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  June  30,  2001
          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 5, 2001 was  $3,899,322  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  5,  2001,  12,240,865  shares  of the
Registrant's  Common Stock were outstanding  before  deducting  1,482,424 shares
which  represent  the  Company's  25.2%  equity  interest in common stock of the
Company owned by Avatex, Inc.

                                       1

<PAGE>

                                     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,  seasonal and other general  merchandise.  As of June 30,
2001, 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 June 30, 2001.

          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").

Subsequent Events - Bankruptcy

          On September 24, 2001, the Company and certain of its affiliates filed
voluntary  petitions  under Chapter 11 of the United States  Bankruptcy  Code to
restructure  their operations in an effort to return to  profitability.  On that
same date,  the Company  secured a $135 million  Debtor-In-Possession  Revolving
Credit  Facility  (the "DIP Credit  Facility")  financing  through  Fleet Retail
Finance,  the Company's principal secured lender, which will be used to fund the
Company's operations through the reorganization process.

          Management determined that the reorganization was necessary to rectify
operational  and  liquidity  difficulties  resulting  from the slowing  economy,
changes in consumer  buying  habits,  increased  competition  from larger retail
chains, the geographic  diversity of some Phar-Mor  locations,  the reduction of
credit  terms  by  vendors  and the  service  of  high-cost  debt.  See  related
discussion in  Management's  Discussion and Analysis of Financial  Condition and
Results of Operations.

          As part of the restructuring, Phar-Mor plans to close approximately 65
of its 139 stores. These stores have been identified as either  under-performing
or outside  the  Company's  core  markets.  The  Company  will focus  continuing
operations on the  approximately 74 remaining stores,  while reducing  corporate
overhead and solidifying its position in the markets it serves.

          Following the Company's  Chapter 11 bankruptcy filing on September 24,
2001, the Nasdaq Stock Market had immediately suspended trading in the Company's
securities. On October 2, 2001, the NASDAQ notified the Company that as a result
of the Company's  bankruptcy it was delisting the Company's  securities from the
NASDAQ as of October 10, 2001,  subject to the  Company's  right of appeal.  The
Company has  determined  not to appeal the NADAQ'S  decision but will  consider,
when appropriate, making application to be listed on the OTC Bulletin Board.

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.

                                       2

<PAGE>
          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.

          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%.

          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 6,125
employees at June 30, 2001.  Approximately 354 warehouse and distribution center
employees  in  Youngstown  are members of the  Teamsters  Union under a contract
which expires March 2, 2003.  Thirty-nine 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, 2003. The Company's  relationship  with its
union employees is good.

          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.

                                       3

<PAGE>
          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 June 30,  2001  ("Fiscal  Year
2001"), 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.

          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  31% of the Company's
purchases  during  Fiscal Year 2001.  During  Fiscal Year 2001,  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. The Company is heavily dependent on obtaining  satisfactory
trade  payment  terms  from its  vendors as a source of  funding  its  inventory
purchases.  A  significant  reduction in trade  payment terms from major vendors
would negatively impact the Company's ability to purchase its inventory needs.

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.  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 1 store during  Fiscal Year
2001 bringing the total number of "Super Phar-Mor" stores to 40. The concept has
been well  received by  customers  and has improved  overall  sales in each such
store.  During the past five fiscal years,  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 sixteen of the "four-wall" remodel projects.

                                       4

<PAGE>

     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 2001, 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  $5.2 million per store and all other merchandise
averaged  $3.7 million per store.  The Company  generated  approximately  $729.3
million in  traditional  drugstore  product  revenues and  approximately  $511.7
million in revenues  from the sale of groceries and general  merchandise  in its
stores in Fiscal Year 2001.

                                       5

<PAGE>

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

                                                Fiscal Year Ended
                                                -----------------

                                 June 30, 2001     July 1, 2000     July 3, 1999
                                 -------------     ------------     ------------
Category

Prescription, Health and
  Beauty Care Products,
  Cosmetics and Greeting Cards        58.8%            58.0%            57.1%

All Other Merchandise                 41.2%            42.0%            42.9%


          The Company's  business is seasonal to a certain  extent.  The highest
volume of sales and net  income  usually  occurs in the  second  fiscal  quarter
(generally  October,  November  and  December)  due to  seasonal  sales  for the
Christmas holiday for greeting cards,  general merchandise and grocery products.
The following table summarizes the Company's sales by quarter during Fiscal Year
2001.

                    Sales by Quarter During Fiscal Year 2001

                                                     Percentage of
                                                      Total Sales
                                                     -------------

                    First Quarter                          24.8%
                    Second Quarter                         27.6%
                    Third Quarter                          24.2%
                    Fourth Quarter                         23.4%
                                                        --------
                                                          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  technological
improvements and remerchandising and remodeling of existing stores.

                                       6

<PAGE>

          The Company's capital expenditures totaled $4.9 million in Fiscal Year
2001, including $1.5 million for remodeling existing stores and $1.2 million for
corporate  and store  information  systems.  The  Company  anticipates  spending
approximately  $5.0  million for capital  expenditures  in the fiscal year ended
June 29, 2002 ("Fiscal Year 2002"),  including  costs of remodeling 3 additional
stores.

Real Estate and Growth

          The Company did not open any new stores in Fiscal Year 2001,  and does
not plan to open any in Fiscal  Year 2002.  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 Virginia,  North  Carolina,
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  record  keeping and  licensing
matters with civil and criminal penalties for violations.

                                       7

<PAGE>

Item 2.  Properties.

          As of June 30,  2001,  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 June 30, 2001,  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 2001,  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 2001,  through the  solicitation of proxies or
otherwise.

                                       8

<PAGE>

                                     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 2001          Fiscal Year 2000
                                      ----------------          ----------------
                                       High      Low             High      Low
                                      ------   -------          ------   -------
1st Quarter..........................  $2.00   $0.97            $6 5/8   $4 1/4
2nd Quarter..........................   1.38    0.88             4 3/4    2 7/16
3rd Quarter..........................   1.44    0.66             4 3/4    2 1/2
4th Quarter..........................   1.10    0.50             3 1/4    1 1/4


          As of September  14, 2001,  there were 2,630  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.

<TABLE>
<CAPTION>
                                                   (In thousands except per share data)
                          -------------------------------------------------------------------------------------
                            52 Weeks         52 Weeks         53 Weeks            52 Weeks           52 Weeks
                             Ended            Ended            Ended               Ended              Ended
                          June 30, 2001    July 1, 2000    July 3, 1999(c)    June 27, 1998(c)    June 28, 1997
                          -------------    ------------    ---------------    ----------------    -------------
<S>                       <C>              <C>             <C>                <C>                 <C>
Net sales                   $ 1,241,012     $ 1,292,090        $ 1,206,539         $ 1,100,851      $ 1,074,828
(Loss) income from
continuing operations           (70,350)(a)     (12,140)(b)            596              (8,830)          (2,281)
Diluted (loss) income per
share from continuing
operations                        (6.46)(a)       (1.08)(b)            .05                (.73)            (.19)

</TABLE>
<TABLE>

                              As of            As of            As of              As of              As of
                              -----            -----            -----              -----              -----
                          June 30, 2001    July 1, 2000     July 3, 1999       June 28, 1998      June 28, 1997
                          -------------    ------------    ---------------    ----------------    -------------
<S>                       <C>              <C>             <C>                <C>                 <C>
Total assets                    313,436         397,904            407,724             349,455          362,605
Long-term debt & capital
leases                          160,791         167,856            142,947             130,993          140,213
</TABLE>


(a)  Excludes  extraordinary  gain of $19.7 million on early  retirement of debt
     and equity in extraordinary item of affiliate of $1.8 million.
(b)  Excludes extraordinary gain of $1.1 million on early retirement of debt.
(c)  Amounts have been restated for the  retroactive  application  of the equity
     method of accounting for the Company's investment in Avatex Corporation

                                       9

<PAGE>

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
financial position as of June 30, 2001.

Results of Operations

The following  table sets forth the number of retail stores operated each fiscal
year:
<TABLE>
<CAPTION>
                                                Fiscal Year Ended
                                 -----------------------------------------------
                                 June 30, 2001     July 1, 2000     July 3, 1999
                                 -------------     ------------     ------------
 <S>                             <C>               <C>              <C>
  Stores, beginning of period              139              139              106
  Stores acquired                            -                -               32
  Stores opened                              -                2                2
  Stores closed                              -               (2)              (1)
                                          ----             ----             ----
  Stores, end of period                    139              139              139
                                          ====             ====             ====
</TABLE>
52 weeks ended June 30, 2001 (Fiscal  Year 2001)  compared to the 52 weeks ended
July 1, 2000 (Fiscal Year 2000) (all dollar amounts in thousands)

<TABLE>
                                                       Fiscal Year 2001           Fiscal Year 2000
                                                   -----------------------    -----------------------
<S>                                                <C>           <C>          <C>           <C>
   Sales                                           $ 1,241,012      100.00%   $ 1,292,090      100.00%
     Less:
      Cost of goods sold, including occupancy
       and distribution costs                        1,027,992       82.83%     1,050,208       81.28%
                                                   -----------   ---------    -----------   ---------
     Gross Profit                                      213,020       17.17%       241,882       18.72%
     Selling, general and administrative expenses      203,582       16.40%       211,833       16.39%
     Depreciation and amortization                      19,917        1.60%        24,708        1.91%
     Impairment of long-lived assets                    23,377        1.88%            --          --
                                                   -----------   ---------    -----------   ---------
     Operating (loss) income                           (33,856)      (2.73)%        5,341        0.41%
     Interest expense                                  (18,317)       1.48%       (18,851)       1.46%
     Interest income and investment loss                (3,048)      (0.25)%       (5,404)      (0.42)%
                                                   -----------   ---------    -----------   ---------
     Loss before equity in income of affiliates
       and income taxes and extraordinary items        (55,221)      (4.45)%      (18,914)      (1.46)%
     Equity in (loss) income of affiliates              (5,564)      (0.45)%        6,774        0.52%
                                                   -----------   ---------    -----------   ---------
     Loss before extraordinary items and taxes         (60,785)      (4.90)%      (12,140)      (0.94)%
     Income tax provision                                9,565         .77%            --          --
                                                   -----------   ---------    -----------   ---------
     (Loss) income before extraordinary items          (70,350)                   (12,140)
     Extraordinary items                                21,555        1.74%         1,117        0.09%
                                                   -----------   ---------    -----------   ---------

     Net loss                                      $   (48,795)      (3.93)%  $   (11,023)      (0.85)%
                                                   ===========   =========    ===========   =========

</TABLE>
Fiscal Year 2001 sales  decreased  $51,078 or 3.9% from  Fiscal  Year 2000.  The
decrease in Fiscal Year 2001 sales was primarily due to a comparable store sales
decrease of 3.9%.  The  comparable  store sales  decrease was primarily due to a
8.2%  comparable  store  front end  sales  decrease  partially  offset by a 5.6%
comparable store pharmacy sales increase.

Gross  profit for Fiscal Year 2001 was 1.55% of sales lower than for Fiscal Year
2000  primarily  due to a 0.41% of sales  decrease in product gross  margins,  a
0.45% of sales increase in inventory  shrink expense,  a 0.40% of sales decrease
in vendor  promotional  allowances and rebates and higher  occupancy  costs as a
percentage of sales.  Vendor  promotional  allowances and rebates were higher in
Fiscal 2000 primarily due to the receipt of new store merchandise allowances for
the  Pharmhouse  stores.  Occupancy  costs  increased as a  percentage  of sales
primarily due to the decrease in sales.

Selling,  general and administrative expenses increased 0.01% of sales in Fiscal
Year 2001 over Fiscal Year 2000. A 0.11% of sales  increase in health  insurance
costs were offset by a 0.11% of sales decrease in incentive  compensation  costs
for store and corporate personnel.

                                       10

<PAGE>

Impairment of long-lived  assets in Fiscal 2001 resulted from the  write-down of
goodwill and fixed assets in stores that had current year  operating  losses and
are projected to have future losses.

Interest  income and investment  loss decreased  $2,356 in fiscal year 2001 from
fiscal year 2000. The decrease was primarily the result of investment  losses of
$1,000 and $5,500 in Fiscal Years 2001 and 2000, respectively, resulting from an
other than temporary impairment of the Company's investment in more.com.

The  Company  had a  decrease  in equity in income of  affiliates  of $12,338 in
fiscal year 2001 from fiscal year 2000, primarily due to an other than temporary
impairment of the Company's investment in Avatex Corporation in Fiscal Year 2001
and investment gains by one of the affiliates in Fiscal Year 2000.

The income tax provision is the result of the write-off of the net deferred tax
asset in Fiscal Year 2001.

The Company  repurchased  $40,001 of its 11.72%  senior notes during Fiscal Year
2001 at a discount  resulting  in a  extraordinary  gain of  $19,731  and Avatex
recognized an extraordinary gain related to the extinguishment of debt for which
Phar-Mor's portion was $1,824.



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>
                                                 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 extraordinary
       item                                        (18,914)   (1.46)%         (767)   (0.06)%
   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.

                                       11

<PAGE>

          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
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 higher costs as 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.


Financial Condition and Liquidity  (all dollar amounts in thousands)

          The Company's cash position as of June 30, 2001 was $14,393.

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

          Credit  availability  under the  Amended  Facility at any time was the
lesser of the  aggregate  availability  (as defined in the Amended  Facility) or
$100,000.  The Amended  Facility  established 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  Facility  bore  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  Facility,
the Company was 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.

          The Amended Facility was terminated on November 16, 2000.

          The Company  entered into a Loan and Security  Agreement  (the "Credit
Facility") effective November 16, 2000 with Fleet Retail Finance Inc., as agent,
and other  financial  institutions  that  established  a credit  facility in the
maximum amount of $150,000.

