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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

|    |  |                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------
|[X] |  | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended March 31, 2002

or

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[   ] |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

Commission File Number: 0-21447

AdvancePCS
(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of incorporation of organization) |  | 75-2493381
(I.R.S. employer Identification No.)

750 West John Carpenter Freeway, Suite 1200, Irving, TX 75039
(formerly 5215 North OConnor, Suite 1600, Irving, TX 75039)
(Address of principal executive offices)

|                                                                   |                          
|------------------------------------------------------------------ | -------------------------
|Registrants telephone number, including area code: (469) 524-4700
|                                                                   | (formerly (469) 420-6000)

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

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange
on which registered
|                    |  |                                          
|None                |  | None                                     

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

Class A common stock, $0.01 par value
(Title of Class)

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

Yes (BALLOT BOX WITH X) No  (OPEN BALLOT BOX)

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Class A common stock
on May 31, 2002 as reported on the Nasdaq National Market, was approximately
$1,839,810,924.

As of May 31, 2002, registrant had (1) 80,404,488 shares of Class A common
stock, $.01 par value, outstanding, (2) 12,913,334 shares of Class B-1 common
stock, $.01 par value, outstanding and (3) 200 shares of Class B-2 common
stock, $.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for registrants 2002 annual meeting of
stockholders are incorporated by reference in Part III.



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|                                                   |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 
|PART I                                            
|                                                   | ITEM 1. BUSINESS                                                                             
|                                                   | ITEM 2. PROPERTIES                                                                           
|                                                   | ITEM 3. LEGAL PROCEEDINGS AND GOVERNMENT INVESTIGATIONS                                      
|                                                   | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                           
|                                                   | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|                                                   | ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA                                     
|                                                   | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                   | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                   | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                   | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                          
|                                                   | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                   | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                                   | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                   | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV                                           
|                                                   | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|EX-4.13 Warrant Agreement                         
|EX-10.33 Employment Agreement - Yon Jorden        
|EX-10.34 Amendment No. 4 to Credit Agreement      
|EX-10.35 Amendment No 1 to Purchase & Contribution
|EX-10.36 Amended/Restated Purchase & Contribution 
|EX-11.1 Statement Regarding Per Share Earnings    
|EX-21.1 Subsidiaries of AdvancePCS                
|EX-23.1 Consent of PricewaterhouseCoopers LLP     



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AdvancePCS

Table of Contents

|                                                  |  |                                                                                       |  |            |    |      |    | 
|------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ---------- | -- | ---- | -- | 
|                                                  |  |                                                                                       |  |            |    | Page
|                                                  |  |                                                                                       |  |            |    |     
|SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS |  | 2                                                                                     | 
|Item No.                                         
|PART I                                           
|Item 1.                                           |  | Business                                                                              |  |            | 3  |     
|Item 2.                                           |  | Properties                                                                            |  |            | 28 |     
|Item 3.                                           |  | Legal Proceedings and Government Investigations                                       |  |            | 28 |     
|Item 4.                                           |  | Submission Of Matters To A Vote Of Security Holders                                   |  |            | 29 |     
|PART II                                          
|Item 5.                                           |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  |            | 30 |     
|Item 6.                                           |  | Selected Historical Financial and Operating Data                                      |  |            | 31 |     
|Item 7.                                           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |            | 33 |     
|Item 7A.                                          |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |            | 43 |     
|Item 8.                                           |  | Financial Statements and Supplementary Data                                           |  |            | 43 |     
|Item 9.                                           |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |            | 43 |     
|PART III                                         
|Item 10.                                          |  | Directors and Executive Officers of the Registrant                                    |  |            | 44 |     
|Item 11.                                          |  | Executive Compensation                                                                |  |            | 44 |     
|Item 12.                                          |  | Security Ownership of Certain Beneficial Owners and Management                        |  |            | 44 |     
|Item 13.                                          |  | Certain Relationships and Related Transactions                                        |  |            | 44 |     
|PART IV                                          
|Item 14.                                          |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |            | 44 |     
|                                                  |  |                                                                                       |  | Signatures |    |      | 45 | 





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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We have based these forward-looking statements on our
current expectations and projections about future events. Statements that are
predictive in nature, that depend upon or refer to future events or conditions
or that include words such as expects, anticipates, intends, plans,
believes, estimates, thinks, and similar expressions are forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results and performance to be
materially different from any future results or performance expressed or
implied by these forward-looking statements. These factors include, among other
things, those matters discussed under the caption Risk Factors, as well as
the following:



| |  | general economic and business conditions;                                                                    
|- |  | -------------------------------------------------------------------------------------------------------------
| 
| |  | new governmental regulations and changes in, or the failure to comply with existing governmental regulations;
| 
| |  | legislative proposals that impact our industry or the way we do business;                                    
| 
| |  | changes in our industry;                                                                                     
| 
| |  | competition;                                                                                                 
| 
| |  | demographic changes;                                                                                         
| 
| |  | changes in Medicare and Medicaid payment levels;                                                             
| 
| |  | liability and other claims asserted against us;                                                              
| 
| |  | changes in our relations with our clients; and                                                               
| 
| |  | our ability to attract and retain qualified personnel.                                                       

Although we believe that these statements are based upon reasonable
assumptions, we can give no assurance that our goals will be achieved. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking statements
speak only as of the date made. Except as required by law, we are under no
duty to update any of the forward-looking statements after the date of this
report to conform such statements to actual results.

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PART I




Item 1. BUSINESS

The following description of our business should be read in conjunction
with the information included elsewhere in this Form 10-K for the year ended
March 31, 2002. This description contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ significantly
from the results discussed in the forward-looking statements due to the factors
set forth in Risk Factors and elsewhere in this Form 10-K. References in
this Form 10-K to we, our, or us refer to AdvancePCS.

Overview

We are a leading provider of health improvement services in the United
States. As the largest pharmacy benefit management company, or PBM, based on
number of lives covered, we currently serve more than 75 million health plan
members and manage approximately $28 billion in prescription drug spending on
an annualized basis on behalf of our health plan sponsors. In addition, we
offer a wide range of other health improvement products and services, such as
prescription discount cards for the uninsured and under-insured, web-based
programs, disease management, clinical trials and outcomes studies. Our mission
is to improve the quality of care delivered to health plan members while
helping health plan sponsors reduce overall costs.

We generate revenues by providing our health improvement services to two
primary customer groups: health plan sponsors and pharmaceutical manufacturers.
We serve a broad range of health plan sponsors, including BlueCross BlueShield
plans and other managed care organizations, employer groups, third-party
administrators of health plans, insurance companies, government agencies and
labor union-based trusts. We work closely with pharmaceutical manufacturers to
negotiate lower drug costs for our health plan sponsors. We also provide
pharmaceutical manufacturers with clinical trial, research and information
management services.

Industry Background

Prescription drug costs in the United States is the fastest growing
component of health care costs. The U.S. Centers for Medicare & Medicaid (CMS)
estimates that prescription drugs accounted for approximately 9.5% of U.S.
health care expenditures in 2001, representing approximately a 16.1% increase
in expenditures over those in 2000. CMS projects that the cost of prescription
drugs will rise between 10% and 15% per year through 2010. We believe factors
contributing to this trend include:



| |  |  | higher drug utilization due to the growing use of pharmaceuticals as a first line of attack in disease treatment;                                                                                                                    
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | increasing availability of pharmacy benefits to health plan members;                                                                                                                                                                 
|
| |  |  | an aging population;                                                                                                                                                                                                                 
|
| |  |  | increasing direct-to-consumer advertising by pharmaceutical manufacturers;                                                                                                                                                           
|
| |  |  | an expected increase in new drug introductions, primarily due to
increases in research and development spending by pharmaceutical
companies, as well as more rapid drug approval by the U.S. Food and Drug
Administration or FDA; and
|
| |  |  | high costs for newly-developed, more effective drug therapies and an
increasing pipeline of biotechnology pharmaceuticals.                                                                                                           

PBMs were first formed during the 1970s to provide health plan sponsors
with a more efficient and less costly means of managing their members
prescription drug benefit, particularly the processing of pharmaceutical
claims. In recent years, managed care has evolved from a short-term,
cost-driven model to a long-term, medical outcomes-based model, where the
overall cost and quality of patient care are both key considerations of the
health plan sponsor. While PBMs continue to process hundreds of millions of
pharmaceutical claims per year, PBMs have also developed additional services,
including mail order pharmacy fulfillment in the 1980s and point-of-sale claims
processing, formulary development and other clinical services in the 1990s. By
designing and implementing effective pharmacy benefit plans and formularies,
PBMs gained the ability to influence the choice of pharmaceuticals used by a
health plans members. PBMs use their formulary influence and increased
purchasing power to negotiate both rebates from pharmaceutical manufacturers
and discounts from retail pharmacies in order to generate savings for health
plan sponsors.

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Over the past few years, the PBM industry has undergone significant
consolidation. We believe such consolidation has principally been driven by the
significant benefits of size and scale, including:



| |  |  | cost-saving opportunities to leverage a fixed-cost infrastructure
over greater prescription claim volume, resulting in greater pricing
flexibility; and                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | increased negotiating leverage with pharmaceutical manufacturers and
retail pharmacies, resulting in greater ability to obtain lower drug
costs for health plan sponsors.

We believe PBMs that effectively capture these benefits will be better
positioned to strengthen their relationships with plan members, physicians and
health plan sponsors and improve their competitive position.

Medicare, the primary health insurer for more than 37 million Americans
over the age of 65, does not currently offer an outpatient prescription drug
benefit. Several legislative proposals are under consideration in Congress to
provide Medicare recipients with outpatient drug benefits. The terms of the
current proposals vary and there can be no assurance of actual implementation
of such a benefit. Depending on the approval and final design of a Medicare
drug benefit, PBMs could play a significant role in its administration.

Our Competitive Advantages

We are the largest PBM in the industry

As the largest PBM based on number of lives covered, we currently serve
more than 75 million members enrolled with our health plan sponsors. We operate
through a network of approximately 60,000 retail pharmacies and, on an
annualized basis, we estimate that we manage more than 550 million pharmacy
claims representing approximately $28 billion in prescription drug spending.
Our large member base gives us significant leverage when negotiating rebates
and discounts from pharmaceutical companies and retail pharmacies. In addition,
we believe that our mail service pharmacies are of sufficient scale and
capacity to effectively compete on large contracts. As the industry leader
based on number of lives covered, we intend to position ourselves as the first
choice of health plan sponsors who need a PBM with scale and scope to help
effectively manage their growing prescription drug costs.

We maintain an independent status

We benefit from our independent status, as we are not controlled by a
pharmaceutical manufacturer, retail pharmacy or health plan sponsor. We believe
this independence is valued by health plan sponsors for the inherent choice and
impartiality we are able to provide.

We offer a wide range of health improvement products and services

We believe we have one of the widest ranges of health improvement products
and services in the industry. We provide a broad range of PBM products and
services complemented by consumer and information products and technology
solutions. Our PBM products and services include data, clinical and mail order
services. Our data service operations process prescription claims through our
retail pharmacy network. Our clinical services perform formulary design and
compliance services as well as provide proprietary decision support tools. Our
mail pharmacy services provide our members with the convenience of having
prescriptions delivered through the mail.

We also offer consumer cards for uninsured and under-insured consumers, as
well as web-based products and services such as online pharmacy services and
web site development services for health plan sponsors. In addition, we offer a
wide range of other health improvement products and services that utilize our
data management and predictive modeling capabilities, such as disease
management, clinical trials and outcome studies.

We have a diverse client base with substantial penetration across all key
client segments

Historically, we have had strong client relationships with BlueCross
BlueShield companies and other managed care organizations which together
represent approximately half of our prescription claims volume. We have also
focused on and developed expertise in serving self-insured employers, insurance
carriers and government plans. We currently have a diverse client base and
substantial market penetration among each of these major target client groups.

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We have a focused and experienced management team with an established track
record in growing our business and integrating acquisitions

Our management team, including our founder and chief executive officer,
David D. Halbert, has consistently delivered strong operating and financial
results through internal growth and the acquisition and successful integration
of several companies. During the last eight fiscal years, we have grown
significantly, with total revenues increasing from approximately $64.4 million
in fiscal year 1995 to approximately $13.1 billion in fiscal year 2002 and
EBITDA increasing from approximately $1.8 million in fiscal year 1995 to
approximately $300.4 million in fiscal year 2002.

We now have approximately 6,000 employees and contractors and an
experienced senior management team. On October 2, 2000, we acquired PCS
Holding Corporation (PCS), a pharmacy benefit management company that was
wholly-owned by Rite Aid Corporation. We have successfully completed most of
the steps in integrating PCS that are necessary for us to operate as a single,
combined company. In addition, we have successfully integrated the following
seven acquisitions in the past four years:



| |  |  | Innovative Medical Research, Inc., which conducts clinical trials and
survey research for the pharmaceutical and managed care industries, in
1998;                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Baumel-Eisner Neuromedical Institute, Inc., which conducts
neurological and psychiatric clinical trials of investigational new
drugs on behalf of the pharmaceutical industry, in 1998;
|
| |  |  | Foundation Health Pharmaceutical Services, the pharmacy benefit
operations of Foundation Health Systems, Inc., now known as Health Net,
in 1999;                                       
|
| |  |  | First Florida International (FFI), which provides PBM services as
well as unique direct-to-consumer capabilities, in 2000;                                                             
|
| |  |  | Dresing-Lierman, Inc. and its wholly owned subsidiary, TheraCom Inc.
(TheraCom), which provides specialty pharmacy services in the
biotechnology arena, in 2001;                       
|
| |  |  | Consumer Health Interactive, Inc. (CHI), an internet health portal development company, in 2001; and                                                                                   
|
| |  |  | iScribe software code and other assets relating to physician connectivity, in 2001.                                                                                                    

Strategy

Our mission is to improve the quality of care delivered to health plan
members while helping health plan sponsors reduce overall costs. In order to
accomplish this mission, we plan to:

Increase sales penetration to existing customers

One of our primary growth strategies is to increase sales penetration of
our health improvement services within our existing customer base. We offer a
broad array of disease management, clinical and research products, developed
internally for specific client segment needs and through acquisitions. We are
cross-selling into our different customer bases the full suite of programs.
For example, the customers in the employer group segment, are increasingly
interested in our disease management programs that we originally developed for
health plans. Similarly, certain clinical programs and services that we have
acquired are being introduced across our customer base.

Increase specialty pharmacy services

We also plan to increase sales of specialty pharmacy services, our newest
product offering, to our existing customers. In June 2001, we launched
AdvancePCS SpecialtyRx to improve the management of patients using injectable
and other high technology drugs, through a joint venture with Priority
Healthcare; and in August 2001, we acquired TheraCom to provide customized
services around complex emerging biotechnology therapies and the significant
patient management needs associated with those therapies. We are able to offer
our clients a fully integrated pharmaceutical care management program designed
to encourage appropriate drug utilization, competitive pricing and
comprehensive integrated reporting for better cost management, and PBM based
electronic claims processing for greater administrative ease. As of May 31,
2002, we have successfully sold specialty pharmacy services to clients
representing approximately 10 million lives and already have begun providing
services for clients representing 8 million of those lives. In addition, we
intend to continue to market TheraCom service offerings as part of the
AdvancePCS specialty pharmacy services.

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Increase our mail service penetration

We believe that our mail services reduce costs to health plan sponsors
through volume purchasing, generic dispensing and higher rebates through
greater formulary compliance. Historically, we have not promoted our mail
pharmacies aggressively, as we did not have the scale to operate mail pharmacy
services efficiently. However, with our scale and recent growth in mail
service, we see a significant opportunity to profitably expand penetration of
our mail order business, which provides lower costs for our health plan
sponsors and convenience of home delivery to their members.

We plan to increase the percentage of the prescriptions filled by our mail
pharmacies by aggressively promoting our mail services to the members of our
health plan sponsors. We estimate that we manage more than 550 million pharmacy
claims on an annualized basis and of these less than 10% of the prescriptions
for these claims are filled by our mail pharmacies. We believe that our
primary competitors are filling a significantly greater proportion of their
members prescriptions through mail service.

Increase our core health plan sponsor customer base

The number of members served by our programs has increased from an
estimated 5.2 million at March 31, 1995 to more than 75 million at March 31,
2002. We plan to continue to grow our customer base by marketing our scale and
comprehensive service offerings to a broader range of health plan sponsors. We
believe that our increased size and ability to negotiate higher rebates and
discounts make us more attractive to our clients. Since the announcement of
the PCS transaction, we have entered into multi-year contracts with new clients
representing over 10 million lives. In addition, we have successfully renewed
all major customer contracts that have been bid since the PCS transaction.

Further develop web-based capabilities and pursue new technology initiatives

Our health plan sponsors are increasingly interested in the convenience of
technology-enabled, pharmacy-related products and services for their members.
We provide our clients with comprehensive web-based solutions, which include
web-enabled PBM functions, such as online refills and online prescription drug
history, web-based content and web site development services for health plan
sponsors. We plan to expand our current web-based product offerings, which
would include developing new initiatives to offer broader medical content to
health plan sponsors and to empower consumers by involving them more directly
in their medical care. We are also currently working with health plan sponsors
to develop web-enabled pharmacy services on their respective web sites for
members. For example, we offer health plan sponsors online access to plan
performance and other management reports and industry trend information as well
as the capability to exchange eligibility data online.

In response to client demand for their own e-health solutions, we provide
web development services for health plan sponsors and an e-health portal. We
develop e-health web portals for our clients by either co-branding our own
e-health portal or creating a completely customized private-label web site on
their behalf. We developed our own e-health portal, BuildingBetterHealth.com,
which provides consumers a comprehensive source of health, wellness and medical
information, including access to medical and drug encyclopedias, an extensive
medical library, medication guides, diet and nutritional resources, information
about diseases, pregnancy, child and elder care, current news articles about
health care developments and related content.

In addition, we intend to continue to explore and implement new
technologies to enable us to more effectively deliver our products and
services. For example, we are currently participating in pilot programs that
support the development of emerging technology solutions using handheld devices
that provide enhanced point-of-care prescribing capabilities to physicians.
These devices provide timely information, such as patient histories, formulary
checks and drug utilization reviews to physicians at the point-of-care to allow
for electronic transmittal of prescriptions. During fiscal year 2002, we
acquired the assets of iScribe to enhance our physician connectivity
capabilities. Further, we are a founding partner in a venture, RxHub, that
will develop an electronic exchange to enable physicians who use electronic
prescribing technology to link to pharmacies, PBMs and health plan sponsors
that their patients use. As a result, we expect improved formulary compliance,
better outcomes and lower costs for us and our health plan sponsors in the
future.

Continue to gain efficiencies from our acquisition of PCS

Through the acquisition of PCS, we have created significant cost saving
opportunities and increased negotiating leverage with pharmaceutical
manufacturers and retail pharmacies. We expect to continue to realize synergies
from the integration of PCS. The integration has already involved the
renegotiations of existing contracts with pharmaceutical manufacturers and
retail pharmacy chains and the consolidation of some operations to maximize the
efficiency of our combined infrastructure. Future synergy opportunities exist
in streamlining operations and developing additional efficiencies through our
scale.

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Pursue strategic acquisitions and alliances

We plan to continue our strategy of selectively pursuing acquisitions and
alliances that are consistent with our corporate mission. In particular, we
seek opportunities to:



| |  |  | increase the size of our core PBM business;                                                
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | expand our product offerings for health plan sponsors and pharmaceutical manufacturers; and
|
| |  |  | enhance our current health improvement programs.                                           

Recent Acquisitions and Joint Ventures

In December 2001, we purchased software code and other assets of iScribe
to expand our capabilities and expertise in the area of physician connectivity.
We believe that this acquisition supplements our efforts to develop mobile
electronic applications that deliver pharmacy benefit and prescribing
information to physicians and other healthcare team members at the point of
care. iScribes technology will enhance our communications with physicians
through wireless and online technology. As we develop this technology, we plan
to provide physicians hand-held and online access to formulary guidelines,
patient drug histories, drug interaction information and alternate therapy
choices. By providing physicians this information before a prescription is
written, patient care and service can be improved and we can reduce the costs
for health plans and lower copays for patients. Ultimately, we believe this
technology will allow physicians to transmit prescriptions to the patients
pharmacy through RxHub, our electronic exchange joint venture.

In August 2001, we acquired TheraCom, a specialty pharmacy provider based
in Bethesda, Maryland. TheraCom is a focused specialty pharmacy company that
provides customized services relating to complex and emerging biotechnology
therapies and the significant patient management needs associated with those
therapies. TheraCom has substantial experience providing distribution and
related services to the biotechnology industry, including product coverage
advocacy, insurance verification, reimbursement processing, pharmacist
counseling and intervention, clinical and dosage monitoring, adherence
counseling, nurse training and in-home nursing coordination. TheraCom also
provides Internet, direct marketing, advertising and product launch support
services. TheraCom is a licensed pharmacy offering nationwide dispensing
services, as well as a licensed wholesaler for distribution orders. We
maintained TheraCom and its employees at its present location. TheraCom
management, including founders Robert Dresing, chairman, and Mark Hansan,
president and chief executive officer, continue to direct its operations. The
TheraCom transaction was accounted for under purchase accounting rules.

In July 2001, we established a joint venture with Priority Healthcare
Corp., a national specialty pharmacy and distribution company located in Lake
Mary, Florida. This joint venture, operating under the name AdvancePriority
SpecialtyRx, provides our customers with comprehensive, quality specialty
pharmacy services. We have a 51% ownership share in the joint venture and
Priority Healthcare Corp. has a 49% interest. Priority Healthcare Corp. is a
national specialty pharmacy and distributor that provides biopharmaceuticals,
complex therapies and related disease treatment programs and services.

In January 2000, we acquired a 19% interest in CHI, an internet health
portal development company. Effective September 30, 2001 we acquired the
remaining equity interests of CHI. CHI is a San Francisco-based provider of
web-based marketing and operational solutions for managed care organizations.
CHIs flagship product, ConsumerDirect, is a private label e-health portal that
enables members and non-members of various health plans to access health
improvement information and services. CHI has built destination portals for
leading clients such as Blue Shield of California, Blue Cross Blue Shield of
Massachusetts and Blue Cross and Blue Shield of Minnesota.

