liability of each Selling Securityholder under the representations and
warranties contained in paragraphs (a) and (b) of Section 2 hereof and
under the indemnity and reimbursement agreements contained in the
provisions of this Section 7 and Section 11 hereof shall be limited to an
amount equal to the initial public offering price of the shares of the
Stock sold by such Selling Securityholder to the Underwriters. The Company
and the Selling Securityholders may agree, as among themselves and without
limiting the rights of the Underwriters under this Agreement, as to the
respective amounts of such liability for which they each shall be
responsible.]

8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity

15
<PAGE>

or crisis or change in economic or political conditions if the effect of such
outbreak, calamity, crisis or change in economic or political conditions in the
financial markets of the United States would, in the Underwriters' reasonable
judgment, make the offering or delivery of the Stock impracticable,
(iii) suspension of trading in securities generally or a material adverse
decline in value of securities generally on the New York Stock Exchange, the
American Stock Exchange, or The Nasdaq National Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company,
(v) declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; PROVIDED, HOWEVER, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.

9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:

(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.

(b) The legality and sufficiency of the sale of the Stock hereunder and
the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing,
and the form of the Registration Statement and of the Prospectus (except as
to the financial statements contained therein), shall have been approved at
or prior to the Closing Date by Brobeck, Phleger & Harrison LLP, counsel
for the Underwriters.

(c) You shall have received from Akin, Gump, Strauss, Hauer & Feld,
L.L.P., counsel for the Company and the Selling Securityholders, addressed
to the Underwriters and dated the Closing Date, covering the matters set
forth in Annex A hereto and if Option Stock is purchased at any date after
the Closing Date, additional opinions from such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements
expressed as of the Closing Date in such opinions remain valid as of such
later date.

(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct and neither the Registration Statement nor the Prospectus
omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not
misleading, (ii) since the Effective Date, no event has occurred which
should have been set forth in a supplement or amendment to the Prospectus
which has not been set forth in such a supplement or amendment, (iii) since
the respective dates as of which information is given in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, there has not been any material adverse
change or any development involving a prospective material adverse change
in or affecting the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, whether
or not arising from transactions in the ordinary course of business, and,
since such dates, except in the ordinary course of

16
<PAGE>

business, neither the Company nor any of its subsidiaries has entered into
any material transaction not referred to in the Registration Statement in
the form in which it originally became effective and the Prospectus
contained therein, (iv) neither the Company nor any of its subsidiaries has
any material contingent obligations which are not disclosed in the
Registration Statement and the Prospectus, (v) there are not any pending or
known threatened legal proceedings to which the Company or any of its
subsidiaries is a party or of which property of the Company or any of its
subsidiaries is the subject which are material and which are not disclosed
in the Registration Statement and the Prospectus, (vi) there are not any
franchises, contracts, leases or other documents which are required to be
filed as exhibits to the Registration Statement which have not been filed
as required, (vii) the representations and warranties of the Company herein
are true and correct in all material respects as of the Closing Date or any
later date on which Option Stock is to be purchased, as the case may be,
and (viii) there has not been any material change in the market for
securities in general or in political, financial or economic conditions
from those reasonably foreseeable as to render it impracticable in your
reasonable judgment to make a public offering of the Stock, or a material
adverse change in market levels for securities in general (or those of
companies in particular) or financial or economic conditions which render
it inadvisable to proceed.

(e) You shall have received on the Closing Date and on any later date on
which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company, stating that the respective signers
of said certificate have carefully examined the Registration Statement in
the form in which it originally became effective and the Prospectus
contained therein and any supplements or amendments thereto, and that the
statements included in clauses (i) through (vii) of paragraph (d) of this
Section 9 are true and correct.

(f) You shall have received from Arthur Andersen LLP a letter or letters,
addressed to the Underwriters and dated the Closing Date and any later date
on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations
thereunder and based upon the procedures described in their letter
delivered to you concurrently with the execution of this Agreement (herein
called the Original Letter), but carried out to a date not more than three
business days prior to the Closing Date or such later date on which Option
Stock is purchased (i) confirming, to the extent true, that the statements
and conclusions set forth in the Original Letter are accurate as of the
Closing Date or such later date, as the case may be, and (ii) setting forth
any revisions and additions to the statements and conclusions set forth in
the Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of the Original Letter or
to reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties
of the Company or any of its subsidiaries which, in your sole judgment,
makes it impractical or inadvisable to proceed with the public offering of
the Stock or the purchase of the Option Stock as contemplated by the
Prospectus.

(g) You shall have been furnished evidence in usual written or telegraphic
form from the appropriate authorities of the several jurisdictions, or
other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.

(h) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by The Nasdaq National
Market, subject to official notice of issuance.

(i) Each director, officer, and beneficial owner of one percent (1%) or
more of the Common Stock shall have agreed in writing that such person will
not, for a period of one hundred eighty (180) days after the effective date
of the Registration Statement, directly or indirectly, sell, offer,
contract to sell, transfer the economic risk of ownership in, make any
short sale, pledge or otherwise dispose of any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for or any
other rights to purchase or acquire Common Stock, otherwise than (A) as a
bona fide gift or gifts, including without limitation transfers to
beneficiaries or trusts for estate planning purposes, PROVIDED the donee or
donees

17
<PAGE>

thereof agree in writing to be bound by this restriction, (B) as a
distribution to limited partners or stockholders of such person, PROVIDED
that the distributees thereof agree in writing to be bound by the terms of
this restriction, or (C) with the prior written consent of Hambrecht &
Quist LLC on behalf of the Underwriters. Furthermore, such person shall
have agreed and consented to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the securities held by
such person except in compliance with this restriction that, without the
prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters.

All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.

In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is
terminated by you because of any refusal, inability or failure on the part of
the Company or the Selling Securityholders to perform any agreement herein, to
fulfill any of the conditions herein, or to comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the transactions contemplated hereby.

10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.

In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters
and without liability of the Underwriters to the Company or the Selling
Securityholders; PROVIDED, HOWEVER, that in the event of any such termination
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.

11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement, the Company and the Selling
Securityholders hereby jointly and severally agree to reimburse on a quarterly
basis the Underwriters for all reasonable legal and other expenses incurred in
connection with investigating or defending any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in paragraph (a) of
Section 7 of this Agreement, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section 11 and the possibility that such payments might later be held to be
improper; PROVIDED, HOWEVER, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.

12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7

18
<PAGE>

hereof, the several parties (in addition to the Company, the Selling
Securityholders and the several Underwriters) indemnified under the provisions
of said Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.

13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters,
shall be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush
Street, San Francisco, California 94104, with a copy to Carmelo M. Gordian,
Esq., Brobeck, Phleger & Harrison LLP, 302 Congress Avenue, Suite 1200,
Austin, Texas 78701; and if to the Company, shall be mailed, telegraphed or
delivered to it at its office, Advance ParadigM, Inc., 545 East John
Carpenter Freeway, Suite 1900, Irving, Texas 75062, Attention: David D.
Halbert, with a copy to J. Kenneth Menges, Jr., P.C., Akin, Gump, Strauss,
Hauer & Feld, L.L.P., 1700 Pacific Avenue, Suite 4100, Dallas, Texas 75201;
and if to the Selling Securityholders, shall be mailed, telegraphed or
delivered to the Selling Securityholders in care of ___________________ at
________________________. All notices given by telegraph shall be promptly
confirmed by letter.

14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
PROVIDED, HOWEVER, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraphs (i), (j), (k), (l) and (m) of Section 6
hereof shall be of no further force or effect.

This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.

This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.

[Signature Page to Underwriting Agreement Follows]

19
<PAGE>

Please sign and return to the Company and to the Selling Securityholders in
care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.

Very truly yours,

Advance ParadigM, Inc.

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

SELLING SECURITYHOLDERS LISTED
ON SCHEDULE II HERETO:

By
----------------------------------
David D. Halbert
Attorney-in-Fact

The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.

HAMBRECHT & QUIST LLC
J.P. MORGAN SECURITIES INC.
MONTGOMERY SECURITIES
By Hambrecht & Quist LLC

By
------------------------------
Managing Director

Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.

20
<PAGE>

SCHEDULE I

UNDERWRITERS

Number
of
Shares
to be
Underwriters Purchased
- ------------ ---------

Hambrecht & Quist LLC. . . . . . . . . . . . . . . . . . . . . .
J.P. Morgan Securities Inc. . . . . . . . . . . . . . . . . . .
Montgomery Securities. . . . . . . . . . . . . . . . . . . . . .

-------

Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
-------
-------
<PAGE>

SCHEDULE II

SELLING SECURITYHOLDERS

NUMBER
OF
NAME AND ADDRESS SHARES
OF SELLING SECURITYHOLDERS TO BE SOLD
- -------------------------- ----------

Part A

[List Insiders who are Selling Securityholders]

Part B

[List Other Securityholders]

-------

Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
-------
-------

<PAGE>

ANNEX A

MATTERS TO BE COVERED IN THE OPINION OF
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.,
COUNSEL FOR THE COMPANY
AND THE SELLING SECURITYHOLDERS

(i) each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, is duly
qualified as a foreign corporation and in good standing in each state of
the United States of America in which its ownership or leasing of property
requires such qualification (except where the failure to be so qualified
would not have a material adverse effect on the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole), and has full corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement; all the issued and outstanding
capital stock of each of the subsidiaries of the Company has been duly
authorized and validly issued and is fully paid and nonassessable, and is
owned by the Company free and clear of all liens, encumbrances and
security interests, and to the best of such counsel's knowledge, no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in such subsidiaries is
outstanding other than as disclosed in the Registration Statement;

(ii) the Company has authorized and outstanding capital stock as set
forth in the Prospectus; on the Closing Date, all shares of the Company's
Series A Preferred Stock has converted into shares of authorized Common
Stock; the outstanding shares of the Company's Common Stock, including the
shares of the Stock to be sold by the Selling Securityholders, and all
outstanding shares of the Company's Series B Preferred Stock, have been
duly authorized and validly issued and are fully paid and non-assessable;
the shares of the Underwritten Stock and the Option Stock, if any, to be
sold by the Company pursuant to this Agreement have been duly authorized
and will be validly issued, fully paid and non-assessable when issued and
paid for as contemplated by this Agreement; and no preemptive rights of, or
rights of refusal in favor of, stockholders exist with respect to the
Stock, or the issue and sale thereof, pursuant to the Restated Certificate
of Incorporation or Bylaws of the Company and, to the knowledge of such
counsel, there are no contractual preemptive rights that have not been
waived, or rights of first refusal or rights of co-sale which exist, with
respect to the shares of the Stock being issued and sold by the Company or
transferred and sold by the Selling Securityholders, as the case may be;

(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for
that purpose have been instituted or are pending or contemplated by the
Commission;

(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial and statistical data
contained or incorporated by reference therein, as to which such counsel
need not express any opinion or belief) comply as to form in all material
respects with the requirements of the Securities Act and with the rules and
regulations of the Commission thereunder;

(v) to the best of such counsel's knowledge, all franchises,
contracts, leases, documents or legal proceedings, pending or threatened,
which in the opinion of such counsel are of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement, are described and filed as
required;

1
<PAGE>

(vi) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;

(vii) (A) the Underwriting Agreement has been duly executed and
delivered by or on behalf of each of the Selling Securityholders; (B) the
Custody Agreement between the Selling Securityholders and ______________,
as Custodian, and the Power of Attorney referred to in such Custody
Agreement have been duly executed and delivered by such Selling
Securityholder; -C- the Custody Agreement entered into by, and the Power of
Attorney given by, such Selling Securityholder is valid and binding on such
Selling Securityholder; and (D) each Selling Securityholder has full legal
right and authority to enter into the Underwriting Agreement and to sell,
transfer and deliver in the manner provided in the Underwriting Agreement
the shares of Stock sold by such Selling Securityholder hereunder;

(viii) the issuance and sale by the Company of the shares of Stock
sold by the Company as contemplated by the Underwriting Agreement will not
conflict with, or result in a breach of, the Restated Certificate of
Incorporation or Bylaws of the Company or any of its subsidiaries or any
agreement or instrument known to such counsel to which the Company or any
of its subsidiaries is a party or any applicable law or regulation, or so
far as is known to such counsel, any order, writ, injunction or decree, of
any jurisdiction, court or governmental instrumentality;

(ix) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such
rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement;

(x) good and indefeasible title to the shares of Stock sold by the
Selling Securityholders under the Underwriting Agreement, free and clear of
all liens, encumbrances, equities, security interests and claims, has been
transferred to the Underwriters who have severally purchased such shares of
Stock under the Underwriting Agreement, assuming for the purpose of this
opinion that the Underwriters are bona fide purchasers within the meaning
of the Uniform Commercial Code; and

(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as
have been obtained under the Securities Act and such as may be required
under the Bylaws and rules of the NASD or under state securities or blue
sky laws in connection with the purchase and distribution of the Stock by
the Underwriters.

Such counsel shall further include in their opinion letter(s) the
following:

Such counsel informs the Underwriters that they have participated in
conferences with officers and other representatives of the Company ,
representatives of the independent public accountants for the Company, the
Underwriters and representatives of legal counsel for the Underwriters, at
which the information in the Registration Statement and the Prospectus was
discussed and, although such counsel is not passing upon and does not
assume any responsibility for and shall not be deemed to have independently
verified the accuracy, completeness or fairness of the statements contained
in the Registration Statement and Prospectus, on the basis of the foregoing
(relying as to materiality of factual matters to a large extent upon the
opinions of officers and other representatives of the Company), no facts
have come to such counsel's attention that lead such counsel to believe
that the Registration Statement (except for the financial statements and
schedules contained therein (including the notes and auditors' report
thereon) or the other financial and statistical data contained therein, as
to which such counsel need not make any statement), at the time it became
effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, or that the Prospectus (except for
the financial statements and schedules contained therein (including notes
thereto and the auditors' report thereon) or the other financial or
statistical data contained therein, as to

2
<PAGE>

which such counsel need not make any statement), on the Closing Date,
included or includes an untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.

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

Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or of the State of Texas or the General
Corporation Law of the State of Delaware, upon opinions of local counsel
satisfactory in form and scope to counsel for the Underwriters. Copies of any
opinions so relied upon shall be delivered to the Representatives and to counsel
for the Underwriters and the foregoing opinion shall also state that counsel
knows of no reason the Underwriters are not entitled to rely upon the opinions
of such local counsel.

<PAGE>

EXHIBIT 4.2

PREFERRED STOCK PURCHASE AGREEMENT

ADVANCE PHARMACY SERVICES, INC.
545 E. JOHN CARPENTER FREEWAY
SUITE 1900
IRVING, TEXAS 75062

AS OF AUGUST 4, 1993

TO THE PURCHASERS LISTED ON EXHIBIT 1.10 HERETO

RE: SERIES A CONVERTIBLE PREFERRED STOCK

GENTLEMEN:

ADVANCE PHARMACY SERVICES, INC. a Delaware corporation (the "COMPANY") and
holder of all of the outstanding capital stock of Advance Prescription
Management, Inc., a Delaware corporation ("APM") and Advance Home Prescriptions,
Inc., a Delaware corporation ("AHP") (individually, a "SUBSIDIARY" and
collectively, the "SUBSIDIARIES"), and each of the Subsidiaries agree with each
of the undersigned Purchasers as follows:

ARTICLE I

PURCHASE, SALE AND TERMS OF SHARES

1.01. THE PREFERRED SHARES. The Company has authorized the issuance and
sale of up to 10,000 shares (the "PREFERRED SHARES") of its authorized but
unissued shares of Series A Convertible Preferred Stock, par value $.01 per
share (the "SERIES A PREFERRED STOCK"), to the persons (collectively, the
"PURCHASERS" and, each individually, a "PURCHASER") and in the respective
amounts at the respective purchase prices set forth in EXHIBIT 1.01, at a price
of $1,000 per share. The designation, rights, preferences and other terms and
provisions of the Series A Preferred Stock are set forth in EXHIBIT A.

1.02. THE CONVERSION SHARES. The Company has authorized and has reserved
and covenants to continue to reserve, free of preemptive rights, rights of first
refusal, and other similar contractual or other preferential rights of
stockholders, a sufficient number of its authorized but unissued shares of
Common Stock to satisfy the rights of conversion of the holders of the Preferred
Shares. Any shares of Common Stock issuable upon conversion of the Preferred
Shares (and such shares when so

<PAGE>

issued) are herein referred to as the "CONVERSION SHARES". The Preferred Shares
and the Conversion Shares are sometimes collectively referred to as the
"SHARES".

1.03. PURCHASE PRICE AND CLOSING.

(a) INITIAL CLOSING. The Company agrees to issue and sell to the
Purchasers and, in consideration of and in express reliance upon the
representations, warranties, covenants, terms and conditions of this Agreement,
the Purchasers, severally but not jointly, agree to purchase that number of
Preferred Shares set forth opposite their respective names in EXHIBIT 1.01. The
aggregate purchase price of the Preferred Shares being acquired by each
Purchaser is set forth opposite such Purchaser's name in EXHIBIT 1.01. The
closing of the purchase and sale of the Preferred Shares to be acquired by the
Purchasers from the Company under this Agreement shall take place by mail or at
some mutually agreed upon location on August 4, 1993, or at such time and date
thereafter as the Purchasers and the Company may agree (the "INITIAL CLOSING").
At the Initial Closing, the Company shall issue and sell to the Purchasers an
aggregate of 4,000 Preferred Shares for a total consideration of $4,000,000 (for
each Purchaser in the amounts set forth next to such Purchaser's name on
EXHIBIT 1.01). At the Initial Closing, the Company will deliver to each
Purchaser certificates representing the number of Preferred Shares set forth
opposite its name under the appropriate headings in EXHIBIT 1.01 registered in
such Purchaser's name (or its nominee), against delivery of a transfer of funds
to the account of the Company by wire transfer or certified bank check,
representing the consideration set forth opposite each such Purchaser's name on
EXHIBIT 1.01. The Preferred Shares to be issued to the Purchaser's represent the
Purchasers' pre-money valuation of the Company, calculated on a fully-diluted
basis, of $12.5 million. The Preferred Shares to be issued at the Initial
Closing shall equal 24.24% of the capital stock of the Company following the
Initial Closing.

(b) SECOND CLOSING. On any one occasion ending on or before 12 months
from the Initial Closing, the Purchasers shall have the right, but not the
obligation, to purchase a minimum of $4,000,000 but not more than $6,000,000 of
Preferred Shares, at the same price, terms and conditions as the Preferred
Shares issued at the Initial Closing, and for each Purchaser in the respective
amounts set forth next to such Purchaser's name in EXHIBIT 1.01 (the "SECOND
CLOSING") (such Preferred Shares to be purchased among the Purchasers on a PRO
rata basis based on each Purchaser's respective percentage of Preferred Shares
purchased at the Initial Closing), subject to the following conditions:

(i) such sale is made pursuant to all of the terms and
conditions of this Agreement and the Company and the Purchasers
shall execute a counterpart amendment to this Agreement under
which the Preferred Shares to be issued

-2-
<PAGE>

at the Second Closing shall become for all purposes Preferred Shares
purchased hereunder as if purchased at the Initial Closing, and the
Purchasers purchasing such securities at the Second Closing shall be
entitled to all of the rights and be bound by all of the obligations
contained herein with respect to the sale and issuance of the
Preferred Shares at the Second Closing;

(ii) the Purchasers shall inform the Company by written
notice at least thirty (30) days prior to the date proposed by the
Purchasers to be the date of the Second Closing;

(iii) the Company updates the representations and warranties
of Article III herein, and delivers such updated disclosure to the
Purchasers at least ten (10) business days prior to the proposed date
of the Second Closing, and to the Purchasers' satisfaction, there has
been no material adverse change to such representations and warranties
as made at the Initial Closing;

(iv) an opinion of counsel for the Company (in preliminary
draft form) substantially similar to EXHIBIT 2.02(B) hereto is
delivered to the Purchasers at the Second Closing with respect to the
sale and issuance of the Preferred Shares to be issued at the Second
Closing no later than two (2) business days prior to the proposed date
of the Second Closing; and

(v) the proceeds of the Preferred Shares to be issued at
the Second Closing shall be used for the acquisition of Paradigm
Pharmacy Management, Inc. ("Paradigm") or another drug cost
containment and mail order pharmacy firm and the Company shall have
executed a definitive purchase agreement or letter of intent for the
acquisition of Paradigm or such other company.

All parties shall consummate the Second Closing within 30 days of the
delivery of such notice. Notwithstanding any of the provisions of Section
1.03(b), any or all of the conditions set forth in Section 1.03(b) may be waived
at the sole discretion of any Purchaser.

(c) For purposes of this Agreement, the term "CLOSING" shall refer to
the Initial Closing or the Second Closing, as the case may be. In addition, any
Preferred Shares purchased pursuant to the Second Closing shall be included in
the definition of "Preferred Shares," "Conversion Shares," "Registrable Shares"
and "Shares" (as the case may be) under this Agreement.

1.04. USE OF PROCEEDS. The Company shall use the cash proceeds from the
sale of the Preferred Shares at the Closing for working capital, capital
expenditures, the acquisition of
-3-
<PAGE>

Paradigm and/or other drug cost containment and mail order pharmacy firms, and
those other general corporate purposes set forth in EXHIBIT 1.04.

1.05. REPRESENTATIONS BY THE PURCHASERS. Each of the Purchasers
represents to the Company, severally but not jointly, as follows:

(a) INVESTMENT REPRESENTATIONS. It is its present intention to
acquire the Preferred Shares to be acquired by it for its own account (and it
will be the sole beneficial owner thereof) and that the Preferred Shares are
being and will be acquired by it for the purpose of investment and not with a
view to distribution or resale thereof except pursuant to registration under the
Securities Act or exemption therefrom and from any applicable "Blue Sky" laws.
The acquisition by each Purchaser of the Preferred Shares shall constitute a
confirmation of this representation. It understands and agrees that, until
registered under the Securities Act or transferred pursuant to the provisions of
Rule 144 or Rule 144A as promulgated by the Commission, all certificates
evidencing any of the Shares, whether upon initial issuance or upon any transfer
or conversion thereof, shall bear a legend, prominently stamped or printed
thereon, reading substantially as follows:

"The securities represented by this certificate have not been
registered under the Securities Act of 1933 and any applicable
state securities laws. These securities have been acquired for
investment and not with a view to distribution or resale. These
securities may not be offered for sale or transferred in the
absence of an effective registration statement covering such
securities under the Securities Act and any applicable state
securities laws, or the availability of an exemption from
registration thereunder. The transferability of these securities
is subject to the provisions of a Preferred Stock Purchase
Agreement dated as of July 30, 1993 among the issuer and the
parties thereto, a copy of which may be obtained at the issuer's
principal office."

(b) ACCESS TO INFORMATION. It or its representative during the course
of this transaction, and prior to the purchase of the Preferred Shares, has had
the opportunity to ask questions of and receive answers from management of the
Company concerning the terms and conditions of this investment and the offering
of the Preferred Shares, and to obtain any additional information which the
Company possesses or can acquire relative to the Company's business, management,
technology, business and marketing strategies, assets, Intellectual Property
Rights, financial condition and results of operations and liabilities
(contingent or otherwise).
-4-

<PAGE>

(c) GENERAL ACCESS. It or its representative has received and read
or reviewed, and is familiar with, this Agreement and the other agreements to be
executed or delivered herewith, and confirms that all documents, records and
books pertaining to the Purchaser's investment in the Company and requested by
it or its representative have been made available or delivered to the Purchaser.

(d) SOPHISTICATION AND KNOWLEDGE. It has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of this investment, and it can bear the economic risks of
this investment and can afford a complete loss of this investment.

(e) TRANSFER RESTRICTIONS IMPOSED BY SECURITIES LAWS. It understands
that: the Preferred Shares have not been registered under the Securities Act and
applicable state securities laws, and, therefore, cannot be resold unless they
are subsequently registered under the Securities Act and applicable state
securities laws or unless an exemption from such registration is available; no
state or governmental authority has made any finding or determination relating
to the fairness of the terms of the investment in the Company proposed
hereunder; the Purchaser is and must be purchasing the Preferred Shares for
investment for its own account and not for the account or benefit of others, and
not with any present view toward resale or other distribution thereof to the
public. Each Purchaser agrees not to resell or otherwise dispose of all or any
part of the Preferred Shares purchased by him or it, except as permitted by law,
including, without limitation, any regulations under the Securities Act and
applicable state securities or "Blue Sky" laws; the Company does not have any
present intention and is under no obligation to register the Shares under the
Securities Act and applicable state securities laws, except as provided in
Article V hereof; and Rule 144 or Rule 144A under the Securities Act may not be
available as a basis for exemption from registration of the Shares thereunder.
The Shares shall not be transferred, and the Company shall not be required to
register any transfer of Shares on the books of the Company, unless the Company
shall have been provided with an opinion of counsel reasonably satisfactory to
it prior to such transfer that registration under the Securities Act is not
required in connection with the transaction resulting in such transfer;
PROVIDED, HOWEVER, that no such opinion of counsel shall be required for a
transfer by a Purchaser to another Purchaser or by a Purchaser which is a
partnership to an affiliate of such partnership or to a partner of such
Purchaser or a retired partner of such Purchaser who retires after the date
hereof, or to the estate of any such partner or retired partner, or a transfer
by gift, will or intestate succession from any such partner to his spouse or
members of his or his spouse's family, if the transferee agrees in writing to
subject to the terms hereof to the same extent as if such transferee were an
original
-5-

<PAGE>

Purchaser thereunder; and PROVIDED, FURTHER, that no such opinion of counsel
shall be required in order to effectuate a transfer in accordance with the
provisions of Rule 144 under the Securities Act.

(f) LACK OF LIQUIDITY. Each Purchaser has no present need for
liquidity in connection with the purchase of the Preferred Shares.

(g) SUITABILITY AND INVESTMENT OBJECTIVES. The purchase of the
Preferred Shares by it is consistent with its general investment objectives. It
understands that the purchase of the Preferred Shares involves a high degree of
risk. It understands that there may be no established or stable trading market
for the Company's capital stock at the time the Purchaser desires to liquidate
its investment.

(h) ACCREDITED INVESTOR STATUS. Each Purchaser is an "ACCREDITED
INVESTOR" as that term is defined in Rule 501 of Regulation D promulgated under
the Securities Act.

1.06. ADDITIONAL REPRESENTATIONS OF PURCHASERS. Each Purchaser, severally
but not Jointly, represents that, except as disclosed in EXHIBIT 1.06 hereof:
(a) it is a validly existing limited partnership or corporation pursuant to the
laws of the state or jurisdiction referred to in EXHIBIT 1.06, and has all
requisite power and authority to own and operate its properties and carry out
its business as now conducted and as is now proposed to be conducted, and to
execute, deliver and perform this Agreement, the Voting Agreement, and the other
agreements delivered by it in connection herewith and to carry out the
transactions contemplated hereby; (b) this Agreement, the Voting Agreement, and
each other agreement executed and delivered in connection herewith have been
duly authorized and executed by it and constitute legal, valid and binding
obligations of each such Purchaser, enforceable against it in accordance with
their respective terms; and (c) there is no litigation or governmental
proceeding or investigation pending or, to the knowledge of such Purchaser,
threatened against it concerning the invalidity of this Agreement, the Voting
Agreement, or the other agreements entered into in connection herewith.

1.07. BROKERS OR FINDERS. Each Purchaser, severally but not jointly,
represents that no Person has or will have, as a result of the transactions
contemplated by this Agreement, any right, interest or valid claim against the
Company for any commission, fee or other compensation as a consultant, finder or
broker because of any act or omission by such Purchaser or its agents.

-6-
<PAGE>

ARTICLE II

CONDITIONS TO THE PURCHASERS' OBLIGATIONS

The obligation of each Purchaser to purchase and pay for the Preferred
Shares to be purchased by it at the Initial Closing is subject to the following
conditions (all of which, except for Section 2.01, shall be deemed satisfied or
waived by the Purchasers at or prior to the Initial Closing in the event all of
the transactions contemplated to be effected at the Initial Closing are
consummated):

2.01. REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the Company set forth in Article III hereof shall be true,
accurate and correct on the date of the Closing.

2.02. DOCUMENTATION AT CLOSING. The Purchasers shall have received prior
to or at the Closing all of the following materials, and each of the following
events shall have occurred, or each of the following documents shall have been
delivered, prior to or simultaneous with the Closing:

(a) A copy of the Certificate of Incorporation of the Company, as
amended or restated to date, and including all certificates of designations with
respect to any class of Preferred Stock (the "CHARTER"); a copy of the
resolutions of the Board of Directors and, if required, the stockholders,
providing for the approval of this Agreement, the terms of the Series A
Preferred Stock, the Voting Agreement, the issuance of the Preferred Shares,
such amendment of the By-laws of the Company as may be reasonably requested by
the Purchasers, and all other agreements or matters contemplated hereby or
executed in connection herewith; and a copy of the By-laws of the Company, all
of which have been certified by the Secretary of the Company to be true,
complete and correct in every particular; and certified copies of all documents
evidencing other necessary corporate or other action and governmental approvals,
if any, required to be obtained at or prior to the Closing with respect to this
Agreement and the issuance of the Preferred Shares.

(b) The opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel
for the Company, in substantially the form set forth in EXHIBIT 2.02(B).

(c) A certificate of the Secretary or an Assistant Secretary of the
Company which shall certify the names of the officers of the Company authorized
to sign this Agreement, the certificates for the Preferred Shares, and the other
documents, instruments or certificates to be delivered pursuant to this
Agreement by the Company or any of its officers, together with the true
signatures of such officers.

-7-

<PAGE>

(d) A certificate of the Chief Executive Officer, President and the
Treasurer of the Company stating that the representations and warranties of the
Company contained in Article III hereof and otherwise made by the Company in
writing in connection with the transactions contemplated hereby are true and
correct as of the time of the Closing and that all covenants or conditions
required to be performed prior to or at the Closing have been performed as of
the Closing.

(e) The Company shall have obtained any consents or waivers necessary
to be obtained at or prior to the Closing which are necessary for the execution,
delivery and performance of this Agreement, the Voting Agreement, the terms of
the Series A Preferred Stock, and the other agreements and instruments executed
and delivered by the Company in connection herewith and to carry out the
transactions contemplated hereby, and such consents and waivers shall be in full
force and effect at the Closing. All corporate and other action and governmental
filings necessary to effectuate the terms of this Agreement, the Series A
Preferred Stock and the other agreements and instruments executed and delivered
by the Company in connection herewith shall have been made or taken.

(f) A Certificate of the Secretary of State of the State of Delaware
as to the due incorporation and good standing of the Company and a certificate
of the Secretary of State of each jurisdiction in which the Company is required
to be qualified to do business as a foreign corporation shall have been provided
to the Purchasers and their counsel.

(g) Payment for the costs, attorneys' fees, due diligence and travel
expenses, consulting fees if any, expenses, taxes and filing fees identified in
Section 8.04.

(h) Each executive officer and/or Key Employee of the Company shall
have entered into a two-year Non-Competition, Nondisclosure and Assignment of
Inventions Agreement in the form attached as EXHIBIT B (collectively, the
"NON-COMPETITION AGREEMENTS") and copies thereof shall have been delivered to
counsel to the Purchasers.

(i) The Board of Directors of the Company (the "BOARD") immediately
following the Closing shall consist of not more than eight (8) members, which
members shall include: David Halbert, the Chief Executive Officer of the
Company; Jon Halbert, the President; four (4) persons designated by the
Purchasers, initially Benno C. Schmidt, Peter M. Castleman, Stephen Green and
Dr. Jeffrey Jay; and two (2) persons who are not employees of the Company, AHC
or any Subsidiary and nominated by management of the Company (two of whom shall
initially be Michael Ware and Mike Faulkner).

(j) Each of the Purchasers, the Company, David Halbert, Jon Halbert,
Dan Phillips, and Advance Health Care, Inc. ("AHC") shall have entered into the
Voting Agreement in the form attached as EXHIBIT C hereto.

-8-

<PAGE>

(L) Indebtedness of the Company to commercial banks or other lenders,
whether under a fixed term obligation or revolving line of credit, shall not
exceed $1 million as of the Closing.

(M) AHC shall promptly engage an investment banking firm to pursue
the sale of the home care division of AHC, consisting of Advance Home Medical,
Inc., Advance Home Care, Inc. and Advance Pharmacies, Inc, if such sale has not
occurred within two months of the Closing.

(N) AHC shall contribute to the Company 100% of the capital stock of
each of AHP and APM, with the result being that APM and AHP shall be
wholly-owned subsidiaries of the Company and AHC shall be the owner of 12,500
shares of Common Stock of the Company.

(O) No intercompany allocations or payables shall be due from the
Company to AHC as of the Initial Closing. The Company shall assume AHC's
obligation to David R. Worley in the principal amount not to exceed $500,000,
bearing interest at a annual rate of 6%, payable on demand, and maturing on
September 30, 1993; the Company shall use its best efforts to replace such
obligation to Worley through indebtedness with a commercial bank or other
institutional lender.

2.03. PROPOSED ACQUISITION OF PARADIGM PHARMACY MANAGEMENT, INC. The
Purchasers acknowledge that the Company is pursuing the acquisition of
Paradigm. In connection with the proposed acquisition of Paradigm, the
Purchasers agree to purchase up to 6,000 shares of Series A Preferred Stock
aggregating $6,000,000 to finance the acquisition of Paradigm pursuant to
Section 1.03(b). Such purchase shall be subject to approval of the terms of
the transaction by two-thirds of the members of the Board of Directors of the
Company (including two (2) Investor Directors). In the event the Company is
unable to consummate the acquisition of Paradigm on terms mutually acceptable
to the Company and the Purchasers, the Purchasers agree to purchase up to
6,000 shares of Series A Preferred Stock aggregating $6,000,000 to finance
other acquisitions by the Company of other drug cost containment and mail
order pharmacy firms, as and to the extent the terms of such acquisitions are
approved in advance by two-thirds of the members of Board of Directors of the
Company (including two (2) Investor Directors), pursuant to Section 1.03(b).

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants as of the Initial Closing as follows:

3.01. ORGANIZATION AND STANDING OF THE COMPANY. The Company
is an organized and existing corporation in good standing (both corporate and
tax) under the laws of the State of Delaware and has all requisite corporate
power and authority for the ownership and
operation of its properties and for the carrying on of its business as now
conducted and as now proposed to be conducted and to execute and deliver this
Agreement and the Voting Agreement, to issue, sell and deliver the Preferred
Shares and to perform its other obligations

-9-

<PAGE>

pursuant hereto and thereto. The Company is licensed or qualified and in good
standing as a foreign corporation authorized to do business in all jurisdictions
wherein the character of the property owned or leased or the nature of the
activities conducted by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would not have a
Material Adverse Effect.

3.02. CORPORATE ACTION. This Agreement, the Voting Agreement and the
Preferred Shares have been duly authorized, executed and delivered on behalf of
the Company and constitute the legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective
terms. The Voting Agreement has been duly authorized, executed and delivered by
the parties thereto and constitutes the legal, valid and binding obligations of
such individuals or Advance Health Care, Inc., enforceable against each of them
in accordance with its terms. The Preferred Shares have been duly authorized by
the Board of Directors. The issuance, sale and delivery of the Preferred Shares,
and the issuance and delivery of the Conversion Shares upon conversion of the
Preferred Shares, have been duly authorized by all required corporate action.
The Preferred Shares have been validly issued, are fully paid and nonassessable,
with no personal liability attaching to the ownership thereof, and are free and
clear of all liens, charges, restrictions, claims and encumbrances imposed
(collectively, "ENCUMBRANCES") by or through the Company except as set forth in
this Agreement and the Voting Agreement. The Conversion Shares have, as of the
Closing, been duly reserved for issuance upon conversion of the Preferred Shares
and, when so issued, will be duly authorized, validly issued, fully paid and
nonassessable, with no personal liability attaching to the ownership thereof,
and will be free and clear of all Encumbrances imposed by or through the Company
except as set forth in this Agreement and the Voting Agreement.

Sufficient authorized but unissued shares of Common Stock have been
reserved by appropriate corporate action in connection with the proposed
conversion of the Preferred Shares. The issuance of the Preferred Shares and
Conversion Shares will not be subject to preemptive rights, rights of first
refusal or other preferential, contractual or statutory rights of the Company or
any stockholder or other Person and will not conflict with any provision of any
agreement to which the Company is a party or by which it is bound (other than
this Agreement).

3.03. GOVERNMENTAL APPROVALS. Except as set forth on EXHIBIT 3.03 and
except for the filing of any notice prior or subsequent to the Closing that may
be required under applicable state and/or federal securities laws (which the
Company covenants to make on a timely basis), no authorization, consent,
approval, license, exemption of or filing or registration with any court or
governmental department, commission, board, bureau, agency or

-10-
<PAGE>

instrumentality, domestic or foreign, or the National Association of Securities
Dealers, Inc. or the Commission, is or will be necessary for, or in connection
with, the execution and delivery by the Company of this Agreement, for the
offer, issue, sale, execution or delivery of the Preferred Shares or for the
performance by the Company of its obligations under this Agreement, the Voting
Agreement or the terms of the Series A Preferred Stock.

3.04. LITIGATION. Except as disclosed on EXHIBIT 3.04, there is no
litigation or governmental proceeding or investigation pending or, to the
Company's knowledge, threatened against the Company affecting any of its
properties or assets, or, to the Company's knowledge, after reasonable inquiry,
against any executive officer, Key Employee or the holder of more than five
percent (5%) of the capital stock of the Company and which relates to the
Company or its business. The Company is not aware of any presently-existing
condition, facts or events on the basis of which any litigation, proceeding or
investigation might properly be instituted which could have a Material Adverse
Effect.

Neither the Company nor, to its knowledge after reasonable inquiry,
any executive officer, Key Employee or holder of more than five percent (5%) of
the capital stock of the Company is in default with respect to any order, writ,
injunction, decree, ruling or decision of any court, commission, board or other
government agency, where such default could have a Material Adverse Effect on
the Company. There are no actions or proceedings pending or, to the Company's
knowledge, threatened which could result, either in any case or in the
aggregate, in any Material Adverse Effect, or which would call into question the
validity of this Agreement or the terms of the Preferred Shares or the Voting
Agreement.

The foregoing paragraphs include, without limiting their generality,
actions pending or threatened involving the prior employment or engagement of
any of the Company's officers, Key Employees or consultants or their use in
connection with the Company's business of any information or techniques
allegedly proprietary to any of their former employers or to any other Person.
Without limitation of the foregoing representations, a brief summary of the
Company's litigation matters and the disposition of such matters is set forth on
EXHIBIT 3.04, in the manner required by Item 103 of Regulation S-K promulgated
under the Securities Act, regarding litigation matters.

3.05. CERTAIN AGREEMENTS OF OFFICERS AND EMPLOYEES. No Key Employee, nor,
to the Company's knowledge, after reasonable inquiry, any employee or consultant
of the Company is in violation of any term of any employment contract, patent
disclosure, assignment of inventions or other proprietary information agreement,
noncompetition or nonsolicitation

-11-

<PAGE>

agreement, confidentiality agreement, or any other similar agreement or
restrictive covenant relating to the right of any such officer, employee or
consultant to be employed or engaged by the Company because of the nature of the
business conducted or to be conducted by the Company or relating to the use of
trade secrets or proprietary information of others.

No Key Employee of the Company whose termination, either individually
or in the aggregate, could have a Material Adverse Effect on the Company, has
terminated, or to the knowledge of the Company, has any present intention of
terminating, his or her employment or engagement with the Company.

3.06. COMPLIANCE WITH OTHER INSTRUMENTS. The Company is in compliance in
all respects with the provisions of this Agreement, the Voting Agreement, and of
its Charter and By-laws, each as amended and/or restated to date. The Company is
in compliance in all respects with the terms and provisions of all agreements by
which it is bound or to which it or any of its properties or assets are subject,
where any breach or noncompliance could have a Material Adverse Effect. The
Company has received no notice of any violation of any judgments, decrees,
governmental orders, laws, statutes, rules or regulations by which it is bound
or to which it or any of its properties or assets are subject, where any
violation or noncompliance could have a Material Adverse Effect. Neither the
execution and delivery of this Agreement, the Voting Agreement or the Preferred
Shares has constituted or resulted in or will constitute or result in a default
or violation of any material term or provision of any of the foregoing.

A schedule of Indebtedness of the Company as of June 30, 1993
(including lease obligations required to be capitalized in accordance with
applicable Statements of Financial Accounting Standards) is attached as
EXHIBIT 3.06.

3.07. TITLE TO ASSETS, PATENTS. The Company has good and indefeasible
title to such of its fixed assets as are real property, and good and
indefeasible title to all of its other assets now carried on its books,
including those reflected in the most recent balance sheet of the Company which
is set forth on EXHIBIT 3.08, or acquired since the date of such balance sheet
(except personal property disposed of since said date in the ordinary course of
business), free of any mortgages, pledges, charges, liens, security interests or
other Encumbrances, except those indicated in EXHIBIT 3.07. To the Company's
knowledge, the Company enjoys peaceful and undisturbed possession under all
capital or operating leases under which it is operating, and all said leases are
in full force and effect in all material respects.

-12-

<PAGE>

The Company owns or has a valid right to use the Intellectual Property
Rights being used to conduct its business as now operated and as now proposed to
be operated. A complete list of the licenses and registrations of such
Intellectual Property Rights is attached hereto as EXHIBIT 3.07. The conduct of
the Company's business as now operated and as now proposed to be operated does
not and will not conflict with or infringe upon the intellectual property rights
of others where such conflict or infringement could have a Material Adverse
Effect. Except as set forth on EXHIBIT 3.07, the Company has not been notified
of any claim, whether pending or threatened, against the Company and/or its
employees and consultants to the effect that any such Intellectual Property
Right owned or licensed by the Company, or which the Company otherwise uses, is
invalid or unenforceable by the Company or, infringes upon the rights of others.
Except as specified on EXHIBIT 3.07, the Company has undertaken no obligation to
compensate any Person for the use of any such Intellectual Property Rights,
whether by the payment of royalties, license fees or otherwise (or the
intellectual property rights of any other Person), and the Company has not
granted any Person any license or other right to use any of the Intellectual
Property Rights of the Company, whether requiring the payment of royalties or
not.

3.08. FINANCIAL INFORMATION. The financial statements of the Company,
including (i) the audited Financial Statements for the fiscal years ended March
31, 1992 and March 31, 1993, of Advance Health Care, Inc., (ii) the preliminary
"draft" of audited financial statements of the Company and the Subsidiary as of
March 31, 1993, and (iii) the Company's unaudited Statement of Income and
Balance Sheet, as at June 30, 1993, attached hereto as EXHIBIT 3.08, present
fairly the financial position of the Company as at the date or dates thereof and
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods indicated (the "FINANCIAL
STATEMENTS"), except, in the case of unaudited Financial Statements, for the
absence of footnotes and normal year-end adjustments, which are not expected to
be material in nature. Except as set forth in Exhibit 3.08, the Company does not
have, and has no reasonable grounds to know of, any liability in excess of
$94,000, contingent or otherwise, not adequately reflected in or reserved
against in the Financial Statements and the notes thereto which could have a
Material Adverse Effect. Except as set forth in EXHIBIT 3.08, since March 31,
1993, (i) there has been no adverse change in the business assets, operations,
affairs, prospects or financial condition of the Company which could have a
Material Adverse Effect; (ii) neither the business, financial condition,
operations, prospects or affairs of the Company nor any of its properties or
assets have been adversely affected as the result of any legislative or
regulatory change, any revocation or change in any franchise, permit, license or
right to do business, or any other event or occurrence, whether or not insured
against, which could have a Material Adverse Effect; and (iii) the Company has
not entered

-13-

<PAGE>

into any transaction other than in the ordinary course of business, made any
distribution on its capital stock, or redeemed or repurchased any of its capital
stock, except as set forth on EXHIBIT 3.08.

3.09. TAXES. Except as set forth in EXHIBIT 3.09, the Company has timely
filed and accurately prepared all federal, state and other tax returns required
by law to be filed by it, and except as set forth in EXHIBIT 3.09, has paid or
made provision for the payment of all taxes shown to be due and all additional
assessments, and adequate provisions have been made and are reflected in the
Company's Financial Statements for all current taxes and other charges to which
the Company is subject and which are not currently due and payable. Except as
set forth in EXHIBIT 3.09, none of the federal income tax returns of the Company
has been audited by the Internal Revenue Service. Management is not aware of
additional assessments, adjustments or contingent tax liability (whether federal
or state) pending or threatened for any period, nor of any basis for any such
assessment, adjustment or contingency. Neither the Company nor, to the Company's
knowledge, any of its stockholders, has ever filed a consent pertaining to the
Company pursuant to Section 341(f) of the Internal Revenue Code (the "CODE")
relating to collapsible corporations.

Prior to Closing, the Company's ability to deduct net operating losses
for federal income tax purposes as set forth in the Financial Statements was not
subject to limitation under Section 382 of the Code, but upon the Initial
Closing, the Company believes that it will be subject to such limitation.

3.10. ERISA. Except as set forth in EXHIBIT 3.10, the Company makes no
contributions to any employee pension benefit plans for its employees which are
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA").

3.11. TRANSACTIONS WITH AFFILIATES. Except as set forth in EXHIBIT 3.11,
there are no loans, leases, royalty agreements or other continuing transactions
between (a) the Company or any of its customers or suppliers, and (b) any
officer, employee, consultant or director of the Company or any Person owning
five percent (5%) or more of the capital stock of the Company or any member of
the immediate family of such officer, employee, consultant, director or
stockholder or any corporation or other entity controlled by such officer,
employee, consultant, director or stockholder, or a member of the immediate
family of such officer, employee, consultant, director or stockholder.

3.12. ASSUMPTIONS OR GUARANTIES OF INDEBTEDNESS OF OTHER PERSONS. Except as
set forth in EXHIBIT 3.12, the Company has not assumed, guaranteed, endorsed or
otherwise become directly or contingently liable on (including, without
limitation, liability by way of agreement, contingent or otherwise, to purchase,
to

-14-

<PAGE>

provide funds for payment, to supply funds to or otherwise invest in the debtor
or otherwise to assure the creditor against loss), any Indebtedness of any other
Person.

3.13. INVESTMENTS IN OTHER PERSONS. Except as set forth in EXHIBIT 3.13,
the Company has not made any loans or advances to any Person which is
outstanding on the date of this Agreement in excess of $94,000 in the aggregate,
nor is it committed or obligated to make any such loan or advance, nor does the
Company own any capital stock, assets comprising the business of, obligations
of, or any interest or investment in, any Person. The Company has those
Subsidiaries listed in EXHIBIT 3.13.

3.14. SECURITIES LAWS. Subject to the validity of the Purchasers'
representations in Section 1.05, the Company has complied with all applicable
federal and state securities laws in connection with the offer and sale of the
Preferred Shares. Subject to the validity of the Purchasers' representations in
Section 1.05, neither the Company nor anyone acting on its behalf has or will
sell, offer to sell or solicit offers to buy the Preferred Shares or similar
securities to, or solicit offers with respect thereto from, or enter into any
preliminary conversations or negotiations relating thereto with, any Person, so
as to require the registration of the Shares pursuant to the Securities Act or
any state securities laws.

3.15. DISCLOSURE. Neither this Agreement, the Financial Statements, nor any
other written agreement, document, certificate, statement, furnished to any of
the Purchasers or their special counsel by or on behalf of the Company in
connection with the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein or therein, in light of the
circumstances in which made, not misleading. There is no fact within the
knowledge of the Company which has not been disclosed herein or in writing by
them to the Purchasers and which materially adversely affects, or in the future
in their opinion may, insofar as they can now foresee, affect the business,
operations, properties, Intellectual Property Rights, assets or condition,
financial or other, of the Company and which could have a Material Adverse
Effect.

3.16. BROKERS OR FINDERS. Except as set forth in Exhibit 3.16, no Person
has or will have, as a result of the transactions contemplated by this
Agreement, any right, interest or valid claim against or upon the Company for
any commission, fee or other compensation as a consultant, finder or broker
because of any act or omission by the Company or its respective agents.

3.17. CAPITALIZATION; STATUS OF CAPITAL STOCK. As of the Closing, the
Company will have a total authorized capitalization consisting of: 30,000 shares
of Common Stock, and 10,000 shares of Series A Preferred Stock. After giving
effect to the

-15-

<PAGE>

transactions contemplated hereby, 12,500 shares of Common Stock will be issued
and outstanding, and 4,000 shares of Series A Preferred Stock will be issued and
outstanding, which Series A Preferred Stock will constitute immediately after
the Initial Closing 24.24% of the issued and outstanding capital stock of the
Company, calculated on a fully-diluted basis. The 4,000 shares of Series A
Preferred Stock issued at the Initial Closing are initially convertible into
4,000 shares of Common Stock, at a conversion rate of one (1) share of Common
Stock for each share of Series A Preferred Stock so converted, and subject to
adjustment as set forth in EXHIBIT A. A complete list of the record shareholders
of the Company is set forth in EXHIBIT 3.17 hereto.

All the currently outstanding shares of capital stock of the Company
have been duly authorized, and are validly issued, fully paid and
non-assessable. The Preferred Shares when issued and delivered in accordance
with the terms hereof, and the Conversion Shares, when issued and delivered upon
conversion of the Preferred Shares, will be duly authorized, validly issued,
fully-paid and non-assessable. Except for the Pool as defined in
Section 4.01(h), no options, warrants, subscriptions or purchase rights of any
nature to acquire from the Company, or commitments of the Company to issue,
shares of capital stock or other securities are authorized, issued or
outstanding, nor is the Company obligated in any other manner to issue shares or
rights to acquire any of its capital stock or other securities except as
contemplated by this Agreement. The Company has reserved a total of 1,833 shares
of its authorized but unissued Common Stock for the grant of options to
employees, officers, consultants and directors under the Pool following the
Initial Closing, and may reserve up to an aggregate of 2,278 shares of Common
Stock under the Pool following the Second Closing.

None of the Company's outstanding securities are subject to any
contractual or statutory rights of redemption or repurchase, rights of first
refusal, preemptive rights or other similar preferential rights for the benefit
of the Company, any stockholder, or any other Person, except pursuant hereto and
in the Voting Agreement. Except as set forth in EXHIBIT 3.17, there are no
restrictions on the transfer of shares of capital stock of the Company other
than those imposed by relevant federal and state securities and as otherwise
contemplated by this Agreement and the Voting Agreement. Except as set forth in
EXHIBIT 3.17 and the Voting Agreement, there are no agreements or other
arrangements concerning the voting, transfer or restrictions on transfer
relating to the capital stock of the Company to which the Company (or any of its
officers or directors) is a party. To the Company's knowledge the offer and sale
of all capital stock and other securities of the Company issued before the
Closing complied with or were exempt from all applicable federal and state
securities laws, and the Company has received no notice of demand or request for
rescission rights.

-16-

<PAGE>

3.18. REGISTRATION RIGHTS. Except as set forth on EXHIBIT 3.18 and except
for the rights granted pursuant to Article V hereof, no Person has been granted
any demand or other rights to cause the Company to file any registration
statement under the Securities Act relating to any securities of the Company or
any right to participate in any such registration statement.

3.19. INSURANCE. The Company carries insurance, in the amounts set forth
in EXHIBIT 3.19, covering its properties and business as identified on
EXHIBIT 3.19.

3.20. MATERIAL AGREEMENTS. Except as set forth in EXHIBIT 3.20, the Company
is not a party to any written or oral contract, instrument, agreement,
commitment, obligation, plan or arrangement, a copy of which would otherwise be
required to be filed with the Commission as an exhibit to a registration
statement on Form S-1. The Company and, to the best of Management's knowledge,
each other party thereto are not in default of any of their material obligations
required to be performed by them to date under the foregoing agreements. Except
as set forth in EXHIBIT 3.20, the Company has received no notice of default and
is not in default under any agreement now in effect to which the Company is a
party or by which it or its property may be bound, the result of which, in any
case or in the aggregate, could cause a Material Adverse Effect.