          Borrowings under the Credit Facility could be used for working capital
needs and general  corporate  purposes.  Up to $20,000 of the Credit Facility at
any time could be used for standby and documentary letters of credit. The Credit
Facility  included  restrictions  on,  among  other  things,   additional  debt,
investments,  dividends and other  distributions,  mergers and  acquisitions and
contains no financial  covenants  as long as unused  credit  availability  is at
least $20,000.

          Credit  availability  under the  Credit  Facility  at any time was the
lesser of the  aggregate  availability  (as defined in the Credit  Facility)  or
$150,000.  The Credit  Facility  established a first  priority lien and security
interest in all the assets of the Company excluding real property and equipment.

                                       12

<PAGE>

          Advances  made under the Credit  Facility  bore  interest at the Fleet
National  Bank prime rate or LIBOR plus 2.00% to LIBOR plus 2.50%  depending  on
the average unused credit availability in the preceding quarter. Under the terms
of the Credit  Facility,  the Company was  required to pay a  commitment  fee of
0.25% per annum on the unused portion of the facility, letter of credit fees and
certain other fees.

          As of June 30, 2001,  there were $100,305 in outstanding  advances and
letters  of credit in the  amount of $2,971  were  outstanding  under the Credit
Facility.  Unused availability under the Credit Facility was $36,968 at June 30,
2001.

          The Credit Facility was terminated on September 24, 2001.

          The Company filed  voluntary  petitions under Chapter 11 of the United
States Bankruptcy Code on September 24, 2001.

          On September 24, 2001, the Company entered into a Debtor-in-Possession
Revolving  Credit  Facility  (the "DIP"  Credit  Facility")  with  Fleet  Retail
Finance,  Inc., as agent,  and other financial  institutions  that established a
credit  facility in the maximum  amount of $135,000  with  $97,022 used to repay
amounts outstanding under the Credit Facility.

          Borrowings  under  the DIP  Credit  Facility  may be used for  working
capital needs and general corporate  purposes.  Up to $20,000 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 a financial  covenant  that  requires the Company to maintain a minimum
excess availability of the greater of $8,000 or 7% of total availability.

          Credit  availability  under the DIP Credit Facility at any time is the
lesser of the  Availability  (as defined in the  Facility) or $135,000.  Maximum
credit  availability  under the DIP Credit Facility  declines to $100,000 on the
earlier of the Company's  election or December 23, 2001. The DIP Credit Facility
establishes a first priority lien and security  interest in all of the assets of
the Company.

          Advances made under the DIP Credit Facility bear interest at the Fleet
National  Bank prime rate plus 0% to .5% or LIBOR plus 2% to 2.5%  depending  on
the average unused credit availability  during the preceding quarter.  Under the
terms of the DIP Credit  Facility,  the Company is required to pay a  commitment
fee of 0.375% per annum on the unused portion of the facility,  letter of credit
fees and certain other fees.

          The DIP  Credit  Facility  expires  on the  earlier  of the  Company's
emergence from bankruptcy as a reorganized entity or September 24, 2003.

          The Company expects to close 65 stores with liquidation sales starting
in October 2001 and ending in December 2001. It is anticipated that the proceeds
from the liquidation of the inventory and pharmacy  prescription  lists from the
closing  stores  will more than  offset  the  associated  decline  in  borrowing
availability under the Company's DIP Credit Facility.

          The Company's cash position  decreased  $2,359 during Fiscal Year 2001
as cash used by operating activities of $16,734 and was partially offset by cash
provided  by  financing  activities  of $10,978 and cash  provided by  investing
activities of $3,397.

          Merchandise inventories decreased by $20,534 due to the success of the
new automatic  replenishment  system and accounts payable decreased $16,437 from
the high levels at the end of Fiscal Year 2000.

          The Company received $9,298 through the sale of equity securities that
it had held as an investment during fiscal year 2001.

          The Company repurchased $40,001 of its Senior Notes at a discount from
face value and recognized an extraordinary  gain of $19,731 in Fiscal Year 2001.
This was funded by borrowings of $20,270  under the Company's  Credit  Facility.
These notes were purchased to reduce future  interest costs and retire a portion
of the Senior Notes which are due in September 2002.

                                       13

<PAGE>

          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
Credit Facility.

          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.

          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.


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

          Management  believes  the  availability  of the DIP  Credit  Facility,
proceeds  from the  liquidation  of  stores  expected  to  close,  the  expected
extension of post-petition trade credit by the Company's vendors,  together with
the Company's  current cash position and expected cash flows from operations for
Fiscal Year 2002 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 2002 are  expected  to total
$5,096.  The major  expenditures  are expected to be the  remodeling of existing
stores $1,250. The Company expects to finance and meet its obligations for these
capital  expenditures  through  internally  generated  funds  and the use of the
Company's DIP Credit Facility.

          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.

          The Company's  consolidated financial statements have been prepared on
a going concern basis, which contemplates continuity of operations,  realization
of assets and the  liquidation  of  liabilities  and  commitments  in the normal
course of business.  The Company's recurring losses and bankruptcy filing raises
substantial  doubt about the Company's  ability to continue as a going  concern.
The ultimate  continuation  of the Company as a going concern is dependent upon,
among other things, the ability of the Company to generate sufficient cash flows
from  operations and achieve  confirmation  of a plan of  reorganization  by the
Bankruptcy Court.

                                       14

<PAGE>

          Management determined that the reorganization was necessary to rectify
operational  and  liquidity  difficulties  resulting  from the slowing  economy,
changes in consumer  buying  habits,  increased  competition  from larger retail
chains, the geographic  diversity of some Phar-Mor  locations,  the reduction of
credit terms by vendors and the service of high-cost debt.

          As part of the restructuring, Phar-Mor plans to close approximately 65
of its 139 stores. These stores have been identified as either  under-performing
or outside  the  Company's  core  markets.  The  Company  will focus  continuing
operations on the  approximately 74 remaining stores,  while reducing  corporate
overhead and solidifying its position in the market it serves.

          This  plan of  reorganization  could  materially  change  the  amounts
reported in the accompanying consolidated financial statements. The accompanying
consolidated  financial  statements do not include any adjustments that might be
necessary as a result of the plan of reorganization.


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.

                                       15

<PAGE>

                                    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      64     Co-Chairman and Co-Chief Executive Officer

Melvyn J. Estrin     59     Co-Chairman and Co-Chief Executive Officer

M. David Schwartz    56     President and Chief Operating Officer

John R. Ficarro      49     Senior Vice President, Chief Administrative Officer,
                            General Counsel and Secretary

Martin S. Seekely    44     Vice President and Chief Financial Officer

Monroe Osterman      74     Director

Arthur G. Rosenberg  63     Director

John D. Shulman      38     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 Century Bancshares,  Inc., and, in connection with the Company's investments,
as a director of RAS Holding Corp. ("RAS") and its subsidiary, Presby Corp., and
iLife  Systems,  Inc.  ("iLife")  and as a member  of the Board of  Managers  of
Chemlink.  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 H.W.  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 and is also Chairman and CEO of University  Research
Co.,  LLC.  Mr.  Estrin  presently  serves as director  and a member of the loan
committee  for Century  Bancshares,  Inc.,  a director of  Washington  Gas Light
Company,  RAS Holding Corp., iLife System,  Inc. and as a member of the board of
managers of Chemlink.  Mr. Estrin also served as a Trustee of the  University of
Pennsylvania  and was  appointed  by  President  George  H.W.  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
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.

                                       16

<PAGE>

          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.

          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  served  as  counsel  to  several  of its  retail
businesses.  Prior to 1981,  Mr.  Ficarro  was  engaged in private  practice  in
Florida.  Mr.  Ficarro  received  a B.A.  from the  Maxwell  School at  Syracuse
University and a J.D. from its College of Law.

          Martin S.  Seekely has served as Vice  President  and Chief  Financial
Officer since October 2000.  Prior to that, Mr. Seekely served as Vice President
and  Controller  from June 1997 to October 2000 and  Assistant  Controller  from
April 1993. From 1990 to 1993, he served as Controller for Boston  Distributors,
Inc.  Mr.  Seekely  was  employed  by Riser  Foods,  Inc.  from  1988 to 1989 as
Controller.  From 1979 to 1988, Mr. Seekely was employed by Fisher Foods,  Inc.,
in a variety of positions, including, Assistant Controller. Mr. Seekely received
a B. S. degree in Business Administration from John Carroll University and he is
a Certified Public Accountant.

          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. Prior thereto, Mr. Rosenberg was a practicing
lawyer in  Huntington,  New York and served as  General  Counsel of ITT Levitt &
Sons, Inc., an international builder.

          John D. Shulman has been a director of the Company since  November 23,
1997. Mr. Shulman is a principal with Allied Capital  Corporation (NYSE: ALD), a
private  finance  company.  Prior  to that he  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 Taiwan  Mezzanine Fund I, L.P.; the Board of
Managers of ChemLink Laboratories,  LLC, and the Board of Directors of Physician
Specialty Corp. Mr. Shulman is the husband of Mr. Estrin's niece.

                                       17

<PAGE>

Item 11. Executive Compensation.

          Phar-Mor,  Inc. 1995 Amended and Restated  Stock  Incentive  Plan. The
Phar-Mor Stock Incentive Plan was adopted in order to attract, reward and retain
key personnel (including officers,  whether or not directors) of the Company and
its  subsidiaries and certain other closely related eligible persons who provide
substantial  services to such entities ("Eligible  Persons") and to provide them
with long-term  incentives that are linked to the Company's  stock  performance.
Approximately nine officers and approximately 450 other employees of the Company
and its  subsidiaries are currently  eligible to participate  under the Phar-Mor
Stock Incentive Plan.

          The Phar-Mor Stock Incentive Plan is administered by the  Compensation
Committee  of the Board  (the  "Administrator").  Currently,  a  maximum  of 5.0
million  shares of the Company's  Common Stock  (subject to  adjustment)  may be
issued upon the exercise of awards  granted under the Phar-Mor  Stock  Incentive
Plan. As of July 1, 2001, a total of 4,211,900  shares of the  Company's  Common
Stock were subject to options granted under the Phar-Mor Stock Incentive Plan.

          The Phar-Mor Stock  Incentive Plan  authorizes the issuance of options
and (subject to plan limitations) certain stock appreciation rights ("SARs"). As
is customary in  incentive  plans of this nature,  the number and kind of shares
available  under the Phar-Mor Stock  Incentive  Plan,  share limits,  and shares
subject to outstanding  awards are subject to adjustment in the event of certain
reorganizations,  recapitalizations,  stock splits, stock dividends,  spin-offs,
property distributions or other similar extraordinary  transactions or events in
respect of the Company or the shares of the Company.  Shares relating to options
or SARs that are not  exercised or that expire or are canceled will again become
available for grant  purposes  under the Phar-Mor  Stock  Incentive  Plan to the
extent  permitted  by law and the plan.  Awards  may be  repriced  or  otherwise
amended after grant,  provided that the amendment does not adversely  affect the
holder's  rights without his or her consent.  A maximum of 277,778 shares of the
Company's  Common Stock may be subject to options that during any calendar  year
are granted to any Eligible Person under the Phar-Mor Stock Incentive Plan.

          The exercise  price of the options  granted  under the Phar-Mor  Stock
Incentive  Plan  generally  may not be less  than the fair  market  value of the
Company's  Common  Stock on the date of grant or such  greater  amount as may be
determined  by the  Administrator.  An option may either be an  incentive  stock
option,  as defined in the Code, or a  non-qualified  stock option.  All options
granted  pursuant to the Phar-Mor  Stock  Incentive  Plan as of July 1, 2000 are
non-qualified  stock options,  except the options granted to Messrs.  Butler and
Estrin which are incentive stock options. The aggregate fair market value of the
Common Stock  (determined at the time the option is granted) for which incentive
stock options may be first  exercisable  by an option holder during any calendar
year under the Phar-Mor Stock Incentive Plan or any other plan of the Company or
its subsidiaries may not exceed  $100,000.  A non-qualified  stock option is not
subject to any of these limitations.

          Subject to early  termination or  acceleration  provisions  (which are
summarized below), an option generally will be exercisable, in whole or in part,
from the date  specified in the related  award  agreement  until the  expiration
date,  all as  determined by the  Administrator.  Earlier  expiration  may occur
following a termination of service. In no event, however, is an option under the
Phar-Mor Stock Incentive Plan  exercisable  more than seven years after its date
of grant.

          Upon the  occurrence  of  either  (A) a Change  in  Control  Event (as
defined in the Phar-Mor Stock Incentive Plan to include,  but not be limited to,
(i)  the  approval  by the  shareholders  of the  Company  of a  dissolution  or
liquidation, (ii) certain agreements of merger or consolidation resulting in the
Company's shareholders,  or entities associated or affiliated with them, holding
less than 50% of the voting  stock of the  surviving  entity,  (iii) the sale of
substantially  all the assets of the  Company as an entirety to a person that is
not an  affiliated  person of the  Company,  (iv) a person or group  (other than
Robert M. Haft,  Hamilton Morgan, LLC ("Hamilton Morgan") or other 25% owners as
of  September  11,  1995 and  certain  related  entities)  acquiring  beneficial
ownership  of over  50% of the  voting  power,  or (v)  certain  changes  in the
composition  of  the  Board,  or  (B)  under  other  circumstances  (such  as  a
termination of service), the Administrator,  in its discretion,  may provide for
acceleration  or  extension  of the  exercisability  of awards,  or provide  for
certain other limited benefits, which may include SARs, under some or all awards
and may determine the extent,  duration and other  conditions of such additional
rights by amendment to outstanding awards or otherwise.  The Board may terminate
or amend the Phar-Mor Stock Incentive Plan,  subject to the rights of holders of
outstanding  options. If an amendment would (i) materially increase the benefits
accruing to Eligible  Persons  under the Phar-Mor  Stock  Incentive  Plan,  (ii)
materially  increase the aggregate number of shares that may be issued under the

                                       18

<PAGE>

Phar-Mor  Stock  Incentive  Plan,  or (iii)  materially  modify the  eligibility
requirements  for  participation  under the Phar-Mor Stock  Incentive  Plan, the
amendment,  to the extent deemed necessary by the Board or the  Administrator or
then required by applicable law, must be approved by the shareholders.