Health Improvement Products and Services

PBM Services

We offer a broad range of data, mail and clinical services to our
customers through our PBM operations. We provide value by improving the level
of care and lowering the costs associated with a pharmacy benefit plan.

Data Services.Through our data services operations, we processed more
than 456 million prescription claims for health plan sponsors in fiscal year
2002. We also administer a network of approximately 60,000 retail pharmacies
that has agreed to provide prescription drugs to individual members of our
health plan sponsors at pre-negotiated prices. The retail pharmacies in our
network are linked to us through our online, real-time claims processing
systems that are designed to significantly reduce the cost of processing
prescriptions for those linked pharmacies. When a member of one of our health
plan sponsors

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presents a prescription or health plan identification card to a retail
pharmacist in our network, our online system provides the pharmacist with the
following information:



| |  |  | verification of whether the individual is eligible for benefits;                                                                                                                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the prescription benefits the individuals health plan has selected,
including whether the drug to be dispensed is included on the health
plans formulary and the individuals co-payment obligation;
|
| |  |  | the amount the pharmacy can expect to receive as payment for its
services; and                                                                                                                        
|
| |  |  | an alert message to warn the pharmacist of possible interactions,
including drug-drug, drug-food, drug-age and drug-pregnancy
interactions.                                                           

On behalf of health plan sponsors, we aggregate all pharmacy benefit claims on
a system-wide basis and facilitate payments to retail pharmacies.

Mail Services.We believe that our mail pharmacies reduce costs to health
plan sponsors through volume purchasing, generic dispensing and higher rebates
through greater formulary compliance. Mail service is ideal for maintenance
medications because of the convenience of home delivery and improved patient
compliance through methods such as refill reminders. Our mail pharmacies
currently dispense almost thirteen million prescriptions on an annualized
basis, typically in the form of a three-month supply of medications for chronic
conditions. Our mail service operations are highly automated, featuring bar
code and scanning technology to route and track orders, computerized dispensing
of many medications and computer-generated mailing labels and invoices. To
enhance accurate dispensing of prescriptions, our mail service system is
equipped with automated quality control features and a registered pharmacist
inspects each prescription.

Our mail pharmacy operations are located in Fort Worth, Texas and
Birmingham, Alabama. We have consolidated our Richardson, Texas mail pharmacy
operations into our larger facilities in Fort Worth, Texas and Birmingham,
Alabama. In April 2001, we announced plans to open a new mail service pharmacy
near Wilkes-Barre, Pennsylvania. This new state of the industry facility will
begin operation in mid-October 2002. It will be capable of processing 500,000
prescriptions per week when developed to full capacity.

While the majority of our mail service prescriptions are currently
submitted through the mail, we will continue to promote our web-based
capabilities to further reduce the costs associated with prescription refills.
For additional information on our web-based capabilities, see
 Web-based
Health Improvement Products and Services below.

Clinical and Other Services.Our clinical services professionals work
closely with health plan sponsors to design and administer pharmacy benefit
plans that, through the use of formularies and other techniques, promote
clinically appropriate drug usage while reducing drug costs. Our formulary
development process begins with a panel of independent physicians and
pharmacists who perform a clinical review of available drugs for inclusion in
the formulary based on safety and efficacy. After the clinical review has been
performed, we negotiate rebates and discounts with pharmaceutical manufacturers
to obtain the most cost effective formulary for our health plan sponsors.

We encourage formulary compliance through programs that operate at the
patient, prescribing physician and pharmacist levels. We help design tiered
co-payment plans, which require a health plan member to pay higher amounts for
non-preferred drugs. We attempt to influence physician prescribing patterns by
analyzing physicians prescribing behavior relative to physician peer groups
and notifying them when their practices differ from peer group norms and
medical best practices. We provide face-to-face consultations between our
clinical pharmacists and high-prescribing physicians in an effort to align
prescribing practices in targeted categories and diseases that are in the best
interests of health plan sponsors and members. We also provide our own
educational materials to physicians, pharmacists and health plan sponsors.
Through the retail pharmacies, we offer a voluntary therapeutic interchange
program that encourages pharmacists to consult with patients and physicians
regarding therapeutically equivalent, cost-effective drug alternatives. Our
programs support cost effective, clinically appropriate drug management and
help to ensure that members receive appropriate drug therapies.

In addition, we have developed consulting products and services to assist
health plan sponsors in designing programs that manage prescription drug costs
effectively while maintaining high physician and member satisfaction. Such
programs include restrictive formularies, three-tiered co-payments and prior
authorization features. We have developed a proprietary decision support system
that offers virtually unlimited querying capability of pharmacy, medical and
laboratory data, sophisticated outcomes analyses, detailed physician and
pharmacy provider profiling, utilization trending and formulary and rebate
analysis. This system allows health plan sponsors to study the effectiveness of
specific drugs, identify and address areas for improvement and develop new
programs.

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Specialty Pharmacy

On June 18, 2001 we announced the launch of our specialty pharmacy
business, AdvancePCS SpecialtyRx, to provide our clients with a single-sourced
solution to their complex and growing specialty pharmacy needs. We entered the
specialty pharmacy business to further our goal of improving overall health
care for patients using injectable and other expensive, high-technology drugs,
while controlling the costs incurred by medical plan sponsors to provide these
therapies. Specialty pharmacy services focus on pharmaceutical products that
generally are biotechnological in nature and are given by injection. These
services traditionally are used by small patient populations with chronic,
often complex diseases requiring challenging regimens and a high level of
clinical expertise. Costs for individual therapies average approximately
$18,000 annually, but can range up to $200,000 annually.

In forming this specialty pharmacy business we established a joint venture
with Priority Healthcare Corp. under the name AdvancePriority SpecialtyRx,
which provides our customers with comprehensive, quality specialty pharmacy
services. In addition, we provide customized services around complex and
emerging biotechnology therapies and the significant patient management needs
associated with those therapies through our wholly-owned subsidiary, TheraCom.
TheraCom has substantial experience providing distribution and related services
to the biotechnology industry, including product coverage advocacy, insurance
verification, reimbursement processing, pharmacist counseling and intervention,
clinical and dosage monitoring, adherence counseling, nurse training and
in-home nursing coordination. TheraCom also provides Internet, direct
marketing, advertising and product launch support services.

Consumer Card Services

According to the U.S. Census Bureau, in 1999 approximately 43 million
Americans had no health insurance coverage. We estimate that approximately 17
million more Americans do not have outpatient prescription drug coverage
included with their health insurance. Additionally, millions of Americans with
outpatient drug coverage have inadequate benefits. We provide services to make
prescription drugs more affordable for groups and individuals that have limited
or no prescription drug insurance coverage. Through our discount cash card
services, participants receive a discount on covered prescription drugs at the
point of sale, thereby reducing their prescription drug costs. We are able to
achieve our goal of providing prescription drugs to consumers at reduced prices
by negotiating rebates on prescription drugs from pharmaceutical manufacturers
and discounts from retail pharmacies based on our size and ability to influence
market share. In order to maximize the cost savings to participants, we also
provide messages to pharmacies participating in the programs to inform them of
clinically appropriate alternative drugs that may have a lower out-of-pocket
cost for the patient. In addition to cost savings, patients benefit by
participating in our drug program by allowing us to capture the patients drug
history and to identify and alert the dispensing pharmacist to any potential
drug interactions.

We currently have five discount cash card programs. Three of our programs
have more than 40,000 participating retail pharmacies nationwide and include a
mail service option to provide additional savings to participants. Currently,
we market our programs under MatureRx®, femScript® and AvidaRx, which
we acquired through our acquisition of FFI. We also provide private label
discount cash card programs for customers. MatureRx is designed to meet the
needs of senior citizens that are beneficiaries of Medicare, which does not
currently cover the cost of prescription drugs, by reducing their costs for
prescription drugs. FemScript is designed to help women obtain prescription
coverage for oral contraceptives and estrogen replacement therapies. AvidaRx
and the AdvancePCS private label discount cash card programs offer savings on
preferred products to participants. In addition, we launched the AdvancePCS
RxSavings Plan, which is a direct to consumer offering. The AdvancePCS private
label discount cash card program and the RxSavings Plan offer savings on a
broad range of products to participants through approximately 47,000
participating retail pharmacies nationwide.

Web-based Health Improvement Products and Services

We believe that our web-based offerings are the most comprehensive in the
industry. Through these offerings we intend to both increase member
satisfaction with our PBM services and enhance our operating efficiency. We
also aim to facilitate the member retention and growth goals of our health plan
sponsors by providing such plans with leading e-health web site development
services and access to our e-health portals.

PBM Services.Our online pharmacy services allow us to both reduce costs
and improve service. When visiting our web sites, members of our health plan
sponsors can place orders for prescriptions, check order status, locate network
pharmacies and review formulary information, which saves processing and
customer service costs. We believe a key differentiating characteristic of our
online PBM services is the ability of patients to access online a confidential
and complete history of all prescriptions dispensed to them. In addition, we
continue to work with our health plan sponsors to develop interfaces that
enable them to seamlessly link into our PBM services through their own web
sites. For example, we offer health plan

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sponsors online access to plan performance and other management reports
and industry trend information as well as the capability to exchange
eligibility data online.

Client Services.In response to client demand for their own e-health
solutions, we provide web development services for health plan sponsors, an
e-health portal and an online drugstore. We develop e-health web portals for
our clients through our wholly-owned subsidiary CHI by either co-branding our
own e-health portal or creating a completely customized private-label web site
on their behalf. CHI assisted us in the development of our corporate e-health
portal, BuildingBetterHealth.com,which provides consumers a comprehensive
source of health, wellness and medical information, including access to medical
and drug encyclopedias, an extensive medical library, medication guides, diet
and nutritional resources, information about diseases, pregnancy, child and
elder care, current news articles about health care developments and related
content. In addition, our online drugstore AdvanceRx.comoffers consumers the
further convenience of shopping for other drugstore products while filling
their prescriptions online or visiting BuildingBetterHealth.comor one of the
other web sites that we developed for health plan sponsors. AdvanceRx.com
offers over-the-counter products, health and beauty products, vitamins and
nutritional supplements, medical supplies and similar products, covering over
7,000 different SKUs.

Disease Management and Other Health Improvement Programs

Disease Management.We help health plan sponsors manage the cost and
treatment of specific chronic diseases by improving medical outcomes and
lowering the cost of health care delivery. Our programs are designed to support
the quality initiatives and fulfill the third party accreditation requirements,
such as those of the National Committee on Quality Assurance, of our health
plan sponsors. These programs monitor the contracted population and intervene
when individuals demonstrate symptoms of a specific disease or high risk
indications.

Our disease management programs are executed by a dedicated team of
clinicians and managed care professionals and typically have five principal
elements:



| |  |  | Data integration.We compile and analyze medical, laboratory,
pharmacy and other relevant data for a particular group of health plan
members.                                                                                                                                                                                                                                             
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Case finding.We identify patients from the group who have the
specific disease and stratify them for targeted interventions.                                                                                                                                                                                                                                                             
|
| |  |  | Treatment assessment.We compare treatment received by identified
patients with nationally accepted treatment guidelines. We also assess
physician knowledge of clinical guidelines for targeted interventions.                                                                                                                                                                           
|
| |  |  | Targeted interventions.We intervene with identified patients by
educating them about their disease and providing self-management tools.
We also provide physicians with treatment guidelines, patient profiles
and patient management tools. Finally nurse outreach and case management
intervention programs are applied to the more challenging care
coordination and monitoring cases.
|
| |  |  | Outcomes analysis.We measure the results of the intervention by
tracking the identified patients medical outcomes and monitoring
ongoing compliance with their treatment programs.                                                                                                                                                                                                      

We have designed disease management programs for cardiovascular secondary
risk reduction, asthma, diabetes, heart failure, depression and hypertension.
We have approximately 16 million eligible members who are enrolled in health
plans currently under contract for one or more of our programs. We believe our
disease management programs are supported by our ability to assess quality of
life, quality of care and overall satisfaction with the disease management
programs. We also assess the economic benefit of the programs to our health
plan sponsors.

The Company has established the Centers for Health Improvement. Beginning
in fiscal year 2001, we packaged our disease management programs into
population-based initiatives. These six Centers target a specific population
and focus on data analysis, survey research, and behavior change models, to
create a 4 step process whereby our clients may learn more about the particular
challenges and barriers to change these populations may exhibit in being helped
and empowered to make the correct healthcare and drug therapy choices, both
from a quality and cost standpoint. Patient education, therapy compliance, and
empowered interaction with their caregivers are key components of these
intervention strategies. From these research activities, the AdvancePCS
Clinical Division has taken a leadership position in developing new and
measurable health improvement capabilities and products. Examples of our
Centers:

The Center for Work and Health.Our Center for Work and Health focuses
specifically on employer group clients and the impact that illnesses have on
losses in productive hours of work. In this regard, the Center for Work and
Health views health care dollars as an investment in human capital that needs
to be effectively managed to improve the quality of life of

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employees and to reduce lost productive hours and absenteeism due to
illness. The Center for Work and Health focuses on health problems that both
have a substantial impact on productivity and can be improved, such as
arthritis pain, back pain, musculoskeletal pain, depression, diabetes,
gastrointestinal disorders, allergic rhinitis, migraines and numerous other
conditions. Many of these conditions are common in working populations and are
under-diagnosed, not adequately managed and under-treated. Strategies that
facilitate effective care are likely to improve outcomes and, as a result,
reduce lost hours of productivity. We believe these results are particularly
valuable to our employer group clients, who are responsible for the cost of
medical care and benefit economically from a reduction in lost productivity.

The Center for Healthier Aging and Patient Safety.Our Center for
Healthier Aging and Patient Safety encourages better health for elderly and the
chronically ill through preventative and interventional programs designed to
promote the appropriate use of pharmacy therapy and reduce overall health care
costs for these patients. Through focused data analysis, we work to assure that
medications provide their intended advantages with minimal unintended adverse
effects. We also work with pharmaceutical manufacturers to evaluate appropriate
medications and medication information for elderly patients and their
physicians. As a result, we believe that our emphasis on effective care for the
elderly will increase our visibility in the marketplace and position us to take
advantage of any future Medicare drug benefit opportunities.

The other population focused Centers are Center for School and Health
(school aged patients), Center for Womens Health (women), Center for Priority
Populations (Medicaid) and Center for Specialty Care (persons with rare or very
complicated disease states).

Outcomes studies

We provide pharmaceutical manufacturers an established vehicle for
conducting studies that can document a drugs economic and clinical benefits in
a real world environment. In addition, our surveying capabilities permit us to
evaluate the effectiveness of disease management strategies. We perform outcome
studies on a broad range of conditions including chronic pain, dementia, asthma
and diabetes.

Our outcomes studies services include conducting studies to further the
understanding of the characteristics of diseases and to develop simple to use
tools, such as questionnaires and decision trees, for diagnosing diseases. In
addition, we develop measurements for monitoring patient medical outcomes and
determine how to best influence the health status of individuals. We also
evaluate the direct and indirect costs of health care, as well as conduct
surveys to evaluate physician knowledge and behavior in order to develop
individualized educational materials for each physician.

Clinical trials

Through our clinical research operations, we assist pharmaceutical
manufacturers in conducting clinical trials for both new drugs and new uses for
existing drugs. Our current clinical trial initiatives are focused on
Alzheimers disease and other neurological disorders, psychological conditions
and pain relief. We provide key functions in the clinical trials process,
including:



| |  |  | recruiting patients and physicians to participate in trials;                 
| | - |  | -----------------------------------------------------------------------------
|
| |  |  | administering the trials as designed by the pharmaceutical manufacturers; and
|
| |  |  | measuring the patients results.                                             

The large size and breadth of our PBM population enhances our clinical
trial recruitment and execution capabilities. Our patient enrollment methods
are designed to reduce drug development time, which permits sponsors of
clinical trials to introduce their products into the market faster and to
maximize the economic return for such products. We use a call center and
medically appropriate surveys to identify patients eligible to participate in
our clinical trials. We believe that the combination of our clinical trials
expertise with the largest PBM membership base allows us to more thoroughly and
accurately evaluate the clinical benefits and predict the impact of new
pharmaceutical products and services on health care expenditures and patient
care management.

Clients

We generate a significant portion of our revenues from contracts with
health plan sponsors. Blue Cross and Blue Shield Association Federal Employee
Program (FEP) accounted for 11% and 13% of the Companys revenues for the
years ended March 31, 2001 and 2002, respectively. Health Net, formerly
Foundation Health Systems (FHS), accounted for 41% and 14% of the Companys
revenues for the years ended March 31, 2000 and 2001, respectively. Health Net
accounted for less than 10% of the Companys revenues in fiscal year 2002.
Government contracts, including state and federal, represented

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approximately 19% of our client base in fiscal year 2002. No other
customer accounted for over 10% of the Companys revenues in fiscal years 2000,
2001, or 2002.

Historically, we have had strong client relationships with BlueCross
BlueShield companies and other managed care organizations. We have also focused
on and developed expertise in serving self-insured employers, insurance
carriers and government plans. We now have a diverse client base and
substantial market penetration among all major target client groups.

Sales, Marketing and Service

As of March 31, 2002, we had a staff of more than 700 sales and support
people. Our sales force is supplemented by client service representatives in
more than 30 offices throughout the United States. As part of our strategy to
expand our client base, we have reorganized our sales force into teams focused
on each client segment. Through this reorganization, our sales force is able to
focus on the specific characteristics and needs of our current and prospective
clients in each segment.

The sales process for health plan sponsors usually lasts a minimum of six
to nine months and sometimes can extend for a year or longer. Often, we
initiate the sales process with potential clients at our most senior levels. A
staff of sales representatives uses a team approach to work with a number of
senior level individuals within a health plan sponsor. In this manner, we are
able to work with health plan sponsors at multiple levels within their
organizations and our health plan sponsors have multiple contacts within our
organization.

Once we have contracted with a health plan sponsor for our services, we
commit to provide it with the highest level of support. For example, our
benefits design group works with our health plan sponsors to design the
pharmacy benefits that they will provide to the individuals in their plans.
Each client is supported by a multi-functional team led by a senior-level
account manager who coordinates with designated resources across our company.
The account management teams are organized by market segment to enhance their
understanding of the needs and complexities of our clients.

In addition, we commit to our health plan sponsors that the individuals
enrolled in their plans will receive high quality member service. To fulfill
this promise, we manage three advanced call centers staffed with over 1,200
member service representatives who are available to answer incoming calls 24
hours a day, seven days a week. In order to service our growing customer base,
we are expanding into a fourth call center which will give us coverage in all
four time zones in the continental United States. For the year ended March
31, 2002, our call centers received approximately 316,000 calls per week, on
average.

Suppliers

On April 1, 2001, we entered into a three-year agreement with a wholesale
distributor, Amerisource Bergen, to be our primary supplier of pharmaceuticals
to our mail pharmacies. We believe our supplier arrangements are more than
adequate and we maintain strong relationships with back-up wholesalers and
suppliers. In addition, we believe alternative suppliers can be utilized
without any disruptions. If a drug is not in our inventory, we can generally
obtain it from either a primary or secondary supplier within one or two
business days. We believe it would be relatively easy to switch from one
supplier to another. Other than with respect to our mail pharmacies, we do not
purchase products for retail pharmacies or otherwise supply products to them.
Retail pharmacies typically have their own arrangements with wholesale
distributors or pharmaceutical manufacturers.

Information Systems

Information technology systems are a critical part of our business. We
maintain a number of separate, proprietary systems that are designed to
efficiently support our specific departments, yet are compatible for electronic
data interchange. Our information technology systems are highly scalable and
run on a variety of platforms. We have an experienced systems staff of more
than 900 employees. We maintain extensive preventative measures to protect
against disaster, including redundancy in all aspects of processing,
telecommunications and power sources.

As part of our integration efforts with PCS, we moved our Richardson,
Texas data center into our Scottsdale, Arizona data center. Although we
combined physical locations, we are continuing to maintain our separate data
processing platforms in order to avoid client disruptions associated with
conversion. The Scottsdale, Arizona data center has received ISO 9002
certification from the International Organization for Standardization, the
worlds foremost quality standards organization, and has also received an
exceptional audit grade from registrars with the professional services firm,
Deloitte & Touche LLP.

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Competition

We compete with a number of national companies, including Merck-Medco
Managed Care, LLC, or Medco, a subsidiary of Merck & Co., Inc., or Merck, a
pharmaceutical manufacturer, Express Scripts, Inc. and Caremark Rx, Inc. On
January 29, 2002, Merck announced plans to establish Medco as a separate,
publicly traded company; and on April 17, 2002, Merck filed on Form S-1 to
register shares of Medcos common stock in a proposed underwritten public
offering. In addition, we compete with a number of local and regional PBMs and
mail order pharmacies, some of which may be owned by health plans or retail
pharmacy chains. These competitors may possess purchasing and other advantages
over us that could allow them to price competing services more aggressively
than we can because of their market position, affiliations and other aspects of
their businesses.

We believe that the primary competitive factors in the PBM industry
include:



| |  |  | the size and financial strength of the company;                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | independence from pharmaceutical manufacturers, retail pharmacies and health plan sponsors;                                             
|
| |  |  | the ability to reduce health plan sponsor costs by negotiating
favorable rebates and volume discounts from pharmaceutical
manufacturers;
|
| |  |  | the quality, scope and costs of programs offered; and                                                                                   
|
| |  |  | the ability to use clinical strategies to improve patient outcomes and reduce costs.                                                    

Government Regulation

Various aspects of our business are governed by federal and state laws and
regulations and compliance is a significant operational requirement for us. We
believe that we are in substantial compliance with all existing legal
requirements material to the operation of our business. However, the
application of complex standards to the detailed operation of our business
always creates areas of uncertainty. Numerous health care laws and regulations
have been proposed at the state and federal level, many of which could affect
our business. We cannot predict what additional federal or state legislation or
regulatory initiatives may be enacted in the future regarding health care or
the business of PBMs, or how existing laws may be interpreted. It is possible
that federal or state governments might impose additional restrictions or adopt
interpretations of existing laws that could have a material adverse affect on
our business, profitability or growth prospects.