3.21. ABSENCE OF CERTAIN DEVELOPMENTS. Except as provided in EXHIBIT 3.21
attached hereto, since March 31, 1993, the Company has not:

(a) issued any stock, bonds or other corporate securities or any
rights, options or warrants with respect thereto;

(b) borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current liabilities incurred in
the ordinary course of business which are comparable in nature and amount
to the current liabilities incurred in the ordinary course of business
during the comparable portion of its prior fiscal year, as adjusted to
reflect the current nature and volume of the Company's business;

(c) discharged or satisfied any lien or encumbrance or paid any
obligation or liability (absolute or contingent), other than current
liabilities paid in the ordinary course of business;

(d) declared or made any payment or distribution of cash or other
property to stockholders with respect to its stock, or purchased or
redeemed, or made any agreements so to purchase or redeem, any shares of
its capital stock;

-17-

<PAGE>

(e) mortgaged or pledged any of its assets, tangible or intangible,
or subjected them to any liens, charge or other encumbrance, except liens
for current property taxes not yet due and payable;

(f) sold, assigned or transferred any other tangible assets, or
cancelled any debts or claims, except in the ordinary course of business;

(g) sold, assigned or transferred any patents, patent rights,
trademarks, trade names, copyrights, trade secrets or other intangible
assets or intellectual property rights, or disclosed any proprietary
confidential information to any persons except to customers in the ordinary
course of business;

(h) suffered any substantial losses or waived any rights of material
value, whether or not in the ordinary course of business, or suffered the
loss of any material amount of prospective business;

(i) made any changes in employee compensation except in the ordinary
course of business and consistent with past practices;

(j) made capital expenditures or commitments therefor that aggregate
in excess of $50,000;

(k) entered into any other transaction other than in the ordinary
course of business, or entered into any other material transaction, whether
or not in the ordinary course of business;

(l) made charitable contributions or pledges in excess of $10,000;

(m) suffered any material damage, destruction or casualty loss,
whether or not covered by insurance;

(n) experienced any problems with labor or management in connection
with the terms and conditions of their employment; or

(o) effected any two or more events of the foregoing kind which in
the aggregate would have a Material Adverse Effect.

3.22. ENVIRONMENTAL AND SAFETY LAWS. To the best of the Company's knowledge
after due investigation, the Company is not in violation of any applicable
federal, state or local statute, law, permit, license, ordinance or regulation
relating to the environment or occupational safety and health, nor are any
material expenditures required to comply with any such statute, permit, license,
law or regulation.

-18-

<PAGE>

3.23. U.S. REAL PROPERTY HOLDING CORPORATION. The Company is not now and
has never been during the last five calendar years a "United States Real
Property Holding Corporation" as defined in Section 897(c)(2) of the Code and
Section 1.897-2(b) of the Regulations promulgated by the Internal Revenue
Service.

3.24. SUBSIDIARIES. The Company has two wholly-owned subsidiaries, Advance
Home Prescriptions, Inc., a Delaware Corporation, and Advance Prescription
Management, Inc., a Delaware corporation. Each of the Company's Subsidiaries is
a duly organized and validly existing corporation in good standing in the
jurisdiction of its organization and has all requisite power and authority for
the ownership and operation of its properties and for the carrying on of its
business as now conducted or as now proposed to be conducted.

With respect to the representations and warranties of the Company set forth
in this Article III, each of such representations and warranties is expressly
modified to include appropriate references to the Company's Subsidiaries, as the
case may be in each instance.

ARTICLE IV

COVENANTS OF THE COMPANY

4.01. AFFIRMATIVE COVENANTS OF THE COMPANY OTHER THAN REPORTING
REQUIREMENTS. Without limiting any other covenants and provisions hereof, and
except to the extent the following covenants and provisions of this Section 4.01
are waived in any instance by the holders of at least sixty percent (60%) of the
outstanding Preferred Shares or as otherwise specifically approved by the Board
of Directors, which approval includes the affirmative vote or consent of at
least three (3) of the Investor Directors, the Company covenants and agrees that
it will perform and observe the following covenants and provisions, and will
cause each Subsidiary to perform and observe such of the following covenants and
provisions as are applicable to such Subsidiary:

(a) MAINTENANCE OF KEY MAN INSURANCE. Procure and maintain term life
insurance on the life of David Halbert in the amount of $1,000,000 (or the
maximum lower amount as to which he is insurable) for so long as that person
remains an officer or Key Employee of the Company, the proceeds of which are
payable to the Company. The Company will add a representative of the Purchasers,
Canaan Capital Limited Partnership, as a notice party to such policy and will
request that the issuer of such policy provide such party with at least thirty
(30) days' prior written notice before such policy is terminated (for failure to
pay premium or otherwise) or assigned, or before any change is made in the
designation of the beneficiary thereof.

-19-

<PAGE>

(b) BUDGETS APPROVAL. At least thirty (30) days prior to the
commencement of the Company's March 31, 1995 fiscal year (i.e., at least thirty
(30) days prior to April 1, 1994), and each fiscal year thereafter, prepare and
submit to, and obtain in respect thereof the approval of a majority of the
members of the Board of Directors, a monthly operating budget in detail for each
fiscal year, monthly operating expenses and profit and loss projections,
quarterly cash flow projections, a capital expenditure budget for the fiscal
year, and the terms and provisions of officers' compensation for such fiscal
year. The Company will prepare, within forty-five (45) days following the
Initial Closing, a revised budget for the 1994 fiscal year detailing a breakdown
of expenses.

(c) MEETINGS OF DIRECTORS, COMMITTEES AND OBSERVER RIGHTS. Hold
meetings of the Board of Directors on not less than a quarterly basis or on four
(4) occasions per each fiscal year; hold meetings of each of the Company's
Compensation Committee and Audit Committee of the Board of Directors not less
than two (2) times a year; send to each Purchaser the notice of the time and
place of such meeting in the same manner and at the same time as it shall send
such notice to its directors or committee members, as the case may be; hold two
(2) separate meetings with representatives of the Purchasers during each
calendar year; and permit each Purchaser or its designee to attend each meeting
of any committee thereof and to participate in all discussions during each such
meeting.

(d) AGREEMENTS OF OFFICERS AND EMPLOYEES. Cause each officer of the
Company or any Subsidiary hereafter employed to execute and deliver a
noncompetition agreement in form and substance approved by a majority of the
members of the Board of Directors.

(e) BY-LAWS; MEETINGS AND INDEMNIFICATION. The Company shall use its
best efforts to at all times cause its By-laws to provide that, (A) unless
otherwise required by the laws of the state of its incorporation, (i) any two
directors or (ii) any holder or holders of at least twenty-five percent (25%) of
the outstanding shares of Series A Preferred Stock shall have the right to call
a special meeting of the Board of Directors or Stockholders, and (B) a quorum
for a meeting of the Board shall require the attendance of at least two Investor
Directors (and any Committee shall require at least one Investor Director for
calculation of a quorum); PROVIDED, HOWEVER, that if notice of a regularly
scheduled meeting of the Board or any Committee thereof have been delivered to
all directors of the Company no later than five (5) days prior to the scheduled
date of such regularly scheduled meeting, then the calculation of any quorum for
such meeting shall not require the attendance of an Investor Director. All
special meetings of the Board of Directors or any Committee thereof shall be
preceded by at least 72 hours prior written notice of such special meeting. The
Company shall at all times maintain provisions in its By-laws or Certificate of

-20-

<PAGE>

Incorporation indemnifying all directors against liability to the maximum extent
permitted under the laws of the state of its incorporation.

(f) EXPENSES OF DIRECTORS. Promptly reimburse each director of the
Company for all of his reasonable out-of-pocket expenses (including travel and
lodging) incurred in attending any Board of Directors' meeting or any committee
thereof. Representatives of the Purchasers who do not serve as directors of the
Company shall not be reimbursed for any such expenses of attending meetings of
the Board of Directors or committee.

(g) SIZE OF BOARD AND COMMITTEES. Fix and maintain the number of
Directors on the Board of Directors of the Company at no more than nine (9)
members and nominate four (4) nominees of the Purchasers to the Board of
Directors; cause one Investor Director to be appointed to the Audit Committee
and two (2) Investor Directors to the Compensation Committee of the Board of
Directors; permit the Investor Directors to receive prior written notice of and
to attend each meeting or teleconference of the Board of Directors and each
committee thereof; and limit the size of the Compensation Committee of the Board
of Directors to no more than four (4) members and the Audit Committee to no more
than three (3) members.

(h) EMPLOYEE OPTIONS. Unless otherwise agreed to by two-thirds of
the members of the Board of Directors, all options which may be granted in the
future to officers, employees or consultants (the "EMPLOYEE OPTIONS") shall be
granted subject to the condition that any option, including the Employee
Options, shall vest and become exercisable in not more than ten equal,
semi-annual installments for a period of five years following the date of
initial grant of the option, and shall be granted at a per share exercise price
of not less than the greater of a twenty percent (20%) discount to the purchase
price of the Preferred Shares or FAIR MARKET VALUE on the date of grant. No
option or installment thereof shall be accelerated or subject to earlier
exercisability without the prior written consent of two-thirds of the members of
the Board of Directors.

The Company agrees to establish a management option pool (the "POOL")
equal to 1,833 shares of Common Stock as of the Initial Closing, or, if the
Second Closing occurs, up to a maximum of 2,278 shares of Common Stock following
the Second Closing. Sixty percent of the 10% pool will be allocated to the Chief
Executive Officer (David Halbert) and President (Jon Halbert) at an exercise
price of not less than eighty percent (80%) of the purchase price of the
Preferred Shares and forty percent (40%) of the 10% pool (one quarter shall be
allocated for the Chief Financial Officer, Dan Phillips) will be set aside for
new and existing managers that will be allocated based on the recommendation of
management and with the same per share exercise price of not less than eighty
percent (80%) of the purchase price of the Preferred Shares. If a Public
Offering occurs before the third anniversary of the Initial Closing, David
Halbert's vesting

-21-

<PAGE>

will be recalculated on a three-year basis from the Initial Closing. Jon Halbert
and Dan Phillips will have a five-year vesting schedule like all other managers.
One hundred percent (100%) vesting for David and Jon Halbert and Dan Phillips
will occur in the event of sale or merger with an outside corporation gaining
50% or greater ownership (but such 100% vesting shall not occur for all other
employees). It is the current intent that management of Paradigm may be granted
up to an additional 3% of the fully diluted Common Stock with whatever terms are
negotiated by David Halbert (the "PARADIGM SHARES"), approved by the Board of
Directors and with the consent of the holders of sixty percent (60%) of the
Preferred Shares. The Paradigm shares shall be deducted from the Acquisition
Pool as defined in Section 6.06(e).

4.02. NEGATIVE COVENANTS OF THE COMPANY. From and after the Closing, the
Company covenants and agrees that it will comply with and observe the following
negative covenants and provisions, and will cause each Subsidiary to comply with
and observe such of the following covenants and provisions as are applicable to
such Subsidiary, if and when such Subsidiary exists, and will not, except as
permitted below, without the written consent or written waiver of (i) the
holders of at least sixty percent (60%) of the outstanding Preferred Shares, or
(ii) the approval of the Board of Directors, which approval shall include the
affirmative vote or consent of at least three (3) Investor Directors:

(a) DEALINGS WITH AFFILIATES. Without the prior approval and consent
of a majority of the disinterested members of the Board of Directors, enter into
any transaction, including, without limitation, any loans or extensions of
credit or royalty agreements with any employee, consultant, officer or director
of the Company or any Subsidiary or holder of ten percent (10%) of any class of
capital stock of the Company or any Subsidiary, or any member of their
respective immediate families or any corporation or other entity directly or
indirectly controlled by one or more of such employees, consultants, officers,
directors or 10% stockholders or members of their immediate families, on terms
less favorable to the Company or any Subsidiary than it would obtain in a
transaction between unrelated parties.

(b) COMPENSATION TO OFFICERS. Amend, increase, modify or waive in any
material respect any employment, benefit or compensation arrangement with any
officer or Key Employee, or pay to any Key Employee, senior manager or officer
compensation (including salary and bonus) which exceeds 115% of the prior year's
compensation plan, except to the extent otherwise approved by a majority of the
disinterested members of the Board of Directors or the Compensation Committee or
as otherwise set forth as officer compensation for any fiscal year in a Business
Plan or operating budget approved by a majority of the members of the Board of
Directors.

-22-

<PAGE>

(c) MAINTENANCE OF OWNERSHIP OF SUBSIDIARIES. Without the prior
approval and consent of two-thirds of the members of the Board of Directors
(which shall include three (3) of the Investor Directors), sell or otherwise
dispose of any shares of capital stock of any Subsidiary, or permit any
Subsidiary to issue, sell or otherwise dispose of any shares or rights to
acquire any of its capital stock or the capital stock of any Subsidiary;
PROVIDED, HOWEVER, that the Company may liquidate, merge or consolidate any
Subsidiary or Subsidiaries into or with itself, provided that the Company is the
surviving entity, or into or with another Subsidiary or Subsidiaries, or the
Company may sell all or a portion of any Subsidiary to the Company or any other
Subsidiary, provided that after giving effect to the transaction, the Subsidiary
continues to remain a member of the Company's "consolidated group" (with the
Company as the parent organization) for tax and accounting purposes.

(d) TRANSFERS OF TECHNOLOGY. Without the prior approval and consent
of two-thirds of the members of the Board of Directors, transfer, sell, pledge,
encumber, mortgage, dispose of, assign, lease, license or convey any ownership
or interest in, or material rights relating to, any of its technology, or other
Intellectual Property Rights to any Person where the loss of such rights would
have a Material Adverse Effect; PROVIDED, HOWEVER, that this Section shall not
apply to transfers, licenses, leases, or sublicenses of the Company's
Intellectual Property Rights accomplished in the ordinary course of business.

(e) DISTRIBUTIONS. Without the prior approval and consent of
two-thirds of the members of the Board of Directors, declare or pay any
dividends, purchase, redeem, retire or otherwise acquire for value any of its
capital stock (or rights, options or warrants to purchase such shares) now or
hereafter outstanding, return any capital or make any distribution to its
stockholders as such, or permit any Subsidiary to do any of the foregoing (such
transactions being hereinafter referred to as "DISTRIBUTIONS"), EXCEPT that the
Subsidiaries may declare and make payment of cash and stock dividends, return
capital and make distributions of assets to the Company; PROVIDED, HOWEVER, that
nothing herein contained shall prevent the Company from:

(i) effecting a stock split or declaring or paying any
non-cash dividend consisting of shares of any class of capital stock
to all holders of shares of such class of capital stock;

(ii) redeeming any shares of capital stock of a deceased
stockholder out of insurance held by the Company on that stockholder's
life;

(iii) complying with any specific provision of the terms of
this Agreement, the Voting Agreement or the Series A Preferred Stock
as set forth herein or in the Charter (including the optional
redemption provisions of Article 6 or the dividend provisions of the
Series A Preferred Stock);

-23-

<PAGE>

(iv) repurchasing any shares of capital stock of any
director, officer, employee, consultant or other person or entity,
subject to a stock repurchase agreement or stock restriction agreement
under which the Company has the right but not the obligation to
repurchase such shares in the event of termination of employment or of
the consulting arrangement, or other similar discontinuation of a
business relationship or otherwise pursuant to a right of first
refusal by the Company on such transfer; PROVIDED, HOWEVER, each
repurchase or payment which is optional under such agreement is
approved in writing by two-thirds of the members of the Board of
Directors; or

(v) distributing shares of capital stock of any Subsidiary
to all stockholders of the Company on a pro rata basis based on voting
power).

(f) EXTRAORDINARY CORPORATE TRANSACTIONS. Take any corporate
act or any agreement to take such action, or obligate itself to take any such
action, if such action would:

(i) cause the Company to create, authorize or issue any
class or series of capital stock (or options, warrants or other rights
therefor) or debt security if such stock or debt ranks on a parity
with or senior to the Series A Preferred Stock with respect to
liquidation preferences, dilution protection, redemption rights, or
payment of dividends, or otherwise having terms and conditions
superior to the terms of the Preferred Shares that would impair or
limit the Company's obligations under this Agreement;

(ii) without the prior approval and consent of two-thirds
of the members of the Board of Directors, cause or authorize any
transaction, whether by merger, consolidation, reorganization, sale of
capital stock or more than thirty percent (30%) of the Company's
assets, or any other form of business combination or acquisition in
which the Company or any Subsidiary is the object of any acquisition
and in which control of the voting securities or assets of the Company
or any Subsidiary are transferred in any way, directly or indirectly,
to another Person and in which the Company or such Subsidiary is not
the surviving entity or does not survive as a going concern (an
"ACQUISITION Transaction");

(iii) provide for the voluntary liquidation, dissolution or
winding up of the Company;

(iv) increase the size of the Board of Directors beyond
nine (9) members;

(v) grant or authorize registration rights senior to or on
a parity with the registration rights contained in Article V, if the
grant of such registration rights would limit, restrict or impair the
registration rights provided to the Purchasers under Article V hereof.

-24-

<PAGE>

(g) CORPORATE PARTNERING OR ACQUISITIONS. Without the prior
approval and consent of two-thirds of the members of the Board of Directors,

(i) undertake or obligate itself to undertake any
acquisition of or investment in another business entity outside of,
not complementary to or substantially related to the principal line
of business of the Company or any subsidiary; or

(ii) accept or obligate itself to accept any investment
in the Company or any Subsidiary by an outside corporate partner,
whether debt or equity.

4.03. REPORTING REQUIREMENTS. The Company will furnish the following to
each Purchaser:

(a) MONTHLY REPORTS: as soon as available and in any event within 30
days after the end of each calendar month, balance sheets, statements of income
and retained earnings and a summary statement of monthly cash flow of the
Company and its Subsidiaries for such month and for the period commencing at the
end of the previous fiscal year and ending with the end of such month, setting
forth in each case in comparative form the corresponding figures for the
corresponding period of the preceding fiscal year, and including comparisons to
the monthly budget or business plan and an analysis of the variances from the
budget or business plan;

(b) ANNUAL REPORTS: as soon as available and in any event within 90
days after the end of each fiscal year of the Company, a copy of the annual
audited report for such year for the Company and its Subsidiaries, including
therein consolidated and consolidating balance sheets of the Company and its
Subsidiaries as of the end of such fiscal year and consolidated and
consolidating statements of income and retained earnings and of changes in
financial position of the Company and its Subsidiaries for such fiscal year,
setting forth in each case in comparative form the corresponding figures for the
preceding fiscal year, all such consolidated statements to be duly certified by
the chief financial officer of the Company and Arthur Anderson & Co., or another
independent public accountant of recognized national standing approved by a of
the members of the Board of Directors;

(c) BUDGETS AND OPERATING PLAN: as soon as available and in any event
at least 30 days before the beginning of each fiscal year of the Company, a
business plan and monthly and quarterly operating budgets for the forthcoming
fiscal year, and as soon as available and in any event within 30 days after the
end of each calendar month, monthly comparisons against the business plan and
monthly operating budgets;

-25-

<PAGE>

(d) NOTICE OF ADVERSE CHANGES: promptly after the occurrence thereof
and in any event within five (5) business days after the Company becomes aware
of each occurrence, provide notice to the Investor Directors of any Material
Adverse Effect; and

(e) REPORTS AND OTHER INFORMATION: promptly upon receipt,
publication, commencement or occurrence provide to each Investor Director copies
of all consulting reports, notices of all material actions, suits or
proceedings, copies of all accountant's reviews and auditor's reports to
management or similar management letters, and such other information as the
Company shall make available to its directors or stockholders as the Purchasers
shall reasonably request.

4.04. U.S. REAL PROPERTY HOLDING CORPORATION. Except to the extent the
following covenants and provisions of this Section 4.04 are waived in any
instance by all of the Purchasers, the Company shall, and shall cause each
Subsidiary, if and when such Subsidiary exists, to conduct its business and do
or cause to be done any and all actions as are necessary, so that the Company
and its Subsidiaries shall not at any time become a "UNITED STATES REAL PROPERTY
HOLDING CORPORATION" as defined in Section 897(c)(2) of the Code and Section
1.897-2(b) of the Regulations promulgated by the Internal Revenue Service.

4.05. TERMINATION OF ARTICLE IV. The obligations of the Company under
Sections 4.01, 4.02 and 4.03 of this Article IV shall terminate and expire on
the later to occur of (i) a Qualifying Public Offering or (ii) at such time when
less than thirty percent (30%) of the aggregate Preferred Shares issued to the
Purchasers under this Agreement remain outstanding.

ARTICLE V

REGISTRATION RIGHTS

5.01. "PIGGY-BACK" REGISTRATIONS. If at any time the Company shall
determine to register for its own account or the account of others under the
Securities Act any of its equity securities (including pursuant to a demand for
registration of any stockholder of the Company OTHER THAN holders exercising
registration rights with respect to the Registrable Shares), it shall send to
each holder of Registrable Shares, including each holder who has the right to
acquire Registrable Shares, written notice of such determination and, if within
fifteen (15) days after receipt of such notice, such holder shall so request in
writing, the Company shall include in such registration statement all or any
part of the Registrable Shares such holder requests to be registered. Nothing
herein shall be construed so as to require the Company, in connection with any
proposed offering, to engage the services of an underwriter under this Section
5.01 as,

-26-

<PAGE>

for example, if the Company shall file a registration statement under Rule 415
of the Securities Act without the services or engagement of any underwriter.

If, in connection with any offering involving an underwriting of
Common Stock to be issued by the Company, the managing underwriter shall impose
a limitation on the number of shares of such Common Stock which may be included
in the registration statement because, in its judgment, such limitation is
necessary to effect an orderly public distribution, then the Company shall be
obligated to include in such registration statement only such limited portion of
the Registrable Shares with respect to which such holder has requested inclusion
hereunder; PROVIDED, HOWEVER, subject to Section 5.17, that the Company shall
not so exclude any Registrable Shares unless it has first excluded any
securities to be offered and sold by officers and employees of the Company or by
holders who do not have contractual, rights to include such securities
(collectively, "EXCLUDABLE SHARES").

Any exclusion of Registrable Shares shall be made pro rata among the
Purchasers (or their assigns) seeking to include such shares, in proportion to
the number of such shares held by such Purchasers (or their assigns). For
purposes of making any such reduction, each Purchaser which is a partnership,
together with the affiliates, partners and retired partners of such Purchaser,
the estates and family members of any such partners and retired partners and of
their spouses, and any trusts for the benefit of any of the foregoing persons
shall be deemed to be a single "holder" of Registrable Shares, and any pro-rata
reduction with respect to such "holder" shall be based upon the aggregate amount
of shares of capital stock held by all entities and individuals included in such
"holder", as defined in this proviso (and the aggregate amount so allocated to
such "holder" shall be allocated among the entities and individuals included in
such "holder" in such manner as such Purchaser may reasonably determine). No
incidental right under this Section 5.01 shall be construed to limit any
registration required under Section 5.02. The obligations of the Company under
this Section 5.01 may be waived at any time upon the written consent of holders
of sixty percent (60%) of the outstanding Registrable Shares.

The obligations of the Company under this Section 5.01 shall expire on
the fifth anniversary of the Company's Initial Public Offering (the "IPO"). This
Section 5.01 shall NOT apply to a registration of shares of Common Stock on Form
S-8 or Form S-4 or their then equivalents relating to an offering of shares of
Common Stock to be issued solely in connection with any acquisition of any
entity or business or otherwise issuable in connection with any stock option or
employee benefit plan.

5.02. DEMAND REGISTRATIONS. Commencing with the earlier of six (6) months
following the initial Public Offering or June 30, 1998, if on any occasion one
or more holders of at least

-27-

<PAGE>

sixty percent (60%) of the Registrable Shares shall notify the Company in
writing that it or they intend to offer or cause to be offered for public sale
not less than fifty percent (50%) of the Registrable Shares, the Company will so
notify all holders of Registrable Shares, including all holders who have a right
to acquire Registrable Shares. Upon written request of any holder given within
ten (10) days after the receipt by such holder from the Company of such
notification, the Company shall cause such of the Registrable Shares as may be
requested by any holder thereof (including the holder or holders giving the
initial notice of intent to offer) to be registered under the Securities Act as
expeditiously as possible.

The Company shall not be required to effect more than two (2)
registrations pursuant to this Section 5.02. If the Company determines to
include shares to be sold by it or by other selling shareholders in any
registration request pursuant to this Section 5.02, such registration shall be
deemed to have been a "piggy back" registration under Section 5.01, and not a
"demand" registration under this Section 5.02 if the holders of Registrable
Shares are unable to include in any such registration statement at least
seventy-five percent (75%) of the Registrable Shares initially requested for
inclusion in such registration statement.

5.03. REGISTRATIONS ON FORM S-3. In addition to the rights provided the
holder of Registrable Shares in Sections 5.01 and 5.02 above, if the
registration of Registrable Shares under the Securities Act can be effected on
S-3 (or any similar form having similar requirements promulgated by the
Commission), then upon the written request of one or more holders of at least
sixty percent (60%) of the Registrable Shares, the Company will so notify each
holder of Registrable Shares, including each holder who has a right to acquire
Registrable Shares, and then shall, as expeditiously as possible, effect
qualification and registration under the Securities Act on Form S-3 of all or
such portion of the Registrable Shares as the holder or holders shall specify.

The Company shall not be required to effect more than three (3)
registrations in the aggregate pursuant to this Section 5.03 and not more than
one during any twelve-month period. The Company's obligations under this Section
5.03 shall expire seven (7) years after the initial Public Offering. Any
offering of Registrable Shares pursuant to this Section shall have a minimum
market value of at least $2,000,000 of the securities so registered.

5.04. EFFECTIVENESS. The Company will use its best efforts to maintain
the effectiveness for up to 90 days (or such shorter period of time as the
underwriters need to complete the distribution of the registered offering in any
Company-primary offering, or six (6) months in the case of a "shelf"
registration statement on Form S-3 pursuant to Section 5.02 or 5.03) of any

-28-

<PAGE>

registration statement pursuant to which any of the Registrable Shares are being
offered, and from time to time will amend or supplement such registration
statement and the prospectus contained therein to the extent necessary to comply
with the Securities Act and any applicable state securities statute or
regulation. The Company will also provide each holder of Registrable Shares with
as many copies of the prospectus contained in any such registration statement as
it may reasonably request.

5.05. INDEMNIFICATION OF HOLDER OF REGISTRABLE SHARES. In the event that
the Company registers any of the Registrable Shares under the Securities Act,
the Company will indemnify and hold harmless each holder and each underwriter of
the Registrable Shares (including their officers, directors, affiliates and
partners) so registered (including any broker or dealer through whom such shares
may be sold) and each Person, if any, who controls such holder or any such
underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages, expenses or liabilities, joint or
several, to which they or any of them become subject under the Securities Act,
applicable state securities laws or under any other statute or at common law or
otherwise, as incurred, and, except as hereinafter provided, will reimburse each
such holder, each such underwriter and each such controlling Person, if any, for
any legal or other expenses reasonably incurred by them or any of them in
connection with investigating or defending any actions whether or not resulting
in any liability, insofar as such losses, claims, damages, expenses, liabilities
or actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement under which
such Securities were registered under the Securities Act, in any preliminary or
amended preliminary prospectus or in the final prospectus (or the registration
statement or prospectus as from time to time amended or supplemented by the
Company), or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances in which
they were made, not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act or any state securities laws
applicable to the Company and relating to action or inaction required of the
Company in connection with such registration.

Notwithstanding the foregoing, the Company shall have no obligation to
indemnify any holder, underwriter or controlling person if: (i) such untrue
statement or omission was made in such registration statement, preliminary or
amended preliminary prospectus or final prospectus in reliance upon and in
conformity with information furnished in writing to the Company in connection
therewith by such holder of Registrable Shares (in the case of indemnification
of such holder), such underwriter (in the

-29-

<PAGE>

case of indemnification of such underwriter) or such controlling Person (in the
case of indemnification of such controlling Person) expressly for use therein,
or (ii) in the case of a sale directly by such holder of Registrable Shares
(including a sale of such Registrable Shares through any underwriter retained by
such holder of Registrable Shares to engage in a distribution solely on behalf
of such holder of Registrable Shares), such untrue statement or alleged untrue
statement or omission or alleged omission was contained in a preliminary
prospectus and corrected in a final or amended prospectus copies of which were
delivered to such holder of Registrable Shares or such underwriter on a timely
basis, and such holder of Registrable Shares failed to deliver a copy of the
final or amended prospectus at or prior to the confirmation of the sale of the
Registrable Shares to the person asserting any such loss, claim, damage or
liability in any case where such delivery is required by the Securities Act.

The indemnity provided in this Section 5.05 shall survive the transfer
of any Registrable Shares by such holder or any termination of this Agreement.

5.06. INDEMNIFICATION OF COMPANY. In the event that the Company registers
any of the Registrable Shares under the Securities Act, each holder of the
Registrable Shares so registered will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed or otherwise
participated in the preparation of the registration statement, each underwriter
of the Registrable Shares so registered (including any broker or dealer through
whom such of the shares may be sold) and each Person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act from and against
any and all losses, claims, damages, expenses or liabilities, joint or several,
to which they or any of them may become subject under the Securities Act,
applicable state securities laws or under any other statute or at common law or
otherwise, and, except as hereinafter provided, will reimburse the Company and
each such director, officer, underwriter or controlling Person for any legal or
other expenses reasonably incurred by them or any of them in connection with
investigating or defending any actions whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement of a material fact
contained in the registration statement, in any preliminary or amended
preliminary prospectus or in the final prospectus (or in the registration
statement or prospectus as from time to time amended or supplemented) or arise
out of or are based upon the omission to state therein a material fact required
to be stated therein or necessary in order to make the statements therein not
misleading, but only to the extent that any such statement or omission was made
in reliance upon and in conformity with information furnished in writing to the
Company in connection therewith by such holder of Registrable

-30-

<PAGE>

shares expressly for use therein; PROVIDED, HOWEVER, that such holder's
obligations hereunder shall be limited to an amount equal to the proceeds
received by such holder of Registrable Shares sold in any such registration.

5.07. INDEMNIFICATION PROCEDURES AND CONTRIBUTION.

(a) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any action or
proceeding (including any governmental investigation) shall be brought or
asserted against any person entitled to indemnification under Sections 5.05 or
5.06 above (an "INDEMNIFIED PARTY") in respect of which indemnity may be sought
from any party who has agreed to provide such indemnification (an "INDEMNIFYING
PARTY"), the Indemnifying Party shall assume the defense thereof, including the
employment of counsel selected by the Indemnifying Party and reasonably
satisfactory to such Indemnified Party, and shall assume the payment of all
expenses. Such Indemnified Party shall have the right to employ separate counsel
in any such action and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party
unless (i) the Indemnifying Party has agreed to pay such fees and expenses or
(ii) the named parties to any such action or proceeding (including any impleaded
parties) include both such Indemnified Party and the Indemnifying Party, and
such Indemnified Party shall have been advised by counsel that there is a
conflict of interest on the part of counsel employed by the Indemnifying Party
to represent such Indemnified Party, or there may be defenses available to the
Indemnified party that are different form or in addition to those available to
the Indemnifying Party and that the Indemnifying Party is not able to assert on
behalf of or in the name of the Indemnified Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense of such action
or proceeding on behalf of such Indemnified Party; it being understood, however,
that the Indemnifying Party shall not, in connection with any one such action or
proceeding or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such Indemnified Parties, which firm shall be
designated in writing by such Indemnified Parties). The Indemnifying Party shall
not be liable of any settlement of any such action or proceeding effected
without its written consent, but if settled with its written consent, or if
there be a final judgment for the plaintiff in any such action or proceeding,
the Indemnifying Party shall indemnify and hold harmless such Indemnified
Parties from and against any loss or liability (to the extent stated above) by
reason of such settlement or judgment.

-31-

<PAGE>

(b) CONTRIBUTION. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in which
the Company or any holder of Registrable Shares exercising its rights under this
Article V, makes a claim for indemnification pursuant to Section 5.05 or 5.06,
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding that Section 5.05 or 5.06 provides for
indemnification, in such case, then, the Company and such holder of Registrable
Shares will contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (after contribution from others) in such proportion
as is appropriate to reflect the relative fault of the Company on the one hand
and of the holder of Registrable Shares on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations or, if the
allocation provided herein is not permitted by applicable law, in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company and any holder of Registrable Shares from the offering of the
Securities covered by such registration statement. The relative fault of the
Company on the one hand and of the holder of Registrable Shares on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company on the one
hand or by the holder of Registrable Shares on the other, and each party's
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission; PROVIDED, HOWEVER, that, in any such case,
(A) no such holder of Registrable Shares will be required to contribute any
amount in excess of the proceeds received by such holder of Registrable Shares
offered by it pursuant to such registration statement; and (B) no person or
entity guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.

5.08. EXCHANGE ACT REGISTRATION. The Company shall timely file with the
Commission such information as the Commission
may require under Section 13 or 15(d) of the Exchange Act;
and in such event, the Company shall use its best efforts to take all action
pursuant to Rule 144(c) as may be required as a condition to the availability of
Rule 144 or Rule 144A under the Securities Act (or any successor exemptive rule
hereinafter in effect) with respect to such Common Stock. The Company shall
furnish to any holder of Registrable Shares forthwith upon request (i) a written
statement by the Company as to its compliance with the reporting requirements of
Rule 144(c), (ii) a copy of the most recent annual or quarterly report of the
Company

-32-

<PAGE>

as filed with the Commission, and (iii) such other publicly-filed reports and
documents as a holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a holder to sell any such Registrable
Securities without registration. The Company agrees to use its best efforts to
facilitate and expedite transfers of the Shares pursuant to Rule 144 under the
Securities Act, which efforts shall include timely notice to its transfer agent
to expedite such transfers of Shares and timely filing of all reports required
to be filed with the Commission within any applicable time period (such as
Form 10-K, Form 10-Q and Form 8-K).

5.09. DAMAGES. The Company recognizes and agrees that the holder of
Registrable Shares will not have an adequate remedy if the Company fails to
comply with this Article V and that damages may not be readily ascertainable,
and the Company expressly agrees that, in the event of such failure, it shall
not oppose an application by the holder of Registrable Shares or any other
Person entitled to the benefits of this Article V requiring specific performance
of any and all provisions hereof or enjoining the Company from continuing to
commit any such breach of this Article V.

5.10. FURTHER OBLIGATIONS OF THE COMPANY. Whenever under the preceding
Sections of this Article V, the Company is required hereunder to register
Registrable Shares, it agrees that it shall also do the following:

(a) Furnish to each selling holder such copies of each preliminary
and final prospectus and such other documents as said holder may reasonably
request to facilitate the public offering of its Registrable Shares;

(b) Use its best efforts to register or qualify the Registrable
Shares covered by said registration statement under the applicable securities or
"blue sky" laws of such jurisdictions as any selling holder may reasonably
request; PROVIDED, HOWEVER, that the Company shall not be obligated to qualify
to do business in any jurisdictions where it is not then so qualified or to take
any action which would subject it to local taxation or the service of process in
suits other than those arising out of the offer or sale of the securities
covered by the registration statement in any jurisdiction where it is not then
so subject or to conform the composition of its assets at the time to the
securities or "Blue Sky" laws of any jurisdiction;

(i) an opinion of counsel for the Company, dated the effective
date of the registration statement, and

-33-

<PAGE>

(ii) "comfort" letters signed by the Company's independent public
accountants who have examined and reported on the Company's financial
statements included in the registration statement, to the extent permitted
by the standards of the American Institute of Certified Public Accountants,

covering substantially the same matters with respect to the registration
statement (and the prospectus included therein) and (in the case of the
accountants' "comfort" letters) with respect to events subsequent to the date of
the financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' "comfort" letters delivered to the underwriters in
underwritten public offerings of securities, but the Company shall be obligated
hereunder only to the extent that the Company is required to deliver or cause
the delivery of such opinion or "comfort" letters to the underwriters in an
underwritten public offering of securities;

(d) Permit each selling holder of Registrable Shares or his counsel
or other representatives to inspect and copy such corporate documents and
records as may reasonably be requested by them, after reasonable advance notice
and without undue interference with the operation of the Company's business;

(e) Furnish to each selling holder of Registrable Shares a copy of
all documents filed with and all correspondence from or to the Commission in
connection with any such offering of securities;

(f) Use its best efforts to insure the obtaining of all necessary
approvals from the National Association of Securities Dealers, Inc (the "NASD");
and

(g) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission.

Whenever under the preceding Sections of this Article V the holders of
Registrable Shares are registering such shares pursuant to any registration
statement, each such holder agrees to (i) timely provide to the Company, at its
request, such written information and materials as it may reasonably request in
order to effect the registration of such Registrable Shares and (ii) convert all
Preferred Shares to be included in any registration statement for shares of
Common Stock, such conversion to be effective at the closing of such offering
pursuant to such registration statement.

5.11. EXPENSES. In the case of each registration
effected under Section 5.01, 5.02 or 5.03, the Company shall bear all reasonable
costs and expenses of each such registration on behalf of the selling holders of
Registrable Shares, except as otherwise prohibited by state securities law or
regulation,

-34-

<PAGE>

including, but not limited to, the Company's printing, legal and accounting fees
and expenses, Commission and NASD filing fees and "Blue Sky" fees and expenses
and the reasonable fees and disbursements of one counsel competent in securities
matters for the selling holders of Registrable Shares in connection with the
registration of their Registrable Shares; PROVIDED, HOWEVER, that the Company
shall have no obligation to pay or otherwise bear any portion of the
underwriters' commissions or discounts attributable to the Registrable Shares
being offered and sold by the holders of Registrable Shares, or the fees and
expenses of more than one counsel for the selling holders of Registrable Shares
in connection with the registration of the Registrable Shares. The fees and
expenses of such counsel to the selling holders shall not exceed $10,000 for any
registration. The Company shall pay all expenses (including reasonable
attorneys' fees subject to the limitations set forth immediately above) of the
holders of the Registrable Shares in connection with any registration initiated
pursuant to this Article V which is withdrawn, delayed or abandoned, except if
such withdrawal, delay or abandonment is caused by the fraud, material
misstatement or omission of a material fact to be included in writing in such
registration by a holder of Registrable Shares, or other act attributable to the
holders of Registrable Shares relating to violation of the provisions of this
Agreement.

5.12. APPROVAL OF UNDERWRITER. Any managing underwriter engaged in any
registration made pursuant to Section 5.02 shall be a nationally recognized
investment banking firm or, if not a nationally-recognized investment banking
firm, then another investment banking firm which is approved in writing by the
holders of sixty percent (60%) of the Registrable Shares requesting such
registration.

5.13. TRANSFERABILITY AND EXPIRATION OF REGISTRATION RIGHTS. For all
purposes of Article V of this Agreement, the "holders of Registrable Shares"
shall include Advance Health Care, Inc. and the Purchasers, and, in addition,
(i) any assignee or transferee for value of the Registrable Shares who acquires
from any Purchaser at least twenty percent (20%) of the Registrable Shares
purchased by any such Purchaser pursuant to this Agreement and who is not a
competitor of the Company, or (ii) any general or limited partner or retired
partner or any officer or director of any Purchaser or their affiliates who has
received Registrable Shares as part of a distribution of shares without the
payment of consideration pursuant to any partnership agreement or similar
governing instrument, including, but not limited to, assignees who are immediate
family members, trusts for estate planning purposes and personal
representatives; provided, however, that any assignee or transferee agrees in
writing to be bound by all of the provisions of this Agreement, including,
without limitation, Section 5.14 hereof.

-35-

<PAGE>

With respect to any Registrable Shares held by any transferee or
assignee referred to in clause (i) of the preceding paragraph, the registration
rights set forth in Section 5.01 of this Article V shall terminate and expire
when any such transferee or assignee holds less than one percent (1%) of the
outstanding Common Stock (calculated assuming conversion of the Preferred
Shares) and such transferee or assignee is otherwise eligible to sell to the
public such Registrable Shares pursuant to the provisions of Rule 144(k) of the
Securities Act.

5.14. "LOCK-UP" AND MARKET STANDSTILL. Each holder of Registrable Shares
agrees that in the event the Company proposes to offer for sale to the public
any of its equity securities in any Public Offering (whether for its own account
or the account of others, including the holders of Registrable Shares), and (1)
if requested in writing by the Company and an underwriter of the proposed
offering of Common Stock or other securities of the Company; AND (2) if all
other "affiliates" and all 10% stockholders, directors and officers similarly
situated are requested by the Company and such underwriter to sign, and actually
do sign, any "Lock-Up Agreement" (as described herein), then such holder will
agree to a restriction whereby he not sell, grant any option or right to buy or
sell, or otherwise transfer or dispose of in any manner, to the public in open
market transactions, any Common Stock or other securities of the Company held by
it during whatever time period requested by the Company and the underwriter for
restrictions on trading or transfer (the "LOCK-UP PERIOD") following the
effective date of the registration statement of the Company filed under the
Securities Act. The Company agrees that it will sign a Lock-Up Agreement upon
substantially similar terms and conditions in the event of a registration
effected pursuant to Section 5.02 or 5.03 hereof. Such agreements shall be in
writing and in form and substance pursuant to customary and prevailing terms and
conditions for such Lock-Up Agreements. The Company may impose stop-transfer
instructions with respect to the securities subject to the foregoing
restrictions until the end of the Lock-Up Period. Such Lock-Up Period shall not
exceed 180 days in length.

5.15. MERGERS OR ACQUISITION TRANSACTIONS. The Company shall not, directly
or indirectly, enter into or agree to enter into any Acquisition Transaction in
which the Company shall not be the surviving corporation unless the proposed
surviving corporation shall, prior to such transaction agree in writing to
assume the obligations of the Company under Article V of this Agreement, and for
that purpose references hereunder to Registrable Shares shall be deemed to be
references to the securities which the Purchasers would be entitled to receive
in exchange for Registrable Shares under any such Acquisition Transaction. The
provisions of this Section 5.15 shall not apply in the event of any Acquisition
Transaction in which the Company is not the surviving corporation if all
stockholders are entitled to receive in exchange for their Registrable Shares
consideration

-36-

<PAGE>

consisting solely of (i) cash, (ii) securities of the acquiring corporation
which may be immediately sold to the public without registration under the
Securities Act, or (iii) securities of the acquiring corporation which the
acquiring corporation has agreed to use its best efforts to register with the
Commission within 90 days of completion of the transaction for resale to the
public pursuant to the Securities Act.

5.16. DELAY OF REGISTRATION. For a period not to exceed 120 days, the
Company shall not be obligated to prepare and file, or be prevented from
delaying or abandoning, a registration statement pursuant to this Agreement at
any time when the Company, in its good faith judgment by the Board of Directors
with the advice of counsel, reasonably believes:

(a) that the filing thereof at the time requested, or the offering of
Registrable Shares pursuant thereto, would materially and adversely affect (a) a
pending or scheduled public offering or private placement of the Company's
securities, (b) an acquisition, merger, consolidation or similar transaction by
or of the Company, (c) pre-existing and continuing negotiations, discussions or
pending proposals with respect to any of the foregoing transactions, or (d) the
financial condition of the Company in view of the disclosure of any pending or
threatened litigation, claim, assessment or governmental investigation which may
be required thereby; and

(b) that the failure to disclose any material information with
respect to the foregoing would cause a violation of the Securities Act or the
Exchange Act.

5.17. CUT-BACK OF REGISTRATION RIGHTS. AHC shall be entitled to participate
in the registration rights provided to the Purchasers in this Article V, except
for Section 5.02. AHC and each of the Purchasers agree that if the number of
Registrable Shares to be included in any registration statement covered by
Section 5.01 or 5.03 hereof is reduced at the request of the managing
underwriter of any offering of Common Stock of the Company because such
limitation is necessary to effect an orderly public distribution of equity
securities of the Company, then the Purchasers and their assignees shall be
entitled to include in such registration statement such number of Registrable
Shares as is equal to twice the number of Registrable Shares as AHC is entitled
to include in such registration statement, following the determination by such
managing underwriter to reduce the number of Registrable Shares sought to be
included in any registration statement.

-37-

<PAGE>

ARTICLE VI

RIGHT OF FIRST OFFER

6.01. RIGHT OF FIRST OFFER. Before the Company or any Subsidiary shall
offer, issue, sell or exchange, agree or obligate itself to offer, issue, sell
or exchange any (i) shares of Common Stock, (ii) any other equity security of
the Company or any Subsidiary, including without limitation, shares of preferred
stock, (iii) any convertible debt security of the Company or any Subsidiary,
including without limitation, any debt security which by its terms is
convertible into or exchangeable for any equity security of the Company or any
Subsidiary, (iv) any security of the Company or any Subsidiary that is a
combination of debt and equity, or (v) any option, warrant or other right to
subscribe for, purchase or otherwise acquire any such equity security or any
such debt security of the Company or any Subsidiary, the Company or such
Subsidiary shall, in each case, first offer to sell such securities (the
"OFFERED SECURITIES") to the Purchasers and any other holder of more than three
percent (3%) of the capital stock of the Company (for purposes of this Article
VI, the Purchasers and such 3% holders are referred to as the "OFFEREE") at the
time of any offering of Offered Securities as follows: the Company or such
Subsidiary shall offer to sell to each Offeree: (a) that portion of the Offered
Securities as the number of shares of Common Stock (calculated on an "as
converted" basis) then held by Offeree bears to the total number of shares of
Common Stock (calculated on an "as converted" basis) held by all Offerees (the
"BASIC AMOUNT"), and (b) such additional portion of the Offered Securities as
such Offeree shall indicate it will purchase should the other Offerees subscribe
for less than their Basic Amounts (the "UNDERSCRIPTION AMOUNT"), at a price and
on such other terms as shall have been specified by the Company in writing
delivered to the Offerees (the "OFFER"), which Offer by its terms shall remain
open and irrevocable for a period of thirty (30) days from receipt of the Offer.
For purposes of this Article VI, each Offeree which is a partnership shall be
deemed to be the holder of shares of capital stock of the Company originally
acquired by such Offeree which are transferred to and held by partners and
retired partners of such Offeree, the spouse and members of the family of any
such partner and such partners spouse and trusts for the benefit of any such
person.

6.02. NOTICE OF ACCEPTANCE. Notice of each Offeree's intention to accept,
in whole or in part, any Offer made pursuant to Section 6.01 shall be evidenced
by a writing signed by such Offeree and delivered to the Company prior to the
end of the 20-day period of such offer, setting forth such of the Offeree's
Basic Amount as such Offeree elects to purchase and, if such Offeree shall elect
to purchase all of its Basic Amount, such Undersubscription Amount as such
Offeree shall elect to purchase (the "NOTICE OF ACCEPTANCE"). If the Basic
Amounts subscribed
for by all Offerees are less than the total Offered Securities,

-38-

<PAGE>

then each Offeree who has set forth Undersubscription Amounts in its Notice of
Acceptance shall purchase, in addition to the Basic Amounts subscribed for, all
Undersubscription Amounts it has subscribed for; PROVIDED, HOWEVER, that should
the Undersubscription Amounts subscribed for exceed the difference between the
Offered Securities and the Basic Amounts subscribed for (the "AVAILABLE
UNDERSUBSCRIPTION AMOUNT"), each Offeree who has subscribed for any
Undersubscription Amount shall purchase only that portion of the Available
Undersubscription Amount as the Undersubscription Amount subscribed for by such
Offeree bears to the total Undersubscription Amounts subscribed for by all
Offerees, subject to equitable adjustment by the Board of Directors to the
extent it reasonably deems necessary.

6.03. CONDITIONS TO ACCEPTANCES AND PURCHASE.

(a) PERMITTED SALES OF REFUSED SECURITIES. In the event that Notices
of Acceptance are not given by the Offerees in respect of all the Offered
Securities at the end of the 30-day period, the Company shall have 180 days from
the end of said period to sell any such Offered Securities as to which a Notice
of Acceptance has not been given by the Offerees (the "REFUSED SECURITIES") to
any Person or Persons, but only for cash and otherwise in all respects upon
terms and conditions, including, without limitation, unit price and interest
rates, which are no more favorable, in the aggregate, to such other Persons or
less favorable to the Company than those set forth in the Offer.

(b) REDUCTION IN AMOUNT OF OFFERED SECURITIES. In the event the
Company shall propose to sell less than all of the Refused Securities (any such
sale to be in the manner and on the terms specified in Section 6.03(a) above),
then each Offeree may reduce the number of shares or other units of the Offered
Securities specified in its respective Notices of Acceptance to an amount which
shall be not less than the amount of the Offered Securities which the Offeree
elected to purchase pursuant to Section 6.02 multiplied by a fraction, (i) the
numerator of which shall be the amount of Offered Securities which the Company
actually proposes to sell, and (ii) the denominator of which shall be the amount
of all Offered Securities. In the event that any Offeree so elects to reduce the
number or amount of Offered Securities specified in its respective Notices of
Acceptance, the Company may not sell or otherwise dispose of more than the
reduced amount of the Offered Securities until such securities have again been
offered to the Offerees in accordance with Section 6.01. If the Company shall
propose to sell less than all of the Offered Refused Securities, then each
Offeree shall reduce the number of Offered Refused Securities it wishes to
purchase in a manner consistent with this Section 6.03.

(c) CLOSING. Upon the closing of the sale to such other Persons of
all or less than all the Refused Securities, the Offerees shall purchase from
the Company, and the Company shall

-39-

<PAGE>

sell to the Offerees, the number of Offered Securities and/or Offered Refused
Securities specified in the Notices of Acceptance, as reduced pursuant to
Section 6.03(b) if the Offerees have so elected, upon the terms and conditions
specified in the Offer. The purchase by the Offerees of any Offered Securities
and/or Offered Refused Securities is subject in all cases to the preparation,
execution and delivery by the Company and the Offerees of a purchase agreement
relating to such Offered Securities and/or Offered Refused Securities reasonably
satisfactory in form and substance to the Company, the Offerees and any other
purchasers and their respective counsel.

6.04. FURTHER SALE. In each case, any Offered Securities or Offered
Refused Securities not purchased by the Offerees or other Person or Persons in
accordance with Section 6.03 may not be sold or otherwise disposed of until they
are again offered to the Offerees under the procedures specified in Sections
6.01, 6.02 and 6.03.

6.05. TERMINATION AND WAIVER OF RIGHT OF FIRST OFFER. The rights of the
Offerees under this Article VI may be waived only upon the prior written consent
of the holders of sixty percent (60%) in interest of the Preferred Shares and
shall terminate immediately prior to the effectiveness of any registration
statement with respect to any Qualified Public Offering, but expressly
conditioned on the consummation of the Qualified Public Offering.

6.06. EXCEPTION. The rights of the Offerees under this Article VI shall
not apply to ("EXCLUDED ISSUANCES"):

(a) Common Stock issued as a dividend to holders of Common Stock upon
any subdivision or combination of shares of Common Stock;

(b) Preferred Stock or Common Stock issued as a dividend to holders
of Preferred Stock upon any subdivision or combination of shares of Common
Stock;

(d) such number of shares of Common Stock, or options
or warrants exercisable therefor (the "POOL"), issued on or after the date
hereof to directors, officers, employees or consultants of the Company and
any Subsidiary pursuant to any incentive, qualified or non-qualified stock
option plan or agreement, employee stock ownership plan, employee stock
purchase plan, employee benefit plan, employee stock bonus plan, stock
purchase agreement, stock plan, stock restriction agreement, or consulting
agreement or such other options, warrants, arrangements, agreements or
plans involving the
Common Stock of the Company as shall equal 1,833 shares of Common Stock as
of the Initial Closing, or, if the Second Closing occurs, up to a maximum
of 2,278 shares of Common Stock following the Second Closing; PROVIDED,
HOWEVER, that the
number set forth above may be increased from time to time
or by the written consent of the holders of sixty percent

-40-

<PAGE>

(60%) of the outstanding shares of Series A Preferred Stock, or by the
approval of the Board of Directors, which approval includes the affirmative
vote or consent of at least three (3) Investor Directors;

(e) shares of Common Stock (or options or warrants exercisable
therefor) issued solely to employees, consultants or others in connection
with the acquisition (whether by merger or otherwise) by the Corporation of
all or substantially all of the capital stock or assets of any other entity
or business organization (the "ACQUISITION POOL"), provided the issuance of
such securities is approved by two-thirds of the members of the Board of
Directors, and provided further that the aggregate number of shares of
Common Stock issued pursuant to this paragraph does not exceed a number
equal to 1,338 shares of Common Stock as of the Initial Closing, or, if the
Second Closing occurs, up to a maximum of 1,662 shares of Common Stock
following the Second Closing.

Each of the foregoing numbers shall be subject to equitable adjustment
in the event of any stock dividend, stock split, combination, reorganization,
recapitalization, reclassification or other similar event.

ARTICLE VII

DEFINITIONS AND ACCOUNTING TERMS

7.01. CERTAIN DEFINED TERMS. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):

"ACCREDITED INVESTOR" shall have the meaning assigned to that term in
Rule 501 under the Securities Act.

"AGREEMENT" means this Preferred Stock Purchase Agreement as from time
to time amended and in effect between the parties, including all Exhibits and
disclosure schedules hereto.

"BOARD OF DIRECTORS" means the Board of Directors of the Company as
constituted from time to time.