          Corporate   Executive  Bonus  Plan.  Under  the  Company's   Corporate
Executive  Bonus Plan for  Fiscal  Year 2001 (the "2001  Bonus  Plan"),  certain
executive officers were eligible to receive a cash bonus if the Company achieved
a  pre-established  level of performance for the fiscal year. The  participating
executive  would  receive  at  least  60%  of his  or  her  individual  targeted
percentage bonus ("target bonus") if this performance were at target, and 35% of
the target bonus (e.g., if the target bonus is 50%, 35% of 50%) if the Company's
performance were at entry level; the remaining amount (up to 40%) was subject to
the  discretion of the Board.  If the Company did not achieve the targeted level
of performance,  but achieved an "entry level" or minimum performance  threshold
for payment of bonuses  established  by the Board,  the  specific  bonus  amount
between minimum and target bonus levels would be  extrapolated,  pro rata, based
on the  relationship  of actual  performance  to the entry and target  levels of
performance;  60% of such amount would be mandatory and up to 40% discretionary.
No bonuses were paid in Fiscal Year 2001 under the 2001 Bonus Plan.

          The  employment  agreements  between  the  Company and each of Messrs.
Butler   and   Estrin   provide   for  an  annual   incentive   bonus   under  a
Company-sponsored  bonus  plan (if a bonus plan is  approved,  or  otherwise  as
provided  under a separate  agreement  between  the  Company and each of Messrs.
Butler and Estrin), if reasonable  performance  objectives approved by the Board
are  achieved,  with a maximum bonus of 60% and a minimum bonus of 21% of annual
base salary,  commencing  in Fiscal Year 1998;  provided,  however,  that if the
performance  objectives  are  exceeded,  then such bonus will be  increased to a
level  commensurate with the amount of bonuses payable to senior officers of the
Company who are situated similarly to Messrs. Butler and Estrin. See "Employment
Contracts    and    Termination    of    Employment    and     Change-In-Control
Arrangements--Messrs. Butler and Estrin."

          401(k) Employee Savings Plan. Employees of the Company are eligible to
participate in the 401(k) Employee Savings Plan (the "401(k) Plan").  The 401(k)
Plan is a tax-qualified  profit sharing plan that provides for pre-tax deferrals
by  employees  and  employer  matching  and  profit-sharing  contributions.   In
addition,  warehouse  employees  and drivers are  eligible to  participate  in a
separate 401(k) savings plan.

          Retirement and Pension Plans.  The Company  provided  pension benefits
under  noncontributory  defined benefit pension plans to its non-union employees
who have 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 nonunion 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 the plan  participants  by June 27, 1998.
Annuities were purchased for the remaining participants during Fiscal Year 1999.

          In  addition,  the Company  maintains  two  pension  plans for various
groups of employees: (i) the Phar-Mor, Inc. Retirement Plan for Hourly Employees
at Niles,  Ohio  Store and (ii) the Tamco  Distributors  Company  Warehouse  and
Drivers Pension Plan (collectively,  the "Pension Plans"). The Pension Plans are
defined benefit plans subject to the Employee  Retirement Income Security Act of
1974, as amended ("ERISA").

          To the extent  permitted by law, the minimum  eligibility  and vesting
provisions  under these and other  retirement,  health and welfare benefit plans
were waived for Messrs.  Estrin and Butler  under the terms of their  respective
employment agreements.

          Employee Stock  Purchase Plan. The Company  sponsors an Employee Stock
Purchase  Plan  ("ESPP")  under  which it is  authorized  to grant up to 500,000
shares,  in the aggregate,  of Common Stock  obtained by open market  purchases.
Employees,  including  executive  officers,  with a minimum  of three  months of
service  are  eligible to  participate  in the ESPP.  The ESPP  allows  eligible
employees to contribute,  through payroll  deductions,  up to 10% (not to exceed
$25,000) of their annual salary toward stock purchases. Stock purchases are made
quarterly and purchased by  participants at 90% of the closing price on the last
day of the calendar quarter.

                                       19

<PAGE>

Employment  Contracts  and  Termination  of  Employment  and   Change-In-Control
Arrangements

          The  Company has  entered  into  employment  agreements  with  Messrs.
Butler, Estrin, Schwartz, Ficarro and Seekely, each of which is described below.

          Messrs.   Abbey  J.  Butler  and  Melvyn  J.  Estrin.  The  employment
agreements  with  Messrs.  Butler  and  Estrin  have a rolling  three-year  term
commencing  on October 1, 1997 that  provide  for  Messrs.  Butler and Estrin to
serve as Co-Chief  Executive  Officers and Co-Chairmen of the Board. The initial
annual base salary of each of Messrs.  Butler and Estrin is $425,000  subject to
annual  increases of 8%. For the contract year ending  September  30, 2001,  the
annual  base  salary of each of  Messrs.  Butler  and  Estrin is  $535,378.  The
agreements provide for an annual incentive bonus under a Company-sponsored bonus
plan (if a bonus plan is approved,  or  otherwise  as provided  under a separate
agreement  between  the  Company  and each of  Messrs.  Butler and  Estrin),  if
reasonable  performance  objectives  approved by the Board are achieved,  with a
maximum bonus of 60% and a minimum bonus of 21% of annual base salary; provided,
however, that if the performance  objectives are exceeded,  then such bonus will
be  increased  to a level  commensurate  with the amount of  bonuses  payable to
senior officers of the Company who are situated similarly to Messrs.  Butler and
Estrin.

          Each of Messrs. Butler and Estrin was also granted options to purchase
200,000  shares of Common Stock at an exercise price of $6.84375 per share under
the Phar-Mor Stock Incentive  Plan,  which options vested with respect to 33.34%
of the  underlying  shares  on the date of grant  (October  1,  1997),  and with
respect to an additional 33.33% on each of the first and second anniversaries of
the date of grant.  The term of the  options is seven  years and unless  Messrs.
Butler and Estrin elect  otherwise,  to the fullest extent  permitted by law and
under the plan,  such options  shall be treated and reported as incentive  stock
options.  Messrs.  Butler  and Estrin  were also each  granted  incentive  stock
options to  purchase  200,000  shares of Common  Stock at an  exercise  price of
$9.625 per share on June 23, 1998, 200,000 shares of Common Stock at an exercise
price of $4.28125 per share on June 29, 1999;  180,000 shares of Common Stock at
an exercise price of $2.51625 per share on April 14, 2000; and 275,000 shares of
Common Stock at an exercise  price of $0.825 on March 16, 2001 on terms  similar
to the earlier grants.

          Pursuant to their respective employment agreements, Messrs. Butler and
Estrin are permitted to engage in activities (except certain activities that are
competitive  with the  Company's  business),  in addition to serving as Co-Chief
Executive  Officers and Co-Chairmen of the Board,  and pursue other  investments
(except  ownership  of more than a 10%  interest in an entity that  derives more
than  50% of its  gross  revenues  from  the  retail  sale,  at a  discount,  of
pharmaceuticals,  unless Messrs. Butler and Estrin or their respective immediate
families owned or controlled,  directly or indirectly,  an ownership interest of
at least 1% in the entity as of October 1, 1997).  The agreements do not require
Messrs.  Butler  and  Estrin to  provide  services  at the  Company's  principal
locations.

          The employment  agreements with Messrs. Butler and Estrin also provide
for  long-term  performance  payouts  to  each  of  them,  commencing  with  the
three-year  period  ending  September  30,  2000 and each third year  thereafter
during the term of the employment agreement, in an amount (subject to the offset
referred to in the last sentence of this paragraph)  equal to 1.5% of any excess
of (i) the aggregate  market value of the publicly traded shares of Common Stock
based on the average  closing price for the thirty (30)-day period ending on the
last  day of the  subject  period  (less  the sum of (a) the  proceeds  from the
exercise  during such  period of any  options or  warrants  plus (b) any cash or
property  consideration actually received by the Company during such period from
the issuance of any shares of its Common Stock) over (ii) the  aggregate  market
value of the publicly traded shares of Common Stock based on the average closing
price for the thirty  (30)-day  period ending on the last day of the immediately
prior subject  period  (provided  that for the first day of the period ending on
September  30, 2000,  such average  closing price shall be deemed to be $6.84375
per share).  One-half of the aggregate annual bonuses paid or payable in respect
of the applicable  three-year period will be offset against the long-term payout
amount.

          The  employment  agreements  with  Messrs.  Butler and Estrin  further
provide for various employee benefits and perquisites, including but not limited
to payment, on a tax reimbursed, "grossed up" basis, for a $1,500,000 whole life
insurance  policy on Messrs.  Butler and  Estrin's  lives or, at the election of
either of them,  a term  policy  requiring  an  equivalent  premium;  disability
insurance adequate to pay Messrs. Butler and Estrin 60% of their respective base
salaries until age 75; reimbursement of all medical,  hospitalization and dental
costs for Messrs.  Butler and Estrin and their families;  the use of a car owned
or leased by the Company and the provision of other  transportation  for Messrs.
Butler and Estrin's  travel  requirements;  and  business  expenses at locations
other than the Company's headquarters.

                                       20

<PAGE>

          Each of the agreements  with Messrs.  Butler and Estrin provides that,
if it is terminated without cause (as defined), such officer will be entitled to
the  present  value of his base  salary,  discounted  at 5%,  for the  remaining
contract term, annual and long-term incentive payments payable for the remainder
of the term, all compensation,  benefits,  stock options,  health and disability
benefits accruing under the agreement for the remainder of the term (or at their
option,  the value of such  stock  options  determined  in  accordance  with the
"Black-Scholes'  Formula"),  tax  reimbursement  in respect  of any  termination
payments that  constitute  excess  parachute  payments  under Federal income tax
laws, and pursuant to an Amendment to the  agreements  dated as of June 1, 2001,
the accelerated vesting (and extended  post-termination exercise periods) of all
stock options.  Under each agreement,  termination  with cause by the Company is
limited to the entry of a felony conviction,  voluntary  resignation,  death, or
permanent disability (as defined).

          Mr. M. David Schwartz.  The employment agreement with Mr. Schwartz, as
amended,  has a rolling  term of two years  commencing  on February 10, 1999 and
provides  for Mr.  Schwartz  to  serve  as the  Company's  President  and  Chief
Operating  Officer.  Mr. Schwartz's annual base salary was increased to $795,000
on June 1, 2001. On September 11, 1995,  Mr.  Schwartz  received a  confirmation
bonus of $450,000  and 6,250  shares of Common  Stock,  and was granted  options
under the Phar-Mor  Stock  Incentive  Plan to purchase  175,000 shares of Common
Stock at an exercise  price of $8.00 per share.  Pursuant to the Phar-Mor  Stock
Incentive Plan, Mr. Schwartz was granted  additional options on June 5, 1997, to
purchase  100,000  shares of Common  Stock at an  exercise  price of $5.4375 per
share;  on June 23,  1998,  to  purchase  100,000  shares of Common  Stock at an
exercise price of $9.625 per share; on June 29, 1999, to purchase 150,000 shares
of Common  Stock at an exercise  price of $4.28125  per share;  and on April 14,
2000,  135,000 shares at an exercise  price of $2.51625 per share;  and on March
16, 2001, 175,000 shares at an exercise price of $0.825 per share.

        Mr. John R. Ficarro.  The employment  agreement with Mr.  Ficarro,  as
amended,  has a rolling term of two years  commencing on February 10, 1999,  and
provides for Mr. Ficarro to serve as the Company's  Senior Vice  President/Chief
Administrative Officer and General Counsel. Mr. Ficarro's annual base salary was
increased to $270,000 on June 1, 2001.  On September 11, 1995,  Mr.  Ficarro was
granted  options  under the Phar-Mor  Stock  Incentive  Plan to purchase  15,000
shares of Common Stock at an exercise price of $8.00 per share.  Pursuant to the
Phar-Mor Stock  Incentive  Plan, Mr. Ficarro was granted  additional  options on
June 5, 1997, to purchase  75,000 shares of Common Stock at an exercise price of
$5.4375 per share;  on June 23, 1998, to purchase  75,000 shares of Common Stock
at an exercise price of $9.625 per share; on June 29, 1999, to purchase  100,000
shares of Common Stock at an exercise price of $4.28125 per share;  on April 14,
2000, to purchase 90,000 of Common Stock shares at an exercise price of $4.28125
per share; and on March 16, 2001,  150,000 shares at an exercise price of $0.825
per share.

          The  employment  agreement  with Mr.  Schwartz  provides for an annual
incentive bonus if the Company achieves certain performance  objectives approved
by the Board, with a target bonus of not less than 60% of annual base salary and
a maximum of 100% of annual  base  salary.  The  employment  agreement  with Mr.
Ficarro  provides for an annual  incentive bonus if the Company achieves certain
performance  objectives  approved by the Board,  with a target bonus of not less
than 50% of annual base salary and a maximum of 100% of annual base salary.  The
options  granted to Messrs.  Schwartz and Ficarro on September 11, 1995,  have a
term of seven  years from the date of grant and vest with  respect to 20% of the
underlying  shares on the date of grant and 20% on each of the first through the
fourth  anniversaries  of the date of grant.  The  options  granted  to  Messrs.
Schwartz and Ficarro on June 5, 1997, June 23, 1998 and June 29, 1999, April 14,
2000 and March 16,  2001 have a term of seven  years  from the date of grant and
vest with respect to one-third of the underlying shares on the date of grant and
one-third  on each of the first and second  anniversaries  of the date of grant.
The options granted to Messrs.  Butler and Estrin in October 1997 and to Messrs.
Schwartz and Ficarro in June 1997 were subject to  shareholder  approval,  which
approval was obtained in February 1998.  Pursuant to amendment  dated as of June
1, 2001, each of the employment  agreements provides for accelerated vesting and
exercisability of all options if the employee is terminated  without cause or if
he terminates for "good reason" because of certain  unilateral  material changes
to  certain  terms of service  or other  events  (as more  fully  defined in the
agreements).