Among the federal and state laws and regulations that affect aspects of
the PBM business are the following:

Regulation of Confidentiality of Patient Identifiable Information.
Government regulation of the use of patient identifiable information has grown
substantially over the past several years and is likely to increase further in
the future. Many states have recently enacted laws dealing with the use and
disclosure of health information, and this is expected to be an area of
significant activity in many states this year again. The proposals vary widely,
some relating to only certain types of information, others to only certain uses
and yet others to only certain types of entities. Texas, California and New
York are some of the larger states that focused on health information privacy
this year. Numerous proposals have been circulated at the state and federal
level and there is no assurance that these proposals, if adopted, will not have
a material adverse effect on our business, profitability and growth prospects.
The programs that we offer our health plan customers are information-based,
utilizing aggregated and anonymous data, as well as patient-specific
information, depending upon the needs of the customer. Further government
restrictions on the use of patient identifiable information could adversely
affect our ability to promote formulary compliance and to conduct health
improvement programs and outcomes studies, as well as our business growth
strategy based on these programs.

In the absence of comprehensive federal privacy legislation, in December
2000, the Department of Health and Human Services, or HHS, issued final
regulations regarding the privacy of individually identifiable health
information pursuant to the Health Insurance Portability and Accountability Act
of 1996, or HIPAA. This final privacy rule applies to both electronic and paper
records and imposes extensive requirements on the way in which cover entities,
health care providers, health plans, and health care information clearinghouses
and their business associates use and disclose protected information. This
final rule gives patients significant rights to understand and control how
their protected health information is used and disclosed. Direct providers,
such as pharmacies, are required to obtain patient consents for treatment,
payment and health care operations. For all uses or disclosures of protected
information that do not involve treatment, payment or health care operations,
the rule requires all covered entities to obtain a valid patient authorization,
which is more demanding than consent. In most cases, use or disclosure of
protected health information must be limited to the minimum amount necessary to
achieve the purpose of the use or disclosure. In March 2002, HHS published a
Notice of Proposed Rule Making that, if adopted, would change certain

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requirements and affect current implementation strategies already
underway. The compliance date for the final privacy rule is April 14, 2003.
Sanctions for failing to comply with standards issued pursuant to HIPAA include
criminal penalties and civil sanctions. Additional guidelines on the
application of the final privacy rule are expected to be released in the near
future and these could impact the manner in which we use or disclose protected
health information.

HHS also published in 2000 a final rule on transaction standards and code
sets, which establishes requirements for the use of particular standard formats
for reporting health care claims to payors. Ultimately, public and private
payors will refuse to accept claims that do not utilize these formats. The
health care industry will need to adapt to these new standards. Compliance will
add to our regulatory burden.

In addition, in August 1998, HHS issued proposed regulations pursuant to
HIPAA that govern the security of individually-identifiable health information.
A final security rule has not yet been published but, once issued, it is likely
to impose additional administrative burdens on health care providers, health
plans and their business associates, relating to the storage, utilization and
transmission of health information.

Due to the complex and controversial nature of the HIPAA regulations, they
may be subject to court challenge, as well as further legislative and
regulatory actions that could alter their effect. However, as currently
written, they will likely increase our burden of regulatory compliance with
respect to our health improvement programs and other information-based products
and may reduce the amount of information we may use if patients do not consent
to its use. There can be no assurance that the restrictions and duties imposed
will not have a material adverse effect on our business, profitability or
growth prospects.

Even without new legislation and beyond the final federal HIPAA
regulations, individual health plan sponsors could prohibit us from including
their patients medical information in our various databases of medical data.
They could also prohibit us from offering services that involve the compilation
of such information.

Anti-Kickback Laws.Subject to certain exceptions, federal law prohibits
the payment, offer, receipt or solicitation of any remuneration that is
knowingly and willfully intended to induce the referral of Medicare, Medicaid
or other federal health care program beneficiaries for the purchase, lease,
ordering or recommendation of the purchase, lease or ordering of items or
services reimbursable under federal health care programs. Several states also
have similar laws, known as all payor statutes, which apply anti-kickback
prohibitions beyond services for which federal health care program payments may
be made. Sanctions for violating these federal and state anti-kickback laws may
include criminal and civil sanctions and exclusion from participation in
federal health care programs. State anti-kickback laws vary and have rarely
been interpreted by courts. However, in several cases, courts have ruled that
contracts that violate anti-kickback laws are void as a matter of public
policy.

The federal anti-kickback statute has been interpreted broadly by courts,
by the Office of Inspector General, or OIG and within administrative tribunals.
Courts have ruled that a violation of the statute may occur even if only one of
the purposes of a payment arrangement is to induce patient referrals or
purchases. Among the practices that have been identified by the OIG as
potentially improper under the statute are product conversion programs in
which benefits are given by pharmaceutical manufacturers to pharmacists or
physicians for changing a prescription, or recommending or requesting such a
change, from one drug to another. These laws have been cited as a partial
basis, along with the state consumer protection laws discussed below, for
investigations and multi-state settlements relating to financial incentives
provided by pharmaceutical manufacturers to physicians or pharmacists in
connection with such programs.

Because of the federal statutes broad scope, federal regulations
establish some safe harbors from liability. Safe harbors exist for, among
other things, certain properly reported discounts received from vendors,
certain investment interests, certain properly disclosed payments made by
vendors to group purchasing organizations and certain managed care risk-sharing
arrangements. A practice that does not fall within a safe harbor is not
necessarily unlawful, but may be subject to scrutiny and challenge.

We believe that we are in compliance with the legal requirements imposed
by these laws and regulations and we believe that there are material
differences between the drug-switching programs about which the OIG has raised
concerns and the programs we offer to our customers. To date, the government
has not, to our knowledge, commenced enforcement actions under the
anti-kickback statutes against PBMs with regard to their negotiation of
discounts, rebates and administrative fees from drug manufacturers in
connection with drug purchasing and formulary management programs, or their
contractual agreements with pharmacies that participate in their networks, or
their relationships with their health plan customers. However, in June of 2000,
MIM Corporation, a PBM, settled a lawsuit with the federal government and the
State of Tennessee asserting that it had defrauded the Tennessee Medicaid
program in managing its prescription drug benefit by making false claims and
diverting payments.

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In June 1998, the United States Attorneys Office for the Eastern District
of Pennsylvania began a civil investigation into whether rebates and other
payments made by pharmaceutical manufacturers to PBMs, or payments made by PBMs
to retail pharmacies or others, may violate the anti-kickback laws or other
federal laws. To date, no specific prosecutions or settlements have been made
public. As part of this investigation, in November of 1999, prior to our
acquisition of PCS, PCS received a subpoena from the OIG requesting records and
data about PCSs programs. In May 2001, AdvancePCS turned over documents
responsive to the subpoena. There is litigation pending in the Eastern District
of Pennsylvania regarding further enforcement of the subpoena and other matters
relating to the propriety of the United States Governments investigation. It
is impossible to predict the outcome.

The United States Attorneys Office has also contacted some of the
pharmaceutical manufacturers with which we have agreements and has asked these
manufacturers to provide copies of documents relating to their agreements with
us. We believe subpoenas have been issued to other PBMs and pharmaceutical
manufacturers as well. At this time, we are unable to predict whether the
government will commence any action challenging any of our programs and
practices. We believe that our programs and those programs of PCS prior to the
acquisition are in compliance with the requirements imposed by the
anti-kickback laws and other applicable laws and regulations. Nevertheless, we
could be subject to scrutiny, investigation or challenge under these laws and
regulations as a result of the OIG investigation or otherwise, which could have
a material adverse effect on our business, profitability and growth prospects.
For more information regarding the OIG investigation, see  Legal Proceedings
and Government Investigations below.

OIG Study.The OIG Office of Evaluation and Inspections, which seeks to
improve the effectiveness and efficiency of the HHSs programs, issued a report
on PBM arrangements on April 15, 1997. The report was based primarily on a
nationwide survey of HMOs that use PBMs and examined the benefits of and
concerns raised by, the HMOs relationships with PBMs.

The report identified concerns about the potential for bias resulting from
alliances of PBMs and pharmaceutical manufacturers and the lack of oversight by
HMOs regarding the performance of PBMs in delivering quality services to health
plan members. The report recommended that CMS and state Medicaid programs
should include stronger oversight provisions in their risk contracts with HMOs
by requiring HMOs to review the performance of the PBMs with which they
contract. The report also recommended that CMS the FDA and the Health Resources
and Services Administration, working with outside organizations, should develop
quality measures for pharmacy practices that can be used in managed care
settings. We intend to closely monitor these agency actions and whether these
actions would have any impact on our business.

ERISA Regulation.We have agreements to provide PBM services to a number
of self-funded corporate health plans. These plans are subject to the Employee
Retirement Income Security Act of 1974, or ERISA, which regulates employee
pension and health and welfare benefit plans. We believe that our activities
are sufficiently limited that we do not assume any of the plan fiduciary
responsibilities that would subject us to regulation under ERISA. Our
agreements with our self-funded corporate plan customers state that we are not
the fiduciary of the plan. However, the U.S. Department of Labor, which is the
agency that enforces ERISA, could assert that the fiduciary obligations imposed
by the statute apply to certain aspects of our operations. In past decisions,
the United States Supreme Court and other federal courts have generally
declined to extend fiduciary status to managed care organizations that contract
with ERISA plans. However, future cases involving PBMs could be decided
differently and if we were deemed to be a fiduciary, we could potentially be
subject to claims over benefit denials. In addition, we could also be subject
to claims for breaching fiduciary duties in connection with the services we
provide to the plan.

AdvancePCS was served with a purported private class action lawsuit filed
in the United States District Court in Arizona on or about December 17, 2001.
The lawsuit alleges that AdvancePCS acts as a fiduciary, as that term is
defined in ERISA and that AdvancePCS has breached certain fiduciary obligations
under ERISA. AdvancePCS believes that it does not act as an ERISA fiduciary or
assume the ERISA fiduciary responsibilities as alleged in the complaint.
AdvancePCS believes that its business practices are in compliance with ERISA.
AdvancePCS believes that it does not assume any of the plan fiduciary
responsibilities that would subject it to regulations under ERISA. AdvancePCS
has denied all allegations of wrongdoing and is vigorously defending this suit.
For more information regarding this action, see Legal Proceedings and
Government Investigations below.

In March 1998, Mulder v. PCS Health Systems, Inc.was filed as an alleged
class action lawsuit, contending that we are an ERISA fiduciary and that we
have breached our fiduciary obligations under ERISA in connection with our
development and implementation of formularies, preferred drug listings and
intervention programs. We have denied all allegations of wrongdoing and are
vigorously defending this lawsuit. For information regarding this action, see
 Legal Proceedings and Government Investigations below.

ERISA prohibits a party in interest to a plan from engaging in certain
types of transactions with the plan, including purchases, sales and loans, in
the absence of an available exemption. Violations are subject to civil and
possibly criminal liability. By providing services to these plans, we are
subject to the restrictions on a party in interest. We believe that we are in
compliance with these provisions of ERISA. However, we can provide no assurance
that the government would not challenge our practices.

FDA Regulation.The U.S. Food and Drug Administration, or FDA, generally
has authority under the Federal Food, Drug and Cosmetic Act, or FDCA, to
regulate drug promotional materials that are disseminated by or on behalf of
a pharmaceutical manufacturer. In January 1998, the FDA issued a Draft Guidance
for Industry regarding the regulation of

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activities of pharmacy benefit managers that are directly or indirectly
controlled by pharmaceutical manufacturers. In that draft guidance, the FDA
purported to have the authority to hold pharmaceutical manufacturers
responsible for the promotional activities of PBMs, depending upon the nature
and extent of the relationship between the pharmaceutical manufacturer and the
PBM. We and many other companies and associations commented to the FDA in
writing regarding its authority to regulate the communications of PBMs that are
not owned by pharmaceutical manufacturers. In the fall of 1998, the FDA
withdrew the guidance and stated that it would reconsider the basis for its
issuance. To date, the FDA has not taken any further action on the issue.
Although it appears that the FDA has changed its position regarding regulation
of communications by PBMs, there is no assurance that it will not re-examine
the issue and seek to assert the authority to regulate the communications of
such PBMs.

The FDA also regulates the conduct of clinical trials for drugs. In
general, the sponsor of the drug product that is being studied, or the
manufacturer that will have the right to market the drug product if it is
approved by the FDA, has the responsibility to comply with the laws and
regulations that apply to the conduct of the clinical trials. However, in
providing services related to the conduct of clinical trials, we may assume
some or all of the sponsors or clinical investigators obligations related to
the study of the drug. In October 1998, the FDA announced that the agency would
give Institutional Review Boards, or IRBs, the independent bodies that oversee
the conduct of clinical investigations, increased access to information
pointing to violative or potentially violative conduct on the part of the
physicians conducting the clinical trials, or clinical investigators.
Recently, public concern over the conduct of clinical trials for drugs has
grown and scrutiny of the authority and the role of IRBs, as well as the
oversight of clinical trials for drugs has increased. New regulations or
standards may be enacted that would increase the regulatory compliance burden
on those involved in clinical investigations.

We believe that we meet our regulatory responsibilities with regard to our
involvement in clinical trials. However, the interpretation of the laws and
regulations relating to the conduct of clinical trials is complex and sometimes
subjective. We cannot assure you that the FDA will not at some point consider
our compliance efforts to be inadequate and initiate administrative enforcement
actions against us. If we fail to successfully defend against an administrative
enforcement action, it could result in an administrative order suspending,
restricting or eliminating our ability to participate in the clinical trial
process, which would materially limit our business operations. Moreover, some
violations of the FDCA are punishable by civil and criminal penalties against
both the violating company and responsible individuals. If warranted by the
facts, we and our employees involved in the trials could face civil and
criminal penalties, which include fines and imprisonment.

Managed Care Reform.Legislation is being debated on both the federal and
state level and has been enacted in several states, aimed primarily at
improving the quality of care provided to individuals enrolled in managed care
plans. Some of these initiatives would, among other things, require that health
plan members have greater access to drugs not included on a plans formulary,
give health plan members the right to sue their health plans for malpractice
when they have been denied care and mandate the content of the appeals or
grievance process when a health plan member is denied coverage. The scope of
the managed care reform proposals under consideration by Congress and state
legislatures, and enacted by states, to date vary greatly, and the extent to
which future legislation may be enacted is uncertain. However, these
initiatives could greatly impact the managed care and pharmaceutical industries
and, therefore, could have a material impact on our business.

Direct Regulation of PBMs.Several states, including Georgia, New Jersey
and New York, have introduced legislation that would directly regulate PBMs,
but to our knowledge, no state has passed such legislation. Several regulatory
and quasi-regulatory bodies, such as the National Association of Insurance
Commissioners, the National Association of Boards of Pharmacy and the National
Committee on Quality Assurance, have considered or are considering proposals to
regulate PBMs and proposals to increase the regulation of certain PBM
activities, such as formulary and utilization management and downstream risk
assumption. As discussed below under - Licensure Laws, state licensure of
certain activities, such as utilization review and third party administration,
also may adversely impact our business and operations. While the outcome of
these initiatives is uncertain, any resulting legislation could significantly
impact our business, both directly as a PBM and indirectly through the impact
on the pharmacy benefit services we are able to deliver on behalf of our health
plan sponsors.

Consumer Protection Laws.Most states have consumer protection laws,
which have been the basis for investigations and multi-state settlements
relating to financial incentives provided by pharmaceutical manufacturers to
retail pharmacies in connection with drug switching programs. In addition,
under a settlement agreement entered into with 17 states on October 25, 1995,
Medco agreed to require pharmacists affiliated with Medco mail service
pharmacies to disclose to physicians and patients the financial relationships
between Merck, Medco and the mail service pharmacy when such pharmacists
contact physicians seeking to change a prescription from one drug to another.
We believe that our contractual relationships with pharmaceutical manufacturers
and retail pharmacies do not include the features that were viewed by
enforcement authorities as problematic in these settlement agreements and that
our business practices are otherwise compliant with consumer protection laws.
However, we could be subject to scrutiny or challenge under one or more of
these laws. Additionally, most states have enacted consumer protection laws
relating to a wide range of managed health care activities, including provider
contracting, member appeals and access to services and supplies.

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Network Access Legislation.A significant number of states have adopted
some form of legislation affecting our ability to manage our retail pharmacy
provider networks or from to remove pharmacies from a network. These laws may
require us, directly or through our health plan customers, to admit any retail
pharmacy willing to meet the plans price and other terms for network
participation; these laws are sometimes referred to as any willing provider
or freedom of choice laws. To date, we have not been materially affected by
these statutes because we administer a large network of approximately 60,000
retail pharmacies and will admit any licensed pharmacy that meets our
credentialing criteria, involving such matters as adequate insurance coverage,
minimum hours of operation and the absence of disciplinary actions by the
relevant state agencies.

Formulary Restrictions.A number of states have begun to actively
regulate the management of prescription drug benefits. Texas, California, New
York and New Jersey have taken the lead proposing legislation on a wide range
of issues affecting the delivery of pharmacy benefits. Many other states have
followed, although they often focus on particular aspects, such as the
development and use of formularies or pharmacy network issues. For example,
some states have passed laws mandating coverage for off-label uses of drug
products, such as the off-label uses of chemotherapeutic agents where those
uses are recognized in peer-reviewed medical journals or reference compendia.
Other states have begun to enact laws that regulate the development and use of
formularies by insurers, HMOs and other third party payors. These laws have
included requirements on the development, review and updating of formularies,
the role and composition of pharmacy and therapeutics committees, the
disclosure of formulary information to health plan members and a process for
allowing members to obtain non-preferred drugs without additional cost-sharing
where they are medically necessary and the formulary drugs are determined to be
inappropriate. Additionally, the National Association of Insurance
Commissioners is developing a model law on drug formularies, currently known as
the Health Carrier Prescription Benefit Management Model Act, that, if
ultimately enacted throughout the country, may provide more uniformity for
health plans and PBMs. Among other things, the model law would address the
disclosure of formulary information to health plan members, members access to
non-preferred drugs and availability of an appeals process for members to use
when coverage of a non-preferred drug is denied by the health plan or its
designee. Increasing regulation of formularies by states could significantly
affect our ability to develop and administer formularies on behalf of our
insurer, HMO and other health plan customers.

Legislation Imposing Plan Design Restrictions.Some states have
legislation that prohibits a health plan sponsor from implementing certain
restrictive design features. For example, some states prohibit insurers, HMOs
and other health plans from requiring members to use mail pharmacies. Other
restrictions affect the ability to make formulary changes and restrictions.
Other states mandate coverage of certain benefits or conditions. This
legislation does not generally apply to us, but it may apply to some of our
customers such as HMOs and insurers. If similar legislation were to become
widespread and broad in scope, it could have the effect of limiting the ability
of PBMs to achieve economic benefits through health benefit management
services.

Licensure Laws.Many states have licensure or registration laws governing
certain types of ancillary health care organizations, including preferred
provider organizations, third party administrators and companies that provide
utilization review and related services. The scope of these laws differs
significantly from state to state and the application of these laws to the
activities of pharmacy benefit managers is often unclear. We have registered
under these laws in those states in which we have concluded, after discussion
with the appropriate state agency, that such registration is required.
Moreover, we have structured our operations and procedures to comply with the
regulatory standards for these regulated entities, where appropriate. As noted
above under Direct Regulation of PBMs, some states have introduced
legislation that, if enacted, would subject PBMs to comprehensive regulation.
Such enactments could adversely affect our business and operations.

Legislation and Regulation Affecting Drug Prices.The federal Medicaid
rebate statute provides that manufacturers must provide rebates to the program
on all drugs purchased equivalent to the difference between the average price
of the drugs and the best price at which the manufacturer sells the drugs to
wholesalers. In addition, under the Federal Supply Schedule, the government
seeks and obtains favorable pricing based on manufacturers commercial prices
and sales practices. Some manufacturers may see these policies as a
disincentive to offering discounts to private purchasers, including the plans
represented by AdvancePCS. Some states have adopted legislation or regulations
providing that a pharmacy participating in the states Medicaid program must
give program patients the best price that the pharmacy makes available to any
third party plan. These requirements are sometimes referred to as most favored
nation payment systems. Other states have enacted unitary pricing
legislation, which mandates that all wholesale purchasers of drugs within the
state be given access to the same discounts and incentives. Any such
legislation, if enacted in any state, may adversely affect our ability to
negotiate discounts from network pharmacies or manufacturers. Some
manufacturers may view these Medicaid rebate provisions as a disincentive to
provide discounts, which could adversely affect our ability to control costs.

A number of states also have bills pending for broad drug price controls
that would extend price controls beyond the Medicaid program. Many of these
bills impose maximum drug prices based on the Federal Supply Schedule and
require that manufacturers and/or pharmacies extend this pricing to one or more
segments of the states population, such as to all Medicare beneficiaries. If
enacted, these bills could adversely affect our mail order pharmacys
reimbursement rates, or

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otherwise discourage the use of the full range of our services by current
or future clients. A number of states have begun to seek supplemental rebates
from drug manufacturers, beyond those required by the federal Medicaid statute.
Some of those states may utilize the services of PBMs to negotiate and
administer these supplemental rebate programs.

In 2000, Congress passed the Medicine Equity and Drug Safety Act of 2000,
directing the FDA to promulgate regulations allowing pharmacists and drug
wholesalers to reimport approved drugs, originally manufactured in the United
States, back into the United States from other countries where the drugs were
sold at a lower price. The purpose of the law was to enable United States
citizens to purchase drugs at prices comparable to lower prices charged for
such medicines in other countries. In December 2000, the Secretary of HHS
notified President Clinton that HHS would not seek the necessary funding to
implement the law, since she believed it was too flawed as written to be
effective. The Secretary of HHS in the Bush Administration has put his review
of this policy on hold. New legislative proposals to permit reimportation have
been introduced in Congress this year. Whether and how such a policy will
ultimately be implemented through law or regulations is unclear. It may offer
PBMs opportunities to reduce costs, but faces substantial opposition from the
prescription drug industry. The ultimate effect of the legislation on our
business is not known at this point.

