SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

   X     Annual  report  pursuant  to  Section  13 or  15(d)  of the  Securities
-------- Exchange Act of 1934 For the fiscal year ended July 1, 2000  Commission
         File Number 0-27050
                     -------

         Transition  report  pursuant  to Section 13 or 15(d) of the  Securities
---------Exchange Act of 1934 For the transition period from ________ to _______

                                 PHAR-MOR, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          PENNSYLVANIA                                         25-1466309
-------------------------------------------------           --------------------
          (State or other jurisdiction of                   (I.R.S. Employer
          incorporation or organization)                     Identification No.)


          20 Federal Plaza West, Youngstown, Ohio            44501-0400
-------------------------------------------------           --------------------
          (Address of principal executive offices)           (Zip code)


Registrant's telephone number, including area code:          (330) 746-6641
                                                             --------------

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

         Title of each class           Name of each exchange on which registered
        ---------------------          -----------------------------------------
Common Stock, Par Value $0.01 per share                  NASDAQ
Warrants to purchase Common Stock                        NASDAQ

Indicate  by check  mark  whether  the  Registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
                                            YES   X       No
                                                -----        -----

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of the  Registrant's  knowledge,  in definitive proxy or information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K.
                                            YES           No   X
                                                -----        -----

              APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

         Indicate by check mark whether the  Registrant  has filed all documents
and reports  required  to be filed by Section 12, 13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.
                                            YES   X       No
                                                -----        -----

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant  as of September 15, 2000 was  $9,067,915  based on the last reported
sale price of the Registrant's Common Stock on the NASDAQ National Market System
on such date).

As of  close of  business  on  September  15,  2000,  12,240,865  shares  of the
Registrant's  Common Stock were outstanding  before  deducting  1,256,603 shares
which  represent  the  Company's  25.2%  equity  interest in common stock of the
Company owned by Avatex, Inc.

<PAGE>2

PART I

Item 1.  Business

Introduction

         Phar-Mor,   Inc.,  a  Pennsylvania   corporation   ("Phar-Mor"  or  the
"Company"),  operates a chain of discount retail drugstores  devoted to the sale
of prescription  and  over-the-counter  drugs,  health and beauty care products,
baby products, pet supplies,  cosmetics,  greeting cards, groceries, beer, wine,
tobacco, soft drinks, video rental,  seasonal and other general merchandise.  As
of July 1, 2000, the Company operated 139 stores in 24 states under the names of
Phar-Mor, Rx Place and Pharmhouse. Approximately 57% of the Company's stores are
located in New York, New Jersey,  Pennsylvania and Ohio, and  approximately  22%
are located in Virginia,  West Virginia,  North Carolina and South Carolina. The
Company's  principal  executive  offices are  located at 20 Federal  Plaza West,
Youngstown,  Ohio 44501-0400.  Unless otherwise  stated,  all statistics in this
Item were compiled as of July 1, 2000.

         Except  for  historical   information  contained  herein,  the  matters
discussed in this Annual Report on Form 10-K are  forward-looking  statements as
defined by the Private Securities  Litigation Reform Act of 1995. Actual results
may differ  materially  from those  projected  as a result of certain  risks and
uncertainties including, but not limited to, economic, competitive, governmental
and technological factors affecting the Company's operations, markets, products,
services and prices and other factors  discussed in the  Company's  filings with
the Securities and Exchange Commission ("SEC").

History

         Phar-Mor was founded in 1982 as a division of a subsidiary of the Giant
Eagle,  Inc.  supermarket  chain.  The initial Phar-Mor concept was built on the
premise  that  a  drugstore  offering  additional,   and  at  times  unexpected,
categories of merchandise  could attract  customers by featuring low prices made
possible by acquiring inventory at relatively low cost through deal purchases of
overstock,  odd lot,  discontinued,  large unit size or slow-moving  merchandise
from manufacturers and distributors. The Company grew, rapidly expanding from 12
stores  in  August  1985 to 311  stores in  August  1992.  Store  size also grew
dramatically,  increasing from an average of approximately 31,000 square feet in
1986 to  approximately  58,500 square feet in 1992.  Phar-Mor's rapid growth was
mirrored by apparent extraordinary financial success.

         However,  in early August 1992, Phar-Mor publicly disclosed that it had
discovered a scheme by certain senior  executives to falsify  certain  financial
results and divert funds to unrelated enterprises and for personal expenses. The
officers  involved,  including  Phar-Mor's  former President and Chief Operating
Officer,  former Chief Financial  Officer,  former Vice President of Finance and
former Controller were promptly dismissed.  In an effort to restore support from
its vendors and lenders and to implement a business  turnaround  plan,  Phar-Mor
and its fifteen  wholly-owned  subsidiaries filed petitions for protection under
Chapter  11 of the  United  States  Bankruptcy  Code on  August  17,  1992  (the
"Petition Date").

         The  Company  emerged  from  bankruptcy  on  September  11,  1995,  the
effective  date  (the  "Effective  Date")  of  Phar-Mor's  Chapter  11  plan  of
reorganization  (the "Plan of  Reorganization")  with a new  President and Chief
Operating  Officer,  Chief  Financial  Officer and Vice  President and Corporate
Controller  hired after the Petition Date to replace those  responsible  for the
fraud.

         During  the   pendency   of  the   Chapter  11   bankruptcy   cases  of
pre-reorganized  Phar-Mor and its  subsidiaries  (the  "Chapter 11 Cases"),  new
management  analyzed the  performance  and prospects of each store to identify a
core group of high volume,  profitable and  geographically  concentrated  stores
that would serve as the basis of reorganized  Phar-Mor.  Based on this analysis,
Phar-Mor  closed 209 stores in five stages  between  October 1992 and July 1995,
thereby  reducing the number of stores from 311 in September  1992 to 102 stores
as of September 1995.

<PAGE>3

         The Company also  implemented a series of fundamental  changes designed
to achieve  operating  profitability and to position Phar-Mor for future growth.
Following  the  Petition  Date,  Phar-Mor  reduced  the  number  of  warehouses;
introduced POS scanning in all stores; installed a new pharmacy software system;
installed a warehouse  logistics system;  installed a state of the art mainframe
computer;   developed  an  EDI  ordering  and  invoicing  system;  developed  an
electronic  store  merchandise  receiving  system;  and  reduced  the  number of
corporate personnel by 75%.

         In  connection  with  the  Company's  Plan  of  Reorganization  and its
emergence from  bankruptcy,  the Company  restructured  its debt obligations and
converted  approximately  $855  million of debt into  equity.  The Company  also
entered  into  a  three-year,   $100  million  revolving  credit  facility  (the
"Revolving Credit Facility").

         On March 15, 1999, the Company completed the merger of its wholly owned
subsidiary  Pharmacy  Acquisition  Corp.  ("PAC") with and into Pharmhouse Corp.
("Pharmhouse"),  pursuant  to the  Agreement  and  Plan of  Merger  dated  as of
December 17, 1998 among Phar-Mor,  PAC and Pharmhouse (the "Merger  Agreement").
As a  result  of the  merger  Pharmhouse  became a wholly  owned  subsidiary  of
Phar-Mor. In addition,  subject to the terms of the Merger Agreement, each share
of the common stock of Pharmhouse  was converted into the right to receive $2.88
per share in cash (the "Merger"). The total purchase price payable in connection
with the Merger was approximately  $34.2 million,  consisting of $7.5 million in
cash and the assumption of $26.7 million in debt.

         The Company used its excess cash position and excess availability under
its Revolving  Credit Facility to pay off $26.7 million in debt that was assumed
as part of the merger with Pharmhouse.

         Pharmhouse  operated 32 discount drug stores in eight  mid-Atlantic and
New England  states under the names  "Pharmhouse"  and "Rx Place" and had annual
revenues of approximately $200 million.

Operations

         Typically,  stores are open 95 hours per week; pharmacies are typically
open 77 hours per  week.  The  average  store has  approximately  50  employees,
including  a store  manager  and  department  managers,  a pharmacy  manager and
pharmacists, and office and cashier supervision.  Overall, the Company had 6,402
employees at July 1, 2000.  Approximately 302 warehouse and distribution  center
employees  in  Youngstown  are members of the  Teamsters  Union under a contract
which expires March 2, 2003.  Sixty-one  employees at the Company's Niles,  Ohio
store are  members of the  United  Food and  Commercial  Workers  Union  under a
contract which expires October 12, 2000.

         The Company is committed to customer  service and encourages  employees
to be  responsive  to  customer  needs and  concerns.  The  remerchandising  and
remodeling  of stores  (discussed  below)  is  designed  to make the  customer's
shopping experience easier and more enjoyable. The number of open checkout lanes
is closely  monitored to facilitate  the efficient and  comfortable  checkout of
customers.  These philosophies are regularly  communicated and reinforced by the
Company to its employees.

         Thorough  education  and  training in store  operations  is provided to
employees at every level.  Computer-based  training,  on and off-site  training,
video training and  teleconferences  are a few of the training methods used. The
Company  believes  that such  training  enables  efficiency,  understanding  and
responsiveness within store operations.

         The  typical  trade  area for a Company  store  includes  approximately
105,000  people in 41,000  households  within a radius of between five and seven
miles.  On  average  during the fiscal  year  ended July 1, 2000  ("Fiscal  Year
2000"), each store served  approximately 8,500 customers per week. The Company's
customers are approximately  52% female,  with a median age of 35.5 years, and a
median household income of approximately $33,000.  Approximately 24% of customer
households have children 17 years old and under.

         Company stores accept payment in cash, check, credit cards, debit cards
and payment from third-party providers of prescription services.

<PAGE>4

         The  Company's   purchasing,   pricing,   advertising,   merchandising,
accounting and  supervisory  activities are centrally  directed from  Phar-Mor's
corporate   headquarters.   The  Company  purchases  substantially  all  of  its
merchandise either directly from manufacturers or from wholesalers under various
types  of  purchase   arrangements.   McKesson  HBOC,   Inc.   ("McKesson"),   a
pharmaceutical  distributor,  accounted for  approximately  28% of the Company's
purchases  during  Fiscal Year 2000.  During  Fiscal Year 2000,  no other single
vendor accounted for more than 10% of the Company's purchases. Substantially all
of the products the Company sells are purchased from approximately 1,200 outside
vendors.  Alternative sources of supply are generally available for all products
sold by the Company.

Marketing and Merchandising

         Phar-Mor's  overall  merchandising  strategy  is to offer  (i) value to
consumers  by pricing  its  products  below the prices  charged by  conventional
drugstores and  supermarkets and (ii) a broader array of products in each of its
major  product  categories  than  is  offered  by  mass  merchant   discounters.
Phar-Mor's  product  strategy is focused on the  traditional  drugstore lines of
prescription  and  over-the-counter  drugs,  health and beauty care products and
cosmetics.  Phar-Mor's stores also typically  feature other product  categories,
including groceries, snacks and beverages, pet food and supplies, beer, wine and
liquor (where permitted by law), tobacco,  baby products,  general  merchandise,
video  and  music  sales  and  video  rentals.  Phar-Mor  is one of the  leading
retailers of film, vitamins, soft drinks and batteries in the United States.

         Ninety-five percent of the Company's  advertising is print advertising,
through  circulars,   newspapers,   and  point  of  sale  materials.   Newspaper
advertisements  and circulars  appear in major  newspapers in most market areas.
The Company presently advertises through 75 newspapers and mailers.

         Phar-Mor  introduced  the "Super  Phar-Mor"  concept during Fiscal Year
1997.  In  approximately  10,000 to 15,000  square feet,  each "Super  Phar-Mor"
offers a variety of grocery items,  including  fresh,  frozen,  and refrigerated
foods.  The Company  incorporated  this concept into 8 stores during Fiscal Year
2000 bringing the total number of "Super Phar-Mor" stores to 39. The concept has
been well  received by  customers  and has improved  overall  sales in each such
store.  The Company plans to  incorporate  the "Super  Phar-Mor"  concept into 4
stores  scheduled  to be  remodeled  during the fiscal year ending June 30, 2001
("Fiscal Year 2001"). During Fiscal Years 1997, 1998, 1999 and 2000, the Company
also undertook a plan to remodel certain stores unable to accommodate the fresh,
frozen and refrigerated  foods included in the "Super  Phar-Mor"  concept due to
their small size. This "four-wall"  remodeling program includes  remerchandising
the stores to provide a more convenient  shopping experience by creating product
adjacencies;  adding new and color coded decor and enhancing signage  throughout
the  store;  and  further  enhancing  the "store  within a store"  idea with its
signature  departments.  The Company has completed  fourteen of the  "four-wall"
remodel projects. The Company plans to complete 4 "four-wall" remodels in Fiscal
Year 2001.

Sales

         The retail sale of traditional  drugstore lines is a highly  fragmented
business, consisting of thousands of chain drugstores and independent drugstores
that sell such products as well as mass  merchandisers who sell such products as
part of their overall product lines. In Fiscal Year 2000, revenues from sales of
the  Company's  traditional   drugstore  products  (i.e.,   prescription  drugs,
over-the-counter drugs, health and beauty care products,  cosmetics and greeting
cards) averaged  approximately  $5.4 million per store and all other merchandise
averaged  $3.9 million per store.  The Company  generated  approximately  $749.2
million in  traditional  drugstore  product  revenues and  approximately  $542.9
million in revenues  from the sale of groceries and general  merchandise  in its
stores in Fiscal Year 2000.

<PAGE>5

         Set forth below is the  percentage  of sales by  principal  category of
products for the continuing stores for the last three fiscal years.

                                                Fiscal Year Ended

                                July 1, 2000      July 3, 1999     June 27, 1998
                                ------------      ------------     -------------
Category

Prescription, Health and
  Beauty Care Products,
  Cosmetics and Greeting Cards       58.0%            57.1%             56.7%
All Other Merchandise                42.0%            42.9%             43.3%


         The  Company's  business is seasonal to a certain  extent.  The highest
volume  of sales and net  income  usually  occur in the  second  fiscal  quarter
(generally October,  November and December).  The following table summarizes the
Company's sales by quarter during Fiscal Year 2000.


                    Sales by Quarter During Fiscal Year 2000

                                                        Percentage of
                                                         Total Sales

                      First Quarter                          24.6%
                      Second Quarter                         27.1%
                      Third Quarter                          23.9%
                      Fourth Quarter                         24.4%
                                                           --------
                                                             100.0%
                                                           ========

Competition

         Phar-Mor's  stores  compete  primarily  with  conventional  drugstores,
supermarkets and mass merchant discounters. Many of these companies have greater
financial   resources  than  Phar-Mor.   Phar-Mor   competes  with  conventional
drugstores by offering a broader  product  selection and generally  lower prices
than  traditional   drugstore  lines.   Phar-Mor  believes  it  has  these  same
competitive advantages against most supermarkets for non-grocery items. Phar-Mor
competes with supermarkets in grocery product lines where Phar-Mor does not have
a broader  selection,  by carrying an often  changing  mix of items priced lower
than most supermarkets.

         Phar-Mor does not attempt to compete against mass merchant  discounters
solely on the basis of  price.  In  traditional  drugstore  lines,  particularly
health and beauty care  products and greeting  cards,  Phar-Mor  offers  broader
product  selection  than mass merchant  discounters.  Mass merchant  discounters
generally are unwilling to allocate as much display space as Phar-Mor devotes to
these categories. The merchandising changes Phar-Mor has implemented,  including
the  creation  of  "signature"   departments  in  dedicated   aisle  space  with
distinguishing  signage,  such as health and beauty  care  products,  cosmetics,
groceries,  perishable foods in certain stores and "The Card Shop," "Pet Place,"
"One Stop Baby Shop," and "Vitamin  World," are designed in part to  distinguish
Phar-Mor from mass merchant discounters and to increase its strength in areas in
which Phar-Mor's management believes such merchants do not excel.