          Mr.  Martin S.  Seekely.  Mr.  Seekely was promoted to the position of
Vice President and Chief Financial  Officer  effective  October 18, 2000. He was
previously the Company's Vice President and controller. On October 23, 2000, the
Company  entered into an agreement with Mr. Seekely  relative to his employment.
The agreement does not provide for a specific term, however, it contains similar

                                       21

<PAGE>

benefits and perquisites to those contained in the employment agreements between
the Company and Messrs.  Schwartz  and Ficarro.  Mr.  Seekely's  current  annual
salary is $175,000.  During his  employment  with the  Company,  pursuant to the
Phar-Mor Stock  Incentive  Plan, Mr. Seekely has been granted options on May 14,
1996, to purchase 700 shares of Common Stock at an exercise price of $7.5625 per
share; on June 5, 1997, to purchase 10,000 shares of Common Stock at an exercise
price of $5.4375 per share; on June 23, 1998, to purchase 5,000 shares of Common
Stock at an exercise price of $2.51625 per share;  on June 29, 1999, to purchase
20,000  shares of Common Stock at an exercise  price of $4.28125  per share;  on
April 14, 2000, to purchase 5,000 shares of Common Stock at an exercise price of
$2.51625 per share;  on October 19, 2000, to purchase  100,000  shares of Common
Stock at an  exercise  price of $1.190  per  share;  and on March 16,  2001,  to
purchase 30,000 shares of Common Stock at an exercise price of $0.825 per share.
All options  (except the 1995 option which provided for vesting at 20% per year)
vest  one-third  immediately  and one  third  on each of the  first  and  second
anniversary of the grant date.

          Loans. The Phar-Mor Stock Incentive Plan authorizes the  Administrator
to make loans to  optionees  to pay the  exercise  price of options,  subject to
specified conditions.

          Under the terms of the employment  agreements with Messrs.  Butler and
Estrin, the Company has agreed to loan Messrs. Butler and Estrin an amount equal
to the exercise price of their options (upon exercise).  Such loan or loans will
become due on the first to occur of (i) the fifth  anniversary  of the date that
the loan was made, (ii) to the extent of net proceeds of sale,  after payment of
related  taxes,  five  business  days after the sale of the shares so  acquired,
(iii) 30 days after a termination of their  employment by the Company with cause
(other  than by death or  permanent  disability)  or his  voluntary  resignation
(except if his resignation is a result of certain delineated  reasons),  or (iv)
by way  of  offset,  upon  the  payment  of  settlement  amounts  to him  upon a
termination without cause by the Company. The loans will bear interest,  payable
semi-annually,  on the outstanding  principal balance at the mid-term applicable
federal  rate in effect on the date such loans were made and shall be subject to
compliance  with  applicable  laws. No loans have been made to Mr. Estrin or Mr.
Butler under these provisions.

          Severance Plan. The Company's  existing  severance plan as of June 30,
2001, as it applies to officers generally, provides for payment of severance pay
equal to salary at the time of  termination  for a period of 26 weeks,  plus one
additional  week for each year of service,  up to ten years.  On March 27, 1997,
the Company  approved an  amendment to its existing  severance  plan,  enhancing
benefits  to all  employees,  including  executive  officers,  whereby  all such
employees would receive  additional  severance  payments upon loss of employment
due only to certain "change of control" events.  Generally,  executive  officers
who are not party to an  employment  agreement  would  receive  a minimum  of 18
months of pay in such event.

          The employment  agreements for Messrs.  Schwartz,  Ficarro and Seekely
provide,  in the case of a  termination  by the  Company  for  each  individual,
without cause or by them "for good reason," for a severance payment equal to two
years' total  compensation  plus benefits  (which includes but is not limited to
salary plus bonus).

          Change in Control Consequences for Messrs. Butler,  Estrin,  Schwartz,
Ficarro and Seekely.  The employment  agreements with Messrs.  Butler and Estrin
provide  that upon a change in control (as  defined)  Messrs.  Butler and Estrin
have the right  for 90 days to  terminate  their  agreements  without  cause and
realize the present value of the full (and certain  accelerated)  benefits under
the agreements for what would otherwise be the remaining term, as in the case of
a  termination  by the  Company  without  cause.  A change in control  under the
agreements  includes (among other events) the acquisition by any person or group
(other than persons affiliated with Messrs.  Butler or Estrin) of 40% or more of
the voting  capital stock of the Company,  the approval by the  shareholders  of
certain  transactions  resulting in a change in ownership of 40% or more control
of the voting capital stock of the Company,  including a merger,  consolidation,
or  sale  or  disposal  of all or  substantially  all  of the  Company's  assets
(including a plan of liquidation or dissolution), or a fundamental alteration in
the nature of its business.  Such a termination  by Messrs.  Butler or Estrin is
deemed a  termination  without  cause by the  Company and  entitles  them to the
rights attendant thereto.

          The employment  agreements  with Messrs.  Schwartz and Ficarro provide
that upon a change in control (as defined),  subject to certain  exceptions more
fully described in the employment  agreements or amendments thereto,  each named
executive  will have the right to terminate  the agreement for "good reason" and
receive the full  benefits  thereunder  as in the case of a  termination  by the
Company  without  cause.  The agreement  with Mr.  Seekely  provides for similar
benefits upon his loss of  employment.  A change in control under each agreement

                                       22

<PAGE>

may include (among other events) (a) the acquisition by any  individual,  entity
or  group  of  beneficial  ownership  of 20% or more  of  either  (i)  the  then
outstanding  shares of Common Stock of the Company or (ii) the  combined  voting
power of the then outstanding  voting securities of the Company entitled to vote
generally  in the  election  of  directors  of the  Company;  (b) any event that
results in the replacement of a majority of the members of the Board as composed
on the date of the employment agreement; (c) approval by the shareholders of the
Company of a  reorganization,  merger or  consolidation  (i) which  results in a
change of ownership  and/or voting rights of 30% or more of the then outstanding
shares of Common  Stock of the Company or (ii) in which the members of the Board
do  not  become  members  of  the  Board  of  the  entity  resulting  from  such
reorganization,  merger or consolidation; or (d) approval by the shareholders of
the Company of a  liquidation  or a dissolution  of the Company,  or the sale or
other disposition or substantially all of the assets of the Company.

                                       23

<PAGE>

Executive Summary Compensation Table

          The following table sets forth information concerning the compensation
of the Chief  Executive  Officers  and the other three most  highly  compensated
executive  officers of the Company who served in those capacities as of June 30,
2001 (the "Named Officers").

<TABLE>
                                                                                           Long Term
                                                                                          Compensation
                                                                                          ------------
                                                  Annual Compensation                  Awards      Payouts
                                        ------------------------------------------  ----------  ----------
Name and                       Fiscal                               Other Annual        Stock       LTIP       All Other
Principal Person                Year    Salary($)  Bonus($)(1)  Compensation($)(2)  Options(#)  Payouts($)  Compensation(3)
----------------               ------   ---------  -----------  ------------------  ----------  ----------  ---------------
<S>                            <C>      <C>        <C>          <C>                 <C>         <C>         <C>

Abbey J. Butler                 2001      525,439            0                  --     285,000          --          100,350
    Co-Chairman and Co-CEO      2000      486,670      154,032                  --     180,000          --          108,168
                                1999      458,939      305,653                  --     220,000          --          112,175

Melvyn J. Estrin                2001      525,439            0                  --     285,000          --          185,029
    Co-Chairman and Co-CEO      2000      486,670      154,032                  --     180,000          --          168,913
                                1999      458,939      305,653                  --     220,000          --          164,301

M. David Schwartz               2001      721,962            0                  --     175,000          --           65,845
    President and COO           2000      715,500      226,456                  --     135,000          --           10,869
                                1999      691,721      460,686                  --     150,000          --           37,445

John R. Ficarro                 2001      233,997            0                  --     150,000          --            7,054
    Senior Vice President       2000      230,000       48,530                  --      90,000          --            6,468
    CAO and General Counsel     1999      219,646      119,592                  --     100,000          --            9,157

Martin S. Seekely (4)           2001      153,521            0                  --     130,000          --            4,585
    Vice President              2000      122,202       19,338                  --       5,000          --            2,444
    Chief Financial Officer     1999      115,049       40,000                  --      20,000          --            2,925

</TABLE>
--------------------
(1)  Bonuses  are  shown  for the  fiscal  year  earned,  but may be paid in the
     following year.

(2)  No   information   is  provided  in  the  column   labeled   "Other  Annual
     Compensation"  since the aggregate amount of perquisites and other personal
     benefits  for the periods  indicated  is less than the lesser of $50,000 or
     10% of the total  annual  salary and bonus  reported  for each of the Named
     Officers.

(3)  Information  provided in the column  labeled "All Other  Compensation"  for
     Fiscal  Year  2001  includes  the  following:  (i) the  value of  insurance
     premiums paid by the Company for the benefit of each of the Named  Officers
     as follows:  Mr. Butler,  $87,511;  Mr.  Estrin,  $172,190;  Mr.  Schwartz,
     $59,189;  Mr.  Ficarro,  $1,324;  and  Mr.  Seekely,  $838;  (ii)  matching
     contributions  to the Company's 401(k) Employee Savings and Retirement Plan
     to each of the  Named  Officers  as  follows:  Mr.  Schwartz,  $6,656;  Mr.
     Ficarro,  $5,725; and Mr. Seekely,  $3,747; (iii) matching contributions to
     the Company's  non-qualified  deferred  compensation  plan as follows:  Mr.
     Butler $12,839 and Mr. Estrin $12,839.

     Information  provided in the column  labeled "All Other  Compensation"  for
     Fiscal  Year  2000  includes  the  following:  (i) the  value of  insurance
     premiums paid by the Company for the benefit of each of the Named  Officers
     as follows:  Mr. Butler,  $96,488;  Mr.  Estrin,  $157,233;  Mr.  Schwartz,
     $4,925; and Mr. Ficarro, $790; (ii) matching contributions to the Company's
     401(k)  Employee  Savings and Retirement Plan to each of the Named Officers
     as follows:  Mr.  Schwartz,  $5,944;  Mr.  Ficarro,  $6,468 and Mr. Seekely
     $2,925;  (iii)  matching  contributions  to  the  Company's   non-qualified
     deferred  compensation  plan as follows:  Mr. Butler $11,680 and Mr. Estrin
     $11,680.

                                       24

<PAGE>

     Information  provided in the column  labeled "All Other  Compensation"  for
     Fiscal  Year  1999  includes  the  following:  (i) the  value of  insurance
     premiums paid by the Company for the benefit of each of the Named  Officers
     as follows:  Mr. Butler,  $101,372;  Mr. Estrin,  $153,498;  Mr.  Schwartz,
     $31,391  and  Mr.  Ficarro,  $3,995;  (ii)  matching  contributions  to the
     Company's  401(k) Employee Savings and Retirement Plan to each of the Named
     Officers as follows:  Mr.  Schwartz,  $6,054;  Mr. Ficarro,  $5,162 and Mr.
     Seekely,   $2,758;  and  (iii)  matching  contributions  to  the  Company's
     non-qualified  deferred compensation plan as follows: Mr. Butler,  $10,803;
     and Mr. Estrin, $10,803.

(4)  Mr. Seekely was named Vice President and Chief Financial  Officer effective
     October 18, 2000.

                                       25

<PAGE>

Option Grants in Fiscal Year 2001

          Option Grants.  The table below shows, for each of the Named Officers,
the number of options  granted  during Fiscal Year 2001.  All of the options set
forth below were issued  under the Phar-Mor  Stock  Incentive  Plan,  other than
options to purchase  20,000 shares granted to each of Abbey J. Butler and Melvyn
J. Estrin as directors of the Company under the Phar-Mor Director Stock Plan. As
of July 1, 2001, no stock appreciation rights ("SARs") were outstanding.

<TABLE>

                                            Percent of                              Potential Realizable
                                              Total                                   Value at Assumed
                                             Options                                   Annual Rates of
                               Number of    Granted to                                  Stock Price
                               Securities   Employees                                 Appreciation for
                               Underlying   in Fiscal                                  Option Term(2)
                                Options        Year       Exercise     Expiration   --------------------
Name and Position              Granted(#)     (%)(1)     Price($/Sh)     Date         5%($)      10%($)
---------------------------    ----------   ----------   -----------   ----------   --------   ---------
                                                                                       (in thousands)
<S>                            <C>          <C>          <C>           <C>          <C>        <C>

Abbey J. Butler                   275,000         24.0          .825    3/16/2008         92         215
    Co-Chairman and Co-CEO

Melvyn J. Estrin                  275,000         24.0          .825    3/16/2008         92         215
    Co-Chairman and Co-CEO

M. David Schwartz                 175,000         15.3          .825    3/16/2008         59         137
    President and COO

John R. Ficarro                   150,000         13.1          .825    3/16/2008         50         117
    Senior Vice President
    CAO and General Counsel

Martin S. Seekely                 100,000          8.7         1.19    10/19/2007         48         113
    Vice President                 30,000          2.6          .825    3/16/2008         10          23
    Chief Financial Officer
---------------------------
</TABLE>

(1)  Based on a total of 1,144,000 options granted to employees of the Company.

(2)  Annual  growth-rate  assumptions are prescribed by the rules of the SEC and
     do not reflect  actual or projected  price  appreciation  of the underlying
     Common Stock.

          All options under the Phar-Mor Stock Incentive Plan will be subject to
early termination  within periods of up to one year (depending on the cause of a
termination  of service)  after the effective  date of a termination  of service
under the Phar-Mor Stock  Incentive Plan or (if  applicable) the expiration date
under an applicable  employment  agreement.  To the extent then not vested,  the
options  will  terminate  and to the extent then  vested,  they may be exercised
within one year  following  the death or disability of the holder of the option,
and within six months  following  any other  termination  event,  except where a
termination  by the Company is for cause,  in which case the  options  then will
terminate.