"CLOSING" shall have the meaning assigned to that term in Section
1.03.

"COMMISSION" shall mean the Securities and Exchange Commission or any
other federal agency then administering the Securities Act or Exchange Act.

-41-

<PAGE>

"COMMON STOCK" includes (a) the Company's Common Stock, $0.01 par
value, as authorized on the date of this Agreement, (b) any other capital stock
of any class or classes (however designated) of the Company, authorized on or
after the date hereof, the holders of which shall have the right, without
limitation as to amount, either to all or to a share of the balance of current
dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and the holders of which
shall ordinarily, in the absence of contingencies or in the absence of any
provision to the contrary in the Company's Certificate of Incorporation, are
entitled to vote for the election of a majority of directors of the Company, and
(c) any other securities into which or for which any of the securities described
in (a) or (b) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.

"COMPANY" means Advance Pharmacy Services, Inc., a Delaware
corporation, and its successors and assigns.

"CONSOLIDATED" and "CONSOLIDATING" when used with reference to any
term defined herein mean that term as applied to the accounts of the Company and
its Subsidiaries consolidated in accordance with generally accepted accounting
principles consistently applied throughout reporting periods.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the Commission
(or of any other federal agency then administering the Exchange Act) thereunder,
all as the same shall be in effect at the time.

"INDEBTEDNESS" means (i) any liability for borrowed money or evidenced
by a note or similar obligation given in connection with the acquisition of any
property or other assets (other than trade or similar accounts payable incurred
in the ordinary course of business); (ii) all guaranties, endorsements and other
contingent obligations, in respect of Indebtedness of others, whether or not the
same are or should be reflected in the Company's balance sheet (or the notes
thereto), except guaranties by endorsement of negotiable instruments for deposit
or collection or similar transactions in the ordinary course of business, and
(iii) the present value of any lease payments due under leases required to be
capitalized in accordance with applicable Statements of Financial Accounting
Standards, determined by discounting all such payments at the interest rate
determined in accordance with applicable Statements of Financial Accounting
Standards.

-42-

<PAGE>

"INTELLECTUAL PROPERTY RIGHTS" means any and all domestic or foreign
patents, patent applications, patent rights, trade secrets, confidential
business information, formula, processes, notebooks, technical specifications,
flow charts, logic diagrams, algorithms, inventions, discoveries, copyrights,
mask works, software methodologies, claims of infringement against third
parties, licenses, permits, license rights, contract rights with employees,
consultants and third parties, trademarks, trademark rights, inventions and
discoveries, and other such rights generally classified as intangible,
intellectual property assets in accordance with generally accepted accounting
principles.

"INVESTOR DIRECTORS" mean those directors of the Company who are
designated by Canaan Venture Limited Partnership and Whitney 1990 Equity Fund,
L.P., initially Benno C. Schmidt, Peter M. Castleman, Stephen Green, and Dr.
Jeffrey R. Jay.

"KEY EMPLOYEE" means and includes the President, Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer, any Vice-President
and the Treasurer of the Company, any director or vice president of operations,
finance, research and development, general administration, sales, marketing,
technology development, engineering, or other functional area of the Company,
the head of any division or Subsidiary of the Company, or any other individual
so designated by the Board of Directors of the Company.

"MANAGEMENT" shall mean any one of David Halbert, Jon Halbert and Dan
Phillips or any other person who is a successor President, Chief Executive
Officer, Chief Operating Officer, Director or Chief Financial Officer or other
successor to the positions of any of the foregoing individuals.

"MATERIAL ADVERSE EFFECT" shall mean any event, circumstance or
condition that would affect the Company's business, assets, liabilities,
revenues, profitability, results of operations, financial condition, officers
and Key Employees, or Intellectual Property Rights, if such effect would be both
material and adverse to the Company or any Subsidiary.

"NONDISCLOSURE AND ASSIGNMENT OF INVENTIONS AGREEMENT" shall have the
meaning assigned to that term in Section 2.02.

"NOTICE OF ACCEPTANCE" shall have the meaning assigned to that term in
Section 6.02.

"OFFER" shall have the meaning assigned to that term in Section 6.01.

"OFFERED SECURITIES" shall have the meaning assigned to that term in
Section 6.01.

-43-

<PAGE>

"PERSON" means an individual, corporation, partnership, joint venture,
trust, university, or unincorporated organization, or a government or any agency
or political subdivision thereof.

"POOL" shall have the meaning assigned to that term in Section 4.01(h)
of this Agreement.

"PREFERRED SHARES" shall have the meaning assigned to that term in
Section 1.01, as modified by Section 1.02.

"PUBLIC OFFERING" means any public offering of Common Stock of the
Company for the account of the Company and/or selling securityholders and
offered on a "firm commitment" or "best efforts" basis to the public pursuant to
an offering registered under the Securities Act with the Commission on Form S-1,
Form S-2, Form SB-2, Form S-3, Form S-18 or their then equivalents, including
without limitation a Qualified Public Offering.

"PURCHASER" and "PURCHASERS" shall have the meaning assigned to that
term in Section 1.01 of this Agreement and shall include the original Purchasers
and also any other holder of any of the Shares.

"QUALIFIED PUBLIC OFFERING" means a fully underwritten, firm
commitment public offering pursuant to an effective registration under the
Securities Act covering the offer and sale by the Company of its Common Stock
for its own account in which the aggregate gross proceeds actually received by
the Company exceed $10,000,000 (calculated after deducting underwriters'
discounts and commissions but before calculation of expenses), and in which the
price per share is at least twice the original purchase price per share of the
Preferred Shares.

"REFUSED SECURITIES" shall have the meaning assigned to that term in
Section 6.03.

"REGISTRABLE SHARES" shall mean and include (i) the Conversion Shares;
and (ii) any shares of capital stock of the Company acquired by the Purchasers
pursuant to Article VI hereof, including shares of Common Stock issuable on the
conversion, exercise or exchange of other securities acquired by the Purchasers
pursuant to Article VI hereof or otherwise; PROVIDED, HOWEVER, that shares of
Common Stock which are Registrable Shares shall cease to be Registrable Shares
upon the consummation of any sale to the public pursuant to a registration
statement, or to the public pursuant to Rule 144 under the Securities Act.
Wherever reference is made in this Agreement to a request or consent of holders
of a certain percentage of Registrable Shares, the determination of such
percentage shall include the Conversion

-44-

<PAGE>

Shares even if conversion of the Preferred Shares has not yet been effected.
Registrable Shares shall also mean and include the 12,500 shares of Common Stock
currently held by Advance Health Care, Inc.

"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission (or of
any other Federal agency then administering the Securities Act) thereunder, all
as the same shall be in effect at the time.

"SHARES" means, collectively, the Preferred Shares and the Conversion
Shares.

"SIGNIFICANT PURCHASER" means a Purchaser who, together with any of
its affiliated funds or investment entities, holds, in the aggregate, at least
$500,000 of the Preferred Shares purchased at the Closing.

"SUBSIDIARY" or "SUBSIDIARIES" means Advance Home Prescriptions, Inc.
and Advance Prescription Management, Inc. and any Person of which the Company
and/or any of its other Subsidiaries (as herein defined) directly or indirectly
owns at the time at least fifty-one percent (51%) of the outstanding voting
shares of every class of such corporation or trust other than directors'
qualifying shares.

"UNDERSUBSCRIPTION AMOUNT" shall have the meaning assigned to that
term in Section 6.01.

"VOTING AGREEMENT" shall have the meaning assigned to that term in
Section 1.06.

7.02. ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted accounting
principles consistently applied, and all financial data submitted pursuant to
this Agreement shall be prepared in accordance with such principles.

ARTICLE VIII

MISCELLANEOUS

8.01. NO WAIVER, CUMULATIVE REMEDIES. No failure or delay on the part of
any party to this Agreement in exercising any right, power or remedy hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. The remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.

-45-

<PAGE>

8.02. AMENDMENTS, WAIVERS AND CONSENTS. Any provision in the Agreement to
the contrary notwithstanding, and except as hereinafter provided, changes in,
termination or amendments of or additions to this Agreement may be made, and
compliance with any covenant or provision set forth herein may be omitted or
waived, if the Company (i) shall obtain consent thereto in writing from the
holder or holders of at least sixty percent (60%) of the outstanding Preferred
Shares and/or Conversion Shares, and (ii) shall deliver copies of such consent
in writing to any holders who did not execute such consent; provided that no
consents shall be effective to reduce the percentage in interest of the Shares
the consent of the holders of which is required under this Section 9.02. Any
waiver or consent may be given subject to satisfaction of conditions stated
therein and any waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.

8.03. ADDRESSES FOR NOTICES. All notices, requests, demands and other
communications provided for hereunder shall be in writing (including telegraphic
communication) and mailed, telegraphed or delivered to each applicable party at
the appropriate address.

If to any other holder of the Shares: at such holder's address for
notice as set forth in EXHIBIT 1.01 hereto or at such other address as shall be
designated by such Person in a written notice to the other parties complying as
to delivery with the terms of this Section.

If to the Company: at the address set forth on page 1 hereof, or at
such other address as shall be designated by the Company in a written notice to
the other parties complying as to delivery with the terms of this Section.

All such notices, requests, demands and other communications shall,
when mailed (which mailing must be accomplished by first class mail, postage
prepaid; electronic facsimile transmission (with confirming copy to follow by
first class mail, postage prepaid); express overnight courier service; or
registered or certified mail, postage prepaid, return receipt requested) or
telegraphed. All notices shall be considered to be delivered three (3) days
after dispatch in the event of first class or registered mail, and on the next
succeeding business day in the event of facsimile transmission or overnight
courier service.

8.04. COSTS, EXPENSES AND TAXES. As a condition precedent, the Company
agrees to pay at the Closing in connection with the preparation, execution and
delivery of this Agreement and the issuance of the Preferred Shares at the
Closing, the fees and expenses, not to exceed $75,000 in the aggregate, of
counsel for each of the Purchasers, and the fees and expenses of any
consultant(s) retained by the Purchasers, due diligence expenses

-46-

<PAGE>

(including travel to the Company), and other expenses related to the
transactions contemplated hereby. In addition, the Company shall pay the
reasonable fees and out of pocket expenses of legal counsel, independent public
accountants, consultants and other outside experts retained by the Purchasers in
connection with any amendment or waiver to this Agreement requested by the
Company, or the enforcement of this Agreement by the Purchasers. In addition,
the Company shall pay any and all U.S. Federal or State stamp or similar taxes
payable or determined to be payable in connection with the execution and
delivery of this Agreement, the issuance of the Shares and the other instruments
and documents to be delivered hereunder or thereunder, and agrees to save the
Purchasers harmless from and against any and all liabilities with respect to or
resulting from any delay in paying or omission to pay such taxes.

8.05. BINDING EFFECT, ASSIGNMENT. Except as provided in Section 5.13, this
Agreement shall be binding upon and inure to the benefit of the Company and the
Purchasers and their respective heirs, successors and assigns, except that the
Company shall not have the right to delegate its obligations hereunder or to
assign its rights hereunder or any interest herein without the prior written
consent of the holders of at least sixty percent (60%) of the outstanding
Preferred Shares and/or Conversion Shares.

8.06. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made in this Agreement, the Shares, or any other instrument or
document delivered in connection herewith or therewith, shall survive the
execution and delivery hereof for a period of one year from the effective date
of this Agreement.

8.07. PRIOR AGREEMENTS. This Agreement, the Voting Agreement, the terms of
the Preferred Shares, and the other agreements or instruments executed and
delivered herewith constitute the entire agreement between the parties and
supersedes any prior understandings or agreements concerning the subject matter
hereof.

8.08. SEVERABILITY. The provisions of this Agreement, the Voting
Agreement, and the terms of the Series A Preferred Stock (collectively, the
"CLOSING AGREEMENTS") are severable and, in the event that any court of
competent Jurisdiction shall determine that any one or more of the provisions or
part of a provision contained in the Closing Agreements, shall, for any reason,
be held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision or part of a
provision of the Closing Agreements, but the Closing Agreements shall be
reformed and construed as if such invalid or illegal or unenforceable provision,
or part of a provision, had never been contained herein, and such provisions or
part reformed so that it would be valid, legal and enforceable to the maximum
extent possible.

-47-

<PAGE>

8.09. CONFIDENTIALITY. Each Purchaser agrees that it will keep
confidential and will not disclose or divulge any confidential, proprietary or
trade secret information of the Company which such Purchaser (and any
transferee) may obtain from the Company pursuant to financial statements,
reports and other materials submitted by the Company to such Purchaser pursuant
to this Agreement, or pursuant to visitation or inspection rights granted
hereunder, unless such information is known, or until such information becomes
known, to the public; PROVIDED, HOWEVER, that a Purchaser may disclose such
information (i) on a confidential basis to its attorneys, accountants,
consultants and other professionals to the extent necessary to obtain their
services in connection with its investment in the Company, (ii) to any
prospective purchaser of any Shares from such Purchaser as long as such
prospective purchaser agrees in writing to be bound by the provisions of this
Section, (iii) to any affiliate or partner of such Purchaser, provided that such
Person shall be bound by the confidentiality obligations of this Section, and
(iv) as required by applicable law. Each Purchaser further agrees that it will
not sell, transfer, transmit or disseminate in any fashion any information,
goods, services or other matter or thing received by, from or through the
Company ("MATERIALS") into any foreign jurisdiction if such sale, transfer,
transmission or dissemination would be in violation of any applicable Federal
law or regulation governing the export, sale, transfer, transmission or
dissemination of any such Materials.

8.10. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware, and without giving
effect to choice of laws provisions.

8.11. HEADINGS. Article, section and subsection headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.

8.12. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.

8.13. FURTHER ASSURANCES. From and after the date of this Agreement, upon
the request of the Purchasers, the Company shall execute and deliver such
instruments, documents and other writings as may be reasonably necessary or
desirable to confirm and carry out and to effectuate fully the intent and
purposes of this Agreement and the Preferred Shares.

-48-

<PAGE>

8.14. PROHIBITION ON PURCHASE OF SHARES OF ADVANCE HEALTH CARE. Each of
the Purchaser's covenants and agrees that neither it nor any of its affiliates
will purchase shares of capital stock of AHC without first obtaining the
approval of a majority of the Board of Directors of AHC. This covenant will
expire upon the earlier of (a) the initial public offering of AHC capital stock
or (b) the sale of all, or substantially all, of the stock or assets of AHC.
Any purported transfer in violation of this section shall be null and void and
shall not be registered in the books of AHC.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGES IMMEDIATELY FOLLOW]

-49-

<PAGE>

IN WITNESS WHEREOF, this Preferred Stock Purchase Agreement has been
executed as of the date and year first above written by the duly authorized
officers and representatives of each of the undersigned Company and the
Purchasers.

COMPANY: PURCHASERS:

ADVANCE PHARMACY SERVICES, CANAAN CAPITAL LIMITED PARTNERSHIP
INC.
By: Canaan Capital Management L.P.,
Its General Partner
By:
By: Canaan Capital Partners L.P.,
Title: Its General Partner

ADVANCE PRESCRIPTION
MANAGEMENT, INC. By:/s/Stephen L. Green
General Partner

By: CANAAN CAPITAL OFFSHORE LIMITED
PARTNERSHIP C.V.
Title:
By: Canaan Capital Management, L.P.,
Its General Partner
ADVANCE HOME PRESCRIPTIONS,
INC. By: Canaan Capital Partners L.P.,
Its General Partner

By:
By:/s/Stephen L. Green
Title: General Partner

FOR PURPOSES OF /s/Stephen L. Green
ARTICLE V AND SECTION 8.14: Stephen L. Green

ADVANCE HEALTH CARE, INC.
/s/Jeffrey R. Jay, M.D.
Dr. Jeffrey R. Jay

By:
QUAI LTD.
Title:

By:

Title:

<PAGE>

COMPANY: PURCHASERS:

ADVANCE PHARMACY CANAAN CAPITAL LIMITED PARTNERSHIP
SERVICES, INC.
By: Canaan Capital Management L.P.,
Its General Partner
By:/s/David Halbert
By: Canaan Capital Partners L.P.,
Title: CEO Its General Partner

ADVANCE PRESCRIPTION
MANAGEMENT, INC. By:
General Partner

By:/s/David Halbert CANAAN CAPITAL OFFSHORE LIMITED
PARTNERSHIP C.V.
Title: CEO
By: Canaan Capital Management, L.P.,
Its General Partner
ADVANCE HOME
PRESCRIPTIONS, INC. By: Canaan Capital Partners L.P.,
Its General Partner

By: /s/David Halbert
By:
Title: CEO General Partner

FOR PURPOSES OF
ARTICLE V ONLY: Stephen L. Green

ADVANCE HEALTH CARE, INC.

Dr. Jeffrey R. Jay

By:/s/David Halbert QUAI LTD.

Title: President
By:

Title:

<PAGE>

COMPANY: PURCHASERS:

ADVANCE PHARMACY CANAAN CAPITAL LIMITED PARTNERSHIP
SERVICES, INC.
By: Canaan Capital Management L.P.,
Its General Partner
By:
By: Canaan Capital Partners L.P.,
Title: Its General Partner

ADVANCE PRESCRIPTION
MANAGEMENT, INC. By:
General Partner

By: CANAAN CAPITAL OFFSHORE LIMITED
PARTNERSHIP C.V.
Title:
By: Canaan Capital Management, L.P.,
Its General Partner
ADVANCE HOME
PRESCRIPTIONS, INC. By: Canaan Capital Partners L.P.,
Its General Partner

By:
By:
Title: General Partner

FOR PURPOSES OF
ARTICLE V ONLY: Stephen L. Green

ADVANCE HEALTH CARE, INC.

Dr. Jeffrey R. Jay

By: QUAI LTD.

Title:
By:/s/Dominique Liardet

Title: Attorney-in-fact

July 29, 1993

<PAGE>

PURCHASERS:

J.H. WHITNEY & CO.

By:/s/ Daniel J. O'Brien

Title: Chief Financial Officer

WHITNEY 1990 EQUITY FUND, L.P.

By:/s/ Daniel J. O'Brien

Title: Chief Financial Officer

<PAGE>

CERTIFICATE OF AMENDMENT
TO THE CERTIFICATE OF INCORPORATION OF

ADVANCE PHARMACY SERVICES, INC.

Pursuant to the provisions of Section 242 of the General Corporation Law of
the State of Delaware, the undersigned corporation adopts the following
Certificate of Amendment to its Certificate of Incorporation;

The name of the corporation is Advance Pharmacy Services, Inc.

II.

The following amendment to the Certificate of Incorporation was
adopted by the stockholders of the corporation on July 29, 1993. The amendment
amends and restates Article 4 of the original Certificate of Incorporation and
the full text of such provision is amended to read as follows:

FOURTH: The Company is authorized to issue a total of forty
thousand (40,000) shares of capital stock, consisting of thirty-five
thousand (35,000) shares of Common Stock, all of a par value of $0.01
each, and ten thousand shares of Series A Preferred Stock (10,000),
all of a par value of $0.01.

A. DESCRIPTION AND DESIGNATION OF SERIES A PREFERRED STOCK

1. DESIGNATION. A total of ten thousand (10,000) shares of the Company's
Preferred Stock shall be designated the "SERIES A PREFERRED STOCK". All numbers
relating to the calculation of cumulative dividends, liquidation preference per
share, or redemption price per share of the Series A Preferred Stock shall be
subject to equitable adjustment in the event of any stock dividend, stock split,
combination, reorganization, recapitalization, reclassification or other similar
event involving a change in the capital structure of the Series A Preferred
Stock.

2. DIVIDENDS.

(a) CUMULATIVE DIVIDENDS. The holders of the outstanding shares of
Series A Preferred Stock shall be entitled to receive, out of funds legally
available therefor, cumulative dividends calculated without compounding, at the
annual rate of eight percent (8%) per share of the Original Issue Price of the
Series A Preferred Stock, or $80.00 per share. Such cumulative dividends shall
accrue and accumulate from the date of original issuance. Cumulative dividends
on the Series A Preferred Stock shall be payable if, as and when declared by the
Board of Directors of the Company, and shall be payable, whether or not earned
or

EXHIBIT A

<PAGE>

declared, only upon a liquidation as provided in Section 3 or upon a redemption
as provided in Section 6.

Dividends on the Series A Preferred Stock shall accrue from day to day
on each share of Series A Preferred Stock from the date of original issuance of
such share, whether or not earned or declared, and shall accrue until paid upon
liquidation or redemption. Such dividends on the Series A Preferred Stock shall
be cumulative so that if such dividends in respect of any previous or current
annual dividend period, at the annual rate specified above, shall not have been
paid or declared, the deficiency shall first be fully paid before any dividend
or other distribution shall be paid or declared and set apart for any class or
series of capital stock of the Company junior to the Series A Preferred Stock,
including the Common Stock.

Upon conversion of the Series A Preferred Stock pursuant to Section 5
hereof, all such accrued and unpaid cumulative dividends on the Series A
Preferred Stock to and until the date of such conversion shall not be due and
payable and shall be forfeited.

(b) PARTICIPATING DIVIDENDS. The Company shall not pay any cash
dividends on its Common Stock without the consent or approval of two-thirds of
the members of the Board of Directors. In the event that the Board of Directors
of the Company shall declare a dividend payable upon the then outstanding shares
of Common Stock (other than a stock dividend on the Common Stock distributed
solely in the form of additional shares of Common Stock), each holder of Series
A Preferred Stock shall be entitled, in addition to any cumulative dividends to
which it may be entitled under Section 2(a) hereof, to receive the amount of
dividends as would be declared payable on the largest number of ~ hole shares of
Common Stock into which such holder's shares of Series A Preferred Stock could
be converted, such number determined as of the record date for the determination
of holders of Common Stock entitled to receive such dividend.

3. LIQUIDATION, DISSOLUTION OR WINDING UP.

(a) TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP. In the event
of any liquidation, dissolution or winding up of the Company, whether voluntary
or involuntary, or in the event of its insolvency, before any distribution or
other payment is made to any holders of any shares of any class or series of
capital stock: of the Company designated to be junior to the Series A Preferred
Stock, including the Common Stock, and subject to the liquidation rights and
preferences of any future class or series of preferred stock designated to be
senior to, or on a parity with, the Series A Preferred Stock, the holders of
each share of Series A Preferred Stock shall be entitled to be paid first out of
the assets of the Company available for distribution to holders of the Company's
capital stock of all classes whether such assets are capital, surplus or
earnings, an amount equal to the greater of:

(i) $1,000 per share of Series A Preferred Stock (the "ORIGINAL
ISSUE PRICE"), PLUS all declared or accrued and unpaid dividends
thereon, whether or not earned or declared, up to and including the
date full payment shall be tendered

<PAGE>

to the holders of the Series A Preferred Stock with respect to such
liquidation, dissolution or winding up; or

(ii) such amount per share of Series A Preferred Stock as would
have been payable had each such share been converted to Common Stock
immediately prior to such event of liquidation, dissolution or winding
up pursuant to the provisions of Section 5 hereof.

If, upon liquidation, dissolution or winding up of the Company, the
assets of the Company available for distribution to its stockholders shall be
insufficient to pay the holders of the Series A Preferred Stock the full amounts
to which they otherwise would be entitled, the holders of Series A Preferred
Stock shall share ratably in any distribution of available assets according to
the respective amounts which would otherwise be payable with respect to the
shares of Series A Preferred Stock held by them upon such liquidating
distribution if all amounts payable on or with respect to said shares were paid
in full, based upon the aggregate liquidation value of the Series A Preferred
Stock.

After such payment shall have been made in full to the holders of the
Series A Preferred Stock, or funds necessary for such payment shall have been
set aside by the Company in trust for the account of holders of the Series A
Preferred Stock so as to be available for such payment, the remaining assets
available for distribution shall be distributed ratably among the holders of the
Common Stock.

(b) TREATMENT OF REORGANIZATIONS, CONSOLIDATIONS, MERGERS, AND SALES
OF ASSETS. A Reorganization (as defined in Section 5(i)) shall be regarded as a
liquidation, dissolution or winding up of the affairs of the Company within the
meaning of this Section 3; provided, however, that the holders of at least sixty
percent (60%) of the outstanding shares of Series A Preferred Stock shall have
the right to elect the benefits of the provisions of Section 5(i) hereof in lieu
of receiving payment in liquidation, dissolution or winding up of the Company
pursuant to this Section 3. The holders of sixty percent (60%) of the
outstanding shares of Series A Preferred Stock have the right to bind the
holders of all outstanding shares of Series A Preferred Stock under this Section
3(b) or Section 5(i).

The provisions of this Section 3(b) and Section S(i) shall not apply
to any reorganization, merger or consolidation involving (1) only a change in
the state of incorporation of the Company, (2) a merger of the Company with or
into a wholly-owned subsidiary of the Company that is incorporated in the United
States of America, or (3) an acquisition by merger, reorganization or
consolidation, of which the Company is substantively the surviving corporation
and operates as a going concern, of another corporation that is engaged in a
business similar related to or complementary with the business of the Company
and which does not involve a recapitalization or reorganization of the Series A
Preferred Stock or Common Stock.

(c) DISTRIBUTION OTHER THAN CASH. Whenever the distribution provided
for in Section 2 or this Section 3 shall be payable in property other than cash,
the value of such

<PAGE>

distribution shall be the fair market value of such property as determined in
good faith by the Board of Directors of the Company. In the event of any dispute
between the holders of the Series A Preferred Stock and the Company regarding
the determination of the fair market value of non cash distributions, at the
election of the holders of sixty percent (60%) of the outstanding shares of
Series A Preferred Stock, the Company shall engage a consulting or investment
banking firm selected by the Board of Directors and approved by the holders of
sixty percent (60%) of the outstanding shares of Series A Preferred Stock (such
approval not to be unreasonably withheld) to prepare an independent appraisal of
the fair market value of such property to be distributed. The costs of such
valuation shall be borne by the Company.

4. VOTING POWER. Except as otherwise expressly provided in this
instrument under Section 7 or as otherwise required by law, the holders of
shares of Series A Preferred Stock and Common Stock shall vote together (or
render written consents in lieu of a vote) as a single class on all matters
submitted to the stockholders of the Company. Except as otherwise expressly
provided in this Section 4 or Section 7 hereof, or as otherwise required by law,
each holder of Series A Preferred Stock shall be entitled to vote on all matters
and shall be entitled to that number of votes equal to the largest number of
whole shares of Common Stock into which such holder's shares of Series A
Preferred Stock could be converted, pursuant to the provisions of Section 5
hereof, at the record date for the determination of stockholders entitled to
vote on such matter or, if no such record date is established, at the date such
vote is taken or any written consent of stockholders is solicited.

5. CONVERSION RIGHTS. The holders of the Series A Preferred Stock shall
have the following rights with respect to the conversion of such shares into
shares of Common Stock:

(a) GENERAL. Subject to and in compliance with the provisions of
this Section 5, any shares of the Series A Preferred Stock may, at the option of
any holder, be converted at any time and from time to time into fully-paid and
non-assessable shares of Common Stock. The number of shares of Common Stock to
which a holder of Series A Preferred Stock shall be entitled to receive upon
conversion shall be the product obtained by multiplying the Applicable
Conversion Rate (determined as provided in Section 5(b)) by the number of shares
of Series A Preferred Stock being converted at any time.

(b) APPLICABLE CONVERSION RATE. The conversion rate in effect at any
time for the Series A Preferred Stock (the "APPLICABLE CONVERSION RATE") shall
be the quotient obtained by dividing the Original Issue Price by the Applicable
Conversion Value, calculated as provided in Section 5(c) below.

(c) APPLICABLE CONVERSION VALUE. The Applicable Conversion Value in
effect from time to time, except as adjusted in accordance with Section 5(d)
hereof, shall be the Original Issue Price ($1,000) with respect to the Series A
Preferred Stock (the "APPLICABLE CONVERSION VALUE").

<PAGE>

(d) ADJUSTMENTS TO APPLICABLE CONVERSION VALUE.

(A) UPON DILUTIVE ISSUANCES OF COMMON STOCK OR CONVERTIBLE
SECURITIES. If the Company shall, while there are any shares of Series A
Preferred Stock outstanding, issue or sell any shares of its Common Stock or
Common Stock Equivalents (as defined below) without consideration or at a price
per share LESS THAN the Applicable Conversion Value in effect immediately prior
to such issuance or sale, then in each such case such Applicable Conversion
Value, except as hereinafter provided, shall be lowered so as to be equal to the
lowest Net Consideration Per Share (as hereinafter determined) received for each
additional share upon such issuance of Common Stock or Common Stock Equivalents.

The provisions of this Section 5(d)(A) may be waived in any instance
(without the necessity of convening any meeting of stockholders of the Company)
upon the written approval of the holders of sixty percent (60%) of the
outstanding shares of Series A Preferred Stock.

(B) UPON DILUTIVE ISSUANCES OF WARRANTS, OPTIONS AND PURCHASE
RIGHTS TO COMMON STOCK OR CONVERTIBLE SECURITIES.

(1) COMMON STOCK EQUIVALENTS. For the purposes of this
Section 5(d), the issuance of any warrants, options, subscription or
purchase rights with respect to shares of Common Stock and the issuance of
any securities convertible into or exchangeable for shares of Common Stock,
or the issuance of any warrants, options, subscription or purchase rights
with respect to such convertible or exchangeable securities (collectively,
"COMMON STOCK EQUIVALENTS" and individually, a "COMMON STOCK EQUIVALENT"),
shall be deemed an issuance of Common Stock with respect to adjustments in
the Applicable Conversion Value if the Net Consideration Per Share (as
hereinafter determined) which may be received by the Company for such
Common Stock or Common Stock Equivalents shall be less than the Applicable
Conversion Value in effect at the time of such issuance

Any obligation, agreement or undertaking to issue Common
Stock or Common Stock Equivalents at any time in the future shall be deemed
to be an issuance at the time such obligation, agreement or undertaking is
made or arises. No adjustment of the Applicable Conversion Value shall be
made under this Section S(d)(B) upon the issuance of any shares of Common
Stock which are issued pursuant to the exercise, conversion or exchange of
any Common Stock Equivalents if any adjustment shall previously have been
made upon the original issuance of any such Common Stock Equivalents as
above provided.

<PAGE>

change, the Applicable Conversion Value will be that which would have been
obtained (1) had the adjustments made upon the issuance of such Common
Stock Equivalents been made upon the basis of the actual Net Consideration
Per Share of such securities, and (2) had the adjustments made to the
Applicable Conversion Value since the date of issuance of such Common Stock
Equivalents been made to such Applicable Conversion Value as adjusted
pursuant to clause (1) above. Any adjustment of the Applicable Conversion
Value with respect to this paragraph which relates to any Common Stock
Equivalents shall be disregarded if, as, and when such Common Stock
Equivalents expire or are cancelled without being exercised, so that the
Applicable Conversion Value effective immediately upon such cancellation or
expiration shall be equal to the Applicable Conversion Value for the Series
A Preferred Stock that would have been in effect had the expired or
cancelled Common Stock Equivalents not been issued.

(3) DEFINITION OF NET CONSIDERATION PER SHARE. For
purposes of this paragraph, the "NET CONSIDERATION PER SHARE" which may be
received by the Company shall be determined as follows:

(a) The "NET CONSIDERATION PER SHARE" shall mean the
amount equal to the total amount of consideration, if any, received by the
Company for the issuance of such Common Stock Equivalents, plus the minimum
amount of consideration, if any, payable to the Company upon exercise, or
conversion or exchange thereof, divided by the aggregate number of shares
of Common Stock that would be issued if all such Common Stock Equivalents
were exercised, exchanged or converted.

(b) The "NET CONSIDERATION PER SHARE" which may be
received by the Company shall be determined in each instance as of the date
of issuance of Common Stock Equivalents without giving effect to any
possible future upward pricing adjustments or rate adjustments which may be
applicable with respect to such Common Stock Equivalents.

(C) STOCK DIVIDENDS FOR HOLDERS OF CAPITAL STOCK OTHER THAN
COMMON STOCK. In the event that the Company shall make or issue, or shall fix a
record date for the determination of holders of any capital stock of the Company
(other than holders of Common Stock) entitled to receive a dividend or other
distribution payable in Common Stock or securities of the Company convertible
into or otherwise exchangeable for shares of Common Stock of the Company, then
such Common Stock or other securities issued in payment of such dividend shall
be deemed to have been issued for a consideration of $.01, except for (i)
dividends payable in shares of Common Stock: payable pro rata to holders of
Series A Preferred Stock and to holders of any other class of stock (whether or
not paid to holders of any other class of stock), or (ii) with respect to the
Series A Preferred Stock, dividends payable in shares of Series A Preferred
Stock; PROVIDED, HOWEVER, that holders of any shares of Series A Preferred Stock
shall be entitled to receive in place of such Series A Preferred Stock the
shares of Common Stock for which the shares of Series A Preferred Stock are then
convertible.

<PAGE>

(D) CONSIDERATION OTHER THAN CASH. For purposes of this Section
5(d), if a part or all of the consideration received by the Company in
connection with the issuance of shares of the Common Stock or Common Stock
Equivalents consists of property other than cash, such consideration shall be
deemed to have a fair market value as is reasonably determined in good faith by
the Board of Directors of the Company. In the event of any dispute between the
holders of the Series A Preferred Stock and the Company regarding the
determination of fair market value, at the option of the holders of sixty
percent (60%) of the outstanding shares of Series A Preferred Stock, the Company
shall engage a consulting firm or investment banking firm, selected by the Board
of Directors and approved by the holders of sixty percent (60%) of the
outstanding shares of Series A Preferred Stock (such approval not to be
unreasonably withheld), to prepare an independent appraisal of the fair market
value of such property to be distributed. The costs of such valuation shall be
borne by the Company.

(E) EXCEPTIONS TO ANTI-DILUTION ADJUSTMENTS: BASKET FOR RESERVED
EMPLOYEE SHARES. This Section 5(d) shall not apply under any of the
circumstances which would constitute an Extraordinary Common Stock Event (as
described below). Further, the anti- dilution protection provisions of this
Section 5(d) shall not apply with respect to:

(1) the grant, issuance or sale of up to a maximum of such
number of shares of Common Stock, or the grant of options, warrants or other
rights exercisable therefor, issued or issuable after the original issue date of
the Series A Preferred Stock to directors, officers, employees, consultants and
others pursuant to any incentive or non-qualified stock option plan or
agreement, stock purchase plan or agreement, stock issuance or restricted stock
agreement, stock ownership plan (ESOP), consulting agreement, or such other
options, issuances, arrangements, agreements or plans ("Employee Options")
approved by a majority of the members of the Board of Directors; PROVIDED,
HOWEVER, that such number of shares of Common Stock available for issuance upon
exercise of the Employee Options shall equal 1,833 shares of Common Stock as of
the Initial Closing (as such term is defined in the Purchase Agreement), or if a
Second Closing (as such term is defined in the Purchase Agreement) occurs, up to
a maximum of 2,278 shares of Common Stock following the Second Closing.

(2) shares of Common Stock (or options or warrants
exercisable therefor) issued solely to employees, consultants or others in
connection with the acquisition (whether by merger or otherwise) by the Company
of all or substantially all of the capital stock or assets of any other entity
or business organization, provided the issuance of such securities is approved
by a majority of the members of the Board of Directors and provided that the
aggregate number of such shares of Common Stock shall equal a maximum of 1,337
shares of Common Stock as of the Initial Closing, or if a Second Closing occurs,
1,662 shares of Common Stock following the Second Closing.

<PAGE>

The foregoing numbers of shares of Common Stock may be increased from time
to time (i) by a vote of two-thirds of the members of the Board of Directors of
the Company (including at least three (3) directors who serve as the designees
or nominees of the holders of the Series A Preferred Stock), or (ii) by the
written consent of the holders of at least sixty percent (60%) of the
outstanding shares of Series A Preferred Stock.

The foregoing numbers shall be subject to a proportionate adjustment in the
event of any stock dividend, stock split, combination, reorganization,
recapitalization, reclassification or other similar event involving a change in
the Common Stock.

(e) UPON EXTRAORDINARY COMMON STOCK EVENTS. Upon the happening of an
Extraordinary Common Stock Event (as hereinafter defined), the Applicable
Conversion Value (and all other conversion values set forth in Section 5(d)
above) shall, simultaneously with the happening of such Extraordinary Common
Stock Event, be adjusted by multiplying the Applicable Conversion Value by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such Extraordinary Common Stock Event and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately after such Extraordinary Common Stock Event, and the product so
obtained shall thereafter be the Applicable Conversion Value. The Applicable
Conversion Value, as so adjusted, shall be readjusted in the same manner upon
the happening of any successive Extraordinary Common Stock Event or Events.

An "EXTRAORDINARY COMMON STOCK EVENT" shall mean (i) the issue of
additional shares of Common Stock as a dividend or other distribution on
outstanding shares of Common Stock, (ii) a subdivision of outstanding shares of
Common Stock into a greater number of shares of Common Stock, or (iii) a
combination or revel se stock split of outstanding shares of Common Stock into a
smaller number of shares of the Common Stock.

(f) AUTOMATIC CONVERSION UPON PUBLIC OFFERING OR ELECTION OF SERIES A
PREFERRED STOCK.

(i) MANDATORY CONVERSION OF PREFERRED STOCK. Immediately

(A) prior to the closing of an underwritten public offering on a firm
commitment basis pursuant to an effective registration statement filed pursuant
to the Securities Act of 1933, as amended, on Form S-l (or its equivalent)
covering the offer and sale of Common Stock for the account of the Company in
which the Company actually receives net proceeds equal to or greater than
$10,000,000 (calculated after deducting underwriters' discounts and commissions
but before calculation of expenses), and at a price per share greater than twice
the Original Issue Price; or

(B) upon the approval, set forth in a written notice to the Company,
of the holders of sixty percent (60%) of the outstanding shares of Series A
Preferred Stock, of an election to convert Series A Preferred Stock into Common
Stock,

<PAGE>

then, all outstanding shares of Series A Preferred Stock shall be
converted automatically into the number of shares of Common Stock into which
such shares of Series A Preferred Stock are then convertible pursuant to Section
5 hereof, as of the closing and consummation of such underwritten public
offering, or the stated date of approval of such holders of Series A Preferred
Stock, without any further action by the holders of such shares and whether or
not the certificates representing such shares are surrendered to the Company or
its transfer agent.

(ii) SURRENDER OF CERTIFICATES UPON MANDATORY CONVERSION. Upon
the occurrence of the conversion events specified in the preceding paragraph
(i), the holders of the Series A Preferred Stock shall, upon notice from the
Company, surrender the certificates representing such shares at the office of
the Company or of its transfer agent for the Common Stock. Thereupon, there
shall be issued and delivered to such holder certificates for the number of
shares of Common Stock into which the shares of Series A Preferred Stock so
surrendered were convertible on the date on which such conversion occurred. The
Company shall not be obligated to issue such certificates unless certificates
evidencing the shares of Series A Preferred Stock being converted are either
delivered to the Company or any such transfer agent, or the holder notifies the
Company that such certificates have been lost, stolen or destroyed and executes
an agreement satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection therewith.

(g) DIVIDENDS. In the event the Company shall make or issue, or
shall fix a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution (other than a distribution
in liquidation or other distribution otherwise provided for herein) with respect
to the Common Stock payable in (i) securities of the Company other than shares
of Common Stock, or (ii) other assets (excluding cash dividends or
distributions), then and in each such event provision shall be made so that the
holders of the Series A Preferred Stock shall receive upon conversion thereof in
addition to the number of shares of Common Stock receivable thereupon, the
number of securities or such other assets of the Company which they would have
received had their Series A Preferred Stock been converted into Common Stock on
the date of such event and had they thereafter, during the period from the date
of such event to and including the Conversion Date (as that term is hereafter
defined in Section 5(k)), retained such securities or such other assets
receivable by them during such period, giving application to all other
adjustments called for during such period under this Section 5 with respect to
the rights of the holders of the Series A Preferred Stock.

(h) CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common Stock
issuable upon the conversion of the Series A Preferred Stock shall be changed
into the same or different number of shares of any class or classes of capital
stock, whether by capital reorganization, recapitalization, reclassification or
otherwise (OTHER THAN a subdivision or combination of shares or stock dividend
provided for elsewhere in this Section 5, or the sale of all or substantially
all of the Company's capital stock or assets to any other person), then and in
each such event the holder of each share of Series A Preferred Stock shall have
the right thereafter to convert such share into the kind and amount of shares of
capital stock and other securities and property

<PAGE>

receivable upon such reorganization, recapitalization, reclassification or other
change by the holders of the number of shares of Common Stock into which such
shares of Series A Preferred Stock might have been converted immediately prior
to such event, all subject to further adjustment as provided herein.

(i) CAPITAL REORGANIZATION, MERGER OR SALE OF ASSETS. If at any time
or from time to time there shall be a capital reorganization of the Common Stock
(other than a subdivision, combination, recapitalization, reclassification or
exchange of shares provided for elsewhere in this Section 5) or a merger, or
consolidation of the Company with or into another corporation, or the sale of
all or substantially all of the Company's capital stock or assets to any other
person, or any other form of business combination, acquisition or reorganization
in which control of the Company is transferred (a "REORGANIZATION"), then, as a
part of and a condition to such Reorganization, provision shall be made so that
the holders of the Series A Preferred Stock shall thereafter be entitled to
receive upon conversion of the Series A Preferred Stock the same kind and amount
of stock or other securities or property (including cash) of the Company, or the
successor corporation resulting from such Reorganization, to which such holder
would have received if such holder had converted its shares of Series A
Preferred Stock into shares of Common Stock immediately prior to the effective
time of such Reorganization. In any such case, appropriate adjustment shall be
made in the application of the provisions of this Section 5 so that the
provisions of this Section 5 (including adjustment of the Applicable Conversion
Value then in effect and the number of shares of Common Stock or other
securities issuable upon conversion of such shares of Series A Preferred Stock)
shall be applicable after that event in as nearly equivalent a manner as may be
practicable.

The holders of sixty percent (60%), of the outstanding shares of
Series A Preferred Stock shall, upon the occurrence of a Reorganization, as such
events are more fully set forth in the first paragraph of this Section 5(i),
have the option of electing treatment of the shares of Series A Preferred Stock
under either this Section 5(i) or Section 3 hereof, notice of which election
shall be submitted in writing to the Company at its principal offices no later
than five (5) days before the effective date of such event. If no such written
election shall be made, the provisions of Section 3(b), and not this Section
5(i), shall apply. The holders of sixty percent (60%) of the outstanding shares
of Series A Preferred Stock have the right to bind the holders of all
outstanding shares of Series A Stock.

The provisions of this Section 5(i) shall not apply to any
reorganization, merger or consolidation involving (1) only a change in the sate
of incorporation of the Company, (2) a merger of the Company with or into a
wholly-owned subsidiary of the Company that is incorporated in the United States
of America, or (3) an acquisition by merger, reorganization or consolidation, of
which the Company is substantively the surviving corporation and operates as a
going concern, of another corporation that is engaged in a business similar or
related to or complementary with the business of the Company and which does not
involve a recapitalization or reorganization of the Series A Preferred Stock or
Common Stock.

<PAGE>

(j) CERTIFICATE TO ADJUSTMENTS; NOTICE BY COMPANY. In each case of
an adjustment or readjustment of the Applicable Conversion Rate, the Company at
its expense will furnish each holder of Series A Preferred Stock with a
certificate prepared by the Treasurer of Chief Financial Officer of the
corporation, showing such adjustment or readjustment, and stating in detail the
facts upon which such adjustment or readjustment is based.

(k) EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion
privilege, a holder of Series A Preferred Stock shall surrender the
certificate(s) representing the shares being convened to the Company at its
principal office, and shall give written notice to the Company at that office
that such holder elects to convert such shares. Such notice shall also state the
name or names (with address or addresses) in which the certificate(s) for shares
of Common Stock issuable upon such conversion shall be issued. The
certificate(s) for shares of Series A Preferred Stock surrendered for conversion
shall be accompanied by proper assignment thereof to the Company or in blank.
The date when such written notice is received by the Company, together with the
certificate(s) representing the shares of Series A Preferred Stock being
converted, shall be the "CONVERSION DATE". As promptly as practicable after the
Conversion Date, the Company shall issue and shall deliver to the holder of the
shares of Series A Preferred Stock being converted, or on its written order,
such certificate(s) as it may request for the number of whole shares of Common
Stock issuable upon the conversion of such shares of Series A Preferred Stock in
accordance with the provisions of this Section 5, and cash, as provided in
Section 5(1), in respect of any fraction of a share of Common Stock issuable
upon such conversion. Such conversion shall be deemed to have been effected
immediately prior to the close of business on the Conversion Date, and at such
time the rights of the holder as holder of the converted shares of Series A
Preferred Stock shall cease and the person(s) in whose name(s) any
certificate(s) for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder or holders of record of the shares of
Common Stock represented thereby.

(l) CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of
Common Stock or scrip representing fractional shares shall be issued upon the
conversion of shares of Series A Preferred Stock. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of
Series A Preferred Stock, the Company shall pay to the holder of the shares of
Series A Preferred Stock which were converted a cash adjustment in respect of
such fractional shares in an amount equal to the same fraction of the market
price per share of the Common Stock (as determined in a reasonable manner
prescribed by the Board of Directors) at the close of business on the Conversion
Date. The determination as to whether or not any fractional shares are issuable
shall be based upon the aggregate number of shares of Series A Preferred Stock
being converted at any one time by any holder thereof, not upon each share
Series A Preferred Stock being converted.

(m) PARTIAL CONVERSION. In the event some but not all of the shares
of Series A Preferred Stock represented by a certificate(s) surrendered by a
holder are convert he Company shall execute ant deliver to or on the order of
the holder, at the expense of the

<PAGE>

Company, a new certificate representing the number of shares of Series A
Preferred Stock which were not converted.

(n) RESERVATION OF COMMON STOCK. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the shares of the
Series A Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of the Series A Preferred Stock (including any shares of Series A
Preferred Stock represented by any warrants, options, subscription or purchase
rights for Series A Preferred Stock), and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Series A Preferred Stock
(including any shares of Series A Preferred Stock represented by any warrants,
options, subscriptions or purchase rights for such Series A Preferred Stock),
the Company shall take such action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.

(o) NO REISSUANCE OF SERIES A PREFERRED STOCK. No share or shares of
Series A Preferred Stock acquired by the Company by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be cancelled, retired and eliminated from the shares which the Company shall be
authorized to issue. The Company shall from time to time take such appropriate
corporate action as may be necessary to reduce the authorized number of shares
of Series A Preferred Stock.

(p) SPECIAL MANDATORY CONVERSION.

(i) PLAY OR LOSE PROVISION. When any holder of shares of Series
A Preferred Stock is entitled to exercise its right of first offer as set forth
in Article VI of the Purchase Agreement (the "RIGHT OF FIRST OFFER") with
respect to any equity financing (the "EQUITY FINANCING") of the Company which
would result in a reduction of the Applicable Conversion Value, and (i) the
Company has fully complied in all material respects with its obligations
pursuant to Article VI of the Purchase Agreement in respect thereof, and (ii)
the provisions of the Right of First Offer have not been waived or eliminated by
the holders of sixty percent (60%) of the outstanding shares of Series A
Preferred Stock, if such holder (a "NON-PARTICIPATING HOLDER") does not, by
exercise of such holder's Right of First Offer, acquire at least his Special
Proportionate Percentage (as hereinafter defined) of the Allocated Offered
Securities (as hereinafter defined) offered to all holders of the Series A
Preferred Stock in such Equity Financing (a "MANDATORY OFFERING"), then, in the
case of holders of Series A Preferred Stock, all of such holder's shares of
Series A Preferred Stock shall automatically and without further action on the
part of such holder be converted effective subject to and concurrently with
consummation of the Mandatory Offering (the "MANDATORY OFFERING DATE") into the
number of shares of Common Stock into which such shares were convertible
immediately prior to such Equity Financing. Upon such conversion, the shares of
Series A Preferred Stock so converted shall be cancelled and not subject to
reissuance. As used in this subsection (p), the following terms shall have the
following meanings:

<PAGE>

(A) "ALLOCATED OFFERED SECURITIES" shall mean as to any
holder of Series A Preferred Stock that portion of the gross amount of
offered securities which has expressly been allocated for purchase by the
holders of the Series A Preferred Stock as a group, it being understood
that for purposes of this subsection that Allocated Offered Securities may
represent an amount of offered securities that is less (but in no event
greater) than the amount of securities which the Company is otherwise
required to offer to the holders of Series A Preferred Stock pursuant to
the Right of First Offer under the Purchase Agreement;

(B) "SPECIAL PROPORTIONATE PERCENTAGE" shall mean as to any
holder of Series A Preferred Stock, that percentage figure which expresses
the ratio which (x) the number of shares of outstanding Series A Preferred
Stock then owned by such holder bears to (y) the aggregate number of shares
of Series A Preferred Stock held by all holders of shares of Series A
Preferred Stockholder. For purposes of this Section 5(o), each holder of
Series A Preferred Stock which is a partnership shall be deemed to be the
owner of shares of capital stock of the Company originally acquired by such
partnership which have been transferred to and are held by partners and
retired partners of such partnership, the spouse and members of the family
of any such partner and trusts for the benefit of any such person.

(ii) SURRENDER OF CERTIFICATES. The holder of any shares of
Series A Preferred Stock converted pursuant to this Section 5(p) shall deliver
to the Company during regular business hours at the office of the Company, or at
such other place as may be designated by the Company, the certificate or
certificates for the shares so converted, duly endorsed or assigned in blank to
the Company. As promptly as practicable thereafter, the Company shall issue and
deliver to such holder, at the place designated by such holder, a certificate or
certificates for the number of full shares of the Common Stock to which such
holder is entitled. The person in whose name the certificate for such Common
Stock is to be issued shall be deemed to have become a stockholder of record on
the Mandatory Offering Date unless the transfer books of the Company are closed
on that date, in which event he shall be deemed to have become a stockholder of
record on the next succeeding date on which the transfer books are open. If the
Non-Participating Holder fails to tender the shares of Series A Preferred Stock,
the Company may cancel the shares of Series A Preferred Stock not so tendered on
the books of the Company and reissue such number of shares of Common Stock to be
received upon conversion.

6. REDEMPTION RIGHTS OF SERIES A PREFERRED STOCK.

(a) OPTIONAL REDEMPTION. On the written request of the holders of
sixty percent (60%) of the then outstanding shares of Series A Preferred Stock
(the "REQUESTING HOLDERS"), delivered to the Company on or after August 4, 1999
(the "REDEMPTION REQUEST"), the Company shall redeem such number of shares of
Series A Preferred Stock then held by each Requesting Holder as shall be
specified in such notice by such Requesting Holders. The redemptions pursuant to
this Section 6(a) shall be made in three equal, annual installments, the

<PAGE>

first on a date to be specified in the Redemption Notice (which date shall be
not less than 45 days after the date of the Redemption Notice) (the "INITIAL
REDEMPTION DATE"), and the second and third installments on each of the first
and second anniversary dates of the Initial Redemption Date (collectively, the
"REDEMPTION DATES").

The redemption price for each share of Series A Preferred Stock
redeemed pursuant to this Section 6 shall be the greater of: (i) the Original
Issue Price per share plus all accrued and unpaid dividends, whether or not
earned or declared, on such shares up to and including the date fixed for
redemption, or (ii) the Fair Market Value per share of the Series A Preferred
Stock (as defined below) (the "SERIES A REDEMPTION PRICE"). Each redemption of
shares of Series A Preferred Stock shall be made pro rata among all holders of
Series A Preferred Stock. No Redemption Request shall be initiated unless the
Company has earnings after interest charges but before taxes, calculated in
accordance with generally accepted accounting principles consistently applied,
of at least $1,500,000, as reflected on its statement of operations for the
twelve-month period preceding the month in which any Redemption Request is
initiated.