Capital Expenditures

         The Company's most significant capital needs are for seasonal purchases
of inventories, technological improvements and remerchandising and remodeling of
existing stores.
         The Company's capital expenditures totaled $17.1 million in Fiscal Year
2000,  including $2.3 million for the  construction of new stores,  $6.6 million
for  remodeling  existing  stores,  and $3.8  million  for  corporate  and store
information  systems.  The  Company  anticipates  spending  approximately  $10.0
million  for  capital  expenditures  in Fiscal  Year  2001,  including  costs of
remodeling 8 additional stores and opening two new stores.

Real Estate and Growth

         The  Company  opened two new stores in Fiscal  Year 2000,  and plans to
open two new stores in Fiscal  Year 2001.  Expansion  in the near  future by the
construction  of new  stores  is  expected  to be  minimal  and in  existing  or
contiguous  markets  in the  Company's  core  areas  of New  York,  New  Jersey,
Pennsylvania  and Ohio.  Expansion in existing  markets  improves the  Company's
operating  margins  by  decreasing  advertising  costs  on a  per  store  basis,
permitting  more  efficient  distribution  of products to stores and  increasing
utilization of existing supervisory and managerial staff.

         The aggregate cost of any future expansion is dependent upon the method
utilized  to finance  new stores.  Build to suit  (i.e.,  landlord  constructed)
leases  cost  approximately  $750,000  per store for  furniture,  fixtures,  and
equipment and each new store requires  approximately $1.25 million in inventory.
Company-funded  conversion of existing  buildings is another  possible method of
expansion;  however the cost of such  expansion  per store varies  significantly
depending upon the age, condition and configuration of such buildings.


Trademarks and Service Marks

         The Company believes that its registered  "Phar-Mor"  trademark is well
recognized  by its customer base and the public at large in the markets where it
has been advertised.  The Company believes that the existing customer and public
recognition  of  its  trademark  and  related  operational  philosophy  will  be
beneficial to its strategic plans to expand  merchandise  categories and add new
stores.  The Company has also  introduced  a number of private  label  brands of
products   under  various   registered   trademarks   and   trademarks   pending
registration.

Regulation

         The Company is subject to the Fair Labor  Standards  Act, which governs
such matters as minimum wages,  overtime,  and other working conditions.  To the
extent that pay scales for a portion of the  Company's  personnel  relate to the
federal  minimum wage,  increases in the minimum wage may increase the Company's
labor costs.

         The prescription drug business is subject to the federal Food, Drug and
Cosmetic  Act,  Drug Abuse  Prevention  and Control Act and Fair  Packaging  and
Labeling Act relating to the content and labeling of drug  products,  comparable
state  statutes  and state  regulation  regarding  recordkeeping  and  licensing
matters with civil and criminal penalties for violations.

<PAGE>7

Item 2.  Properties.

         As of July 1,  2000,  the  Company  operated  139  stores in 24 states.
Approximately  57% of  Phar-Mor's  stores are  located in New York,  New Jersey,
Pennsylvania  and Ohio and  approximately  22% are  located  in  Virginia,  West
Virginia,  North  Carolina and South  Carolina.  The following is a breakdown by
state of the locations of the Company's stores.

               Alabama          1                 Missouri                   1
               Colorado         2                 New Jersey                12
               Connecticut      1                 New York                   8
               Florida          5                 North Carolina             8
               Georgia          2                 Ohio                      19
               Illinois         4                 Oklahoma                   1
               Indiana          3                 Pennsylvania              40
               Iowa             2                 Rhode Island               2
               Kansas           1                 South Carolina             4
               Kentucky         1                 Virginia                  14
               Maryland         1                 West Virginia              4
               Massachusetts    2                 Wisconsin                  1


         As of July 1,  2000,  138 of the  Company's  stores  were  leased.  The
Company owns the land and building of its retail store in Winchester,  Virginia.
All store  leases  are  long-term;  the  original  terms of 101  leases  and the
original terms plus options of sixteen  leases expire on or before  December 31,
2009.  The  remaining  stores have longer lease  terms.  Most stores are located
adjacent to or near shopping  centers or are part of strip centers.  Some stores
are free  standing.  Depending on the  location of a store,  the sites may vary,
with averages by type of location as follows:  free-standing  stores are located
on sites  averaging  2.84 acres;  stores  located in strip  centers are found on
sites  averaging  23.7 acres;  and stores in malls are on sites  averaging  46.8
acres. A proto-typical  store now includes  approximately  40,000 square feet of
sales space and 10,000 square feet of storage area and ample off-street parking.
The stores are designed in a  "supermarket"  format  familiar to  customers  and
shopping  is done with carts in wide aisles with  attractive  displays.  Traffic
design is intended to enhance the opportunity for impulse purchases.

         The Company operates a distribution center in Youngstown, Ohio which it
leases. This center delivered approximately 46% of all merchandise to the stores
in Fiscal  Year 2000,  primarily  using  contract  carriers.  The balance of the
products were delivered directly to the Company's stores by vendors.

         The Company and a  wholly-owned  subsidiary of the Company are partners
in an Ohio  limited  partnership,  which owns the office  building  in which the
Company  leases  approximately  141,000  square feet of space for its  corporate
offices in Youngstown, Ohio.

Item 3.  Legal Proceedings

         In the normal  course of  business,  the  Company is subject to various
claims.  In the opinion of management,  any ultimate  liability  arising from or
related to these  claims  should not have a  material  adverse  effect on future
results of operations,  cash flows or the consolidated financial position of the
Company.

Item 4.  Submission of Matters to a Vote of Security Holders.

         There were no matters  submitted to a vote of security  holders  during
the fourth quarter of Fiscal Year 2000,  through the  solicitation of proxies or
otherwise.

<PAGE>8

                                     Part II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

         The  Company's  common  stock,  par value $.01 per share  (the  "Common
Stock"),  is included  for  quotation  on the NASDAQ  National  Market under the
symbol  "PMOR."  High and low prices of the Common  Stock are shown in the table
below:

                                    Fiscal Year 2000         Fiscal Year 1999
                                    ----------------         ----------------
                                     High      Low            High       Low
                                     ----      ---            ----       ---
   1st Quarter....................  $6 5/8    $4 1/4         $11 1/4     $6 1/8
   2nd Quarter....................   4 3/4    2 7/16           8 15/16    5 1/4
   3rd Quarter....................   4 3/4    2 1/2            8 3/4      5 1/2
   4th Quarter....................   3 1/4    1 1/4            6 7/8      4 1/16

         As of  September  15, 2000,  there were 2,966  holders of record of the
Common  Stock.  The Company has not  declared or paid any cash  dividends on the
Common Stock and does not anticipate  paying cash  dividends in the  foreseeable
future.  The Company  currently intends to retain earnings for future operations
and expansion of its business. In addition,  the indenture pursuant to which the
Company's  senior notes were issued and the Company's  amended  revolving credit
facility (the "Amended Revolving Credit Facility")  restrict the payment of cash
dividends on the Company's  capital stock. See "Notes to Consolidated  Financial
Statements."

Item 6.  Selected Financial Data.

         The following selected consolidated  financial data of Phar-Mor and its
subsidiaries  should  be read in  conjunction  with the  consolidated  financial
statements and related footnotes appearing elsewhere in this Form 10-K.

                                  (In thousands except per share data)
<TABLE>
<CAPTION>

                         52 Weeks        53 Weeks         52 Weeks           52 Weeks        43 Weeks          9 Weeks
                           Ended           Ended            Ended              Ended          Ended             Ended
                       July 1, 2000    July 3,1999(b)  June 27, 1998(b)    June 28, 1997  June 29, 1996   September 2, 1995
                       ------------    --------------  ----------------    -------------  -------------   -----------------
<S>                     <C>               <C>               <C>              <C>            <C>                  <C>
Net sales               $ 1,292,090       $ 1,206,539       $ 1,100,851      $ 1,074,828    $   874,284  |       $   181,968
                                                                                                         |
(Loss) income from                                                                                       |
continuing operations       (12,140)(a)           596            (8,830)          (2,281)         2,526  |           (10,389)(c)
                                                                                                         |
Diluted (loss) income                                                                                    |
per share from                                                                                           |
continuing operations         (1.08)              .05              (.73)            (.19)           .21  |              (.19)
</TABLE>
<TABLE>
<CAPTION>

                           As of            As of          As of                As of         As of
                           -----            -----          -----                -----         -----
                       July 1, 2000    July 3,1999(b)    June 27, 1998     June 28, 1997  June 29, 1996
                       ------------    --------------    -------------     -------------  -------------
<S>                         <C>               <C>               <C>              <C>            <C>
 Total assets               397,904           407,724           349,455          362,605        363,463

 Long-term debt & capital
 leases                     167,856           142,947           130,993          140,213        149,163
</TABLE>

Note: In accordance with fresh-start reporting, reorganization value was used to
record  the  assets  and  liabilities  of the  Company  at  September  2,  1995.
Accordingly,  the selected consolidated  financial data for the nine weeks ended
September  2,  1995 is not  comparable  in  material  respects  to such data for
subsequent periods.


(a)      Excludes  extraordinary  gain of $1.1  million on early  retirement  of
         debt.

(b)      Amounts  have been  restated  for the  retroactive  application  of the
         equity  method of  accounting  for the  Company's  investment in Avatex
         Corporation.

<PAGE>9

(c)      Excludes extraordinary gain of $775 million on debt discharged pursuant
         to the Plan of Reorganization; and includes the gain for revaluation of
         assets and liabilities  under  fresh-start  reporting of $8 million and
         reorganization costs of $16.8 million.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.
         (All dollar amounts in thousands, unless otherwise stated)

Introduction

         The discussion of results of operations  that follows is based upon the
Company's  consolidated financial statements set forth on pages F-1 to F-25. The
discussion  of  liquidity  and  capital  resources  is based upon the  Company's
current financial position.

Recent Developments

         On March 15, 1999, the Company completed the merger of its wholly owned
subsidiary  Pharmacy  Acquisition  Corp.  ("PAC") with and into Pharmhouse Corp.
("Pharmhouse"),  pursuant  to the  Agreement  and  Plan of  Merger  dated  as of
December 17, 1998 among Phar-Mor,  PAC and Pharmhouse (the "Merger  Agreement").
As a  result  of the  merger  Pharmhouse  became a wholly  owned  subsidiary  of
Phar-Mor. In addition,  subject to the terms of the Merger Agreement, each share
of the common stock of Pharmhouse  was converted into the right to receive $2.88
per share in cash (the "Merger"). The total purchase price payable in connection
with the Merger was approximately $34,200,  consisting of $7,500 in cash and the
assumption of $26,700 in debt.

         The Company used its excess cash position and excess availability under
its  Amended  Revolving  Credit  Facility  to pay off  $26,700  in debt that was
assumed as part of the Merger with Pharmhouse.

         Pharmhouse  operated 32 discount drug stores in eight  mid-Atlantic and
New England  states under the names  "Pharmhouse"  and "Rx Place" and had annual
revenues of approximately $200,000.

         The Company's consolidated results of operations include the results of
the acquired Pharmhouse stores from March 16, 1999 forward.

         The  Company  set an  aggressive  schedule  for the  conversion  of the
acquired Pharmhouse stores to the Company's store systems and merchandising mix.
As of July 3,  1999,  all 32 of the  Pharmhouse  stores  were  converted  to and
trained on the Company's  store  systems.  This allowed the Company to integrate
the Pharmhouse stores into the Company's purchasing,  warehousing, financial and
management  reporting  systems  which  allowed the Company to eliminate  all the
Pharmhouse  corporate  office personnel and systems by July 3, 1999. The Company
completed the conversion of the Pharmhouse stores to the Company's merchandising
mix by October 31, 1999.

<PAGE>10

Results of Operations

The following  table sets forth the number of retail stores operated each fiscal
year:
<TABLE>
<CAPTION>

                                                        Fiscal Year Ended
                                                        -----------------
                                               July 1, 2000    July 3, 1999    June 27, 1998
                                               ------------    ------------    -------------
<S>                                                    <C>              <C>             <C>
             Stores, beginning of period               139              106             103
             Stores acquired                             -               32               -
             Stores opened                               2                2               3
             Stores closed                              (2)              (1)              -
                                                       ---              ---             ---
             Stores, end of period                     139              139             106
                                                       ===              ===             ===
</TABLE>

52 weeks ended July 1, 2000  (Fiscal  Year 2000)  compared to the 53 weeks ended
July 3, 1999 (Fiscal Year 1999) (all dollar amounts in thousands)
<TABLE>
<CAPTION>

                                               Fiscal Year 2000          Fiscal Year 1999
                                               ----------------          ----------------

<S>                                        <C>             <C>       <C>             <C>
Sales                                      $ 1,292,090     100.00%   $ 1,206,539     100.00%

Less:
 Cost of goods sold, including occupancy
  and distribution costs                     1,050,208      81.28%       977,878      81.05%
                                             ---------                   -------
Gross Profit                                   241,882      18.72%       228,661      18.95%
 Selling, general and administrative
  expenses                                     211,833      16.39%       188,264      15.60%
Depreciation and amortization                   24,708       1.91%        25,386       2.10%
                                                ------                    ------

Operating income                                 5,341       0.41%        15,011       1.24%
Interest expense                               (18,851)      1.46%       (16,338)      1.35%
Interest and investment (loss) income           (5,404)     (0.42)%          560       0.05%
                                                ------                    ------

(Loss) income before equity in income of
affiliates, income taxes and                   (18,914)     (1.46)%         (767)     (0.06%)
extraordinary item
Equity in income of affiliates                   6,774       0.52%         1,568       0.13%
                                                ------                    ------
(Loss) income before income taxes and
 extraordinary item                            (12,140)     (0.94)%          801       0.07%
Income tax provision                                --         --            205       0.02%
                                                ------                    ------
(Loss) income before extraordinary item        (12,140)     (0.94)%          596       0.05%
Extraordinary item                               1,117       0.09%            --         --
                                                ------                    ------
Net (loss) income                          $   (11,023)     (0.85)%  $       596       0.05%
                                           ===========               ===========
</TABLE>

         Fiscal Year 2000 sales increased $85,551 or 7.1% over Fiscal Year 1999.
The  increase  in Fiscal  Year 2000  sales was  primarily  due to a full year of
Pharmhouse  sales in Fiscal  Year 2000  compared  to three and a half  months of
Pharmhouse  sales in  Fiscal  Year  1999,  partially  offset by one less week in
Fiscal Year 2000,  and a comparable  store sales decrease of .4%. The comparable
store sales  decrease was  primarily  due to a 3.3%  comparable  store front end
sales  decrease  partially  offset by a 7.3%  comparable  store  pharmacy  sales
increase.

         Gross  profit  for Fiscal  Year 2000 was 0.23% of sales  lower than for
Fiscal Year 1999. A 0.44% of sales  increase in product  gross  margins was more
than offset by lower cash discounts,  higher third party  receivable  write offs
and higher  occupancy  costs.  Cash discounts  declined as a percentage of sales
primarily  due to an increase in pharmacy  sales as a percentage  of total sales
from 28.0% of sales in Fiscal  Year 1999 to 30.9% of sales in Fiscal  Year 2000.
Occupancy  costs  increased  as a  percentage  of  sales  primarily  due  to the
inclusion of the lower volume  Pharmhouse  stores for a full year in Fiscal Year
2000 versus three and a half months in Fiscal Year 1999.

         Selling,  general and administrative  expenses increased 0.79% of sales
in Fiscal Year 2000 over Fiscal Year 1999. The increase in selling,  general and
administrative   expenses  was  primarily  due  to  higher  wage  costs,  higher
advertising  expenditures and higher store expenses.  The increase in wage costs

<PAGE>11

as a  percentage  of sales  was  primarily  due to the full  year  effect of the
addition of the Pharmhouse stores which have a higher store wage as a percentage
of sales due to lower per store  sales  volume and an  increase  in the  average
hourly wage paid to store  employees.  The increase in advertising  expenditures
and store  expenses as a percentage  of sales was primarily due to the full year
effect of the  addition of the  Pharmhouse  stores  which have a higher  costs a
percentage of sales due to lower per store sales volume.