Recently, the federal and state governments have increased their attention
to how drug manufacturers develop pricing information, which in turn is used in
setting payments under the Medicare and Medicaid programs. One element common
to many payment formulas, Average Wholesale Price, or AWP, has come under
criticism as not accurately reflecting prices actually charged and paid at the
wholesale or retail level. The Department of Justice is currently conducting
and the House Commerce Committee has conducted, an investigation into the use
of AWP for federal program reimbursement and whether it has inflated drug
expenditures by the Medicare and Medicaid programs. In addition, the Clinton
administration, along with many states, proposed changing the basis for
calculating reimbursement of certain drugs by the Medicare and Medicaid
programs. Instead of using AWP as historically reported by First DataBank, a
company that specializes in the compilation of drug pricing information, the
federal and state governments proposed to use a different set of pricing data,
also compiled by First DataBank, which generally yielded lower prices for
certain drugs. As part of the 2000 Consolidated Appropriations Act, P.L.
106-554, however, Congress enjoined reductions in Medicare drugs reimbursed
based on the revised data pending a study by the General Accounting Office and
the CMS has suspended the implementation of this data with respect to Medicare
pending this study.

The GAO released its AWP report in September 2001, which found that
physicians and suppliers can obtain Medicare-covered drugs at prices
significantly below current Medicare payments. Likewise, wholesaler and group
purchasing organization prices generally available to physicians were
considerably less than the AWPs used to establish Medicare payment levels. The
GAO recommended that CMS take steps to begin reimbursing providers for Part
B-covered drugs and related services at levels reflecting providers
acquisition costs, using information about actual market transaction prices.
Moreover, the GAO recommended that CMS evaluate expanding competitive bidding
for drugs covered under Part B.

In March 2002, the Senate Finance Committee held a hearing on Medicare
outpatient drug pricing, at which the HHS OIG noted that its studies have
consistently found that Medicare pays too much for prescription drugs. The CMS
Administrator announced his intention to take action to reform Medicare drug
pricing. Some members of Congress have also expressed an interest in reforming
the Medicare reimbursement formula as part of a future Medicare prescription
drug benefit legislation.

These changes and other legislative or regulatory adjustments that may be
made to the program for reimbursement of drugs by Medicare and Medicaid, if
implemented, could significantly affect our ability to negotiate discounts with
pharmaceutical manufacturers. In addition, it may affect our relations with
pharmacies and health plans. In some circumstances, they might also impact the
reimbursement that our mail order pharmacy receives from managed care
organizations that contract with government health programs to provide
prescription drug benefits or otherwise elect to rely on the revised First
DataBank pricing information. Furthermore, private payors may choose to follow
the federal and state governments example and adopt different drug pricing
bases. This could affect our ability to negotiate with plans, manufacturers and
pharmacies regarding discounts.

In January of 2001, Bayer Corporation entered into a $14 million
settlement with the Department of Justice regarding a qui tamsuit that alleged
that Bayer had artificially inflated the average wholesale price that it
reported to government health care programs. In addition, Bayer agreed to
report new pricing information, the average sale price, to government health
care programs, which is calculated differently from the average wholesale
price. In October of 2001, TAP Pharmaceuticals agreed to pay the government
$875 million for a range of alleged misconduct, including inflation of AWP, and
encouraging physicians to maximize their profits by exploiting the spread
between acquisition costs and the AWP-based Medicare reimbursement. In light
of the increased focus on calculation of AWP, AdvancePCSs private plan
customers may opt to rely on different data and demand similar
calculations from manufacturers. To the extent that they do, our ability to
negotiate rebates with manufacturers could be negatively impacted.

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Medicare Prescription Drug Benefit.Medicare reimbursement and coverage of
prescription drugs continues to be an issue in Congress. Medicare currently
offers a very limited outpatient prescription drug benefit. Proposals have been
made to expand Medicare outpatient drug coverage while reducing Medicare drug
reimbursement amounts, although the prospects for legislation remain uncertain.
Several legislative proposals are under consideration in Congress to provide
Medicare recipients with broader outpatient drug benefits administered through
the use of PBMs. Moreover, many states have established or are considering
establishing or expanding state drug assistance programs that would increase
access to drugs by those currently without coverage. We cannot assess at this
stage how such proposals, if enacted, will impact drug costs or our business.

Medicare Drug Discount Card.In June 2001 President Bush proposed
Medicare sponsored drug discount card programs administered through PBMs and
other vendors. The proposal was temporarily enjoined in court after pharmacists and
drug store trade associations challenged CMSs statutory authority to implement
such a program. In March 2002, the Administration published a proposed rule to
establish a new discount card program, seeking to cure some of the earlier
procedural defects. While it is uncertain whether or not a Medicare drug
discount card program will ever be enacted, such a program could have a
significant impact on our business through our discount card programs.

Regulation of Financial Risk Plans.The administration of fee-for-service
prescription drug plans by PBMs generally is not subject to insurance
regulation by the states. However, if a pharmacy benefit manager offers to
provide prescription drug coverage on a capitated basis or otherwise accepts
financial or insurance type risk in providing the benefit, laws in various
states may regulate the plan. These laws may require that the party at risk
establish reserves or otherwise demonstrate financial responsibility. Laws that
may apply in such cases include laws governing the business of insurance, HMOs,
limited prepaid health service plans, preferred provider organizations and
organized delivery systems. Many of these state laws may be preempted in whole
or in part by ERISA, which provides for comprehensive federal regulation of
employee benefit plans. However, the scope of ERISA preemption is uncertain and
is subject to conflicting court rulings. Other state laws may be invalid in
whole or in part as an unconstitutional attempt by a state to regulate
interstate commerce, but the outcome of challenges to these laws on this basis
is uncertain. This issue has received a great deal of attention recently. For
example, the National Community Pharmacists Association has asked the National
Association of Insurance Commissioners to examine whether PBMs should be
subject to state insurance laws. Compliance with state laws and regulations is
a significant operational requirement for us and increased state regulation
could limit our flexibility to adopt alternative and novel fee arrangements
with our customers.

Mail Pharmacy
Regulation.Our mail pharmacy operation, including our
online pharmacy, distributes drugs throughout the United States. Our
fulfillment centers are presently located in Fort Worth, Texas and Birmingham,
Alabama. We are licensed by United States, Texas and Alabama authorities to do
business as a pharmacy and to deliver controlled substances. In April 2001,
we announced plans to open a new mail service pharmacy near Wilkes-Barre,
Pennsylvania. This new state of the industry facility will begin operation in
mid-October 2002. Many of the states into which we deliver pharmaceuticals
and controlled substances have laws and regulations that require out-of-state
mail service pharmacies to register with that states board of pharmacy, or
similar regulatory body, in order to mail drugs into the state. We have
registered in every state that, to our knowledge, requires such registration.
In addition, some states require out-of-state mail service pharmacies to have a
pharmacist at the mail order location that is licensed in the state to which
the drugs are shipped, as well as meeting other standards. To the extent that
such laws or regulations are applicable to us, we believe that we are in
compliance.

Other Statutes and Regulations Affecting our Mail Pharmacy Operations.
CMS requires mail order pharmacies to provide toll-free numbers for patient
counseling of Medicaid recipients residing out of state. Other than
reimbursement for specialty pharmacy products, we do not currently receive
reimbursement from any state Medicaid programs. Congressional directives to
provide useful information on prescription drugs to consumers may involve
participation by mail order pharmacies in disseminating such information.
Federal statutes and regulations govern the labeling, packaging, advertising
and adulteration of prescription drugs and the dispensing of controlled
substances. The Federal Trade Commission requires mail order sellers of goods
generally to engage in truthful advertising, to stock a reasonable supply of
the product to be sold, to fill mail orders within thirty days and to provide
customers with refunds when appropriate. The United States Postal Service has
statutory authority to restrict the transmission of drugs and medicines through
the mail to a degree that could have an adverse effect on our mail service
operations. The United States Postal Service historically has exercised this
statutory authority only with respect to controlled substances. Alternative
means of delivery are available to us.

Employees

On March 31, 2002, we had 5,655 employees, including 375 pharmacists.
None of our employees is represented by a labor union. In the opinion of
management, we have good relationships with our employees.

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Insurance

Our PBM operations, including the dispensing of pharmaceutical products by
our mail service pharmacies, and the services rendered in connection with our
health improvement services and our non-PBM operations, such as the products
and services provided in connection with our clinical trial services, may
subject us to litigation and liability for damages. We believe that our
insurance protection is adequate for our present business operations, but there
can be no assurance that we will be able to maintain our professional and
general liability insurance coverage in the future or that such insurance
coverage will be available on acceptable terms or be adequate to cover any or
all potential product or professional liability claims. A successful product or
professional liability claim in excess of our insurance coverage, or one for
which an exclusion from coverage applies, could have a material adverse effect
upon our financial position or results of operations.

Risk Factors

Risks Related to Our Business

Competition in our industry is intense and could reduce or eliminate our
profitability.

The PBM industry is very competitive. If we do not compete effectively,
our business, profitability and growth prospects could suffer. Our competitors
include profitable and well-established companies that have significant
financial, marketing and other resources. Some of our competitors in the PBM
business are owned by profitable and well-established pharmaceutical
manufacturers or national retail pharmacy chains, which may give them
purchasing power and other advantages over us by virtue of their ownership
structure and enable them to succeed in taking away some of our customers.

Competitive pressures have historically contributed to a decrease in our
gross profit margins. Our margins were 5.4% in the year ended March 31, 1999,
4.1% in the year ended March 31, 2000, 3.3% in the year ended March 31, 2001
and 3.5% in the year ended March 31, 2002. Our margins may decline as we
attract and renew larger customers who typically have greater bargaining power
than smaller customers and may require us to sell our services at decreased
prices. We cannot be sure that we will continue to remain competitive, nor can
we be sure that we will be able to successfully market our PBM services to
customers at our current levels of profitability.

If we lose key health plan sponsors, our business, profitability and growth
prospects could suffer.

We depend on a limited number of large health plan sponsors for a
significant portion of our consolidated revenues. Five customers generated
approximately 35% of the claims we processed in fiscal year 2002. Our
business, profitability and growth prospects could suffer if we were to lose
one or more of our significant health plan sponsors.

Our contracts with health plan sponsors typically provide for multi-year
terms, with automatic 12-month renewals unless either party terminates the
contract by giving written notice in accordance with the agreement. Many of our
health plan sponsors put their contracts out for competitive bidding prior to
expiration. We could lose health plan sponsors if they cancel their agreements
with us, if we fail to win a competitive bid at the time of contract renewal,
if the financial condition of any of our health plan sponsors deteriorates or
if our health plan sponsors are acquired by, or acquire, companies with which
we do not have contracts. Over the past several years, insurance companies,
health maintenance organizations, or HMOs and managed care companies have
experienced significant consolidation. Our health plan sponsors have been and
may continue to be, subject to consolidation pressures.

If we lose relationships with one or more key pharmaceutical manufacturers or
if the payments we receive from pharmaceutical manufacturers decline, our
business, profitability and growth prospects could suffer.

We have contractual relationships with numerous pharmaceutical
manufacturers that pay us rebate payments on behalf of our health plan sponsors
based on use of selected drugs by their health plan members, as well as fees
for other programs and services. We believe our business, profitability and
growth prospects could suffer if:



| |  |  | we lose relationships with one or more key pharmaceutical manufacturers;                                                                         
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | rebates decline due to the failure of our health plan sponsors to meet market share or other thresholds;                                         
|
| |  |  | legal restrictions are imposed on the ability of pharmaceutical
manufacturers to offer formulary rebates or purchase our programs or
services; or
|
| |  |  | pharmaceutical manufacturers choose not to offer formulary rebates or
purchase our programs or services.                                         

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Over the next few years, as patents expire covering many brand name drugs
that currently have substantial market share, generic products will be
introduced that may substantially reduce the market share of the brand name
drugs. Historically, manufacturers of generic drugs have not offered formulary
rebates on their drugs. Our pricing could be altered if the use of
newly-approved, brand name drugs added to formularies, which are on the lists
of preferred prescription drugs covered by a health plan, does not offset any
decline in use of brand name drugs whose patents expire.

If we lose pharmacy network affiliations, our business, profitability and
growth prospects could suffer.

Our contracts with retail pharmacies, which are non-exclusive, are
generally terminable by either party on short notice. If one or more of the top
pharmacy chains elects to terminate its relationship with us or if we are only
able to continue our relationship on terms less favorable to us, our members
access to retail pharmacies and our business could suffer. In addition, some
large retail pharmacy chains either own or have strategic alliances with PBMs
or could attempt to acquire or enter into these kinds of relationships with
PBMs in the future. Ownership of, or alliances with, PBMs by retail pharmacy
chains could have material adverse effects on our relationships with these
retail pharmacy chains and on our business, profitability and growth prospects.

Failure to continue to develop or acquire new products, services and
technologies could adversely affect our business, profitability and growth
prospects.

We and our competitors continually develop new products and services to
assist our customers in managing their pharmacy benefit. If we are unsuccessful
in continuing to develop innovative products and services, our ability to
attract new customers and retain existing customers may suffer. If our product
development strategies are not successful, our business, profitability and
growth prospects could suffer. Historically, we have experienced expense
increases when developing new products. We anticipate that we will need to
expend significant resources to develop or acquire new products and services in
the future, which may adversely impact our profitability.

We have debt obligations that could restrict our operations.

To finance our acquisition of PCS, we entered into an $825 million senior
secured credit facility and issued $200 million of senior subordinated notes to
the seller, Rite Aid Corporation, or Rite Aid. We repaid the senior
subordinated notes with the proceeds from our offering of $200 million in
81/2% Senior Notes Due 2008 (Senior Notes). As of March 31, 2002, our
outstanding debt was approximately $501 million and our ratio of debt to total
stockholders equity was approximately 0.6 to 1. As of June 5, 2002, we have
significantly reduced our indebtedness under the credit facility with only the
$175 million revolving credit facility currently in place, and have increased
our indebtedness under our asset securitization facility to $300 million. For
additional information about our indebtedness, see Managements Discussion and
Analysis  Liquidity and Capital Resources below.

Our indebtedness could have adverse consequences, including:



| |  |  | increasing our vulnerability to adverse economic and industry
conditions;                                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------
|
| |  |  | limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate; and
|
| |  |  | limiting our ability to borrow additional funds.                                                                           

Our debt service requirements will require the use of a substantial
portion of our operating cash flow to pay interest on our debt instead of other
corporate purposes.

Any failure to meet our debt obligations could harm our business, financial
condition and results of operations.

If our cash flow and capital resources are insufficient to fund our debt
obligations, we may be forced to sell assets, seek additional equity or debt
capital or restructure our debt. In addition, any failure to make scheduled
payments of interest and principal on our outstanding indebtedness would likely
result in a reduction of our credit rating, which could harm our ability to
incur additional indebtedness on acceptable terms. Although we have not
defaulted on, or failed to meet, any of our debt obligations, we cannot assure
you that our cash flow and capital resources will be sufficient for payment of
interest on and principal of our debt in the future or that any such
alternative measures would be successful or would permit us to meet scheduled
debt service obligations. Any failure to meet our debt obligations could harm
our business, profitability and growth prospects.

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Restrictive financing covenants limit the discretion of our management.

Our credit facility and certain agreements governing our debt contain a
number of covenants that limit the discretion of our management with respect to
certain business matters. Our credit facility covenants, among other things,
restrict our ability to:



| |  |  | incur additional indebtedness;                   
| | - |  | -------------------------------------------------
|
| |  |  | issue preferred stock;                           
|
| |  |  | declare or pay dividends and other distributions;
|
| |  |  | create liens;                                    
|
| |  |  | make capital expenditures;                       
|
| |  |  | make certain investments or acquisitions;        
|
| |  |  | enter into mergers or consolidations;            
|
| |  |  | make sales of assets; and                        
|
| |  |  | engage in certain transactions with affiliates.  

The Senior Notes indenture contains similar restrictive covenants. In
addition, under our credit facility, we are required to satisfy a minimum fixed
charge coverage ratio, a maximum total leverage ratio and a minimum interest
coverage ratio. A breach of any agreements governing our debt would permit the
acceleration of the related debt, which could harm our business, profitability
and growth prospects. These restrictions may place us at a disadvantage
compared to our competitors that have fewer restrictive covenants and are not
required to operate under such restrictions.

If we are unable to manage potential problems and risks related to future
acquisitions and alliances, our business, profitability and growth prospects
could suffer.

Part of our growth strategy includes acquisitions and alliances involving
complementary products, services, technologies and businesses. For example, on
October 2, 2000 we acquired PCS, which dramatically increased the size of our
company. If we are unable to overcome the potential problems and inherent
risks related to such acquisitions and alliances, our business, profitability
and growth prospects could suffer. Our ability to continue to expand
successfully through acquisitions and alliances depends on many factors,
including our ability to identify acquisition or alliance prospects and
negotiate and close transactions. Even if we complete future acquisitions or
alliances:



| |  |  | we could fail to successfully integrate the operations, services and products of any acquired company;          
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | we could fail to select the best alliance partners or fail to effectively plan and manage any alliance strategy;
|
| |  |  | our managements attention could be diverted from other business concerns; and                                  
|
| |  |  | we could lose key employees of the acquired company.                                                            

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

If our business continues to grow rapidly and we are unable to manage this
growth, our business, profitability and growth prospects could suffer.

Our business has grown rapidly in the last eight years due to our
acquisitions, with total revenues increasing from approximately $64.4 million
in fiscal year 1995 to $13.1 billion in fiscal year 2002. If we continue to
grow rapidly, we will need to hire additional senior and line management,
increase our investment in employee recruitment, training and retention and
expand our information processing and financing control systems. Our future
operating results will depend in part on the ability of our officers and other
key employees to continue to recruit, train, retain and effectively manage our
employees as well as to improve our operations, customer support and financial
control systems. Our future growth will also depend on our

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ability to access capital. If we are unable to finance continued growth,
manage future expansion successfully or hire and retain the personnel needed to
manage our business successfully, then our business, profitability and growth
prospects could suffer.

If we lose key employees on whom we depend, in particular our chairman and
chief executive officer, David D. Halbert, our business could suffer.

We believe that our continued success will depend to a significant extent
upon retaining the services of our senior management. Our business could be
materially and adversely affected if we lose the services of Mr. David D.
Halbert, our chairman of the board and chief executive officer, or other
persons in senior management, because we would lose the strategic direction and
experience that these officers contribute, as well as the benefits of their
relationships with customers, pharmaceutical manufacturers and stockholders.
Except as limited by their employment agreements, any of our senior management
could seek other employment at any time. We do not currently have key-person
life insurance policies on any of our employees. If we cannot recruit, train,
retain and effectively manage key employees, our business, profitability and
growth prospects could suffer.

If we become subject to liability claims that are not covered by our insurance
policies, we may be liable for damages and other expenses that could have a
material adverse effect on our business, profitability and growth prospects.

A successful product or professional liability claim in excess of our
insurance coverage where we are required to pay damages, incur defense costs or
face negative publicity, could have a material adverse effect on our liquidity,
our reputation in the industry and our ability to attract and retain clients.
While we intend to maintain professional and general liability insurance
coverage at all times, we cannot assure you that we will be able to maintain
insurance in the future, that insurance will be available on acceptable terms
or that insurance will be adequate to cover any or all potential product or
professional liability claims.

Various aspects of our business may subject us to litigation and liability
for damages. For example, our clinical trials services involve the risk of
liability for personal injury from unforeseen adverse side effects or improper
administration of a new drug. Other aspects of our business that may subject us
to liability include:



| |  |  | the dispensing of pharmaceutical products;                          
| | - |  | --------------------------------------------------------------------
|
| |  |  | the performance of PBM services and health improvement services; and
|
| |  |  | the operation of our call centers and web sites.                    

Some investors own a significant amount of our stock and may exert influence
over corporate transactions and other matters.

As a result of our acquisition of PCS, Joseph Littlejohn & Levy Fund III,
L.P. and certain other investors, collectively referred to as JLL and Rite Aid
received shares of Series A preferred stock. The Series A preferred stock was
convertible into Class B common stock. The Class B common stock is convertible
into our Class A common stock on a one-for-one basis. Rite Aid converted all
its shares of Series A preferred stock into Class B common stock and then
substantially all of those shares of Class B common stock into Class A common
stock. Rite Aid sold all of its shares of Class A common stock in our
secondary offering that was completed in March 2001. However, Rite Aid has
retained ownership of a sufficient number of shares of Class B common stock to
retain its right to designate two of our 11 directors through December 8, 2002.
JLL has converted all of its shares of Series A preferred stock into our Class
B common stock. As a holder of Class B common stock JLL is entitled to
designate two of our 11 directors and we cannot take certain actions without
their consent. Assuming conversion of all its shares of Class B common stock
into Class A common stock, JLL would beneficially own approximately 13.9% of
our Class A common stock. Accordingly, JLL may be able to substantially
influence the outcome of stockholder votes and otherwise have influence over
our business. The interests of these investors may differ from interests of
other stockholders.

Risks could arise due to Arthur Andersen LLP being our past auditors

You may have no effective remedy against Arthur Andersen LLP in connection
with a material misstatement or omission in these financial statements,
particularly in the event that Arthur Andersen LLP ceases to exist or becomes
insolvent as a result of the indictment or other proceedings against Arthur
Andersen LLP.

Arthur Andersen LLP, which audited our financial statements included in
this report for the years ended March 31, 2000 and March 31, 2001, has informed
us that on March 14, 2002 an indictment was unsealed charging it with federal
obstruction

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of justice arising from the governments investigation of Enron Corp. On June
15, 2002, Arthur Andersen was convicted of obstructing justice in connection
with investigations of their former client Enron Corp.

Arthur Andersen LLP consented to the inclusion of their report in the
annual reports and registration statements we filed prior to January 31, 2002.
Some changes to the financial statements covered by Arthur Andersen LLPs
report for 2000 and 2001 were made after January 31, 2002, but we do not
believe these changes materially affect the financial results covered by Arthur
Andersen LLPs report. A complete discussion of these changes is located in
Notes 2 and 15 to the financial statements included with this report. These
adjustments and changes to the financial statements audited by Arthur Andersen
include those related to our two-for-one stock split, accomplished through a
stock dividend on October 23, 2001. We also made adjustments to restate our
accounting for our investment in CHI (in accordance with Opinions of the
Accounting Principles Board (APB) No. 18) from the cost basis to the equity
method of accounting upon our acquisition of the remaining equity of CHI in
September, 2001, after Arthur Andersen LLPs last audit of our annual financial
statements for the fiscal year ended March 31, 2001. The last consent provided
to us by Arthur Andersen LLP, dated January 31, 2002, was received after we
began restating our quarterly financial statements to account for our
acquisition of CHI on an equity rather than cost basis as required by APB 18.