Option Exercises and Values for Fiscal Year 2001

          The following  table sets forth  certain  information  concerning  the
exercise of stock options,  the number of unexercised options, and the values of
unexercised options at June 30, 2001 for the Named Officers. Value is considered
to be, in the case of exercised  options,  the  difference  between the exercise
price  and  the  market  price  on the  date of  exercise  and,  in the  case of
unexercised  options,  the difference  between the exercise price and the market
price on June 30, 2001.

                                       26

<PAGE>

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR END OPTION VALUES

<TABLE>

                                                 Number of Securities    Value of Unexercised
                                                Underlying Unexercised       In-the-Money
                                                      Options at              Options at
                      Shares                        June 30, 2001          June 30, 2001($)
                    Acquired on     Value           (Exercisable/           (Exercisable/
      Name          Exercise(#)   Realized($)      Unexercisable)(#)      Unexercisable)(1)
-----------------   -----------   -----------   ----------------------   --------------------
<S>                 <C>           <C>           <C>                      <C>

Melvyn J. Estrin             --            --          861,667/243,333            4,583/9,167
Abbey J. Butler              --            --          861,667/243,333            4,583/9,167
M. David Schwartz            --            --          673,333/161,667            2,917/5,833
John R. Ficarro              --            --          375,000/130,000            2,500/5,000
Martin S. Seekely            --            --            82,366/88,334              500/1,000

</TABLE>


(1)  Options  are "in the  money"  if the fair  market  value of the  underlying
     securities exceeds the exercise price of the options. The amounts set forth
     represent  the  difference  between .90 per share,  the market value of the
     Common Stock at June 30, 2001 issuable  upon  exercise of options,  and the
     exercise price of the option, multiplied by the applicable number of shares
     underlying the options.

                                       27

<PAGE>

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

          Set forth in the table below is information, as of September 14, 2001,
with respect to the number of shares of Common Stock  beneficially  owned by (i)
each person or entity  known by the Company to own more than five percent of the
outstanding  shares of Common Stock,  (ii) each  director of the Company,  (iii)
each of the Named Officers and (iv) all directors and executive  officers of the
Company as a group. A person or entity is considered to  "beneficially  own" any
shares (i) over which such person or entity  exercises  sole or shared voting or
investment power or (ii) which such person or entity has the right to acquire at
any time within 60 days (e.g., through the exercise of options or warrants).
<TABLE>

                                                                Period       Number of Shares
Name and Address of                 Amount and Nature of          of       Which maybe Acquired
Beneficial Owner (1)                Beneficial Ownership(2)      Class      Within 60 Days (3)
-------------------------------     -----------------------     ------     --------------------
<S>                                 <C>                         <C>        <C>

Avatex Corporation                                5,869,535(4)    47.6%                  91,902(5)
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206

Dimensional Fund Advisors Inc.                      917,800(6)     7.5%                      --
1299 Ocean Avenue
Santa Monica, California  90401

M. David Schwartz                                   693,197        5.4%                 673,333(7)
20 Federal Plaza West
Youngstown, Ohio 44501

John R. Ficarro                                     375,000        3.0%                 375,000(7)
20 Federal Plaza West
Youngstown, Ohio 44501

Martin S. Seekely                                    84,255          *                   82,366
20 Federal Plaza West
Youngstown, OH  44501

Abbey J. Butler                                   7,040,702(8)    53.3%                 963,569(5)(9)
c/o Avatex Corporation
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206

Melvyn J. Estrin                                  6,944,802(8)    52.6%                 963,569(5)(9)
c/o Avatex Corporation
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206

Monroe Osterman                                      50,000          *                   50,000(10)
20 Federal Plaza West
Youngstown, Ohio 44501

Arthur G. Rosenberg                                  50,000          *                   50,000(10)
20 Federal Plaza West
Youngstown, Ohio 44501

                                       28

<PAGE>

John D. Shulman                                      50,000          *                   50,000(10)
20 Federal Plaza West
Youngstown, Ohio 44501

All Directors and Executive                       9,214,821       60.0%               3,115,935
Officers, including those named
above, as a Group (8 persons)
-------------------------------
</TABLE>

*    Less than 1%.

(1)  No director or executive  officer is the  beneficial  owner of other equity
     securities of the Company or any of its subsidiaries.

(2)  Unless otherwise indicated, each person or entity has sole investment power
     and sole voting power with respect to the Common Stock  beneficially  owned
     by such person or entity.

(3)  This  column  lists the  number of shares of Common  Stock  which the named
     person or entity  has the right to acquire  within 60 days after  September
     14, 2001,  through the exercise of stock options and  warrants.  The shares
     shown in this column are  included  in the Amount and Nature of  Beneficial
     Ownership column.

(4)  Includes 5,777,633 shares held directly by Avatex and 91,902 shares subject
     to purchase by Avatex within 60 days upon exercise of warrants.

(5)  Includes 91,902 shares of Common Stock subject to purchase by Avatex within
     60 days upon exercise of warrants.

(6)  The information provided is based on information provided to the Company by
     its  registrar.   Dimensional  Fund  Advisors,  Inc.  ("Dimensional"),   an
     investment advisor registered under Section 203 of the Investment  Advisors
     Act of 1940,  serves as  investment  manager  to certain  other  investment
     vehicles,  including  commingled group trusts.  (These investment companies
     and  investment  vehicles are the  "Portfolios").  The  Portfolios  own all
     securities  and  Dimensional   disclaims   beneficial   ownership  of  such
     securities.

(7)  All such shares of Common  Stock are  subject to purchase by the  indicated
     person within 60 days upon  exercise of options  awarded under the Phar-Mor
     Stock Incentive Plan.

(8)  Messrs.  Butler and Estrin are Co-Chairmen of the Board, Co-Chief Executive
     Officers and major shareholders of Avatex.

(9)  All such shares  (other than 91,902  shares  deemed  beneficially  owned by
     Messrs.  Butler and Estrin,  as described in note (4) above) are subject to
     purchase  within 60 days by the  indicated  person upon exercise of options
     under the Phar-Mor  Director  Stock Plan and/or  Phar-Mor  Stock  Incentive
     Plan.

(10) All such  shares are subject to  purchase  within 60 days by the  indicated
     person upon exercise of options  awarded under the Phar-Mor  Director Stock
     Plan.

          Avatex has pledged  1,132,500 shares of its Common Stock as collateral
to Bart A. Brown,  Jr., as trustee  (the  "Trustee")  as partial  collateral  to
secure certain obligations of Avatex. In the event of a default, the Trustee may
acquire such shares by foreclosing on the collateral.

                                       29

<PAGE>

Item 13. Certain Relationships and Related Transactions.

          From  September 11, 1995 to September 19, 1997,  Avatex owned 69.8% of
Hamilton   Morgan  L.L.C.   ("Hamilton   Morgan")   which   beneficially   owned
approximately  39.9% of the Company's  common stock.  Robert Haft, the Company's
former  Chairman of the Board of  Directors  and Chief  Executive  Officer,  was
President of Hamilton Morgan.  Messrs. Butler and Estrin, the two Co-chairmen of
the Board of Directors of Avatex,  were members of the Board of Directors of the
Company during this time.

          During Fiscal 2001 and July and August 2001 Avatex  purchased  943,800
shares  of the  Company's  common  stock  on the  open  market,  increasing  its
beneficial  ownership  level  to  47.6%  of the  Company's  common  stock  as of
September 14, 2001.

          In April 1998,  13 persons and  entities  purchased  (or  committed to
purchase)  a total of  $3,000,000  of Series B 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 by Abbey J. Butler or
Melvyn J. Estrin. 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.

          In April  1999,  RAS Holding  Corp.  distributed  to its  stockholders
(including Cabot Noble, Inc., a wholly-owned  subsidiary of the Company,  Avatex
and two parties related to or referred by Directors Butler and Estrin) shares of
common stock in two RAS Holding Corp.  subsidiaries,  PC Lens Corp.  and Medical
Internet  Technologies,  Inc.  In April 2000,  the  Company  and other  Series B
preferred  stockholders  exercised  warrants  acquired in April 1998 to purchase
additional shares of Series B preferred stock. In addition, Avatex is a party to
a  consulting  agreement  with RAS Holding  Corp.  under which  Avatex  provides
certain financial,  accounting and other management  consulting  services to RAS
Holding  Corp.  Avatex  also leases to RAS  Holding  Corp.  a portion of Avatex'
office space in Dallas,  Texas.  Directors Butler and Estrin are Co-Chairman and
Co-Chief Executive Officers of Avatex and directors of RAS Holding Corp.

          In March and December 1998,  certain persons and entities  purchased a
total of  $7,200,000 of 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;  the Company's  Co-Chairmen and Co-Chief  Executive  Officers,  Abbey J.
Butler and Melvyn J. Estrin (and/or their designees); one former Avatex officer,
Edward L.  Massman;  one  non-officer  director of Avatex;  and five  additional
parties  related to or referred 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 an Avatex officer or director
(or his designee) was  approximately  6.1% of the total amount invested.  In May
1999, the members of Chemlink Acquisition Company, LLC including the Company and
the other  members of Chemlink  loaned a total of $250,000 to Chemlink  pro rata
based on their ultimate ownership interests in Chemlink, in the form of one-year
notes.  In  January  and July  2000,  all of these  persons  and  entities  made
contributions to Chemlink's  capital in the form of new cash, the May 1999 notes
and other  indebtedness,  and the net amount of prior  advanced  owed to them by
Chemlink.  Avatex is also a party to a consulting agreement with Chemlink, under
which they provide certain financial, accounting and other management consulting
services to Chemlink.  Messrs. Butler, Estrin, and Shulman serve on the Board of
Managers of ChemLink Laboratories, LLC.

          The Company and Avatex each acquired $1.25 million of preferred  stock
and 2.5% of the  common  stock  of HPD  Holdings  Corp.  in  1998.  The  largest
shareholder  of HPD Holdings  Corp.  is HPD Partners,  L.P., a Delaware  limited
partnership, and Mr. Butler and Mr. Estrin are limited partners of HPD Partners,
L.P. Mr. Estrin and executive officer of Avatex, Grady Schleier are directors of
HPD Holdings  Corp. In February and April 2000,  along with virtually all of HPD
Holdings Corp.'s other common  stockholders,  the Company and Avatex purchased a
total of $131,575 in convertible  debentures to maintain their respective common
stock ownership positions. In May 2001, the Company sold their investment in HPD
Holdings Corp.

                                       30

<PAGE>

          During 1998,  1999 and 2000 the Company  invested  $10.725  million to
purchase approximately 25.2% of the outstanding common stock of Avatex. Pursuant
to the  Company's  By-Laws,  each  transaction  was  approved by an  Independent
Committee of disinterested Company directors.

          During  Fiscal Year 2001,  the Company paid  $104,328 to Human Service
Group,  Inc. for  secretarial  services  provided to Mr.  Estrin.  Human Service
Group, Inc. is a corporation wholly owned by Mr. Estrin.

          The  Company  purchased  $20,000 of product  from Carson  Products,  a
subsidiary of Carson,  Inc.  during Fiscal Year 1999.  Mr. Butler and Mr. Estrin
were directors of Carson, Inc. during Fiscal Year 1999.

          During  Fiscal  Year 2001,  the Company  paid CB Equities  Corporation
$66,768 for office and equipment support for Mr. Butler. Mr. Butler is President
of CB Equities Corporation.

                                       31

<PAGE>

                                     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.

                                       32

<PAGE>

                                   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:  October 15, 2001                                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:  October 15, 2001                                  /s/   M. David Schwartz
                                                               -----------------
                                                    M. David Schwartz, President


Date:  October 15, 2001                                  /s/     Abbey J. Butler
                                                               -----------------
                                                Abbey J. Butler, Co-Chairman and
                                                      Co-Chief Executive Officer
                                                (Co-Principal executive officer)

Date:  October 15, 2001                                  /s/    Melvyn J. Estrin
                                                               -----------------
                                               Melvyn J. Estrin, Co-Chairman and
                                                      Co-Chief Executive Officer
                                                (Co-Principal executive officer)

Date:  October 15, 2001                                  /s/     Monroe Osterman
                                                               -----------------
                                                       Monroe Osterman, Director

Date:  October 15, 2001                                  /s/ Arthur G. Rosenberg
                                                             -------------------
                                                   Arthur G. Rosenberg, Director

Date:  October 15, 2001                                  /s/     John D. Shulman
                                                               -----------------
                                                       John D. Shulman, Director

Date:  October 15, 2001                                  /s/    Martin S.Seekely
                                                               -----------------
                                                               Martin S. Seekely
                                                        Vice President and Chief
                                                               Financial Officer
                                                        (principal financial and
                                                             accounting officer)

                                       33

<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  Loan Security Agreement, dated November 16, 2000.

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

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

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

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

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

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

      **10.10  Employee Stock Purchase Plan

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

        10.12  Loan and Security Agreement dated September 24,2001 by and among
               the financial institutions listed on the signature pages therein,
               Fleet Retail Finance,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.,  Phar-Mor of
               Wisconsin, Inc., and Pharmhouse Corp.

  ****10.21.1  List of Subsidiaries

           23  Independent Auditors' Consent


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

                                       34

<PAGE>

*       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

******* Previously  filed in connection with the filing of Phar-Mor's  quarterly
        report on Form 10-Q on February 9, 2001.