         Interest and  investment  income  decreased  $5,964 in fiscal year 2000
from fiscal year 1999.  The  decrease was  primarily  the result of a decline in
interest  income of $1,461 due to lower cash  balances  and a $5,500  investment
loss resulting  from an other than temporary  impairment of one of the Company's
investments.

         The Company had an increase in equity in income of affiliates of $5,206
in fiscal year 2000 from fiscal year 1999,  primarily due to investment gains by
one of the affiliates.

         The  Company  repurchased  $10,149 of its 11.72%  senior  notes  during
Fiscal Year 2000 at a discount resulting in a extraordinary gain of $1,117.

53 weeks ended July 3, 1999  (Fiscal  Year 1999)  compared to the 52 weeks ended
June 27, 1998 (Fiscal Year 1998) (all dollar amounts in thousands)

<TABLE>
<CAPTION>

                                                 Fiscal Year 1999             Fiscal Year 1998
                                                 ----------------             ----------------

<S>                                          <C>              <C>       <C>                <C>
Sales                                        $ 1,206,539      100.00%   $ 1,100,851        100.00%

Less:
 Cost of goods sold, including occupancy
  and distribution costs                         977,878       81.05%       887,657         80.63%
                                                 -------                    -------
Gross Profit                                     228,661       18.95%       213,194         19.37%
 Selling, general and administrative
  expenses                                       188,264       15.60%       173,736         15.78%
 Executive severance                                --           --           6,787          0.62%
 Loss on disposal of equipment                      --           --           4,615          0.42%
 Depreciation and amortization                    25,386        2.10%        22,293          2.02%
                                                 -------                    -------
Income from operations before interest and
 income taxes                                     15,011        1.24%         5,763          0.52%
Interest expense                                 (16,338)       1.35%       (16,639)         1.51%
Interest and investment income                       560        0.05%         2,058          0.19%
                                                 -------                    -------
(Loss) income before equity in income
(loss) of affiliates, and income taxes              (767)      (0.06%)       (8,818)        (0.80%)
Equity in income (loss) of affiliates              1,568        0.13%           (12)         0.00%
                                                 -------                    -------
Income (loss) before taxes                           801        0.07%        (8,830)        (0.80%)
Income tax provision                                 205        0.02%          --             --
                                                 -------                    -------
Net income (loss)                            $       596        0.05%   $    (8,830)        (0.80%)
                                             ===========                ===========
</TABLE>

         Fiscal  Year 1999 sales  increased  $105,688  or 9.6% over  Fiscal Year
1998.  Fiscal Year 1999 sales were  favorably  impacted by the  inclusion of one
more week, $26,832,  three and a half months of Pharmhouse sales, $46,280, and a
comparable store sales increase of $25,426,  or 2.4%. The comparable store sales
increase was primarily due to the success of the store remodel and  reformatting
program and a 9.7% comparable store pharmacy sales increase.

         The Company incorporated the "Super Phar-Mor" food and drug format into
8 stores during  Fiscal Year 1999 bringing the total number of "Super  Phar-Mor"
stores to 31. The Company's "Super Phar-Mor" format expands the existing grocery
offering and adds fresh, frozen and refrigerated food.

         Gross  profit  for Fiscal  Year 1999 was 0.42% of sales  lower than for
Fiscal Year 1998.  A 0.16% of sales  increase in  promotional  costs and a 0.33%
reduction in product gross margins more than offset $2,505 in additional  vendor

<PAGE>12

income from a partial settlement received from manufacturers, related to certain
product overcharges to retailers.  A 38% reduction in video rental sales was the
primary cause of the decline in product gross margins.

         Selling,  general and administrative  expenses decreased 0.18% of sales
in Fiscal Year 1999 over Fiscal Year 1998. The decrease in selling,  general and
administrative  expenses was  primarily  due to lower  advertising  expenditures
partially  offset  by higher  store  wages.  The  increase  in store  wages as a
percentage of sales is due to the addition of the Pharmhouse stores which have a
higher store wage as a  percentage  of sales due to lower per store sales volume
and an increase in the minimum wage.

         Interest and  investment  income  decreased  $1,498 in fiscal year 1999
from  fiscal  year 1998.  The  decrease  was mostly due to a decline in interest
income of $1,566 as the result of lower cash balances.

         Equity in income of  affiliates  increased  $1,556 in fiscal  year 1999
from  fiscal  year  1998,  primarily  due  to  investment  gains  by  one of the
affiliates.

Financial Condition and Liquidity  (all dollar amounts in thousands)

         The Company's cash position as of July 1, 2000 was $16,752.

         On September 10, 1998, the Company entered into an Amended and Restated
Revolving  Credit  Facility  (the  "Amended  Revolving  Credit  Facility")  with
BankAmerica  Business  Credit,  Inc.  ("BABC"),  as agent,  and other  financial
institutions  that  established  a credit  facility  in the  maximum  amount  of
$100,000.

         Borrowings under the Amended  Revolving Credit Facility may be used for
working  capital  needs and  general  corporate  purposes.  Up to $50,000 of the
facility at any time may be used for standby and documentary  letters of credit.
The facility  includes  restrictions  on, among other things,  additional  debt,
investments,  dividends and other distributions,  mergers and acquisitions.  The
facility contains no financial covenants.

         Credit  availability under the Amended Revolving Credit Facility at any
time is the lesser of the Aggregate Availability (as defined in the Facility) or
$100,000.  The Amended  Revolving  Credit Facility  establishes a first priority
lien and  security  interest in the current  assets of the  Company,  including,
among other items, cash, accounts receivable and inventory.

         Advances made under the Amended Revolving Credit Facility bear interest
at the  BankAmerica  reference rate plus 1/2% or LIBOR plus 2.00% from January 1
to June 30 each year and the BankAmerica  reference rate plus 3/4% or LIBOR plus
2.25%  from July 1 to  December  31 each  year.  Under the terms of the  Amended
Revolving  Credit  Facility,  the Company is required to pay a commitment fee of
between 0.25% and 0.35% per annum on the unused portion of the facility,  letter
of credit fees and certain other fees.

         As of July 1, 2000,  there were  $60,283 in  outstanding  advances  and
letters of credit in the amount of $5,084  were  outstanding  under the  Amended
Revolving Credit Facility.

         The Amended Revolving Credit Facility expires on March 14, 2002.

         The Company's  cash position  decreased $594 during Fiscal Year 2000 as
cash  provided by operating  activities of $9,641 and cash provided by financing
activities  of  $19,786  was  offset  by  $30,021  in cash  used  for  investing
activities.

         Merchandise  inventories  decreased  by  $8,506  and  accounts  payable
decreased  $18,638 from the high levels at the end of Fiscal Year 1999. The high
levels at the end of Fiscal Year 1999  resulted from large  inventory  purchases
made in order to supply the Pharmhouse  stores with products normally carried in
the Company's stores.

         The Company invested $5,724 during Fiscal Year 2000 in the common stock
of Avatex  Corporation,  the  Company's  largest  shareholder.  The Company also
invested  $11,761 in equity  securities of other privately held  companies.  The
Company then sold $6,000 of those equity securities.

<PAGE>13

         The Company's cash position  decreased  $27,309 during Fiscal Year 1999
as cash  provided  by  operating  activities  of  $7,294  and cash  provided  by
financing  activities of $4,940 was offset by $39,543 in cash used for investing
activities.

         Accounts  receivable  increased  $5,750  and  merchandise   inventories
increased $8,539 during Fiscal Year 1999 primarily due to the acquisition of the
32 Pharmhouse stores and the opening of two new stores.

         The Company invested $1,001 during Fiscal Year 1999 in the common stock
of Avatex  Corporation,  the  Company's  largest  shareholder.  The Company also
invested $2,291 in equity securities of other privately held companies.

         The Company's cash position  decreased  $35,192 during Fiscal Year 1998
as cash  provided by  operating  activities  of $10,054 was offset by $35,655 in
cash  used for  investing  activities  and  $9,591  in cash  used for  financing
activities.

         The Company  invested  $9,065 in  marketable  securities in Fiscal Year
1998  in an  effort  to  increase  its  return  on  its  excess  cash  position.
Merchandise  inventories  increased $6,769 during Fiscal Year 1998 primarily due
to the opening of three new stores.

         The Company  invested $4,000 in the common stock of Avatex  Corporation
in Fiscal Year 1998.  The Company also invested  $4,275 in equity  securities of
other privately held companies.


Trends,  Demands,  Commitments,  Events or Uncertainties  (all dollar amounts in
thousands)

         Management  believes the  availability of the Amended  Revolving Credit
Facility,  together  with  the  Company's  current  cash  position,   marketable
securities  and expected  cash flows from  operations  for Fiscal Year 2001 will
enable the Company to fund its working  capital needs and capital  expenditures.
Achievement  of expected  cash flows from  operations is dependent  upon,  among
other things, the Company's attainment of sales, gross profit and expense levels
that  are  consistent  with  its  financial  projections,  and  there  can be no
assurance that the Company will achieve its expected cash flows.

         Investment  activities  for  Fiscal  Year  2001 are  expected  to total
$11,300.  The major  expenditures  are  expected  to be (i) video  rental  tapes
($1,400),  (ii)  remodeling of existing  stores  ($4,075),  and (iii) new stores
($1,375).  The  Company  expects to finance and meet its  obligations  for these
capital  expenditures  through  internally  generated  funds  and the use of the
Company's Amended Revolving Credit Facility.

         Certain Company information systems have potential operational problems
in  connection  with  applications  that  contain a date  and/or use a date in a
comparative  manner as the date  transitions  into the Year  2000.  The  Company
implemented a comprehensive program to identify and remediate potential problems
related to the Year 2000 in its information systems,  infrastructure,  logistics
and retail facilities.  In addition,  the Company initiated formal communication
with all of its significant  vendors and other external  interfaces to determine
the extent to which the Company was  vulnerable  to a  third-party's  failure to
remediate their own potential  problems  related to the Year 2000. The inability
of the Company or significant  vendors and/or external interfaces of the Company
to  adequately  address  Year 2000 issues  could have caused  disruption  of the
Company's systems.

         The Company  completed all of the software  modifications  necessary to
make its systems Year 2000  compliant  and as a result has not  experienced  any
major operational problems or disruptions.

         The Company incurred approximately $1,300 related to the assessment of,
and efforts in connection with, its Year 2000 program and remediation  plan. The
Company  accelerated  by one  year  the  purchase  of  approximately  $5,000  in
replacement  hardware  in order to ensure  the  associated  system was Year 2000
compliant.

         The Company is exposed to certain market risks from  transactions  that
are entered into during the normal course of business. The Company's policies do
not  permit  active  trading  of,  or  speculation  in,   derivative   financial
instruments. The Company's primary market risk exposure relates to interest rate
risk.  The  Company  manages  its  interest  rate risk in order to  balance  its
exposure  between  fixed and  variable  rates while  attempting  to minimize its
interest costs.

<PAGE>14

         In June 1998, the FASB issued SFAS No. 133,  "Accounting for Derivative
Instruments and Hedging Activities," which establishes  accounting and reporting
standards for derivative  instruments  and for hedging  activities.  It requires
that an entity  recognize all derivatives as either assets or liabilities in the
statement of financial  position and measure  those  instruments  at fair value,
with the potential effect on operations  dependent upon certain conditions being
met.  SFAS No. 133 (as  amended  by SFAS No.  137) is  effective  for all fiscal
quarters of fiscal  years  beginning  after June 15, 2000.  Management  does not
believe  that the  adoption  of SFAS No. 133 will have a material  impact on its
financial position or results of operations.

In November 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue
Recognition".  This Bulletin sets forth the SEC Staff's  position  regarding the
point at which it is  appropriate  for a Registrant  to recognize  revenue.  The
Staff  believes that revenue is realizable  and earned when all of the following
criteria are met:

           -     Persuasive evidence of an arrangement exists;

           -     Delivery has occurred or service has been rendered;

           -     The seller's price to the buyer is fixed or determinable; and

           -     Collectibility is reasonably assured.

The  Company  uses the  above  criteria  to  determine  whether  revenue  can be
recognized,  and therefore believes that the issuance of SAB 101 does not have a
material impact on the Company's financial statements.

Item 8.  Financial Statements and Supplementary Data.

         See Index to Consolidated Financial Statements.


Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure.

         None.

<PAGE>15

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.

The  executive  officers and  directors of the Company as of the date hereof are
listed below:

Name                     Age         Position(s)
----                     ---         -----------
Abbey J. Butler          63          Co-Chairman and Co-Chief Executive Officer

Melvyn J. Estrin         58          Co-Chairman and Co-Chief Executive Officer

M. David Schwartz        55          President and Chief Operating Officer

Warren E. Jeffery        51          Executive Vice President - Merchandising,
                                     Marketing and Logistics

John R. Ficarro          48          Senior Vice President, Chief Administrative
                                     Officer, General Counsel and Secretary

Monroe Osterman          73          Director

Arthur G. Rosenberg      62          Director

John D. Shulman          37          Director

         Abbey J . Butler has been a director  of the  Company  since  September
1995 and Co-Chairman of the Board and Co-Chief  Executive Officer of the Company
since  October 1, 1997.  Mr.  Butler is  Co-Chairman  of the Board and  Co-Chief
Executive Officer of Avatex Corporation  ("Avatex"),  formerly known as FoxMeyer
Health Corporation.  He also serves as President and a director of C.B. Equities
Corp., a private investment  company.  Mr. Butler presently serves as a director
of  GrandBanc,  Inc.,  Carson,  Inc.,  iLife  Systems,  Inc.  ("iLife")  and, in
connection with our  investments,  as director of RAS Holding Corp.  ("RAS") and
its  subsidiary,  Presby  Corp.  and as a member  of the  Board of  Managers  of
Chemlink and Cyclone  Acquisition  Company,  LLC. Mr. Butler is a trustee of the
Board of Trustees of the American  University,  and a director of the  Starlight
Foundation, a charitable organization. He was appointed by President George Bush
to serve on the President's Advisory Committee on the Arts, and he now serves as
President of the National  Committee for the  Performing  Arts,  John F. Kennedy
Center,  Washington,  D.C. Mr. Butler also served as Co-Chairman of the Board of
FoxMeyer  Corporation  since March 1991 and was its Co-Chief  Executive  Officer
from May 1993 to November  1996,  and also served as Co-Chairman of the Board of
Ben Franklin from November 1991 until March 1997.  FoxMeyer  Corporation and Ben
Franklin each filed for relief under the Bankruptcy Code in 1996.

         Melvyn J.  Estrin has been a director of the  Company  since  September
1995 and Co-Chairman of the Board and Co-Chief  Executive Officer of the Company
since October 1, 1997. Melvyn J. Estrin is Co-Chairman of the Board and Co-Chief
Executive  Officer of Avatex.  He also has served as  Chairman  of the Board and
Chief Executive Officer of Human Service Group,  Inc., a private  management and
investment  firm,  since  1983.  Mr.  Estrin  presently  serves as  Chairman  of
GrandBanc,  Inc. and a director of Washington Gas Light Company,  Carson,  Inc.,
RAS,  iLife and,  in  connection  with our  investments,  as a  director  of HPD
Holdings Corp., and as a member of the Board of managers of Chemlink and Cyclone
Acquisition Company,  LLC. Mr. Estrin also served as a Trustee of the University
of  Pennsylvania  and  was  appointed  by  President  George  Bush to  serve  as
Commissioner of the National Capital Planning Commission. Mr. Estrin also served
as Co-Chairman of the Board of FoxMeyer Corporation since March 1991 and was its

<PAGE>16

Co-Chief  Executive  Officer from May 1993 to November  1996, and also served as
Co-Chairman  of the Board of Ben Franklin  from  November 1991 until March 1997.
FoxMeyer  Corporation  and Ben Franklin  each filed for relief under  Bankruptcy
Code in 1996.