Our inability to include in future registration statements or reports
financial statements for one or more years audited by Arthur Andersen LLP or to
obtain Arthur Andersen LLPs consent to the inclusion of their report on our
2000 and 2001 financial statements may impede our access to the capital
markets.

Should we seek to access the public capital markets, Securities and
Exchange Commission (SEC) rules will require us to include or incorporate by
reference in any prospectus three years of audited financial statements. Until
our audited financial statements for the fiscal year ending March 31, 2004
become available, the SECs current rules would require us to present audited
financial statements for one or more fiscal years audited by Arthur Andersen
LLP. Prior to that time the SEC may cease accepting financial statements
audited by Arthur Andersen LLP, in which case we would be unable to access the
public capital markets unless PricewaterhouseCoopers LLP, our current
independent accounting firm, or another independent accounting firm, is able to
audit the financial statements originally audited by Arthur Andersen LLP. In
addition, as a result of the departure of our former engagement team leaders,
Arthur Andersen LLP is no longer in a position to consent to the inclusion or
incorporation by reference in any prospectus of their report on our audited
financial statements for the years ended March 31, 2000 and March 31, 2001, and
investors in any subsequent offerings for which we use their audit report will
not be entitled to recovery against them under Section 11 of the Securities Act
of 1933 for any material misstatements or omissions in those financial
statements. Consequently, our financing costs may increase or we may miss
attractive market opportunities if either our annual financial statements for
2000 and 2001 audited by Arthur Andersen LLP should cease to satisfy the SECs
requirements or those statements are used in a prospectus but investors are not
entitled to recovery against our auditors for material misstatements or
omissions in them.

Risks Related to Our Industry

Prior to our acquisition of PCS, PCS received a subpoena from the Department of
Health and Human Services Office of Inspector General in connection with an
industry-wide investigation, and although there have been no charges filed
against AdvancePCS, we could be subject to scrutiny, investigation or challenge
under federal or state anti-kickback and false claims, or other laws, which
could cause our business, profitability and growth prospects to suffer.

Federal anti-kickback laws generally prohibit the receipt or solicitation
of payment in return for purchasing or ordering, or arranging for or
recommending the purchasing or ordering of, items and services reimbursable by
federal health care programs. Some states have similar laws that apply across
all payors. To date, these laws have not been applied to prohibit the types of
business arrangements we have with pharmaceutical manufacturers, health plan
sponsors or retail pharmacies. However, courts and enforcement authorities that
administer the anti-kickback laws have historically interpreted these laws
broadly.

In November 1999, PCS received a subpoena by the OIG requesting PCS to
produce certain documents about its programs and how they operate in connection
with an industry-wide investigation. The investigation was instigated and is
being pursued by the United States Attorneys Office for the Eastern District
of Pennsylvania, which indicated an intention to review PBMs programs in light
of anti-kickback and other laws and regulations. Specifically, the focus of
this investigation appears to be PBMs relationships with pharmaceutical
manufacturers and retail pharmacies and PBMs programs relating to drug
formulary compliance, including rebate and other payments made by
pharmaceutical manufacturers to PBMs and payments made by PBMs to retail
pharmacies or others, and therapeutic intervention activity. AdvancePCS has
turned over documents responsive to the subpoena. There is litigation pending
in the Eastern District of Pennsylvania regarding further enforcement of the
subpoena and other matters relating to the propriety of the United States
Governments investigation. It is impossible to predict the outcome.

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The United States Attorneys Office has also contacted some of the
pharmaceutical manufacturers with which we have agreements and has asked these
manufacturers to provide copies of documents relating to their agreements with
us. At this time, we are unable to predict whether the government will commence
any action challenging any of our programs and practices. We believe that our
programs and those of PCS prior to the acquisition are in compliance with the
requirements imposed by anti-kickback laws and other applicable laws and
regulations. Nevertheless, we could be subject to scrutiny, investigation or
challenge under these laws and regulations as a result of the OIG investigation
or otherwise. Such scrutiny, investigation or challenge could alter our
business practices related to formulary products and services and our
relationships with pharmaceutical manufacturers, which could reduce our
profitability and growth prospects.

If legislative or regulatory initiatives restrict our ability to use patient
identifiable medical information, our clinical programs and our business growth
strategy based on these services could suffer.

Through our health improvement programs, we help our health plan sponsor
customers identify individuals who will most benefit from the programs.
Governmental restrictions on the use of patient identifiable information may
adversely affect our ability to conduct health improvement programs and medical
outcome studies and could adversely affect our growth strategy based on these
programs. Federal and state legislation has been proposed and some state laws
have been enacted, to restrict the use and disclosure of patient identifiable
medical information. Additional legislation could be enacted in the future that
severely restricts or prohibits our use of patient identifiable information,
which could harm our business, profitability and growth prospects.

In December 2000, the HHS issued final regulations regarding the privacy
of individually identifiable health information pursuant to the Health
Insurance Portability and Accountability Act of 1996, or HIPAA. This final rule
on privacy applies to both electronic and paper records and imposes extensive
requirements on the way in which health care providers, health plan sponsors
and their business associates use and disclose protected information. The final
rule gives patients significant rights to understand and control how their
protected health information is used and disclosed. Direct providers, such as
pharmacies, are required to obtain patient consents for treatment, payment and
health care operations. For all uses or disclosures of protected information
that do not involve treatment, payment or health care operations, the rule
requires all covered entities to obtain a valid patient authorization, which is
more demanding than consent. In most cases, use or disclosure of protected
health information must be limited to the minimum amount necessary to achieve
the purpose of the use or disclosure. In March 2002, HHS published a Notice of
Proposed Rule Making that if adopted, would change certain requirements and
affect current implementation strategies already underway. The compliance date
for the final privacy rule is April 14, 2003. Sanctions for failing to comply
with standards issued pursuant to HIPAA include criminal penalties and civil
sanctions. Additional guidelines on the application of the final privacy rule
are expected to be released in the near future and these could impact the
manner in which we use or disclose protected health information.

HHS also published in 2000 a final rule on transaction standards and code
sets, which establishes requirements for the use of particular standard formats
for reporting health care claims to payors. Ultimately, public and private
payors will refuse to accept claims that do not utilize these formats. The
health care industry will need to adapt to these new standards. Compliance will
add to our regulatory burden.

In addition, in August 1998, HHS issued proposed regulations pursuant to
HIPAA that govern the security of individually-identifiable health information.
A final security rule has not yet been published but, once issued, it is likely
to impose additional administrative burdens on health care providers, health
plans and their business associates, relating to the storage, utilization and
transmission of health information.

Due to the complex and controversial nature of the privacy regulations,
they may be subject to court challenge, as well as further legislative and
regulatory actions that could alter their effect. We cannot at this time
predict with specificity what impact the final HIPAA rule on the privacy of
individually identifiable health information, or the final security rule, may
have on us. However, they will likely increase our burden of regulatory
compliance with respect to our health improvement programs and other
information-based products and may reduce the amount of information we may use
if patients do not consent to such use. There can be no assurance that the
restrictions and duties imposed by the recently adopted final rule on the
privacy of individually-identifiable health information, or the eventual final
rule on security of individually-identifiable health information, will not
materially impact our ability to offer new and existing products and services,
such as certain health improvement programs and other clinical programs to our
clients, thereby reducing our profitability and growth prospects.

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Even without new legislation and beyond the final federal regulations,
individual health plan sponsor customers could prohibit us from including their
patients medical information in our various databases of medical data. They
could also prohibit us from offering services that involve the compilation of
such information.

If we are ever deemed to be a fiduciary of a health benefit plan governed by
ERISA, we could be subject to claims for benefit denials and liability for
breach of fiduciary duty.

We have agreements to provide PBM services to a number of self-funded
corporate health plans. These plans are subject to the ERISA, which regulates
employee pension and health and welfare benefit plans. We believe that our
activities are sufficiently limited that we do not assume any of the plan
fiduciary responsibilities that would subject us to regulation under ERISA. Our
agreements with our self-funded corporate plan customers state that we are not
the fiduciary of the plan. However, the U.S. Department of Labor, which is the
agency that enforces ERISA, could assert that the fiduciary obligations imposed
by the statute apply to certain aspects of our operations. If we were deemed to
be a fiduciary, we could potentially be subject to claims relating to benefit
denials. In addition, we could also be subject to claims for breaching
fiduciary duties in connection with the services we provide to the plan.

AdvancePCS was served with a purported private class action lawsuit filed
in the United States District Court in Arizona on or about December 17, 2001.
The lawsuit alleges that AdvancePCS acts as a fiduciary, as that term is
defined in the ERISA, and that AdvancePCS has breached certain fiduciary
obligations under ERISA. AdvancePCS believes that it does not act as an ERISA
fiduciary or assume the ERISA fiduciary responsibilities as alleged in the
complaint. AdvancePCS believes that its business practices are in compliance
with ERISA. The lawsuit seeks unspecified monetary damages and injunctive
relief. AdvancePCS believes that it does not assume any of the plan fiduciary
responsibilities that would subject it to regulation under ERISA. Although the
ultimate outcome is uncertain, an adverse determination could potentially cause
us to change our business practices with respect to formularies, preferred drug
listings and intervention programs, potentially reducing our profitability and
growth prospects. A class of plaintiffs has not yet been certified and we
intend to oppose such certification. AdvancePCS has denied all allegations of
wrongdoing and is vigorously defending this suit.

In March 1998, a class action lawsuit captioned Mulder v. PCS Health
Systems, Inc. was filed in the United States District Court for the District of
New Jersey. This action alleges that PCS is an ERISA fiduciary and that we
have breached our fiduciary obligations under ERISA in connection with our
development and implementation of formularies, preferred drug listings and
intervention programs for our sponsors of ERISA health plans. The plaintiffs
are seeking injunctive relief and monetary damages in an unspecified amount. A
class of plaintiffs has not yet been certified and we intend to oppose such
certification. AdvancePCS has denied all allegations of wrongdoing and is
vigorously defending this lawsuit. Although the ultimate outcome is uncertain,
an adverse determination could potentially cause us to change our business
practices with respect to formularies, preferred drug listings and intervention
programs, potentially reducing our profitability and growth prospects.

ERISA also prohibits a party in interest to a plan from engaging in
certain types of transactions with the plan, including purchases, sales and
loans, absent an available exemption. Violations are subject to civil and
criminal liability. By providing services to these plans, we are subject to the
restrictions on a party in interest. We believe that we are in compliance with
these provisions of ERISA. However, there is no guarantee that the government
would not challenge our practices.

If there are changes in federal or state financing and regulation of the health
care industry, our customers may delay or reduce the purchase of our services.

During the past several years, the United States health care industry has
been subject to an increase in governmental regulation and legislation, on both
the federal and state level. We cannot predict what effect, if any, these
proposals might have on our business, profitability and growth prospects.
Congress is considering proposals to change Medicare drug coverage and
reimbursement policies and many states are considering proposals to provide or
expand drug assistance programs. Some states have begun to seek supplemental
Medicaid rebates from drug manufacturers, beyond those required by the federal
Medicaid statute. Both Congress and the states are expected to consider
legislation to increase governmental regulation of managed care plans. Some of
these initiatives would, among other things, require that health plan members
have greater access to drugs not included on a plans formulary and give health
plan members the right to sue their health plans for malpractice when they have
been denied care. The scope of the managed care reform proposals under
consideration by Congress and state legislatures and enacted by certain states
to date vary greatly and the extent to which future legislation may be enacted
is uncertain. However, these initiatives could greatly impact the managed care
and pharmaceutical industries and, therefore, could have a material adverse
impact on our business, profitability and growth prospects.

In addition, several legislative proposals are under consideration in
Congress to provide Medicare recipients with expanded outpatient drug benefits
through the use of PBMs. While we believe that a Medicare prescription drug
benefit

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could provide us with new business opportunities, the structure of such a
program could have a material adverse impact on our business, profitability and
growth prospects.

Several states, including California, New Jersey and New York, have
introduced legislation that would directly regulate PBMs, but to our knowledge,
no state has passed such legislation. Several regulatory and quasi-regulatory
bodies, such as the National Association of Insurance Commissioners, the
National Association of Boards of Pharmacy and the National Committee on
Quality Assurance, are also considering proposals to regulate PBMs and
proposals to increase the regulation of certain PBM activities, such as
formulary and utilization management and downstream risk assumption. While the
outcome of these initiatives is uncertain, any resulting legislation could
materially harm our business, both directly as a PBM and indirectly through the
impact on the pharmacy benefit services we are able to deliver on behalf of our
health plan sponsors.

There is great attention being paid to the pricing of prescription drug
products and how they are reimbursed by government programs. One pharmaceutical
manufacturer has settled a lawsuit with the federal government asserting that
it inappropriately calculated drug prices for Federal health care programs and
agreed to provide a new calculation formula. In addition, a number of class
action lawsuits have been filed against various pharmaceutical manufacturers.
These cases generally allege that for certain drugs, the manufacturers inflated
the average wholesale prices upon which some federal health care programs based
reimbursement to physicians and pharmacists. Most of these cases have been
consolidated for pretrial proceedings in one federal court in Massachusetts.
The manufacturers deny any wrongdoing and are defending the litigation.

Legislative and regulatory proposals have been put forward that would
alter the calculation of drug prices for federal programs and likely reduce
expenditures. These proposals may increase governmental involvement in health
care and health benefit management services and otherwise change the way our
customers do business. Health care organizations may react to these proposals
and the uncertainty surrounding them by cutting back or delaying the purchase
of our health benefit management services and manufacturers may react by
reducing rebates or reducing supplies of certain products, which would
materially harm our business, profitability and growth prospects.

If government laws or regulations relating to the financial relationships
between PBMs and pharmaceutical manufacturers are interpreted and enforced in a
manner adverse to our PBM and health improvement programs, we may be subject to
enforcement actions and our business operations could be materially limited.

In January 1998, the FDA issued a Draft Guidance for Industry regarding
the regulation of activities of PBMs that are directly or indirectly controlled
by pharmaceutical manufacturers. To date, the FDA has not taken any further
action. Although it appears that the FDA has changed its position regarding
regulation of communications by PBMs, there is no assurance that it will not
re-examine the issue and seek to assert the authority to regulate the
communications of such PBMs.

If government laws or regulations are enacted, interpreted or enforced in a
manner adverse to our clinical research programs, we may be subject to
administrative enforcement actions, as well as civil and criminal liability.

We assist pharmaceutical manufacturers in conducting clinical trials for
new drugs, or new uses for existing drugs. The conduct of clinical trials is
regulated by the FDA under the authority of the FOCA and the related
regulations. Oversight of clinical trials has received increasing scrutiny in
recent years. If government laws or regulations are interpreted and enforced
in a manner adverse to our clinical research programs, we may be subject to
administrative enforcement actions, as well as civil and criminal liability. In
general, the sponsor of the drug product that is being studied, or the
manufacturer that will have the right to market the drug product if it is
approved by the FDA, has the responsibility to comply with the laws and
regulations that apply to the conduct of the clinical trials. However, in
providing services related to the conduct of clinical trials, we may assume
some or all of the sponsors or clinical investigators obligations related to
the study of the drug. In October 1998, the FDA announced that the agency would
give Institutional Review Boards, which are independent bodies that oversee the
conduct of clinical investigations, increased access to information pointing to
violative or potentially violative conduct on the part of clinical
investigators, for example the physicians who conduct the clinical trials.

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

As a consequence of the severe penalties we and our employees potentially
could face, we must devote significant operational and managerial resources to
comply with these laws and regulations. Although we believe that we
substantially

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comply with all existing statutes and regulations material to the
operation of our business, regulatory authorities may disagree and initiate
enforcement or other actions against us. In addition, we cannot predict the
impact of future legislation and regulatory changes on our business or assure
you that we will be able to obtain or maintain the regulatory approvals
required to operate our business.




ITEM 2. PROPERTIES

Our existing facilities consist of approximately 1.3 million square feet,
of which we own 150,400 square feet and lease the remainder. The monthly lease
payments were approximately $1.6 million in the month of March 2002. The
following table sets forth information with respect to our principal
facilities.

|                       |  |                            |         |           |             |  |  |  |  |       |  | 
|---------------------- |  | -------------------------- | ------- | --------- | ----------- |  |  |  |  | ----- |  | 
|                       |  |                            |         |           | Approximate | 
|                       |  |                            |         |           | Square      | 
|Facility               |  | Location                   | Footage | Lease/Own
|                       |  |                            |         |           |             |  | 
|Corporate Headquarters |  | Irving, Texas              |         |           | 104,000     |  |  |  |  | Lease
|Corporate Office       |  | Scottsdale, Arizona        |         |           | 354,800     |  |  |  |  | Lease
|Call Center            |  | Scottsdale, Arizona        |         |           | 53,800      |  |  |  |  | Lease
|Call Center            |  | Richardson, Texas          |         |           | 52,000      |  |  |  |  | Lease
|Call Center            |  | Mather, California         |         |           | 42,395      |  |  |  |  | Lease
|Call Center            |  | Knoxville, Tennessee       |         |           | 60,000      |  |  |  |  | Lease
|Clinical Services      |  | Bloomington, Minnesota     |         |           | 45,300      |  |  |  |  | Lease
|Clinical Services      |  | Hunt Valley, Maryland      |         |           | 40,635      |  |  |  |  | Lease
|Mail Service Pharmacy  |  | Birmingham, Alabama        |         |           | 112,000     |  |  |  |  | Own  
|Mail Service Pharmacy  |  | Fort Worth, Texas          |         |           | 93,800      |  |  |  |  | Lease
|Mail Service Pharmacy  |  | Wilkes-Barre, Pennsylvania |         |           | 76,000      |  |  |  |  | Lease
|Specialty Pharmacy     |  | Bethesda, Maryland         |         |           | 7,758       |  |  |  |  | Lease
|e-Solutions            |  | Richardson, Texas          |         |           | 48,300      |  |  |  |  | Lease
|e-Solutions            |  | San Francisco, CA          |         |           | 4,394       |  |  |  |  | Lease

In addition, we have several other facilities throughout the United States that
we use for sales offices, clinics, data services and other corporate purposes.
We believe our facilities are adequate to meet our requirements for the
foreseeable future.




ITEM 3. LEGAL PROCEEDINGS AND GOVERNMENT INVESTIGATIONS

AdvancePCS was served with a purported private class action lawsuit filed
in the United States District Court in Arizona on or about December 17, 2001.
The lawsuit alleges that AdvancePCS acts as a fiduciary, as that term is
defined in ERISA and that AdvancePCS has breached certain fiduciary obligations
under ERISA. AdvancePCS believes that it does not act as an ERISA fiduciary or
assume the ERISA fiduciary responsibilities as alleged in the complaint.
AdvancePCS believes that its business practices are in compliance with ERISA.
The lawsuit seeks unspecified monetary damages and injunctive relief.
AdvancePCS believes that it does not assume any of the plan fiduciary
responsibilities that would subject it to regulation under ERISA. Although the
ultimate outcome is uncertain, an adverse determination could potentially cause
us to change our business practices with respect to formularies, preferred drug
listings and intervention programs, potentially reducing our profitability and
growth prospects. A class of plaintiffs has not yet been certified and we
intend to oppose such certification. AdvancePCS has denied all allegations of
wrongdoing and is vigorously defending this suit.

In November 1999, PCS received a subpoena by the OIG requesting PCS to
produce certain documents about its programs and how they operate in connection
with an industry-wide investigation. The investigation was instigated and is
being pursued by the United States Attorneys Office for the Eastern District
of Pennsylvania, which indicated an intention to review PBMs programs in light
of anti-kickback and other laws and regulations. Specifically, the focus of
this investigation appears to be PBMs relationships with pharmaceutical
manufacturers and retail pharmacies and PBMs programs relating to drug
formulary compliance, including rebate and other payments made by
pharmaceutical manufacturers to PBMs and payments made by PBMs to retail
pharmacies or others, and therapeutic intervention activity. AdvancePCS has
turned over documents responsive to the subpoena. There is litigation pending
in the Eastern District of Pennsylvania regarding further enforcement of the
subpoena and other matters relating to the propriety of the United States
Governments investigation. It is impossible to predict the outcome.

The United States Attorneys Office has also contacted some of the
pharmaceutical manufacturers with which we have agreements and has asked these
manufacturers to provide copies of documents relating to their agreements with
us. At this time, we are unable to predict whether the government will commence
any action challenging any of our programs and practices. AdvancePCS believes
that its programs and those of PCS prior to the acquisition are in compliance
with the requirements imposed by anti-kickback laws and other applicable laws
and regulations. Nevertheless, we could be subject to scrutiny, investigation
or challenge under these laws and regulations as a result of the OIG
investigation or otherwise, which could have a material adverse effect on our
business, profitability and growth prospects.

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In March 1998, a class action lawsuit captioned Mulder v. PCS Health
Systems, Inc., case number 98-1003, was filed in the United States District
Court of the District of New Jersey. This action alleges that PCS is an ERISA
fiduciary and that we have breached our fiduciary obligations under ERISA in
connection with our development and implementation of formularies, preferred
drug listings and intervention programs for our sponsors of ERISA health plans.
In particular, plaintiffs allege that our therapeutic interchange programs and
negotiation of formulary rebates and discounts from pharmaceutical
manufacturers violate fiduciary obligations. The plaintiffs are seeking
injunctive relief and monetary damages in an unspecified amount. AdvancePCS
believes that it does not assume any of the plan fiduciary responsibilities
that would subject it to regulation under ERISA. Although the ultimate outcome
is uncertain, an adverse determination could potentially cause us to change our
business practices with respect to formularies, preferred drug listings and
intervention programs, potentially reducing our profitability and growth
prospects. A class of plaintiffs has not yet been certified and we intend to
oppose such certification. AdvancePCS has denied all allegations of wrongdoing
and is vigorously defending this suit.