                                       35

<PAGE>

PHAR-MOR, INC. AND SUBSIDIARIES
(Debtor-in-Possession)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                                                        Page

INDEPENDENT AUDITORS' REPORT                                            F - 2

CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001 AND JULY 1, 2000        F - 3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FIFTY-TWO WEEKS
ENDED JUNE 30, 2001, THE FIFTY-TWO WEEKS ENDED JULY 1, 2000 AND THE
FIFTY-THREE WEEKS ENDED JULY 3, 1999                                    F - 4

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FIFTY-TWO WEEKS ENDED JUNE 30, 2001, THE FIFTY- TWO WEEKS
ENDED JULY 1, 2000 AND THE FIFTY-THREE WEEKS ENDED JULY 3, 1999         F - 5

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FIFTY-TWO WEEKS
ENDED JUNE 30, 2001, THE FIFTY-TWO WEEKS ENDED JULY 1, 2000 AND  THE
FIFTY-THREE WEEKS ENDED JULY 3, 1999                                    F - 6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              F - 7

SCHEDULE II                                                             F - 27




<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 (debtor-in-possession) (the "Company") as of June 30, 2001 and
July 1, 2000, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the fifty-two weeks ended June 30, 2001,
the fifty-two weeks ended July 1, 2000 and the fifty-three weeks ended July 3,
1999. 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 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 June 30, 2001 and July 1, 2000 and the results of their
operations and their cash flows for the fifty-two weeks ended June 30, 2001, the
fifty-two weeks ended July 1, 2000 and the fifty-three weeks ended July 3, 1999,
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.

As discussed in Note 1, the Company has filed for reorganization under Chapter
11 of the United States Bankruptcy Code. The accompanying consolidated financial
statements do not purport to reflect or provide for the consequences of the
bankruptcy proceedings. In particular, such consolidated financial statements do
not purport to show (a) as to assets, their realizable value on a liquidation
basis or their availability to satisfy liabilities; (b) as to liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company; and (d) as to operations, the
effect of any changes that may be made in its business.

The accompanying consolidated financial statements for the fifty-two weeks ended
June 30, 2001 have been prepared assuming the Company will continue as a going
concern. As discussed in Note 2, the Company's recurring losses and bankruptcy
filing raise substantial doubt about the Company's ability to continue as a
going concern. The continuation of the Company as a going concern is dependent
upon, among other things, its ability to generate sufficient cash flows from
operations and to achieve confirmation of a plan of reorganization by the
Bankruptcy Court. Management's plans concerning these matters are also described
in Note 2. The financial statements do not include adjustments that might result
from the outcome of the uncertainties referred to herein and in the preceding
paragraph.

Deloitte & Touche LLP

Pittsburgh, Pennsylvania
September 24, 2001

                                      F-2

<PAGE>

PHAR-MOR, INC. AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
--------------------------------------------------------------------------------
<TABLE>
                                                                         June 30,     July 1,
                                                                          2001          2000
                                                                          -----         ----
<S>                                                                    <C>          <C>
ASSETS

Current assets:
  Cash and cash equivalents                                            $  14,393    $  16,752
  Marketable securities                                                      143        3,019
  Accounts receivable - net                                               25,495       25,017
  Merchandise inventories                                                186,226      207,228
  Prepaid expenses                                                         6,595        6,099
  Deferred tax asset                                                        --            439
                                                                       ---------    ---------

          Total current assets                                           232,852      258,554

Property and equipment - net                                              67,044       91,801
Goodwill                                                                   3,925       15,809
Deferred tax asset                                                          --          9,126
Investments                                                                3,233       13,682
Investment in Avatex                                                         789        3,691
Other assets                                                               5,593        5,241
                                                                       ---------    ---------

          Total assets                                                 $ 313,436    $ 397,904
                                                                       =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                     $  78,148    $  97,461
  Accrued expenses                                                        31,222       38,840
  Current portion of self insurance reserves                               2,165        1,781
  Current portion of long-term debt                                        3,647        1,964
  Current portion of capital lease obligations                             4,191        4,535
                                                                       ---------    ---------
          Total current liabilities                                      119,373      144,581

Long-term debt                                                           149,377      152,410
Capital lease obligations                                                 11,414       15,446
Long-term self insurance reserves                                          5,503        7,335
Unfavorable lease liability - net                                          9,395       10,639
                                                                       ---------    ---------
          Total liabilities                                              295,062      330,411
                                                                       ---------    ---------

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                                              90,326       90,007
  Stock options outstanding                                                1,881        2,200
  Retained deficit                                                       (67,807)     (19,012)
                                                                       ---------    ---------
                                                                          24,522       73,317
Less:  equity, through investment in Avatex, in cost of common
       stock of the Company held by Avatex, Inc.                          (6,683)      (6,359)
                                                                       ---------    ---------
         Total stockholders' equity                                       17,839       66,958
                                                                       ---------    ---------

         Total liabilities and stockholders' equity                    $ 313,436    $ 397,904
                                                                       =========    =========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statement

                                      F-3

<PAGE>

PHAR-MOR, INC. AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
<TABLE>
                                                          Fifty-two        Fifty-two    Fifty-three
                                                         weeks ended      weeks ended   weeks ended
                                                        June 30, 2001    July 1, 2000   July 3, 1999
                                                        -------------    ------------   ------------

<S>                                                     <C>              <C>            <C>
Sales                                                   $  1,241,012    $  1,292,090    $  1,206,539

Less:
 Cost of goods sold, including occupancy and
      distribution costs                                   1,027,992       1,050,208         977,878
 Selling, general and administrative expenses                203,582         211,833         188,264
 Depreciation and amortization                                19,917          24,708          25,386
 Impairment of long-lived assets                              23,377            --              --
                                                        ------------    ------------    ------------

 (Loss) income from operations before interest
   expense,  investment (loss),  interest income,
   equity in income (loss) of affiliates,
   income taxes and extraordinary items                      (33,856)          5,341          15,011


Interest expense                                             (18,317)        (18,851)        (16,338)
Investment loss                                               (3,097)         (5,528)         (1,025)
Interest income                                                   49             124           1,585
                                                        ------------    ------------    ------------

Loss before equity in income (loss) of affiliates,
  income taxes and extraordinary items                       (55,221)        (18,914)           (767)
Equity in (loss) income of affiliates                         (5,564)          6,774           1,568
                                                        ------------    ------------    ------------
(Loss) income before income taxes and extraordinary
   items                                                     (60,785)        (12,140)            801

Income tax provision                                           9,565            --               205
                                                        ------------    ------------    ------------
(Loss) income before extraordinary item                      (70,350)        (12,140)            596


Extraordinary items:
  Gain on extinguishment of debt                              19,731           1,117            --

  Equity in extraordinary item of affiliate                    1,824            --              --
                                                        ------------    ------------    ------------
Net (loss) income                                       $    (48,795)   $    (11,023)   $        596
                                                        ============    ============    ============

(Loss) income per basic and diluted share:
  (Loss) income before extraordinary item               $      (6.46)   $      (1.08)   $        .05
  Extraordinary items                                   $       1.98    $        .10    $       --
                                                        ------------    ------------    ------------
  Net (loss) income                                     $      (4.48)   $       (.98)   $        .05
                                                        ============    ============    ============

Weighted average number of basic shares outstanding       10,886,359      11,241,342      11,522,800
                                                        ============    ============    ============
Weighted average number of diluted shares outstanding     10,886,359      11,241,342      11,570,955
                                                        ============    ============    ============

</TABLE>

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

                                      F-4

<PAGE>

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

                                                                                    Equity,
                                                                                    Through
                                                                                   Investment
                                                                                   in Avatex,
                                                                                   in Cost of
                                            Common Stock                          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 27, 1999               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

Net loss                                 --         --         --          --          --       (48,795)    (48,795)

Forfeited stock options                  --         --          319        (319)       --          --          --

Avatex purchase of Phar-Mor shares       --         --         --          --          (324)       --          (324)
                                       ------      -----     ------       -----      ------      ------      ------
Balance at June 30, 2001               12,241   $    122   $ 90,326    $  1,881    $ (6,683)   $(67,807)   $ 17,839
                                       ======   ========   ========    ========    ========    ========    ========

</TABLE>


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

                                      F-5

<PAGE>

PHAR-MOR, INC. AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
--------------------------------------------------------------------------------
<TABLE>
                                                          Fifty-two     Fifty-two    Fifty-three
                                                         weeks ended   weeks ended   weeks ended
                                                        June 30, 2001  July 1, 2000  July 3, 1999
                                                        -------------  ------------  ------------
<S>                                                     <C>            <C>           <C>
OPERATING ACTIVITIES
  Net loss                                                   $(48,795)   $(11,023)   $    596
  Adjustments to reconcile net loss to net cash
       provided by operating activities:
    Items not requiring the outlay of cash:
      Depreciation                                             17,317      18,682      17,028
      Impairment of long lived assets                          23,377        --          --
      Deferred tax provision                                    9,565        --           205
      Stock option expense                                       --            95         704
      Amortization of video rental tapes                        1,271       4,696       7,784
      Amortization of deferred financing costs and
          goodwill                                              2,007       1,594         446
      Realized and unrealized loss (gain) on equity
          investments                                           3,915       1,111      (1,748)
      Gain on extinguishment of debt                          (19,731)     (1,117)       --
      Deferred rent and unfavorable lease liabilities          (1,244)       (434)     (1,059)
    Changes in assets and liabilities:
      Accounts receivable                                        (478)      3,232      (5,750)
      Marketable securities                                     2,922         235       5,811
      Merchandise inventories                                  20,534       8,506      (8,539)
      Prepaid expenses                                           (496)        803      (4,385)
      Other assets                                             (1,546)     (1,277)        181
      Accounts payable                                        (16,437)    (18,638)      8,174
      Accrued expenses                                         (7,312)      4,543     (11,175)
      Other                                                    (1,603)     (1,367)       (979)
                                                             --------    --------    --------
  Net cash (used for) provided by operating activities        (16,734)      9,641       7,294
                                                             --------    --------    --------

INVESTING ACTIVITIES
  Additions to rental videotapes                                 (803)     (1,485)     (7,445)
  Additions to property and equipment                          (4,869)    (17,051)    (23,968)
  Investment in Avatex                                           --        (5,724)     (1,001)
  Investment in Pharmhouse Corp., net of $3,292 cash
       acquired                                                  --          --        (4,838)
  Proceeds from sale of equity securities                       9,298       6,000        --
  Investment in equity securities                                (229)    (11,761)     (2,291)
                                                             --------    --------    --------
  Net cash provided by (used for) for investing activities      3,397     (30,021)    (39,543)
                                                             --------    --------    --------


FINANCING ACTIVITIES
  Borrowings under revolving credit facility                   40,022      40,217      20,066
  Retirement of senior notes                                  (20,270)     (9,032)       --
  Principal payments on term debt                              (1,371)     (1,397)    (29,592)
  Principal payments on capital lease obligations              (4,376)     (7,357)     (6,847)
  Bank overdrafts                                              (3,027)     (3,793)     21,032
  Other additions to long-term debt                              --         1,148         250
  Issuance of common stock                                       --          --            31
                                                             --------    --------    --------
  Net cash provided by (used for) financing activities         10,978      19,786       4,940
                                                             --------    --------    --------
  Decrease in cash and cash equivalents                        (2,359)       (594)    (27,309)
  Cash and cash equivalents, beginning of period               16,752      17,346      44,655
                                                             --------    --------    --------
  Cash and cash equivalents, end of period                   $ 14,393    $ 16,752    $ 17,346
                                                             ========    ========    ========

Supplemental Information
         Interest paid                                       $ 20,300    $ 13,602    $ 21,744
         Income tax refunds                                      --            53          47
</TABLE>

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.   SUBSEQUENT EVENTS - BANKRUPTCY

     On September  24,  2001,  the Company and certain of its  affiliates  filed
     voluntary  petitions  for  reorganization  under  Chapter  11 of the United
     States  Bankruptcy  Code to  restructure  their  operations in an effort to
     return to  profitability.  On that same date,  the  Company  secured a $135
     million  Debtor-in-Possession  ("DIP") Credit Facility through Fleet Retail
     Finance, the Company's principal secured lender, which will be used to fund
     the Company's operations through the reorganization process.

     Borrowings  under the DIP Credit  Facility may be used for working  capital
     needs and general corporate purposes.  Up to $20,000 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 a financial  covenant  that  requires the Company to
     maintain a minimum  excess  availability  of the greater of $8,000 or 7% of
     total availability.

     Credit availability under the DIP Credit Facility at any time is the lesser
     of the  Availability  (as defined in the  Facility)  or  $135,000.  Maximum
     credit  availability  under the DIP Credit Facility declines to $100,000 on
     the earlier of the Company's  election or December 23, 2001. The DIP Credit
     Facility  establishes a first priority lien and security interest in all of
     the assets of the Company.

     Advances  made under the DIP Credit  Facility  bear  interest  at the Fleet
     National Bank prime rate plus 0% to .5% or LIBOR plus 2% to 2.5%  depending
     on the average  unused credit  availability  during the preceding  quarter.
     Under the terms of the DIP Credit Facility,  the Company is required to pay
     a commitment fee of 0.375% per annum on the unused portion of the facility,
     letter of credit fees and certain other fees.

     The DIP Credit Facility  expires on the earlier of the Company's  emergence
     from bankruptcy as a reorganized entity or September 24, 2003.

     The  accompanying  consolidated  financial  statements  do not  purport  to
     reflect or provide for the consequences of the bankruptcy  proceedings.  In
     particular,  such consolidated  financial statements do not purport to show
     (a) as to assets,  their realizable  value on a liquidation  basis or their
     availability to satisfy  liabilities;  (b) as to  liabilities,  the amounts
     that may be allowed for claims or contingencies, or the status and priority
     thereof; (c) as to stockholder accounts, the effect of any changes that may
     be made in the capitalization of the Company; and (d) as to operations, the
     effect of any changes that may be made in its business.

2.   GOING CONCERN

     The Company's  consolidated  financial  statements  have been prepared on a
     going  concern  basis,   which   contemplates   continuity  of  operations,
     realization of assets and the liquidation of liabilities and commitments in
     the  normal  course  of  business.   The  Company's  recurring  losses  and
     bankruptcy  filing (see Note 1) raise substantial doubt about the Company's
     ability to continue as a going concern.  The continuation of the Company as
     a going concern is dependent upon,  among other things,  the ability of the
     Company to  generate  sufficient  cash flows from  operations  and  achieve
     confirmation of a plan of reorganization by the Bankruptcy Court.