The Fair Market Value shall be calculated, as of each such date of
redemption, in the following manner:

(i) if the Company's Common Stock or Preferred Stock is then
traded on any nationally-recognized stock exchange (e.g., New York Stock
Exchange, American Stock Exchange or Pacific Stock Exchange) or quoted on the
NASDAQ National Market System, the average of the closing sale prices for the
twenty (20) consecutive trading days preceding the Redemption Date, as reported
by such exchange or system;

(ii) if the Company's Common Stock or Preferred Stock is then
traded on the NASDAQ over-the-counter market or Small-Cap market, the average of
the average of the closing bid and closing asked prices for the twenty (20)
consecutive trading days preceding the date of any Redemption Date, as reported
in THE WALL STREET JOURNAL or by any market maker; or

(iii) if the Company's Common Stock or Preferred Stock is not
so quoted or publicly traded, then as determined by an independent investment
banking firm acceptable to the holders of sixty percent (60%) of the outstanding
shares of Series A Preferred Stock, upon a review of all relevant factors,
including, without limitation, the price at which shares of the Company's Common
Stock could reasonably be expected to be sold in an arms'-length transaction,
for cash, other than on an installment basis, to a person not employed by,
controlled by, in control of or under common control with the Company, which
determination by the disinterested members of the Board of Directors shall give
due consideration to recent transactions involving shares of the Common Stock or
Preferred Stock, if any; revenues, operating cash flow and earnings of the
Company to the date of such determination; projected revenues, operating cash
flow ant earnings of the Company for the twelve-month period following the date
of any determination; determined on the basis of the value of the Company

<PAGE>

as a going concern, on the basis of the shares of Series A Preferred Stock being
free of all restrictions on transfer imposed by any agreement or relevant
securities laws, but including any reduction in such value due to the
illiquidity or absence of any established trading market for the Common Stock;
on the basis of discounted cash flow analysis, a comparison of price/earnings
ant revenue multiples of comparable, publicly-traded companies within the same
industry, and comparisons of market value and market capitalization of
comparable companies within the same industry; on the basis of an evaluation of
the strength of the Company's products, markets, management and distribution
channels; and such other matters as the disinterested members of the Board of
Directors deem pertinent.

(b) REDEMPTION NOTICE. At least 30 days prior to the Redemption
Date, written notice (hereinafter referred to as the "REDEMPTION NOTICE") shall
be mailed, first class or certified mail, postage prepaid, by the Company to
each holder of record of Series A Preferred Stock which is to be redeemed, at
its address shown on the records of the Company; PROVIDED, HOWEVER, that the
Company's failure to give such Redemption Notice shall in no way affect its
obligation to redeem the shares of Series A Preferred Stock as provided in
Section 6(a) hereof. The Redemption Notice shall contain the following
information:

(i) the number of shares of Series A Preferred Stock held by the
holder which shall be redeemed by the Company and the total number of
shares of Series A Preferred Stock held by all holders to be so redeemed;

(ii) the Redemption Dates and the Series A Redemption Price; and

(iii) that the holder is to surrender to the Company, at the
place designated therein, its certificate or certificates representing the
shares of Series A Preferred Stock to he redeemed.

(c) SURRENDER OF CERTIFICATES. Each holder of shares of Series A
Preferred Stock to be redeemed shall surrender the certificate(s) representing
such shares to the Company at the place designated in the Redemption Notice, and
thereupon the Series A Redemption Price for such shares as set forth in this
Section 6 shall be paid to the order of the person whose name appears on such
certificate(s) and each surrendered certificate shall be cancelled and retired.
In the event some but not all of the shares of Series A Preferred Stock
represented by a certificate(s) surrendered by a holder are being redeemed, the
Company shall execute and deliver to or on the order of the holder, at the
expense of the Company, a new certificate representing the number of shares of
Series A Preferred Stock which were not redeemed.

(d) DIVIDENDS AND CONVERSION AFTER REDEMPTION. No shares of Series A
Preferred Stock subject to redemption shall be entitled to any further dividends
pursuant to Section 2 hereof or to the conversion provisions set forth in
Section 5 hereof; provided, however, that the Company has duly paid the Series A
Redemption Price therefor.

<PAGE>

(e) INSUFFICIENT FUNDS FOR REDEMPTION.

(i) PARTIAL REDEMPTION. If the funds of the Company legally
available for redemption of the Series A Preferred Stock on the Redemption
Date are insufficient to redeem the number of shares of Series A Preferred
Stock to be so redeemed on such Redemption Date, the holders of shares of
Series A Preferred Stock shall share ratably in any funds legally available
for redemption of such shares according to the respective amounts which
would be payable with respect to the number of shares owned by them if the
shares to be so redeemed on such Redemption Date were redeemed in full. The
shares of Series A Preferred Stock not redeemed shall remain outstanding
and entitled to all rights and preferences provided herein, notwithstanding
Section 6(d) above. Furthermore, the rights of the holders of the Series A
Preferred Stock under Section 4(c)(i)(a) shall have been automatically
triggered.

(ii) REMEDIES FOR DEFAULT. At any time thereafter when
additional funds of the Company are legally available for the redemption of
such shares of Series A Preferred Stock, such funds will be used, as soon
as practicable but no later than the end of the next succeeding fiscal
quarter, to redeem the balance of such shares, or such portion thereof for
which funds are then legally available, on the basis set forth above,
except that the redemption price for each share of Series A Preferred Stock
shall be the Series A Redemption Price PLUS that amount which represents
interest on the Series A Redemption Price, calculated from the Redemption
Date to the date of actual redemption, compounded on a monthly basis, based
on an interest rate equal to eight percent (8%) per annum (such interest
rate to apply to the forthcoming calendar month, or portion thereof).

(iii) CONVERSION OF PREFERRED STOCK INTO PROMISSORY NOTE.
The holders of sixty percent (60%) of the outstanding shares of Series A
Preferred Stock shall be entitled, at their sole discretion, to compel the
Company to convert the Redemption Price of any or all of such unredeemed
shares of Series A Preferred Stock into unsecured promissory notes with a
principal amount equal to such Redemption Price of the unredeemed shares
(for each holder of Series A Preferred Stock) and bearing interest at eight
percent (8%) per annum (such interest rate to apply to the forthcoming
calendar month, or portion thereof). Principal and interest under such
promissory note shall be payable semi-annually in six (6) equal
installments based upon a 36-month principal and interest amortization
schedule in equal installments of principal and interest.

7. RESTRICTIONS AND LIMITATIONS.

(a) RIGHTS OF SERIES A PREFERRED STOCK WITH RESPECT TO COMPANY
ACTION; AMENDMENTS TO CHARTER. The Company shall not take any corporate action
or otherwise amend its Certificate of Incorporation of By-Laws without the
approval by vote or written consent of the holders of at least sixty percent
(60%) of the then outstanding shares of Series A Preferred Stock, voting as a
separate class, each share of Series A Preferred Stock to be entitled to one

<PAGE>

vote in each instance, if such corporate action or amendment would change any of
the rights, preferences, privileges of or limitations provided for herein for
the benefit of any shares of Series A Preferred Stock or otherwise adversely
affect the rights and preferences of the Series A Preferred Stock. Without
limiting the generality of the preceding sentence, the Company will not amend
its Certificate of incorporation or take any corporate action without the
approval by the holders of at least sixty percent (60%) of the then outstanding
shares of Series A Preferred Stock, voting as a single class, if such amendment
or corporate action would:

(i) authorize, create or issue, or obligate the Company to
authorize, create or issue, additional shares of Series A Preferred Stock
or any class of stock ranking senior to or on a parity with the Series A
Preferred Stock with respect to liquidation preferences, dividends rights
or redemption rights, except for the designation and issuance of shares of
preferred stock approved in any instance by all Directors who serve as the
designees or nominees of the holders of the Series A Preferred Stock; or

(ii) reduce the amount payable to the holders of Series A
Preferred Stock upon the voluntary or involuntary liquidation, dissolution
or winding up of the Company; or

(iii) adversely effect the liquidation preferences, dividends
rights, voting rights or redemption rights of the Series A Preferred Stock;
or

(iv) cancel or modify the conversion rights of the Series A
Preferred Stock provided for in Section 5 herein; or

(v) provide for the voluntary liquidation, dissolution,
recapitalization, reorganization or winding up of the Company; or

(vi) cause or authorize any Reorganization or sale, lien,
encumbrance, mortgage or other disposition of all, of substantially all, of
the assets of the Company (except for security interests, license or
encumbrances given as security or collateral securing indebtedness to
commercial banks or other institutional lenders or for sales of assets
accomplished in the ordinary course of business).

8. NO DILUTION OR IMPAIRMENT. Subject to the immediately preceding
paragraph, the Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of capital stock or
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of the Series A Preferred Stock set forth herein, but will at
all times in good faith assist in the carrying out of all such terms and in the
taking of all such reasonable action as may be necessary or appropriate in order
to protect the rights of the holders of the Series A Preferred Stock against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any shares of stock
receivable on the conversion of the Series A Preferred Stock above the amount
payable therefor on such conversion, and e will take all such action as may be
necessary or appropriate

<PAGE>

in order that the Company may validly and legally issue fully paid and
nonassessable shares of stock on the conversion of all Series A Preferred Stock
from time to time outstanding.

9. NOTICES OF RECORD DATE. In the event of

(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of capital stock of any
class or any other securities or property, or to receive any other right, or

(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company, any merger or
consolidation of the Company, or any transfer of all or substantially all of the
assets of the Company to any other corporation, or any other entity or person,
or

(c) any voluntary or involuntary dissolution, liquidation or winding
up of the Company, then and in each such event the Company shall mail or cause
to be mailed to each holder of Series A Preferred Stock a notice specifying (i)
the date on which any such record is to be taken for the purpose of such
dividend, distribution or right and a description of such dividend, distribution
or right, (ii) the date on which any such reorganization reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to become effective, and (iii) the time, if any, that is
to be fixed, as to when the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Sock (or other
securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding up. Such notice shall be mailed by
first class mail, postage prepaid, or express overnight courier service, at
least twenty (20) days prior to the date specified in such notice on which such
action is to be taken.

III.

The number of shares of the Company outstanding at the time of such
adoption was twelve thousand five hundred (12,500); and the number of shares
entitled to vote thereon was twelve thousand five hundred (12,500).

IV.

Pursuant to the provisions of Section 228 of the General Corporation Law of
the State of Delaware, (i) the holders of shares of outstanding stock of the
Company having not less than the minimum number of votes that would be necessary
to authorize this amendment at a meeting at which all shares entitled to vote
thereon were present and voted have signed a consent in writing adopting said
amendment and (ii) written notice has been given to those stockholders of the
Company who have not so consented in writing.

<PAGE>

Executed as of the 4th day of August, 1993.

ADVANCE PHARMACY SERVICES, INC.

By: /s/David A. Halbert
David D. Halbert, Chairman

ATTEST:

/s/Dan Phillips
Dan Phillips, Secretary

<PAGE>

EXHIBIT 1.01

INVESTMENT IN ADVANCE PHARMACY SERVICES, INC.

SCHEDULE OF PURCHASERS

PERCENTAGE
NUMBER OF INTEREST OF
AGGREGATE PREFERRED PREFERRED
PURCHASE PRICE SHARES SHARES TO BE
OF PREFERRED PURCHASED PURCHASED
SHARES AT AT INITIAL AT SECOND
INITIAL CLOSING CLOSING CLOSINGG
--------------- ------- -------
<S> <C> <C> <C>
Canaan Capital Limited Partnership $ 187,000 187 4.675%
c/o Canaan Capital Management L.P.
105 Rowayton Avenue
Rowayton, CT 06853
Attn: Dr. Jeffrey R. Jay

Canaan Capital Offshore Limited $ 1,558,000 1,558 38.950%
Partnership C.V.
c/o Canaan Capital Management L.P.
105 Rowayton Avenue
Rowayton, CT 06853
Attn: Dr. Jeffrey R. Jay

Stephen L. Green $ 25,000 25 .625%
105 Rowayton Avenue
Rowayton, CT 06853

Dr. Jeffrey R. Jay $ 30,000 30 .750%
39 Rock Ridge Avenue
Greenwich, CT 06831

Quai Ltd. $ 200,000 200 5.000%
c/o Windlesham Services Ltd.
22A Old Court Place
London, W8 4PP England
Attn: William Rowan

J.H. Whitney & Co. $ 400,000 400 10.000%
630 Fifth Avenue
Suite 3200
New York, NY 10111-0302
Attn: Daniel J. O'Brien

Whitney 1990 Equity Fund, L.P. $ 1,600,000 1,600 40.000%
630 Fifth Avenue
Suite 32000
New York, NY 10111-0301
Attn: Daniel J. O'Brien
--------------- ----- -------

TOTALS $ 4,000,000 4,000 100%
--------------- ----- -------
--------------- ----- -------

</TABLE>

<PAGE>

EXHIBIT 1.04

USE OF PROCEEDS

1. Possible acquisition of Paradigm Pharmacy Management, Inc.
2. Other possible strategic acquisitions
3. Repayment of Working Capital Line
4. Repayment of loan obligation assumed from AHC (see Exhibit 3.06)
5. Working Capital
6. Capital Expenditures

<PAGE>

EXHIBIT 1.06

Name and Address
of Purchaser Description Jurisdiction
- ---------------- ----------- ------------

Canaan Capital Limited Limited Partnership Delaware
Partnership
c/o Canaan Capital
Management L.P.
105 Rowayton Avenue
Rowayton, CT 06853
Attn: Dr. David C. Fries

Canaan Capital Offshore Limited Partnership Netherlands Antilles
Limited Partnership C.V.
c/o Canaan Capital
Management L.P.
105 Rowayton, Avenue
Rowayton, CT 06853
Attn: Dr. David C. Fries

J.H. Whitney & Co. Limited Partnership New York
6300 Fifth Avenue
Suite 3200
New York, NY 1011-0302
Attn: Dan O'Brien

Whitney 1990 Equity Fund, L.P. Limited Partnership Delaware
630 Fifth Avenue
Suite 3200
New York, NY 10111-0301
Attn: Dan O'Brien

<PAGE>

EXHIBIT 3.03

GOVERNMENTAL APPROVALS

- None -

<PAGE>

EXHIBIT 3.04

LITIGATION

-- None --

<PAGE>

EXHIBIT 3.06

SCHEDULE OF INDEBTEDNESS

1. Demand Promissory Note dated January 28, 1993 made by Advance
Home Prescriptions, Inc. in favor of Security State Bank for up
to $500,000 principal amount (matures January 28, 1994) (the
"Working Capital Line").

2. Assumption by the Company from Advance Health Care, Inc. of
$500,000 principal amount in debt previously incurred by Advance
Health Care, Inc. for the benefit of the Company (the "Assumption
of Shareholder Loan").

3. Equipment Lease dated November 12, 1993 between Advance Home
Prescriptions, Inc. and Universal Leasing Services, Inc.

Term: November 20,1991 through November 20, 1994. Monthly
Payment: $446.87.

<PAGE>

EXHIBIT 3.07

TITLE TO ASSETS

Encumbrances

1. Security State Bank security interest in all accounts receivable
and inventory of Advance Home Prescriptions, Inc..

2. FoxMeyer Corporation secondary security interest in all inventory
of Advance Home Prescriptions, Inc.

LICENSES

APM has acquired the right to use the software products and databases
of pharmaceutical information described below:

LICENSOR DESCRIPTION

ComCoTec, Inc. Mail Service Pharmacy Software

Medi-Span, Inc. Drug Pricing and Information Services
Database

Health Business Systems, Inc./ Retail Claim Adjudication Software
Time Share

Strategic Mapping/Atlas GIS Mapping Software for Provider Coverage
Analysis

VAX/VMS Operating System Utilized on Digital
Equipment Corp. VAX Computer System

Pick/Blue End User Software License

<PAGE>

EXHIBIT 3.08

FINANCIAL INFORMATION

ATTACHMENTS:

(i) the audited Financial Statements for the fiscal years
ended March 31, 1992 and March 31, 1993, of Advance Health Care, Inc.,

(ii) the preliminary "draft" of audited financial statements of
the Company and the Subsidiary as of March 31, 1993, and

(iii) the Company's unaudited Statement of Income and Balance
Sheet, as at June 30, 1993.

TRANSACTIONS OTHER THAN IN THE ORDINARY COURSE OF BUSINESS SINCE MARCH
31, 1993:

1. Assumption of Shareholder Loan

2. Agreement for Purchase of Machines dated July 17, 1993 between
Prelude Systems, Inc. and Advance Prescriptions Management, Inc.
to purchase new computer system, hardware and software for
$76,000 (the "Computer Purchase Agreement").

LIABILITY NOT REFLECTED ON FINANCIAL STATEMENTS

1. Assumption of Shareholder Loan
<PAGE>

ARTHUR
ANDERSEN

ARTHUR ANDERSEN & CO. SC

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1993 AND 1992

TOGETHER WITH AUDITORS' REPORT

<PAGE>

ARTHUR ANDERSEN & CO.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Advance Health
Care, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1993 and
1992, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advance Care, Inc. and
subsidiaries as of March 31, 1993 and 1992, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.

/s/ Arthur Andersen & Co.

Dallas, Texas
June 30, 1993

<PAGE>

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS--MARCH 31, 1993 AND 1992

<TABLE>
<CAPTION>
ASSETS 1993 1992
------ ---------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 42,000 $ 27,000
Accounts receivable, net of allowance for doubtful
accounts of $319,000 and $135,000 in 1993 and
1992, respectively 2,750,000 1,727,000
Other receivables 57,000 49,000
Inventories 939,000 521,000
Prepaid expenses 58,000 43,000
---------- ----------

Total current assets 3,847,000 2,367,000
---------- ----------

PROPERTY AND EQUIPMENT:
Vehicles 212,000 98,000
Office equipment and furniture 861,000 455,000
Rental equipment 1,377,000 903,000
Leasehold improvements 113,000 98,000
---------- ----------

2,563,000 1,554,000

Less-Accumulated depreciation and amortization (1,152,000) (694,000)
---------- ----------

Net property and equipment 1,411,000 860,000
---------- ----------

OTHER ASSETS: 27,000 25,000
Note receivable
Organizational costs and other, net of accumulated
amortization of $40,000 and $23,000 in 1993 and
1992, respectively 109,000 84,000
---------- ----------

Total other assets 136,000 109,000
---------- ----------

Total assets $5,394,000 $3,336,000
---------- ----------
---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1992
------------------------------------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,506,000 $ 846,000
Accrued expenses 426,000 166,000
Short-term obligations 2,604,000 264,000
Current portion of long-term obligations 161,000 170,000
----------- -----------

Total current liabilities 4,697,000 1,446,000
----------- -----------

LONG-TERM OBLIGATIONS:
Notes payable, less current portion 77,000 478,000
Obligations under capital leases, less current portion 62,000 128,000
----------- -----------

Total long-term obligations 139,000 606,000
----------- -----------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Subordinated debenture, nonvoting, converted into
16,013 common shares on June 14, 1993 2,388,000 2,388,000
Convertible preferred stock, nonvoting, stated value
$1; 10,000 shares authorized, 4,153 shares issued
and outstanding at March 31, 1993 and 1992; each
share is convertible to 1.67 shares of common stock at
option of the holders or the Company 4,000 4,000
Common stock, par value $1; 100,000 shares
authorized, 31,532 and 30,629 issued and
outstanding at March 31, 1993 and 1992, respectively 32,000 31,000
Additional paid-in capital 1,257,000 1,258,000
Accumulated deficit (3,123,000) (2,397,000)
----------- -----------

Total stockholders' equity 558,000 1,284,000
----------- -----------

Total liabilities and stockholders' equity $5,394,000 $3,336,000
----------- -----------
----------- -----------

</TABLE>

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

<PAGE>

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED MARCH 31, 1993 AND 1992

1993 1992
----------- -----------

NET REVENUES $18,506,000 $10,817,000
----------- -----------
COST OF OPERATIONS:
Cost of goods and services 12,678,000 7,399,000
Selling, general and administrative expenses 5,995,000 3,486,000
----------- -----------

Total cost of operations 18,673,000 10,885,000
----------- -----------
Net loss before other revenues and expenses
and provision for income taxes (167,000) (68,000)
----------- -----------

OTHER REVENUES AND (EXPENSES):
Depreciation and amortization expense (404,000) (233,000)
Interest and other income 51,000 21,000
Interest expense (206,000) (115,000)
----------- -----------

Net other revenues and (expenses) (559,000) (327,000)
----------- -----------

NET LOSS BEFORE PROVISION FOR INCOME TAXES (726,000) (395,000)
----------- -----------

PROVISION FOR INCOME TAXES - -
----------- -----------

NET LOSS $ (726,000) $ (395,000)
----------- -----------
----------- -----------

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

<PAGE>

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED MARCH 31, 1993 AND 1992

Additional
Subordinated Preferred Common Paid-In Accumulated
Debentures Stock Stock Capital Deficit Total
---------- ----- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1991 $ - $ 4,000 $ 28,000 $ 1,023,000 $ (2,002,000) $ (947,000)

Reclassification of 5.5% subordinated
debenture (net of $112,000 of
unamortized placement fees) as
equity resulting from modification
of agreement 2,388,000 - - - - 2,388,000

Conversion of 8% subordinated debenture - - 2,000 98,000 - 100,000

Issuance of common stock in
payment of accrued interest
on 5.5% subordinated debenture - - 1,000 137,000 - 138,000

Net loss - - - - (395,000) (395,000)
----------- --------- --------- ------------ ------------ ----------

BALANCE, March 31, 1992 2,388,000 4,000 31,000 1,258,000 (2,397,000) 1,284,000

Issuance of common stock to
holder of 5.5% subordinated
debenture - - 1,000 (1,000) - -

Net loss - - - - (726,000) (726,000)
----------- --------- --------- ------------ ------------ ----------

BALANCE, March 31, 1993 $ 2,388,000 $ 4,000 $ 32,000 $ 1,257,000 $ (3,123,000) $ 558,000
----------- --------- --------- ------------ ------------ ----------
----------- --------- --------- ------------ ------------ ----------

</TABLE>

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

<PAGE>

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MARCH 31, 1993 AND 1992

1993 1992
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (726,000) $ (395,000)
Adjustments to reconcile net loss
to net cash used in operating activities-
Depreciation and amortization 404,000 233,000
Bad debt expense 381,000 188,000
Interest on subordinated debenture - 19,000
Increase in accounts receivable (1,404,000) (947,000)
Increase in inventories (144,000) (64,000)
Increase in other receivables, prepaid
expenses, organizational costs and other (51,000) (25,000)
Increase in accounts payable and accrued expenses 920,000 336,000
------------- -------------

Net cash used in operating activities (620,000) (655,000)
------------- -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (435,000) (446,000)
Purchases of property and equipment in Owen acquisition (520,000) -
Purchases of inventories in Owen acquisition (274,000) -
------------- -------------

Net cash provided by investing activities (1,229,000) (446,000)
------------- -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, obligations under capital
leases, and bank line of credit 2,030,000 1,044,000
Principal payments on long-term obligations (166,000) (563,000)
------------- -------------

Net cash provided by financing activities 1,864,000 481,000
------------- -------------
NET INCREASE (DECREASE) IN CASH 15,000 (620,000)

CASH, beginning of year 27,000 647,000
------------- -------------

CASH, end of year $ 42,000 $ 27,000
------------- -------------
------------- -------------

</TABLE>

SCHEDULE OF NONCASH TRANSACTIONS:

Effective May 18, 1991, the Company and the holder of the $2,500,000, 5.5%
subordinated debenture agreed to an amendment to the debenture which allows
for its reclassification as equity. Related unamortized placement fees of
$112,000, recorded as prepaid expenses at March 13, 1991, have been netted
against equity.

During 1993, the Company issued 870 shares of common stock on the 5.5%
subordinated debenture. In 1992, the Company issued 870 shares of common
stock in payment of accrued interest on the 5.5% subordinated debenture.

At March 31, 1992, the Company exercised its option to convert $100,000 of 8%
subordinated debentures to equity.

SUPPLEMENTARY INFORMATION:

Cash paid for interest expense totaled approximately $173,000 and $88,000 in
1993 and 1992, respectively.

The Company incurred no income tax liabilities in 1993 and 1992; therefore,
no cash payments for this purpose were made.

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

<PAGE>

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1993 AND 1992

1. ORGANIZATION AND BASIS OF PRESENTATION:

The consolidated financial statements include the accounts of Advance Health
Care, Inc. and its five wholly owned subsidiaries: Advance Home Prescriptions,
Inc., Advance Home Medical, Inc., Advance HomeCare, inc., Advance Pharmacies,
Inc., and Advance Prescription Management, Inc. (collectively, the "Company").

The Company's operations consist of the sale and rental (on a month-to-month
basis) of medical equipment and supplies, the mail order sale of
pharmaceuticals, the processing of prescription claims, the delivery of
home-based nursing services and the retail sales of one pharmacy. The Company
operates medical equipment, supply and service facilities throughout the state
of Texas, and its mail order prescription operations are nationwide.

On June 30, 1992, Advance Home Medical, Inc. purchased the assets of two home
care centers from Owen Healthcare, Inc., an unrelated company, for approximately
$800,000 in cash. The results of operations for these home care centers in
Houston and Fort Worth, Texas, for the period since acquisition have been
included in the accompanying financial statements.

All significant intercompany accounts and transactions have been eliminated in
consolidation.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

REVENUE RECOGNITION

Revenues from the rental and sale of medical equipment, supplies, and services
are generally recognized upon the delivery to the patient/customer. The mail
order prescription revenues are generally recognized when each prescription is
filled and shipped. The Company bills insurance companies, third-party
administrators, individuals, and federal and state third-party reimbursement
programs for its services. The Medicare and Medicaid programs pay the Company
at established amounts based on the nature of services rendered to the program
beneficiaries. Differences between the Company's established rates and the
Medicare and Medicaid payments are treated as contractual allowances and netted
against revenues.

INVENTORIES

Inventories consist of medical supplies, medical equipment for resale and
pharmaceuticals. Inventories are valued at the lower of cost or market under
the first-in, first-out method.

PROPERTY AND EQUIPMENT

<PAGE>

-2-

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 operations.

ORGANIZATIONAL COSTS AND OTHER

Organizational costs are comprised of professional fees incurred in the
formation of the Company and the acquisition of various Company assets. Other
assets are comprised primarily of capitalized costs incurred in the development
of certain computer systems. These costs are being amortized on the
straight-line method over periods ranging from 48 to 60 months.

FEDERAL INCOME TAXES

The Company files a consolidated U.S. federal income tax return with its five
wholly owned subsidiaries.

In February 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes." SFAS 109 becomes mandatory for the Company for the fiscal
year ending March 31, 1994. The Company has neither determined the impact of
adoption of SFAS 109 nor decided whether it will restate prior year financial
statements in the year of adoption.

3. INVENTORIES:

Inventories are comprised of the following assets held for sale within one year.

MARCH 31,
------------------------------
1993 1992
-------------- -------------

Medical supplies and equipment $ 459,000 $ 210,000
Pharmaceuticals 480,000 311,000
-------------- -------------

$ 939,000 $ 521,000
-------------- -------------
-------------- -------------

4. SHORT-TERM OBLIGATIONS:

Short-term obligations consist of the following:

MARCH 31,
------------------------------
1993 1992
-------------- -------------

Bank line of credit of $500,000 which
expires January 1994; bearing interest
at 8.5%; collateralized by certain
accounts receivable and inventory $ 359,000 $ 264,000

Unsecured note payable to an affiliated
entity bearing interest at 6% and due
July 1993 495,000 -

Unsecured note payable to a related party
bearing interest at 6% and due
October 1993 1,500,000 -

Unsecured note payable to a related party
bearing interest at 6% and due
September 1993 250,000 -
-------------- -------------

$2,604,000 $ 264,000
-------------- -------------
-------------- -------------

<PAGE>

-3-

5. LONG-TERM OBLIGATIONS:

Long-term obligations consist of the following:

MARCH 31,
-----------------------------
1993 1992
-------------- -------------

Payable to an affiliated entity, bearing
interest at 9% $ - $ 310,000

Unsecured note payable to a related party,
bearing interest at 10%; payable in 36
equal monthly installments of
approximately $8,100; due December 1994 155,000 232,000

Bank note bearing interest at 9%; payable
in 36 equal monthly installments of
approximately $1,000; collateralized
by certain equipment and property; due
March 1995 15,000 20,000

Various vehicle leases bearing an average
rate of interest of 15%; payable in
monthly installments; collateralized
by vehicles; maturity dates ranging
from May 1995 to January 1996 18,000 24,000

Various obligations under capital leases
bearing interest at an average rate of
18%; payable in monthly installments;
collateralized by certain rental
equipment; maturity dates ranging
from July 1993 to June 1995 112,000 190,000
-------------- -------------

300,000 776,000

Less-Current portion of notes payable and
obligations under capital leases (161,000) (170,000)
-------------- -------------

$ 139,000 $ 606,000
-------------- -------------
-------------- -------------

The $155,000 note payable to a related party at March 31, 1993, requires, among
other things, that Advance Home Medical, Inc. maintain a minimum net worth of
$250,000. This covenant was met as of March 31, 1993.

The aggregate maturities of long-term obligations, including capital leases, for
the 12-month periods ending March 31 are as follows: 1994 - $161,000, 1995 -
$129,000, 1996 - $8,000, 1997 - $1,000, and 1998 - $1,000.

The Company incurred interest expense of $206,000 and $115,000 in 1993 and 1992,
respectively, for short-term and long-term obligations.

Virtually all the Company's debt has been personally guaranteed by certain
stockholders and officers of the Company.

<PAGE>

-4-

6. SUBORDINATED DEBENTURES:

In May 1990, the Company issued a $2,500,000 convertible subordinated debenture
bearing interest at 5.5% and due May 1992. Under the terms of the debenture,
the principal and any accrued interest were convertible at the holder's option
into common shares of the Company at the rate of $156.12 per share for principal
and $158 per share for interest. In addition, the holder was entitled to
designate one member to serve on the Company's Board of Directors. In January
1992, a letter agreement was signed whereby the debenture holder agreed
retroactive to May 1991 to the mandatory conversion of all principal and
interest into common stock as they come due. In addition, the due date of the
debenture was extended to May 1993, and the Company agreed to issue 870 shares
of its common stock each year to the debenture holder until the conversion of
the debenture. A subsequent agreement extended the conversion date to June
1993. The 5.5% debenture was retired on June 14, 1993, with the issuance of
16,013 shares of common stock to the holder.

Because conversion of the debenture into common stock was assured, the Company
elected to begin reflecting the debenture as equity in its financial statements
as of March 31, 1992. The debenture is recorded net of $112,000 of unamortized
placement costs relating to the issuance of the original debenture.

The debenture holder received common stock in 1992 as payment of interest
through May 1991 under the terms of the debenture. As a result of the letter
agreement, the debenture holder received common stock which has been reflected
as a charge to the additional paid-in capital in 1993. In addition, a similar
charge to paid-in capital has been made subsequent to year-end to reflect the
shares accrued through the conversion date.

In March 1992, the Company exercised its conversion rights in accordance with
the terms of the $100,000 convertible, subordinated debenture which bore 8%
interest and which was held by a stockholder. The debenture was retired with
the issuance of 1,428 shares of common stock to the holder.

7. FEDERAL INCOME TAXES:

The Company accounts for certain income and expense items differently for
financial reporting purposes than for federal income tax purposes. The
principal timing differences arise as a result of the use of different methods
for recognizing bad debt deductions and depreciation for financial statement
accounting and tax reporting purposes.

The Company paid no income taxes relating to 1993 or 1992. The Company has
unused net operating loss carryforwards of $2,615,000 for tax return purposes at
March 31, 1993. If not used, these carryforwards expire beginning in 2002.
Similar unrecognized net operating loss carryforwards exist for financial
reporting purposes.

8. RETIREMENT PLAN:

The Company sponsors a retirement plan for all eligible employees. The plan is
qualified under Section 401(k) of the Internal Revenue Code. The Company is not
required to make, and has not made, contributions to the plan to date.

9. STOCK OPTION PLAN:

The Company has 7,500 shares of its common stock reserved for issuance to
employees under the 1991 Incentive Stock Option Plan. The options become
exercisable after one year from the date granted and expire not more than 10
years from the date of grant. Options for 6,750 and 6,250 were outstanding at
March 31, 1993 and 1992, respectively, at exercise prices ranging from $30 to
$158 per share.

<PAGE>

-5-

10. RELATED-PARTY TRANSACTIONS:

Certain subsidiaries of the Company lease space in a medical mall located in
Abilene, Texas. The medical mall is a project in which several board members
and stockholders are partners. It is the opinion of management that the mall
rental rates are at market rates. Total rental expense approximated $84,000 and
$85,000 in 1993 and 1992, respectively.

The Company advanced $29,000 to a director and former employee in 1992 in
exchange for a note receivable. The note is due in February 1995, bears
interest at 8%, and is classified as a long-term note receivable.

As stated in Note 6 to these financial statements, the Company issued a
$2,500,000, 5.5% subordinated debenture during 1990. An affiliated entity of
the Company arranged for the debenture on behalf of the Company. For its
services, the affiliate was paid $190,000, of which $150,000 represents
placement fees and $40,000 represents out-of-pocket expenses. In 1992, the
remaining $112,000 of unamortized placement costs was charged against equity in
connection with the reclassification of the debenture as equity.

Effective fiscal 1991, the Company entered into an arrangement with an affiliate
whereby the affiliate provided certain management services and paid for the
Company's office rent and certain operating costs. In exchange, the Company
paid the affiliate a monthly fee of $20,000. This agreement was terminated in
February 1992. Payments associated with this agreement totaled $220,000 in
1992.

11. COMMITMENTS AND CONTINGENCIES:

The Company has operating leases for office space and certain rental and office
equipment. Total rental expense incurred in 1993 and 1992 was $715,000 and
$380,000, respectively. Future minimum rentals under noncancelable operating
lease agreements as of March 31, 1993, are as follows:

Year Ending
March 31,
-----------
1994 $ 387,000
1995 339,000
1996 276,000
1997 213,000
1998 and thereafter 120,000

12. SUBSEQUENT EVENTS:

In June 1993, the Company signed a nonbinding Term Sheet that proposed a Series
A Senior preferred stock financing for the Pharmacy Division of the Company.
These proposed proceeds will be used for the continued expansion of the Pharmacy
Division.

As described in Note 6, on June 14, 1993, the Company retired the $2,500,000,
5.5% subordinated debenture with the issuance of 16,013 shares of common stock
to the holder.

<PAGE>

Advance Health Care, Inc.
Prescription Management Division
Combined Balance Sheet
(Unaudited)

Combined at
June 30, 1993
-------------

Assets

Current Assets:
Cash $ 9,601
Accounts and Other Receivables 869,716
Inventories 484,537
Other Current Assets 41,946
-------------
Total Current Assets 1,405,800
-------------

Property, Plant and Equipment 549,450
Less: Accumulated Depreciation (155,099)
-------------
Net Property, Plant & Equipment 394,351
-------------

Other Assets 74,597
-------------

Total Assets $ 1,874,748
-------------
-------------

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable and Accrued Expenses $ 1,233,732
Intercompany Payable 249,263
Current Portion of Notes Payable and Capital Leases 504,215
-------------
Total Current Liabilities 1,987,210
-------------

Long-Term Notes Payable and Capital Leases 1,736

Stockholders' Equity:
Preferred Stock 250,000
Common Stock 1,664
Additional Paid in Capital 1,025,293
Accumulated Earnings (Deficit) (1,391,155)
-------------
Total Stockholders' Equity (114,198)

-------------
Total Liabilities & Equity $ 1,874,748
-------------
-------------

Note:
The Prescription Management Division includes the combined operations of Advance
Prescription Management, Inc. and Advance Home Prescriptions, Inc.

<PAGE>

Advance Health Care, Inc.
Prescription Management Division
Combined Statement of Operations
(Unaudited)

Combined at
June 30, 1993
-----------------
Revenues:
Mail Service Pharmaceuticals $ 3,442,452
Adjudication Revenues 114,888
-------------
Total Revenues 3,557,340
Cost of Sales (2,869,887)
-------------

Gross Profit 687,453
Operating Expenses:
Insurance (11,276)
Leases and Rentals (29,456)
Other Operating Expenses (20,474)
Professional Services (18,557)
Repairs and Maintenance (7,288)
Salaries and Benefits (332,595)
Supplies/Postage/Freight (152,090)
Taxes (3,690)
Training/Development (695)
Travel/Auto/Entertainment (20,741)
Utilities and Telephone (34,341)
-------------
Total Operating Expenses (631,203)
-------------

Income From Operations 56,250
Non-Operating Revenue (Expense):
Interest Income and (Expense) (10,383)
Depreciation and Amortization (30,507)
Corporate Overhead (120,487)
Total Non-Operating Revenue (Expense) (161,377)
-------------

Net Income (Loss) Before Taxes (105,127)
Federal Income Taxes -
-------------
Net Income (Loss) $ (105,127)
-------------
-------------

Note:
The Prescription Management Division includes the combined operations of Advance
Prescription Management,Inc. and Advance Home Prescriptions, Inc.

<PAGE>

EXHIBIT 3.09

TAXES

-- None --

<PAGE>

EXHIBIT 3.10

ERISA

Advance Health Care, Inc. established a 401(k) Plan. It does NOT
contribute to this Plan.

<PAGE>

EXHIBIT 3.11

TRANSACTIONS WITH AFFILIATES

1. Historically, various administrative and support functions are
performed for AHP and APM and all other subsidiaries by Advance
Health Care, Inc., including without limitation executive
management, insurance, workers compensation, office space,
parking, secretarial support, accounting, bookkeeping, telephone
and telecopy. The average monthly consolidated cost of all such
administrative functions historically ranges between
approximately $75,000 and $85,000. In connection with the
closing of the transactions contemplated by the Agreement, a
substantial portion of these functions, and some of the employees
responsible for these functions, will be assigned to the Company.

2. Recapitalization Agreement dated July 30, 1993 among Advance
Pharmacy Services, Inc., Advance Prescription Management, Inc.
and Advance Home Prescriptions, Inc. (the "Recapitalization
Agreement") (which includes the Assumption of the Shareholder
Loan).

3. Letter Agreement dated January 16, 1992 between Advance Home
Prescriptions, Inc. and Tim Moser, pursuant to which APM agreed
to loan $10,785, interest free, to Mr. Moser, and Mr. Moser
agreed to repay APM at a rate of $85 per month (the "Moser
Loan").

<PAGE>

EXHIBIT 3.12

ASSUMPTIONS OR GUARANTIES OF INDEBTEDNESS OF OTHER PERSONS

1. Assumption of Shareholder Loan.

<PAGE>

EXHIBIT 3.13

INVESTMENT IN OTHER PERSONS

LOANS OR ADVANCES MADE BY ADVANCE HOME PRESCRIPTIONS, INC.:

1. Moser Loan.

SUBSIDIARIES OF THE COMPANY:

1. Advance Prescription Management, Inc. (wholly-owned)
2. Advance Home Prescriptions, Inc. (wholly-owned)

SUBSIDIARIES OF AHP:
None

SUBSIDIARIES OF APM:
None

<PAGE>

EXHIBIT 3.16

BROKERS OR FINDERS

Advance Capital Markets, Inc. has been hired in connection with the
negotiations and acquisition of Paradigm Pharmacy Management, Inc.

<PAGE>

EXHIBIT 3.17

CAPITALIZATION; STATUS OF CAPITAL STOCK

RECORD SHAREHOLDER OF THE COMPANY:

Advance Health Care, Inc.

RECORD SHAREHOLDER OF AHP AND APM:

Advance Pharmacy Services, Inc.

RESTRICTIONS ON TRANSFER:

The capital stock of the Company, AHP and APM is subject to
customary restrictions on transfer imposed on securities that
have not been registered pursuant to the Securities Act of 1933.

PRO-FORMA POST CLOSING CAPITALIZATION OF THE COMPANY:

Shareholder Class No. of Shares
----------- ----- -------------
Advance Health Care, Inc. Common Stock 12,500
Canaan Capital Limited Partnership Preferred 187
Canaan Capital Offshore Limited
Partnership Preferred 1,558
Dr. Jeffrey R. Jay Preferred 30
Stephen L. Green Preferred 25
Quai Ltd. Preferred 200
J.H. Whitney & Co. Preferred 400
Whitney 1990 Equity Fund, L.P. Preferred 1,600

<PAGE>

EXHIBIT 3.18

REGISTRATION RIGHTS

-- None --

<PAGE>

EXHIBIT 3.19

INSURANCE

Coverage Amount Carrier
- -------- ------ -------

Primary General $1,000,000 per Commercial Union
Liability (including occurrence
commercial, property $2,000,000
and druggist aggregate
professional
liability)

Excess General $4,000,000 per National Surety
Liability (including occurrence Corp.
commercial, property $4,000,000
and druggist aggregate
professional
liability)

Contents (including $600,000 Commercial Union
computers)

Automobile Liability $500,000 Commercial Union

Workers Compensation $500,000 (statutory Texas Workers
(standard employers portion is Comp. Insurance
liability) unlimited as Fund
mandated under
workers
compensation act)

<PAGE>

EXHIBIT 3.20

MATERIAL AGREEMENTS

A. MAIL ORDER PHARMACY SERVICES AGREEMENTS. AHP HAS ENTERED INTO VARIOUS
AGREEMENTS WITH EMPLOYERS, THIRD PARTY ADMINISTRATORS AND OTHER INSURERS (EACH A
"SPONSOR") WHEREBY IT AGREES TO PROVIDE EXCLUSIVE MAIL ORDER PHARMACY SERVICES
TO THE RESPECTIVE PARTICIPANTS IN SUCH SPONSOR'S GROUP. THE MATERIAL
AGREEMENTS, LISTED BELOW, PROVIDE THAT THE SPONSOR WILL PAY AHP A NEGOTIATED
FORMULA RATE BASED ON PERCENTAGE OF INGREDIENT COSTS (GENERALLY, 5% TO 40% OFF
AVERAGE WHOLESALE PRICE) AND A DISPENSING FEE PER PRESCRIPTION (GENERALLY, $0 TO
$4 PER PRESCRIPTION). GENERALLY, THE MATERIAL AGREEMENTS HAVE A ONE-YEAR TERM
SUBJECT TO AUTOMATIC YEAR TO YEAR RENEWALS.

1. MAIL ORDER PHARMACY SERVICES AGREEMENT between Advance Home
Prescriptions, Inc. and CMC Steel Group, effective August 1, 1993.

2. MAIL ORDER PHARMACY SERVICES AGREEMENT between Advance Home
Prescriptions, Inc. and ENRON Corp., effective June 1, 1991.

3. AGREEMENT TO PROVIDE MAIL ORDER PHARMACY SERVICES between Group
Administrators, Inc. and Allied Home Pharmacy, Inc. (predecessor of
Advance Home Prescriptions. Inc.), effective July 8, 1987.

B. MANAGED PHARMACEUTICAL AGREEMENTS. APM HAS ENTERED INTO VARIOUS AGREEMENTS
WHEREBY IT OFFERS A SPONSOR-REIMBURSED DIRECT CLAIM INDEMNIFICATION PROGRAM
COVERING ELIGIBLE PARTICIPANTS IN A SPONSOR'S PLAN. APM PROVIDES ELIGIBLE
PARTICIPANTS WITH AN IDENTIFICATION CARD TO ASSIST IN ESTABLISHING THE NECESSARY
CLAIM DATA. THE MATERIAL AGREEMENTS, LISTED BELOW, PROVIDE THAT APM WILL
REIMBURSE THE PROVIDERS AND/OR PARTICIPANTS FOR THEIR PRESCRIPTION DRUG COSTS
AND THAT THE SPONSOR WILL PAY AHP A NEGOTIATED ADMINISTRATIVE FEE ON A PER
PRESCRIPTION BASIS (GENERALLY, $0.65 TO $1.95 PER PRESCRIPTION). GENERALLY, THE
MATERIAL AGREEMENTS HAVE A ONE-YEAR TERM SUBJECT TO AUTOMATIC YEAR TO YEAR
RENEWALS.

1. MANAGED PHARMACEUTICAL AGREEMENT between Advance Prescription
Management, Inc. and National Health Insurance Company, dated November
1, 1992.

2. MANAGED PHARMACEUTICAL AGREEMENT: MAIL SERVICE AND CLAIM ADJUDICATION
between Advance Prescription Management, Inc. and The Travelers Plan
Administrators/Fort Worth, dated April 1, 1993.

3. MANAGED PHARMACEUTICAL AGREEMENT: MAIL SERVICE AND CLAIM ADJUDICATION
between Advance Prescription Management, Inc. and Specialized
Association

<PAGE>

Services, dated April 1, 1993.

4. MANAGED PHARMACEUTICAL AGREEMENT: MAIL SERVICE AND DIRECT
REIMBURSEMENT CLAIM PROCESSING between Advance Prescription
Management, Inc. and Specialized Association Services, Inc., dated
January 1, 1993.

5. INDEPENDENT GENERAL AGENT AGREEMENT between Keenan & Associates and
Advance Prescription Management, Inc., effective March 1, 1993.

C. NETWORK PHARMACY AGREEMENTS. APM HAS ENTERED INTO AGREEMENTS WITH
PHARMACIES THAT DESIRE TO BECOME A PHARMACY ELIGIBLE TO PARTICIPATE IN APM'S
ADVANCE RX-TM- PROGRAMS (A "PROVIDER PHARMACY"). THE MATERIAL NETWORK PHARMACY
AGREEMENTS, LISTED BELOW, EACH HAVE A ONE-YEAR TERM SUBJECT TO AUTOMATIC YEAR TO
YEAR RENEWALS. GENERALLY, EACH NETWORK PHARMACY AGREEMENT OBLIGATES APM TO USE
ITS BEST EFFORTS TO PROCESS THE PROVIDER PHARMACIES CLAIMS FOR PAYMENT, ALTHOUGH
IT IS NOT OBLIGATED TO PAY SUCH CLAIMS UNTIL IT HAS RECEIVED THE PAYMENT FROM
THE PARTICIPATING INSURERS.

1. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Revco D.S., Inc., effective December 5, 1992.

2. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and Revco D.S., Inc., effective December 5, 1992.

3. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Big B Drug Stores, effective October 1, 1992.

4. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and Big B Drug Stores, effective October 1, 1992.

5. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Thrift Drug, Inc., effective January 1, 1993.

6. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and K-Mart, effective November 1, 1992.

7. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and K-Mart, effective November 1, 1992.

8. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and The Kroger Company, effective September 10, 1992.

9. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and The Kroger Company, effective September 10, 1992.

<PAGE>

10. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Medicine Shoppe (with InterNet, Inc. as agent), effective
October 23, 1992.

11. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and Medicine Shoppe (with InterNet, Inc. as agent),
effective October 23, 1992.

12. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Northeast Pharmacy Service Corporation.

13. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and United Managed Care, effective February 1, 1993.

14. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and United Managed Care, effective February 1, 1993.

15. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Hook-SupeRx, Inc.

16. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and Hook-SupeRx, Inc.

17. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Jack Eckerd Corporation/Eckerd Holdings II, Inc., effective
January 1, 1993, as amended.

18. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Thrifty Corporation, effective January 1, 1993.

19. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Wal-Mart Pharmacy, effective October 12, 1992.

20. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and Wal-Mart Pharmacy, effective October 12, 1992.

21. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and American Drug Stores, dba, Osco/Savon, effective January 27,
1993.

22. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Rite Aid Corp., effective October 30, 1992.

23. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and various corporations maintaining their principal place of
business at One CVS Drive, Woonsocket, RI 02895, effective January 1,
1993.

<PAGE>

D. OTHER

1. EMPLOYMENT AGREEMENT between Advance Home Prescriptions, Inc. and
Donald M. Lea, II (Vice President of Sales and Marketing), dated
April 21, 1992.

AHP EMPLOYS MR. LEA AS VICE PRESIDENT OF SALES AND MARKETING
UNTIL JULY 21, 1995 A BASE SALARY OF $75,000 PER YEAR PLUS
INCENTIVE COMPENSATION AND BENEFITS. MR. LEA AGREES NOT TO
DISCLOSE CONFIDENTIAL INFORMATION, COMPETE WITH AHP OR
INTERFERE WITH AHP'S RELATIONS FOR A PERIOD OF ONE YEAR
FOLLOWING TERMINATION. THE AGREEMENT MAY BE RENEWED FOR ONE
YEAR.

2. COMPUTER PURCHASE AGREEMENT

3. SHAREHOLDER LOAN

4. WORKING CAPITAL LINE

<PAGE>

EXHIBIT 3.21

VARIOUS DEVELOPMENTS

EVENTS THAT HAVE OCCURRED SINCE MARCH 31, 1993:

1. Assumption of Shareholder Loan.

2. Computer Purchase Agreement.

3. Recapitalization Agreement.

4. The Company cannot predict the impact, if any, on its business or
prospects of the various proposed federal initiatives currently under
discussion.

<PAGE>

EXHIBIT 4.3

AMENDMENT NO. 1
TO
PREFERRED STOCK PURCHASE AGREEMENT

This AMENDMENT NO. 1 to the PREFERRED STOCK PURCHASE AGREEMENT dated as of
December 7, 1993, is made by and among ADVANCE PHARMACY SERVICES, INC., a
Delaware corporation (the "COMPANY"), and those investors set forth on the
signature page hereto who execute a counterpart of this agreement and amendment
(hereinafter referred to collectively as the "PURCHASERS" and individually as a
"PURCHASER").

WHEREAS, the Purchasers and the Company have previously entered into a
certain Preferred Stock Purchase Agreement dated as of August 4, 1993 (the
"STOCK PURCHASE AGREEMENT"), pursuant to which the Purchasers purchased from the
Company, and the Company issued and sold to the Purchasers, 4,000 shares of the
Company's Series A Preferred Stock, par value $.01 per share (the "SERIES A
PREFERRED STOCK"), in the respective amounts set forth on EXHIBIT 1.01 to the
Stock Purchase Agreement;

WHEREAS, pursuant to Section 1.03(b), entitled "Second Closing," of the
Stock Purchase Agreement, the Purchasers and the Company have agreed to purchase
6,000 additional shares of Series A Preferred Stock upon satisfaction of certain
conditions set forth herein and in the Stock Purchase Agreement; and

NOW THEREFORE, the parties hereto agree as follows:

SECTION 1. AUTHORIZATION OF SERIES A PREFERRED STOCK. Pursuant to Section
1.03(b) of the Stock Purchase Agreement, the Company has authorized the issuance
and sale to the Purchasers of up to 6,000 additional shares of Series A
Preferred Stock (the "PREFERRED SHARES") to each of the Purchasers in the
respective amounts set forth EXHIBIT A hereto for a purchase price of $1,000.00
per share, and for an aggregate consideration of $6,000,000.00. The Company will
sell to each Purchaser, and each Purchaser will purchase from the Company, the
Preferred Shares set forth beside such Purchaser's name on EXHIBIT A hereto, for
the aggregate consideration set forth next to each Purchaser's name on EXHIBIT A
hereto. The sale to and purchase by each Purchaser of the Preferred Shares
hereunder will constitute a separate sale and purchase.

Capitalized terms used herein and not otherwise defined herein shall have
the same meaning as set forth in the Stock Purchase Agreement and the terms of
the Series A Preferred Stock.

SECTION 3. THE CLOSING. The closing of the separate sales to and purchases
by the Purchasers of the Preferred Shares (the "SECOND CLOSING") will take place
at the offices of the Company, on December 7, 1993, at 1:00 P.M., or such other
mutually acceptable time and place. At the Second Closing, the Company

<PAGE>

- 2 -

will deliver to counsel for the Purchasers certificates evidencing the number of
Preferred Shares to be purchased by each Purchaser, registered in such name as
such Purchaser shall designate, against payment of the purchase price therefor
by delivery of a cashier's or certified bank check of immediately available
funds or by wire transfer to a bank account designated by the Company. At the
Second Closing, the Company's counsel will deliver an opinion of counsel
substantially in the form of EXHIBIT B attached hereto with respect to the
issuance of the Preferred Shares.

SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the Purchasers that the representations and
warranties made by the Company pursuant to Article III of the Stock Purchase
Agreement are true and correct as of the date hereof, except as amended or
modified by the Disclosure Schedule attached hereto as EXHIBIT C.

SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each of the
Purchasers hereby represents and warrants to the Company that the
representations and warranties of the Purchasers made in Sections 1.05, 1.06 and
1.07 of the Stock Purchase Agreement are true and correct and in full force and
effect as of the date hereof with respect to the purchase by the Purchasers of
the additional Preferred Shares hereunder.

SECTION 6. AMENDMENT OF STOCK PURCHASE AGREEMENT. The parties hereby
acknowledge and agree that the Stock Purchase Agreement is hereby expressly
amended to include the additional Preferred Shares purchased hereunder and is
hereby ratified, confirmed and approved as being in full force and effect and
that the Preferred Shares to be purchased hereunder shall be entitled to all of
the rights and benefits, and bound by all of the obligations, accruing to shares
of Series A Preferred Stock purchased under the Stock Purchase Agreement,
including registration rights, rights of first refusal or first offer, and the
other rights, benefits and obligations contained therein. The Company hereby
reconfirms all of the covenants contained in Article IV of the Stock Purchase
Agreement as being in full force and effect with respect to the issuance of the
Preferred Shares hereunder. The Stock Purchase Agreement is hereby reconfirmed
as being in full force and effect except as expressly modified hereby through
the issuance to the Purchasers of the additional Preferred Shares.