On December 17, 2001 AARP and United Healthcare Insurance Co. (United)
filed a multi-count complaint against AdvancePCS in federal court in
Minneapolis, Minnesota in a matter captioned United Healthcare Insurance Co.
and AARP v. AdvancePCS, Civ. No. 01-CV-2320 (D. Minn.). AARP and United have
asserted claims against AdvancePCS for violation of Minnesotas deceptive trade
practices act, tortious interference with prospective economic advantage and
unjust enrichment. Specifically, AARP and United claim that AdvancePCS created
confusion among certain AARP members and pharmacists through the launch of the
AdvancePCS prescription drug discount program. AARP and United have requested
preliminary and permanent injunctive relief and recently quantified their
compensatory damage claim of $30 million, including attorneys fees and costs.
AdvancePCS has moved to dismiss all counts of the Complaint. On March 18,
2002, without holding an evidentiary hearing, the district court granted AARP
and Uniteds request for preliminary injunctive relief. The courts order was
modified on March 22, 2002. AdvancePCS has appealed the district courts
orders and this appeal is pending. AdvancePCS has denied AARP and Uniteds
allegations and is vigorously defending this matter.

In addition, we are a defendant in lawsuits from time to time arising in
the ordinary course of business, the outcome of which we believe will not have
a material adverse effect on our business, profitability and growth prospects.




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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2002.

29



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PART II




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

Our Class A common stock has been traded on the Nasdaq National Market
under the symbol ADVP since our initial public offering on October 8, 1996. The
following table sets forth the range of quarterly high and low sales prices per
share of our Class A common stock as quoted on the Nasdaq National Market. On
October 1, 2001 we announced a two-for-one stock split, effected in the form of
a stock dividend of our common stock. Financial information and stock prices
contained throughout the Form 10-K have been adjusted to reflect the impact of
the stock split.

|                                  |  |      |       |     |  |   |       | 
|--------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                  |  | High |       | Low
|                                  |  |      |       |    
|Fiscal year ended March 31, 2000: |  |      |       |     |  |   |       | 
|First Quarter                     |  | $    | 16.25 |     |  | $ | 10.07 | 
|Second Quarter                    |  |      | 17.38 |     |  |   | 12.00 | 
|Third Quarter                     |  |      | 15.75 |     |  |   | 9.03  | 
|Fourth Quarter                    |  |      | 14.38 |     |  |   | 5.57  | 
|Fiscal year ended March 31, 2001: |  |      |       |     |  |   |       | 
|First Quarter                     |  | $    | 11.32 |     |  | $ | 4.75  | 
|Second Quarter                    |  |      | 21.10 |     |  |   | 9.50  | 
|Third Quarter                     |  |      | 25.82 |     |  |   | 14.82 | 
|Fourth Quarter                    |  |      | 29.63 |     |  |   | 14.50 | 
|Fiscal year ended March 31, 2002: |  |      |       |     |  |   |       | 
|First Quarter                     |  | $    | 34.30 |     |  | $ | 25.30 | 
|Second Quarter                    |  |      | 38.23 |     |  |   | 26.90 | 
|Third Quarter                     |  |      | 40.15 |     |  |   | 25.03 | 
|Fourth Quarter                    |  |      | 33.69 |     |  |   | 26.60 | 

On March 31, 2002 there were approximately 19,000 beneficial owners, based
on our most recent mailing to shareholders, of our Class A common stock
represented by 128 holders of record.

We have never paid any cash dividends on our Class A common stock and do
not expect to pay cash dividends in the foreseeable future. In the past we have
paid cash dividends on our preferred stock. We intend to retain future earnings
to finance the ongoing operations and growth of our business.

There is no established public trading market for our Class B-1 common
stock or our Class B-2 common stock. On March 31, 2002, there was one holder
of our Class B-1 common stock, JLL, and one holder of our Class B-2 common
stock, Rite Aid.

The number of shares of common stock subject to outstanding options and
remaining available for grant pursuant to our stock based compensation plans as
of March 31, 2002 is reflected in the table below. All of our stock based
compensation plans have been approved by our shareholders.

30



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Equity Compensation Plan Information

|                                                            |       |            |                            |                     |                  |                                  |                                     |       |  |  |                                  |           | 
|----------------------------------------------------------- | ----- | ---------- | -------------------------- | ------------------- | ---------------- | -------------------------------- | ----------------------------------- | ----- |  |  | -------------------------------- | --------- | 
|                                                            |       |            |                            |                     |                  |                                  |                                     |       |  |  | Number of shares of common stock
|                                                            |       |            | Number of shares of common |                     | Weighted-average |                                  | available for future issuance under
|                                                            |       |            | stock to be issued upon    |                     | exercise price   |                                  | equity compensation plans          
|                                                            |       |            | exercise of outstanding    |                     | per share of     |                                  | (excluding securities issuable upon
|Plan Category                                               |       | options(1) |                            | outstanding options |                  | exercise of outstanding options)
|                                                            |       |            |                            |                     |                  |                                 
|Equity compensation plans
approved by security holders      |       |            | 15,577,065                 |                     |                  | $                                | 11.56                               |       |  |  | 2,370,101                        |          
|Equity compensation plans, not
approved by security holders |       |            |                           |                     |                  |                                  | 0.00                                |       |  |  |                                 |          
|                                                            |       |            |                            |                     |                  |                                  |                                     |       |  |  |                                  |          
|                                                            | Total |            |                            | 15,577,065          |                  |                                  | $                                   | 11.56 |  |  |                                  | 2,370,101 | 
|                                                            |       |            |                            |                     |                  |                                  |                                     |       |  |  |                                  |          



---

|(1) |  | All options are outstanding under our three stock-based compensation plans:
Incentive Stock Option Plan, Amended and Restated Incentive Stock Option Plan
and the 1997 Nonstatutory Stock Option Plan. Each of these plans provides that
options must be granted with exercise prices that are equal to or exceed the
market value of our common stock at the date the option is granted. The
options generally vest over 5-year periods. In the event of a sale of all or
substantially all of the common stock or assets of AdvancePCS or a merger in
which AdvancePCS is not to be the surviving entity, options granted to certain
employees become 100% vested. As of March 31, 2002, there were 5,157,508
options vested at a weighted-average exercise price of $7.89 per share.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following tables present selected consolidated statement of
operations, balance sheet and supplemental data of AdvancePCS for the periods
and dates indicated. The selected statement of operations for each of the years
in the five-year period ended March 31, 2002 and the balance sheet data as of
March 31, 1998, 1999, 2000, 2001 and 2002 presented below are derived from our
consolidated financial statements and accompanying notes, which, for the fiscal
years 1998 through 2001 have been audited by Arthur Andersen LLP, independent
accountants and for fiscal year 2002 have been audited by
PricewaterhouseCoopers LLP, independent accountants.

The results of operations of PCS for the period commencing October 2,
2000, the date of our acquisition of PCS, are reflected in the financial
statements of AdvancePCS after that date.

The information contained in this section should be read in conjunction
with Managements Discussion and Analysis of Financial Condition and Results
of Operations in the historical consolidated financial statements and related
notes of each of AdvancePCS and PCS.

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AdvancePCS

|                                                             |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |        | 
|------------------------------------------------------------ | ----------------------------------- | - | ------------------------------------- | ------ | ---- | - | ------- | ------ | ---------- | - | --------- | ------ |  | - | --------- | ------ |  | - | ---------- | ------ | 
|                                                             |                                     |   | Year
Ended March 31,                 
|                                                             |                                     |   |                                      
|                                                             |                                     |   | 1998                                  |        | 1999 |   | 2000(4) |        | 2001(1)(4) |   | 2002     
|                                                             |                                     |   |                                       |        |      |   |         |        |            |   |          
|                                                             |                                     |   | (In thousands, except per share data)
|Statement of Operations Data:                                |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|Revenues(2)                                                  |                                     | $ | 473,761                               |        |      | $ | 757,259 |        |            | $ | 1,833,888 |        |  | $ | 7,024,298 |        |  | $ | 13,107,290 |       
|Gross profit                                                 |                                     |   | 29,806                                |        |      |   | 40,959  |        |            |   | 75,502    |        |  |   | 229,160   |        |  |   | 451,591    |       
|Selling, general and
administrative expenses                 |                                     |   | 18,955                                |        |      |   | 21,006  |        |            |   | 39,076    |        |  |   | 128,984   |        |  |   | 189,320    |       
|Non-recurring and impairment expenses                        |                                     |   |                                      |        |      |   |        |        |            |   |          |        |  |   | 11,129    |        |  |   | 1,760      |       
|                                                             |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|Operating income                                             |                                     |   | 10,851                                |        |      |   | 19,953  |        |            |   | 36,426    |        |  |   | 89,047    |        |  |   | 260,511    |       
|Interest income                                              |                                     |   | 2,950                                 |        |      |   | 2,860   |        |            |   | 1,064     |        |  |   | 3,450     |        |  |   | 6,606      |       
|Interest expense                                             |                                     |   | (67                                   | )      |      |   |        |        |            |   | (3,943    | )      |  |   | (45,332   | )      |  |   | (64,185    | )     
|Loss from joint venture                                      |                                     |   |                                      |        |      |   |        |        |            |   |          |        |  |   |          |        |  |   | (2,871     | )     
|Merger costs and asset disposal                              |                                     |   | (689                                  | )      |      |   |        |        |            |   | (160      | )      |  |   | (1,200    | )      |  |   |           |       
|                                                             |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|Income before income taxes                                   |                                     |   | 13,045                                |        |      |   | 22,813  |        |            |   | 33,387    |        |  |   | 45,965    |        |  |   | 200,061    |       
|Provision for income taxes                                   |                                     |   | (4,957                                | )      |      |   | (8,669  | )      |            |   | (12,684   | )      |  |   | (24,291   | )      |  |   | (79,015    | )     
|                                                             |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|Income before extraordinary loss                             |                                     |   | 8,088                                 |        |      |   | 14,144  |        |            |   | 20,703    |        |  |   | 21,674    |        |  |   | 121,046    |       
|Extraordinary loss on early retirement of
debt, net of taxes |                                     |   |                                      |        |      |   |        |        |            |   |          |        |  |   |          |        |  |   | (5,315     | )     
|                                                             |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|Net income                                                   |                                     | $ | 8,088                                 |        |      | $ | 14,144  |        |            | $ | 20,703    |        |  | $ | 21,674    |        |  | $ | 115,731    |       
|                                                             |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|Basic:                                                       |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|                                                             | Net income per share                |   | $                                     | 0.19   |      |   | $       | 0.30   |            |   | $         | 0.42   |  |   | $         | 0.37   |  |   | $          | 1.37   | 
|                                                             |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|                                                             | Weighted average shares
outstanding |   |                                       | 42,022 |      |   |         | 48,008 |            |   |           | 49,520 |  |   |           | 58,290 |  |   |            | 84,432 | 
|Diluted:                                                     |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|                                                             | Net income per share                |   | $                                     | 0.16   |      |   | $       | 0.27   |            |   | $         | 0.37   |  |   | $         | 0.30   |  |   | $          | 1.18   | 
|                                                             |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|                                                             | Weighted average shares
outstanding |   |                                       | 52,404 |      |   |         | 53,752 |            |   |           | 55,474 |  |   |           | 72,377 |  |   |            | 98,338 | 
|Balance Sheet Data (as of end of period):                    |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|Cash and cash equivalents                                    |                                     | $ | 63,018                                |        |      | $ | 45,895  |        |            | $ | 55,243    |        |  | $ | 110,048   |        |  | $ | 139,145    |       
|Total assets                                                 |                                     |   | 178,639                               |        |      |   | 304,016 |        |            |   | 406,738   |        |  |   | 3,001,850 |        |  |   | 3,223,964  |       
|Total debt                                                   |                                     |   | 1,285                                 |        |      |   | 50,000  |        |            |   | 50,000    |        |  |   | 845,000   |        |  |   | 500,786    |       
|Stockholders equity                                         |                                     |   | 50,342                                |        |      |   | 68,773  |        |            |   | 98,044    |        |  |   | 404,536   |        |  |   | 877,260    |       
|Supplemental Data(unaudited):                                |                                     |   |                                       |        |      |   |         |        |            |   |           |        |  |   |           |        |  |   |            |       
|Adjusted EBITDA(3)                                           |                                     | $ | 13,320                                |        |      | $ | 23,789  |        |            | $ | 45,536    |        |  | $ | 147,973   |        |  | $ | 300,432    |       
|Capital expenditures                                         |                                     |   | 6,795                                 |        |      |   | 7,860   |        |            |   | 22,807    |        |  |   | 41,197    |        |  |   | 51,112     |       
|Depreciation and amortization                                |                                     |   | 2,469                                 |        |      |   | 3,836   |        |            |   | 9,110     |        |  |   | 47,797    |        |  |   | 38,161     |       
|Goodwill amortization                                        |                                     |   | 347                                   |        |      |   | 588     |        |            |   | 3,354     |        |  |   | 23,775    |        |  |   |           |       
|Pharmacy network claims
processed                            |                                     |   | 38,319                                |        |      |   | 50,588  |        |            |   | 81,225    |        |  |   | 269,501   |        |  |   | 456,314    |       
|Mail pharmacy prescriptions
filled                           |                                     |   | 839                                   |        |      |   | 1,289   |        |            |   | 1,674     |        |  |   | 5,670     |        |  |   | 11,042     |       



---

|(1) |  | Includes PCS data since the acquisition on October 2, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Historical revenues for AdvancePCS have been reclassified to reflect
adoption of consistent revenue recognition policies with PCS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(3) |  | Adjusted EBITDA consists of operating income plus depreciation,
amortization and non-recurring and impairment expenses. Adjusted EBITDA
excludes merger costs, asset impairment, loss from joint ventures and
other non-recurring and impairment expenses. Adjusted EBITDA does not
represent funds available for our discretionary use and is not intended to
represent cash flow from operations as measured under generally accepted
accounting principles. Adjusted EBITDA should not be considered as an
alternative to net income or net cash used in operating activities, but
may be useful to investors as an indication of operating performance. Our
calculations of adjusted EBITDA may not be consistent with calculations of
adjusted EBITDA used by other companies.
|   
|(4) |  | Financial information for 2000 and 2001 has been restated for the
purchase of CHI (See Notes 2 and 15 to the financial statements included
in this report).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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

Overview

We are a leading provider of health improvement services in the United
States. As the largest PBM based on number of lives covered, we currently serve
more than 75 million health plan members and manage approximately $28 billion
in prescription drug spending on an annualized basis on behalf of our health
plan sponsors. In addition, we offer a wide range of other health improvement
products and services, such as prescription discount cards for the uninsured
and under-insured, web-based programs, disease management, clinical trials and
outcomes studies. Our mission is to improve the quality of care delivered to
health plan members while helping health plan sponsors reduce overall costs.

Over the past few years, the PBM industry has undergone significant
consolidation. We believe such consolidation has principally been driven by the
significant benefits of size and scale, including:



| |  |  | cost-saving opportunities to leverage a fixed-cost infrastructure
over greater prescription claim volume, resulting in greater pricing
flexibility; and                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | increased negotiating leverage with pharmaceutical manufacturers and
retail pharmacies, resulting in greater ability to obtain lower drug
costs for health plan sponsors.

We believe PBMs that effectively capture these benefits will be positioned to
strengthen their relationships with plan members, physicians and health plan
sponsors and improve their competitive position.

Critical Accounting Policies

Revenue Recognition

We purchased PCS on October 2, 2000 and have included this business in our
consolidated results of operations since that time. We made changes in our
revenue recognition presentation to conform the different policies used by
Advance Paradigm and PCS. These changes are reflected in all periods
presented. These changes are as follows:



|(1) |  | The historical PCS amounts have been reclassified to reflect the change
in presentation of data services revenues. In cases in which we have
assumed an independent obligation to pay our network pharmacy providers
and act as a principal in the transaction, we include payments from our
plan sponsors for these benefits as revenues and payments to our pharmacy
providers as cost of revenues (i.e. gross reporting). Historically, PCS
recorded only claims processing fees as revenues (i.e. net reporting).
The change results in higher revenues and an equal increase in cost of
revenues. This change had no effect on gross profit or operating income.                                                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In addition, the historical financial statements of AdvancePCS have been
revised to reflect a change in recognition of clinical and other service
revenues. We receive funds from pharmaceutical manufacturers for
formulary rebate programs that we administer on behalf of our health plan
sponsors. We record revenues in the amount of the administration fees we
charge for our services (i.e. net reporting) and include the cost of such
services in cost of revenues. Previously, we recognized the entire amount
of the rebate, including our administration fee, in revenues and the
portion of the rebate paid to our client in cost of revenues (i.e. gross
reporting). This revision resulted in lower revenues and an equal decrease
in cost of revenues. This change had no effect on gross profit or
operating income.

Revenues from the dispensing of pharmaceuticals from our mail service
pharmacy are recognized when each prescription is shipped. Revenues from sales
of prescription drugs by pharmacies in our nationwide network and claims
processing fees are recognized when the claims are adjudicated. At the
point-of-sale, the pharmacy claims are adjudicated using our on-line claims
processing system. When we independently contract to pay our network pharmacy
providers, we assume credit risk and act as a principal in the transaction,
therefore, we include payments from plan sponsors for these benefits as
revenues and payments to its pharmacy providers as cost of revenues (i.e. gross
reporting) in accordance with EITF 99-19 Reporting Gross Revenue as a
Principle vs Net as an Agent. If we are only administering plan sponsors
network pharmacy contracts, the Company records the claims processing fees as
revenue (i.e. net reporting). If we had reported our data services revenues
using net reporting, revenues and cost of revenues would have decreased by $1.5
billion, $5.9 billion and $10.8 billion, respectively, for the fiscal years
ended March 31, 2000, 2001 and 2002.

Clinical services fees received from the plan sponsors or pharmaceutical
manufacturers are recognized in revenues as earned in accordance with the
contractual agreements. Clinical services revenue includes service fees for
negotiating rebates

33



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##### Table of Contents



with pharmaceutical manufacturers on behalf of its health plan sponsor
customers. The rebate due from the manufacturer is determined based on a
complex formula including such factors as volume and quarterly drug
utilization. We estimate the most recent quarters rebate receivables from the
manufacturers and rebate payable to plan sponsors and its fees based on the
terms of its contracts and claims for the quarter. Following the end of the
quarter, we invoice the drug manufacturer. We revise our estimates based upon
the invoiced amounts. Rebates received from pharmaceutical manufacturers on
behalf of plan sponsors are excluded from revenues. Clinical services revenues
from certain disease management and health benefit management products are
reimbursed at predetermined contractual rates based on the delivery or
completion of the services.

Cost of Revenues

Cost of revenues includes product costs, pharmacy claims payments made to
our retail network pharmacies and other direct costs associated with the
provision of customer services and the sale and/or dispensing of prescriptions
including our call center operations. Rebate amounts paid to plan sponsors,
collected from pharmaceutical manufacturers, are excluded from cost of
revenues.

Selling, General and Administrative

Selling, general and administrative expenses reflect the costs of
operations dedicated to generating new sales and maintaining existing client
relationships. These expenses also include costs relating to certain corporate
functions including executive oversight, accounting, treasury, tax, legal,
public affairs, human resources, procurement and other services.

Use of Estimates

Preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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 consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. We have made
significant estimates of the purchase price, fair market value of the assets
acquired and liabilities assumed in our acquisitions, clinical service revenues
and costs, reserves for uncollectable accounts and contract losses and the
value of our various investments. We continually evaluate the appropriateness
of the amounts recorded and revise these estimates regularly. Actual results
could differ from those estimates.

Accounts Receivable

Accounts receivable balances represent trade receivables generated from
health benefit management and related services. To reduce the potential for
credit risk, the Company performs ongoing evaluations of its customers
financial condition but does not generally require significant collateral. As
of March 31, 2001 and 2002, unbilled receivables were $418.6 million and $495.7
million, respectively. Unbilled receivables to plan sponsors are typically
billed within 15 days and unbilled receivables to manufacturers are typically
billed within 90 days, based on the respective contractual billing schedule.