     Management  determined  that the  reorganization  was  necessary to rectify
     operational and liquidity  difficulties resulting from the slowing economy,
     changes in consumer buying habits, increased competition from larger retail
     chains, the geographic diversity of some Phar-Mor locations,  the reduction
     of credit terms by vendors and the service of high-cost debt.

     As part of the restructuring,  Phar-Mor plans to close  approximately 65 of
     its  139   stores.   These   stores   have   been   identified   as  either
     under-performing  or outside the Company's  core markets.  The Company will
     focus continuing operations on the approximately 74 remaining stores, while
     reducing  corporate  overhead and solidifying its position in the market it
     serves.

                                      F-7

<PAGE>

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

     This plan of reorganization could materially change the amounts reported in
     the  accompanying  consolidated  financial  statements.   The  accompanying
     consolidated financial statements do not include any adjustments that might
     be necessary as a result of the uncertainties  regarding  continuation as a
     going concern or the plan of reorganization.

3.   BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a.   Fiscal  Periods  Presented  - The  accompanying  consolidated  balance
          sheets  were  prepared  as of June  30,  2001 and  July 1,  2000.  The
          accompanying   consolidated  statements  of  operations,   changes  in
          stockholders'  equity and cash flows were  prepared for the  fifty-two
          weeks ended June 30, 2001, the fifty-two weeks ended July 1, 2000, and
          the  fifty-three  weeks ended July 3, 1999. The Company's  fiscal 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  (losses)  gains of  $(2,922),  $419 and
          $(390) are included in investment loss in the Consolidated  Statements
          of  Operations  for the  fifty-two  weeks  ended  June 30,  2001,  the
          fifty-two  weeks  ended July 1, 2000 and the  fifty-three  weeks ended
          July 3, 1999, 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. The Company  discontinued video tape
          rental during Fiscal 2001.

     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  ($1,933  at June 30,  2001 and $9,788 at July 1, 2000) in
          which it has 20% or more  interest in voting common stock and the cost
          method of  accounting  for  investments  ($1,300 at June 30,  2001 and
          $3,894 at July 1,  2000) in which it has less than a 20%  interest  in
          voting common stock or investments  in preferred  stock (see Note 11).
          During fiscal 2001 and 2000 the Company  recorded a $1,000 and $5,500,
          respectively,  investment  loss resulting from an other than temporary
          impairment of a cost basis investment.

     i.   Investment  in Avatex - During the three  fiscal  years  ended July 1,
          2000, the Company invested $10,725 to purchase  approximately 25.2% of
          Avatex Corporation, formerly known as FoxMeyer Health Corporation

                                      F-8

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
          ("Avatex"),  an  affiliate  of  one of the  Company's  former  largest
          suppliers  and the largest  stockholder  of the Company (see Note 11).
          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  48%  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 1,354,506
          and  1,207,979  at June 30, 2001 and July 1, 2000,  respectively.  The
          financial statements for Fiscal 1999 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 income  for Fiscal  1999 by $2,188,
          eliminate  comprehensive  income  (loss)  for all  prior  periods  and
          reclassify  a portion 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  on the  Condensed  Consolidated  Balance
          Sheets.

          During Fiscal 2001,  the Company  recorded a $4,248  investment  loss,
          included  in  equity  in  loss  of  affiliates  in  the  statement  of
          operations,  on its investment in Avatex  resulting from an other than
          temporary impairment of an equity basis investment.

     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 $1,775 and $962 at June 30, 2001 and
          July 1, 2000, 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.   Accounting  for the  Impairment  of  Long-Lived  Assets - The  Company
          accounts for impairment of long-lived  assets in accordance  with SFAS
          121,  "Accounting  for  the  Impairment  of  Long-Lived  Assets  to be
          Disposed of." SFAS No. 121 requires that long-lived assets be reviewed
          for impairment  whenever events or changes in  circumstances  indicate
          that the book value of the assets may not be recoverable.  The Company
          evaluates at each balance sheet date whether events and  circumstances
          have occurred that indicate  possible  impairment.  In accordance with
          SFAS No. 121, the Company uses an estimate of the future  undiscounted
          net  cash  flows of the  related  asset  or  asset  grouping  over the
          remaining  lives in  measuring  whether  the assets  are  recoverable.
          During Fiscal 2001,  the Company wrote down  approximately  $12,307 of
          furniture  and fixtures  and  leasehold  improvements,  and $11,070 of
          goodwill  related  to  certain  stores  resulting  from  current  year
          operating  losses  combined  with a history  of losses  and  projected
          future  losses.  The  impairment  loss is included in the statement of
          operations as impairment of long-lived assets.  Based on the Company's
          expectation of future  undiscounted  net cash flow,  these assets have
          been written down to their fair value.

                                      F-9

<PAGE>

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

     p.   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.

     q.   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.

     r.   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.

     s.   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.

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

     u.   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.

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

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

     x.   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.

     y.   Recent  Accounting  Pronouncements  -  In  June  1998,  the  Financial
          Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for
          Derivative Instruments and Hedging Activities," which is effective for
          fiscal years  beginning  after June 15, 2000.  Therefore,  the Company
          adopted SFAS No. 133 for its fiscal year beginning July 2, 2000.  SFAS
          No. 133 establishes  accounting and reporting standards for derivative
          instruments  that  require  every  derivative  to be  recorded  on the
          balance sheet as an asset or liability measured at its fair value. The
          statement also defines the accounting for the change in the fair value
          of derivatives depending on their intended use. The Company's adoption
          of SFAS  No.  133 did not  have a  material  impact  on its  financial
          condition or results of operations.

                                      F-10

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
          In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
          SFAS No.  142,  Goodwill  and Other  Intangible  Assets.  SFAS No. 141
          requires that all business combinations initiated after June 30, 2001,
          be accounted for using the purchase method of accounting. After giving
          consideration  to the  guidance  provided  by SFAS No.  141, we do not
          believe that the  prospective  adoption of this  statement will have a
          material impact on our  consolidated  financial  position,  results of
          operations  or cash flows for fiscal  2002.  SFAS No. 142  changes the
          accounting  for goodwill and certain other  intangible  assets from an
          amortization method to an impairment only approach.  We will adopt the
          provisions of SFAS No. 142 effective July 1, 2001. We are currently in
          the process of evaluating the effect the adoption of SFAS No. 142 will
          have on our consolidated financial position, results of operations and
          cash flows for fiscal 2002.

     z.   Advertising  Costs -  Advertising  costs are expensed  when  incurred.
          Advertising  expenses for the fifty-two weeks ended June 30, 2001, the
          fifty-two  weeks  ended July 1, 2000 and the  fifty-three  weeks ended
          July 3, 1999 were $22,421, $22,827, and $19,392, respectively.

4.   ACCOUNTS RECEIVABLE

     Accounts receivable consists of the following:

                                              June 30, 2001   July 1, 2000
                                              -------------   ------------
          Accounts receivable - vendors             $ 9,373        $10,315
          Third-party prescriptions                  16,695         14,944
          Vendor coupons                                601            711
          Other                                         280            551
                                                    -------        -------
                                                     26,949         26,521

          Less allowance for doubtful accounts        1,454          1,504
                                                    -------        -------
                                                    $25,495        $25,017
                                                    =======        =======


5.   MERCHANDISE INVENTORIES

     Merchandise inventories consists of the following:

                                                 June 30, 2001    July 1, 2000
                                                 -------------    ------------
          Store inventories                           $163,138        $189,423
          Warehouse inventories                         35,414          29,476
          Video rental tapes - net                         -0-           1,019
                                                      --------        --------
                                                       198,552         219,918
          Less reserves for markdowns, shrinkage
            And vendor rebates                          12,326          12,690
                                                      --------        --------
                                                      $186,226        $207,228
                                                      ========        ========

          The video rental tape inventory is net of accumulated amortization of
$3,832 at July 1, 2000.

                                      F-11

<PAGE>

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

6.   PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:
<TABLE>

                                                           June 30, 2001       July 1, 2000
                                                           -------------       ------------
<S>                                                        <C>                 <C>
          Furniture, fixtures and equipment                   $ 65,698            $ 70,171
          Building improvements to leased property              49,583              52,559
          Land                                                     497                 497
          Building                                               1,517               1,517
          Capital leases:
          Buildings                                             11,076              11,076
          Furniture, fixtures and equipment                     22,072              22,072
                                                              --------            --------
                                                               150,443             157,892

          Less accumulated depreciation and amortization        83,399              66,091
                                                              --------            --------

                                                              $ 67,044            $ 91,801
                                                              ========            ========

</TABLE>


7.   OTHER ASSETS

     Other assets consists of the following:

                                           June 30, 2001      July 1, 2000
                                           -------------      ------------
          Purchased pharmacy files                $2,797        $3,313
          Liquor licenses                            994         1,117
          Deferred debt expense                      806           291
          Utility and other deposits                 357           388
          Other                                      639           132
                                                  ------        ------
                                                  $5,593        $5,241
                                                  ======        ======

     Deferred debt expense, liquor licenses and purchased pharmacy files are net
     of accumulated  amortization of $1,159 and $1,430 at June 30, 2001 and July
     1,  2000,  respectively.   The  deferred  debt  expense  consists  of  debt
     origination costs associated with the credit facility (See Note 8).

8.   REVOLVING CREDIT FACILITIES

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

     Credit  availability  under the Amended Facility at any time was the lesser
     of the  aggregate  availability  (as  defined in the Amended  Facility)  or
     $100,000.  The  Amended  Facility  established  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  Facility bore 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  Facility,
     the Company was 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.

                                      F-12

<PAGE>

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

     The Amended Facility was terminated on November 16, 2000.

     The  Company  entered  into a Loan  and  Security  Agreement  (the  "Credit
     Facility")  effective  November 16, 2000 with Fleet Retail Finance Inc., as
     agent, and other financial  institutions that established a credit facility
     in the maximum amount of $150,000.

     Borrowings  under the Credit  Facility  could be used for  working  capital
     needs and general corporate purposes.  Up to $20,000 of the Credit Facility
     at any time could be used for  standby and  documentary  letters of credit.
     The  Credit  Facility   included   restrictions  on,  among  other  things,
     additional debt,  investments,  dividends and other distributions,  mergers
     and  acquisitions  and  contains no  financial  covenants as long as unused
     credit availability is at least $20,000.

     Credit availability under the Credit Facility at any time was the lesser of
     the aggregate availability (as defined in the Credit Facility) or $150,000.
     The Credit Facility established a first priority lien and security interest
     in all the assets of the Company excluding real property and equipment.

     Advances made under the Credit Facility bore interest at the Fleet National
     Bank prime rate or LIBOR  plus 2.00% to LIBOR plus 2.50%  depending  on the
     average  unused credit  availability  in the preceding  quarter.  Under the
     terms of the Credit Facility,  the Company was required to pay a commitment
     fee of 0.25% per annum on the  unused  portion of the  facility,  letter of
     credit fees and certain other fees.

     Unused  availability under the Credit Facility,  after subtracting  amounts
     used for outstanding letters of credit, was $36,968 at June 30, 2001.

     At June 30, 2001 the Fleet  reference  rate (prime  rate) was 6.75% and the
     LIBOR rate was 3.8625%.

     At June 30,  2001  there  were  letters  of credit in the  amount of $2,971
     outstanding under the Credit Facility.

     The Credit Facility was terminated and outstanding borrowings thereunder of
     $97,022  were  repaid  upon the  filing of  Chapter  11  Bankruptcy  by the
     Company. See Note 1 for a description of the DIP Credit Facility.

                                      F-13

<PAGE>

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

9.   LONG-TERM DEBT

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


                                                                       June 30, 2001      July 1, 2000
                                                                       -------------      ------------
<S>                                                                  <C>                <C>
     Senior unsecured notes, interest rate of 11.72%,
       due September 2002                                                   $ 41,312          $ 81,313

     Revolving Credit Facility (See Note 8)                                  100,305            60,283

     Equipment notes, interest rate of 7%, due in installments
       through October 2003                                                    3,006             3,926

     Tax notes, interest rates at 5.89% to 8%, due
       through September 2006                                                  4,482             4,455

     Real estate mortgage notes and bonds payable at rates ranging
       from 3% to 9.98% and the prime rate plus 1%                             3,919             4,397
                                                                            --------          --------
     Total debt                                                              153,024           154,374
     Less current portion                                                      3,647             1,964
                                                                            --------          --------
     Total long-term debt                                                   $149,377          $152,410
                                                                            ========          ========

</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 years 2001 and 2000,  the Company  recognized  extraordinary
     gains  of  $19,731  and  $1,117,  respectively,   in  connection  with  the
     retirement of $40,001 and $10,149, respectively, of senior unsecured notes.


     The Company has mortgage  notes and bonds  payable  collateralized  by real
     estate  with an  aggregate  net book value of $3,694 and $3,853 at June 30,
     2001 and July 1, 2000, respectively.


     Future  maturities  of  long-term  debt  subsequent  to June  30,  2001 are
     summarized as follows:


         2002                           $  3,647
         2003                             42,809
         2004                            100,932 *
         2005                                383
         2006                                387
         Thereafter                        4,866
                                        --------
                                        $153,024
                                        ========

     *Includes the scheduled  repayment of borrowings under the Credit Facility.
     As a result of the  bankruptcy  filing on September  24, 2001,  the amounts
     owed under the Revolving Credit Facility were repaid with proceeds from the
     DIP Credit Facility (See Note 1).