         M. David Schwartz has served as President and Chief  Operating  Officer
of the Company since February 1993. From 1991 to 1993, he was a Director and the
President and Chief Executive  Officer of Smitty's Super Valu,  Inc., a food and
general merchandising retailer, and between 1987 and 1991 Mr. Schwartz served as
a Director and the  President and Chief  Operating  Officer of Perry Drug Stores
Inc., a regional  chain of 200 drug stores.  Mr.  Schwartz was Vice President of
Drug/General  Manager for the Kroger Company between 1985 and 1987 and,  between
1971 and 1985,  held  positions  with  Albertson's  Inc.  including  Senior Vice
President  of  Marketing,  Senior Vice  President  of  Non-Foods  Merchandising,
Distribution and  Procurement,  Vice President of  Merchandising,  and Non-Foods
Merchandise Manager. Mr. Schwartz attended Arizona State University.

         Warren  E.   Jeffery  has  served  as  Executive   Vice   President  of
Merchandising, Marketing and Logistics of the Company since February 1999. Prior
to that, Mr.  Jeffery  served as Senior Vice President of Operations  from April
1996 to February 1999 and Vice President of Operations, beginning February 1993.
From 1992 to 1993,  he served as Regional  Director-Store  Operations  for Revco
D.S., Inc.,  operator of one of the country's  largest retail drug store chains.
Mr.  Jeffery was  employed  by Perry Drug  Stores from 1976 until 1992,  holding
various management positions,  including Vice President of Store Operations from
1988 to 1992. Mr. Jeffery  received a B.S.  degree in pharmacy from Ferris State
University.

         John  R.  Ficarro  has  served  as  Senior  Vice  President  and  Chief
Administrative  Officer (in addition to his existing  duties as General  Counsel
and Secretary of the Company) since June 1997. Prior to that, Mr. Ficarro served
as Vice  President,  General  Counsel and Secretary of the Company  beginning in
February  1995.  From 1981 to 1995,  Mr.  Ficarro was  employed by General  Host
Corporation  where he served as Vice  President,  General  Counsel and Secretary
since  1989 and prior to that time  served as  Counsel  to several of its retail
businesses.  Prior to 1981, Mr. Ficarro  practiced law at Titone & Roarke in Ft.
Lauderdale,  Florida.  Mr.  Ficarro  received a B.A. from the Maxwell  School at
Syracuse University and a J.D. from its College of Law.

         Monroe  Osterman has been a director of the Company since September 25,
1997.  Mr.  Osterman has served as President  of Gala  Trading  Corporation,  an
investment  company  specializing  in large  purchases of diamonds  from Europe,
since 1982.  Prior to serving as  President  of Gala  Trading  Corporation,  Mr.
Osterman served as President of Paras USA and Bermont Corporation and was also a
partner at J. Winston & Company, an importing and merchandising company.

         Arthur G.  Rosenberg has been a director of the Company since  November
23, 1997.  Mr.  Rosenberg was a principal of The  Associated  Companies,  a real
estate  development  firm,  from 1987 to 1998 and in 1999 became a principal  of
Millennium  Development  Group LLC, a commercial  real estate  developer.  Prior
thereto,  Mr.  Rosenberg  was a practicing  lawyer in  Huntington,  New York and
served as General Counsel for ITT Levitt & Sons, Inc., an international builder.

         John D. Shulman has been a director of the Company  since  November 23,
1997.  Mr. Shulman has served as President and Chief  Executive  Officer of ONYX
International, L.L.C., a merchant banking and venture firm focusing primarily on
private equity placements in high growth companies, since 1994. Prior to serving
as President and Chief  Executive  Officer of ONYX  International,  L.L.C.,  Mr.
Shulman served as the Director of Development for Tower Companies, a diversified
group of  companies  including  real  estate  development,  banking  and related
activities since 1986. Mr. Shulman currently serves on the Board of Directors of
U.S. Interactive, Inc., Performance Distribution, Inc., Taiwan Mezzanine Fund I,
L.P.,  Interactive  Video  Technologies,  Inc.,  and on the Board of Managers of
ChemLink Laboratories,  LLC and is the Chairman of Juggernaut Partners, LLC. Mr.
Shulman is the husband of Mr. Estrin's niece.

<PAGE>17

Item 11.  Executive Compensation.

         The information required by Item 11 is incorporated herein by reference
from  the   information   set  forth  under  the  sections   titled   "Executive
Compensation,"  "Committees  of the Board;  Meetings,"  "Executive  Compensation
Plans,"  "Compensation of Directors,"  "Employment  Contracts and Termination of
Employment and Change -In-Control Arrangements,"  "Compensation Committee Report
on Executive  Compensation,"  "Executive  Summary  Compensation  Table," "Option
Grants in Fiscal Year 2000," "Option Exercises and Values for Fiscal Year 2000,"
and "Performance Graph" of the Company's  definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the close of its fiscal year.


Item 12.  Security Ownership of Certain Beneficial Owners and Management.

         The information required by Item 12 is incorporated herein by reference
from the  information  set forth under sections  titled  "Voting  Securities and
Principal  Holders  Thereof" of the Company's  definitive  proxy statement to be
filed  pursuant to Regulation  14A within 120 days after the close of its fiscal
year.


Item 13.  Certain Relationships and Related Transactions.

         The information required by Item 13 is incorporated herein by reference
from the information  set forth under the section titled "Certain  Relationships
and Related  Transactions"  of the Company's  definitive  proxy  statement to be
filed  pursuant to Regulation  14A within 120 days after the close of its fiscal
year.


<PAGE>18


                                     PART IV

ITEM 14.  Financial  Statements,  Financial  Statement  Schedule,  Exhibits  and
          Reports on Form 8-K.

         (a)  Documents filed as part of this Form 10-K

         1.  Financial Statements

                  The Financial  Statements listed in the accompanying  Index to
                  Consolidated  Financial  Statements  are filed as part of this
                  Form 10-K.

         2.  Financial Statement Schedule

                  The Financial  Statement  Schedule listed in the  accompanying
                  Index to Consolidated Financial Statements is filed as part of
                  this Form 10-K

         3.  Exhibits

                  The Exhibits filed as part of this Form 10-K are listed on the
                  Exhibit   Index    immediately    preceding   such   exhibits,
                  incorporated herein by reference.

         (b)  Reports on Form 8-K

                  None.

<PAGE>19



                                   SIGNATURES



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


                                                        PHAR-MOR, INC.


Date:  September 28, 2000              By:  /s/  John R. Ficarro
                                       -----------------------------------------
                                                 John R. Ficarro
                                                 Senior Vice President and Chief
                                                 Administrative Officer

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


Date:  September 28, 2000              /s/  M. David Schwartz
                                       -----------------------------------------
                                                M. David Schwartz, President


Date:  September 28, 2000              /s/  Abbey J. Butler
                                       -----------------------------------------
                                                Abbey J. Butler, Co-Chairman and
                                                Co-Chief Executive Officer
                                               (Co-Principal executive officer)

Date:  September 28, 2000              /s/  Melvyn J. Estrin
                                       -----------------------------------------
                                                Melvyn J. Estrin, Co-Chairman
                                                and Co-Chief Executive Officer
                                                (Co-Principal executive officer)

Date:  September 28, 2000              /s/ Monroe Osterman
                                       -----------------------------------------
                                                Monroe Osterman, Director

Date:  September 28, 2000              /s/  Arthur G. Rosenberg
                                       -----------------------------------------
                                                Arthur G. Rosenberg, Director

Date:  September 28, 2000              /s/ John D. Shulman
                                       -----------------------------------------
                                                John D. Shulman, Director

Date:  September 28, 2000              /s/  Martin S. Seekely
                                       -----------------------------------------
                                                Martin S. Seekely
                                                Vice President and Controller
                                                (principal financial and
                                                accounting officer)


<PAGE>


                                  PHAR-MOR, INC.

                                INDEX TO EXHIBITS


Exhibit No.

*3.1              Amended and Restated Articles of Incorporation

**3.2             Amended and Restated By-laws

*4.1              Indenture dated September 11, 1995 between Phar-Mor, Inc. and
                  IBJ Schroder Bank & Trust Company

*4.2              Warrant Agreement dated September 11, 1995 between Phar-Mor,
                  Inc. and Society National Bank

10.1              Amendment No. 3 to Loan Security Agreement, dated June 27,
                  2000, by and among the financial institutions listed on the
                  signature pages therein, BankAmerica Business Credit, Inc., as
                  agent, and Phar-Mor, Inc., Phar-Mor, Inc. LLC, Phar-Mor of
                  Delaware, Inc., Phar-Mor of Florida, Inc., Phar-Mor of Ohio,
                  Inc., Phar-Mor of Virginia, Inc. and Phar-Mor of Wisconsin,
                  Inc.

***10.2           Employment Agreement between Phar-Mor, Inc. and Abbey J.
                  Butler, dated October 1, 1997

***10.3           Employment Agreement between Phar-Mor, Inc. and Melvyn J.
                  Estrin, dated October 1, 1997

*****10.4         Second Amendment to Employment Agreement between Phar-Mor,
                  Inc. and Warren E. Jeffery, dated February 10, 1999

*****10.5         Third Amendment to Employment Agreement between Phar-Mor, Inc.
                  and M. David Schwartz, dated February 10, 1999

*****10.6         Third Amendment to Employment Agreement between Phar-Mor, Inc.
                  and John R. Ficarro, dated February 10, 1999

*10.7             Form of Indemnification Agreement dated as of September 11,
                  1995

**10.8            Phar-Mor, Inc. 1995 Amended and Restated Stock Incentive Plan

**10.9            Phar-Mor, Inc. 1995 Director Stock Plan, as Amended

**10.10           Phar-Mor, Inc. 1996 Director Retirement Plan

**10.11           Employee Stock Purchase Plan

******10.12       Amendment to the Supply Agreement dated November 5, 1999,
                  between Phar-Mor and McKesson Drug Company

****21.1          List of Subsidiaries

23                Independent Auditors' Consent

27                Financial Data Schedule


-----------------------------------------------------------------
*        Previously filed in connection with the filing of Phar-Mor's Form 10,
         on October 23, 1995

**       Previously filed in connection with the filing of  Phar-Mor's quarterly
         report on Form 10-Q, on May 1, 1998

***      Previously filed in connection with the filing of  Phar-Mor's annual
         report on Form 10-K405, on September 25, 1998

****     Previously filed in connection with the filing of  Phar-Mor's quarterly
         report on Form 10-Q, on November 2, 1998

*****    Previously filed in connection with the filing of Phar-Mor's annual
         report on Form 10-K405, on September 29, 1999


******   Previously filed in connection with the filing of Phar-Mor's quarterly
         report on Form 10-Q, on February 7, 2000


<PAGE>


PHAR-MOR, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                                                           Page

INDEPENDENT AUDITORS' REPORT                                              F - 2

CONSOLIDATED BALANCE SHEETS AS OF JULY 1, 2000 AND JULY 3, 1999           F - 3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FIFTY-TWO WEEKS
ENDED JULY 1, 2000, THE FIFTY-THREE WEEKS ENDED JULY 3, 1999 AND THE
FIFTY-TWO WEEKS ENDED JUNE 27, 1998                                       F - 4

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FIFTY-TWO WEEKS ENDED JULY 1, 2000, THE FIFTY- THREE WEEKS
ENDED JULY 3, 1999 AND THE FIFTY-TWO WEEKS ENDED JUNE 27, 1998            F - 5

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FIFTY-TWO WEEKS
ENDED JULY 1, 2000, THE FIFTY-THREE WEEKS ENDED JULY 3, 1999 AND  THE
FIFTY-TWO WEEKS ENDED JUNE 27, 1998                                       F - 6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                F - 7

SCHEDULE II                                                               F - 25









                                            F-1
<PAGE>


                       INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Phar-Mor, Inc. :

We have audited the accompanying  consolidated balance sheets of Phar-Mor,  Inc.
and  subsidiaries  (the  "Company") as of July 1, 2000 and July 3, 1999, and the
related consolidated  statements of operations,  changes in stockholders' equity
and cash flows for the fifty-two weeks ended July 1, 2000, the fifty-three weeks
ended July 3, 1999 and the fifty-two  weeks ended June 27, 1998. Our audits also
included consolidated  financial statement Schedule II, Valuation and Qualifying
Accounts.  These financial  statements and financial  statement schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial  statements and financial statement schedule based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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 consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Phar-Mor,  Inc. and
subsidiaries  as of July 1,  2000 and  July 3,  1999  and the  results  of their
operations and their cash flows for the fifty-two  weeks ended July 1, 2000, the
fifty-three  weeks  ended July 3, 1999 and the  fifty-two  weeks  ended June 27,
1998, in conformity with accounting  principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly in all  material  respects  the  information  set forth
therein.


Deloitte & Touche LLP

Pittsburgh, Pennsylvania
September 26, 2000


                                            F-2



<PAGE>

PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                        July 1,       July 3,
                                                                         2000          1999
                                                                     -----------   -----------
ASSETS

Current assets:
<S>                                                                    <C>          <C>
Cash and cash equivalents                                              $  16,752    $  17,346
Marketable securities                                                      3,019        3,254
Accounts receivable - net                                                 25,017       28,293
Merchandise inventories                                                  207,228      218,945
Prepaid expenses                                                           6,099        6,902
Deferred tax asset                                                           439          516
                                                                         -------      -------
Total current assets                                                     258,554      275,256

Property and equipment - net                                              91,801       93,738
Goodwill                                                                  15,809       16,234
Deferred tax asset                                                         9,126        9,049
Investments                                                               13,682        8,314
Investment in Avatex                                                       3,691         --
Other assets                                                               5,241        5,133
                                                                         -------      -------

Total assets                                                           $ 397,904    $ 407,724
                                                                        ========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable                                                       $  97,461    $ 119,843
Accrued expenses                                                          38,840       34,926
Current portion of self insurance reserves                                 1,781        2,178
Current portion of long-term debt                                          1,964        1,751
Current portion of capital lease obligations                               4,535        7,195
                                                                         -------      -------
Total current liabilities                                                144,581      165,893

Long-term debt                                                           152,410      122,804
Capital lease obligations                                                 15,446       20,143
Long-term self insurance reserves                                          7,335        8,032
Unfavorable lease liability - net                                         10,639       11,073
                                                                         -------      -------
Total liabilities                                                        330,411      327,945
                                                                         -------      -------


Commitments and contingencies

Minority interests                                                           535          535
                                                                         -------      -------


Stockholders' equity:
 Preferred stock, $.01 par value, authorized shares, 10,000,000,
   none outstanding                                                         --           --
 Common stock, $.01 par value, authorized shares, 40,000,000;
   issued and outstanding shares, 12,240,865                                 122          122
 Additional paid-in capital                                               90,007       90,007
 Stock options outstanding                                                 2,200        2,105
 Retained deficit                                                        (19,012)      (7,989)
                                                                         -------      -------

                                                                          73,317       84,245
Less: equity, through investment in Avatex, in cost of common stock
 of the Company held by Avatex, Inc                                       (6,359)      (5,001)
                                                                         -------      -------
Total stockholders' equity                                                66,958       79,244
                                                                         -------      -------

Total liabilities and stockholders' equity                             $ 397,904    $ 407,724
                                                                       =========    =========
</TABLE>