Goodwill and Other Intangible Assets

We have adopted Statement of Accounting Financial Standards (SFAS) 142
effective April 1, 2001. Under SFAS 142 goodwill is no longer amortized. In
addition, certain identified intangibles with indefinite lives are also not
amortized, but are subject to periodic impairment testing. Amortization expense
for the fiscal year ended March 31, 2002 was $10.9 million, which represented
the amortization relating to the identified intangible assets with finite
lives. Over the next five years, intangible amortization expense relating to
these identified intangibles will be as follows (in thousands):

|                       |       |   |        |        | 
|---------------------- | ----- | - | ------ | ------ | 
|Years Ending March 31, |       |   |        |       
|2003                   |       | $ | 11,515 |       
|2004                   |       |   | 11,515 |       
|2005                   |       |   | 11,515 |       
|2006                   |       |   | 10,706 |       
|2007                   |       |   | 10,301 |       
|                       |       |   |        |       
|                       | Total |   | $      | 55,552 | 
|                       |       |   |        |       

Under SFAS 142 assembled workforce is not a recognized intangible asset
and accordingly has been reclassified as goodwill. In addition, the trade name
is deemed to have an indefinite life as it is expected to generate cash flows
indefinitely. Accordingly, the trade name is no longer amortized. The effect
of the adoption of SFAS 142 is summarized in the following table:

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|                                                             |                             |       |           |                |         |              |         |         |         |  
|------------------------------------------------------------ | --------------------------- | ----- | --------- | -------------- | ------- | ------------ | ------- | ------- | ------- | -
|                                                             |                             |       |           | March 31, 2002
|                                                             |                             |       |           |               
|                                                             |                             |       |           | Gross Carrying |         | Accumulated 
|                                                             |                             |       |           | Amount         |         | Amortization
|                                                             |                             |       |           |                |         |             
|                                                             |                             |       |           | (in thousands)
|Goodwill                                                     |                             | $     | 1,228,380 |                |         | $            | (29,455 | )      
|                                                             |                             |       |           |                |         |              |         |        
|Intangible assets with indefinite
lives as of April 1, 2001: |                             |       |           |                |         |              |         |        
|                                                             | Trade name                  |       | $         | 106,600        |         |              | $       | (1,333  | )      
|                                                             |                             |       |           |                |         |              |         |        
|Intangible assets with finite lives:                         |                             |       |           |                |         |              |         |        
|                                                             | Customer base and contracts |       | $         | 277,300        |         |              | $       | (15,332 | )      
|                                                             | Other                       |       |           | 7,400          |         |              |         | (1,594  | )      
|                                                             |                             |       |           |                |         |              |         |        
|                                                             |                             | Total |           | $              | 284,700 |              |         | $       | (16,926 | )
|                                                             |                             |       |           |                |         |              |         |        

As required by SFAS 142 the results for the prior years financials have
not been restated. Net income as if SFAS 142 had been adopted is presented
below:

|                                                   |                     |   |                   |      |                   |   |        |      | 
|-------------------------------------------------- | ------------------- | - | ----------------- | ---- | ----------------- | - | ------ | ---- | 
|                                                   |                     |   | Fiscal Year Ended |      | Fiscal Year Ended
|                                                   |                     |   | March 31,         |      | March 31,        
|                                                   |                     |   | 2000              |      | 2001             
|                                                   |                     |   |                   |      |                  
|                                                   |                     |   | (in thousands)    |      | (in thousands)   
|Reported net income                                |                     | $ | 20,703            |      |                   | $ | 21,674 |     
|Add back: Goodwill amortization (net of tax)       |                     |   | 2,446             |      |                   |   | 21,562 |     
|Add back: Amortization of trade name and workforce |                     |   |                  |      |                   |   | 1,491  |     
|                                                   |                     |   |                   |      |                   |   |        |     
|Adjusted net income                                |                     | $ | 23,149            |      |                   | $ | 44,727 |     
|                                                   |                     |   |                   |      |                   |   |        |     
|Basic net income per share:                        |                     |   |                   |      |                   |   |        |     
|                                                   | Reported net income |   | $                 | 0.42 |                   |   | $      | 0.37 | 
|                                                   | Adjusted net income |   | $                 | 0.47 |                   |   | $      | 0.76 | 
|Diluted net income per share:                      |                     |   |                   |      |                   |   |        |     
|                                                   | Reported net income |   | $                 | 0.37 |                   |   | $      | 0.30 | 
|                                                   | Adjusted net income |   | $                 | 0.42 |                   |   | $      | 0.62 | 

Acquisitions

In January 2000, AdvancePCS acquired a 19% interest in Consumer Health
Interactive, Inc. (CHI), an internet health portal development company, with an
option to acquire the additional interest. Effective September 30, 2001 we
acquired the remaining equity interests of CHI, which we did not previously
own. The acquisition of the remaining interest was accounted for using the
purchase method of accounting. The acquisition of the remaining 81% equity
interest was completed with cash of $9.2 million, making CHI a wholly owned
subsidiary. Under the terms of the acquisition we may pay additional cash upon
the achievement by CHI of certain account growth targets. Prior to the
complete acquisition of CHI, we had accounted for our 19% interest in CHI on
the cost basis. In accordance with APB Opinion 18 all prior period financial
statements have been restated to account for CHI as though we had accounted for
our investment on the equity method.

Effective August 1, 2001 we completed the acquisition of 100% of the
equity of Dresing-Lierman, Inc. and its wholly owned subsidiary, TheraCom Inc.
(collectively, TheraCom), a specialty pharmacy and distribution company located
in Bethesda, Maryland. The aggregate purchase price paid was 1.3 million shares
of our Class A common stock. An additional 384,006 shares of Class A common
stock were placed in escrow, subject to release upon achievement of future
financial performance. In addition, we paid $10.6 million to eliminate
TheraComs outstanding indebtedness. The acquisition was accounted for using
the purchase method of accounting. The excess of the purchase price paid over
the net identifiable assets and liabilities of TheraCom, $39.1 million, was
recorded as goodwill. We also recognized $4.7 million in intangible

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customer contracts. The portion of the purchase price allocated to the
net identifiable assets and goodwill is preliminary and subject to revision
following the results of an appraisal and further identification of intangible
assets.

On October 2, 2000 we completed the acquisition of PCS for an aggregate
purchase price of approximately $1.0 billion, of which we paid Rite Aid, the
seller, $675 million in cash and issued to Rite Aid $200 million in senior
subordinated notes and $125 million in our convertible preferred stock. The
cash portion of the purchase price was financed with the proceeds of an $825
million senior secured credit facility and $150 million in equity financing
committed by JLL. In connection with the equity financing, we issued to JLL
65,854 shares of Series A-1 preferred stock for an aggregate purchase price of
$65.9 million, six shares of Series B convertible preferred stock and 8.4
million shares of our Class A common stock for an aggregate purchase price of
$84.1 million. On December 8, 2000, the six shares of Series B convertible
preferred stock and the 8.4 million shares of Class A common stock
automatically converted into 8.4 million shares of Class B-1 common stock. In
connection with the senior subordinated notes, we issued to Rite Aid warrants
to purchase 1.6 million shares of Class A common stock. The senior
subordinated notes were fully redeemed on March 13, 2001. The warrants
terminated upon repayment of the senior subordinated notes. The acquisition of
PCS was accounted for using the purchase method of accounting. The excess of
the purchase price paid over the net identifiable assets and liabilities of PCS
was recorded as goodwill.

Effective July 5, 2000, we completed a merger with FFI. We issued seven
million shares of our Class A common stock in exchange for all of the
outstanding shares of FFI. The merger constituted a tax-free reorganization and
has been accounted for as a pooling of interests. The historical financial
results have been restated in accordance with APB 16 to reflect the merger as
though FFI had always been a part of AdvancePCS.

Sources of Revenue

We group the revenues from all of our health improvement service offerings
into three categories: data, mail and clinical services.

Data services

Through our data services operations we process prescription claims on
behalf of our health plan sponsor customers. When a member of one of our health
plan sponsors presents a prescription or health plan identification card to a
retail pharmacist in our network, the pharmacist accesses our online system to
receive information regarding eligibility, patient history, health plan
formulary listings and negotiated price. The member generally pays a co-pay to
the retail pharmacy and the pharmacist fills the prescription. On behalf of our
health plan sponsors, during each billing cycle, our systems electronically
aggregate pharmacy benefit claims, which include prescription costs plus our
claims processing fees. Once we receive payments from health plan sponsors, we
remit the amounts owed by those health plan sponsors to the retail pharmacies
and retain the claims processing fees.

We have established a nationwide network of over 60,000 retail pharmacies,
each of which pay an access fee to be included in our network. Our contracts
with most of our health plan sponsors provide for member access to our retail
pharmacy network. Under these contracts, we have an independent obligation to
pay network retail pharmacies for the drugs dispensed, meaning we have assumed
this risk. We are a principal in the transaction; therefore, we record the
aggregate pharmacy benefit claim payments from our health plan sponsors as
revenues and include prescription costs to be paid to retail pharmacies in cost
of revenues.

Some of our other customers have established their own pharmacy networks.
Under contracts with these customers, we are not at risk for retail pharmacy
payment obligations. Thus, we record only our claims processing fees as
revenues and do not include prescription costs in revenues or cost of revenues.

As a result, customers that use our network will generate higher revenues
than customers that use their own networks. Similarly, while a customer who
uses our network may contribute the same gross profit in terms of dollars as a
customer that uses its own network, gross profit as a percentage of revenue
will be significantly lower for the customer using our network because of the
higher level of revenue we recognize.

Mail services

We derive mail services revenues from the sale of pharmaceuticals to
members of our customers health plans. These revenues include the cost of the
pharmaceuticals plus a dispensing fee. Our cost of revenues includes product
costs and other direct costs associated with the dispensing of prescription
drugs.

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Clinical and other services

We have historically derived our clinical revenues primarily from
formulary management and administration of rebate and volume discount programs
of pharmaceutical manufacturers relating to our PBM and consumer card
operations. We record revenues in the amount of the fees we charge for our
services and include the cost of such services in cost of revenues. Some of
these revenues are based on estimates of rebates generated for our clients that
are subject to final settlement with the manufacturer. In addition, we generate
clinical revenues on a fee-for-service basis on the sale of our comprehensive
health improvement products and services, including disease management,
clinical trials and outcomes studies.

Results Of Operations  AdvancePCS

The following table sets forth certain consolidated historical financial
data of AdvancePCS. Historical revenues for AdvancePCS and PCS have been
revised to reflect adoption of consistent revenue recognition policies as
described above.

|                                                           |                             |                |        |                                       |           |            |         |           |           |   |         |            |            | 
|---------------------------------------------------------- | --------------------------- | -------------- | ------ | ------------------------------------- | --------- | ---------- | ------- | --------- | --------- | - | ------- | ---------- | ---------- | 
|                                                           |                             |                |        | Year Ended March 31,                 
|                                                           |                             |                |        |                                      
|                                                           |                             |                |        | 2000(1)                               |           | 2001(1)(2) |         | 2002     
|                                                           |                             |                |        |                                       |           |            |         |          
|                                                           |                             |                |        | (In thousands, except per share data)
|Revenues:                                                  |                             |                |        |                                       |           |            |         |           |           |   |         |           
|                                                           | Data services               |                | $      | 1,558,113                             |           |            | $       | 6,010,692 |           |   | $       | 10,986,747 |           
|                                                           | Mail services               |                |        | 184,103                               |           |            |         | 714,294   |           |   |         | 1,555,319  |           
|                                                           | Clinical and other services |                |        | 91,672                                |           |            |         | 299,312   |           |   |         | 565,224    |           
|                                                           |                             |                |        |                                       |           |            |         |           |           |   |         |           
|                                                           |                             | Total revenues |        |                                       | 1,833,888 |            |         |           | 7,024,298 |   |         |            | 13,107,290 | 
|Gross profit                                               |                             |                | 75,502 |                                       |           |            | 229,160 |           |           |   | 451,591 |           
|Selling, general and
administrative expenses               |                             |                | 39,076 |                                       |           |            | 128,984 |           |           |   | 189,320 |           
|Non-recurring and impairment expenses                      |                             |                |       |                                       |           |            | 11,129  |           |           |   | 1,760   |           
|Operating income                                           |                             |                | 36,426 |                                       |           |            | 89,047  |           |           |   | 260,511 |           
|Net interest expense                                       |                             |                | (2,879 | )                                     |           |            | (41,882 | )         |           |   | (57,579 | )         
|Loss from joint venture                                    |                             |                |       |                                       |           |            |        |           |           |   | (2,871  | )         
|Merger costs & asset disposal                              |                             |                | (160   | )                                     |           |            | (1,200  | )         |           |   |        |           
|Income before extraordinary loss                           |                             |                | 20,703 |                                       |           |            | 21,674  |           |           |   | 121,046 |           
|Extraordinary loss on early retirement of
debt, net of tax |                             |                |       |                                       |           |            |        |           |           |   | (5,315  | )         
|Net income                                                 |                             | $              | 20,703 |                                       |           | $          | 21,674  |           |           | $ | 115,731 |           
|Basic net income per share                                 |                             | $              | 0.42   |                                       |           | $          | 0.37    |           |           | $ | 1.37    |           
|Diluted net income per share                               |                             | $              | 0.37   |                                       |           | $          | 0.30    |           |           | $ | 1.18    |           



---

|(1) |  | Financial information for 2000 and 2001 has been restated for the
purchase of CHI (See Notes 2 and 15 to the financial statements included
in this report).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes PCS data since the acquisition on October 2, 2000.                                                                                                

Fiscal Year 2002 Compared to Fiscal Year 2001

Revenues.Our revenues for fiscal year 2002 increased by $6.1 billion, or
87%, compared to revenues for fiscal year 2001. The increase in revenues was
primarily the result of our acquisition of PCS on October 2, 2000.
Approximately $5.0 billion, or 82% of the increase in revenues was attributable
to data services and a 69% increase in the number of pharmacy claims processed
during the period. Claims processed increased from 269 million in fiscal year
2001 to 456 million for fiscal year 2002. Approximately 14% of the increase was
attributable to additional sales of our mail pharmacy services, resulting from
a 95% increase in the number of mail prescriptions dispensed. Mail pharmacy
prescriptions dispensed increased from 5.7 million in fiscal year 2001 to 11.0
million for fiscal year 2002. The remaining 4% of the increase in revenues
resulted from an increase in clinical and other services revenues derived from
formulary and disease management services as well as clinical trials.

Gross profit.Our gross profit for fiscal year 2002 increased by $222
million, or 97%, compared to the same period in fiscal year 2001. This increase
was attributable primarily to the additional revenue and gross profit
associated with the PCS acquisition. As a percentage of revenues, gross profit
was approximately 3.5% in fiscal year 2002 compared to 3.3% in the same period
in fiscal year 2001. The increase was due to a decrease in data services
revenues as a percentage of total revenues. Data services revenues generally
have a lower percentage margin than other services.

Selling, general and administrative expenses.Our selling, general and
administrative expenses for fiscal year 2002 increased by $60.3 million, or
47%, compared to the same period in fiscal year 2001. This increase is due to
the acquisition of PCS and the comparison of six months of financial data in
fiscal year 2001 to one full year of PCS expenses in fiscal year 2002 offset by
the decrease in goodwill amortization of approximately $23.8 million as a
result of the adoption of FAS 142 . Selling, general and administrative
expenses as a percentage of revenues was approximately 1.4% in fiscal year 2002

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compared to 1.8% in fiscal year 2001. This was due to greater economies of
scale from the integration of PCS and due to the increase in revenue associated
with our data services. Additional revenues generated by customers using our
network pharmacy providers typically do not result in a proportional increase
in selling, general and administrative expenses.

Non-recurring and impairment expenses.Net income for the year ended March
31, 2001 reflected a non-recurring charge of $11.1 million ($6.8 million after
taxes, or $0.09 per diluted share) representing an impairment related to the
combination of our mail facilities. Our mail facility in Richardson, Texas has
been closed and operations moved to the Fort Worth and Birmingham facilities.
In addition, the charges include severance costs for certain management
employees that were terminated or resigned following and as a result of the
acquisition of PCS. All of these severance costs to management employees were
paid prior to March 31, 2001.

Net income for the year ended March 31, 2002 reflected a non-recurring
charge of $1.8 million ($1.1 million after taxes, or $0.01 per diluted share)
primarily representing a write-off of the human resources software previously
utilized by Advance prior to the acquisition of PCS and severance costs for
certain employees that were terminated or resigned following and as a result of
the acquisition with PCS.

Interest income and interest expense.Interest expense, net of interest
income, for fiscal year 2002 increased $15.7 million compared to the same
period in fiscal year 2001. The increase resulted from the acquisition of PCS,
which was partially funded by over $800 million in additional debt.

Loss from joint venture.In February 2001, we entered into an agreement
with Express Scripps and Merck-Medco, to form RxHub, LLC (RxHub) to develop
electronic prescribing technology. We own one third of the equity of RxHub.
We have recorded our investment in RxHub under the equity method of accounting
and record our percentage interest in RxHubs results in our Consolidated
Statement of Operations. Our prorata share of RxHubs loss for fiscal year
2002 was $2.9 million.

Income taxes.For fiscal year 2002 our effective tax rate was
approximately 39.5%. For fiscal year 2001 our recorded income tax expense
approximated an effective tax rate of 52.8%. The difference in rates is
primarily due to the amortization of non-deductible goodwill in fiscal year
2001, which is approximately $21 million. Goodwill amortization was not
recorded in fiscal year 2002 due to the implementation of FAS 142.

Extraordinary loss on early retirement of debt.In connection with the
bank debt repayments made in fiscal year 2002 and the securitization, we
recorded an extraordinary loss, associated with the early retirement of debt.
The loss was attributable to a non-cash charge to write-off a portion of the
deferred financing fees related to the secured bank agreement in the amount of
$5.3 million, net of tax.

Diluted net income per share.We reported diluted net income per share of
$1.18 per share for fiscal year 2002 compared to $0.30 per share for the same
period in fiscal year 2001. The weighted average shares outstanding were 72.4
million and 98.3 million for fiscal years 2001 and 2002, respectively. We
issued securities convertible into common stock in connection with the PCS
acquisition, resulting in an increase in weighted average shares outstanding.
On August 23, 2001 we completed the sale of nine million shares of Class A
common stock. In addition, during fiscal year 2002 we completed a two-for-one
stock split effected in the form of a stock dividend of our common stock.
Financial information and stock prices contained throughout the Form 10-K have
been adjusted to reflect the impact of the stock split.

Fiscal Year 2001 Compared to Fiscal Year 2000

Revenues.Our revenues for fiscal year 2001 increased by $5.2 billion, or
283%, compared to revenues for fiscal year 2000. The increase in revenues was
primarily the result of our acquisition of PCS on October 2, 2000.
Approximately $4.5 billion, or 86% of the increase in revenues was attributable
to data services and a 232% increase in the number of pharmacy claims processed
during the period. Claims processed increased from 81 million in fiscal year
2000 to 269 million for fiscal year 2001. The addition of PCS added
approximately 160 million claims for the period. Approximately 10% of the
increase was attributable to additional sales of our mail pharmacy services,
resulting from a 239% increase in the number of mail prescriptions dispensed.
Mail pharmacy prescriptions dispensed increased from 1.7 million in fiscal year
2000 to 5.7 million for fiscal year 2001. The addition of PCSs two mail
pharmacies accounted for approximately 91% of the increase. The remaining 4% of
the increase in revenues resulted from an increase in clinical and other
services revenues derived from formulary and disease management services as
well as clinical trials.

Gross profit.Our gross profit for fiscal year 2001 increased by $154
million, or 204%, compared to the same period in fiscal year 2000. This
increase was attributable primarily to the additional revenue and gross profit
associated with the PCS acquisition. As a percentage of revenues, gross profit
was approximately 3.3% in fiscal year 2001 compared to 4.1% in the

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same period in fiscal year 2000. The decrease was primarily due to a
substantial increase in data services revenues from the PCS acquisition, which
have lower margins than other services.

Selling, general and administrative expenses.Our selling, general and
administrative expenses for fiscal year 2001 increased by $89.9 million, or
230%, compared to the same period in fiscal year 2000. This increase is due to
the acquisition of PCS. Approximately $26.8 million of the increase is due to
additional goodwill and other intangibles amortization associated with the PCS
acquisition. Selling, general and administrative expenses as a percentage of
revenues was approximately 1.8% in fiscal year 2001 compared to 2.1% in the
same period in fiscal year 2000.

Non-recurring and impairment expenses.Net income for the year ended March
31, 2001 reflected a non-recurring charge of $11.1 million ($6.8 million after
taxes, or $0.09 per diluted share) representing an impairment related to the
combination of our mail facilities. Our mail facility in Richardson, Texas has
been closed and operations moved to the Fort Worth and Birmingham facilities.
In addition, the charges include severance costs for certain management
employees that were terminated or resigned following and as a result of the
acquisition of PCS. All of these severance costs to management employees were
paid prior to March 31, 2001.

Interest income and interest expense.Interest expense, net of interest
income, for fiscal year 2001 increased $39.0 million compared to the same
period in fiscal year 2000. The increase resulted from the acquisition of PCS,
which was partially funded by over $800 million in additional debt.

Merger costs.Net income for fiscal year 2001 reflected a pre-tax charge
of $1.2 million ($926,000 after taxes, or $0.01 per share) relating to merger
costs incurred in connection with the merger with FFI.

Income taxes.For fiscal year 2001 our effective tax rate was
approximately 52%. For fiscal year 2000 our income tax expense approximated an
effective tax rate of 38%. The effective rate for fiscal year 2001 was higher
due to the non-deductible nature of the goodwill and other intangible assets
acquired in the PCS acquisition.

Diluted net income per share.We reported diluted net income per share of
$0.30 per share for fiscal year 2001 compared to $0.37 per share for the same
period in fiscal year 2000. The weighted average shares outstanding were 55.5
million and 72.4 million for fiscal years 2000 and 2001, respectively. The
decrease in diluted net income per share resulted from additional interest
expense and goodwill and other intangibles amortization in connection with the
PCS acquisition. In addition, securities convertible into common stock were
issued in connection with the PCS acquisition resulting in an increase in
weighted average shares outstanding.

Unaudited Pro Forma Results of Operations for PCS Acquisition

The following table sets forth certain unaudited pro forma financial data
assuming the PCS acquisition occurred on April 1 of the periods presented.
Historical revenues for AdvancePCS and PCS have been revised to reflect
adoption of consistent revenue recognition policies as described in - Changes
in Revenue Recognition.

|                                             |                             |                |         |                      |            |         |         |            |            | 
|-------------------------------------------- | --------------------------- | -------------- | ------- | -------------------- | ---------- | ------- | ------- | ---------- | ---------- | 
|                                             |                             |                |         | Year Ended March 31,
|                                             |                             |                |         |                     
|                                             |                             |                |         | 2001(1)              |            | 2002(2)
|                                             |                             |                |         |                      |            |        
|                                             |                             |                |         | (In thousands)      
|Revenues                                     |                             |                |         |                      |            |         |         |           
|                                             | Data services               |                | $       | 9,711,112            |            |         | $       | 10,986,747 |           
|                                             | Mail services               |                |         | 1,143,087            |            |         |         | 1,555,319  |           
|                                             | Clinical and other services |                |         | 457,743              |            |         |         | 565,224    |           
|                                             |                             |                |         |                      |            |         |         |           
|                                             |                             | Total revenues |         |                      | 11,311,942 |         |         |            | 13,107,290 | 
|Gross profit                                 |                             |                | 339,881 |                      |            |         | 451,591 |           
|Selling, general and
administrative expenses |                             |                | 222,775 |                      |            |         | 189,320 |           
|Operating income                             |                             |                | 105,977 |                      |            |         | 260,511 |           



---

|(1) |  | Operating income would have been $129.8 million and selling, general and
administrative expenses would have been $199 million if SFAS 142 had been
adopted for the twelve-month period ended March 31, 2001.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Actual AdvancePCS results for the twelve-month period ended March 31,
2002.                                                                                                                                 

Pro Forma AdvancePCS:

Fiscal Year 2002 Compared to Pro Forma Fiscal Year 2001

Revenues.Our revenues for fiscal year 2002 increased by $1.8 billion, or
16% compared to the pro forma revenues for fiscal year 2001. Approximately $1.3
billion, or 71% of the increase in revenues was attributable to data services
and a 4.5%

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increase in the number of pharmacy claims processed during the period.
Claims processed increased from 437 million on a pro forma basis in fiscal year
2001 to 456 million for fiscal year 2002. Approximately 23% of the increase was
attributable to additional sales of our mail pharmacy services, resulting from
an 19% increase in the number of mail prescriptions dispensed. The remaining 6%
of the increase in revenues resulted from an increase in clinical and other
services revenues derived from formulary and disease management services.