                                      F-14

<PAGE>

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

10.  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
     June 30, 2001 are as follows:



                                                       Capital        Operating
                                                        Leases          Leases
                                                      ----------      ----------
              2002                                        $5,220         $44,750
              2003                                         3,388          41,597
              2004                                         2,033          37,030
              2005                                         2,055          32,573
              2006                                         2,078          28,896
              Thereafter                                   4,316         128,167
                                                        --------        --------

     Total minimum lease payments                         19,090        $313,013
                                                                        ========
     Less amounts representing interest                    3,485
                                                        --------
     Present value of minimum lease payments              15,605
     Less current portion                                  4,191
                                                        --------
     Long-term capital lease obligations                 $11,414
                                                        ========


     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 June 30,
     2001,  fifty-two weeks ended July 1, 2000, and the fifty-three  weeks ended
     July 3, 1999 was $43,149,  $43,730,  and $37,306,  respectively,  including
     $185, $206 and $223 of additional rentals.

11.  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  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  48% 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  continued  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.

                                      F-15

<PAGE>

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

     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   47.1%,  the  Company's  share  was  25%,  the  Avatex
     officers/designees'  share was  19.4%,  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. In May 2001, the Company sold their investment in HPD
     and realized a gain of $825.

     The Company paid $104,  $95 and $77 to Human  Service  Group,  Inc.  during
     Fiscal Year 2001, 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 of product from AM Cosmetics, Inc. during Fiscal
     Year 1999. Mr. Butler and Mr. Estrin were  directors of AM Cosmetics,  Inc.
     until September, 1998.

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

     The Company paid CB Equities  Corporation  $67 and $74 during  Fiscal Years
     2001 and 2000,  respectively,  for office  and  equipment  support  for Mr.
     Butler. Mr. Butler is President of CB Equities Corporation.

                                      F-16

<PAGE>

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

12.  WARRANTS AND OPTIONS

     Warrants

     There are warrants to purchase an  aggregate of 1,250,000 of the  Company's
     common shares  outstanding as of June 30, 2001.  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 June 30, 2001, 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 5,000,000  options.
     As of June 30, 2001,  options for 788,100  common  shares were reserved for
     future grant,  and options for 4,211,900  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 June 30, 2001,
     options for 265,000 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-17

<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 June 30, 2001 and July 1, 2000
     and the  fifty-three  weeks ended July 3, 1999, the Company  recognized $0,
     $95 and $704,  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>

                                           Fifty-two weeks       Fifty-two weeks      Fifty-three weeks
                                          ended June 30, 2001   ended July 1, 2000    ended July 3, 1999
                                          -------------------   -------------------  -------------------
<S>                                       <C>                   <C>                  <C>
     Net (loss) income:
       As reported                              $  (48,795)          $  (11,023)          $     596
       Pro forma                                $  (49,819)          $  (13,734)          $  (2,160)
     Basic and diluted (loss) earnings
     per share:
       As reported                              $    (4.48)          $     (.98)          $     .05
       Pro forma                                $    (4.58)          $    (1.22)          $   (0.19)

</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 June 30,  2001,  3,911,013  options  were  exercisable  at a weighted
     average exercise price per share of $5.82.

                                      F-18

<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>

                                                         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 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
     Granted                            1,194,000           $   0.88       $ 0.73 - $ 1.53                              0.41
     Forfeited                           (646,733)          $   5.80       $ 2.52 - $ 9.63
                                        ---------
     Balance at June 30, 2001           4,893,567           $   4.92       $ 0.73 - $ 9.63              4.39
                                        =========

</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 June 30, 2001:

<TABLE>

                                                                     Weighted Average                   Weighted 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>
         $ 6.17 - $ 9.63            2,053,267            $   8.18            2.66         2,036,747            $   8.19

         $ 4.25 - $ 5.44            1,035,300            $   4.50            4.50         1,033,200            $   4.50

         $ 2.52 - $ 3.16              611,000            $   2.52            5.79           409,067            $   2.52

         $ 0.73 - $ 1.53            1,194,000            $   0.88            6.57           431,999            $   0.93

</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.

13.  INCOME TAXES

     Deferred  income  taxes at June 30, 2001 and July 1, 2000,  reflect the net
     tax effect of temporary  differences between the carrying amounts of assets
     and  liabilities  for financial  reporting  purposes,  the amounts used for
     income tax  purposes and net  operating  loss  carryforwards.  Deferred tax
     assets are  recognized to the extent that  realization  of such benefits is
     more likely than not.

                                      F-19

<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>

                                                         June 30, 2001          July 1, 2000
                                                        ---------------        --------------
<S>                                                     <C>                    <C>
     Deferred Tax Assets:
            Operating and restructuring reserves            $   3,696             $   5,090
            Net operating losses                              135,723               135,272
            Depreciation and amortization                      28,514                29,947
            Lease escalation accruals                           3,772                 4,299
            Jobs tax credit                                     4,441                 4,432
            Other items                                         8,112                 3,069
                                                            ---------             ---------
                                                              184,258               182,109
            Valuation allowance                              (184,258)             (172,544)
                                                            ---------             ---------
               Net deferred tax assets                         $  -0-             $   9,565
                                                            =========             =========


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


       Deferred tax assets - noncurrent                     $    --               $   9,126
       Deferred tax liabilities - noncurrent                     --                    --
                                                            ---------             ---------
         Net deferred tax assets - noncurrent               $    --               $   9,126
                                                            =========             =========
</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. As a
     result of the losses  incurred in Fiscal 2001,  the  realization of the net
     deferred  tax assets is no longer  more  likely  than not.  Therefore,  the
     valuation  allowance  was  increased to fully  reserve the net deferred tax
     assets.  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  2001,  2000 or 1999;
     deferred  tax  provisions  in fiscal  2001 and 1999 total  $9,565 and $205,
     respectively.  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>

                                                           Fifty-two        Fifty-two      Fifty-three
                                                          weeks ended      weeks ended     weeks ended
                                                         June 30, 2001     July 1, 2000    July 3, 1999
                                                         -------------    -------------    ------------

<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                           50.7%             35.0%             --
                                                           -------           -------          -------
       Effective tax rate                                    15.7%              0.0%            25.6%
                                                           =======           =======          =======

</TABLE>

     The  Company has  approximately  $380,000  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

                                      F-20
<PAGE>

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

     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 $7,000 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.

     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.

14.  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  June 30,  2001,  the  fifty-two  weeks  ended  July 1,  2000 and the
     fifty-three  weeks  ended July 3, 1999,  were  $1,215,  $1,214 and  $1,087,
     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 June 30, 2001, the fifty-two weeks ended July
     1, 2000, and the fifty-three weeks ended July 3, 1999, were $2,237,  $2,343
     and $2,050, 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-21

<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>


                                                              June 30, 2001        July 1, 2000
                                                              -------------        ------------
<S>                                                           <C>                  <C>
       Change in benefit obligation
       Benefit obligation at the beginning of the year            $ 5,382             $ 4,592
       Service costs with expenses                                    419                 339
       Interest cost                                                  372                 309
       Actuarial (gain)/loss                                         (223)                173
       Benefits paid                                                  (28)                (31)
                                                                  -------             -------

       Benefit obligation at end of year                            5,922               5,382
                                                                  -------             -------

       Change in plan assets
       Fair value of plan assets at beginning of year               3,704               3,190
       Actual return on plan assets                                    24                 129
       Employer contributions                                          67                 416
       Benefits paid                                                  (28)                (31)
                                                                  -------             -------
       Fair value of plan assets at end of year                     3,767               3,704
                                                                  -------             -------

       Funded status                                               (2,155)             (1,678)
       Unrecognized net actuarial loss                              1,242               1,220
       Unrecognized prior service cost                                  0                   1
                                                                  -------             -------
       Net amount recognized                                      $  (913)            $  (457)
                                                                  =======             =======

       Amounts recognized in the statement of
         financial position consist of:
           Accrued benefit liability                              $  (913)            $  (463)
           Intangible asset                                             0                   6
                                                                  -------             -------
       Net amount recognized                                      $  (913)            $  (457)
                                                                  =======             =======

</TABLE>

<TABLE>

                                                                June 30, 2001     July 1, 2000
                                                                -------------     ------------
<S>                                                             <C>               <C>
            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>


                                                       Fifty-two         Fifty-two        Fifty-three
                                                      weeks ended       weeks ended       weeks ended
                                                     June 30, 2001      July 1, 2000      July 3, 1999
                                                     -------------      ------------      ------------

<S>                                                  <C>                <C>               <C>
       Components of net periodic benefit cost
          Service cost                                    $ 419             $ 339             $ 287
          Interest cost                                     372               309               264
          Expected return on plan assets                   (337)             (290)             (244)
          Recognized actuarial loss                          69                42                45
                                                          -----             -----             -----
          Net periodic pension expense                    $ 523             $ 400             $ 352
                                                          =====             =====             =====

</TABLE>

                                      F-22

<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  $5,885,  $4,275,  and
     $3,728, respectively, as of June 30, 2001.


15.  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 20).

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

                                                                 Fifty-two        Fifty-two       Fifty-three
                                                                weeks ended      weeks ended      weeks ended
                                                               June 30, 2001     July 1, 2000     July 3, 1999
                                                               -------------     ------------     ------------
<S>                                                            <C>               <C>              <C>
       Balance, beginning of period                                $ 340             $ 918             $ 967
       Costs incurred in connection with the Pharmhouse
       acquisition                                                  (259)             (542)              800
       Store rightsizing costs                                       (31)              (36)             (849)
                                                                   -----             -----             -----
       Balance, end of period                                      $  50             $ 340             $ 918
                                                                   =====             =====             =====
</TABLE>


16.  FINANCIAL INSTRUMENTS

     The Company has financial instruments which include marketable  securities,
     investments and long-term debt. The carrying values of these instruments at
     June 30, 2001  approximated  their fair market  value except for the senior
     unsecured  notes. The estimated fair value of the senior unsecured notes is
     $25,820 at June 30, 2001.

     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-23

<PAGE>

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

17.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     Fiscal 2001
     -----------
<TABLE>

                                                      Thirteen             Thirteen            Thirteen            Thirteen
                                                     weeks ended          weeks ended         weeks ended         weeks ended
                                                 September 30, 2000    December 30, 2000     March 31, 2001      June 30, 2001
                                                 ------------------    -----------------    ----------------    -----------------
<S>                                              <C>                   <C>                  <C>                 <C>
     Sales                                          $    308,187         $    342,326         $    300,175         $    290,324
     Gross profit                                   $     52,909         $     59,273         $     51,861         $     48,977
     (Loss) income before extraordinary item              (8,502)              (9,255)              (6,263)             (46,330)
     (Loss) income per basic and diluted
       share before extraordinary item                      (.77)                (.84)                (.58)               (4.30)
     Net (loss) income                              $     (8,502)        $      7,842         $     (3,629)        $    (44,506)

     Net (loss) income per basic and diluted
     share                                          $      (0.77)        $       0.72         $      (0.34)        $      (4.13)
     Weighted average number of basic and
     diluted shares outstanding                       11,019,871           10,932,841           10,810,801           10,781,923

</TABLE>


     Fiscal 2000
     -----------
<TABLE>

                                                     Thirteen              Thirteen            Thirteen             Fourteen
                                                    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
     (Loss) income before extraordinary item              (4,191)               7,912              (2,303)             (13,558)
     (Loss) income per basic and diluted
       share before extraordinary item                      (.36)                 .69                (.21)               (1.23)
     Net (loss) income                              $     (4,191)        $      8,118        $     (1,839)        $    (13,111)

     Net (loss) income per basic  and
     diluted share                                  $      (0.36)        $       0.71        $      (0.17)        $      (1.19)


     Weighted average number of basic and
     diluted shares outstanding                       11,516,185           11,383,411          11,032,886           11,032,886

</TABLE>


     In the  thirteen  weeks  ended  June 30,  2001,  the  Company  recorded  an
     impairment of  long-lived  assets in the amount of $23,377 (see Note 3.o.),
     increased  the  valuation  allowance  on deferred  taxes by $9,565 to fully
     reserve the net  deferred  tax assets  (see Note 13) and  recorded an other
     than  temporary  loss on its  investment  in Avatex in the amount of $4,248
     (see Note 3.i.).

                                      F-24

<PAGE>

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

18.  (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>

                                                                 Fifty-two          Fifty-two          Fifty-three
                                                                weeks ended        weeks ended         weeks ended
                                                                June 30, 2001       July 1, 2000        July 3, 1999
                                                              ---------------    ----------------    ----------------
<S>                                                           <C>                <C>                 <C>
       BASIC (LOSS) EARNINGS PER SHARE
       Net (loss) income available for common shares           $    (48,795)        $    (11,023)        $        596
       Basic weighted average common shares outstanding          10,886,359           11,241,342           11,522,800
       Basic earnings (loss) per share                         $      (4.48)        $       (.98)        $        .05

       DILUTED (LOSS) EARNINGS PER SHARE
       Net (loss) income available for common shares           $    (48,795)        $    (11,023)        $        596
       Diluted weighted average common shares                    10,886,359           11,241,342           11,570,955
       Diluted earnings per share                              $      (4.48)        $       (.98)        $        .05
</TABLE>


     There were  4,893,567,  4,346,300 and  3,710,234  options for the fifty-two
     weeks ended June 30, 2001,  the fifty-two  weeks ended July 1, 2000 and the
     fifty-three weeks ended July 3, 1999, respectively,  and 1,250,000 warrants
     for the fifty-two weeks ended June 30, 2001, the fifty-two weeks ended July
     1, 2000 and the  fifty-three  weeks  ended July 3, 1999  excluded  from the
     calculation  of diluted  (loss)  income per share as they would have had an
     anti-dilutive effect on (loss) income per share.

19.  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.

20.  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-25

<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:

                                                      Fifty-three weeks
                                                      Ended July 3, 1999
                                                     --------------------

     Sales                                               $  1,337,222
                                                         ============
     Net loss                                            $     (7,983)
                                                         ============
     Basic and diluted loss per common share             $       (.69)
                                                         ============

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

                                      F-26

<PAGE>


Schedule II

VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
                                               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
         -------------------------------
         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

         52 weeks ended June 30, 2001              1,504           1,607          (1,657)           1,454


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

         52 weeks ended June 30, 2001              4,181          14,353         (13,382)           5,152


</TABLE>

                                      F-27