The Stock Purchase Agreement is hereby expressly amended to have an
effective date of August 1, 1993; PROVIDED, HOWEVER, that for purposes of
calculating the holding period on the Preferred Shares issued at the Initial
Closing for purposes of Rule 144 of the Securities Act of 1933, the date of
original issuance of such shares shall be August 4, 1993; and PROVIDED, FURTHER,
that any representations and warranties made by the parties in the Stock
Purchase Agreement as of the date of Closing shall be deemed to be made only as
of the date that the transactions contemplated by the Initial Closing and Second
Closing are consummated.

<PAGE>

- 3 -

IN WITNESS WHEREOF, each of the undersigned has executed this Amendment
No. 1 to the Series A Preferred Stock Purchase Agreement as of the date set
forth above by their duly authorized representatives.

ADVANCE PHARMACY SERVICES, INC.

By:/S/ David Halbert
---------------------
Title: Chairman and CEO
------------------

INVESTORS: INVESTORS:
- --------- ---------

CANAAN CAPITAL LIMITED PARTNERSHIP

By: Canaan Capital Management /s/ Jeffrey R. Jay
Limited Partnership, General Partner -------------------
DR. JEFFREY R. JAY

By: Canaan Capital Partners L.P.,
General Partner /s/ Stephen L. Green
---------------------
STEPHEN L. GREEN
By: /s/ Stephen L. Green
--------------------
General Partner
QUAI LTD.

CANAAN CAPITAL OFFSHORE LIMITED
PARTNERSHIP C.V. By: /s/ D. Liardet
-------------------
Title: Attorney-in-Fact
----------------
By: Canaan Capital Management
Limited Partnership,
General Partner

By: Canaan Capital Partners L.P.,
General Partner

By: /s/ Stephen L. Green
--------------------
General Partner

J.H. WHITNEY & CO.

By: /s/ Jeffrey R. Jay
-------------------
Title: General Partner
---------------
WHITNEY 1990 EQUITY FUND, L.P.

By: /s/ Jeffrey R. Jay
-------------------
Title: General Partner
---------------

<PAGE>

EXHIBIT A

INVESTMENT AT SECOND CLOSING OF ADVANCE PHARMACY SERVICES, INC.

SCHEDULE OF INVESTORS

PERCENTAGE
NUMBER OF INTEREST OF
AGGREGATE PREFERRED PREFERRED
PURCHASE PRICE SHARES SHARES TO BE
OF PREFERRED PURCHASED PURCHASED
SHARES AT AT SECOND AT SECOND
SECOND CLOSING CLOSING CLOSING
-------------- ------- -------

Canaan Capital Limited Partnership $ 281,000 281 4.675%
c/o Canaan Capital Management L.P.
105 Rowayton Avenue
Rowayton, CT 06853
Attn: Stephen L. Green

Canaan Capital Offshore Limited $2,337,000 2,337 38.950%
Partnership C.V.
c/o Canaan Capital Management L.P.
105 Rowayton Avenue
Rowayton, CT 06853
Attn: Stephen L. Green

Stephen L. Green $ 37,000 37 .625%
105 Rowayton Avenue
Rowayton, CT 06853

Dr. Jeffrey R. Jay $ 45,000 45 .750%
39 Rock Ridge Avenue
Greenwich, CT 06831

Quai Ltd. $ 300,000 300 5.000%
c/o Windlesham Services Ltd.
22A Old Court Place
London, W8 4PP England
Attn: William Rowan

J.H. Whitney & Co $ 600,000 600 10.000%
630 Fifth Avenue
Suite 3200
New York, NY 10111-0302
Attn: Daniel J. O'Brien

Whitney 1990 Equity Fund, L.P. $2,400,000 2,400 40.000%
630 Fifth Avenue
Suite 3200
New York, NY 10111-0302
Attn: Daniel J. O'Brien
---------- ----- -------

TOTALS $6,000,000 6,000 100%
---------- ----- ------
---------- ----- ------

<PAGE>

UPDATE TO DISCLOSURE SCHEDULE

FOR

AMENDMENT NO. 1

PREFERRED STOCK PURCHASE AGREEMENT

<PAGE>

EXHIBIT 3.17

CAPITALIZATION; STATUS OF CAPITAL STOCK

RECORD SHAREHOLDERS OF THE COMPANY:

Advance Health Care, Inc.
Canaan Capital Limited Partnership
Canaan Offshore Limited Partnership
Dr. Jeffrey R. Jay
Stephen L. Green
Quai Ltd.
J.H. Whitney & Co.
Whitney 1990 Equity Fund, L.P.

RECORD SHAREHOLDER OF AHP AND APM:

Advance Pharmacy Services, Inc.

RESTRICTIONS ON TRANSFER:

The capital stock of the Company, AHP and APM is subject to customary
restrictions on transfer imposed on securities that have not been
registered pursuant to the Securities Act of 1933.

OPTIONS GRANTED

The Company has granted options to purchase 1652 shares of its Common Stock
under the 1993 Incentive Stock Option Plan. The Company has authorized the
issuance of following options and warrants in connection with its acquisition of
Paradigm Pharmacy Management, Inc.:

Option Pool for the management of Paradigm Pharmacy Management, Inc.
equal to up to 696 shares of Common Stock;

Warrant issued to Blue Cross and Blue Shield of Maryland, Inc. for 225
shares of Common Stock; and

Warrant issued to Whitney Subordinated Debt Fund, L.P. for 1346 shares
of Common Stock.

<PAGE>

PRO-FORMA POST CLOSING CAPITALIZATION OF THE COMPANY:

SHAREHOLDER CLASS NO. OF SHARES
- ----------- ----- -------------
Advance Health Care, Inc. Common Stock 12,500
Canaan Capital Limited Partnership Preferred 468
Canaan Capital Offshore Limited Partnership Preferred 3,895
Dr. Jeffrey R. Jay Preferred 75
Stephen L. Green Preferred 62
Quai Ltd. Preferred 500
J.H. Whitney & Co. Preferred 1,000
Whitney 1990 Equity Fund, L.P. Preferred 4,000

<PAGE>

EXHIBIT 3.20

MATERIAL AGREEMENTS

1. Letter of Intent dated November 15, 1993 between Advance Pharmacy
Services, Inc. and Blue Cross and Blue Shield of Maryland, Inc.

2. Letter of Intent dated November 15, 1993 between Advance Pharmacy
Services, Inc. and ArcVentures, Inc.

3. Pharmacy Card, Inc. Proposal.

4. Assignment, Assumption, Bill of Sale and Consent Agreement dated
October 20, 1993 by and between Medco Containment Services, Inc., APS
and Trinity Properties, Ltd. relating to that Original Commercial
Lease Agreement between Trinity Properties, Ltd. and FlexRX Pharmacy
Services, Inc.

5. Agreement regarding purchase of upgraded automation equipment at the
new facility.

<PAGE>

EXHIBIT 3.21

VARIOUS DEVELOPMENTS

EVENTS THAT HAVE OCCURRED SINCE AUGUST 4, 1993:

1. Letter of Intent dated November 15, 1993 between Advance Pharmacy
Services, Inc. and Blue Cross and Blue Shield of Maryland, Inc.

2. Letter of Intent dated November 15, 1993 between Advance Pharmacy
Services, Inc. and ArcVentures, Inc.

3. Pharmacy Card, Inc. Proposal.

4. Assignment, Assumption, Bill of Sale and Consent Agreement dated
October 20, 1993 by and between Medco Containment Services, Inc.,
Advance Pharmacy Services, Inc. and Trinity Properties, Ltd. relating
to that Original Commercial Lease Agreement between Trinity
Properties, Ltd.and FlexRX Pharmacy Services, Inc.

5. Agreement regarding purchase of upgraded automation equipment at the
new facility.

6. Advance Pharmacy Services, Inc. has granted options to purchase 1652
shares of its Common Stock under the 1993 Incentive Stock Option Plan.

7. The Company cannot predict the impact, if any, on its business or
prospectus of the various proposed federal initiatives currently under
discussion.

<PAGE>

[LETTERHEAD]

December 7, 1993

Canaan Capital Limited Partnership
Canaan Capital Offshore Limited Partnership C.V.
c/o Canaan Capital Management L.P.
105 Rowayton Avenue
Rowayton, CT 06853

J.H. Whitney & Co.
Whitney 1990 Equity Fund, L.P.
630 Fifth Avenue
Suite 3200
New York, Ny 10111-0301

Ladies and Gentlemen:

We have acted as counsel to Advance Pharmacy Services, Inc., a Delaware
corporation (the "Company") in connection with the transactions contemplated by
the Amendment No. 1 to Preferred Stock Purchase Agreement dated as of
December 6, 1993 (the "Amendment") among the Company and the Purchasers
identified therein (the "Purchasers") pursuant to which the Company will issue
additional shares of its Series A Preferred Stock, par value $.01 per share (the
"Additional Preferred Shares"). This opinion is being delivered to you pursuant
to Section 4 of the Amendment. All capitalized terms that are defined in the
Amendment and that are used herein without definition shall have the meanings
ascribed to such terms in the Amendment.

A. DOCUMENTS EXAMINED.

In preparing this opinion, we have examined and relied on originals or
copies of the following:

(1) the Amendment;

(2) the Stock Purchase Agreement;

<PAGE>

Canaan Capital Limited Partnership
Cannan Capital Offshore Limited Partnership
J.H. Whitney & Co.
Whintney 1990 Equity Fund, L.P.
December 7, 1993
Page 2

(3) the Voting, Co-Sale and Right of First Refusal Agreement, dated as of
even date herewith, among the Company, the Purchasers David D.
Halbert, Jon Halbert, Dan Phillips and any other holder of at least 5%
of the outstanding capital stock of the Company (the "Voting
Agreement");

(4) copy of the Company's Certificate of Incorporation, as amended,
certified by the Secretary of State of the State of Delaware;

(5) the Company's Minute Book and Stock Ledger;

(6) Officer's Certificates from the Company dated December 6, 1993
certifying the Company's Certificate of Incorporation, the Company's
Bylaws, the resolutions of the Board of Directors authorizing the
Company to enter into the Amendment and consummate the transactions
contemplated thereby, the incumbency of the officers of the Company
and certain other matters;

(7) Such other documents as we have deemed necessary or appropriate as a
basis for the opinions set forth below.

Subject to the limitations set forth below, we have made such examination
of law as we have deemed necessary for purposes of this opinion.

B. COMMENTS, ASSUMPTIONS, LIMITATIONS, QUALIFICATIONS AND EXCEPTIONS.

(1) We (or sole shareholders of professional corporations that are members
of this firm) are members of the State Bar of Texas, and we express no
opinion herein as to the laws of any jurisdiction other than the State
of Texas as applied by courts located in Texas, the General
Corporation Law of the State of Delaware as applied by courts located
in Delaware (the "DGCL"), and the Federal laws of the United States of
America, to the extent that the same may apply to or govern such
transactions. In this regard we note that the Stock Purchase
Agreement contains a provisions to the effect that the laws of
Delaware are intended to be governing. For purposes of our opinion
herein, we have assumed, with your permission and without any
independent investigation, that the laws of Delaware,

<PAGE>

Canaan Capital Limited Partnership
Cannan Capital Offshore Limited Partnership
J.H. Whitney & Co.
Whintney 1990 Equity Fund, L.P
December 7, 1993
Page 3

other than the DGCL, are identical in all relevant respects to the
laws of the State of Texas.

(2) In rendering the opinions set forth below, we have assumed (a) the
genuineness of all signatures (other than those of the Company), the
authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as
certified or photostatic copies thereof, and the authenticity of the
originals of such certified or photostatic copies; (b) that all
documents and agreements to which the Company is a party will be
construed in accordance with the internal laws of the jurisdictions
specified by the parties therein or, in the absence of such specified
jurisdiction, then in accordance with the internal laws of the State
of Texas (and we render no opinion as to the conflict of law rules of
any jurisdiction); (c) the legal capacity of all natural persons, and
the power and authority of all parties to the Amendment (other than
the Company) to execute and deliver the Amendment and all related
documents to which any such party is a party; (d) that the Amendment
has been duly authorized, executed and delivered by all parties (other
than the Company); (e) that the Amendment and all related documents
constitute valid and binding obligations of all parties (other than
the Company) to such agreements, enforceable against such parties in
accordance with their respective terms; (f) that the representations
and warranties in the Amendment of all parties (other than the
Company) are true and correct; (g) that no fraud, dishonesty, duress,
undue influence or breach of fiduciary duty exists with respect to any
of the matters relevant to our opinion; (h) that each party to the
transactions contemplated by the (other than the Company) has complied
with all legal requirements pertaining to its rights to enforce the
Amendment against the Company; (i) that there are no agreements or
understandings to which the Company is a party of which we do not have
knowledge, written or oral, and there is no usage of trade or course
of prior-dealing among the parties that would, in either case, define,
supplement or qualify the terms of the Amendment; and (j) that the
statements of fact contained in the certificates identified in
paragraphs A(5) above are accurate and complete.

(3) In rendering the opinions set forth in Section C below, we have relied
solely upon our examination of the items specified in Section A above
including without limitation the documents described in paragraph
A(7), and we have made no

<PAGE>

Canaan Capital Limited Partnership
Cannan Capital Offshore Limited Partnership
J.H. Whitney & Co.
Whintney 1990 Equity Fund, L.P
December 7, 1993
Page 4

investigation or verification of the factual matters set forth in such
documents or certificates. As to all matters of fact (including
factual conclusions and characterizations and descriptions of purpose,
intention or other states of mind) we have relied entirely upon
representations made to us by officers of the Company and have
assumed, without independent inquiry, the accuracy of such
representations.

(4) In rendering the opinion set forth in C(4) we have relied solely upon
our examination of the items set forth in A(4) and A(5).

(5) The opinions expressed below are subject to the qualifications that
the legality, validity, binding effect and enforceability of the Stock
Purchase Agreement and the Amendment may be limited by and subject to
(a) applicable liquidation, conservatorship, bankruptcy, insolvency,
reorganization, fraudulent transfer or conveyance, preferential
transfer, moratorium or other similar laws affecting creditors' rights
from time to time in effect; (b) general principles of equity
(regardless of whether such enforceability is considered in a
proceeding in equity or at law), including concepts of materiality,
commercial reasonableness, good faith, fair dealing and
conscionability; and (c) the power of courts to award damages in lieu
of equitable remedies, including specific performance; however, in our
opinion,this power will not materially diminish the practical
realization of the essential benefits expressed in the Stock Purchase
Agreement and the Amendment (except to the extent of any economic
consequences of any judicial administrative, procedural or other delay
that may result therefrom).

(6) We express no opinion as to the validity, binding effect or
enforceability of any provision of the Amendment purporting (a) to
prohibit oral amendment or waiver of such agreements or limit the
effect, of a course of dealing between the parties thereto; (b) to
indemnify any person for its own acts of negligence, recklessness,
willful misconduct or unlawful conduct; or (c) to make the Amendment,
or any part thereof, enforceable in the event any term or other
provision of the Amendment is held to be invalid, illegal or incapable
of being enforced.

<PAGE>

Canaan Capital Limited Partnership
Cannan Capital Offshore Limited Partnership
J.H. Whitney & Co.
Whintney 1990 Equity Fund, L.P
December 7, 1993
Page 5

(7) We express no opinion as to compliance with any state securities or
"blue sky" laws, applicable anti-fraud provisions of federal or state
securities laws and antitrust and unfair competition laws.

(8) We express no opinion as to the tax consequences of the transactions
contemplated by the Amendment on the Company.

(9) We express no opinion with regard to any matter of patent, trademark,
copyright or other intellectual property law.

C. OPINIONS.

Based upon the foregoing and such investigations that we have deemed
necessary, and subject to the limitations, qualifications, assumptions and
exceptions set forth herein, we are of the opinion that:

(1) The Company is a corporation organized and existing under, and by
virtue of, the laws of the State of Delaware and is in good standing
under such laws has requisite corporate power to own and operate its
properties and assets, and to carry on its business as presently
conducted and is qualified to do business as a foreign corporation in
Texas.

(2) The execution and delivery of the Amendment and the consummation of
the transactions contemplated thereby, have been duly authorized by
the Company and such agreements have been duly executed and delivered
by, and are the valid and binding obligation of, the Company
enforceable against the Company in accordance with their terms. The
Company has all the necessary corporate power and authority to execute
and deliver the Amendment and to carry out and perform its respective
obligations under the terms of such document. The Company has all the
necessary corporate power and authority to sell and issue the
Additional Preferred Shares.

(3) The execution and delivery of the Amendment and the issuance of the
Additional Preferred Shares, and the consummation of any transaction
contemplated thereby, will not constitute or result in a default or
violation of any term or provision in

<PAGE>

Canaan Capital Limited Partnership
Cannan Capital Offshore Limited Partnership
J.H. Whitney & Co.
Whintney 1990 Equity Fund, L.P
December 7, 1993
Page 6

any of the Certificate of Incorporation or Bylaws of the Company and,
to our knowledge, any material agreement listed in Exhibit 3.20, as
amended, of the Stock Purchase Agreement.

(4) The Certificate of Incorporation of the Company (the "Certificate")
has been filed with the State of Delaware. The authorized capital
stock of the Company consists of 30,000 shares of Common Stock, 12,500
shares of which are issued and outstanding, 10,000 Series A Preferred
Stock, 4,000 shares of which are issued and outstanding. The
Additional Preferred Shares are fully paid and nonassessable.
Sufficient authorized corporate action in connection with the
prospective conversion of the Additional Preferred Shares as set forth
in the Certificate of Incorporation.

This opinion has been delivered solely for your use in connection with the
transactions contemplated by the Amendment and may not be referred to or used
for any other purpose or relied upon by any other person, except with our prior
consent. The opinions expressed herein are given as of the date hereof and we
undertake no obligation hereby and disclaim any obligation to advise you of any
change after the date hereof pertaining to any matter referred to herein.

Very truly yours,

/s/ Akin, Gump, Strauss, Hauer & Feld, L.L.P.

Akin, Gump, Strauss, Hauer & Feld, L.L.P.

<PAGE>

EXHIBIT 4.4

AMENDMENT NO. 2
TO
PREFERRED STOCK PURCHASE AGREEMENT

This AMENDMENT NO. 2 to PREFERRED STOCK PURCHASE AGREEMENT dated as of
December 8, 1993, is made by and among ADVANCE PHARMACY SERVICES, INC., a
Delaware corporation (the "Company"); CANAAN CAPITAL LIMITED PARTNERSHIP, CANAAN
CAPITAL OFFSHORE LIMITED PARTNERSHIP, C.V., STEPHEN L. GREEN, JEFFREY R. JAY,
QUAI, LTD., J.H. WHITNEY & CO. and WHITNEY 1990 EQUITY FUND, L.P. (hereinafter
referred to collectively as the "PURCHASERS" and individually as a "PURCHASER");
and WHITNEY SUBORDINATED DEBT FUND L.P. ("Debt Fund").

WHEREAS, the Purchasers and the Company are parties to that certain
Preferred Stock Purchase Agreement dated as of August 4, 1993, as amended by
Amendment No. 1 thereto dated as of December 7, 1993 (as so amended, the "STOCK
PURCHASE AGREEMENT"), pursuant to which the Purchasers purchased from the
Company, and the Company issued and sold to the Purchasers, an aggregate of
10,000 shares of the Company's Series A Preferred Stock, par value $.01 per
share;

WHEREAS, the Company and Debt Fund are parties to that certain Note
and Warrant Purchase Agreement dated as of the date hereof (the "Note Purchase
Agreement"), pursuant to which the Company is issuing and selling to Debt Fund,
and Debt Fund is purchasing from the Company, $7,000,000 in principal amount of
the Company's 10.101% Promissory Note (the "Note") and a Warrant to purchase up
1,346 shares of the Company's Common Stock, par value $.01 per share (the
"Warrant");

WHEREAS, it is a condition of Debt Fund's obligation to purchase
the Note and the Warrant pursuant to the Note Purchase Agreement that the
Company and the Purchasers enter into this Agreement;

NOW, THEREFORE, the parties hereto agree as follows:

1. AMENDMENTS TO STOCK PURCHASE AGREEMENT.

(a) Section 7.01 of the Stock Purchase Agreement is hereby
amended to add the following defined terms:

<PAGE>

"WARRANTS" shall mean that certain Common Stock Purchase
Warrant dated December 8, 1993 issued by the Company to Whitney
Subordinated Debt Fund, L.P., and any other Warrants issued in
transfer or exchange of such Warrant or such other Warrants.

"WARRANT SHARES" shall mean the shares of Common Stock
issuable upon exercise of the Warrants (and such shares when so
issued).

(b) The term "Registrable Shares", as defined in Section 7.01 of
the Stock Purchase Agreement, is hereby amended and restated in its entirety to
read as follows:

"REGISTRABLE SHARES" shall mean and include (i) the
Conversion Shares; (ii) the Warrant Shares; and (iii) any shares
of capital stock of the Company acquired by the Purchasers
pursuant to Article VI hereof, including shares of Common Stock
issuable on the conversion, exercise or exchange of other
securities acquired by the Purchasers pursuant to Article VI
hereof or otherwise; PROVIDED, HOWEVER, that shares of Common
Stock which are Registrable Shares shall cease to be Registrable
Shares upon the consummation of any sale to the public pursuant
to a registration statement, or to the public pursuant to
Rule 144 under the Securities Act. Wherever reference is made in
this Agreement to a request or consent of holders of a certain
percentage of Registrable Shares, the determination of such
percentage shall include the Conversion Shares and the Warrant
Shares even if conversion of the Preferred Shares and exercise of
the Warrants have not yet been effected. Registrable Shares shall
also mean and include the 12,500 shares of Common Stock currently
held by Advance Health Care, Inc.

(c) For purposes of Article V and Article VI of the Stock
Purchase Agreement, Debt Fund shall be deemed to be a "Purchaser", and the
Warrant Shares shall be deemed to be "Shares". For purposes of Article VI of
the Stock Purchase Agreement, in calculating the number of shares of Common
Stock held by any Offeree (as deferred therein) on as "as converted" basis, it
shall be assumed that all shares of Series A Preferred Stock have been converted
into Common Stock and that all Warrants have been fully exercised.

(d) Section 8.02 of the Stock Purchase Agreement is hereby
amended and restated in its entirety to read as follows:

-2-

<PAGE>

"AMENDMENTS, WAIVERS AND CONSENTS. Any provision in the
Agreement to the contrary notwithstanding, and except as
hereinafter provided, changes in, termination or amendments of or
additions to this Agreement may be made, and compliance with any
covenant or provision set forth herein may be omitted or waived,
if the Company (i) shall obtain consent thereto in writing from
the holder or holders of at least sixty percent (60%) of the
Preferred Shares and/or Conversion Shares outstanding, and, in
the case of any amendment, change or waiver involving any
provision of Article V or Article VI hereof, the Warrant Shares,
and (ii) shall deliver copies of such consent in writing to any
holders who did not execute such consent; PROVIDED that no
consents shall be effective to reduce the percentage in interest
of the Shares the consent of the holders of which is required
under this Section 9.02. Any waiver or consent may be given
subject to satisfaction of conditions stated therein and any
waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given."

2. WAIVER.

Each of the Purchasers hereby waives any rights such Purchaser
may have under Article VI of the Stock Purchase Agreement with respect to the
issuance of the Securities (as defined in the Note Purchase Agreement).

3. RATIFICATION.

Except as specifically amended hereby, the terms and provisions
of the Stock Purchase Agreement are hereby ratified and confirmed.

IN WITNESS WHEREOF, this Amendment No. 2 to Preferred Stock Purchase
Agreement has been executed as of the date and year first above written by the
duly authorized officers and representatives of each of the undersigned.

-3-

<PAGE>

COMPANY: INVESTORS:

ADVANCE PHARMACY SERVICES, CANAAN CAPITAL LIMITED PARTNERSHIP
INC.

By: /s/ David Halbert By: Canaan Capital Management, L.P.,
-------------------- Its General Partner
Title: Chairman, CEO
-------------------

By: Canaan Capital Partners, L.P.,
Its General Partner

By: /s/ Stephen L. Green
--------------------
General Partner

CANAAN CAPITAL OFFSHORE LIMITED
PARTNERSHIP, C.V.

By: Canaan Capital Management, L.P.,
Its General Partner

By: Canaan Capital Partners, L.P.,
Its General Partner

By: /s/ Stephen L. Green
----------------------------------
General Partner

FOR PURPOSES OF ARTICLE V /s/ Stephen L. Green
--------------------------------------------
Stephen L. Green

ADVANCE HEALTH CARE, INC. /s/ Dr. Jeffrey R. Jay
--------------------------------------------
Dr. Jeffrey R. Jay

By: /s/ David Halbert
----------------------
Title: President
------------------- QUAI, LTD.

By: /s/
-----------------------------------------
Title:
--------------------------------------

J.H. WHITNEY & CO.

By: /s/ Daniel J. O'Brien
---------------------
Title: CHIEF FINANCIAL OFFICER

-4-

<PAGE>

WHITNEY 1990 EQUITY FUND, L.P.

By: /s/ Daniel J. O'Brien
-------------------------
Title: Chief Financial Officer

WHITNEY SUBORDINATED DEBT
FUND, L.P.

By: /s/ Daniel J. O'Brien
--------------------------
Title: Chief Financial Officer

<PAGE>

EXHIBIT 4.5

VOTING, CO-SALE AND RIGHT OF FIRST REFUSAL AGREEMENT

This Voting, Co-Sale and Right of First Refusal Agreement dated as of
August 4, 1993 among Advance Pharmacy Services, Inc., a Delaware corporation
(the "COMPANY"), Advance Health Care, Inc., a Delaware corporation ("AHC");
Canaan Capital Limited Partnership, Canaan Capital Offshore Limited
Partnership, C.V., Quai Ltd., Stephen L. Green, and Dr. Jeffrey R. Jay, J.H.
Whitney & Co. and Whitney 1990 Equity Fund, L.P. (collectively, the
"INVESTORS"); David D. Halbert, Jon Halbert, and Dan Phillips (collectively,
the "EXECUTIVE STOCKHOLDERS"). Each of the Executive Stockholders, AHC and
any other holders of at least 5% of the outstanding capital stock of the
Company (who is also not an Investor) shall be referred to herein as a
"STOCKHOLDER". Canaan Capital Limited Partnership, Canaan Capital Offshore
Limited Partnership, C.V., Quai Ltd., Stephen L. Green, and Dr. Jeffrey R.
Jay are sometimes collectively referred to herein as the "Canaan Funds". J.H.
Whitney & Co. and Whitney 1990 Equity Fund, L.P. are sometimes herein
collectively referred to as the "Whitney Funds". Either of the Canaan Funds
or the Whitney Funds are sometimes referred to herein as the "INVESTOR GROUP".

WHEREAS, the Company is issuing shares of its Series A Preferred Stock
(the "SERIES A PREFERRED STOCK") to the Investors pursuant to a Series A
Preferred Stock Purchase Agreement of even date herewith (the "STOCK PURCHASE
AGREEMENT"), and the Investors are investing at least $4,000,000 in the
Company; and

WHEREAS, one of the conditions to the investment by the Investors is the
execution of a voting agreement relating to the election of members to the
Company's Board of Directors (the "BOARD OF DIRECTORS") and a stock
restriction and co-sale agreement providing for, among other things,
restrictions on the terms of any dispositions by Executive Stockholders and
any other Stockholders holding at least 5% of the outstanding capital stock
of the Company (except for such persons who acquire such shares pursuant to
purchase in the public market) (collectively, "SIGNIFICANT STOCKHOLDERS") of
their capital stock of the Company;

NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and the investment by the Investors under the Stock Purchase
Agreement, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:

<PAGE>

-2-

ARTICLE I

ELECTION OF DIRECTORS

SECTION 1.1. ELECTION OF DIRECTORS. At any time at which stockholders
of the Company will have the right to, or will vote for or consent in writing
to, the election of directors of the Company, the Investors, AHC and the
Stockholders hereby agree to vote all shares of capital stock of the Company
presently owned or hereafter acquired by them in favor of the following
actions:

(a) to cause and maintain the election to the Board of Directors
of four (4) persons designated by the Investors (the "INVESTOR DIRECTORS"),
two (2) of whom shall be designated by the Canaan Funds (the "CANAAN
DIRECTORS"), two (2) of whom shall be designated by Whitney 1990 Equity Fund,
L.P. (the "WHITNEY DIRECTORS"). The Canaan Directors shall be Stephen L.
Green and Dr. Jeffrey R. Jay. and the Whitney Directors shall be Peter M.
Castleman and Benno C. Schmidt.

(b) to cause and maintain the election to the Board of Directors
of two (2) members designated by the Stockholders (the "MANAGEMENT
DIRECTORS"), who shall initially be David Halbert and Jon Halbert.

(c) to cause and maintain the election to the Board of Directors
of three (3) persons designated by the Stockholders who are not employees or
officers of the Company, AHC or any subsidiary thereof, two of whom shall
initially be Michael Ware and Mikel Faulkner (the "OUTSIDE DIRECTORS"). The
Management Directors and the Outside Directors are jointly referred to herein
as the "STOCKHOLDER DIRECTORS").

The Company shall cause the nomination for election to the Board of
Directors of the individuals set forth above. Each of the directors
designated in this Section 1.1 shall be elected at any annual or special
meeting of stockholders (or by written consent in lieu of a meeting of
stockholders) and shall serve until his or her successor is elected and
qualified, or until his or her earlier resignation or removal.

In the event the Stockholders elect to designate the ninth member of the
Board of Directors, the ninth director shall be an individual who is not an
employee or officer of the Company, its subsidiaries or AHC, and such
individual shall be an Outside Director for purposes of this Agreement. The
Board of Directors shall not be enlarged above nine (9) members without the
approval or consent of the holders of sixty percent (60%) of the outstanding
shares of the Series A Preferred Stock.

Anything contained herein to the contrary notwithstanding, in the event
either of the Canaan Funds or the Whitney Funds fails to participate in the
Second Closing (as defined in the Stock Purchase Agreement) for such Investor
Group's full proportionate percentage interest in the aggregate number of
Preferred Shares

<PAGE>

-3-

to be purchased by such Investor Group at the Second Closing, and the other
Investor Group does participate in the Second Closing to the full extent of
their respective proportionate interest, then the non-participating Investor
Group, as among all Investors, agrees to forfeit the right to nominate and
designate one (1) of the two (2) Directors otherwise nominated by such
Investor Group. Such forfeited Investor Director shall then be designated
and nominated by the Investor (who may be an investor unaffiliated with the
Canaan Funds or the Whitney Funds) which participates in the Second Closing
and (i) purchases at least sixty percent (60%) of the Preferred Shares
otherwise required to be purchased by the non-participating Investor Group
and (ii) purchases at least $1,200,000 of the aggregate Preferred Shares
available for purchase at the Second Closing. Such new Investor Director
shall be approved by a majority vote of the Stockholder Directors, such
approval not to be unreasonably withheld or delayed. The additional Investor
Director may also be designated by the Investor Group which participates for
its full percentage interest of the Preferred Shares to be purchased at the
Second Closing. In no instance may the new Investor Director be an officer,
employee, director or consultant of AHC, the Company or its Subsidiaries. In
no event may the number of Investor Directors at anytime exceed four.

SECTION 1.2. COMMITTEES. The Company, AHC, the Investors and the
Stockholders agree to cause the Board of Directors to create, nominate and
appoint to, and maintain as a member of, an Audit Committee composed of three
(3) directors, and a Compensation Committee composed of four (4) directors.
The Board of Directors shall nominate at least one (1) of the Investor
Directors to the Audit Committee and at least two (2) Investor Directors to
the Compensation Committee, and to nominate at least one Outside Director to
any other committee of the Board of Directors. The committees shall not be
expanded without the express written consent or approval of the Board of
Directors, which consent or approval shall include the affirmative vote or
consent of all Investor Directors or the holders of sixty percent (60%) of
the outstanding shares of Series A Preferred Stock. Each Investor Director
shall be entitled to receive notice of, observe and attend all meetings of
each of the foregoing committees, whether or not a member thereof.

SECTION 1.3. VACANCIES AND REMOVAL. Each of the directors designated
in Section 1.1 shall be elected at any annual or special meeting of
Stockholders (or by written consent in lieu of a meeting of stockholders) and
shall serve until his successor is elected and qualified or until his earlier
resignation or removal.

(a) INVESTOR DIRECTORS. Any Investor Director may be removed
during his term of office, with cause, by and only by the written consent of
the Investors holding sixty percent (60%) of the outstanding shares of Series
A Preferred Stock, and AHC and

<PAGE>

-4-

the Stockholders agree to vote their shares of Common Stock in accordance
with the vote of the Investors on the matter described in this sentence. Any
vacancy in the office of an Investor Director shall be filled by a person
designated by the Investor or Investor Group which has designated the
Investor Director whose departure from the Board gave rise to such vacancy
and the Investors, AHC and Stockholders agree to vote all shares of capital
stock of the Company owned by them in favor of such person.

(b) MANAGEMENT DIRECTORS. The Management Directors may be removed
during their term of office, with or without cause, by and only by the
affirmative vote or written consent of the holders of a majority of the
outstanding shares of Common Stock, and the Investors agree to vote their
shares of Series A Preferred Stock (or Conversion Shares issued thereon) in
accordance with the vote of AHC and the Executive Stockholders on the matters
described in this sentence. Any vacancy in the office of the Management
Directors shall be filled by the vote or written consent of AHC and the
Executive Stockholders, and the Investors agree to vote their shares of
Series A Preferred Stock (or Conversion Shares issued thereon) in favor of
such person.

(c) OUTSIDE DIRECTORS. Any vacancy in the office of the Outside
Directors shall be filled by AHC and the Executive Stockholders, and the
Investors agree to vote their shares of Series A Preferred Stock (or
Conversion Shares issued thereon) in accordance with the vote of AHC and the
Executive Stockholders on the matter described in this sentence.

Pending any vote or written consent of holders of capital stock provided
for or required in this Section 1.3, any vacancy in the office of an Investor
Director shall be filled by the vote of a majority of the remaining Investor
Directors, any vacancy in the office of a Management Director shall be filled
by the vote of a majority of the remaining Directors (EXCLUDING the Investor
Directors), and any vacancy in the office of the Outside Directors shall be
filled by the vote of a majority of the remaining Directors, excluding the
Investor Directors.

Anything to the contrary notwithstanding, any Director may be removed
for cause in accordance with the statutory provisions of, and ancillary case
law interpreting, the General Corporation Law of the State of Delaware.

SECTION 1.4. EXPIRATION OF VOTING PROVISIONS. The provisions of this
Article I shall apply following conversion of any or all of the shares of
Series A Preferred Stock into Common Stock. Notwithstanding anything
contained herein to the contrary, the provisions of this Article I shall
terminate in their entirety on the later to occur of (i) twelve (12) months
following the consummation of the initial underwritten public offering by the
Company under the Securities Act of 1933 of any

<PAGE>

-5-

of its equity securities pursuant to an offering registered on Form S-1, or
its then equivalent, in which the aggregate gross proceeds to the Company
equal or exceed $10,000,000 AND at a price at least twice the original
purchase price per share of the Series A Preferred Stock, or (ii) the fifth
anniversary of the effective date of this Agreement set forth above. Prior to
the expiration of this Article I, the Canaan Funds shall forfeit the right to
designate one of the two Canaan Directors at such time when the Canaan Funds
and their affiliated entities or partners hold less than nine percent (9%) of
the outstanding voting capital stock of the Company (whether Series A
Preferred Stock or Conversion Shares). Prior to the expiration of this
Article I, the Whitney Funds shall forfeit the right to designate one of the
two Whitney Directors at such time when the Whitney Funds and their
affiliated entities or partners hold less than nine percent (9%) of the
outstanding voting capital stock of the Company (whether Series A Preferred
Stock or Conversion Shares). Prior to the expiration of this Article I,
either of the Canaan Funds or the Whitney Funds shall forfeit its respective
right to designate their Investor Directors at such time as it no longer owns
any shares of capital stock of the Company (whether Series A Preferred Stock
or Conversion Shares).

ARTICLE II

CO-SALE AND RIGHT OF FIRST REFUSAL

SECTION 2.1. RIGHT OF FIRST REFUSAL OR FIRST OFFER ON PRIVATE SALES.

(a) SALES TO THIRD PARTIES. If at any time during the term of
this Agreement a Stockholder (including AHC) desires to transfer (a "Selling
Stockholder") all or any part of the vested shares of capital stock of the
Company beneficially owned by him or it (the "Shares") in a
privately-negotiated transaction pursuant to a bona fide offer (the "Proposed
Offer Sale") from a third party (the "Proposed Transferee"), the Selling
Stockholder shall first submit a written offer (the "Offer") to sell such
Shares (the "Offered Shares") to the Company, the Investors and the other
Stockholders on terms and conditions, including without limitation, price,
not less favorable to the Company, the Investors and the other Stockholders
than those on which the Selling Stockholder proposes to sell such Offered
Shares to the Proposed Transferee or otherwise pursuant to the Proposed Offer
Sale in accordance with the provisions of Section 2.1(b) - (d), inclusive, of
this Agreement.

The Offer shall disclose the identity of and information about the
Proposed Transferee, and the terms of the Proposed Offer Sale, the number of
Offered Shares proposed to be sold, the total number of Shares owned by the
Selling Stockholder, the

<PAGE>

-6-

terms and conditions, including without limitation price, of the proposed
sale, and any other material facts relating to the proposed sale which may be
requested by the Company. The Offer shall further state that the Company, the
Investors and the other Stockholders may acquire, in accordance with the
provisions of Section 2.1(b) - (d), inclusive, of this Agreement, all of the
Offered Shares for the price indicated in the Offer and upon the other terms
and conditions, including deferred or installment payment (if applicable),
set forth therein.

In the event the terms of the Proposed Offer Sale contemplate the
payment to the Selling Stockholder of consideration other than cash, the
value of such non-cash consideration shall be determined in good faith by the
Board of Directors of the Company; provided that if the Proposed Transferee
offers the Selling Stockholder (i) securities that are traded on a
nationally-recognized stock exchange or quoted on the NASDAQ National Market
System, then the value of such consideration shall be the average closing
sale prices for the twenty (20) consecutive trading days preceding the date
of the Offer or (ii) securities that are traded on the NASDAQ
over-the-counter market or Small-Cap market, the value of such consideration
shall be the average of the closing bid and closing asked prices for the
twenty (20) consecutive trading days preceding the date of the Offer as
reported in the WALL STREET JOURNAL or by any market maker. In the event of
any dispute between the holders of the Series A Preferred Stock and the
Company regarding the determination of the fair market value of non-cash
consideration, at the election of the holders of sixty percent (60%) of the
outstanding shares of Series A Preferred Stock, the Company shall engage a
consulting or investment banking firm selected by the Board of Directors and
approved by the holders of sixty percent (60%) of the outstanding shares of
Series A Preferred Stock (such approval not to be unreasonably withheld or
delayed) to prepare an independent appraisal of the fair market value of such
non-cash consideration. The costs of such valuation shall be borne by the
Company.

(b) COMPANY'S RIGHT OF FIRST REFUSAL. Upon receipt of the Offer,
if the Company desires to purchase all or any part of the Offered Shares, the
Company shall deliver a written notice of its election to purchase or not to
purchase such shares to the Selling Stockholder and each Investor and other
Stockholder, which notice shall be delivered in person or mailed to the
Selling Stockholder, each Investor and other Stockholder within thirty (30)
days of the date of receipt by the Company of the Offer. Such notice, if to
purchase the Offered Shares, shall, when taken in conjunction with the Offer,
be deemed to constitute a valid, legally binding and enforceable agreement
for the sale to, and purchase by, the Company of the number of Offered Shares
specified by the Company in such notice and on the terms of the Offer. The
closing of the sale of Offered Shares to the Company pursuant to this Section
2.1(b) shall be made at the offices of

<PAGE>

-7-

the Company on such date as may be agreed upon by the Company and the Selling
Stockholder, but no later than on or before the 90th day following the date
the Offer is received by the Company (or if such 90th day is not a business
day, then on the next succeeding business day). Such sale shall be effected
by the Selling Stockholder's delivery to the Company of a certificate(s)
evidencing the Offered Shares (or any portion thereof) to be purchased by the
Company, duly endorsed for transfer to the Company, against payment to the
Selling Stockholder of the purchase price by the Company. The exercise or
non-exercise by the Company of its rights pursuant to this Section 2.1(b)
shall be without prejudice to its rights under this Section 2.1(b) with
respect to any future sales of Offered Shares.

(c) RIGHT OF SECOND REFUSAL OF INVESTORS AND OTHER STOCKHOLDERS.
If the Company has not elected to purchase all of the Offered Shares pursuant
to Section 2.1(b) above, then each Investor and other Stockholder shall have
the absolute right, subject to the limitations set forth herein, to purchase
that number of the Offered Shares remaining to be sold (after the exercise by
the Company of its election to purchase any part of the Offered Shares) which
shall be equal to the number of such Offered Shares remaining to be sold
multiplied by a fraction, the numerator of which shall be the number of
shares of capital stock (calculated on an as-converted basis) then owned by
such Investor or other Stockholder, as the case may be (the "HOLDER SHARES"),
and the denominator of which shall be the aggregate number of shares of
capital stock of the Company (calculated on an as-converted basis) then owned
by all Investors and other Stockholders desiring to exercise their rights of
purchase of the Offered Shares under this subsection. For purposes of this
Article II, all of the Common Stock which an Investor or other Stockholder
has the right to acquire from the Company upon the conversion, exercise or
exchange of any of the preferred stock of the Company then owned by such
Investor or other Stockholder shall be deemed to be Holder Shares then owned
by such Investor or other Stockholder (as adjusted, in the case of Series A
Preferred Stock, for any adjustments in the applicable conversion or exchange
rate of any such Series A Preferred Stock). For purposes of this Section 2.1
and Section 2.2 hereof, each Investor which is a partnership shall be deemed
to be the owner of shares of capital stock of the Company originally acquired
by such Investor which have been transferred to and are held by direct or
indirect partners and retired partners of such Investor, the spouse and
members of the family of any such partner and trusts for the benefit of any
such person.

The amount of the Offered Shares that each Investor and other
Stockholder is entitled to purchase under this Section shall be referred to
as its "PRO RATA FRACTION". The Investors and other Stockholders shall have a
right of oversubscription such that if the Company or any Investor or
Stockholder fails to accept the Offer as to its Pro Rata Fraction, the
remaining Investors and

<PAGE>

-8-

Stockholders shall, among them, have the right to purchase up to the balance
of the Offered Shares not so purchased. Such right of oversubscription may be
exercised by an Investor and/or Stockholder by accepting the Offer as to more
than its Pro Rata Fraction in its reply notice. If, as a result thereof, such
oversubscriptions exceed the total number of the Offered Shares available in
respect of such oversubscription privilege, the oversubscribing Investors and
Stockholders shall be reduced with respect to their oversubscriptions on a
pro rata basis in accordance with their respective Pro Rata Fractions, unless
they may otherwise agree among themselves.

(d) CLOSING ON OFFERED SHARES. If an Investor or Stockholder
desires to purchase all or any part of the Offered Shares, then each Investor
or other Stockholder so desiring shall communicate in writing its election to
purchase to the Selling Stockholder, which communication shall state the
number of Offered Shares the Investor or other Stockholder desires to
purchase and shall be delivered in person or mailed to the Selling
Stockholder at the address set forth in accordance with Section 4.10. Such
communication of the Investors and other Stockholders shall be delivered
within 30 days of the date the Offer was received. Such communication shall,
when taken in conjunction with the Offer, be deemed to constitute a valid,
legally binding and enforceable agreement for the sale and purchase of such
Selling Stockholder's Offered Shares (subject to the Company's exercise of
its rights under Section 2.1(b) and the aforesaid limitations as to an
Investor's and Stockholder's right to purchase more than its Pro Rata
Fraction). Sales of the Offered Shares to be sold to the Investors and/or
other Stockholders pursuant to this Section shall be made at the offices of
the Company on or before the 90th day following the date the Offer was
received by the Investors and other Stockholders (or if such 90th day is not
a business day, then on the next succeeding business day). Such sales shall
be effected by the Selling Stockholder's delivery to each purchasing Investor
and other Stockholder of a certificate(s) evidencing the Offered Shares to be
purchased by them, duly endorsed for transfer to each purchasing Investor and
other Stockholder, against payment to the Selling Stockholder of the purchase
price therefor by all such purchasing Investors and other Stockholders.

(e) SALES TO PROPOSED TRANSFEREE. If the Company, Investors and
other Stockholders do not purchase all of the Offered Shares, the Offered
Shares may be sold by the Selling Stockholder to the Proposed Transferee at
any time within 150 days after the date the Offer was made pursuant to the
Proposed Offer Sale, subject to the co-sale provisions of Section 2.2 of this
Agreement. Any such sale shall be at the same or greater price and upon other
terms and conditions, if any, not more favorable to the transferee than those
specified in the Offer. Any Offered Shares not sold within the permitted time
period shall continue to be subject to the requirements of a

<PAGE>

-9-

prior offer and right of first refusal pursuant to this Section 2.1. If
Offered Shares are sold pursuant to this Section 2.1 to any purchaser who is
not a party to this Agreement or who is not otherwise a permitted transferee
under Section 2.3 hereof, the Offered Shares so sold shall no longer be
subject to any of the restrictions imposed by this Agreement.

(f) ELECTION WITHOUT PREJUDICE. An Investor's or other
Stockholder's election not to participate in an Offer shall be without
prejudice to such Investor's or other Stockholder's rights to participate in
any future Offers in accordance with Section 2.1 (and, in the case of an
Investor, Section 2.2 also).

(g) RIGHT OF REMEDY. Any violation of these provisions will
provide the Investors with an immediate right of remedy to demand from the
Company and the Selling Stockholder the total dollar amount the Investors
were otherwise eligible to buy or sell under the provisions hereof, plus
accrued interest of 10% from the date the violation occurred. Such remedy
will be made within 2 weeks of notice from the Investors.

SECTION 2.2 RIGHT OF PARTICIPATION IN SALES BY SELLING STOCKHOLDER.

(a) CO-SALE RIGHT. If a Selling Stockholder proposes to transfer
Shares pursuant to Section 2.1(e) of this Agreement, each of the Investors
and other Stockholders shall have the right to sell to the Proposed
Transferee, as a condition to such sale by the Selling Stockholder, at the
same price per share and on the same terms and conditions as involved in such
sale by the Selling Stockholder, such number of Holder Shares equal to the
Offered Shares multiplied by a fraction, the numerator of which is the
aggregate number of shares of capital stock of the Company owned by the
particular Investor or Stockholder (as the case may be) desiring to sell
Holder Shares to a Proposed Transferee, and the denominator of which is the
sum of all shares of capital stock of the Company owned by the Selling
Stockholder and all Investors and other Stockholders desiring to participate
in sales to a Proposed Transferee under this Section 2.2 (calculated as
provided in Section 2.1(c)).

(b) NOTICE OF INTENT TO PARTICIPATE. Each person wishing to so
participate in any sale under this Section 2.2 shall notify the Selling
Stockholder in writing of such intention within 40 days of such Investor's
receipt of notification of the failure of the Company, the Investors or other
Stockholders (as the case may be) to purchase the Offered Shares pursuant to
Section 2.1, and in any event within the time period specified in Section
2.1. Such notification shall be delivered in person or mailed to the Selling
Stockholder at the address set forth in accordance with Section 3.11.

<PAGE>

-10-

(c) SALE TO TRANSFEREE. The Selling Stockholder and each
participating Investor and Stockholder shall sell to the Proposed Transferee
all, or at the option of the Proposed Transferee, any part of the Shares
and/or Holder Shares proposed to be sold by them at not less than the price
and upon other terms and conditions, if any, not more favorable to the
Proposed Transferee than those in the Offer provided by the Selling
Stockholder under Section 2.1; PROVIDED, HOWEVER, that any purchase of less
than all of such Shares and/or Holder Shares by the Proposed Transferee shall
be made from the Selling Stockholder and each participating Investor and
other Stockholder pro rata based upon the relative amount of the Shares
and/or Holder Shares that the Selling Stockholder and each participating
Investor and other Stockholder is otherwise entitled to sell pursuant to
Section 2.2(a).

(d) LAPSE OF RESTRICTIONS. Except as provided in Section 3.3(b)
herein, any Shares sold by the Selling Stockholder to any third party
pursuant to this Section 2.2 shall no longer be subject to the restrictions
imposed or entitled to any of the benefits conferred by this Agreement, and
any Holder Shares sold by a participating Investor or other Stockholder
pursuant to this Section 2.2 shall no longer be entitled to the benefits
conferred by this Agreement.

SECTION 2.3 RESTRICTIONS ON TRANSFER.

(a) NO TRANSFERS. A Stockholder shall not sell, assign, transfer,
grant an option to or for, pledge, hypothecate, mortgage, encumber or dispose
of all or any of his Shares except as expressly provided in this Agreement.

(b) PERMITTED TRANSFERS. Notwithstanding the foregoing, an
Executive Stockholder or a Stockholder who is a Key Manager (as defined in
the Stock Purchase Agreement), but not an Executive Stockholder, may (i)
transfer up to 50% of his vested Shares by way of gift for estate planning
purposes to any member of his immediate family or to any trust for the
benefit of any such family member, provided that any transferee shall agree
in writing with the Company and the Investors, as a condition precedent to
such transfer, to be bound by all of the provisions of this Agreement to the
same extent as if such transferee were the Stockholder, or (ii) transfer any
of his vested Shares by will or the laws of descent and distribution to the
heirs of the Stockholder, or in the event of the disability of the
Stockholder, to the legal representatives of the Stockholder, in which event
each such transferee shall be bound by all of the provisions of this
Agreement to the same extent as if such transferee were the Stockholder.

<PAGE>

-11-

(c) DEFINITIONS. As used herein, the word "FAMILY" shall include
any spouse, lineal ancestor or descendant, brother or sister. As used herein,
the term "STOCKHOLDER" is deemed to include any transferees of the
Stockholder, except as expressly provided otherwise.

SECTION 2.4. DURATION OF AGREEMENT. The rights and obligations of the
Company, each Stockholder and each Investor under Article II of this
Agreement shall terminate, on the earlier to occur of the following: (a)
immediately prior to the consummation of the initial underwritten public
offering by the Company under the Securities Act of 1933 of any of its equity
securities pursuant to an offering registered on Form S-1, or its then
equivalent, in which the aggregate gross proceeds to the Company equal or
exceed $10,000,000 AND at a price at least twice the original purchase price
per share of the Series A Preferred Stock, or (b) immediately prior to and
expressly conditioned upon the consummation of the sale of all, or
substantially all, of the Company's assets or capital stock either through a
direct sale, merger, reorganization, consolidation or other form of business
combination or acquisition in which voting control of the equity securities
of the Company is transferred to a third party unaffiliated with the Company,
the Investors or any Stockholder.

ARTICLE III

MISCELLANEOUS

SECTION 3.1. LEGEND. Each certificate representing shares of capital
stock beneficially owned by the Stockholders and the Investors shall bear a
legend in substantially the following form, until such time as the shares of
capital stock represented thereby are no longer subject to the provisions
hereof:

"The sale, transfer or assignment of the securities
represented by this certificate are subject to the terms and
conditions of a certain Voting, Co-Sale and Right of First
Refusal Agreement among the Company and certain holders of its
outstanding capital stock. Copies of such Agreement may be
obtained at no cost by written request made by the holder of
record of this certificate to the Secretary of the Company."

SECTION 3.2. FAILURE TO DELIVER SHARES. If a Stockholder becomes
obligated to sell any Shares to an Investor and/or other Stockholder under
this Agreement and fails to deliver such Shares in accordance with the terms
of this Agreement, such Investor and/or other Stockholder may, at its option,
upon ten (10) days prior written notice to the Company and the Selling
Stockholder, in addition to all other remedies it may have, send to the

<PAGE>

-12-

Company for the benefit of the Selling Stockholder the purchase price for
such Shares as is herein specified. Thereupon, the Company upon written
notice to the Selling Stockholder shall, (a) cancel on its books the
certificate(s) representing the Shares to be sold, (b) issue, in lieu
thereof, in the name of such Investor and/or other Stockholder, as the case
may be, a new certificate(s) representing such Shares, and (c) pay the
proceeds tendered by the Investor and/or other Stockholder to the Selling
Stockholder, and thereupon all of the Selling Stockholder's rights in and to
such Shares shall terminate. The Company may exercise a similar remedy in
enforcing its rights under Section 2.1. If a Selling Stockholder transfers
any shares to a Proposed Transferee in violation of this Agreement, the
Company may, at the election of a majority of the disinterested members of
the Board of Directors, cancel on the books of the Company any shares of
capital stock then held by such Selling Stockholder and compel such Selling
Stockholder to purchase from the Investors and other Stockholders a number of
shares of capital stock equal to the amount so transferred in violation of
this Agreement.