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

                                            F-3


<PAGE>

PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                       Fifty-two       Fifty-three      Fifty-two
                                                      weeks ended      weeks ended     weeks ended
                                                      July 1, 2000    July 3, 1999    June 27, 1998
                                                      ------------    ------------    -------------

<S>                                                   <C>             <C>             <C>
Sales                                                 $  1,292,090    $  1,206,539    $  1,100,851

Less:
Cost of goods sold, including occupancy and
distribution costs                                       1,050,208         977,878         887,657
Selling, general and administrative expenses               211,833         188,264         173,736
Executive severance                                           --              --             6,787
Loss on disposal of equipment                                 --              --             4,615
Depreciation and amortization                               24,708          25,386          22,293
                                                            ------          ------          ------
Income from operations before interest expense,
investment (loss), interest income, equity in
income (loss) of affiliates, income taxes and
extraordinary item                                           5,341          15,011           5,763


Interest expense                                           (18,851)        (16,338)        (16,639)
Investment loss                                             (5,528)         (1,025)         (1,093)
Interest income                                                124           1,585           3,151
                                                            ------          ------          ------

Loss before equity in income (loss) of affiliates,
income taxes and extraordinary item                        (18,914)           (767)         (8,818)
Equity in income (loss) of affiliates                        6,774           1,568             (12)
                                                            ------          ------          ------

(Loss) income before income taxes and extraordinary
 item                                                      (12,140)            801          (8,830)

Income tax provision                                          --               205            --
                                                            ------          ------          ------

(Loss) income before extraordinary item                    (12,140)            596          (8,830)

Extraordinary item - gain on extinguishment of debt          1,117            --              --
                                                            ------          ------          ------

Net (loss) income                                     $    (11,023)   $        596    $     (8,830)
                                                      ============    ============    ============

(Loss) income per basic share:
(Loss) income before extraordinary item               $      (1.08)   $        .05    $       (.73)
Extraordinary item                                    $        .10    $       --      $       --
                                                      ------------    ------------    ------------
Net (loss) income                                     $       (.98)   $        .05    $       (.73)
                                                      ============    ============    ============

(Loss) income per diluted share:
(Loss) income before extraordinary item               $      (1.08)   $        .05    $       (.73)
Extraordinary item                                    $        .10    $       --      $       --
                                                      ------------    ------------    ------------
Net (loss) income                                     $       (.98)   $        .05    $       (.73)
                                                      ============    ============    ============

Weighted average number of basic shares outstanding     11,241,342      11,522,800      12,117,683
                                                      ============    ============    ============
Weighted average number of diluted shares
    outstanding                                         11,241,342      11,570,955      12,117,683
                                                      ============    ============    ============

</TABLE>

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


                                            F-4


<PAGE>


PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>



                                                                              Equity,
                                                                              Through
                                                                             Investment
                                                                             in Avatex,
                                Common Stock                                 in Cost of
                                ------------                                Common Stock
                                                                              of the
                                          Par     Additional   Stock          Company    Retained     Total
                                         Value     Paid-in    Options         Held by   (Deficit)  Stockholders'
                              Shares    Amount     Capital    Outstanding   Avatex, Inc. Earnings     Equity
                              ------    ------     -------    -----------   ------------ --------     ------

<S>                           <C>      <C>        <C>          <C>         <C>            <C>         <C>
Balance at June 28, 1997      12,159   $    122   $ 89,402         --          --         $    245    $ 89,769


Net loss                        --         --         --           --          --           (8,830)     (8,830)


Stock options outstanding       --         --         --       $  1,401        --             --         1,401


Purchase of Avatex shares       --         --         --           --      $ (4,000)          --        (4,000)


Shares issued                     77       --          574         --          --             --           574
                            --------   --------   --------     --------     --------       --------    --------


Balance at June 27, 1998      12,236        122     89,976        1,401      (4,000)        (8,585)     78,914


Net income                      --         --         --           --          --              596         596


Stock options outstanding       --         --         --            704        --             --           704


Purchase of Avatex shares       --         --         --           --        (1,001)          --        (1,001)


Shares issued                      5       --           31         --          --             --            31
                            --------   --------   --------     --------     --------       --------    --------


Balance at July 3, 1999       12,241        122     90,007        2,105     (5,001)         (7,989)     79,244


Net loss                        --         --         --           --          --          (11,023)    (11,023)

Stock options outstanding
                                --         --         --             95        --             --            95

Purchase of Avatex shares       --         --         --           --        (1,358)          --        (1,358)
                            --------   --------   --------     --------     --------       --------    --------


Balance at July 1, 2000       12,241   $    122   $ 90,007     $  2,200    $ (6,359)      $(19,012)   $ 66,958
                            ========   ========   ========     ========     ========      ========    ========

</TABLE>

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

                                            F-5


<PAGE>


PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                     Fifty-two       Fifty-three        Fifty-two
                                                                    weeks ended      weeks ended       weeks ended
                                                                    July 1, 2000     July 3, 1999     June 27, 1998
                                                                    ------------     ------------     -------------
OPERATING ACTIVITIES
<S>                                                                     <C>            <C>             <C>
Net loss                                                               $ (11,023)      $    596        $ (8,830)
Adjustments to reconcile net loss to net cash provided
  by operating activities:
Items not requiring the outlay of cash:
 Depreciation                                                             18,682         17,028          14,030
 Loss on disposal of equipment                                              --             --             4,615
 Stock option expense                                                         95            704           1,401
 Amortization of video rental tapes                                        4,696          7,784           7,970
 Amortization of deferred financing costs and goodwill                     1,594            446            467
 Deferred taxes                                                             --              205            --
 Unrealized (gain)loss on equity investments                               1,111         (1,748)           --
 Gain on extinguishment of debt                                           (1,117)          --              --
 Deferred rent and unfavorable lease liabilities                            (434)        (1,059)         (1,419)
Changes in assets and liabilities:
 Accounts receivable                                                       3,232         (5,750)            687
 Marketable securities                                                       235          5,811          (9,065)
 Merchandise inventories                                                   8,506         (8,539)         (6,769)
 Prepaid expenses                                                            803         (4,385)          3,014
 Other assets                                                             (1,277)           181             298
 Accounts payable                                                        (18,638)         8,174           5,283
 Accrued expenses                                                          4,543        (11,175)             58
 Other                                                                    (1,367)          (979)         (1,686)
                                                                        --------       --------        --------
Net cash provided by operating activities                                  9,641          7,294          10,054
                                                                        --------       --------        --------

INVESTING ACTIVITIES
 Additions to rental videotapes                                           (1,485)        (7,445)         (8,167)
 Additions to property and equipment                                     (17,051)       (23,968)        (19,213)
 Investment in Avatex                                                     (5,724)        (1,001)         (4,000)
 Investment in Pharmhouse Corp., net of $3,292 cash
  acquired                                                                  --           (4,838)          --
 Proceeds from sale of equity securities                                   6,000           --             --
 Investment in equity securities                                         (11,761)        (2,291)         (4,275)
                                                                        --------       --------        --------
Net cash used for investing activities                                   (30,021)       (39,543)        (35,655)
                                                                        --------       --------        --------

FINANCING ACTIVITIES
 Borrowings under revolving credit facility                               40,217         20,066           --
 Retirement of senior notes                                               (9,032)          --             --
 Principal payments on term debt                                          (1,397)       (29,592)         (3,043)
 Principal payments on capital lease obligations                          (7,357)        (6,847)         (7,122)
 Bank overdrafts                                                          (3,793)        21,032           --
 Other additions to long-term debt                                         1,148            250           --
 Issuance of common stock                                                   --               31             574
                                                                        --------       --------        --------
Net cash provided by (used for) financing activities                      19,786          4,940          (9,591)
                                                                        --------       --------        --------
Decrease in cash and cash equivalents                                       (594)       (27,309)        (35,192)
Cash and cash equivalents, beginning of period                            17,346         44,655          79,847
                                                                        --------       --------        --------
Cash and cash equivalents, end of period                                $ 16,752       $ 17,346        $ 44,655
                                                                        ========       ========        ========

Supplemental Information
 Interest paid                                                          $ 13,602       $ 21,744        $ 16,155
 Income tax refunds                                                           53             47              48
</TABLE>

Non-Cash: For the fifty-two weeks ended June 27, 1998, the Company entered into
a capital  lease which  increased  property  and  equipment  and  capital  lease
obligations $2,178.

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


                                            F-6


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
1.       BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         a.       Fiscal  Periods  Presented  -  The  accompanying  consolidated
                  balance  sheets  were  prepared as of July 1, 2000 and July 3,
                  1999. The accompanying  consolidated statements of operations,
                  changes in  stockholders'  equity and cash flows were prepared
                  for the fifty-two  weeks ended July 1, 2000,  the  fifty-three
                  weeks ended July 3, 1999,  and the fifty-two  weeks ended June
                  27, 1998. The Company's  year ends on the Saturday  closest to
                  June 30.

         b.       Business - The  Company  operates  a chain of "deep  discount"
                  drugstores primarily located in the midwest and along the east
                  coast  of the  continental  United  States  in  which it sells
                  merchandise in various categories. The Company operates in one
                  segment.

         c.       Principles  of  Consolidation  -  The  consolidated  financial
                  statements  include  the  accounts  of  Phar-Mor,   Inc.,  its
                  wholly-owned subsidiaries and its majority-owned partnerships.
                  All   intercompany   accounts  and   transactions   have  been
                  eliminated.

         d.       Cash  and  Cash  Equivalents  -  The  Company   considers  all
                  short-term  investments  with an  original  maturity  of three
                  months or less to be cash equivalents.

         e.       Marketable  Securities - Under the  provisions of Statement of
                  Financial  Accounting  Standards ("SFAS") No. 115, "Accounting
                  for  Certain  Investments  in  Debt  and  Equity  Securities,"
                  marketable  securities  are  carried at fair  market  value as
                  trading  securities.  The  cost  of  the  securities  sold  is
                  determined   using   the   specific   identification   method.
                  Marketable  securities consist primarily of equity instruments
                  of corporations. Unrealized gains (losses) of $419, $(390) and
                  $(1,363) are included in Investment  loss in the  Consolidated
                  Statements of Operations for the fifty-two weeks ended July 1,
                  2000,  the  fifty-three  weeks  ended  July  3,  1999  and the
                  fifty-two weeks ended June 27, 1998, respectively.

         f.       Merchandise  Inventories - Merchandise  inventories are valued
                  at the lower of first-in, first-out ("FIFO") cost or market.

         g.       Video  Rental  Tapes -  Videotapes  held for rental  which are
                  included  in  inventories,   are  recorded  at  cost  and  are
                  amortized  over  their   estimated   economic  lives  with  no
                  provision for salvage value.  With respect to "hit" titles for
                  which four or more copies per store are purchased,  the fourth
                  and any succeeding  copies are amortized over nine months on a
                  straight-line  basis. All other video cassette purchases up to
                  three copies per store are amortized over thirty-six months on
                  a straight-line basis.

         h.       Investments  -  Investments  consist  of equity  interests  in
                  unconsolidated   affiliates   that   do   not   have   readily
                  determinable market values. The Company uses the equity method
                  of  accounting  for  investments  ($9,788  at July 1, 2000 and
                  $6,134 at July 3,  1999) in which it has 20% or more  interest
                  in voting common stock and the cost method of  accounting  for
                  investments  ($3,894  at July 1,  2000 and  $2,180  at July 3,
                  1999)  in  which it has less  than a 20%  interest  in  voting
                  common stock or investments  in preferred  stock (see Note 9).
                  During  fiscal 2000 the Company  recorded a $5,500  investment
                  loss resulting  from an other than  temporary  impairment of a
                  cost basis investment.

         i.       Investment in Avatex - During the  fifty-two  weeks ended June
                  27, 1998,  the  fifty-three  weeks ended July 3, 1999, and the
                  fifty-two  weeks  ended July 1,  2000,  the  Company  invested
                  $4,000,   $1,001,   and  $5,724   respectively,   to  purchase
                  approximately 25.2% of Avatex  Corporation,  formerly known as
                  FoxMeyer Health Corporation ("Avatex"), an affiliate of one of
                  the  Company's  former  largest   suppliers  and  the  largest
                  stockholder  of the Company  (see Note 9).  Accordingly,  upon
                  attaining  a 20% or more  interest in  Avatex's  common  stock
                  during the fiscal year ended July 1, 2000, the Company changed
                  its method of accounting for the  investment  from the cost to
                  the equity basis as required by generally accepted  accounting
                  principles.  Because Avatex holds an approximate  39% interest
                  in the Company's  common stock,  the Company  treats  Avatex's
                  investment in the  Company's  common stock similar to treasury
                  stock,  with a reduction  in the number of shares  outstanding
                  for calculating earnings per share of 1,207,979. The financial
                  statements  of prior  years have been  restated to reflect the
                  adoption of the equity method in a manner  consistent with the
                  accounting  for a  step-by-step  acquisition  of  Avatex.  The
                  effect of the restatement was to increase net

                                            F-7

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
                  income for  fiscal  1999 by  $2,188,  eliminate  comprehensive
                  income (loss) for all prior periods and  reclassify all of the
                  Company's  investment  in Avatex  common stock prior to fiscal
                  2000 from Investment in Avatex to equity,  through  investment
                  in Avatex,  in cost of common stock of the Corporation held by
                  Avatex, Inc. on the Condensed Consolidated Balance Sheets.

                  The Company's  investment in Avatex  includes the  unamortized
                  excess of the Company's investment over its equity in Avatex's
                  net assets. This excess was $3,628 and is being amortized on a
                  straight-line basis over 20 years.

         j.       Deferred  Debt Expense - Deferred  debt expense is included in
                  other assets and is amortized  on a  straight-line  basis over
                  the term of the related debt.

         k.       Goodwill - Goodwill is amortized on a straight-line basis over
                  its  estimated  useful life,  which  ranges  between 25 and 40
                  years and is net of accumulated  amortization of $962 and $318
                  at July 1, 2000 and July 3, 1999, respectively.

         l.       Purchased  Pharmacy  Files  -  Purchased  pharmacy  files  are
                  included  in other  assets and are  recorded at fair value and
                  amortized  over their  estimated  useful  lives,  which  range
                  between 3 and 10 years.

         m.       Pre-Opening  Costs - Expenses incurred for new stores prior to
                  their opening are expensed as incurred.

         n.       Property  and  Equipment - The  Company's  policy is to record
                  property and equipment (including  leasehold  improvements) at
                  cost.  Depreciation  is recorded on the  straight-line  method
                  over  the  estimated  useful  lives of the  assets.  Leasehold
                  improvements  are amortized over the estimated useful lives of
                  the  improvements  or the lives of the  leases,  whichever  is
                  shorter.  The Company  capitalizes  the costs of software  and
                  software  upgrades  purchased for use in its  operations.  The
                  Company  capitalizes the internal costs of software  developed
                  or modified for use in its operations. Maintenance and repairs
                  are expensed as incurred.  Replacements  and  betterments  are
                  capitalized  and  depreciated  over  the  remaining  estimated
                  useful life of the asset.

         o.       Leased  Property Under Capital  Leases - The Company  accounts
                  for capital leases,  which transfer  substantially  all of the
                  benefits  and risks  incident to the  ownership of property to
                  the Company, as the acquisition of an asset and the incurrence
                  of an obligation.  Under this method of accounting the cost of
                  the  leased   asset  is   amortized   principally   using  the
                  straight-line  method over its estimated  useful life, and the
                  obligation, including interest thereon, is liquidated over the
                  life of the lease.

         p.       Operating  Leases and  Deferred  Rent -  Operating  leases are
                  accounted for on the straight-line method over the lease term.
                  Deferred rent represents the difference between rents paid and
                  the amounts expensed for operating leases.

         q.       Unfavorable  Lease Liability - The unfavorable lease liability
                  represents  the excess of the present  value of the  liability
                  related to lease  commitments over the present value of market
                  rate rents. This liability will be amortized as a reduction of
                  rent expense over the remaining lease terms.  The amounts were
                  recorded as part of fresh-start  reporting in conjunction with
                  a  Chapter  11  Bankruptcy  proceeding  in which  the  Company
                  emerged from Chapter 11 on September 11, 1995,  and related to
                  purchase accounting for an acquisition.

         r.       Self   Insurance   Reserves  -  The   Company   is   generally
                  self-insured for losses and liabilities  related  primarily to
                  workers'  compensation and  comprehensive  general and product
                  liability.   Losses  are  accrued  based  upon  the  Company's
                  estimates of the aggregate liability for claims incurred using
                  certain  actuarial   assumptions  followed  in  the  insurance
                  industry and based on Company experience.

         s.       Income Taxes - The Company accounts for income taxes using the
                  provisions of SFAS No. 109, "Accounting for Income Taxes".