SECTION 3.3. ADDITIONAL PARTIES AND DEFINITIONS. The Company, Investors
(in the case of a transfer of Series A Preferred Stock), and Stockholders (in
the case of a transfer of capital stock by them or issuance of capital stock
by the Company) shall cause the following to occur:

(a) Any person or entity who acquires shares of Series A Preferred
Stock shall execute a counterpart of this Agreement and shall become an
Investor hereunder (except as expressly provided in Section 2.1(e) and 2.2(d)
of this Agreement), unless at the time of such purchase, such person or
entity was a Stockholder or an officer or employee of the Company, in which
case such person or entity shall still remain or become (as the case may be)
a Stockholder hereunder. Any purported transfer pursuant to this Section
3.3(a) shall be subject to and conditioned upon the proposed transferee
executing a counterpart of this Agreement; and

(b) Any person or entity who acquires five percent (5%) or more of
the outstanding shares of capital stock of the Company (other than as
provided in Section 3.4(a) or pursuant to purchases in the open market) shall
execute a counterpart to this Agreement and shall become a Stockholder
hereunder (except as expressly provided in Section 2.1(e) or 2.2(d) of this
Agreement), unless at the time such person or entity was, or was required to
become pursuant to this Section, an Investor hereunder.

Execution by such persons or entities and the Company of a counterpart
of this Agreement and an amendment adding their names as signatories hereto
shall be a condition of any acquisition of such shares by such person or
entity. This Agreement shall thereafter be amended and restated to include
such additional persons or entities without the necessity of procuring an
amendment to this Agreement by the other parties hereto. The

<PAGE>

-13-

Secretary of the Company shall promptly notify all Stockholders and Investors
of any purported transfer or disposition of shares by a Stockholder under
this Agreement.

SECTION 3.4. SEVERABILITY GOVERNING. If any provisions of this
Agreement shall be determined to be illegal or unenforceable by any court of
law, the remaining provisions shall be severable and enforceable to the
maximum extent possible in accordance with their terms. This Agreement shall
be governed by, and construed in accordance with, the laws of the State of
Delaware, without giving effect to the principles of conflicts of law
thereof.

SECTION 3.5. INJUNCTIVE RELIEF. It is acknowledged that it will be
impossible to measure the damages that would be suffered by any party if
another party fails to comply with the provisions of this Agreement and that
in the event of any such failure, the non-defaulting party will not have an
adequate remedy at law. The non-defaulting party shall, therefore, be
entitled to obtain specific performance of any defaulting party's obligations
hereunder and to obtain immediate injunctive relief. The defaulting party
shall not argue, as a defense to any proceeding for such specific performance
or injunctive relief, that the non defaulting party has an adequate remedy at
law.

SECTION 3.6. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their permitted successors and
assigns, legal representatives and heirs.

SECTION 3.7. MODIFICATION OR AMENDMENT. Neither this Agreement nor any
provision hereof can be modified, amended, changed, discharged or terminated
except by an instrument in writing, signed by (A) the Stockholders holding at
least a majority of the shares of capital stock then subject to this
Agreement and held by such Stockholders, based upon actual voting power and
calculated on an "as if converted" basis, together with (B) the consent of
the Investors holding at least sixty percent (60%) of the outstanding shares
of Series A Preferred Stock or capital stock issued on conversion or exchange
thereof.

SECTION 3.8. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all
of which taken together shall constitute one and the same instrument.

SECTION 3.9. NOTICES. All notices to be given or otherwise made to any
part to this Agreement shall be deemed to be sufficient if contained in a
written instrument, delivered by hand in person, by express overnight courier
service, or by electronic facsimile transmission (with a confirming copy sent
by U.S. mail, first class, postage prepaid mail, or by registered or
certified mail, return receipt requested, postage prepaid,

<PAGE>

-14-

addressed to such party at the address set forth herein or at such other
address as may hereafter be designated in writing by the addressee to the
addressor listing all parties.

Notice to the Company or the Stockholders should be addressed as follows:

Advance Pharmacy Services, Inc.
545 East John Carpenter Freeway
Suite 1900
Irving, Texas 75062
Attention: President

Notice to the Canaan funds should be addressed as follows:

Canaan Partners
105 Rowayton Avenue
Rowayton, Connecticut 06853
Attn: Dr. Jeffrey R. Jay

Notice to J.H. Whitney & Co. or Whitney 1990 Equity Fund, L.P. should be
addressed to such Investor as follows:

J.H. Whitney & Co.
630 Fifth Avenue
New York, New York 10111
Attn: Mr. Daniel J. O'Brien

All notices shall be considered to be delivered three (3) days after
dispatch in the event of first class or registered mail, and on the next
succeeding business day in the event of facsimile transmission (with
confirmation of receipt) or overnight courier service.

SECTION 3.10. MERGER PROVISION. This Agreement and the Stock Purchase
Agreement of even date herewith, by and among the Company and the Investors,
along with all exhibits and schedules to the various agreements, and the
terms of the Series A Preferred Stock, constitute the entire agreement among
the parties hereto pertaining to the subject matter hereof and supersede all
prior and contemporaneous agreements and understandings, whether oral or
written, of any of the parties hereto concerning the subject matter hereof.
Any agreement between the Company and any Stockholder in effect immediately
prior to the execution hereof and concerning any of the subject matter hereof
or which conflicts with the terms of this Agreement is hereby terminated. Any
capitalized terms used herein but not otherwise defined herein shall have the
same meaning assigned to them in the Preferred Stock Purchase Agreement.

SECTION 3.11. FURTHER ASSURANCES. From and after the date of this
Agreement, upon the request of any Investor or the Company, the Company, the
Investors and the Stockholders shall

<PAGE>

-15-

execute and deliver such instruments, documents and other writings as may be
reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement.

[SIGNATURE PAGES TO FOLLOW]

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Voting, Co-Sale
and Right of First Refusal Agreement to be executed as of the date first
above written.

ADVANCE PHARMACY SERVICES, INC.

By: /s/ David D. Halbert
-----------------------------
Title: CEO
----------------------------

INVESTORS:

CANAAN CAPITAL LIMITED
PARTNERSHIP STOCKHOLDERS:

By:Canaan Capital Management
Limited Partnership, General /s/ David D. Halbert
Partner ----------------------------
David D. Halbert

By:Canaan Capital Partners L.P., /s/ John Halbert
General Partner ----------------------------
John Halbert

By: /s/ Dan Phillips
------------------------- ----------------------------
General Partner Dan Phillips

CANAAN CAPITAL OFFSHORE ADVANCE HEALTH CARE, INC.
LIMITED PARTNERSHIP C.V.
By: /s/ David D. Halbert
By:Canaan Capital Management ------------------------
Limited Partnership, Title: President
General Partner ----------------

By: Canaan Capital Partners L.P., INVESTORS:
General Partner

By: --------------------------- -----------------------------
General Partner Dr. Jeffrey R. Jay

J.H. WHITNEY & CO.

By: --------------------------- -----------------------------
Title: Stephen L. Green
---------------------------

WHITNEY 1990 EQUITY FUND, L.P. QUAI LTD.

By: By:
------------------------------ ----------------------------
Title: Title:
--------------------------- ----------------------

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Voting, Co-Sale and
Right of First Refusal Agreement to be executed as of the date first above
written.

ADVANCE PHARMACY SERVICES, INC.

By:
----------------------------
Title:
-------------------------

INVESTORS:

CANAAN CAPITAL LIMITED
PARTNERSHIP STOCKHOLDERS:

By:Canaan Capital Management
Limited Partnership, General -------------------------
Partner David D. Halbert

By: Canaan Capital Partners L.P., ------------------------
General Partner John Halbert

By: /s/ Stephen L. Green -------------------------
------------------------------- Dan Phillips
General Partner

CANAAN CAPITAL OFFSHORE ADVANCE HEALTH CARE, INC.
LIMITED PARTNERSHIP C.V.
By:
By: Canaan Capital Management ----------------------
Limited Partnership, Title:
General Partner -------------------

By:Canaan Capital Partners L.P., INVESTORS:
General Partner

By: /s/ Stephen L. Green /s/ Jeffrey R. Jay, M.D.
------------------------------ --------------------------
General Partner Dr. Jeffrey R. Jay

J.H. WHITNEY & CO.

By: /s/ Stephen L. Green
----------------------------- --------------------------
Title: Stephen L. Green
-------------------------

WHITNEY 1990 EQUITY FUND, L.P. QUAI LTD.

By: By:
---------------------------- ----------------------
Title: Title:
------------------------- -------------------

<PAGE>

NI WITNESS WHEREOF, the parties hereto have caused this Voting, Co-Sale and
Right of First Refusal Agreement to be executed as of the date first above
written.

ADVANCE PHARMACY SERVICES, INC.

By:
----------------------------
Title:
-------------------------

INVESTORS:

CANAAN CAPITAL LIMITED
PARTNERSHIP STOCKHOLDERS:

By:Canaan Capital Management
Limited Partnership, General -------------------------------
Partner David D. Halbert

By:Canaan Capital Partners L.P., -------------------------------
General Partner John Halbert

By: --------------------------------- -------------------------------
General Partner Dan Phillips

CANAAN CAPITAL OFFSHORE ADVANCE HEALTH CARE, INC.
LIMITED PARTNERSHIP C.V.
By:
By: Canaan Capital Management ----------------------------
Limited Partnership, Title:
General Partner -------------------------

By: Canaan Capital Partners L.P., INVESTORS:
General Partner

By: --------------------------------- ---------------------------------
General Partner Dr. Jeffrey R. Jay

J.H. WHITNEY & CO.

By: /s/ Daniel J. O'Brien
---------------------------------- ---------------------------------
Title: Chief Financial Officer Stephen L. Green
------------------------------

WHITNEY 1990 EQUITY FUND, L.P. QUAI LTD.

By: /s/ Daniel J. O'Brien By:
--------------------------------- ------------------------------
Title: Chief Financial Officer Title:
------------------------------ -----------------------

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Voting, Co-Sale and
Right of First Refusal Agreement to be executed as of the date first above
written.

ADVANCE PHARMACY SERVICES, INC.

By:
-----------------------------
Title:
--------------------------

INVESTORS:

CANAAN CAPITAL LIMITED
PARTNERSHIP STOCKHOLDERS:

By:Canaan Capital Management
Limited Partnership, General ------------------------------
Partner David D. Halbert

By:Canaan Capital Partners L.P., ------------------------------
General Partner John Halbert

By:
------------------------------- ------------------------------
General Partner Dan Phillips

CANAAN CAPITAL OFFSHORE ADVANCE HEALTH CARE, INC.
LIMITED PARTNERSHIP C.V.
By:
---------------------------
By: Canaan Capital Management
Limited Partnership, Title:
General Partner ------------------------

By: Canaan Capital Partners L.P., INVESTORS:
General Partner

By:
------------------------------- -------------------------------
General Partner Dr. Jeffrey R. Jay

J.H. WHITNEY & CO.

By:
------------------------------- --------------------------------
Title: Stephen L. Green
-----------------------------

WHITNEY 1990 EQUITY FUND, L.P. QUAI LTD.

By: By: /s/Dominique Liardet
-------------------------------- ---------------------------
Title: Title: Attorney-in-Fact
----------------------------- ------------------------

<PAGE>

EXHIBIT 4.6

AMENDMENT NO. 1
TO
VOTING, CO-SALE AND RIGHT OF FIRST REFUSAL AGREEMENT

This Amendment No. 1 to Voting, Co-Sale and Right of First Refusal
Agreement dated as of December 8, 1993 among Advance Pharmacy Services, Inc., a
Delaware corporation (the "Company"); Advance Health Care, Inc., a Delaware
corporation; Canaan Capital Limited Partnership, Canaan Capital Offshore Limited
partnership, C.V., Quai Ltd., Stephen L. Green, Jeffrey R. Jay, J.H. Whitney &
Co. and Whitney 1990 Equity Fund, L.P.; David D. Halbert, Jon Halbert and Dan
Phillips; and Whitney Subordinated Debt Fund, L.P. ("Debt Fund").

WHEREAS, the parties hereto, other than Debt Fund, are parties to that
certain Voting, Co-Sale and Right of First Refusal Agreement dated as of August
4, 1993 (the "Voting Agreement");

WHEREAS, it is a condition of Debt Fund's obligation to purchase the
Note and the Warrant pursuant to the Note Purchase Agreement that the Company
and the other parties hereto enter into this Agreement;

NOW, THEREFORE, the parties hereto agree as follows:

1. AMENDMENTS TO VOTING AGREEMENT.

(a) The term "Investors" and "Whitney Funds", as defined in the
Voting Agreement, are hereby amended to include Debt Fund, and for purposes of
the Voting Agreement, Debt Fund shall be deemed to be an "Investor" and a
"Whitney Fund".

(b) For purposes of the Voting Agreement, the following terms
shall have the following meanings:

<PAGE>

"WARRANTS" shall mean that certain Common Stock Purchase Warrant
dated December 8, 1993 issued by the Company to Whitney Subordinated
Debt Fund, L.P., and any other Warrants issued in transfer or exchange
of such Warrant or such other Warrants.

"WARRANT SHARES" shall mean the shares of Common Stock issuable
upon exercise of the Warrants (and such shares when so issued).

(c) The second sentence of Section 2.1(c) of the Voting
Agreement is hereby amended and restated in its entirety to read as follows:

"For purposes of this Article II, all of the Common Stock which
an Investor or other Stockholder has the right to acquire from the
Company upon the conversion, exercise or exchange of any of the
preferred stock of the Company or the Warrants then owned by such
Investor or other Stockholder shall be deemed to be Holder Shares then
owned by such Investor or other Stockholder (as adjusted, in the case
of Series A Preferred Stock and the Warrants, for any adjustments in
the applicable conversion or exchange rate of any such Series A
Preferred Stock or the exercise price of any such Warrants)."

(d) Section 3.7 of the Voting Agreement is hereby amended and
restated in its entirety to read as follows:

"SECTION 3.7. MODIFICATION OR AMENDMENT. Neither this
Agreement nor any provision hereof can be modified, amended,
changed, discharged or terminated except by an instrument in
writing, signed by (A) the Stockholders holding at least a
majority of the shares of capital stock then subject to this
Agreement and held by such Stockholders, based upon actual voting
power and calculated on an "as if converted" basis, together with
(B) the consent of the Investors holding at least sixty percent
(60%) of the aggregate of (i) the outstanding shares of Series A
Preferred Stock or capital stock issued on conversion or exchange
thereof and (ii) the Warrant Shares."

-2-

<PAGE>

(e) Notice to Debt Fund should be addressed to such Investor as
follows:

c/o J.H. Whitney & Co.
630 Fifth Avenue
New York, NY 10111
Attn: Mr. Daniel J. O'Brien

2. RATIFICATION.

Except as specifically amended hereby, the terms and provisions
of the Voting Agreement are hereby ratified and confirmed.

IN WITNESS WHEREOF, this Amendment No. 1 to Voting, Co-Sale and Right
of First Refusal Agreement has been executed as of the date and year first above
written by the duly authorized officers and representatives of each of the
undersigned.

ADVANCE PHARMACY SERVICES, INC.

By:
----------------------------
Title:
-------------------------

CANAAN CAPITAL LIMITED PARTNERSHIP

By: Canaan Capital Management ------------------------
Limited Partnership, David D. Halbert
General Partner

By: Canaan Capital Partners L.P. ------------------------
General Partner John Halbert

By: /s/ Stephen L. Green
---------------------------- ------------------------
General Partner Dan Phillips

CANAAN CAPITAL OFFSHORE
LIMITED PARTNERSHIP C.V. ADVANCE HEALTH CARE, INC.

By: Canaan Capital Management
Limited Partnership, By:
General Partner ---------------------
Title:
------------------

By: Canaan Capital Partners, L.P.,
General Partner

By: /s/ Stephen L. Green
---------------------------- ------------------------
General Partner Dr. Jeffrey R. Jay

<PAGE>

(e) Notice to Debt Fund should be addressed to such Investor as
follows:

c/o J.H. Whitney & Co.
630 Fifth Avenue
New York, NY 10111
Attn: Mr. Daniel J. O'Brien

2. RATIFICATION.

Except as specifically amended hereby, the terms and provisions
of the Voting Agreement are hereby ratified and confirmed.

ADVANCE PHARMACY SERVICES, INC.

By:/s/ David Halbert
----------------------------
Title: Chairman, CEO
-------------------------

CANAAN CAPITAL LIMITED PARTNERSHIP

By: Canaan Capital Management /s/ David D. Halbert
Limited Partnership, --------------------
General Partner David D. Halbert

By: Canaan Capital Partners L.P. /s/ John Halbert
General Partner --------------------
John Halbert

By: /s/ Dan Phillips
-------------------------- --------------------
General Partner Dan Phillips

CANAAN CAPITAL OFFSHORE
LIMITED PARTNERSHIP C.V. ADVANCE HEALTH CARE, INC.

By: Canaan Capital Management
Limited Partnership, By:/s/ David Halbert
--------------------
General Partner Title: President
--------------------

By: Canaan Capital Partners, L.P.,
General Partner

By: /s/ Dr. Jeffrey R. Jay
-------------------------- ----------------------
General Partner Dr. Jeffrey R. Jay

<PAGE>

J.H. WHITNEY & CO.
/s/ Stephen L. Green
--------------------
Stephen L. Green
By:---------------------------
Title:------------------------

WHITNEY 1990 EQUITY FUND, L.P. QUAI LTD.

By:--------------------------- By:-----------------
Title:------------------------ Title:--------------

WHITNEY SUBORDINATED DEBT
FUND, L.P.

By:---------------------------
Title:------------------------

-4-

<PAGE>

J.H. WHITNEY & CO.
--------------------
Stephen L. Green
By:/s/ Daniel J. O'Brien
---------------------------
Title: Chief Financial Officer
------------------------

WHITNEY 1990 EQUITY FUND, L.P. QUAI LTD.

By:/s/ Daniel J. O'Brien By: /s/
--------------------------- -----------------
Title: Chief Financial Officer Title:
------------------------ --------------

WHITNEY SUBORDINATED DEBT
FUND, L.P.

By:/s/ Daniel J. O'Brien
--------------------------
Title: Chief Financial Officer
-----------------------

-4-

<PAGE>

EXHIBIT 4.7

ADVANCE PHARMACY SERVICES, INC.
NOTE AND WARRANT PURCHASE AGREEMENT

December 8, 1993

Whitney Subordinated Debt Fund, L.P.
630 Fifth Avenue
New York, NY 10111

Dear Sirs:

The undersigned ADVANCE PHARMACY SERVICES, INC., a Delaware corporation
(the "Company"), hereby agrees with WHITNEY SUBORDINATED DEBT FUND, L.P. (the
"Purchaser"), as follows:

SECTION 1.SALE AND PURCHASE OF NOTE AND WARRANT; CLOSING.

1.1. SALE OF NOTE AND WARRANT.

Subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to the Purchaser and the Purchaser agrees to purchase from the
Company, on the Closing Date (as defined in Section 1.2 hereof) (a) the
Company's $7,000,000 in principal amount 10.101% Promissory Note due December 8,
2000 (the "Note") and (b) a warrant (the "Warrant") to purchase up to 1,346
shares of Company's Common Stock, par value $.01 per share ("Common Stock), at
an aggregate purchase price of $7,000,000 for the Note and the Warrant. The Note
and the Warrant shall be in the form of EXHIBIT A and EXHIBIT B attached hereto,
respectively. The Warrant shall entitle the holder to purchase shares of Common
Stock at an initial exercise price of $1,000 per share and shall expire on
December 8, 2003. The shares of Common Stock of the Company issued or issuable
upon exercise of the Warrant are referred to herein as the "Warrant Shares". The
Note, the Warrant and the Warrant Shares are sometimes referred to herein
collectively as the "Securities".

1.2. CLOSING.

The "Closing Date" shall be December 8, 1993, or such other date as may be
mutually agreed upon by the Company and the Purchaser. The closing (the
"Closing") will take place at 10 A.M. on the Closing Date, at the offices of
Lord

<PAGE>

Day & Lord, Barrett Smith, 1675 Broadway, New York, New York 10019. At the
Closing the Company shall issue and deliver the Note and the Warrant to the
Purchaser against delivery by wire transfer of immediately available funds to an
account designated by the Company in the aggregate amount of $7,000,000.

SECTION 2.THE COMPANY'S REPRESENTATIONS AND WARRANTIES.

The Company represents and warrants to the Purchaser as follows:

2.1. ORGANIZATION AND STANDING OF THE COMPANY.

The Company is an organized and existing corporation in good standing (both
corporate and tax) under the laws of the State of Delaware and has all requisite
corporate power and authority for the ownership and operation of its
properties and for the carrying on of its business as now conducted and as now
proposed to be conducted and to execute and deliver this Agreement, to issue,
sell and deliver the Note, the Warrant and the Warrant Shares and to perform its
other obligations pursuant hereto and thereto. The Company is licensed or
qualified and in good standing as a foreign corporation authorized to do
business in all jurisdictions wherein the character of the property owned or
leased or the nature of the activities conducted by it makes such licensing or
qualification necessary, except where the failure to be so licensed or qualified
would not have a Material Adverse Effect.

The Company has two wholly-owned Subsidiaries, Advance Home Prescriptions,
Inc., a Delaware corporation, and Advance Prescriptions Management, Inc., a
Delaware corporation. Each of such Subsidiaries is a duly organized and validly
existing corporation in good standing in the jurisdiction of its organization
and has all requisite power and authority for the ownership and operation of its
properties and for the carrying on of its business as now conducted or as now
proposed to be conducted.

2.2. CORPORATE ACTION.

This Agreement, the Note, the Warrant, the Stock Purchase Agreement
Amendment and the Voting Agreement Amendment have been duly authorized, executed
and delivered on behalf of the Company and constitute the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms. The

-2-
<PAGE>

issuance, sale and delivery of the Note and the Warrant, and the issuance and
delivery of the Warrant Shares upon exercise of the Warrant, have been duly
authorized by all required corporate action. The Warrant and the Note have been
validly issued and are free and clear of all liens, charges, restrictions,
claims and encumbrances imposed (collectively, "ENCUMBRANCES") by or through the
Company except as set forth in this Agreement. The Warrant Shares have, as of
the Closing, been duly reserved for issuance upon exercise of the Warrant and,
when so issued, will be duly authorized, validly issued, fully paid and
nonassessable, with no personal liability attaching to the ownership thereof,
and will be free and clear of all Encumbrances imposed by or through the Company
except as set forth in this Agreement.

Sufficient authorized but unissued shares of Common Stock have been
reserved by appropriate corporate action in connection with the proposed
exercise of the Warrant. The issuance of the Note, the Warrant and Warrant
Shares will not be subject to preemptive rights, rights of first refusal or
other preferential, contractual or statutory rights of the Company or any
stockholder or other Person and will not conflict with any provision of any
agreement to which the company is a party or by which it is bound.

2.3. GOVERNMENTAL APPROVALS.

Except as set forth on SCHEDULE 2.3, no authorization, consent, approval,
license, exemption of or filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, or the National Association of Securities Dealers, Inc. or the
Commission, is or will be necessary for, or in connection with, the execution
and delivery by the Company of this Agreement, the Stock Purchase Agreement
Amendment or the Voting Agreement Amendment, for the offer, issue, sale,
execution or delivery of the Note or the Warrant or for the performance by the
Company of its obligations under this Agreement, the Stock Purchase Agreement
Amendment, the Voting Agreement Amendment, the Note or the Warrant.

2.4. LITIGATION.

Except as disclosed on SCHEDULE 2.4, there is no litigation or governmental
proceeding or investigation pending or, to the Company's knowledge, threatened
against the Company or any Subsidiary affecting any of its properties or assets,
or, to the Company's knowledge, after reasonable inquiry, against any executive
officer, Key Employee or the

-3-

<PAGE>

holder of more than five percent (5%) of the capital stock of the Company and
which relates to the Company or any Subsidiary or the business of any of them.
The Company is not aware of any presently existing condition, facts or events on
the basis of which any litigation, proceeding or investigation might properly be
instituted which could have a Material Adverse Effect.

Neither the Company nor any Subsidiary nor, to the Company's knowledge
after reasonable inquiry, any executive officer, Key Employee or holder of more
than five percent (5%) of the capital stock of the Company is in default with
respect to any order, writ, injunction, decree, ruling or decision of any court,
commission, board or other government agency, where such default could have a
Material Adverse Effect. There are no actions or proceedings pending or, to the
Company's knowledge, threatened which could result, either in any case or in the
aggregate, in any Material Adverse Effect, or which would call into question the
validity of this Agreement, the Stock Purchase Agreement Amendment or the Voting
Agreement Amendment or the terms of the Note or the Warrant.

The foregoing paragraphs include, without limiting their generality,
actions pending or threatened involving the prior employment or engagement of
any of the Company's officers, Key Employees or consultants or their use in
connection with the business of the Company or any Subsidiary of any information
or techniques allegedly proprietary to any of their former employers or to any
other Person. Without limitation of the foregoing representations, a brief
summary of the Company's litigation matters and the disposition of such matters
is set forth on SCHEDULE 2.4, in the manner required by Item 103 of Regulation
S-K promulgated under the Securities Act, regarding litigation matters.

2.5. CERTAIN AGREEMENTS OF OFFICERS AND EMPLOYEES.

No Key Employee, nor, to the Company's knowledge, after reasonable inquiry,
any employee or consultant of the Company or any Subsidiary is in violation of
any term of any employment contract, patent disclosure, assignment of inventions
or other proprietary information agreement, noncompetition or nonsolicitation
agreement, confidentiality agreement, or any other similar agreement or
restrictive covenant relating to the right of any such officer, employee or
consultant to be employed or engaged by the Company or any Subsidiary because of
the nature of the business conducted or to be conducted by the Company or any
Subsidiary or relating

-4-

<PAGE>

to the use of trade secrets or proprietary information of others.

No officer or Key Employee of the Company or any Subsidiary whose
termination, either individually or in the aggregate, could have a Material
Adverse Effect, has terminated, or to the knowledge of the Company, has any
present intention of terminating, his or her employment or engagement with the
Company or such Subsidiary.

2.6. COMPLIANCE WITH OTHER INSTRUMENTS.

The Company is in compliance in all respects with the provisions of this
Agreement and of its Charter and By-laws, each as amended and/or restated to
date. Each of the Company and each Subsidiary is in compliance in all respects
with the terms and provisions of all agreements by which it is bound or to which
it or any of its properties or assets are subject, where any breach or
noncompliance could have a Material Adverse Effect. Neither the Company nor any
Subsidiary has received any notice of any violation of any judgments, decrees,
governmental orders, laws, statutes, rules or regulations by which it is bound
or to which it or any of its properties or assets are subject, where any
violation or noncompliance could have a Material Adverse Effect. Neither the
execution and delivery of this Agreement, the Stock Purchase Agreement
Amendment, the Voting Agreement Amendment, the Note or the Warrant has
constituted or resulted in or will constitute or result in a default or
violation of any material term or provision of any of the foregoing.

A schedule of Indebtedness of the Company and the Subsidiaries as of
October 31, 1993 (including lease obligations required to be capitalized in
accordance with applicable Statements of Financial Accounting Standards) is
attached as SCHEDULE 2.6.

2.7. TITLE TO ASSETS, PATENTS.

Each of the Company and each Subsidiary has good and indefeasible title to
such of its fixed assets as are real property, and good and indefeasible title
to all of its other assets now carried on its books, including those reflected
in the most recent balance sheet of the Company which is set forth on SCHEDULE
2.8, or acquired since the date of such balance sheet (except personal property
disposed of since said date in the ordinary course of business), free of any
mortgages, pledges, charges, liens, security interests or other Encumbrances,
except those indicated in

-5-

<PAGE>

SCHEDULE 2.7. To the Company's knowledge, each of the Company and each
Subsidiary enjoys peaceful and undisturbed possession under all capital or
operating leases under which it is operating, and all said leases are in full
force and effect in all material respects.

Each of the Company and each Subsidiary owns or has a valid right to use
the Intellectual Property Rights being used to conduct its business as now
operated and as now proposed to be operated. A complete list of the licenses and
registrations of such Intellectual Property Rights is attached hereto as
SCHEDULE 2.7. The conduct of the business of the Company and each Subsidiary as
now operated and as now proposed to be operated does not and will not conflict
with or infringe upon the intellectual property rights of others where such
conflict or infringement could have a Material Adverse Effect. Except as set
forth on SCHEDULE 2.7, the Company has not been notified of any claim, whether
pending or threatened, against the Company and/or any Subsidiary and/or any of
their respective employees and consultants to the effect that any such
Intellectual Property Right owned or licensed by the Company and/or any
Subsidiary, or which the Company and/or any Subsidiary otherwise uses, is
invalid or unenforceable by the Company and/or any Subsidiary or infringes upon
the rights of others. Except as specified on SCHEDULE 2.7, neither the Company
nor any Subsidiary has undertaken any obligation to compensate any Person for
the use of any such Intellectual Property Rights, whether by the payment of
royalties, license fees or otherwise (or the intellectual property rights of any
other Person), and neither the Company nor any Subsidiary has not granted any
Person any license or other right to use any of the Intellectual Property Rights
of the Company or any Subsidiary, whether requiring the payment of royalties or
not.

2.8. FINANCIAL INFORMATION.

The financial statements of the Company, including (i) the audited
financial statements for the fiscal years ended March 31, 1992 and March 31,
1993, of Advance Health Care, Inc., (ii) the audited financial statements of the
Company's Subsidiaries as of March 31, 1993, and (iii) the Company's unaudited
consolidated financial statements for the period ended October 31, 1993,
attached hereto as SCHEDULE 2.8, present fairly the financial position of the
Company as at the date or dates thereof and have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods indicated (the "FINANCIAL STATEMENTS"), except, in the case

-6-

<PAGE>

of unaudited Financial Statements, for the absence of footnotes and normal
year-end adjustments, which are not expected to be material in nature. Except as
set forth in SCHEDULE 2.8, the Company and the Subsidiaries do not have, and
have no reasonable grounds to know of, any liability in excess of $94,000,
contingent or otherwise, not, adequately reflected in or reserved against in the
Financial Statements and the notes thereto which could have a Material Adverse
Effect. Except as set forth in SCHEDULE 2.8, since March 31, 1993, (i) there has
been no adverse change in the business, assets, operations, affairs, prospects
or financial condition of the Company or any Subsidiary which could have a
Material Adverse Effect; (ii) neither the business, financial condition,
operations, prospects or affairs of the Company or any Subsidiary nor any of
their respective properties or assets have been adversely affected as the result
of any legislative or regulatory change, any revocation or change in any
franchise, permit, license or right to do business, or any other event or
occurrence, whether or not insured against, which could have a Material Adverse
Effect; and (iii) neither the Company nor any Subsidiary has entered into any
transaction other than in the ordinary course of business, made any distribution
on its capital stock, or redeemed or repurchased any of its capital stock,
except as set forth on SCHEDULE 2.8.

2.9. TAXES.

Except as set forth in SCHEDULE 2.9, each of the Company and each
Subsidiary has timely filed and accurately prepared all federal, state and other
tax returns required by law to be filed by it, and except as set forth in
SCHEDULE 2.9, has paid or made provision for the payment of all taxes shown to
be due and all additional assessments, and adequate provisions have been made
and are reflected in the Company's Financial Statements for all current taxes
and other charges to which the Company and the Subsidiaries are subject and
which are not currently due and payable. Except as set forth in SCHEDULE 2.9,
none of the federal income tax returns of the Company or any Subsidiary has been
audited by the Internal Revenue Service. Management is not aware of additional
assessments, adjustments or contingent tax liability (whether federal or state)
pending or threatened for any period, nor of any basis for any such assessment,
adjustment or contingency. Neither the Company nor any Subsidiary nor, to the
Company's knowledge, any of their stockholders, has ever filed a consent
pertaining to the Company pursuant to Section 341(f) of the Internal Revenue
Code (the "Code") relating to collapsible corporations.

-7-

<PAGE>

2.10. ERISA.

Except as set forth in SCHEDULE 2.10, neither the Company nor any
Subsidiary makes any contributions to any employee pension benefit plans for its
employees which are subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA").

2.11. TRANSACTIONS WITH AFFILIATES.

Except as set forth in SCHEDULE 2.11, there are no loans, leases, royalty
agreements or other continuing transactions between (a) the Company, any
Subsidiary or any of their customers or suppliers, and (b) any officer,
employee, consultant or director of the Company or any Subsidiary or any Person
owning five percent (5%) or more of the capital stock of the Company or any
member of the immediate family of such officer, employee, consultant, director
or stockholder or any corporation or other entity controlled by such officer,
employee, consultant, director or stockholder, or a member of the immediate
family of such officer, employee, consultant, director or stockholder.

2.12. ASSUMPTIONS OR GUARANTIES OF INDEBTEDNESS OF OTHER PERSONS.

Except as set forth in SCHEDULE 2.12, neither the Company nor any
Subsidiary has assumed, guaranteed, endorsed or otherwise become directly or
contingently liable on (including, without limitation, liability by way of
agreement, contingent or otherwise, to purchase, to provide funds for payment,
to supply funds to or otherwise invest in the debtor or otherwise to assure the
creditor against loss), any Indebtedness of any other Person.

2.13. INVESTMENTS IN OTHER PERSONS.

Except as set forth in SCHEDULE 2.13, neither the Company nor any
Subsidiary has made any loans or advances to any Person which is outstanding on
the date of this Agreement in excess of $94,000 in the aggregate, nor is the
Company or any Subsidiary committed or obligated to make any such loan or
advance, nor does the Company or any Subsidiary own any capital stock, assets
comprising the business of, obligations of, or any interest or investment in,
any Person. The Company's only Subsidiaries are those referred to in Section
2.1.

-8-

<PAGE>

2.14. SECURITIES LAWS.

Subject to the validity of the Purchaser's representations in Section 3,
the Company has complied with all applicable federal and state securities laws
in connection with the offer and sale of the Note and the Warrant. Subject to
the validity of the Purchaser's representations in Section 3, neither the
Company nor anyone acting on its behalf has or will sell, offer to sell or
solicit offers to buy the Note, the Warrant or similar securities to, or solicit
offers with respect thereto from, or enter into any preliminary conversations or
negotiations relating thereto with, any Person, so as to require the
registration of the Note or the Warrant pursuant to the Securities Act or any
state securities laws.

2.15. DISCLOSURE.

Neither this Agreement, the Financial Statements, nor any other written
agreement, document, certificate, statement, furnished to the Purchaser or its
counsel by or on behalf of the Company in connection with the transactions
contemplated hereby contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein, in light of the circumstances in which made, not misleading. There
is no fact within the knowledge of the Company which has not been disclosed
herein or in writing to the Purchaser and which materially adversely affects, or
in the future in their opinion may, insofar as they can now foresee, affect the
business, operations, properties, Intellectual Property Rights, assets or
condition, financial or other, of the Company or any Subsidiary and which could
have a Material Adverse Effect.

2.16. BROKERS OR FINDERS.

No Person has or will have, as a result of the transactions contemplated by
this Agreement, any right, interest or valid claim against or upon the Company
for any commission, fee or other compensation as a consultant, finder or broker
because of any act or omission by the Company or its respective agents.

2.17. CAPITALIZATION; STATUS OF CAPITAL STOCK.

As of the Closing, the Company will have a total authorized capitalization
consisting of: 30,000 shares of Common Stock, and 10,000 shares of Series A
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock").

-9-

<PAGE>

As of the date hereof, 12,500 shares of Common Stock are issued and outstanding,
and 10,000 shares of Series A Preferred Stock are issued and outstanding. The
10,000 shares of Series A Preferred Stock are convertible into 10,000 shares of
Common Stock, at a conversion rate of one (1) share of Common Stock for each
share of Series A Preferred Stock so converted. A complete list of the record
shareholders of the Company is set forth in SCHEDULE 2.17 hereto.

All the currently outstanding shares of capital stock of the Company have
been duly authorized, and are validly issued, fully paid and non-assessable. The
Warrant Shares, when issued and delivered upon exercise of the Warrant, will be
duly authorized, validly issued, fully-paid and non-assessable. Except for the
Pool and the Warrant, no options, warrants, subscriptions or purchase rights or
any nature to acquire from the Company, or commitments of the Company to issue,
shares of capital stock or other securities are authorized, issued or
outstanding, nor is the Company obligated in any other manner to issue shares or
rights to acquire any of its capital stock or other securities except as
contemplated by this Agreement. The Company has reserved a total of 2,278 shares
of its authorized but unissued Common Stock for the grant of options to
employees, officers, consultants and directors (the "Pool").

Except as set forth in SCHEDULE 2.17, none of the Company's outstanding
securities are subject to any contractual or statutory rights of redemption or
repurchase, rights of first refusal, preemptive rights or other similar
preferential rights for the benefit of the Company, any stockholder, or any
other Person. Except as set forth in SCHEDULE 2.17, there are no restrictions on
the transfer of shares of capital stock of the Company other than those imposed
by relevant federal and state securities laws and as otherwise contemplated by
this Agreement. Except as set forth in SCHEDULE 2.17, there are no agreements or
other arrangements concerning the voting, transfer or restrictions on transfer
relating to the capital stock of the Company to which the Company (or any of its
officers or directors) is a party. To the Company's knowledge, the offer and
sale of all capital stock and other securities of the Company issued before the
Closing complied with or were exempt from all applicable federal and state
securities laws, and the Company has received no notice of demand or request for
rescission rights.

-10-

<PAGE>

2.18. REGISTRATION RIGHTS.

Except as set forth on SCHEDULE 2.18, no Person has been granted any demand
or other rights to cause the Company to file any registration statement under
the Securities Act relating to any securities of the Company or any right to
participate in any such registration statement.

2.19. INSURANCE.

The Company and the Subsidiaries carry insurance, in the amounts set forth
in SCHEDULE 2.19, covering their properties and businesses as identified on
SCHEDULE 2.19.

2.20. MATERIAL AGREEMENTS.

Except as set forth in SCHEDULE 2.20, neither the Company nor any
Subsidiary is a party to any written or oral contract, instrument, agreement,
commitment, obligation, plan or arrangement, a copy of which would otherwise be
required to be filed with the Commission as an exhibit to a registration
statement on Form S-1. The Company and each Subsidiary and, to the best of
Management's knowledge, each other party thereto are not in default of any of
their material obligations required to be performed by them to date under the
foregoing agreements. Except as set forth in SCHEDULE 2.20, neither the Company
nor any Subsidiary has received any notice of default and is not in default
under any agreement now in effect to which the Company or any Subsidiary is a
party or by which it or its property may be bound, the result of which, in any
case or in the aggregate, could cause a Material Adverse Effect.

2.21. ABSENCE OF CERTAIN DEVELOPMENTS.

Except as provided in SCHEDULE 2.21 attached hereto, since March 31, 1993,
neither the Company nor any Subsidiary has:

(a) issued any stock, bonds or other corporate securities or any
rights, options or warrants with respect thereto;

(b) borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current liabilities incurred in
the ordinary curse of business which are comparable in nature and amount to
the current liabilities incurred in the ordinary course of business during
the comparable portion of its prior fiscal year, as adjusted to reflect

-11-

<PAGE>

the current nature and volume of the business of the Company and the
Subsidiaries;

(c) discharged or satisfied any lien or encumbrance or paid any
obligation or liability (absolute or contingent), other than current
liabilities paid in the ordinary course of business;

(d) declared or made nay payment or distribution of cash or other
property to stockholders with respect to its stock, or purchased or
redeemed, or made any agreements so to purchase or redeem, any shares of
its capital stock;

(e) mortgaged or pledged any of its assets, tangible or intangible,
or subjected them to any lien, charge or other encumbrance, except liens
for current property taxes not yet due and payable;

(f) sold, assigned or transferred any other tangible assets, or
cancelled any debts or claims, except in the ordinary course of business;

(g) sold, assigned or transferred any patents, patent rights,
trademarks, tradenames, copyrights, trade secrets or other intangible
assets or intellectual property rights, or disclosed any proprietary
confidential information to any persons except to customers in the ordinary
course of business;

(h) suffered any substantial losses or waived any rights of material
value, whether or not in the ordinary course of business, or suffered the
loss of any material amount of prospective business:

(i) made any changes in employee compensation except in the ordinary
course of business and consistent with past practices;

(j) made capital expenditures or commitments therefor that aggregate
in excess of $50,000;

(k) entered into any other transaction other than in the ordinary
course of business, or entered into any other material transaction, whether
or not in the ordinary course of business;

(l) made charitable contributions or pledges in excess of $10,000;

-12-

<PAGE>

(m) suffered any material damage, destruction or casualty loss,
whether or not covered by insurance:

(n) experienced any problems with labor or management in connection
with the terms and conditions of their employment; or

(o) effected any two or more events of the foregoing kind which in
the aggregate would have a Material Adverse Effect.

2.22. ENVIRONMENTAL AND SAFETY LAWS.

To the best of the Company's knowledge after due investigation, neither the
Company nor any Subsidiary is in violation of any applicable federal, state or
local statute, law, permit, license, ordinance or regulation relating to the
environment or occupational safety and health, nor are any material expenditures
required to comply with any such statute, permit, license, law or regulation.

2.23. U.S. REAL PROPERTY HOLDING CORPORATION.

Neither the Company nor any Subsidiary is now, nor has any of them ever
been during the last five calendar years, a "United States Real Property Holding
Corporation" as defined in Section 897(c)(2) of the Code and Section 1.897-2(b)
of the Regulations promulgated by the Internal Revenue Service.

SECTION 3. THE PURCHASER'S REPRESENTATIONS.

The Purchaser represents to the Company as follows:

3.1. INVESTMENT REPRESENTATIONS.

It is its present intention to acquire the Note and the Warrant for its own
account (and it will be the sole beneficial owner thereof), and that the Note
and the Warrant are being and will be acquired by it for the purpose of
investment and not with a view to distribution or resale thereof except pursuant
to registration under the Securities Act or exemption therefrom and from any
applicable "Blue Sky" laws. The acquisition by the Purchaser of the Note and the
Warrant shall constitute a confirmation of this representation. It understands
and agrees that, until registered under the Securities Act or transferred
pursuant to the provisions of Rule 144 or Rule 144A as promulgated by the
Commission, all instruments evidencing the Note, the

-13-

<PAGE>

Warrant and the Warrant Shares, whether upon initial issuance or upon any
transfer or exercise thereof, shall bear a legend, prominently stamped or
printed thereon, reading substantially as follows:

"The securities represented by this instrument have not been registered
under the Securities Act of 1933 and any applicable state securities laws.
These securities have been acquired for investment and not with a view to
distribution or resale. These securities may not be offered for sale or
transferred in the absence of an effective registration statement covering
such securities under the Securities Act and any applicable state
securities laws, or the availability of an exemption from registration
thereunder. The transferability of these securities is subject to the
provisions of a Note and Warrant Purchase Agreement dated as of December 8,
1993 between the issuer and Whitney Subordinated Debt Fund, L.P., a copy of
which may be obtained at the issuer's principal office."

3.2. ACCESS TO INFORMATION.

It or its representative during the course of this transaction, and prior
to the purchase of the Note and the Warrant, has had the opportunity to ask
questions of and receive answers from management of the Company concerning the
terms and conditions of this investment and the offering of the Note and
Warrant, and to obtain any additional information which the Company possesses or
can acquire relative to the Company's business, management, technology, business
and marketing strategies, assets, Intellectual Property Rights, financial
condition and results of operations and liabilities (contingent or otherwise).

3.3. SOPHISTICATION AND KNOWLEDGE.

It has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits And risks of this investment, and it can
bear the economic risks of this investment and can afford a complete loss of
this investment.

3.4. TRANSFER RESTRICTIONS IMPOSED BY SECURITIES LAWS.

It understands that: the Securities have not been registered under the
Securities Act and applicable state

-14-

<PAGE>

securities laws, and, therefore, cannot be resold unless they are subsequently
registered under the Securities Act and applicable state securities laws or
unless an exemption from such registration is available; no state or
governmental authority has made any finding or determination relating to the
fairness of the terms of the investment in the Company proposed hereunder; the
Purchaser is and must be acquiring the Note and the Warrant for investment for
its own account and not for the account or benefit of others, and not with any
present view toward resale or other distribution thereof to the public. The
Purchaser agrees not to resell or otherwise dispose of all or any part of the
Securities purchased by it, except as permitted by law, including, without
limitation, any regulations under the Securities Act and applicable state
securities or 'Blue Sky" laws; the Company does not have any present intention
and is under no obligation to register the Securities under the Securities Act
and applicable state securities laws, except as provided pursuant to the Stock
Purchase Agreement Amendment; and Rule 144 or Rule 144A under the Securities Act
may not be available as a basis for exemption from registration of the
Securities thereunder. The Securities shall not be transferred, and the Company
shall not be required to register any transfer of Securities on the books of the
Company, unless the Company shall have been provided with an opinion of counsel
reasonably satisfactory to it prior to such transfer that registration under the
Securities Act is not required in connection with the transaction resulting in
such transfer; PROVIDED, HOWEVER, that no such opinion of counsel shall be
required for a transfer by the Purchaser to an affiliate of the Purchaser or to
a partner of the Purchaser or a retired partner of the Purchaser who retires
after the date hereof, or to the estate of any such partner or retired partner,
or a transfer by gift, will or intestate succession from any such partner to his
spouse or members of his or his spouse's family, if the transferee agrees in
writing to be subject to the terms hereof to the same extent as if such
transferee were the original Purchaser thereunder; and PROVIDED, FURTHER, that
no such opinion of counsel shall be required in order to effectuate a transfer
in accordance with the provisions of Rule 144 under the Securities Act. The
Purchaser understands that there may be no established or stable trading market
for the Company's securities at the time the Purchaser desires to liquidate its
investment.

3.5. ACCREDITED INVESTOR STATUS.

The Purchaser is an "Accredited Investor" as that term is defined in Rule
501 of Regulation D promulgated under the Securities Act.

-15-

<PAGE>

3.6. ADDITIONAL REPRESENTATION OF PURCHASER.

The Purchaser is a validly existing limited partnership pursuant to the
laws of the State of Delaware, and has all requisite power and authority to own
and operate its properties and carry out its business as now conducted and as is
now proposed to be conducted, and to execute, deliver and perform this
Agreement, the Stock Purchase Agreement Amendment, the Voting Agreement
Amendment and the other agreements delivered by it in connection herewith and to
carry out the transactions contemplated hereby; this Agreement and each other
agreement executed and delivered in connection herewith have been duly executed
by it and constitute legal, valid and binding obligations of the Purchaser,
enforceable against it in accordance with their respective terms; and there is
no litigation or governmental proceeding or investigation pending or, to the
knowledge of the Purchaser, threatened against it concerning the invalidity of
this Agreement, the Stock Purchase Agreement Amendment, the Voting Agreement
Amendment or the other agreements entered into in connection herewith.

3.7. BROKERS OR FINDERS.

No person has or will have, as a result of the transactions contemplated by
this Agreement, any right, interest or valid claim against the Company for any
commission, fee or other compensation as a consultant, finder ar broker because
of any act or omission by the Purchaser or its agents.

SECTION 4. CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATION.

The obligation of the Purchaser to purchase and make payment for the Note
and the Warrant on the Closing Date is subject, at the Purchaser's option, to
the following conditions:

4.1. All proceedings to be taken in connection with the transactions
contemplated by this Agreement to be consummated on or prior to the Closing
Date, and all documents to be executed incident thereto, shall have been taken
and executed in a manner reasonably satisfactory in form and substance to the
Purchaser.

4.2. On the Closing Date, the representations and warranties contained in
Section 2 hereof shall be true and

-16-

<PAGE>

correct in all material respects with the same effect as though made on and as
of the Closing Date, and the Company shall have so certified to the Purchaser in
writing.

4.3. All the covenants, agreements and conditions contained in this
Agreement to be performed or complied with by the Company on or prior to the
Closing Date shall have been performed or complied with in all material
respects, and the Company shall have so certified to the Purchaser in writing.

4.4. On the Closing Date, the Purchaser shall have received an opinion from
Messrs. Akin, Gump, Strauss, Hauer & Feld, counsel to the Company, dated he
Closing Date in substantially the form of EXHIBIT C attached hereto.

4.5. The Purchaser, the Company and other parties to that certain Preferred
Stock Purchase Agreement dated as of August 4, 1993, as amended by Amendment No.
1 thereto dated as of December 7, 1993, shall have entered into that certain
Amendment No. 2 to Preferred Stock Purchase Agreement in the form of EXHIBIT D
attached hereto (the "Stock Purchase Agreement Amendment").

4.6. The Purchaser, the Company and the other parties to that certain
Voting, Co-Sale and Right of First Refusal Agreement dated as of August 4, 1993,
shall have entered into that certain Amendment No. 1 to Voting, Co-Sale and
Right of First Refusal Agreement in the form of EXHIBIT E attached hereto (the
"Voting Agreement Amendment").

4.7. The Company shall have paid J.H. Whitney & Co. a placement fee in the
amount of $210,000.

4.8. The Purchaser shall have received such certified copies or other
copies of such documents and certificates as it may reasonably request.

SECTION 5. COVENANTS OF THE COMPANY

5.1. REPORTING REQUIREMENTS. The Company will furnish the following to each
holder of a Note:

-17-

<PAGE>

ending with the end of such month, setting forth in each case in
comparative form the corresponding figures for the corresponding period of
the preceding fiscal year, and including comparisons to the monthly budget
or business plan and an analysis of the variances from the budget or
business plan;

(b) ANNUAL REPORTS: as soon as available and in any event within 90
days after the end of each fiscal year of the Company, a copy of the annual
audited report for such year for the Company and its Subsidiaries,
including therein consolidated and consolidating balance sheets of the
Company and its Subsidiaries as of the end of such fiscal year and
consolidated and consolidating statements of income and retained earnings
and of changes in financial position of the Company and its Subsidiaries
for such fiscal year, setting forth in each case in comparative form the
corresponding figures for the preceding fiscal year, all such consolidated
statements to be duly certified by the chief financial officer of the
Company and Arthur Andersen & Co., or another independent public accountant
of recognized national standing approved by a majority of the members of
the Company's Board of Directors;

(c) BUDGETS AND OPERATING PLAN: as soon as available and in any event
at least 30 days before the beginning of each fiscal year of the Company, a
business plan and monthly and quarterly operating budgets for the
forthcoming fiscal year, and as soon as available and in any event within
30 days after the end of each calendar month, monthly comparisons against
the business plan and monthly operating budgets;

(d) NOTICE OF DEFAULT: within five Business Days after the Company
has knowledge of its occurrence, written notice of any Event of Default or
any event which, with notice or lapse of time or both, could become an
Event of Default; and

(e) OTHER INFORMATION: such other information concerning the Company
and the Subsidiaries as any holder of Notes shall reasonably request.

5.2. ACCESS.

The Company shall afford to each holder of a Note and each holder's
constituent partners, employees, counsel and other authorized representatives,
for any reasonable purpose whatsoever access, at reasonable times and upon prior
notice to the Company, to the books, records and properties

-18-

<PAGE>

of the Company and each Subsidiary and to all officers and employees of the
Company and each Subsidiary.

5.3. NOTE.

For purposes of Section 1273(c)(2) of the Code, and the regulations
promulgated thereunder (or any predecessor or successor statute or regulation),
the Purchaser and the Company agree (a) that the aggregate purchase price of the
Note and the Warrant shall be allocated based on the relative fair market value
thereof, and (b) that, based on such allocation, the amount of original issue
discount (as defined in Section 1273(a)(1) of the Code) with respect to the Note
is an aggregate amount of $167,000. The Company hereby covenants and agrees with
the Purchaser that such aggregate issue price and original issue discount will
be used for federal income tax purposes with respect to the transactions under
or contemplated by this Agreement and the Note.

5.4. MAINTENANCE OF OFFICE.

The Company will maintain an office or agency in the City of Irving, in the
State of Texas (or such other place in the United States of America as the
Company may designate in writing to the holders of the Notes), where the Notes
may be presented for registration of transfer and for exchange as herein
provided, where notices and demands to or upon the Company in respect of the
Notes may be served and where, at the option of the holder thereof, the Notes
may be presented for payment. Until the Company otherwise notifies the holders,
said office shall be the principal office of the Company.

5.5. CORPORATE EXISTENCE.

The Company (i) will maintain, and will cause each of its Subsidiaries to
maintain, its corporate existence in good standing under the laws of the
jurisdiction of its incorporation and (ii) will qualify to do business, and will
cause each of its Subsidiaries to qualify to do business, in each jurisdiction
in which the character of the properties owned or leased by it or the nature of
the business conducted by it makes such qualification necessary, except where
the failure to be so licensed or qualified would not have a Material Adverse
Effect.

5.6. PAYMENT OF TAXES. The Company will promptly pay and discharge or cause
to be paid and discharged before the same shall become in default, all lawful
taxes and assessments imposed upon the Company or any Subsidiary or

-19-

<PAGE>

upon the income and profits of the Company or any Subsidiary, or upon any
property, real, personal or mixed, belonging to the Company or any Subsidiary,
or upon any part thereof, by the United States or any State thereof, as well as
all lawful claims for labor, materials and supplies which, if unpaid, would
become a lien or charge upon such property or any part thereof; PROVIDED,
HOWEVER, that neither the Company nor any Subsidiary shall be required to pay
and discharge or to cause to be paid and discharged any such tax, assessment,
charge, levy or claim so long as both (x) the Company has set aside adequate
reserves for such tax, assessment, charge, levy or claim and (y) the Company or
such Subsidiary shall be contesting the validity thereof in good faith by
appropriate proceedings.

5.7. MAINTENANCE OF PROPERTY; INSURANCE. The Company will at all times
maintain and keep, or cause to be maintained and kept, in good repair, working
order and condition all significant properties of the Company and its
Subsidiaries used in the conduct of the business of the Company and its
Subsidiaries, and will from time to time make or cause to be made all needful
and proper repairs, renewals and replacements thereto, so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times. The Company will maintain or cause to be maintained, with
financially sound and reputable insurers, insurance with respect to the
properties and business of the Company and its Subsidiaries against loss or
damage of the kinds customarily insured against by corporations of established
reputation engaged in the same or similar businesses and similarly situated, of
such types and in such amounts, as are customarily carried under similar
circumstances by such other corporations.

5.8. COMPLIANCE WITH LAWS, ETC.

The Company and each of its Subsidiaries shall exercise all due diligence
in order to comply with the requirements of all applicable laws (including
ERISA), rules, regulations and orders of any governmental authority,
noncompliance with which could reasonably be expected to have a Material Adverse
Effect (including, without limitation, environmental laws, rules, regulations
and orders).

5.9. KEEPING OF BOOKS.

The Company will at all times keep, and cause each of its Subsidiaries to
keep, proper books of record and account in which proper entries will be made of
its

-20-

<PAGE>

transactions in accordance with generally accepted accounting principles
consistently applied.

5.10. U.S. REAL PROPERTY HOLDING CORPORATION.

The Company shall, and shall cause each Subsidiary, if and when such
Subsidiary exists, to conduct its business and do or cause to be done any and
all actions as are necessary, so that the Company and its Subsidiaries shall not
at any time become a "UNITED STATES REAL PROPERTY HOLDING CORPORATION" as
defined in Section 897(c)(2) of the Code and Section 1.897-2(b) of the
Regulations promulgated by the Internal Revenue Service.

5.11. NEGATIVE COVENANTS OF THE COMPANY. From and after the Closing,
the Company covenants and agrees that it will comply with and observe the
following negative covenants and provisions, and will cause each Subsidiary to
comply with and observe such of the following covenants and provisions as are
applicable to such Subsidiary, if and when such Subsidiary exists, and will not,
except as permitted below, without the written consent or written waiver of the
holders of at least sixty percent (60%) of the outstanding principal amount of
Notes:

(a) DEALINGS WITH AFFILIATES. Enter into any transaction, including,
without limitation, any loans or extensions of credit or royalty agreements with
any employee, consultant, officer or director of the Company or any Subsidiary
or holder of ten percent (10%) of any class of capital stock of the Company or
any Subsidiary, or any member of their respective immediate families or any
corporation or other entity directly or indirectly controlled by one or more of
such employees, consultants, officers, directors or 10% stockholders or members
of their immediate families, on terms less favorable to the Company or any
Subsidiary than it would obtain in a transaction between unrelated parties.

(b) MAINTENANCE OF OWNERSHIP OF SUBSIDIARIES. Sell or otherwise dispose of
any shares of capital stock of any Subsidiary, or permit any Subsidiary to
issue, sell or otherwise dispose of any shares or rights to acquire any of its
capital stock or the capital stock of any Subsidiary; PROVIDED, HOWEVER, that
the Company may liquidate, merge or consolidate any Subsidiary or Subsidiaries
into or with itself, provided that the Company is the surviving entity, or into
or with another Subsidiary or Subsidiaries, or the Company may sell all or a
portion of any Subsidiary to the Company or any other Subsidiary, provided that
after giving effect to the transaction, the Subsidiary continues to remain

-21-

<PAGE>

a member of the Company's "consolidated group" (with the Company as the parent
organization) for tax and accounting purposes.

(c) TRANSFERS OF TECHNOLOGY. Transfer, sell, pledge, encumber, mortgage,
dispose of, assign, lease, license or convey any ownership or interest in, or
material rights relating to, any of its technology, or other Intellectual
Property Rights to any person where the loss of such rights would have a
Material Adverse Effect; PROVIDED, HOWEVER, that this Section shall not apply to
transfers, licenses, leases, or sublicenses of the Company's Intellectual
Property Rights accomplished in the ordinary course of business.

(d) DISTRIBUTIONS. Declare or pay any dividends, purchase, redeem, retire
or otherwise acquire for value any of its capital stock (or rights, options or
warrants to purchase such shares) now or hereafter outstanding, return any
capital or make any distribution to its stockholders as such, or permit any
Subsidiary to do any of the foregoing, EXCEPT that the Subsidiaries may declare
and make payment of cash and stock dividends, return capital and make
distributions of assets to the Company; PROVIDED, HOWEVER, that nothing herein
contained shall prevent the Company from:

(i) effecting a stock split or declaring or paying any non-cash
dividend consisting of shares of any class of capital stock to all holders
of shares of such class of capital stock; or

(ii) redeeming any shares of capital stock of a deceased stockholder
out of insurance held by the Company on that stockholder's life.

(e) EXTRAORDINARY CORPORATE TRANSACTIONS. Take any corporate action,
enter into any agreement to take such action, or obligate itself to take
any such action, if such action would:

(i) cause or authorize any transaction, whether by merger,
consolidation, reorganization, sale of capital stock or more than thirty
percent (30%) of the Company's Consolidated Assets, or any other form of
business combination or acquisition in which the Company or any Subsidiary
is the object of any acquisition and in which control of the voting
securities or assets of the Company or any Subsidiary are transferred in
any way, directly or indirectly, to another Person and in which

-22-

<PAGE>

the Company or such Subsidiary is not the surviving entity or does not
survive as a going concern;

(ii) provide for the voluntary liquidation, dissolution or winding up
of the Company.

(f) NET WORTH. Permit Consolidated Net Worth at any time during any
period specified below to be less than the amount set forth below opposite
such period:

PERIOD AMOUNT

12/8/93-6/30/94 $ 8,000,000
7/1/94-12/31/94 8,500,000
1/1/95-12/31/95 9,000,000
After 12/31/95 10,000,000

(g) INTEREST COVERAGE. Permit the ratio of (i) EBDITA minus Capital
Expenditures to (ii) Consolidated Interest Expense for any period of four
consecutive fiscal quarters (or such shorter period as has elapsed since
the Closing Date) ending during any period described below to be less than
the ratio set forth below opposite such period:

PERIOD RATIO

12/8/93-12/31/94 1.2 to 1.0
1/1/95-12/31/95 1.5 to 1.0
After 12/31/95 1.6 to 1.0

(h) INDEBTEDNESS. Incur, create, assume, guarantee or permit to exist
any Indebtedness other than (i) the Notes; (ii) obligations under
Capitalized Leases not exceeding $1,000,000 in aggregate amount for all
capitalized leases at any time outstanding; (iii) purchase money
obligations relating to the acquisition of real or personal property,
provided that the aggregate outstanding principal amount of such
Indebtedness of the Company and its Subsidiaries shall not exceed the
aggregate amount of $1,500,000 at any one time; and (iv) up to $6,000,000
in principal amount of Indebtedness of the Company (but not any Subsidiary,
except for the Demand Promissory Note of Advance Home Prescriptions, Inc.
referred to in SCHEDULE 2.6) for borrowed money, PROVIDED, that on a pro
forma basis after giving effect to such borrowing and assuming that such
borrowing had been outstanding for the preceding four fiscal quarters (or
such shorter period as has elapsed since the Closing Date), the Company
would be in compliance with Section 5.11(g) hereof.

-23-

<PAGE>

(i) LIENS. Create or incur or suffer to be created or incurred or to
exist any lien, encumbrance,mortgage, pledge, charge, restriction or other
security interest of any kind upon any of its property or assets of any
character whether now owned or hereafter acquired, or upon the income or
profits therefrom; PROVIDED, HOWEVER, that the Company and any Subsidiary
may create or incur or suffer to be created or incurred or to exist:

(i) liens to secure taxes, assessments and other government
charges in respect of obligations not overdue or liens to secure
claims for labor, material or supplies in respect of obligations not
overdue;

(ii) deposits or pledges made in connection with,or to secure
payment of, workmen's compensation, unemployment insurance, old age
pensions or other social security obligations;

(iii) liens of carriers, warehousemen, mechanics and
materialmen, and other like liens, in existence less than 120 days
from the date of creation thereof in respect of obligations not
overdue;

(iv) encumbrances on real property consisting of easements,
rights of way, zoning restrictions, restrictions on the use of real
property and defects and irregularities in the title thereto,
landlord's or lessor's liens under leases to which the Company or a
Subsidiary is a party, and other minor liens or encumbrances none of
which in the opinion of the Company interferes materially with the use
of the property affected in the ordinary conduct of the business of
the Company and its Subsidiaries, which defects do not individually or
in the aggregate have a Material Adverse Effect;

(v) liens existing on the date hereof and listed on SCHEDULE 2.7
hereto;

(vi) purchase money security interests in or purchase money
mortgages on real or personal property acquired after the date hereof
to secure purchase money indebtedness of the type and amount permitted
by Section 5.11(i) hereof, incurred in connection with the acquisition
of such property, which security interests or mortgages cover only the
real or personal property so acquired;

(vii) liens securing indebtedness permitted under clause (iv)
of Section 5.11(h).

-24-

<PAGE>

(j) NATURE OF BUSINESS. Engage in any field by business which is
unrelated to the business engaged in on the date hereof.

(k) ACQUISITIONS. Effect any Acquisition unless, on a pro forma
combined basis giving effect to such Acquisition and any permitted
Indebtedness incurred in connection therewith, (a) the Company would not
have been in violation of any of the provisions of Section 5.11(g) or
Section 5.11(h) hereof at any time during the twelve month period preceding
such Acquisition, and (b) based upon the Company's reasonable, good faith
projections, the Company will not be in violation of any such covenants
during the twelve month period following such Acquisition. For purposes of
this Section 5.11(k), the term "Acquisition" shall mean the acquisition by
the Company, either directly or through one or more Subsidiaries, in a
single transaction or a related series of transactions, of stock and/or
assets representing a business or product line of another person or entity
for an aggregate purchase price of $1,000,000 or more.

5.12. USE OF PROCEEDS. The Company covenants and agrees that the net
proceeds received from the sale of the Note and the Warrant will be applied on
the Closing Date to the purchase by the Company of all of the issued and
outstanding stock of Paradigm Pharmacy Management, Inc.

6. EVENTS OF DEFAULT.

If any one or more of the following events (herein called "Events of
Default") shall occur, for any reason whatsoever, and whether such occurrence
shall, on the part of the Company or any Subsidiary, be voluntary or involuntary
or come about or be effected by operation of law or pursuant to or in compliance
with any judgment, decree or order of a court of competent jurisdiction or any
order, rule or regulation of any administrative or other governmental authority,
and such Event of Default shall be continuing:

(a) default shall be made in the payment of principal of any Note,
when and as the same shall become due and payable, whether at maturity or
at a date fixed for prepayment or by acceleration or otherwise;

(b) default shall be made in the payment of any of interest on any
Note, when and as the same shall become due and payable, and such default
shall continue for a period of five (5) Business Days; or

-25-

<PAGE>

(c) any material representation or warranty made by the Company in
this Agreement shall be false in any material adverse respect on the date
as of which made; or

(d) default shall be made in the due observance or performance of any
covenant to be observed or performed pursuant to Section 5 hereof; or

(e) default shall be made in the due observance or performance of any
covenant or agreement on the part of the Company to be observed or
performed pursuant to the terms hereof or pursuant to the terms of the Note
(other than those referred to in clauses (a) through (d) above), and such
default shall continue for 30 days after the earliest of (i) the date the
Company gives notice thereof to the holders of the Notes, (ii) the date by
which the Company should have given such notice pursuant to Section 5.1(d)
hereof, and (iii) the date written notice thereof, specifying such default
and requesting that the same be remedied, shall have been given to the
Company by the holder or holders of at least 51% of the principal amount of
the Notes then outstanding (the Company to give forthwith to all other
holders of Notes at the time outstanding written notice of the receipt of
such notice specifying the default referred to therein); or

(f) the Company or any Subsidiary shall default (as principal or
guarantor) either in the payment of the principal of, or premium, if any,
or interest on, more than $250,000 of Indebtedness for borrowed money
(other than the Notes) or with respect to any of the provisions of any
evidence of Indebtedness for borrowed money (other than the Notes) or which
represents a purchase money obligation, as a result of which the holder or
holders of such Indebtedness have the right to accelerate the maturity of
such Indebtedness or otherwise cause such Indebtedness to become due prior
to the stated maturity thereof, or the Company or any Subsidiary shall not
pay such Indebtedness at maturity; or

(g) the Company or any Subsidiary shall become insolvent or shall
fail generally to pay its debts as they mature or shall apply for, shall
consent to, or shall acquiesce in, the appointment of a custodian, trustee
or receiver thereof or for a substantial part of the property thereof; or,
in the absence of such application, consent or acquiescence, a custodian,

-26-

<PAGE>

trustee or receiver shall be appointed for the Company or any Subsidiary or
for a substantial part of the property thereof, or the Company or any
Subsidiary shall make any assignment for the benefit of creditors: or

(h) the Company or any Subsidiary shall be voluntarily or
involuntarily dissolved or shall be the subject of any bankruptcy,
reorganization, debt arrangement or other proceeding under any bankruptcy
or insolvency law; or any dissolution, liquidation or bankruptcy proceeding
shall be instituted by or against the Company or any Subsidiary and, if
instituted against the Company or any Subsidiary, shall be consented to or
acquiesced in by the Company or any Subsidiary, shall not have been
dismissed within 60 days or an order for relief shall have been entered
against the Company or any Subsidiary; or

(i) A Reportable Event (as defined in Section 4043(b) of ERISA) shall
have occurred with respect to any Plan, and the holders of at least 60% of
the outstanding principal amount of Notes determine that, on the basis of
such Reportable Event, there are reasonable grounds for the termination of
such Plan by the PBGC or for the appointment by the appropriate United
States District Court of a trustee to administer such Plan; or a trustee
shall be appointed by a United District Court to administer any such Plan
or Plans; or the PBGC shall institute proceedings to terminate any Plan or
Plans; or

(j) there shall remain in force, undischarged, unsatisfied or
unstayed, for more than 60 days, whether or not consecutive, any final
judgment against the Company or any Subsidiary that, with other outstanding
final judgments, undischarged, against the Company and its Subsidiaries
exceeds in the aggregate $250,000;

then, (i) in the case of an Event of Default described in clauses (g) or (h)
above, the outstanding principal of the Notes and all accrued interest thereon
shall automatically become immediately due and payable, without presentment,
demand, protest or notice of any kind, all of which are expressly waived; and
(ii) in the case of any other Event of Default, the holder or holders of a least
60% in aggregate principal amount of the Notes at the time outstanding may, at
their option, by notice to the Company at any time on or after the occurrence of
such Event of Default, declare the outstanding principal of the Notes and all
accrued interest thereon to be, and the outstanding principal of the Notes and
all accrued interest thereon shall thereupon be and become,

-27-

<PAGE>

forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are expressly waived.

At any time after any such acceleration, the holders of at least 60% in
aggregate principal amount of the Notes then outstanding may, by notice to the
Company, rescind such acceleration and its consequences, if (i) the Company has
paid all overdue installments of interest on the Notes which have become due
otherwise than by such declaration of acceleration; and (ii) all other defaults
and Events of Default (other than non-payments of principal and interest which
have become due solely by reason of acceleration) shall have been remedied or
cured or shall have been waived pursuant to this paragraph; PROVIDED, HOWEVER,
that no such rescission shall extend to or affect any subsequent default or
Event of Default or impair any right consequent thereon.

Any such modification or waiver shall apply equally to all the holders of
the Notes and shall be binding upon them, upon each future holder of any Notes
and upon the Company, whether or not such Notes shall have been marked to
indicate such modification or waiver, but any Notes issued thereafter shall bear
a notation referring to any such modification or waiver. Promptly after
obtaining the written consent of the holders as herein provided, the Company
shall transmit a copy of such modification or waiver to all the holders of the
Notes at the time outstanding.

7. REMEDIES.

(a) In case any one or more Events of Default shall happen and be
continuing, the holder of a Note may proceed to protect and enforce its
rights by suit in equity, action at law and/or by other appropriate
proceeding, whether for the specific performance of any covenant or
agreement contained herein or in such Note or in aid of the exercise of any
power granted herein or in such Note, or may proceed to enforce the payment
of such Note, or to enforce any other legal or equitable right of the
holder of such Note.

(b) In case of any default under any Note, the Company will pay to
the holder thereof such amounts as shall be sufficient to cover the
reasonable costs and expenses of such holder due to said default,
including, without limitation, collection costs and reasonable attorneys'
fees, to the extent actually incurred.

-28-

<PAGE>

each and every such remedy shall be cumulative and shall be in addition to
every other remedy given hereunder or now or hereafter existing at law or
in equity or by statute or otherwise.

(d) No course of dealing between the Company and the holders of the
Notes or any delay on the part of any holder in exercising any rights
hereunder or under the Notes shall operate as a waiver of any right of any
holder of Notes.

SECTION 8. DEFINITIONS AND ACCOUNTING TERMS.

8.1. CERTAIN DEFINED TERMS.

As used in this Agreement, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined):

"ACQUISITION" shall have the meaning assigned to such term in Section
5.11(1).

"AGREEMENT" means this Note and Warrant Purchase Agreement as from time to
time amended and in effect between the parties, including all Exhibits and
Schedules hereto.

"CAPITAL EXPENDITURES" means for any period, amounts paid or indebtedness
incurred by the Company or any of its Subsidiaries in connection with the
purchase or lease by the Company or any Subsidiary of capital assets that would
be required to be capitalized on the balance sheet of such person in accordance
with generally accepted accounting principles; PROVIDED, HOWEVER, that the term
Capital Expenditures shall not include any expenditure funded with either (a)
Indebtedness permitted under Section 5.11(h) having a term greater than one
year, or (b) equity raised by the Company.

"CLOSING" shall have the meaning assigned to that term in Section 1.2.

"CLOSING AGREEMENTS" shall have the meaning assigned to such term in
Section 9.8.

"CLOSING DATE" shall have the meaning assigned that term in Section 1.2.

-29-

<PAGE>

"CODE" shall have the meaning assigned to such term in Section 2.9.

"CONSOLIDATED ASSETS" means all assets of the Company and its Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles.

"CONSOLIDATED INTEREST EXPENSE" means for any period, the aggregate amount
of interest scheduled for payment by the Company and its Subsidiaries during
such period on all indebtedness of the Company and its Subsidiaries for borrowed
money outstanding during all or any part of such period, whether such interest
was or is required to be reflected as an item of expense or capitalized,
including payments consisting of interest in respect of capitalized leases and
including commitment fees, agency fees, facility fees, balance deficiency fees
and similar fees or expenses in connection with the borrowing of money.

"CONSOLIDATED LIABILITIES means all liabilities of the Company and its
Subsidiaries determined on a consolidated basis in accordance with generally
accepted accounting principles.

"CONSOLIDATED NET INCOME (OR DEFICIT) means for any period, the
consolidated net income (or deficit) of the Company and its Subsidiaries, after
deduction of all expenses, taxes, and other proper charges, determined in
accordance with generally accepted accounting principles, after eliminating
therefrom all extraordinary nonrecurring items of income.

"CONSOLIDATED NET WORTH: The excess of Consolidated Assets over
Consolidated Liabilities.

"COMMISSION" shall mean the Securities and Exchange Commission or any other
federal agency then administering the Securities Act or Exchange Act.

-30-

<PAGE>

absence of any provision to the contrary in the Company's Certificate of
Incorporation, are entitled to vote for the election of a majority of directors
of the Company, and (c) any other securities into which or for which any of the
securities described in (a) or (b) may be converted or exchanged pursuant to a
plan of recapitalization, reorganization, merger, sale of assets or otherwise.

"COMPANY" means Advance Pharmacy Services, Inc., a Delaware corporation,
and its successors and assigns.

"CONSOLIDATED" and "CONSOLIDATING" when used with reference to any term
defined herein mean that term as applied to the accounts of the Company and its
Subsidiaries consolidated in accordance with generally accepted accounting
principles consistently applied throughout reporting periods.

"EBDITA" means an amount equal to the Consolidated Net Income (or Deficit)
of the Company and its Subsidiaries for any period, after all expenses and other
proper charges (including allocations of corporate charges consistent with the
Company's current practice) but before payment or provision for any
depreciation, amortization, income taxes or Consolidated Interest Expense for
such period, determined in accordance with generally accepted accounting
principles.

"ENCUMBRANCES" shall have the meaning assigned to such term in Section 2.2.

"ERISA" shall have the meaning assigned to such term in Section 2.10.

"EVENT OF DEFAULT" shall have the meaning assigned to such term in Section
6.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any similar federal statute, and the rules and regulations of the Commission (or
of any other federal agency then administering the Exchange Act) thereunder, all
as the same shall be in effect at the time.

"FINANCIAL STATEMENTS" shall have the meaning assigned to such term in
Section 2.8.

-31-

<PAGE>

Indebtedness of others, whether or not the same are or should be reflected in
the Company's balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection of similar
transactions in the ordinary course of business, and (iii) the present value of
any lease payments due under leases required to be capitalized in accordance
with applicable Statements of Financial Accounting Standards, determined by
discounting all such payments at the interest rate determined in accordance with
applicable Statements of Financial Accounting Standards.

"KEY EMPLOYEE" means and includes the President, Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, any Vice-President and the
Treasurer of the Company, any director or vice president of operations, finance,
research and developments, general administration, sales, marketing, technology
development, engineering, or other functional area of the Company or any
Subsidiary, the head of any division or Subsidiary of the Company, or any other
individual so designated by the Board of Directors of the Company.

"MATERIAL ADVERSE EFFECT" shall mean any event, circumstance or condition
that would affect the Company's business, assets, liabilities, revenues,
profitability, results of operations, financial condition, officers and Key
Employees, or Intellectual Property Rights, if such effect would be both
material and adverse to the Company or any Subsidiary.

-32-

<PAGE>

"NOTES" shall mean the Note, as defined in Section 1.1, and any other Note
issued in transfer or exchange of such Note or any such other Notes.

"PBGC" shall mean the Pension Benefit Guaranty Corporation.

"PERSON" means an individual, corporation, partnership, joint venture,
trust, university, or unincorporated organization, or a government or any agency
or political subdivision thereof.

"PLAN" shall mean any employee plan which is subject to the provisions of
Title IV of ERISA and which is maintained (in whole or in part) by the Company
or any Subsidiary.

"POOL" shall have the meaning assigned to such term in Section 2.17.

"PURCHASER" shall have the meaning assigned to that term on page 1 of this
Agreement and shall include the original Purchaser and also any other holder of
any of the Securities.

"SECURITIES" shall have the meaning assigned to such term in Section 1.1.

"SERIES A PREFERRED STOCK" shall have the meaning assigned to such term in
Section 2.17.

"STOCK PURCHASE AGREEMENT AMENDMENT" shall have the meaning assigned to
such term in Section 4.5.

"SUBSIDIARY" or "SUBSIDIARIES" means Advance Home Prescriptions, Inc. and
Advance Prescription Management, Inc. and any Person of which the Company and/or
any of its other Subsidiaries (as herein defined) directly or indirectly owns at
the time at least fifty-one percent (51%) of the outstanding voting shares of
every class of such corporation or trust other than directors' qualifying
shares.

"VOTING AGREEMENT AMENDMENT" shall have the meaning assigned to such term
in Section 4.6.

-33-

<PAGE>

"WARRANT" shall have the meaning assigned to such term in Section 1.1.

"WARRANT SHARES" shall have the meaning assigned to such term in Section
1.1.

8.2. ACCOUNTING TERMS.

All accounting terms not specifically defined herein shall be construed in
accordance with generally accepted accounting principles consistently applied,
and all financial data submitted pursuant to this Agreement shall be prepared in
accordance with such principles.

SECTION 9. MISCELLANEOUS.

9.1. NO WAIVER; CUMULATIVE REMEDIES.

No failure or delay on the part of any party to this Agreement in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy hereunder. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.

9.2. AMENDMENTS, WAIVERS AND CONSENTS.

Any provision in the Agreement to the contrary notwithstanding, and except
as hereinafter provided, changes in, termination or amendment of or additions to
this Agreement may be made, and compliance with any covenants or provision set
forth herein may be omitted or waiver, if the Company (i) shall obtain consent
thereto in writing from the holder or holders of at least 60% in aggregate
principal amount of the Notes then outstanding, and (ii) shall deliver copies of
such consent in writing to any holders who did not execute such consent;
PROVIDED that no consents shall be effective to reduce the percentage in
interest of the outstanding principal amount of Notes the consent of the holders
of which is required under this Section 9.2. Any waiver or consent may be given
subject to satisfaction of conditions stated therein and any waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.

-34-

<PAGE>

9.3. ADDRESSES FOR NOTICES.

All notices, requests, demands and other communications provided for
hereunder shall be in writing (including telegraphic communication) and mailed,
telegraphed or delivered to each applicable party at the appropriate address.

If to any holder of Securities: at such holder's address for notice as set
forth on page 1 hereof, or at such other address as shall be designated by such
Person in awritten notice to the other parties complying as to delivery with the
terms of this Section.

If to the Company: at the address set forth on page 1 hereof, or at such
other address as shall be designated by the Company in a written notice to the
other parties complying as to delivery with the terms of this Section.

All such notices, requests, demands and other communications shall, when
mailed (which mailing must be accomplished by first class mail, postage prepaid;
electronic facsimile transmission (with confirming copy to follow by first class
mail, postage prepaid); express overnight courier service, or registered or
certified mail, postage prepaid, return receipt requested) or telegraphed. All
notices shall be considered to be delivered three (3) days after dispatch in the
event of first class or registered mail, and on the next succeeding business day
in the event of facsimile transmission or overnight courier service.

9.4. COSTS, EXPENSES AND TAXES.

The Company agrees to pay a placement fee to J.H. Whitney & Co. in the
amount of $210,000, such fee to be paid at the Closing. The Company agrees to
pay promptly after the Closing in connection with the preparation, execution and
delivery of this Agreement and the issuance of the Note and the Warrant at the
Closing, the fees and expenses of the counsel for the Purchaser, and the fees
and expenses of any consultant(s) retained by the Purchaser, due diligence
expenses (including travel to the Company), and other expenses related to the
transactions contemplated hereby. In addition, the Company shall pay the
reasonable out of pocket expenses incurred by the holders of the Notes or the
Warrants, including fees and expenses of legal counsel, independent public
accountants, consultants and other outside experts retained by the holders of
the Notes or the Warrants in connection with any amendment or waiver to any of
the

-35-

<PAGE>

Closing Agreements, and the collection or enforcement of theCompany's
obligations hereunder or under any of the other Closing Agreements. In addition,
the Company shall pay any and all U.S. Federal or State stamp or similar taxes
payable or determined to be payable in connection with the execution and
delivery of this Closing Agreements, and agrees to save the Purchaser harmless
from and against any and all liabilities with respect to or resulting from any
delay in paying or omission to pay such taxes.

9.5. BINDING EFFECT.

This Agreement shall be binding upon and inure to the benefit of the
Company and the Purchaser and their respective heirs, successors and assigns.

9.6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.

All representations and warranties made in this Agreement, or any other
instrument or document delivered in connection herewith, shall survive the
execution and delivery hereof and shall continue until repayment of the Notes in
full; PROVIDED, HOWEVER, that if all or any part of such payment is set aside,
the representations and warranties shall continue as if no such payment had been
made.

9.7. PRIOR AGREEMENTS.

The Closing Agreements, and the other agreements or instruments executed
and delivered in connection therewith constitute the entire agreement between
the parties and supersede any prior understandings or agreements concerning the
subject matter hereof.

9.8. SEVERABILITY.

The provisions of this Agreement, the Note, the Warrant, the Stock Purchase
Agreement Amendment and the Voting Agreement Amendment (collectively, the
"CLOSING AGREEMENTS") are severable and, in the event that any court of
competent jurisdiction shall determine that any one or more of the provisions or
part of a provision contained in the Closing Agreements, shall, for any reason,
be held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision or part of a
provision of the Closing Agreements, but the Closing Agreements shall be
reformed and construed as if such invalid or illegal or unenforceable provision,
or part of a provision, had never been contained

-36-

<PAGE>

herein, and such provisions or part reformed so that it would be valid, legal
and enforceable to the maximum extent Possible.

9.9. CONFIDENTIALITY.

The Purchaser agrees that it will keep confidential and will not disclose
or divulge any confidential, proprietary or trade secret information of the
Company which the Purchaser (and any transferee) may obtain from the Company
pursuant to financial statements, reports and other materials submitted by the
Company to the Purchaser pursuant to this Agreement, or pursuant to visitation
or inspection rights granted hereunder, unless such information is known, or
until such information becomes known, to the public; PROVIDED, HOWEVER, that the
Purchaser may disclose such information (i) on a confidential basis to its
attorneys, accountants, consultants and other professionals to the extent
necessary to obtain their services in connection with its investment in the
Company, (ii) to any prospective purchaser of any Securities from such Purchaser
as long as such prospective purchaser agrees in writing to be bound by the
provisions of this Section, (iii) to any affiliate or partner of the Purchase,
provided that such Person shall be bound by the confidentiality obligations of
this Section, and (iv) as required by applicable law. The Purchaser further
agrees that it will not sell, transfer, transmit or disseminate in any fashion
any information, goods, services or other matter or thing received by, from or
through the Company into any foreign jurisdiction if such sale, transfer,
transmission or dissemination would be in violation of any applicable Federal
law or regulation governing the export, sale, transfer, transmission or
dissemination of any such materials.

9.10. INDEMNITY.

In addition to the payment of expenses pursuant to SECTION 9.4, whether or
not the transactions contemplated hereby shall be consummated, the Company
agrees to indemnify, pay and hold the Purchaser and any holder of any Notes, and
the agents of the Purchaser and such holders (collectively the "Indemnitees"),
harmless from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
of any kind or nature whatsoever (including, without limitation, the reasonable
fees and disbursements of counsel for any of such Indemnitees in connection with
any investigative, administrative or judicial proceeding

-37-

<PAGE>

commenced or threatened, whether or not any of such Indemnitees shall be
designated a party thereto) that may be imposed on, incurred by, or asserted
against any Indemnitee in any matter relating to or arising out of this
Agreement, any other Closing Agreement or any other agreements executed and
delivered by the Company in connection herewith, or the use or intended use of
the proceeds hereunder (the "indemnified liabilities"); PROVIDED that the
Company shall have no obligation to an Indemnitee hereunder with respect to
indemnified liabilities arising from the gross negligence or willful misconduct
of such Indemnitee. To the extent that the undertaking to indemnify, pay and
hold harmless set forth in the preceding sentence may be unenforceable because
it is violative of any law or public policy, the Company shall contribute the
maximum portion that it is permitted to pay and satisfy under applicable law to
the payment and satisfaction of all indemnified liabilities incurred by the
Indemnitees or any of them. The provisions of the undertakings and
indemnification set out in this SECTION 9.10 shall survive satisfaction and
payment of the Notes and termination of this Agreement.

9.11. GOVERNING LAW.

THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, AND WITHOUT GIVING
EFFECT TO CHOICE OF LAWS PROVISIONS.

9.12. WAIVER OF JURY TRIAL. THE COMPANY WAIVES ANY RIGHT TO A TRIAL BY
JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS
AGREEMENT OR ANY OTHER CLOSING AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT,
DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN
CONNECTION HEREWITH, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE
TRIED BEFORE A COURT AND NOT BEFORE A JURY.

9.13. CONSENT TO JURISDICTION. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST
THE COMPANY WITH RESPECT TO THIS AGREEMENT, ANY NOTE OR ANY WARRANT MAY BE
BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF
NEW YORK AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT THE COMPANY ACCEPTS FOR
ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE
NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE
BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT
SUBJECT, HOWEVER, TO RIGHTS OF APPEAL. THE COMPANY DESIGNATES AND APPOINTS CT
CORPORATION AND SUCH OTHER PERSONS AS MAY HEREAFTER BE SELECTED BY THE COMPANY

-38-

<PAGE>

IRREVOCABLY AGREEING IN WRITING TO SERVE, AS ITS AGENT TO RECEIVE ON ITS BEHALF,
SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE
BEING HEREBY ACKNOWLEDGED BY THE COMPANY TO BE EFFECTIVE AND BINDING SERVICE IN
EVERY RESPECT. A COPY OF SUCH PROCESS SO SERVED SHALL BE MAILED BY REGISTERED
MAIL TO THE COMPANY AT ITS ADDRESS PROVIDED IN THE SIGNATURE PAGE HERETO, EXCEPT
THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY
SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY
THE COMPANY REFUSES TO ACCEPT SERVICE, THE COMPANY HEREBY AGREES THAT SERVICE
UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT
THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT
THE RIGHT OF THE LENDER TO BRING PROCEEDINGS AGAINST THE COMPANY IN THE COURTS
OF ANY OTHER JURISDICTION.

9.14. HEADINGS.

Article, section and subsection headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.

9.15. COUNTERPARTS.

This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one and the same instrument, and any Of the
parties hereto may execute this Agreement by signing any such counterpart.

9.16. FURTHER ASSURANCES.

From and after the date of this Agreement, upon the request of the
Purchaser, the Company shall execute and deliver such instruments, documents and
other writings as may be reasonably necessary or desirable to confirm and carry
out and to effectuate fully the intent and purposes of the Closing Agreement.

Very truly yours,

ADVANCE PHARMACY SERVICES, INC.

By: /s/ David D. Halbert
----------------------
Title: Chairman, CEO

-39-

<PAGE>

Agreed to and accepted as
of the date first above
written:

WHITNEY SUBORDINATED DEBT
FUND, L.P.

By:/s/ Daniel J. O'Brien
--------------------------------
Title: Chief Financial Officer

-40-

<PAGE>

EXHIBIT A

THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE
STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE.
THESE-SECURITIES MAY NOT BE OFFERED FOR SALE OR TRANSFERRED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH
SECURITIES UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR THE AVAILABILITY OF AN EXEMPTION FROM
REGISTRATION THEREUNDER. THE TRANSFERABILITY OF THESE SECURITIES
IS SUBJECT TO THE PROVISIONS OF A NOTE AND WARRANT PURCHASE
AGREEMENT DATED AS OF DECEMBER 8, 1993 BETWEEN THE ISSUER AND
WHITNEY SUBORDINATED DEBT FUND, L.P., A COPY OF WHICH MAY BE
OBTAINED AT THE ISSUER'S PRINCIPAL OFFICE.

ADVANCE PHARMACY SERVICES, INC.

10.101% Promissory Note

$7,000,000 New York, New York
December 8, 1993

ADVANCE PHARMACY SERVICES, INC., a Delaware corporation (hereinafter
called the "Company"), for value received, hereby promises to pay to the order
of WHITNEY SUBORDINATED DEBT FUND, L.P., the principal sum of SEVEN MILLION and
NO/100 DOLLARS ($7,000,000), on December 8, 2000, and to pay interest (computed
on the basis of a 360-day year consisting of twelve 30-day months) from the date
hereof on the unpaid principal amount hereof at the rate of 10.101% per annum.
Interest shall be payable on the last Business Day (as defined below) of March,
June, September and December of each year, commencing on December 31, 1993,
until the principal amount hereof shall have been paid in full, whether at
maturity or by acceleration or otherwise. Upon the occurrence and during the
continuation of any Event of Default (as hereinafter defined), this Note shall
bear additional interest (computed on the basis of a 360-day year consisting of
twelve 30-day months) on the unpaid principal amount hereof at a rate of 2% per
annum, which amount shall be payable by the Company in addition to, and at the
same time as, the regular interest payments hereon, as set forth above. The
term "Business Day" shall mean any day other than a Saturday, Sunday or legal
holiday in the State of New York.

<PAGE>

All payments of principal and interest on this Note shall be in such
currency of the United States of America as at the time of payment shall be
legal tender for payment of public and private debts.

This Note is a 10.101% Senior Subordinated Promissory Note, authorized
for issuance and sale pursuant to that certain Note and Warrant Purchase
Agreement dated as December 8, 1993 (the "Purchase Agreement") between the
Company and Whitney Subordinated Debt Fund, L.P. The Note issued pursuant to
the Purchase Agreemont and any other Notes issued in transfer or exchange of
such Note or any such other Notes are referred to collectively as the "Notes".
The Purchase Agreement contains, among other things, provisions for the
acceleration of the maturity of the Notes upon the happening of certain events
and for the amendment or waiver of certain provisions of the Purchase Agreement,
all upon the terms and conditions therein specified.

1. TRANSFER OR EXCHANGE OF NOTE. The Company shall keep at its
office or agency maintained as provided in Section 5(a) hereof a register in
which the Company shall provide for the registration of the Notes and for the
registration of transfers and exchanges. The holder of this Note may, at its
option, and either in person or by duly authorized attorney, surrender the same
for registration of transfer or exchange at such office or agency, and, without
expense to such holder, receive in exchange therefore a Note or Notes each in
such denomination or denominations as such holder may request, dated as of the
date to which interest has been paid on the Note or Notes so surrendered for
transfer or exchange, for the same aggregate principal amount as the then unpaid
principal amount of the Note or Notes so surrendered for transfer or exchange,
and registered in the name of such person or persons as may be designated by
such holder. Every Note presented or surrendered for registration of transfer
or exchange shall be duly endorsed, or shall be accompanied by a written
instrument of transfer, satisfactory in form to the Company, duly executed by
the holder of such Note or his attorney duly authorized in writing. Every Note
so made and delivered in exchange for this Note shall in all other respects be
in the same form and have the same terms as this Note.

2. LOSS, THEFT, DESTRUCTION OR MUTILATION OF NOTE. Upon receipt of
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of a Note, and, in the case of any such loss, theft or destruction,
upon receipt of an affidavit of loss and indemnity from the holder hereof
reasonably satisfactory to the Company, or in the case of

-2-
<PAGE>

any such mutilation, upon surrender and cancellation of such Note, the Company
will make and deliver, in lieu of such Note, a new Note of like tenor and unpaid
principal amount and dated as of the date to which interest has been paid on
such Note.

3. PERSONS DEEMED OWNERS; HOLDERS. The Company may deem and treat the
person in whose name this Note is registered as the owner and holder of this
Note for the purpose of receiving payment of principal of and interest on this
Note and for all other purposes whatsoever. With respect to any Note at any time
outstanding, the term "holder", as used herein, shall be deemed to mean the
person in whose name such Note is registered at such time.

4. PREPAYMENTS.

(a) MANDATORY PREPAYMENT. If the Company (i) consummates a public
offering of any of its securities (or securities of any of its subsidiaries)
pursuant to a registration statement filed with and declared effective by the
Securities and Exchange Commission, (ii) merges with or into another corporation
in a transaction pursuant to which the Company is not the surviving corporation,
or (iii) sells substantially all of the assets of the Company, the Company shall
apply the net proceeds received by the Company and any such subsidiary in such
public offering or other transaction (to the extent not required to be applied
to the payment of any indebtedness of the Company to which the Notes may be
subordinated) to the prepayment of the Notes (including interest on the
principal amount through the date of prepayment), without penalty or premium.

(b) OPTIONAL PREPAYMENT. The Company may, at its option, at any time
and from time to time, prepay this Note, in whole or in part, without penalty or
premium, together with interest accrued on the amount prepaid to the date of
prepayment.

(c) NOTICE OF PREPAYMENT. The Company shall give written notice of
prepayment of this Note or any portion hereof not less than five nor more than
30 Business Days prior to the date fixed for such prepayment. Upon notice of
prepayment being given as aforesaid, the Company covenants and agrees that it
will prepay, on the date therein fixed for prepayment, this Note or the portions
thereof, as the case may be, so called for prepayment, at the principal amount
hereof so called for prepayment together with interest acrrued thereon to the
date fixed for such prepayment.

-3-

<PAGE>

(d) ALLOCATION OF PREPAYMENT. In the event of any prepayment of less
than all of the outstanding Notes, the Company will allocate the principal
amount so to be prepaid (but only in units of $1,000) to each Note in
proportion, as nearly as may be, to the aggregate principal amount of all Notes
then outstanding.

(e) SURRENDER OF NOTE: NOTATION THEREON. Upon any prepayment of a
portion of the principal amount of this Note, the holder, at its option, may
require the Company to execute and deliver at the expense of the Company (other
than for transfer taxes, if any), upon surrender of this Note, a new Note
registered in the name of such person or persons as may be designated by such
holder for the principal amount of this Note then remaining unpaid, dated as of
the date to which interest has been paid on the principal amount of this Note
then remaining unpaid, or may present this Note to the Company for notation
thereon of the payment of the portion of
the principal amount of this Note so prepaid.

5. MODIFICATION: WAIVER.

(a) The Company may not, without the written consent of the holders of
not less than 51% in aggregate principal amount of the Notes then outstanding,
modify the terms and provisions of the Notes or the rights of the holders of the
Notes or the obligations of the Company thereunder, and the observance by the
Company of any term or provision of the Notes may not be waived without the
written consent of the holders of at least 51% in aggregate principal amount of
the Notes then outstanding; PROVIDED, HOWEVER, that without the consent of the
holder of each Note so affected, no such modification or waiver shall:

(i) change the maturity of any Note or reduce the principal amount
thereof or reduce the rate or extend the time of payment of interest
thereon or reduce the amount or change the time of any prepayment thereof;
or

(ii) give any Note any preference over any other Note; or

(iii) reduce the applicable percentages of Notes, the consent of the
holders of which is required for any such modification; and

(b) Any such modification or waiver shall apply equally to all the
holders of Notes and shall be binding upon them, upon each future holder of any
Notes and upon the

-4-

<PAGE>

Company, whether or not such Notes shall have been marked to indicate such
modification or waiver, but any Notes issued thereafter shall bear a notation
referring to any such modification or waiver. Promptly after obtaining the
written consent of the holders as herein provided, the Company shall transmit a
copy of such modification or waiver to all the
holders of the Notes at the time outstanding.

6. COVENANTS BIND SUCCESSORS AND ASSIGNS. All the covenants,
stipulations, promises and agreements in this Note contained by or on behalf of
the Company shall bind its successors and assigns, whether so expressed or not.

7. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT
OF LAW PROVISIONS THEREOF.

8. HEADINGS. The headings of the sections and subsections of this
Note are inserted for convenience only and do not constitute a part of this
Note.

IN WITNESS WHEREOF, ADVANCE PHARMACY SERVICES, INC. has caused this
Note to be signed in its corporate name by one of its officers thereunto duly
authorized and to be dated as of the day and year first above written.

ADVANCE PHARMACY SERVICES, INC.

By:
---------------------------------------------
Title:
---------------------------------------

-5-

<PAGE>

EXHIBIT B

THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES
LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH
A VIEW TO DISTRIBUTION OR RESALE. THESE SECURITIES MAY NOT BE OFFERED
FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT COVERING SUCH SECURITIES UNDER THE SECURITIES ACT AND ANY
APPLICABLE STATE SECURITIES LAWS, OR THE AVAILABILITY OF AN EXEMPTION
FROM REGISTRATION THEREUNDER. THE TRANSFERABILITY OF THESE SECURITIES
IS SUBJECT TO THE PROVISIONS OF A NOTE AND WARRANT PURCHASE AGREEMENT
DATED AS OF DECEMBER 8, 1993 BETWEEN THE ISSUER AND WHITNEY
SUBORDINATED DEBT FUND, L.P., A COPY OF WHICH MAY BE OBTAINED AT THE
ISSUER'S PRINCIPAL OFFICE.

Void after December 8, 2003 Right to Purchase 1,346
Shares of Common Stock,
par value of $.01 per
share, of Advance Pharmacy
Services, Inc.

ADVANCE PHARMACY SERVICES, INC.

Common Stock Purchase Warrant

ADVANCE PHARMACY SERVICES, INC., a Delaware corporation (the
"Company"), hereby certifies that for value received, WHITNEY SUBORDINATED DEBT
FUND, L.P., or assigns (the "Holder"), is entitled to purchase, subject to the
terms and conditions hereinafter set forth, an aggregate of 1,346 fully paid and
nonassessable shares of the Common Stock, par value $.01 per share, of the
Company ("Common Stock"), at an exercise price of $1,000.00 per share. The
number of shares of Common Stock to be received upon the exercise of this
warrant and the price to be paid for a share of Common Stock may be adjusted
from time to time as hereinafter set forth. The exercise price of a share of
Common Stock in effect at any time and as adjusted from time to time is
hereinafter referred to as the "Exercise Price". This Warrant is issued pursuant
to the terms of a certain Note and Warrant Purchase Agreement dated as of
December 8, 1993 between the Company

<PAGE>

and Whitney Subordinated Debt Fund, L.P. (the "Purchase Agreement"), pursuant to
which the Company issued its 10.101% Promissory Note in the aggregate principal
amount of $7,000,000 (the "Note") and a Warrant to purchase up to an aggregate
of 1,346 shares of Common Stock. The Holder is entitled to the rights and
subject to the obligations contained in the Purchase Agreement relating to this
Warrant and the shares of Common Stock issuable upon exercise of this Warrant.
This Warrant and any other Warrants issued in transfer or exchange of such
Warrant or any such other Warrants are referred to collectively as the
"Warrants".

(a) EXERCISE. (A) This Warrant may be exercised in whole or in part
at any time or from time to time by submitting at the office of the Company at
545 E. John Carpenter Freeway, Suite 1900, Irving, Texas 75062, or at such other
office as the Company may designate by notice in writing, this Warrant, with the
Purchase Form annexed hereby duly executed and accompanied by payment of the
Exercise Price for the number of shares specified in such form. Subject to
Sections 1(b) and 4 hereof, payment of the Exercise Price shall be made in
lawful money of the United States. As promptly as practicable after surrender of
the Warrant and receipt of payment, the Company shall issue and deliver to the
Holder a certificate or certificates for shares of Common Stock of the Company,
in certificates of such denominations, and in such names as the Holder may
specify, together with any other stock, securities or property which such Holder
may be entitled to receive pursuant hereto. In the case of the purchase of less
than all the shares purchasable under this Warrant, the Company shall cancel
this Warrant upon the surrender hereof and shall execute and deliver to the
Holder a new Warrant of like tenor for the balance of the shares purchasable
hereunder. Upon receipt by the Company of this Warrant at its office in proper
form for exercise, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise.

(B) The Holder shall have the option, but not the obligation, upon
any exercise of this Warrant, to apply to the payment required by Section
1(a) hereof all or any part of the unpaid principal amount of or interest on
any Note at the time held by the Holder. The Company will accept the amount
of principal or interest, if such election is selected, specified in the
Purchase Form in satisfaction of the exercise price for such shares to be
purchased. The Holder shall have the right to apply all or any portion of the
principal amount of or interest on a Note to exercise all or any portion of
this Warrant (i) whether or not payment on

-2-
<PAGE>

the Notes is otherwise prohibited and (ii) even though the Company or such
Holder may have given notice of prepayment with respect to all or any portion
of the principal amount of such Note, so long as the Purchase Form with
respect to such principal amount of such Note shall, together with this
Warrant, have been delivered to the Company in accordance with Section l(a)
hereof prior to the date fixed for such prepayment.

(b) RESERVATION OF STOCK. The Company will at all times reserve and
keep available, solely for issuance and delivery upon the exercise of this
Warrant, the number of shares of Common Stock from time to time issuable upon
the exercise of this Warrant. All shares of Common Stock issued upon the
exercise of this Warrant and the payment of the Exercise Price shall be duly
authorized, fully paid, and non-assessable with no liability on the part of the
holder thereof, and the Company will pay all taxes in respect of the issuance
thereof.

(c) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of a share, as determined in good faith
by the Board of Directors of the Company.

(d) CONVERSION OF WARRANT.

(A) In addition to and without limiting the rights of the Holder
under the terms of this Warrant, the Holder shall have the right to convert this
Warrant, or any portion thereof (the "Conversion Right"), into shares of Common
Stock as provided in this Section 4 at any time and from time to time while this
Warrant is exercisable. Upon exercise of the Conversion Right with respect to a
particular number of shares subject to this Warrant (the "Converted Warrant
Shares"), the Company shall deliver to the Holder (without payment by the Holder
of any Exercise Price or any cash or other consideration) that number of shares
of fully paid and nonassessable Common Stock equal to the quotient obtained by
dividing (x) the value of this Warrant (or the specified portion hereof) on the
Conversion Date (as defined in Section 4(b) hereof), which value shall be
determined by subtracting (A) the aggregate Exercise Price of the Converted
Warrant Shares immediately prior to the exercise of the Conversion Right from
(B) the aggregate fair market value of such Converted Warrant Shares on the
Conversion Date by

-3-

<PAGE>

(y) the fair market value of one share of Common Stock on the Conversion Date.
No fractional shares shall be issuable upon exercise of the Conversion Right,
and if the number of shares to be issued determined in accordance with the
foregoing formula is other than a whole number, the Company shall pay to the
holder an amount in cash equal to the fair market value of the resulting
fractional share on the Conversion Date, as determined in good faith by the
Board of Directors of the Company.

(B) The Conversion Right may be exercised by the Holder by the
surrender of this Warrant at the designated office of the Company together with
a written statement (a "Conversion Notice") specifying that the Holder thereby
intends to exercise the Conversion Right and indicating the number of Converted
Warrant Shares (I.E., the shares subject to this Warrant which are being
surrendered in exercise of the Conversion Right). Such conversion shall be
effective upon receipt by the Company of this Warrant together with the
Conversion Notice, or on such later date as is specified therein (the
"Conversion Date") and, at the election of the Holder, may be made contingent
upon the occurrence of any event specified in the Conversion Notice.
Certificates for the shares issuable upon exercise of the Conversion Right and,
if applicable, a new Warrant evidencing the balance of the shares remaining
subject to this Warrant, shall be issued as of the Conversion Date and shall be
delivered to the Holder promptly following the Conversion Date.

i) If the Conversion Right is exercised in connection with and
contingent upon a registered public offering of Common Stock, and if
the Company's registration statement relating to such public offering
has been declared effective by the Securities and Exchange Commission,
then fair market value shall be the initial "Price to Public"
specified in the final prospectus with respect to such offering;

ii) If the Conversion Right is not exercised in connection with
and contingent upon such a public offering, then fair market value
shall be as follows:

(A) If traded on a national securities exchange, the fair
market value of the Common Stock shall be deemed to be the
closing price

-4-

<PAGE>

of the Common Stock on such exchange on the trading day preceding
the Conversion Date;

(B) If traded over-the-counter, the fair market value of
the Common Stock shall be deemed to be the closing bid price of
the Common Stock on the trading day preceding the Conversion
Date; and

(C) If there is no public market for the Common Stock, then
fair market value shall be determined by mutual agreement of the
Holder and the Company, and if the Holder and the Company are
unable to so agree, by the good faith determination of the
Company's Board of Directors.

(e) REGISTRATION UNDER SECURITIES LAWS. The Holder has certain rights
under the Purchase Agreement and that certain Preferred Stock Purchase Agreement
dated as of August 2, 1993, as amended, among the Company and the Purchasers
parties thereto, with respect to the registration under the Securities Act of
1933, as amended, of the shares of Common Stock issuable upon exercise of this
Warrant.

(f) EXERCISE PRICE. Initially, the Exercise Price shall be $1000.00
per share of Common Stock. The Exercise Price shall be adjusted in accordance
with the provisions of this Section 6.