                                            F-8
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         t.       Stock Based  Compensation - The Company applies the provisions
                  of APB No. 25,  "Accounting for Stock Issued to Employees" and
                  related  interpretations  in  accounting  for its  stock-based
                  compensation arrangements.

         u.       Revenue  Recognition  - Sales are  recognized  on  merchandise
                  inventories sold upon receipt by the customer and are recorded
                  net of returns.

         v.       Reclassifications  - Certain  amounts in prior year  financial
                  statements have been  reclassified to conform with the current
                  year presentation.

         w.       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 period.  Actual  results could differ
                  from those estimates.

         x.       Recent  Accounting  Pronouncements  - In June  1998,  the FASB
                  issued SFAS No. 133,  "Accounting  for Derivative  Instruments
                  and Hedging  Activities,"  which  establishes  accounting  and
                  reporting standards for derivative instruments and for hedging
                  activities.   It  requires   that  an  entity   recognize  all
                  derivatives  as either assets or  liabilities in the statement
                  of financial  position and measure those  instruments  at fair
                  value, with the potential effect on operations  dependent upon
                  certain conditions being met. SFAS No. 133 (as amended by SFAS
                  No. 137) is effective for all fiscal  quarters of fiscal years
                  beginning  after June 15,  2000.  Management  does not believe
                  that the adoption of SFAS No. 133 will have a material  impact
                  on its financial position or results of operations.

                  In November  1999,  the SEC issued Staff  Accounting  Bulletin
                  ("SAB") 101, "Revenue  Recognition".  This Bulletin sets forth
                  the SEC Staff's  position  regarding  the point at which it is
                  appropriate for a Registrant to recognize  revenue.  The Staff
                  believes that revenue is realizable and earned when all of the
                  following criteria are met:

                         -  Persuasive evidence of an arrangement exists;

                         -  Delivery has occurred or service has been rendered;

                         -  The seller's price to the buyer is fixed or
                              determinable; and

                         -  Collectibility is reasonably assured.

                  The  Company  uses the above  criteria  to  determine  whether
                  revenue can be  recognized,  and  therefore  believes that the
                  issuance  of SAB 101 does not have a  material  impact  on the
                  Company's financial statements.

         y.       Advertising  Costs  -  Advertising  costs  are  expensed  when
                  incurred.  Advertising  expenses for the fifty-two weeks ended
                  July 1, 2000, the fifty-three weeks ended July 3, 1999 and the
                  fifty-two weeks ended June 27, 1998 were $22,827,  $19,392 and
                  $23,381, respectively.

                                            F-9




<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

2.       ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>


         Accounts receivable consists of the following:
                                                                          July 1, 2000      July 3, 1999
                                                                          ------------      ------------

<S>                                                                           <C>             <C>
         Accounts receivable - vendors                                        $ 10,315        $ 13,587
         Third-party prescriptions                                              14,944          14,038
         Vendor coupons                                                            711           1,015
         Other                                                                     551           1,397
                                                                                ------          ------
                                                                                26,521          30,037
         Less allowance for doubtful accounts                                    1,504           1,744
                                                                                ------          ------
                                                                              $ 25,017        $ 28,293
                                                                              ========        ========
</TABLE>
<TABLE>
<CAPTION>

3.       MERCHANDISE INVENTORIES

         Merchandise inventories consists of the following:

                                                                          July 1, 2000    July 3, 1999
                                                                          ------------    ------------
<S>                                                                           <C>             <C>
         Store inventories                                                    $189,423        $187,197
         Warehouse inventories                                                  29,476          41,624
         Video rental tapes - net                                                1,019           5,080
                                                                               -------         -------
                                                                               219,918         233,901
         Less reserves for markdowns, shrinkage
         and vendor rebates                                                     12,690          14,956
                                                                              --------        --------
                                                                              $207,228        $218,945
                                                                              ========        ========
</TABLE>

         The video rental tape inventory is net of accumulated  amortization  of
         $3,832 and $7,526 at July 1, 2000 and July 3, 1999, respectively.

4.       PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>

         Property and equipment consists of the following:

                                                                          July 1, 2000    July 3, 1999
                                                                          ------------    ------------
<S>                                                                           <C>             <C>
         Furniture, fixtures and equipment                                    $ 70,171        $ 60,534
         Building improvements to leased property                               52,559          45,804
         Land                                                                      497             497
         Building                                                                1,517           1,517
         Capital leases:
          Buildings                                                             11,076          11,076
          Furniture, fixtures and equipment                                     22,072          22,072
                                                                               -------         -------
                                                                               157,892         141,500
         Less accumulated depreciation and
         amortization                                                           66,091          47,762
                                                                               -------         -------
                                                                              $ 91,801        $ 93,738
                                                                              ========        ========
</TABLE>

                                            F-10

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
5.       OTHER ASSETS
<TABLE>
<CAPTION>

         Other assets consists of the following:

                                                                          July 1, 2000    July 3, 1999
                                                                          ------------    ------------
<S>                                                                             <C>             <C>
         Purchased pharmacy files                                               $3,313          $4,001
         Liquor licenses                                                         1,117              45
         Deferred debt expense                                                     291             456
         Utility and other deposits                                                388             396
         Other                                                                     132             235
                                                                                ------          ------
                                                                                $5,241          $5,133
                                                                                ======          ======
</TABLE>

         Deferred debt expense, liquor licenses and purchased pharmacy files are
         net of accumulated  amortization of $1,430 and $1,315,  at July 1, 2000
         and July 3, 1999,  respectively.  The deferred debt expense consists of
         debt  origination  costs  associated with the credit facility (See Note
         6).


6.       REVOLVING CREDIT FACILITIES

         On September 10, 1999, the Company entered into an Amended and Restated
         Revolving  Credit Facility (the "Amended  Revolving  Credit  Facility")
         with BankAmerica  Business Credit,  Inc. ("BABC"),  as agent, and other
         financial  institutions  that  established  a  credit  facility  in the
         maximum amount of $100,000.

         Borrowings under the Amended  Revolving Credit Facility may be used for
         working capital needs and general corporate purposes.  Up to $50,000 of
         the  facility  at any  time  may be used for  standby  and  documentary
         letters of credit.  The Facility includes  restrictions on, among other
         things,    additional   debt,   investments,    dividends   and   other
         distributions, mergers and acquisitions. The facility contains no other
         financial covenants.

         Credit  availability under the Amended Revolving Credit Facility at any
         time is the lesser of the  Aggregate  Availability  (as  defined in the
         Facility)  or  $100,000.   Availability   under  the  Facility,   after
         subtracting outstanding letters of credit, was $34,633 at July 1, 2000.
         The Amended Revolving Credit Facility establishes a first priority lien
         and security interest in the current assets of the Company,  including,
         among other items, cash, accounts receivable and inventory.

         Advances made under the Amended Revolving Credit Facility bear interest
         at the  BankAmerica  reference  rate plus 1/2% or LIBOR plus 2.00% from
         January 1 to June 30 each year and the BankAmerica  Reference rate plus
         3/4% or LIBOR plus 2.25% from July 1 to  December  31 each year.  Under
         the terms of the  Amended  Revolving  Credit  Facility,  the Company is
         required to pay a commitment  fee of between  0.25% and 0.35% per annum
         on the  unused  portion  of the  facility,  letter of  credit  fees and
         certain other fees.

         At July 1, 2000 the  BankAmerica  reference  rate (prime rate) was 9.5%
         and the LIBOR rate was 6.42%.

         At July 1, 2000  there  were  letters of credit in the amount of $5,084
         outstanding under the Amended Revolving Credit Facility.

         The Amended Revolving Credit Facility expires on March 14, 2002.

                                            F-11


<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------


7.       LONG-TERM DEBT

         The composition of the debt  obligations  included on the  consolidated
         balance sheets is as follows:
<TABLE>
<CAPTION>

                                                                      July 1, 2000  July 3, 1999
                                                                      ------------  ------------
<S>                                                                       <C>        <C>
         Senior unsecured notes, interest rate of 11.72%,
          due September 2002                                              $ 81,313   $ 91,462
         Amended Revolving Credit Facility                                  60,283     20,066

         Equipment notes, interest rate of 7%, due in installments
          through October 2003                                               3,926      3,785
         Tax notes, interest rates at 5.89% to 8%, due
          through September 2001                                             4,455      4,575

         Real estate mortgage notes and bonds payable at rates ranging
          from 3% to 9.98% and the prime rate plus 1%                        4,397      4,667
                                                                           -------    -------
         Total debt                                                        154,374    124,555
         Less current portion                                                1,964      1,751
                                                                           -------    -------
         Total long-term debt                                             $152,410   $122,804
                                                                          ========   ========
</TABLE>

         The Company  must offer to  purchase  the senior  unsecured  notes at a
         price equal to 101% of the  principal  amount upon the  occurrence of a
         change in control.  The senior  notes  contain  restrictions  on, among
         other things,  incurrence of debt, payment of dividends and repurchases
         of  common  stock.  During  fiscal  2000,  the  Company  recognized  an
         extraordinary  gain of  $1,117 in  connection  with the  retirement  of
         $10,149 of senior unsecured notes.

         The Company has mortgage notes and bonds payable collateralized by real
         estate with an aggregate net book value of $3,853 and $4,038 at July 1,
         2000 and July 3, 1999, respectively.

                                            F-12

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

         Future  maturities  of long-term  debt  subsequent  to July 1, 2000 are
         summarized as follows:

                  2001                                               $     1,964
                  2002                                                    63,597
                  2003                                                    82,801
                  2004                                                       554
                  2005                                                       365
                  Thereafter                                               5,093
                                                                        --------
                                                                        $154,374
                                                                        ========

8.       LEASES

         The  Company  leases its retail  store  properties,  certain  warehouse
         facilities and certain  equipment  under capital and operating  leases.
         Generally,  leases are net leases that require the payment of executory
         expenses such as real estate taxes,  insurance,  maintenance  and other
         operating costs, in addition to minimum  rentals.  The initial terms of
         the leases range from three to twenty-five  years and generally provide
         for renewal options.

         Minimum  annual  rentals for all capital and  operating  leases  having
         initial noncancelable lease terms in excess of one year at July 1, 2000
         are as follows:

                                                       Capital         Operating
                                                        Leases           Leases
                                                        ------           ------

                                 2001                   $ 5,919         $ 42,816
                                 2002                     5,220           40,784
                                 2003                     3,388           36,753
                                 2004                     2,033           31,097
                                 2005                     2,055           26,832
                                 Thereafter               6,394          103,775
                                                          -----          -------

          Total minimum lease payments                   25,009         $282,057
                                                                         =======
          Less amounts representing interest              5,028
                                                        -------
          Present value of minimum lease payments        19,981
          Less current portion                            4,535
                                                        -------
          Long-term capital lease obligations           $15,446
                                                        =======


         The operating leases on substantially all store properties  provide for
         additional  rentals  when sales  exceed  specified  levels and  contain
         escalation clauses.  Rent expense for the fifty-two weeks ended July 1,
         2000,  fifty-three  weeks ended July 3, 1999,  and the fifty-two  weeks
         ended June 27, 1998 was  $43,730,  $37,306,  and $31,921  respectively,
         including $206, $223, and $123 of additional rentals.

9.       TRANSACTIONS WITH RELATED PARTIES

         From  September  11, 1995 to September  19, 1997,  Hamilton  Morgan LLC
         ("Hamilton  Morgan")  beneficially  owned  approximately  39.9%  of the
         Company's common stock.  During this period,  (a) Avatex owned 69.8% of
         Hamilton  Morgan,  and Abbey J. Butler and Melvyn J.  Estrin,  Avatex's
         Co-Chairmen  of the Board and Co-Chief  Executive  Officers,  served as
         directors of the  Company,  and (b) Robert Haft owned 30.2% of Hamilton
         Morgan and served as  Hamilton  Morgan's  President  and the  Company's
         Chairman of the Board and Chief  Executive  Officer.  On September  19,
         1997, under the terms of an agreement  between Hamilton Morgan,  Robert
         Haft and Avatex (the "Hamilton Morgan Agreement"),  Avatex acquired the
         3,750,000  shares of the  Company's  common stock  previously  owned by
         Hamilton  Morgan  in  exchange  for  (i)  the  redemption  of  Avatex's
         membership interest in Hamilton

                                            F-13

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         Morgan,  (ii)  the  satisfaction  of a  certain  promissory  note  from
         Hamilton  Morgan to Avatex  and (iii) the  transfer  of  certain  other
         assets from Avatex to Hamilton  Morgan.  Avatex now  beneficially  owns
         approximately 39.1% of the Company's common stock.

         In conjunction with the Hamilton Morgan Agreement,  the Company entered
         into a Severance  Agreement  with Robert Haft  whereby he resigned  his
         positions  as Chairman of the Board of  Directors  and Chief  Executive
         Officer and received a lump sum cash payment of $4,417. Under the terms
         of the  Severance  Agreement,  the  Company  will  continue  to provide
         benefits to him through  September  19,  2000.  He is  indemnified  and
         entitled  to  tax   reimbursement  in  respect  to  any  payments  that
         constitute excess parachute payments under Federal Income Tax laws. The
         Company  is  obligated  to  provide a letter of credit in the amount of
         approximately  $2,900 to secure its contractual  obligations  under the
         Severance Agreement.

         In March 1998 and December 1998, 13 persons and entities  purchased (or
         committed  to  purchase)  a total of  $7,200  of  Series  A  membership
         interests in Chemlink Acquisition Company, LLC, which in turn purchased
         a total of 50% of the  membership  interests in Chemlink  Laboratories,
         LLC. These persons and entities  included the Company;  Avatex;  two of
         the Company's executive officers,  Abbey J. Butler and Melvyn J. Estrin
         (and/or their designees);  one Avatex officer,  Edward L. Massman;  one
         non-officer director of Avatex; and five additional parties related to,
         or referred to by,  Abbey J. Butler or Melvyn J.  Estrin.  Of the total
         amount invested,  the Company's share was approximately 35.8%, Avatex's
         share was  approximately  41.1%, the Avatex  officers/designees'  share
         (including  Messrs.  Butler and Estrin) was  approximately  14.4%,  the
         Avatex  non-officer  director's share was  approximately  0.7%, and the
         related  parties'  share was  approximately  8.0%.  The  largest  share
         invested  by a  Company  officer  or  director  (or his  designee)  was
         approximately 6.1% of the total amount invested. Messrs. Butler, Estrin
         and Shulman  serve on the Board of  Managers of Chemlink  Laboratories,
         LLC. The Company  accounts for this investment  using the equity method
         of accounting.

         In April 1998,  13 persons and  entities  purchased  (or  committed  to
         purchase) a total of $3,000 of Series B Non-voting  Preferred Stock and
         warrants to  purchase  Series B  Preferred  Stock of RAS Holding  Corp.
         These  persons and entities  included the Company;  Avatex;  two of the
         Company's executive officers, Melvyn J. Estrin and Abbey J. Butler; all
         of Avatex's  executive  officers and its Director of Accounting (and/or
         their  designees);   one  non-officer   director  of  Avatex;  and  two
         additional  parties  related to, or referred to by,  Abbey J. Butler or
         Melvyn J. Estrin. Mr. Butler is also a director of RAS Holding Corp. Of
         the total amount invested,  Avatex's share was approximately 46.7%, the
         Company's  share  was 25%,  the  Avatex  officers/designees'  share was
         19.8%, the Avatex  non-officer  director's share was 1% and the related
         parties' share was approximately 7.5%. The largest share invested by an
         officer or  director of the  Company  (or his  designee)  was 5% of the
         total amount  invested.  The Company accounts for this investment using
         the cost method of accounting.

         In April  1998,  the  Company  and  Avatex  each  purchased  $1,250  of
         preferred  stock of HPD Holdings Corp.  ("HPD") in connection  with the
         acquisition  by a HPD subsidiary of certain of the assets of Block Drug
         Company, Inc. ("Block") used in or related to the manufacture,  sale or
         distribution  of Block's  household  product  lines.  In addition,  the
         Company and Avatex  each  acquired  2.5% of the common  stock of HPD as
         part  of  the  transaction.  The  largest  shareholder  of  HPD  is HPD
         Partners,  LP, a Delaware  limited  partnership and Abbey J. Butler and
         Melvyn J. Estrin are limited partners of HPD Partners, LP and directors
         of HPD  Laboratories,  Inc.,  a wholly  owned  subsidiary  of HPD.  The
         Company   accounts  for  this  investment  using  the  cost  method  of
         accounting.

         The Company paid $95 and $77 to Human Service Group, Inc. during Fiscal
         Year 2000 and 1999, respectively,  for secretarial services provided to
         Mr. Estrin.  Human Service Group, Inc. is a corporation wholly owned by
         Mr. Estrin.

         The Company purchased $319 and $314 of product from AM Cosmetics,  Inc.
         during  Fiscal  Year 1999 and 1998,  respectively.  Mr.  Butler and Mr.
         Estrin were directors of AM Cosmetics, Inc. until September, 1998.

         The Company  purchased $20 and $241 of product from Carson Products,  a
         subsidiary  of  Carson,   Inc.   during  Fiscal  Year  1999  and  1998,
         respectively. Mr. Butler and Mr. Estrin are directors of Carson, Inc.

                                            F-14
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         The  Company  paid CB Equities  Corporation  $67,  $74 and $52,  during
         Fiscal Year 2000, 1999 and 1998, respectively, for office and equipment
         support  for  Mr.  Butler.  Mr.  Butler  is  President  of CB  Equities
         Corporation.

10.      WARRANTS AND OPTIONS

         Warrants
         --------

         There are  warrants  to  purchase  an  aggregate  of  1,250,000  of the
         Company's  common shares  outstanding as of July 1, 2000.  Each warrant
         entitles  the holder  thereof to acquire one common share at a price of
         $13.50, subject to certain adjustments. The warrants are exercisable at
         any time until the close of business on September  10, 2002. As of July
         1, 2000, no warrants had been exercised.


         Stock Options
         -------------

         The Company has an  incentive  stock  option plan for  officers and key
         employees  which  allows for the  issuance  of a maximum  of  3,850,000
         options.  As of July 1, 2000,  options for 155,367  common  shares were
         reserved  for future  grant,  and  options  for  3,694,633  shares were
         outstanding  and are exercisable  upon vesting.  Under the terms of the
         option plan,  all options  have a  seven-year  term from date of grant.
         Generally,  the options  granted vest with respect to 20% or 33 1/3% of
         the  underlying  shares on the grant date,  and will vest in additional
         increments  of 20% or 33 1/3% of the  underlying  shares on each of the
         subsequent  anniversaries  of the grant date until 100% vested.  To the
         extent then vested,  the options are generally  exercisable  within one
         year following the death or disability of the holder of the option, and
         within six months of any termination event,  except where a termination
         is for  cause,  in which case the option  will then  terminate.  To the
         extent then not vested,  the options  generally will terminate upon the
         holders' death, disability or termination of employment. The employment
         agreements  of  certain  executive  officers  provide  for  accelerated
         vesting of options upon specified termination events.

         The Company has a stock option plan for  directors.  Before  October 1,
         1997,  each director  received an annual grant of an option to purchase
         5,000 shares of Common Stock.  Commencing  with the grant on October 1,
         1997,  each  director  now  receives  an  annual  grant of an option to
         purchase 10,000 shares of Common Stock.  The options vest  immediately,
         expire  five  years  after the  grant  date and are  exercisable  at an
         exercise  price equal to the market  price on the grant date. A maximum
         of 500,000 common shares may be granted under the stock option plan for
         directors.  As of  July  1,  2000,  options  for  235,000  shares  were
         outstanding.

         Each director may also elect to receive common stock, in lieu of all or
         portions  of the  director's  annual  retainer  at a price equal to the
         market price as of October 1 of the year of the election.

                                            F-15


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         The  Company  applies  APB No.  25,  "Accounting  for  Stock  Issued to
         Employees"   and  related   interpretations   in  accounting   for  its
         stock-based  compensation.  Accordingly,  for the fifty-two weeks ended
         July 1,  2000,  the  fifty-three  weeks  ended  July 3,  1999,  and the
         fifty-two weeks ended June 27, 1998, the Company  recognized $95, $704,
         and $1,401  respectively,  in compensation cost for the Company's stock
         option plans in the accompanying consolidated financial statements. Had
         compensation  cost for the Company's plans been determined based on the
         fair value at the grant  date  instead of the  intrinsic  value  method
         described  above, the Company's net income (loss) and net income (loss)
         per share would have been  reduced to the pro forma  amounts  indicated
         below.

<TABLE>
<CAPTION>

                                          Fifty-two weeks            Fifty-three weeks         Fifty-two weeks
                                        ended July 1, 2000         ended July 3, 1999        ended June 27, 1998
                                        ------------------         ------------------        -------------------

         <S>                                 <C>                        <C>                      <C>
         Net (loss) income:
           As reported                      $(11,023)                   $     596                $  (8,830)
           Pro forma                        $(13,734)                   $  (2,160)                $(11,654)

         Basic and diluted (loss) earnings
         per share:
           As reported                        $(0.98)                     $   .05                   $(0.73)
           Pro forma                          $(1.22)                      $(0.19)                  $(0.96)


</TABLE>

         The fair value of each option has been  estimated  on the date of grant
         using  the  Black-Scholes  options  pricing  model  with the  following
         assumptions for the periods presented:  expected  volatility of 30%; no
         dividend yield; expected life of 7 years; and a risk-free interest rate
         of 6.5%.

         All of  the  Company's  stock  option  plans  are  administered  by the
         Compensation Committee of the Company's Board of Directors.

         As of July 1, 2000,  3,527,968  options were  exercisable at a weighted
         average exercise price per share of $6.79.

                                            F-16

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         The following table summarizes stock option activity under the plans:

<TABLE>
<CAPTION>
                                                                                        Weighted
                                                         Weighted                       Average        Weighted
                                                          Average                      Remaining       Average
                                          Options        Exercise     Exercise Price  Contractual     Grant Date
                                        Outstanding   Price Per Share    per Share    Life (Years)    Fair Value
                                        -----------   ---------------    ---------    ------------    ----------

            <S>                            <C>             <C>         <C>      <C>        <C>
            Balance at June 28, 1997       1,320,817       $ 7.75      $ 5.44 - $8.00      5.30
            Granted                        1,840,000       $ 7.83      $ 5.44 - $9.63                    3.55
            Forfeited                       (467,984)      $ 7.00      $ 5.44 - $8.00
            Exercised                        (76,666)      $ 7.50      $ 6.50 - $8.00
                                           ---------

            Balance at June 27, 1998       2,616,167       $ 7.92      $ 5.44 - $9.63      5.71
            Granted                        1,120,300       $ 4.47      $ 4.25 - $8.13                    2.11
            Forfeited                        (21,233)      $ 7.88      $ 7.22 - $9.63
            Exercised                         (5,000)      $ 6.17      $ 6.17
                                           ---------

            Balance at July 3, 1999        3,710,234       $ 6.88      $ 4.25 - $9.63      5.32
            Granted                          810,300       $ 2.55      $ 2.52 - $5.34                    1.20
            Forfeited                       (174,234)      $ 4.87      $ 2.52 - $9.63
                                           ---------
             Balance at July 1, 2000       4,346,300       $ 6.16      $ 2.52 - $9.63        4.72
                                           =========
</TABLE>


         On February 17, 1998, the Company granted  options to purchase  375,000
         shares at $5.4375 and options to purchase  400,000  shares at $6.84375.
         These options were issued at exercise  prices below the market price of
         $9.6875 on this date. All of the remaining  options were granted at the
         market price on the date of the grant.  On April 13, 2000,  the Company
         repriced  options to purchase  93,600  shares from the  original  grant
         price of $9.625 and options to purchase  30,000 shares with an original
         grant price of $7.375 to $2.51625 per share.

         The following table stratifies the options as of July 1, 2000:
<TABLE>
<CAPTION>

                                                                                                        Weighted
                                                                   Weighted Average                      Average
                                       Total      Weighted Average    Remaining                         Exercise
               Exercise Price         Options         Exercise       Contractual        Options      Price Per Share
                  per Share         Outstanding   Price Per Share    Life (Years)     Exercisable      Exercisable
                  ---------         -----------   ---------------    ------------     -----------     -------------

<S>            <C>                   <C>              <C>                <C>           <C>                <C>
               $ 8.00 - $ 9.63       1,525,767        $ 8.85             3.65          1,525,600          $ 8.85
               $ 6.17 - $ 7.75         767,733        $ 7.04             3.67            725,567          $ 7.02
               $ 4.25 - $ 5.44       1,312,800        $ 4.57             5.4           1,010,268          $ 4.65
               $ 2.52 - $ 3.16         740,000        $ 2.52             6.79            266,533          $ 2.52
</TABLE>


         EMPLOYEE STOCK PURCHASE PLAN
         ----------------------------

         The Company  sponsors an Employee  Stock  Purchase Plan ("ESPP")  under
         which it is authorized to issue up to 500,000 shares of common stock to
         all  employees  with a minimum  of three  months of  service.  The ESPP
         allows eligible  employees to contribute  through payroll deductions up
         to 10% of their annual salary toward stock  purchases.  Stock purchases
         will be made  quarterly at 90% of the closing  price at the last day of
         any calendar quarter.

11.      INCOME TAXES

         Deferred income taxes at July 1, 2000 and July 3, 1999, reflect the net
         tax effect of temporary  differences  between the  carrying  amounts of
         assets and liabilities for financial reporting purposes and the amounts
         used for income tax purposes. Deferred tax assets are recognized to the
         extent that realization of such benefits is more likely than not.

                                            F-17

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         Changes in tax rates or laws will result in adjustments to the recorded
         deferred  tax assets or  liabilities  in the period  that the change is
         enacted.

         The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>

                                               July 1, 2000   July 3, 1999
                                               ------------   ------------
<S>                                               <C>            <C>
         Deferred Tax Assets:
          Operating and restructuring reserves    $   5,090      $   5,977
          Net operating losses                      135,272        131,807
          Depreciation and amortization              29,947         29,578
          Lease escalation accruals                   4,299          4,454
          Jobs tax credit                             4,432          4,432
          Other items                                 3,069          4,458
                                                  ---------      ---------
                                                    182,109        180,706
          Valuation allowance                      (172,544)      (171,141)
                                                  ---------      ---------
          Net deferred tax assets                 $   9,565      $   9,565
                                                  =========      =========


         Composition of amounts in Consolidated
          Balance Sheet:
          Deferred tax assets - current           $     439      $     516
          Deferred tax liabilities - current           --             --
                                                  ---------      ---------
          Net deferred tax assets - current       $     439      $     516
                                                  =========      =========


          Deferred tax assets - noncurrent        $   9,126      $   9,049
          Deferred tax liabilities - noncurrent        --             --
                                                  ---------      ---------
          Net deferred tax assets - noncurrent    $   9,126      $   9,049
                                                  =========      =========
</TABLE>

         Deferred  tax assets,  arising  both from future  deductible  temporary
         differences and net operating losses  ("NOLs"),  have been reduced by a
         valuation  allowance  to an amount  more likely than not to be realized
         through the future reversal of existing taxable temporary  differences.
         Any  future  reversal  of  the  valuation  allowance  existing  at  the
         effective date of the Company's plan of  reorganization to increase the
         net deferred tax asset will be added to additional paid-in capital.

         There is no current  income tax provision in fiscal 2000,  1999 or 1998
         and  a  deferred  tax  provision  in  fiscal  1999  totaling   $205.  A
         reconciliation  of the total tax provision with the amount  computed by
         applying the statutory  federal income tax rate to (loss) income before
         taxes is as follows:

<TABLE>
<CAPTION>

                                                     Fifty-two    Fifty-three     Fifty-two
                                                    weeks ended   weeks ended    weeks ended
                                                   July 1, 2000   July 3, 1999  June 27, 1998
                                                   ------------   ------------  -------------
<S>                                                     <C>             <C>          <C>
         Statutory tax rate                             (35.0%)         35.0%        (35.0%)
         State income taxes, net of federal benefit        --            5.2%           --
         Tax effect of permanent differences               --          (14.6)%          --
         Change in valuation allowance                   35.0%            --          35.0%
                                                         ----           ----          ----
         Effective tax rate                               0.0%          25.6%          0.0%
                                                         ====           ====          ====
</TABLE>


         The Company has  approximately  $378,000 of tax basis NOLs available to
         offset future  taxable  income.  Approximately  $347,000 of this amount
         ("Section 382 NOLs") is subject to restrictions enacted in the Internal
         Revenue  Code of 1986,  as  amended,  dealing  specifically  with stock
         ownership  changes and debt  cancellations  that occurred in connection
         with the Company's emergence from bankruptcy.  Additional  restrictions
         imposed  by  Internal   Revenue  Code  Section  382  (I)(6),   and  the
         regulations  thereunder,  could further limit the Company's  ability to
         use  its  Section  382  NOLs  to  offset  future  income  to an  amount
         approximating  $5,500  annually.  The  remaining  $31,000  of NOLs were
         incurred  subsequent  to September  2, 1995,  and may be used to offset
         future  taxable  income  without  restriction.  The  NOLs  will  expire
         beginning in 2008.

         The  Company  also has  $4,432  of  federal  targeted  jobs tax  credit
         carryovers, which will expire beginning in 2001.

                                            F-18
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         The Internal Revenue Service has completed its field examination of the
         Company's  federal  income tax returns  for all years to and  including
         June 1992.

12.      EMPLOYEE BENEFIT PLANS

         Defined Contribution Plans
         --------------------------

         The Company has defined  contribution  employee  savings plans covering
         employees  who meet the  eligibility  requirements  as described in the
         plans.  The Company  contributes to the union employee  savings plan an
         amount equal to 25% of an employee's contribution up to a maximum of 4%
         of the employee's compensation. The Company contributes to the nonunion
         employee  savings  plan an  amount  equal  to  100%  of the  employee's
         contribution up to 2% of the employee's pay and a minimum of 20% of the
         employee's  contribution  in  excess of 2% up to 4% of  employee's  pay
         based on the Company's financial  performance.  The Company contributes
         to the Pharmhouse  Corp.  employee savings plan an amount equal to 100%
         of the  employee's  contribution  up to one dollar of an employee's pay
         each  week and 25% of the  employee's  contribution  in  excess  of one
         dollar each week up to 3% of  employee's  pay.  Employee  savings  plan
         expenses for the fifty-two  weeks ended July 1, 2000,  the  fifty-three
         weeks ended July 3, 1999 and the  fifty-two  weeks ended June 27, 1998,
         were $1,214, $1,087 and $1,009, respectively.