(A) ADJUSTMENTS TO EXERCISE PRICE

(i) (A) UPON DILUTIVE ISSUANCES OF COMMON STOCK OR CONVERTIBLE
SECURITIES. If the Company shall, while there are any Warrants outstanding,
issue or sell any shares of its Common Stock or Common Stock Equivalents without
consideration or at a price per share LESS THAN the Exercise Price in effect
immediately prior to such issuance or sale, then in each such case the Exercise
Price upon each such issuance or sale, except as hereinafter provided, shall be
lowered so as to be equal to the lowest Net Consideration per Share received for
each additional share upon such issuance of Common Stock or Common Stock
Equivalents.

The provisions of this Section 6(a)(i)(A) may be waived in any
instance upon the written approval of the holders of sixty percent (60%) of the
outstanding Warrants.

-5-

<PAGE>

(i) (B) UPON DILUTIVE ISSUANCES OF WARRANTS, OPTIONS AND PURCHASE
RIGHTS TO COMMON STOCK OR CONVERTIBLE SECURITIES.

(1) COMMON STOCK EQUIVALENTS. For the purposes of this Section
6(a)(i), the issuance of any warrants, options, subscription or purchase
rights with respect to shares of Common Stock and the issuance of any
securities convertible into or exchangeable for shares of Common Stock, or
the issuance of any warrants, options, subscription or purchase rights with
respect to such convertible or exchangeable securities (collectively,
"Common Stock Equivalents" and individually, a "Common Stock Equivalent"),
shall be deemed an issuance of Common Stock with respect to adjustments in
the Exercise Price if the Net Consideration Per Share (as hereinafter
determined) which may be received by the Corporation for such Common Stock
or Common Stock Equivalents shall be less than the Exercise Price in effect
at the time of such issuance.

Any obligation, agreement or undertaking to issue Common Stock
Equivalents at any time in the future shall be deemed to be an issuance at
the time such obligation, agreement or undertaking is made or arises. No
adjustment of the Exercise Price shall be made under this Section
6(a)(i)(B) upon the issuance of any shares of Common Stock which are issued
pursuant to the exercise, conversion or exchange of any Common Stock
Equivalents if any adjustment shall previously have been made upon the
original issuance of any such Common Stock Equivalents as above provided.

(2) DECREASES IN NET CONSIDERATION PER SHARE AND RETROACTIVE
ADJUSTMENT UPON EXPIRATION OF COMMON STOCK EQUIVALENTS. Should the Net
Consideration Per Share of any such Common Stock or Common Stock
Equivalents (even if issued or granted and outstanding as of the date of
issuance of this Warrant or hereafter) be decreased from time to time,
then, upon the effectiveness of each such change, the Exercise Price will
be that which would have been obtained (1) had the adjustments made upon
the issuance of such Common Stock Equivalents been made upon the basis of
the actual Net Consideration Per Share of such securities, and (2) had the
adjustments made to the Exercise Price since the date of issuance of such
Common Stock Equivalents been made to such Exercise Price as adjusted
pursuant to clause (1) above. Any adjustment of the Exercise Price with
respect to this paragraph which relates to any Common Stock Equivalent

-6-

<PAGE>

shall be disregarded if, as, and when such Common Stock Equivalent expires
or is cancelled without being exercised, so that the Exercise Price
effective immediately upon such cancellation or expiration shall be equal
to the Exercise Price that would have been in effect had the expired or
cancelled Common Stock Equivalent not been issued.

(3) DEFINITION OF NET CONSIDERATION PER SHARE. For purposes of
this paragraph, the "NET CONSIDERATION PER SHARE" which may be received by
the Company shall be determined as follows:

(A) The "NET CONSIDERATION PER SHARE" shall mean the amount
equal to the total amount of consideration, if any, received by the Company
for the issuance of such Common Stock Equivalents, plus the minimum amount
of consideration, if any, payable to the Company upon exercise, or
conversion or exchange thereof, divided by the aggregate number of shares
of Common Stock that would be issued if all such Common Stock Equivalents
were exercised, exchanged or converted.

(B) The "NET CONSIDERATION PER SHARE" which may be received by
the Company shall be determined in each instance as of the date of issuance
of Common Stock Equivalents without giving effect to any possible future
upward price adjustments or rate adjustments which may be applicable with
respect to such Common Stock Equivalents.

(i) (C) STOCK DIVIDENDS FOR HOLDERS OF CAPITAL STOCK OTHER THAN
COMMON STOCK. In the event that the Company shall make or issue, or shall fix a
record date for the determination of holders of any capital stock of the Company
(OTHER THAN holders of Common Stock) entitled to receive a dividend or other
distribution payable in Common Stock or securities of the Company convertible
into or otherwise exchangeable for shares of Common Stock of the Company, then
such Common Stock or other securities issued in payment of such dividend shall
be deemed to have been issued for a consideration of $.01.

(i) (D) CONSIDERATION OTHER THAN CASH. For purposes of this
Section 6(a)(i), if a part or all of the consideration received by the Company
in connection with the issuance of shares of the Common Stock or Common Stock
Equivalents consists of property other than cash, such consideration shall be
deemed to have a fair market value as is reasonably determined in good faith by
the Board of Directors of the Company. In the event of any dispute

-7-
<PAGE>

between the holders of Warrants and the Company regarding the determination of
fair market value, at the option of the holders of sixty percent (60%) of the
outstanding Warrants, the Company shall engage a consulting firm or investment
banking firm, selected by the Board of Directors and approved by the holders of
sixty percent (60%) of the outstanding Warrants (such approval not to be
unreasonably withheld), to prepare an independent appraisal of the fair market
value of such property to be distributed. The costs of such valuation shall be
borne by the Company.

(i) (E) EXCEPTIONS TO ANTI-DILUTION ADJUSTMENTS; BASKET FOR
RESERVED EMPLOYEE SHARES. This Section 6(a)(i) shall not apply under any of the
circumstances which would constitute an Extraordinary Common Stock Event (as
described below). Further, the anti-dilution protection provisions of this
Section 6(a)(i) shall not apply with respect to:

(1) the grant, issuance or sale of up to a maximum of 2,278
shares of Common Stock, or the grant of options, warrants or other rights
exercisable therefor, issued or issuable after the original issue date of the
Warrants to directors, officers, employees, consultants and others pursuant to
any incentive or non-qualified stock option plan or agreement, stock purchase
plan or agreement, stock issuance or restricted stock agreement, stock ownership
plan (ESOP), consulting agreement, or such other options, issuances,
arrangements, agreements or plans approved by a majority of the members of the
Board of Directors; and

(2) shares of Common Stock (or options or warrants exercisable
therefor) issued solely to employees, consultants or others in connection with
the acquisition (whether by merger or otherwise) by the Company of all or
substantially all of the capital stock or assets of any other entity or business
organization, provided the issuance of such securities is approved by two-thirds
of the members of the Board of Directors and provided that the aggregate number
of shares of Common Stock issued pursuant to this paragraph does not exceed
1,662 shares.

The foregoing numbers of shares of Common Stock may be increased
from time to time (i) by a vote of two-thirds of the members of the Board of
Directors of he Corporation, or (ii) by the written consent of the holders of at
least sixty percent (60%) of the outstanding Warrants.

The foregoing numbers shall be subject to a proportionate
adjustment in the event of any stock dividend,

-8-
<PAGE>

stock split, combination, reorganization, recapitalization, reclassification or
other similar event involving a change in the Common Stock.

(a) (ii) UPON EXTRAORDINARY COMMON STOCK EVENT. Upon the
happening of an Extraordinary Common Stock Event (as hereinafter defined), the
Exercise Price shall, simultaneously with the happening of such Extraordinary
Common Stock Event, be adjusted by multiplying the Exercise Price by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such Extraordinary Common Stock Event and the denominator
of which shall be the number of shares of Common Stock outstanding immediately
after such Extraordinary Common Stock Event, and the product so obtained shall
thereafter be the Exercise Price. The Exercise Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive Extraordinary
Common Stock Event or Events.

An "EXTRAORDINARY COMMON STOCK EVENT" shall mean (i) the issue of
additional shares of Common Stock as a dividend or other distribution on
outstanding shares of Common Stock, (ii) a subdivision of outstanding shares of
Common Stock into a greater number of shares of Common Stock, or (iii) a
combination or reverse stock split of outstanding shares of Common Stock into a
smaller number of shares of the Common Stock.

(g) NUMBER OF SHARES. Upon any adjustment of the Exercise Price, the
Holder of this Warrant shall thereafter (until another such adjustment) be
entitled to purchase, at the new Exercise Price, the number of shares,
calculated to the nearest full share, obtained by multiplying the Exercise Price
in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the new Exercise Price resulting from such adjustment. As
use herein, the term "shares" shall include any property receivable upon
exercise of the Warrants pursuant to Section 10 hereof.

(h) DIVIDENDS. In the event the Company shall make or issue, or shall
fix a record date for the determination of holders of Common Stock entitled to
receive a dividend or other distribution with respect to the Common Stock
payable in (i) securities of the Company other than shares of Common Stock, or
(ii) other assets (excluding cash dividends or distributions), then and in each
such event provision shall be made so that the holders of the Warrants shall
receive upon exercise thereof in addition to the number

-9-

<PAGE>

of shares of Common Stock receivable thereupon, the number of securities or such
other assets of the Company which they would have received had their Warrants
been exercised on the date of such event and had they thereafter, during the
period from the date of such event to and including the date of exercise,
retained such securities or such other assets receivable by them during such
period, giving application to all other adjustments called for during such
period under Section 6 hereof with respect to the rights of the holders of the
Warrants.

(i) CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common Stock
issuable upon the exercise of the Warrants shall be changed into the same or
different number of shares of any class or classes of capital stock, whether by
capital reorganization, recapitalization, reclassification or otherwise (other
than a subdivision or combination of shares of stock dividend provided for in
Section 6 hereof, or the sale of all or substantially all of the Company's
capital stock or assets to any other person), then and in each such event each
holder of Warrants shall have the right thereafter to exercise the Warrants for
kind and amount of shares of capital stock and other securities and property
receivable upon such reorganization, recapitalization, reclassification or other
change by the holders of the number of shares of Common Stock for which such
Warrants might have been exercised immediately prior to such event, all subject
to further adjustment as provided herein.

(j) CAPITAL REORGANIZATION, MERGER OR SALE OF ASSETS. If at any time
or from time to time there shall be a capital reorganization of the Common Stock
(other than a subdivision, combination, recapitalization, reclassification or
exchange of shares provided for elsewhere in this Warrant) or a merger, or
consolidation of the Company with or into another corporation, or the sale of
all or substantially all of the Company's capital stock or assets to any other
person, or any other form of business combination, acquisition or reorganization
in which control of the Company is transferred (a "Reorganization"), then, as a
part of and a condition to such Reorganization, provision shall be made so that
the holders of the Warrants shall thereafter be entitled to receive upon
exercise of the Warrants the same kind and amount of stock or other securities
or property (including cash) of the Company, or of the successor corporation
resulting from such Reorganization, to which such holder would have received if
such holder had exercised its Warrants for shares of Common Stock immediately
prior to the effective time of such Reorganization. In any such case,
appropriate adjustment shall be made in the application of the provisions

-10-

<PAGE>

of this Warrant so that the provisions of this Warrant (including adjustment of
the Exercise Price then in effect and the number of share of Common Stock or
other securities issuable upon exercise of the Warrants) shall be applicable
after that event in as nearly equivalent a manner as may be practicable.

The provisions of this Section 10 shall not apply to any
Reorganization involving (1) only a change in the state of incorporation of the
Company, (2) a merger of the Company with or into a wholly-owned subsidiary of
the Company that is incorporated in the United States of America, or (3) an
acquisition by merger, reorganization or consolidation, of which the Company is
substantively the surviving corporation and operates as a going concern, of
another corporation that is engaged in a business similar or related to or
complementary with the business of the Company and which does not involve a
recapitalization or reorganization of the Common Stock.

(k) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Exercise Price, the Company, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to the Holder of this Warrant a certificate
of the chief financial officer of the Company setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request any time of
the holder of this Warrant, furnish to such Holder a like certificate setting
forth (i) such adjustments and readjustments, (ii) the Exercise Price at the
time in effect, and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the exercise
of this Warrant.

(l) NOTICES OF RECORD DATE. In the event of any taking by the Company
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any Common Stock or Common Stock Equivalents, or any right
to subscribe for, purchase or otherwise acquire any shares of stock of any class
or any other securities or property, or to receive any other right, the Company
shall mail to the holder of this Warrant, at least thirty (30) days prior to the
record date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or rights,
and the amount and character of such dividend, distribution or right.

-11-

<PAGE>

(m) STOCK TRANSFER TAXES. The issue of stock certificates upon the
exercise of this Warrant shall be made without charge to the exercising Holder
for any tax in respect of such issue. The Company shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the issue and delivery of shares in any name other than that of the Holder,
and the Company shall not be required to issue or deliver any such stock
certificate unless and until the person or persons requesting the issue thereof
shall have paid to the Company the amount of such tax or shall have established
to the satisfaction of the Company that such tax has been paid.

(n) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant
is exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company for other Warrants of different
denominations entitling the holder thereof to purchase in the aggregate the same
number of shares of Common Stock purchasable hereunder. Any transfer or
assignment of this Warrant may, subject to the provisions of the Purchase
Agreement, be made upon surrender of this Warrant to the Company with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax; whereupon the Company shall, without charge, execute and deliver a
new Warrant in the name of the assignee named in such instrument of assignment
and this Warrant shall promptly be cancelled, and in the case of a transfer or
assignment of less than all of the shares purchasable under this Warrant, the
Company shall execute and deliver to the Holder a new Warrant of like tenor for
the balance of the shares purchasable hereunder. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) of a reasonable
satisfactory indemnification agreement and upon surrender and cancellation of
this Warrant, if mutilated, the Company will execute and deliver a new Warrant
of like tenor and date. Any such new Warrant executed and delivered shall
constitute an additional contractual obligation on the part of the Company,
whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at
any time enforceable by anyone.

(o) NOTICES, ETC. All notices and other communications from the
Company to the Holder of the Warrant shall be mailed by first-class registered
or certified mail, postage prepaid, at such address as may have been furnished
to the company in writing by such Holder, or until an address is so furnished,
to and at the address of the last

-12-

<PAGE>

Holder of the Warrant who has so furnished an address to the Company.

(p) MISCELLANEOUS. This Warrant and any term hereof may be
changed, waived, discharged or terminated only be an instrument in writing
signed by the Company and the Holder of this Warrant. This Warrant shall be
construed and enforced in accordance with an governed by the laws of the State
of New York. The headings in this Warrant are for purposes of reference only
and shall not limit or otherwise affect the meaning thereof.

(q) NO RIGHTS AS STOCKHOLDER. The holder of this Warrant shall
not have any rights as a stockholder of the Company (including rights to
dividends and voting rights), and shall only have the rights specifically set
forth in this Warrant and in the Purchase Agreement.

(r) EXPIRATION. The right to exercise this Warrant shall expire
at 11:59 p.m. Eastern Time on December 8, 2003.

Dated: December 8, 1993

ADVANCE PHARMACY SYSTEMS, INC.

By:/s/ David D. Halbert
---------------------
Title: Chairman, CEO

<PAGE>

PURCHASE FORM

Dated___________, ____

The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing _____ shares of Common Stock of ADVANCE
PHARMACY SYSTEMS, INC., and hereby [makes payment of $__________ as payment of
the actual exercise price thereof] [or] [makes payment therefor by application
pursuant to Section 1(b) of the Warrant of $__________ aggregate [interest on]
[principal amount of] Notes (as defined in the Warrant)].

________________

INSTRUCTIONS FOR REGISTRATION OF STOCK

Name
-------------------------------------------------------------------------
(please typewrite or print in block letters)

Address
----------------------------------------------------------------------

Signature
--------------------------------------

________________

ASSIGNMENT FORM

FOR VALUE RECEIVED, ______________________________________ hereby
sells, assigns and transfers unto

Name
-------------------------------------------------------------------------
(please typewrite or print in block letters)

Address
----------------------------------------------------------------------

the right to purchase Common Stock of ADVANCE PHARMACY SYSTEMS, INC.,
represented by this Warrant to the extent of _____ shares as to which such right
is exercisable and does hereby irrevocably constitute and appoint
________________________________________, attorney, to transfer the same on the
books of ADVANCE PHARMACY SYSTEMS, INC., with full power of substitution in the
premises.

Signature
--------------------------------------

Dated_____________,____

<PAGE>

DISCLOSURE SCHEDULE
TO
ADVANCE PHARMACY SERVICES, INC.
NOTE AND WARRANT PURCHASE AGREEMENT

<PAGE>

SCHEDULE 2.3
GOVERNMENTAL APPROVALS

--None--

<PAGE>

SCHEDULE 2.4

LITIGATION

--None--

<PAGE>

SCHEDULE 2.6

SCHEDULE OF INDEBTEDNESS

1. Demand Promissory Note dated January 28, 1993 made by Advance Home
Prescriptions, Inc. in favor of Security State Bank for up to $500,000
principal amount (matures January 28, 1994) (the "Working Capital Line").

2. Equipment Lease dated November 12, 1993 between Advance Home Prescriptions,
Inc. and Universal Leasing Services, Inc.

Term: November 20, 1991 through November 20, 1994.

Monthly Payment: $446.87.

<PAGE>

SCHEDULE 2.7

TITLE TO ASSETS

ENCUMBRANCES

1. Security State Bank security interest in all accounts receivable and
inventory of Advance Home Prescriptions, Inc..

2. FoxMeyer Corporation secondary security interest in all inventory of
Advance Home Prescriptions, Inc.

LICENSES

APM has acquired the right to use the software products and databases of
pharmaceutical information described below:

Licensor Description
- -------- -----------

ComCoTec, Inc. Mail Service Pharmacy Software

Medi-Span, Inc. Drug Pricing and Information
Services Database

Health Business Systems, Inc./ Retail Claim Adjudication
Time Share Software

Strategic Mapping/Atlas GIS Mapping Software for Provider
Coverage Analysis

VAX/VMS Operating System Utilized on
Digital Equipment Corp. VAX
Computer System

Pick/Blue End User Software License

<PAGE>

SCHEDULE 2.8

FINANCIAL INFORMATION

ATTACHMENTS:

(i) the audited Financial Statements for the fiscal years ended March 31,
1992 and March 31, 1993, of Advance Health Care, Inc.,

(ii) the audited financial statements of the Company's Subsidiaries as of
March 31, 1993, and

(iii) the Company's unaudited Statement of Income and Balance Sheet, as
at October 31, 1993.

TRANSACTIONS OTHER THAN IN THE ORDINARY COURSE OF BUSINESS SINCE MARCH 31, 1993:

1. Assumption by the Company from Advance Health Care, Inc. of $500,000
principal amount in debt previously incurred by Advance Health Care, Inc.
for the benefit of the Company (the "Assumption of Shareholder Loan").

2. Agreement for Purchase of Machines dated July 17, 1993 between Prelude
Systems, Inc. and Advance Prescriptions Management, Inc. to purchase new
computer system, hardware and software for $76,000 (the "Computer Purchase
Agreement").

3. Recapitalization Agreement dated July 30, 1993 among Advance Pharmacy
Services, Inc., Advance Prescription Management, Inc. and Advance Home
Prescriptions, Inc. (the "Recapitalization Agreement") (which includes the
Assumption of the Shareholder Loan).

4. All agreements and arrangements listed in Schedule 2.21 are hereby
incorporated by reference as if listed in their entirety in this Schedule
2.8.

Continued on next page

<PAGE>

LIABILITY NOT REFLECTED ON FINANCIAL STATEMENTS

1. Assumption of Shareholder Loan

2. Assignment, Assumption, Bill of Sale and Consent Agreement dated October
20, 1993 by and between Medco Containment Services, Inc., APS and Trinity
Properties, Ltd. relating to that Original Commercial Lease Agreement
between Trinity Properties, Ltd. and Flex RX Pharmacy Services, Inc.

3. Agreement regarding purchase of upgraded automation equipment at the new
facility.

<PAGE>

ARTHUR
ANDERSEN

ARTHUR ANDERSEN & CO. SC

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1993 AND 1992

TOGETHER WITH AUDITORS' REPORT

<PAGE>

ARTHUR ANDERSEN & CO.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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 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 Health Care, Inc. and
subsidiaries as of March 31, 1993 and 1992, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.

Dallas, Texas,
June 30, 1993

<PAGE>

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS--MARCH 31, 1993 AND 1992

ASSETS 1993 1992
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 42,000 $ 27,000
Accounts receivable, net of allowance for doubtful
accounts of $319,000 and $135,000 in 1993 and
1992, respectively 2,750,000 1,727,000
Other receivables 58,000 49,000
Inventories 939,000 521,000
Prepaid expenses 58,000 43,000
----------- -----------

Total current assets 3,847,000 2,367,000
----------- -----------

PROPERTY AND EQUIPMENT:
Vehicles 212,000 98,000
Office equipment and furniture 861,000 455,000
Rental equipment 1,377,000 903,000
Leasehold improvements 113,000 98,000
----------- -----------

2,563,000 1,554,000

Less-Accumulated depreciation and amortization (1,152,000) (694,000)
----------- -----------

Net property and equipment 1,411,000 860,000
----------- -----------

OTHER ASSETS:
Note receivable 27,000 25,000
Organizational costs and other, net of accumulated
amortization of $40,000 and $23,000 in 1993 and
1992, respectively 109,000 84,000
----------- -----------

Total other assets 136,000 109,000
----------- -----------

Total assets $ 5,394,000 $ 3,336,000
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1992
------------------------------------ ----------- -----------

CURRENT LIABILITIES:
Accounts payable $ 1,506,000 $ 846,000
Accrued expenses 426,000 166,000
Short-term obligations 2,604,000 264,000
Current portion of long-term obligations 1,161,000 170,000
----------- -----------

Total current liabilities 4,697,000 1,446,000
----------- -----------

LONG-TERM OBLIGATIONS:
Notes payable, less current portion 77,000 478,000
Obligations under capital leases, less current portion 62,000 128,000
----------- -----------

Total long-term obligations 139,000 606,000
----------- -----------

COMMITMENTS AND CONTINGENCIES:

STOCKHOLDERS' EQUITY:
Subordinated debenture, nonvoting, converted into
16,013 common shares on June 14, 1993 2,388,000 2,388,000
Convertible preferred stock, nonvoting, stated value
$1; 10,000 shares authorized, 4,153 shares issued
and outstanding at March 31, 1993 and 1992; each
share is convertible to 1.67 shares of common
stock at option of the holders or the Company 4,000 4,000
Common stock, par value $1; 100,000 shares
authorized, 31,532 and 30,692 issued and
outstanding at March 31, 1993 and 1992,
respectively 32,000 31,000
Additional paid in capital 1,257,000 1,258,000
Accumulated deficit (3,123,000) (2,397,000)
----------- -----------

Total stockholders' equity 558,000 1,284,000
----------- -----------

Total liabilities and stockholders' equity $ 5,394,000 $ 3,336,000
----------- -----------
----------- -----------

</TABLE>

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

<PAGE>

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED MARCH 31, 1993 AND 1992

1993 1992
----------- -----------

Total cost of operations 18,673,000 10,885,000
----------- -----------

Net loss before other revenues and expenses
and provision for income taxes (167,000) (68,000)
----------- -----------

OTHER REVENUES AND (EXPENSES):
Depreciation and amortization expense (404,000) (233,000)
Interest and other income 51,000 21,000
Interest expense (206,000) (115,000)
----------- -----------

Net other revenues and (expenses) (559,000) (327,000)
----------- -----------

NET LOSS BEFORE PROVISION FOR INCOME TAXES (726,000) (395,000)

PROVISION FOR INCOME TAXES - -
----------- -----------

NET LOSS $(726,000) $(395,000)
----------- -----------
----------- -----------

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

<PAGE>

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED MARCH 31, 1993 AND 1992

Additional
Subordinated Preferred Common Paid-In Accumulated
Debentures Stock Stock Capital Deficit Total
------------- --------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1991 $ - $ 4,000 $ 28,000 $ 1,023,000 $ (2,002,000) $ (947,000)

Reclassification of 5.5% subordinated debenture
(net of $112,000 of unamortized
placement fees) as equity resulting from
modification of agreement 2,388,000 - - - - 2,388,000

Conversion of 8% subordinated debenture - - 2,000 98,000 - 100,000

Issuance of common stock in payment of accrued
interest on 5.5% subordinated debenture - - 1,000 137,000 - 138,000

Net loss (395,000) (395,000)
---------- --------- --------- ----------- ------------ ----------

BALANCE, March 31, 1992 2,388,000 4,000 31,000 1,258,000 (2,397,000) 1,284,000

Issuance of common stock to holder of
5.5% subordinated debenture - - 1,000 (1,000) - -

Net Loss - - - - (726,000) (726,000)
---------- --------- --------- ----------- ------------ ----------

$2,388,000 $ 4,000 $ 32,000 $ 1,257,000 $ (3,123,000) $ 558,000
---------- --------- --------- ----------- ------------ ----------
---------- --------- --------- ----------- ------------ ----------

</TABLE>

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

<PAGE>

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MARCH 31, 1993 AND 1992

1993 1992
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (726,000) $ (395,000)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 404,000 233,000
Bad debt expense 381,000 188,000
Interest on subordinated debenture - 19,000
Increase in accounts receivable (1,404,000) (947,000)
Increase in inventories (144,000) (64,000)
Increase in other receivables,
prepaid expenses, organizational
costs and other (51,000) (25,000)
Increase in accounts payable and
accrued expenses 920,000 336,000
----------- -----------

Net cash used in operating activities (620,000) (655,000)
----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (435,000) (446,000)
Purchases of property and equipment in
Owen acquisition (520,000) -
Purchases of inventories in Owen acquisition (274,000) -
----------- -----------

Net cash provided by investing activities (1,229,000) (446,000)
----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, obligations
under capital leases, and
bank line of credit 2,030,000 1,044,000
Principal payments on long-term obligations (166,000) (563,000)
----------- -----------

Net cash provided by financing activities 1,864,000 481,000
----------- -----------
----------- -----------

NET INCREASE (DECREASE) IN CASH 15,000 (620,000)

CASH, beginning of year 27,000 647,000
----------- -----------

CASH, end of year $ 42,000 $ 27,000
----------- -----------
----------- -----------

</TABLE>

SCHEDULE OF NONCASH TRANSACTIONS:

At March 31, 1992, the Company exercised its option to convert $100,000 of
8% subordinated debentures to equity.

SUPPLEMENTARY INFORMATION

Cash paid for interest expense totaled approximately $173,000 and $88,000
in 1993 and 1992, respectively.

The Company incurred no income tax liabilities in 1993 and 1992; therefore,
no cash payments for this purpose were made.

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

<PAGE>

ADVANCE HEALTH CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1993 AND 1992

1. ORGANIZATION AND BASIS OF PRESENTATION:

The consolidated financial statements include the accounts of Advance Health
Care, Inc. and its five wholly owned subsidiaries: Advance Home Prescriptions,
Inc., Advance Home Medical, Inc., Advance HomeCare, Inc., Advance Pharmacies,
inc., and Advance Prescription Management, Inc. (collectively, the "Company").

The Company's operations consist of the sale and rental (on a month-to-month
basis) of medical equipment and supplies, the mail order sale of
pharmaceuticals, the processing of prescription claims, the delivery of home-
based nursing services and the retail sales of one pharmacy. The Company
operates medical equipment, supply and service facilities throughout the state
of Texas, and its mail order prescription operations are nationwide.

All significant intercompany accounts and transactions have been eliminated in
consolidation.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

REVENUE RECOGNITION

INVENTORIES

Inventories consist of medical supplies, medical equipment for resale and
pharmaceuticals. Inventories are valued at the lower of cost or market under
the first-in, first-out method.

PROPERTY AND EQUIPMENT

<PAGE>

-2-

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 operations.

ORGANIZATIONAL COSTS AND OTHER

Organizational costs are comprised of professional fees incurred in the
formation of the Company and the acquisition of various Company assets. Other
assets are comprised primarily of capitalized costs incurred in the development
of certain computer systems. These costs are being amortized on the straight-
line method over periods ranging from 48 to 60 months.

FEDERAL INCOME TAXES

The Company files a consolidated U.S. federal income tax return with its five
wholly owned subsidiaries.

3. INVENTORIES:

Inventories are comprised of the following assets held for sale within one year:

MARCH 31,
---------------------------
1993 1992
------------ ------------
Medical supplies and equipment $ 459,000 $ 210,000
Pharmaceuticals 480,000 311,000
------------ ------------
$ 939,000 $ 521,000
------------ ------------
------------ ------------

4. SHORT-TERM OBLIGATIONS:

Short-term obligations consist of the following:

MARCH 31,
--------------------------
1993 1992
------------ ------------
Bank line of credit of $500,000 which expires
January 1994; bearing interest at 8.5%;
collateralized by certain accounts
receivable and inventory $ 359,000 $ 264,000

Unsecured note payable to an affiliated entity
bearing interest at 6% and due July 1993 495,000 -

Unsecured note payable to a related party
bearing interest at 6% and due
October 1993 1,500,000 -

Unsecured note payable to a related party
bearing interest at 6% and
due September 1993 250,000 -
----------- -----------
$ 2,604,000 $ 264,000
----------- -----------
----------- -----------

<PAGE>

-3-

5. LONG-TERM OBLIGATIONS:

Long-term obligations consist of the following:

MARCH 31,
------------------------
1993 1992
---- ----
Payable to an affiliated entity,
bearing interest at 9% $ - $ 310,000

Unsecured note payable to a related party,
bearing interest at 10%; payable in 36
equal monthly installments of
approximately $8,100; due December 1994 155,000 232,000

Bank note bearing interest at 9%; payable in
36 equal monthly installments of
approximately $1,000; collateralized by
certain equipment and property;
due March 1995 15,000 20,000

Various vehicle leases bearing an average rate
of interest of 15%; payable in monthly
installments; collateralized by vehicles;
maturity dates ranging from May 1995
to January 1996 18,000 24,000

Various obligations under capital leases
bearing interest at an average rate of 18%;
payable in monthly installments;
collateralized by certain rental equipment;
maturity dates ranging
from July 1993 to June 1995 112,000 190,000
----------- -----------
300,000 776,000

Less- Current portion of notes payable and
obligations under capital leases (161,000) (170,000)
----------- -----------

$ 139,000 $ 606,000
----------- -----------
----------- -----------

The Company incurred interest expense of $206,000 and $115,000 in 1993 and 1992,
respectively, for short-term and long-term obligations.

Virtually all the Company's debt has been personally guaranteed by certain
stockholders and officers of the Company.

<PAGE>

-4-

6. SUBORDINATED DEBENTURES.

The debenture holder received common stock in 1992 as payment of interest
through May 1991 under the terms of the debenture. As a result of the letter
agreement, the debenture holder received common stock which has been reflected
as a charge to additional paid-in capital in 1993. In addition, a similar
charge to paid-in capital has been made subsequent to year-end to reflect the
shares accrued through the conversion date.

7. FEDERAL INCOME TAXES:

8. RETIREMENT PLAN:

9. STOCK OPTION PLAN:

<PAGE>

-5-

10. RELATED-PARTY TRANSACTIONS:

Certain subsidiaries of the company lease space in a medical mall located in
Abilene, Texas. The medical mall is a project in which several board members
and stockholders are partners. It is the opinion of management that the mall
rental rates are at market rates. Total rental expense approximated $84,000 and
$85,000 in 1993 and 1992, respectively.

Effective fiscal 1991, the Company entered into an agreement with an affiliate
whereby the affiliate provided certain management services and paid for the
Company's office rent and certain operating costs. In exchange, the Company
paid the affiliate a monthly fee of $20,000. This agreement was terminated in
February 1992. Payments associated with this agreement totaled $220,000 in
1992.

11. COMMITMENTS AND CONTINGENCIES:

Years Ending
March 31,
------------

1994 $ 387,000
1995 339,000
1996 276,000
1997 213,000
1998 and thereafter 120,000

12. SUBSEQUENT EVENTS:

As described in Note 6, on June 14, 1993, the Company retired the $2,500,000,
5.5% subordinated debenture with the issuance of 16,013 shares of common stock
to the holder.

<PAGE>

Advance Pharmacy Services, Inc. and Subsidiaries
Consolidated Balance Sheet
October 31, 1993
(Unaudited)

Assets
Current Assets:
Cash $ 2,531,390
Accounts and Other Receivables 1,023,226
Inventories 522,998
Other Current Assets 104,039
--------------
Total Current Assets 4,181,653
--------------

Property, Plant and Equipment 1,071,281
Less: Accumulated Depreciation (198,418)
--------------
Net Property, Plant & Equipment 872,863
--------------

Other Assets 101,331
--------------

Total Assets $ 5,155,847
--------------
--------------

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable and Accrued Expenses $ 1,774,266
Current Portion of Capital Leases 4,973
--------------
Total Current Liabilities 1,779,239
--------------

Long-Term Notes payable and Capital Leases -

Stockholders Equity:
Preferred Stock 40
Common Stock 125
Additional Paid in Capital 4,836,755
Accumulated Earnings (Deficit) (1,460,312
--------------)
Total Stockholders' Equity 3,376,608
--------------

Total Liabilities & Equity $ 5,155,847
--------------
--------------

<PAGE>

ARTHUR
ANDERSEN

ARTHUR ANDERSEN & CO. SC

ADVANCE HOME PRESCRIPTIONS, INC. AND
ADVANCE PRESCRIPTION MANAGEMENT, INC.

COMBINED FINANCIAL STATEMENTS
AS OF MARCH 31, 1993

TOGETHER WITH AUDITORS' REPORT

<PAGE>

ARTHUR ANDERSEN & CO.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying combined balance sheets of Advance Home
Prescriptions, Inc. and Advance Prescription Management, Inc. (Delaware
corporations and both wholly owned subsidiaries of Advance Health Care, Inc.) as
of March 31, 1993, and the related combined statements of operations,
stockholder's equity, and cash flows for the year then ended. These financial
statements are the responsibility of the companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit 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 audit provides 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 Home Prescriptions,
Inc. and Advance Prescription Management, Inc. as of March 31, 1993, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

Dallas, Texas,
June 30, 1993

<PAGE>

ADVANCE HOME PRESCRIPTIONS, INC. AND
ADVANCE PRESCRIPTION MANAGEMENT, INC.

COMBINED BALANCE SHEET--MARCH 31, 1993

ASSETS

CURRENT ASSETS:
Cash $ 10,000
Accounts receivable, net of allowance for doubtful
accounts of $75,000 899,000
Other receivables 9,000
Inventories 351,000
Prepaid expenses 33,000
----------

Total current assets 1,302,000
----------

FURNITURE AND EQUIPMENT, net of accumulated
depreciation of $129,000

ORGANIZATIONAL COSTS AND OTHER, net
of accumulated amortization of $31,000 73,000
-----------

Total assets $1,761,000
----------
----------

LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES:
Accounts payable $ 881,000
Accrued expenses 86,000
Payable to stockholder and affiliates 436,000
Bank line of credit 359,000
Current portion of capital lease obligation 5,000
----------

Total current liabilities 1,767,000
----------
CAPITAL LEASE OBLIGATION, less current portion 3,000

COMMITMENTS AND CONTINGENCIES

STOCKHOLDER'S EQUITY:
Preferred stock of Advance Home Prescriptions, Inc.,
stated value $100; 10,000 shares authorized, 2,500
shares issued and outstanding at March 31, 1993 250,000
Common stock, par value $1 and $.01, 3,000 and
1,000 shares authorized for Advance Home
Prescriptions, Inc. and Advance Prescription
Management, Inc., respectively; 1,654 shares
issued and outstanding net of 1,500 shares
held in treasury for Advance Home
Prescriptions, Inc.; 1,000 shares issued and
outstanding for Advance
Prescription Management, Inc. 2,000
Additional paid-in capital 1,025,000
Accumulated deficit (1,286,000)
----------

Total stockholder's equity (deficit) (9,000)
----------
Total liabilities and
stockholder's equity $1,761,000
----------
----------

The accompanying notes are an integral part of this combined financial
balance sheet.

<PAGE>

ADVANCE HOME PRESCRIPTIONS, INC. AND
ADVANCE PRESCRIPTION MANAGEMENT, INC.

COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED MARCH 31, 1993

REVENUES $11,867,000
-----------
COST OF OPERATIONS:
Cost of goods and services 9,846,000
Selling, general and administrative expense 2,372,000
-----------

Total cost of operations 12,218,000
-----------

Net income before other expenses and provision for
income taxes (351,000)
-----------
OTHER EXPENSES:
Depreciation and amortization expense 69,000
Interest expense 26,000
-----------

Total other expenses 95,000
-----------

NET LOSS BEFORE PROVISION FOR INCOME TAXES (446,000)

PROVISION FOR INCOME TAXES -
-----------

NET LOSS $ (446,000)
-----------
-----------

The accompanying notes are an integral part of this combined financial
statement.

<PAGE>

ADVANCE HOME PRESCRIPTIONS, INC. AND
ADVANCE PRESCRIPTION MANAGEMENT, INC.

COMBINED STATEMENT OF STOCKHOLDER'S EQUITY

FOR THE YEAR ENDED MARCH 31, 1993

<TABLE>
<CAPTION>
Common
Stock
Net of Additional
Preferred Treasury Paid-In Accumulated
Stock Stock Capital Deficit Total
-------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>

BALANCE, March 31, 1992 $250,000 $ 2,000 $1,025,000 $ (840,000) $ 437,000

Net loss - - - (446,000) (446,000)
-------- -------- ---------- ----------- ----------
BALANCE, March 31, 1993 $250,000 $ 2,000 $1,025,000 $(1,286,000) $ (9,000)
-------- -------- ---------- ----------- ---------
-------- -------- ---------- ----------- ---------

</TABLE>

The accompanying notes are an integral part of this combined financial
statement.

<PAGE>

ADVANCE HOME PRESCRIPTIONS, INC. AND
ADVANCE PRESCRIPTION MANAGEMENT, INC.

COMBINED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED MARCH 31, 1993

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (446,000)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities-
Depreciation and amortization 69,000
Bad debt expense 58,000
Increase in accounts receivable (209,000)
Increase in inventories (98,000)
Increase in other receivables, prepaid expenses,
organizational costs, and other (21,000)
Increase in accounts payable, accrued expenses,
and payable to affiliates 818,000
----------

Net cash provided by operating activities 171,000
----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (286,000)
----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term obligations 95,000
Decrease in capital lease obligation (4,000)
----------

Net cash provided by financing activities 91,000
----------

NET DECREASE IN CASH (24,000)

CASH, beginning of year 34,000
----------

CASH, end of year $ 10,000
----------
----------

SUPPLEMENTARY INFORMATION:

Cash paid for interest expense totaled approximately $24,000.

The Division incurred no income tax liabilities in 1993; therefore, no cash
payments for this purpose were made.

The accompanying notes are an integral part of this combined financial
statement.

<PAGE>

ADVANCE HOME PRESCRIPTIONS, INC. AND
ADVANCE PRESCRIPTION MANAGEMENT, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

MARCH 31, 1993

1. ORGANIZATION AND BASIS OF PRESENTATION:

The consolidated financial statements include the accounts of Advance Home
Prescriptions, Inc. and Advance Prescription Management, Inc., both wholly owned
subsidiaries of Advance Health Care, Inc. (the "Company"). The two subsidiaries
comprise the Company's Pharmacy Division and are referred to collectively as the
"Division."

The Division's operations consist of the sale of mail service pharmaceuticals
and the processing of prescription claims. The Division operates a pharmacy
facility in Carrollton, Texas, and its mail service prescription operations are
nationwide.

All significant intercompany accounts have been eliminated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

REVENUE RECOGNITION

The mail service prescription revenues are generally recognized when each
prescription is filled and shipped. Prescription management service fees are
recognized when claims are processed. The Division bills insurance companies,
third-party administrators and individuals for its services.

MANAGEMENT SERVICES

The Company provides senior management and other services, including payroll,
personnel, accounting, and administration, to the Division. The cost of these
services is allocated to the Division and is reflected in the accompanying
financial statements. The total management fee incurred in 1993 was $443,000.

INVENTORIES

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

FURNITURE AND EQUIPMENT

Furniture 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 seven years. Amortization of
leasehold improvements is computed over the lives of the assets or the lease
terms, whichever is shorter. Lease terms average seven years. Major renewals
and betterments are added to the furniture and equipment accounts, while the
cost of repairs and maintenance is charged to operating expenses in the period
incurred.

<PAGE>

-2-

ORGANIZATIONAL COSTS AND OTHER

Organizational costs are comprised of professional fees incurred in the
formation of the companies and the acquisition of various Division assets.
Other assets are comprised primarily of capitalized costs incurred in the
development of certain computer systems. These costs are being amortized on the
straight-line method over periods ranging from 48 to 60 months.

FEDERAL INCOME TAXES

The Division's activities are included in the consolidated U.S. federal income
tax return of the Company. The Division calculates its tax provision on a
stand-alone basis.

The Division accounts for certain income and expense items differently for
financial reporting purposes than for federal income tax purposes. The
principal timing differences arise as a result of the use different methods for
recognizing bad debt deductions and depreciation for financial statement
accounting and tax reporting purposes. The Division paid no income taxes and
recognized no income tax expense relating to 1993.

In February 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes." SFAS 109 becomes mandatory for the Division for the fiscal
year ending March 31, 1994. The Company and the Division have neither
determined the impact of adoption of SFAS 109 nor decided whether they will
restate prior year financial statements in the year of adoption.

3. BANK LINE OF CREDIT:

The Division has a $500,000 bank line of credit which expires on January 28,
1994. The line of credit bears interest at 8.5% and is collateralized by
certain accounts receivable and inventory.

Virtually all the Division's debt has been personally guaranteed by certain
stockholders and officers of the Company.

4. CAPITAL LEASE OBLIGATION:

The Division's capital lease obligation bears interest at the rate of 15%. The
lease is payable in monthly installments and is collateralized by certain
equipment. The lease terminates October 1994.

5. RETIREMENT PLAN:

The Company sponsors a retirement plan for all eligible Division employees. The
plan is qualified under Section 401(k) of the Internal Revenue Code. The
Company and the Division are not required to make, and have not made, any
contributions to the plan to date.

<PAGE>

-3-

6. COMMITMENTS AND CONTINGENCIES:

The Division has operating leases for office space and certain office equipment.
Total rental expense incurred in 1993 was $97,000. Future minimum rentals under
noncancelable operating lease agreements as of March 31, 1993, are as follows:

Years Ending
March 31,
--------------
1994 $ 78,000
1995 35,000
1996 19,000
1997 9,000
1998 and thereafter 4,000

7. SUBSEQUENT EVENTS:

In June 1993, the Company signed a nonbinding Term Sheet that proposed a Series
A Senior preferred stock financing for the continued expansion of the Division.
In connection with this proposed financing, all capital stock of the Division
will be contributed to a new holding company, which will also be a wholly owned
subsidiary of the Company.

<PAGE>

Advance Pharmacy Services, Inc. and Subsidiaries
Consolidated Statement of Operations
For the Seven Months Ended October 31, 1993
(Unaudited)

Revenues:
Mail Service Pharmaceuticals $ 8,701,756
Adjudication Revenues 351,686
--------------
Total Revenues 9,053,442
Cost of Sales (7,244,856)
--------------

Gross Profit 1,808,586

Operating Expenses:
Advertising (3,493)
Insurance (26,933)
Leases and Rentals (76,159)
Other Operating Expenses (61,283)
Professional Services (51,112)
Repairs and Maintenance (18,030)
Salaries and Benefits (872,198)
Supplies/Postage/Freight (348,405)
Taxes (8,158)
Training/Development (1,737)
Travel/Auto/Entertainment (62,254)
Utilities and Telephone (78,642)
--------------
Total Operating Expenses (1,608,404)
--------------

Income From Operations 200,182
Non-Operating Revenue (Expense):
Interest Income and (Expense) 4,268
Depreciation and Amortization (79,304)
Corporate Overhead (299,430)
--------------
Total Non-Operating Revenue (Expense) (374,466)
--------------

Net Income (Loss) Before Taxes (174,284)
Federal Income Taxes -
--------------
Net Income (Loss) $ (174,284)
--------------
--------------
<PAGE>

<PAGE>

SCHEDULE 2.9

TAXES

--None--

<PAGE>

SCHEDULE 2.10

ERISA

Advance Health Care, Inc. established a 401(k) Plan. It does not contribute to
this Plan.

<PAGE>

SCHEDULE 2.11

TRANSACTIONS WITH AFFILIATES

1. Historically, various administrative and support functions are performed
for AHP and APM and all other subsidiaries by Advance Health Care, Inc.,
including without limitation executive management, insurance, workers
compensation, office space, parking, secretarial support, accounting,
bookkeeping, telephone and telecopy. The average monthly consolidated cost
of all such administrative functions historically ranges between
approximately $75,000 and $85,000. In connection with the closing of the
transactions contemplated by the Agreement, a substantial portion of these
functions, and some of the employees responsible for these functions, will
be assigned to the Company.

2. Recapitalization Agreement

3. Letter Agreement dated January 16, 1992 between Advance Home
Prescriptions, Inc. and Tim Moser, pursuant to which APM agreed to loan
$10,785, interest free, to Mr. Moser, and Mr. Moser agreed to repay APM at
a rate of $85 per month (the "Moser Loan").

<PAGE>

SCHEDULE 2.12

ASSUMPTIONS OR GUARANTIES OF INDEBTEDNESS OF OTHER PERSONS

1. Assumption of Shareholder Loan.

<PAGE>

SCHEDULE 2.13

INVESTMENT IN OTHER PERSONS

--None--

<PAGE>

SCHEDULE 2.16

BROKERS OR FINDERS

Advance Capital Markets, Inc. has been hired in connection with the negotiations
and acquisition of Paradigm Pharmacy Management, Inc.

<PAGE>

SCHEDULE 2.17

CAPITALIZATION; STATUS OF CAPITAL STOCK

RECORD SHAREHOLDERS OF THE COMPANY:

Advance Health Care, Inc.
Canaan Capital Limited Partnership
Canaan Capital Offshore Limited Partnership
Dr. Jeffrey R. Jay
Stephen L. Green
Quai Ltd.
J.H. Whitney & Co.
Whitney 1990 Equity Fund, L.P.

OPTIONS GRANTED

The Company has authorized the issuance of options to the current management of
Paradigm Pharmacy Management, Inc. ("Paradigm") to purchase up to 715 shares of
Common Stock and a warrant to Blue Cross and Blue Shield of Maryland, Inc. to
purchase up to 225 shares of Common Stock (the "Blue Cross Warrant").

RESTRICTIONS ON CAPITAL STOCK

1. The Purchase and Sale Agreement dated August 4, 1993, as amended (the
"Canaan/Whitney Purchase Agreement"), between the Company, Advance
Prescription Management, Inc., Advance Home Prescriptions, Inc. and each of
the Purchasers listed therein (the "Purchasers") grants a right of first
offer to the Purchasers with respect to certain proposed issuances by the
Company of equity, instruments convertible into equity or debt.

2. The Voting, Co-Sale and Right of First Refusal Agreement dated as of August
4, 1993 among the Company, Advance Health Care, Inc., the Investors and
Executive Stockholders listed therein (the "Voting Agreement") restricts
the ability of such Investors' and Executive Stockholders' to transfer
their shares of capital stock.

<PAGE>

SCHEDULE 2.18

REGISTRATION RIGHTS

1. The Purchasers are granted demand and piggy-back registration rights in the
Canaan/Whitney Purchase Agreement.

2. Blue Cross and Blue Shield, Inc. will be granted piggy-back registration
rights in the Blue Cross Warrant.

<PAGE>

SCHEDULE 2.19

INSURANCE

Coverage Amount Carrier
- -------- ------ -------

Primary General $1,000,000 per Commercial Union
Liability (including occurrence
commercial, property $2,000,000 aggregate
and druggist
professional
liability)

Excess General [caad 214]$4,000,000 per National Surety
Liability (including occurrence Corp.
commercial, property [caad 214]$4,000,000 aggregate
and druggist
professional
liability)

Contents (including $600,000 Commercial Union
computers)

Automobile Liability $500,000 Commercial Union

Workers Compensation $500,000 (statutory Texas Workers Comp.
(standard employers portion is unlimited [caad 214]Insurance Fund
liability) as mandated under
workers compensation
act)

<PAGE>

SCHEDULE 2.20

MATERIAL AGREEMENTS

A. MAIL ORDER PHARMACY SERVICES AGREEMENTS. AHP has entered into various
agreements with employers, third party administrators and other insurers (each a
"Sponsor") whereby it agrees to provide exclusive mail order pharmacy services
to the respective participants in such Sponsor's group. The material agreements,
listed below, provide that the Sponsor will pay AHP a negotiated formula rate
based on percentage of ingredient costs (generally, 5% to 40% off average
wholesale price) and a dispensing fee per prescription (generally, $0 to $4 per
prescription). Generally, the material agreements have a one-year term subject
to automatic year to year renewals.

1. MAIL ORDER PHARMACY SERVICES AGREEMENT between Advance Home
Prescriptions, Inc. and CMC Steel Group, effective August 1, 1993.

2. MAIL ORDER PHARMACY SERVICES AGREEMENT betweenbetween Advance Home
Prescriptions, Inc. and ENRON Corp., effective June 1, 1991.

3. AGREEMENT TO PROVIDE MAIL ORDER PHARMACY SERVICES between Group
Administrators, Inc. and Allied Home Pharmacy, Inc. (predecessor of
Advance Home Prescriptions. Inc.), effective July 8, 1987.

B. MANAGED PHARMACEUTICAL AGREEMENTS. APM has entered into various agreements
whereby it offers a Sponsor-reimbursed direct claim indemnification program
covering eligible participants in a Sponsor's plan. APM provides eligible
participants with an identification card to assist in establishing the necessary
claim data. The material agreements, listed below, provide that APM will
reimburse the providers and/or participants for their prescription drug costs
and that the Sponsor will pay AHP a negotiated administrative fee on a per
prescription basis (generally, $0.65 to $1.95 per prescription). Generally, the
material agreements have a one-year term subject to automatic year to year
renewals.

1. MANAGED PHARMACEUTICAL AGREEMENT between Advance Prescription
Management, Inc. and National Health Insurance Company, dated November
1, 1992.

2. MANAGED PHARMACEUTICAL AGREEMENT: Mail Service and Claim Adjudication
between Advance Prescription Management, Inc. and The Travelers Plan
Administrators/Fort Worth, dated April 1, 1993.

3. MANAGED PHARMACEUTICAL AGREEMENT: Mail Service Claim Adjudication
between Advance Prescription Management, Inc. and Specialized
Association Services, dated April 1, 1993.

<PAGE>

4. MANAGED PHARMACEUTICAL AGREEMENT: Mail Service and Direct
Reimbursement Claim Processing between Advance Prescription
Management, Inc. and Specialized Association Services, Inc., dated
January 1. 1993.

5. INDEPENDENT GENERAL AGENT AGREEMENT between Keenan & Associates and
Advance Prescription Management, Inc., effective March 1, 1993.

C. NETWORK PHARMACY AGREEMENTS. APM has entered into agreements with
pharmacies that desire to become a pharmacy eligible to `participate in APM's
ADVANCE Rx-TM- programs (a "Provider Pharmacy"). The material Network Pharmacy
Agreements, listed below, each have a one-year term subject to automatic year to
year renewals. Generally, each Network Pharmacy Agreement obligates APM to use
its best efforts to process the Provider Pharmacies claims for payment, although
it is not obligated to pay such claims until it has received the payment from
the participating insurers.

1. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Revco D.S., Inc., effective December 5, 1992.

2. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and Revco D.S., Inc., effective December 5, 1992.

3. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Big B Drug Stores, effective October 1, 1992.

4. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and Big B Drug Stores, effective October 1, 1992.

5. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Thrift Drug, Inc., effective January 1, 1993.

6. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and K-Mart, effective November 1. 1992.

7. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and K-Mart, effective November 1, 1992.

8. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and The Kroger Company, effective September 10, 1992.

9. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management, Inc. and The Kroger Company, effective September 10, 1992.

10. NETWORK PHARMACY AGREEMENT between Advance Prescription Management,
Inc. and Medicine Shoppe (with InterNet, Inc. as agent), effective
October 23, 1992.

11. PPO NETWORK PHARMACY AGREEMENT between Advance Prescription
Management,

<PAGE>

Inc. and Medicine Shoppe (with InterNet, Inc. as agent), effective
October 23, 1992.