         Health and Welfare Plans
         ------------------------

         The Company also contributes to a multiemployer  union sponsored health
         and welfare plan covering truck drivers and warehouse personnel.  Total
         expenses for the fifty-two  weeks ended July 1, 2000,  the  fifty-three
         weeks ended July 3, 1999, and the fifty-two  weeks ended June 27, 1998,
         were $2,343, $2,050 and $1,858, respectively.

         The  Company  has no  postretirement  health and  welfare  or  benefits
         programs.

         Defined Benefit Plans
         ---------------------

         The Company  provides pension  benefits under  noncontributory  defined
         benefit  pension  plans  to  its  union  employees  who  have  met  the
         applicable age and service requirements specified in the plans.

         Benefits  are  earned  on the basis of  credited  service  and  average
         compensation over a period of years. Vesting occurs after five years of
         service as specified under the plans.  The Company makes  contributions
         to the plans as necessary to satisfy the minimum funding requirement of
         ERISA.

         The Company  provided pension  benefits under  noncontributory  defined
         benefit  pension  plans  to its  non-union  employees  who  had met the
         applicable age and service requirements  specified in the plans. During
         fiscal  1996 the  Company's  Board of  Directors  voted to  freeze  the
         benefits  accruing under its defined benefit plan that covers non-union
         personnel  effective  June  29,  1996  and to  increase  the  Company's
         matching  contribution  to the  defined  contribution  plan  for  those
         employees.  The Company terminated its defined benefit plan that covers
         non-union personnel on April 30, 1998. Lump sum cash payments were made
         to the majority of plan participants prior to June 27, 1998.  Annuities
         were purchased for the remaining  participants  during the  fifty-three
         weeks ended July 3, 1999.

                                            F-19


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         The  following  table  sets forth the  funded  status of the  Company's
         defined  benefit  pension  plans  and  the  amounts  recognized  in the
         Company's consolidated balance sheets:
<TABLE>
<CAPTION>

                                                            July 1, 2000  July 3, 1999
                                                            ------------  ------------
<S>                                                              <C>        <C>
         Change in benefit obligation
         Benefit obligation at the beginning of the year         $ 4,592    $ 5,175
         Service costs with expenses                                 339        287
         Interest cost                                               309        264
         Actuarial (gain)/loss                                       173        907
         Benefits paid                                               (31)    (2,041)
                                                                 -------    -------
         Benefit obligation at end of year                         5,382      4,592
                                                                 -------    -------


         Change in plan assets
         Fair value of plan assets at beginning of year            3,190      3,589
         Actual return on plan assets                                129        437
         Employer contributions                                      416      1,205
         Benefits paid                                               (31)    (2,041)
                                                                 -------    -------
         Fair value of plan assets at end of year                  3,704      3,190
                                                                 -------    -------

         Funded status                                            (1,678)    (1,402)
         Unrecognized net actuarial loss                           1,220        929
         Unrecognized prior service cost                               1          1
                                                                 -------    -------
         Net amount recognized                                   $  (457)   $  (472)
                                                                 =======    =======

         Amounts recognized in the statement of financial
         position consist of:
         Accrued benefit liability                               $  (463)   $  (479)
         Intangible asset                                              6          7
                                                                 -------    -------
         Net amount recognized                                   $  (457)   $  (472)
                                                                 =======    =======

</TABLE>
<TABLE>
<CAPTION>


                                                             July 1, 2000    July 3, 1999
                                                             ------------    ------------
<S>                                                                 <C>             <C>
         Weighted-average assumptions
         Discount rate                                              6.5 %           6.5 %
         Expected long-term rate of return on assets                8.5 %           8.5 %
         Rate of increase in future compensation levels             4.0 %           4.0 %
</TABLE>
<TABLE>
<CAPTION>

                                                   Fifty-two      Fifty-three       Fifty-two
                                                  weeks ended     weeks ended      weeks ended
                                                 July 1, 2000    July 3, 1999    June 27, 1998
                                                 ------------    ------------    -------------
<S>                                                   <C>             <C>            <C>
         Components of net periodic benefit cost
          Service cost                                $   339         $   287        $   170
          Interest cost                                   309             264            668
          Expected return on plan assets                 (290)           (244)          (773)
          Recognized actuarial loss                        42              45             (1)
                                                      -------         -------        -------
          Net periodic pension cost                       400             352             64
          Settlement effect from lump sum cashouts       --              --           (1,446)
                                                      -------         -------        -------
          Net pension (income) expense                $   400         $   352        $(1,382)
                                                      =======         =======        =======

</TABLE>

                                            F-20

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         The projected benefit  obligation,  the accumulated benefit obligation,
         and the  fair  value  of plan  assets  for the  pension  plan  with the
         accumulated benefit obligations in excess of plan assets were $68, $51,
         and  $30,  respectively,  as of July 1,  2000 and  $58,  $44,  and $22,
         respectively, as of July 3, 1999.


13.      REORGANIZATION ITEMS AND RELATED RESERVES

         In August 1995 management  identified 50 stores which were scheduled to
         be  reduced  in  size   (rightsized)  and  provided  for  the  cost  of
         rightsizing and provided a markdown  reserve for the inventories  which
         would be liquidated in the affected  stores.  In 1997, the  rightsizing
         program was  replaced  with the "Super  Phar-Mor"  concept.  The "Super
         Phar-Mor"  concept  involves  liquidating  slow-moving  merchandise and
         utilizes the excess space to expand the existing  grocery  offering and
         adds frozen and refrigerated food.

         In March 1999, the Company recorded a reserve of approximately  $800 in
         purchase  accounting  related to the planned  closure of a distribution
         facility acquired as part of the Pharmhouse acquisition (see note 18).

         The activity in the reserve for costs of downsizing is as follows:
<TABLE>
<CAPTION>

                                                         Fifty-two      Fifty-three        Fifty-two
                                                        weeks ended     weeks ended       weeks ended
                                                       July 1, 2000     July 3, 1999     June 27, 1998
                                                       ------------     ------------     -------------
<S>                                                        <C>              <C>               <C>
         Balance, beginning of period                       $   918          $   967           $ 1,866
         Costs incurred in connection with the
          Pharmhouse acquisition                               (542)             800               --
         Store rightsizing costs                                (36)            (849)             (899)
                                                            -------          -------           -------
         Balance, end of period                             $   340          $   918           $   967
                                                            =======          =======           =======
</TABLE>


         The  remainder  of the reserve for the costs of  downsizing  at July 1,
         2000 is considered  by  management  to be a reasonable  estimate of the
         costs to be incurred related to the Pharmhouse acquisition.

14.      FINANCIAL INSTRUMENTS

         The  Company  has  financial   instruments  which  include   marketable
         securities,  investments  and long-term  debt.  The carrying  values of
         these instruments at July 1, 2000 approximated  their fair market value
         except for the senior  unsecured notes. The estimated fair value of the
         senior unsecured notes is $51,227 at July 1, 2000.

         The fair values of the instruments were based upon quoted market prices
         of the same or  similar  instruments  or on the rate  available  to the
         Company for instruments of the same maturities.

                                            F-21


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
15.      SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>

          Fiscal 2000
          -----------
                                                        Thirteen           Thirteen         Thirteen         Thirteen
                                                      weeks ended        weeks ended       weeks ended     weeks ended
                                                   October 2, 1999    January 1, 2000    April 1, 2000    July 1, 2000
                                                   ---------------    ---------------    -------------    ------------
<S>                                                   <C>                <C>              <C>             <C>
         Sales                                        $    317,835       $    350,411     $    308,663    $    315,181
         Gross profit                                 $     61,052       $     70,061     $     54,560    $     56,209
         Net (loss) income                            $     (4,191)      $      8,118     $     (1,839)   $    (13,111)

         Net (loss) income per basic share            $      (0.36)      $       0.71     $      (0.17)   $      (1.19)
         Weighted average number of basic
         shares outstanding                             11,516,185         11,383,411       11,032,886      11,032,886
         Net (loss) income per diluted share          $      (0.36)      $       0.71     $      (0.17)   $      (1.19)

         Weighted average number of diluted shares
         outstanding                                    11,516,185         11,383,411       11,032,886      11,032,886
</TABLE>
<TABLE>
<CAPTION>


          Fiscal 1999
          -----------

                                                     Thirteen           Thirteen            Thirteen         Fourteen
                                                    weeks ended         weeks ended       weeks ended      weeks ended
                                                September 26, 1998  December 26, 1998   March 27, 1999    July 3, 1999
                                                ------------------  -----------------   --------------    ------------

<S>                                                   <C>                <C>              <C>             <C>
         Sales                                        $    269,412       $    296,989     $    290,928    $    349,210
         Gross profit                                 $     50,815       $     58,704     $     55,018    $     64,124
         Net (loss) income                            $     (1,512)      $      3,747     $      1,167    $     (2,806)

         Net (loss) income per basic share            $      (0.13)      $       0.33     $       0.10    $      (0.24)
         Weighted average number of basic
         shares outstanding
                                                        11,542,000         11,516,220       11,516,185      11,516,185
         Net (loss) income per diluted share          $      (0.13)      $       0.32     $       0.10    $      (0.24)
         Weighted average number of diluted shares
         outstanding                                    11,542,000         11,637,444       11,592,371      11,516,185

</TABLE>

                                            F-22


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------

16.      (LOSS) INCOME PER SHARE

         Basic  earnings per share is computed by dividing net income  (loss) by
         the average number of common shares  outstanding during the period. The
         diluted earnings (loss) per share calculation assumes the conversion of
         dilutive  stock options and warrants into common  shares.  The earnings
         per share calculations for all periods are as follows:
<TABLE>
<CAPTION>

                                                             Fifty-two      Fifty-three      Fifty-two
                                                            weeks ended     weeks ended     weeks ended
                                                           July 1, 2000     July 3, 1999   June 27, 1998
                                                           ------------     ------------   -------------
         BASIC (LOSS) EARNINGS PER SHARE
         -------------------------------

<S>                                                         <C>             <C>            <C>
         Net (loss) income available for common shares      $    (11,023)   $        596   $     (8,830)
         Basic weighted average common shares outstanding     11,241,342      11,522,800     12,117,683
         Basic earnings (loss) per share                    $       (.98)   $        .05   $       (.73)

         DILUTED (LOSS) EARNINGS PER SHARE
         ---------------------------------

         Net (loss) income available for common shares      $    (11,023)   $        596   $     (8,830)
         Diluted weighted average common shares               11,241,342      11,570,955     12,117,683
         Diluted earnings per share                         $       (.98)   $        .05   $       (.73)
</TABLE>

         There were 4,346,300, 2,782,934 and 2,616,167 options for the fifty-two
         weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999, and
         the fifty-two  weeks ended June 27, 1998,  respectively,  and 1,250,000
         warrants for the fifty-two  weeks ended July 1, 2000,  the  fifty-three
         weeks  ended July 3, 1999 and the  fifty-two  weeks ended June 27, 1998
         excluded  from the  calculation  of diluted  (loss) income per share as
         they would have had an anti-dilutive effect on (loss) income per share.

17.      LITIGATION

         The Company and its  subsidiaries  are  involved in legal  proceedings,
         claims and litigation  arising in the ordinary  course of business.  In
         the  opinion  of   management,   the  outcome  of  such  current  legal
         proceedings,  claims and litigation  will not have a material impact on
         the Company's consolidated financial position, results of operations or
         cash flows.


18.      BUSINESS COMBINATIONS

         On March 15, 1999, the Company completed the merger of its wholly owned
         subsidiary Pharmacy  Acquisition Corp. ("PAC") with and into Pharmhouse
         Corp.  ("Pharmhouse"),  pursuant  to the  Agreement  and Plan of Merger
         dated as of December 17, 1998 among  Phar-Mor,  PAC and Pharmhouse (the
         "Merger  Agreement").  As a result of the  merger  Pharmhouse  became a
         wholly owned subsidiary of Phar-Mor. In addition,  subject to the terms
         of the Merger  Agreement,  each share of the common stock of Pharmhouse
         was  converted  into the right to receive  $2.88 per share in cash (the
         "Merger").  The total  purchase  price payable in  connection  with the
         Merger was approximately $34,200,  consisting of $7,500 in cash and the
         assumption of $26,700 in debt.

         Phar-Mor and PAC  financed  the payment of the  purchase  price and all
         other fees and expenses  associated  with the Merger  through cash from
         operations and from borrowings  under the Company's  Amended  Revolving
         Credit Facility.

         The Company used its excess cash position and excess availability under
         its Amended  Revolving  Credit Facility to pay off $26,700 in debt that
         was assumed as part of the merger with Pharmhouse.

                                            F-23

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
         The Merger was accounted for under the purchase  method of  accounting.
         The results of  operations  of  Pharmhouse  from March 16, 1999 through
         July 3, 1999 have  been  included  in the  Consolidated  Statements  of
         Operations  for the  fifty-three  weeks  ended July 3, 1999.  The total
         purchase price payable in connection with the Merger was  approximately
         $34,200,  consisting of $7,500 in cash and the assumption of $26,700 in
         debt. Goodwill is being amortized using the straight-line method over a
         period  of 25  years.  The  fair  value  of  the  assets  acquired  and
         liabilities assumed was as follows:

                  Identifiable assets acquired                         $54,962
                  Liabilities assumed                                  (61,954)
                  Goodwill                                              14,866
                                                                       -------
                  Cash paid                                             $7,874
                                                                       =======

         The following supplemental pro forma information is presented as though
         the companies combined at the beginning of the respective periods:
<TABLE>
<CAPTION>

                                                     Fifty-three weeks        Fifty-two weeks
                                                     ended July 3, 1999      ended June 27, 1998
                                                     ------------------      -------------------
<S>                                                        <C>                       <C>
        Sales                                              $  1,337,222              $ 1,293,956
                                                     ==================      ===================
        Net loss                                           $     (7,983)             $   (13,377)
                                                     ==================      ===================
        Basic and diluted loss per common share            $       (.69)             $     (1.10)
                                                     ==================      ===================
</TABLE>

         Pharmhouse  operated 32 discount drug stores in eight  mid-Atlantic and
         New England states under the names "Pharmhouse" and "Rx Place".

19.      EQUITY BASIS INVESTMENTS

         Summarized  financial   information  for  the  Company's  equity  basis
         investments  in  associated  companies,  combined,  was as follows  for
         fiscal 2000:

                  Income Statement Information:
                       Revenue                                       $       0
                       Net Income                                       27,767

                  Balance Sheet Information:
                       Assets                                        $ 133,347
                       Liabilities                                      48,492





                                            F-24


<PAGE>


<TABLE>
<CAPTION>
                                                                                        Schedule II

VALUATION AND QUALIFYING ACCOUNTS

                                 Balance at   Charged to                  Balance at
                                  beginning    costs and   Deductions-      end of
Description                       of period     expense    Charge-offs      period
-----------                       ---------     -------    -----------      ------
<S>                                <C>         <C>           <C>           <C>

Allowance for doubtful accounts
-------------------------------

52 weeks ended June 27, 1998       $  2,703    $   (186)     $ (1,115)     $  1,402

53 weeks ended July 3 1999            1,402       2,097        (1,755)        1,744

52 weeks ended July 1, 2000           1,744       4,049        (4,289)        1,504


Inventory shrink reserve
------------------------

52 weeks ended June 27, 1998          5,623       6,310        (8,009)        3,924

53 weeks ended July 3, 1999           3,924       9,741        (7,839)        5,826

52 weeks ended July 1, 2000           5,826      11,155       (12,800)        4,181


Inventory markdown reserve
--------------------------

52 weeks ended June 27, 1998            745        --            (745)         --

53 weeks ended July 3, 1999            --          --            --            --

52 weeks ended July 1, 2000            --          --            --            --

</TABLE>


                                            F-25