Gross profit.Our gross profit for fiscal year 2002 increased by $111.7
million, or 33%, compared to the same period in fiscal year 2001 on a pro forma
basis. This increase was attributable primarily to the additional revenue and
gross profit generated by the improvement in operations at our mail facilities.
The improvement resulted from the closing of the Richardson, Texas mail
facility along with the acquisition of PCS and the cost savings from the
integration and streamlining of operations. As a percentage of revenues, gross
profit was approximately 3.5% in fiscal year 2002, compared to 3.0% in the same
period in fiscal year 2001 on a pro forma basis.

Selling, general and administrative expenses.Our selling, general and
administrative expenses for fiscal year 2002 decreased by $33.5 million, or
15%, compared to the same period in fiscal year 2001 on a pro forma basis.
This decrease was due to losses of approximately $7 million that were incurred
in connection with performance-based contracts in fiscal year 2001. Savings
also came from the integration and synergies created by the PCS acquisition.
Also, savings came from the implementation of FAS 142 and the related reduction
in amortization of goodwill. As a percentage of revenue, selling general and
administrative costs for 2002 were 1.4%, compared to 2.0% in the same period in
fiscal year 2001 on a pro forma basis. If SFAS 142 had been adopted for the
twelve months ended March 31, 2001, selling, general and administrative
expenses would have been $199 million, or 1.8% of revenues on a pro forma
basis.

Non-recurring and impairment expenses.Net income for the year ended March
31, 2001 reflected a non-recurring charge of $11.1 million ($6.8 million after
taxes, or $0.09 per diluted share) representing an impairment related to the
combination of our mail facilities. Our mail facility in Richardson, Texas has
been closed and operations moved to the Fort Worth and Birmingham facilities.
In addition, the charges include severance costs for certain management
employees that were terminated or resigned following and as a result of the
acquisition of PCS. All of these severance costs to management employees were
paid prior to March 31, 2001.

Net income for the year ended March 31, 2002 reflected a non-recurring
charge of $1.8 million ($1.1 million after taxes, or $0.01 per diluted share)
primarily representing a write-off of the human resources software previously
utilized by Advance prior to the acquisition of PCS and severance costs for
certain employees that were terminated or resigned following and as a result of
the acquisition with PCS.

Operating income.Our operating income increased by $154.5 million, or
146%, for fiscal year 2002 compared to the same period in fiscal year 2001 on a
pro forma basis. The increase resulted from the factors mentioned above as
revenues improved and due to the integration and related synergies.

Liquidity and Capital Resources

As of March 31, 2002, we had a working capital deficit of $236.4 million.
The majority of our current obligations are not due until cash is collected
from our customers. We use our excess cash balances to reduce debt under our
revolving credit facility, which results in a net deficit in working capital.
Our net cash provided by operating activities was $143.3 million for fiscal
year 2002 resulting primarily from net income and also due to the timing of
receivables and payables resulting from our continued growth. During fiscal
year 2002, we used cash of $51.1 million for purchases of property and
equipment associated with the growth and expansion of our systems and
facilities.

Historically, we have been able to fund our operations and continued
growth through cash flow from operations. In fiscal years 2000, 2001 and 2002
our operating cash flow funded our capital expenditures and our short-term
excess cash was used to reduce our debt or invested in money market funds. We
anticipate that cash flow from operations, combined with our current cash
balances and amounts available under our credit facility, will be sufficient to
meet our internal operating requirements and expansion programs, including
capital expenditures, for at least the next 18 months. However, if we continue
our expansion, acquisition and alliance plans, we may be required to seek
additional debt or equity financing in order to achieve these plans.

In conjunction with our acquisition of PCS in fiscal year 2001, we
obtained an $825 million senior secured credit facility that included a $175
million revolving credit facility, a $100 million interim revolving credit
facility and two term notes totaling $550 million. Our $150 million Term A note
accrued interest at LIBOR plus 2.75%, with escalating quarterly principal
payments and was fully repaid in fiscal year 2002. Our $400 million Term B note
accrues interest at LIBOR plus 3.25%, with quarterly principal payments of
$381,000 until December 31, 2006 and payments of $36 million thereafter on each
of December 31, 2006, March 31, 2007, June 30, 2007 and September 30, 2007. Our
revolving credit facilities accrue

40



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interest at LIBOR plus 2%. The Term B note has been fully repaid as of
June 5, 2002. The revolving credit facility expires on October 2, 2005. As of
March 31, 2002, we had no amount outstanding under this revolving credit
facility. The senior secured credit facility contains covenants that are
typical for this type of loan. The Company is in compliance with all covenants.
The senior secured credit facility has been unconditionally guaranteed,
jointly and severally, by all of our subsidiaries. In addition, the senior
secured credit facility is secured by a first priority lien on the stock of our
subsidiaries and substantially all of our assets and the assets of our
subsidiaries. Each subsidiary is 100% owned. There are no restrictions on the
ability of the subsidiary guarantors to pay dividends or make loans or advances
to the parent. We also issued to Rite Aid $125 million in convertible preferred
stock substantially all of which was subsequently converted into Class A common
stock and sold by Rite Aid. In addition, we issued $150 million in 8.4 million
shares of common stock and 65,854 shares of convertible preferred stock to JLL.
Also, we issued to Rite Aid $200 million in senior subordinated notes. In
March 2001, the Company issued $200 million in 8 1/2 % Senior Notes Due 2008
(Senior Notes). The proceeds from this offering were used to retire the $200
million senior subordinated notes due 2010 that were issued to Rite Aid in
connection with the PCS acquisition. The Senior Notes contain covenants that
are typical for this type of debt. The Senior Notes have been unconditionally
guaranteed, jointly and severally, by all of our subsidiaries, which are all
100% owned. There are no restrictions on the ability of the guarantors to pay
dividends, make loans or advances to the parent.

On August 23, 2001 we completed the sale of nine million shares of Class A
common stock. The proceeds, net of offering costs, of approximately $291
million were used to reduce debt. The Term A debt of approximately $147
million was fully repaid and the remaining $144 million was used to repay a
portion of the outstanding Term B debt. In addition, during the three-month
period ended September 30, 2001, our preferred stockholders converted their
preferred shares totaling 65,854 shares into 6.6 million shares of Class B-1
common stock.

In December 2001, we securitized certain of our accounts receivable
pursuant to a $150 million facility (the Asset Securitization Facility). The
$150 million commitment under the facility is due December 10, 2006. The Asset
Securitization Facility incurs interest at the funding agents A-1+/P-1
commercial paper rate plus .65%. As of March 31, 2002, we had drawn $150
million under this facility. The Asset Securitization Facility is included in
our debt balance as of March 31, 2002 and will continue to be reflected
on-balance sheet. The proceeds were used to repay $150 million of our Term B
debt. In addition, our $100 million interim revolving credit facility was
eliminated. As of March 31, 2002 our debt consists of the following in
thousands:

|                              |  |   |         | 
|----------------------------- |  | - | ------- | 
|Term B bank debt              |  | $ | 150,786 | 
|Asset Securitization Facility |  |   | 150,000 | 
|Senior Notes                  |  |   | 200,000 | 
|                              |  |   |         | 
|                              |  | $ | 500,786 | 
|                              |  |   |         | 

In addition, we have a $175 million revolving credit facility that expires
in 2005. As of March 31, 2002, no amounts were drawn on this revolving
facility. In connection with the bank debt repayments made in the second and
third quarters of fiscal year 2002 and the securitization, we recorded an
extraordinary loss, associated with the early retirement of debt. The loss was
attributable to a non-cash charge to write-off a portion of the deferred
financing fees related to the secured bank agreement in the amount of $5.3
million, net of tax.

On June 5, 2002 we completed an increase in our Asset Securitization
Facility. The $150 million commitment under the facility was expanded to $300
million and is due December 10, 2006. The Asset Securitization Facility now
incurs interest at the funding agents A-1+/P-1 commercial
paper rate plus .85%. The Asset Securitization Facility is included in our debt balance as of
March 31, 2002 and will continue to be reflected on-balance sheet. We used
the proceeds to repay the remaining $150 million of our Term B note.

Effective April 1, 2001 we adopted SFAS 133 Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS 137 and SFAS 138. In
order to hedge variable rate interest payments made in conjunction with our
debt we entered into interest rate protection agreements that have fixed the
LIBOR rate as of November 7, 2000 at 6.60% for $400 million. The notional
amount dropped to $300 million in October 2001 and drops to $200 million in
October 2002. We have declared these agreements fair value hedges in
accordance with SFAS 133, as amended and have recognized the fair value of
these financial instruments in the condensed consolidated balance sheet
effective April 1, 2001 upon adoption of SFAS 133. As a portion of the debt
interest rates and underlying index of the interest rate protection agreements
do not coincide, we test for hedge effectiveness using the hypothetical
derivative method. The results of this test at March 31, 2002 indicate that
the hedge is highly effective and any ineffectiveness is not significant to the
results of operations. These instruments have been marked to market at March
31, 2002 with the adjustment recognized as a component of other comprehensive
income in stockholders equity. The fair value of our interest rate swaps, a
liability of $14.5 million at March 31, 2002, was based upon quoted market
prices. Under SFAS 133, we have recorded a charge to other comprehensive
income of $8.8 million, net of taxes, for the fiscal year ended March 31, 2002.

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The following table sets forth our schedule of current maturities of
long-term debt, excluding the deferred interest rate swap gain or loss of $14.5
million at March 31, 2002, and future minimum lease payments due under
noncancellable operating leases (in thousands):

|                       |                |        |        |        |  |       |         |         |  |   |         |         | 
|---------------------- | -------------- | ------ | ------ | ------ |  | ----- | ------- | ------- |  | - | ------- | ------- | 
|Years Ending March 31, |                | Leases |        | Debt   |  | Total
|                       |                |        |        |        |  |      
|2003                   |                | $      | 23,757 |        |  | $     | 1,523   |         |  | $ | 25,280  |        
|2004                   |                |        | 17,224 |        |  |       | 1,523   |         |  |   | 18,747  |        
|2005                   |                |        | 8,031  |        |  |       | 1,523   |         |  |   | 9,554   |        
|2006                   |                |        | 6,570  |        |  |       | 1,523   |         |  |   | 8,093   |        
|2007 and thereafter    |                |        | 31,343 |        |  |       | 494,694 |         |  |   | 526,037 |        
|                       |                |        |        |        |  |       |         |         |  |   |         |        
|                       | Total payments |        | $      | 86,925 |  |       | $       | 500,786 |  |   | $       | 587,711 | 
|                       |                |        |        |        |  |       |         |         |  |   |         |        

Additionally, we continue to evaluate the scope of modifications of our
information systems needed to comply with applicable HIPAA rules. We expect
that HIPAA requirements will result in additional capital expenditures over the
level required for maintenance and growth of our operations though 2003, which
is the scheduled deadline for HIPAA compliance. We do not expect costs
associated with HIPAA to materially impact our financial condition, results of
operations or cash flows.

Related Party Transactions

In fiscal 2001 and 2002, the Company had an interest bearing note
receivable of $500,000 and $400,000, respectively, due from an executive
officer of the Company issued in conjunction with his relocation as a result of
the acquisition of PCS.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to all entities and legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, constructions, development and/or the normal operation of
a long-lived asset. SFAS 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and are subsequently allocated to expense over the assets
useful life. This statement is effective for the financial statements issued
for fiscal years beginning after June 15, 2002. We have not yet determined the
impact that SFAS 143 will have on its financial position or results of
operations.

In August 2001 the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. This statement supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of;
however, this statement retains the fundamental provisions of SFAS 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale.
This statement also supersedes the accounting and reporting provisions of APB
Opinion 30, Reporting the Results of Operations Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions for segments of a business to be disposed
of. SFAS 144 is effective for fiscal years beginning after December 15, 2001.
We do not believe that the adoption of SFAS 144 will have a material effect on
our financial position or results of operations.

In May 2002, the FASB issued SFAS No. 145 Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections as of April 2002. This
Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement No.
64, and Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. SFAS 145 is effective
for fiscal years beginning after May 15, 2002. The Company has not yet
determined the impact that SFAS No. 145 will have on its financial position or
results of operations.

Impact Of Inflation

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

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has not entered into derivatives or other financial
instruments for trading purposes. We have entered into interest rate
protection agreements (interest rate swaps  see Note 2 to the condensed
consolidated financial statements) that have fixed the LIBOR rate as of
November 7, 2000 at 6.60% for $400 million of our variable rate debt under our
credit facility. The notional amount dropped to $300 million in October 2001
and drops to $200 million in October 2002. We use the interest rate swaps to
manage our interest rate risk on future interest payments. In addition the
Company has $200 million of 81/2% Senior Notes outstanding. As a result,
virtually all of our debt is effectively fixed rate debt as of March 31, 2002.
Due to these measures a change in interest rates would have no material effect
on our statement of operations but could impact the fair value of debt
outstanding relative to current market rates.

A sensitivity analysis is used to determine the impact interest rate
changes will have on the fair value of the interest rate swap, measuring the
change in the net present value arising from the change in the interest rate.
The fair value of the swap is then determined by calculating the present value
of all cash flows expected to arise thereunder, with future interest rate
levels implied from prevailing mid-market swap rates. Anticipated cash flows
are then discounted on the assumption of a continuously compounded zero-coupon
yield curve.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information
required by this item is found on pages F-1 through F-26
hereof.




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

Previous Independent Accountants

After a competitive bid process that began in September 2001, AdvancePCS
dismissed Arthur Andersen LLP as its independent accountants effective February
12, 2002. AdvancePCSs Audit Committee and Board of Directors participated in
and approved the decision to change independent accountants. Arthur Andersen
LLPs audit reports on the AdvancePCSs financial statements for the two most
recent fiscal years did not contain an adverse opinion or disclaimer of opinion
and no such report was qualified or modified as to uncertainty, audit scope or
accounting principles. In connection with its audits for AdvancePCSs two most
recent fiscal years and through February 12, 2002, there were no disagreements
between AdvancePCS and Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Arthur
Andersen LLP would have caused them to make reference thereto in their report
on the financial statements for such years. During the Companys two most
recent fiscal years and through February 12, 2002, there have been no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
AdvancePCS requested Arthur Andersen LLP to furnish it with a letter addressed
to the Securities and Exchange Commission stating whether it agrees with the
above statements made by the Company. A copy of such letter, dated February
15, 2002, was filed as Exhibit 16 to AdvancePCSs Current Report on Form 8-K,
dated as of February 12, 2002.

New Independent Accountants

AdvancePCS engaged PricewaterhouseCoopers LLP as its new independent
accountants as of February 12, 2002. During the two most recent fiscal years
and through February 12, 2002, AdvancePCS did not consult with
PricewaterhouseCoopers LLP regarding any of the matters or events set forth in
Item 304(a)(2) of Regulation S-K.

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##### Table of Contents






PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item will be incorporated by reference to
our definitive proxy statement for our 2002 annual meeting of stockholders (the
Proxy Statement) to be filed with the Securities and Exchange Commission not
later than 120 days following our fiscal year pursuant to Regulation 14A.




ITEM 11. EXECUTIVE COMPENSATION

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




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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




PART IV




ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

| |     |  |                                                                                                          |  |                                                                                                                                                                                                                                                                                                                       
| | --- |  | -------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) |  | The following documents are filed as part of this report.                                               
|
| |     |  | (1)                                                                                                      |  | Financial Statements. See index to financial
statements on page F-1 of this report.                                                                                                                                                                                                                                   
|
| |     |  | (2)                                                                                                      |  | Financial Statement Schedules. See index to
financial statement schedules on page F-1 of this report.                                                                                                                                                                                                                 
|
| |     |  | (3)                                                                                                      |  | Exhibit. See index to exhibits.                                                                                                                                                                                                                                                                                       
|
| | (b) |  | Reports on Form 8-K. We filed the following reports on Form
8-K during the quarter ended March 31, 2002:
|
| |     |  | (1)                                                                                                      |  | Report on Form 8-K/A filed with the Securities and
Exchange Commission on January 10, 2002 to include additional
financial statements of PCS Holding Corporation and
Subsidiaries, relating to the acquisition of PCS Holding
Corporation and Subsidiaries pursuant to a Stock Purchase
Agreement dated July 11, 2000.
|
| |     |  | (2)                                                                                                      |  | Report on Form 8-K filed with the Securities and
Exchange Commission on January 10, 2002 to include an updated
pro forma statement of operations for the year ended March 31,
2001 related to AdvancePCSs acquisition of PCS Holding
Corporation and Subsidiaries.                                                   
|
| |     |  | (3)                                                                                                      |  | Report on Form 8-K filed with the Securities and
Exchange Commission on February 12, 2002 to announce a change
in the Registrants certifying accountant from Arthur Andersen
LLP to PricewaterhouseCoopers LLP.                                                                                                      

44



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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.

|              |  |            |  |                                                                                       
|------------- |  | ---------- |  | --------------------------------------------------------------------------------------
|June 28, 2002 |  | AdvancePCS
|             
|              |  | By:        |  | /s/ David D. HalbertDavid D. Halbert
Chairman of the Board and Chief Executive 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 Company
and in the capacities and on the dates indicated.

|                                     |  |                                                                                              |  |              
|------------------------------------ |  | -------------------------------------------------------------------------------------------- |  | -------------
|Signature                            |  | Title                                                                                        |  | Date         
|                                     |  |                                                                                              |  |              
|/s/ David D. HalbertDavid D. Halbert |  | Chairman of the Board
& Chief Executive Officer
(Principal Executive Officer)                |  | June 28, 2002
|                                    
|/s/ Jon S. HalbertJon S. Halbert     |  | Vice Chairman & Director                                                                     |  | June 28, 2002
|                                    
|/s/ David A. GeorgeDavid A. George   |  | President & Director                                                                         |  | June 28, 2002
|                                    
|/s/ Yon Y. JordenYon Y. Jorden       |  | Executive Vice President, Chief
Financial Officer (Principal Financial
& Accounting Officer) |  | June 28, 2002
|                                    
|/s/ Ramsey A. FrankRamsey A. Frank   |  | Director                                                                                     |  | June 28, 2002
|                                    
|/s/ Stephen L. GreenStephen L. Green |  | Director                                                                                     |  | June 28, 2002
|                                    
|/s/ David R. JessickDavid R. Jessick |  | Director                                                                                     |  | June 28, 2002

45



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|                                         |  |          |  |              
|---------------------------------------- |  | -------- |  | -------------
|                                        
|                                        
|/s/ Paul S. LevyPaul S. Levy             |  | Director |  | June 28, 2002
|                                        
|/s/ Robert G. MillerRobert G. Miller     |  | Director |  | June 28, 2002
|                                        
|/s/ Jean-Pierre MillonJean-Pierre Millon |  | Director |  | June 28, 2002
|                                        
|/s/ Michael D. WareMichael D. Ware       |  | Director |  | June 28, 2002

46



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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
AdvancePCS and Subsidiaries

|                                                                                                  |  |  |      | 
|------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Report of Independent Accountants                                                                 |  |  | F-2  | 
|Report of Independent Accountants                                                                 |  |  | F-3  | 
|Consolidated Balance Sheets as of March 31, 2001 and 2002                                         |  |  | F-4  | 
|Consolidated Statements of Operations for the Years Ended March 31, 2000,
2001 and 2002           |  |  | F-5  | 
|Consolidated Statements of Stockholders Equity for the Years Ended
March 31, 2000, 2001 and 2002 |  |  | F-6  | 
|Consolidated Statements of Cash Flows for the Years Ended March 31, 2000,
2001 and 2002           |  |  | F-8  | 
|Notes to Consolidated Financial Statements                                                        |  |  | F-9  | 
|Schedule II. Valuation and Qualifying Accounts for the
Years Ended March 31, 2000, 2001 and 2002  |  |  | F-26 | 

F- 1



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of AdvancePCS:

In our opinion, the consolidated financial statements listed in the
accompanying index on page F-1 of this form 10-K present fairly, in all
material respects, the financial position of AdvancePCS and its
subsidiaries at March 31, 2002 and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments as of April
1, 2001.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas,
May 15, 2002 (except with respect to the matter
discussed in Note 16, as to which the date is June 5, 2002).

F- 2



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##### Table of Contents



THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

Due to the acquisition of the remaining 81% interest in Consumer Health
Interactive (CHI), as required by APB 18, the financial statements which are
the subject of this report have been restated to account for CHI as if it had
been accounted for on the equity method (See Note 2 Principles of Consolidation
to the financial statements). Arthur Andersen did not participate in the
preparation of the restatement and accordingly this report does not extend to
those adjustments

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of AdvancePCS:

We have audited the accompanying consolidated balance sheets of AdvancePCS
(a Delaware corporation) and subsidiaries as of March 31, 2000 and 2001, and
the related consolidated statements of operations, stockholders equity and
cash flows for each of the three years in the period ended March 31, 2001.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AdvancePCS and subsidiaries
as of March 31, 2000 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 2001, in
conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Dallas, Texas,
May 29, 2001 (except with respect to the matter
discussed in Note 15*, as to which the date is June 18, 2001).

*     This reference refers to Note 15 on Form 10-K of the prior year, fiscal year
2001.

F- 3



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##### Table of Contents



AdvancePCS and Subsidiaries

Consolidated Balance Sheets
(in thousands, except share data)

|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |           |     |           |  | 
|------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | --- | --------- | --------- | --------- | --- | --------- |  | 
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     | March 31,
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |          
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     | 2001      |           | 2002     
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|ASSETS                                                                                                       |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|Current assets:                                                                                              |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|                                                                                                             | Cash and cash equivalents                                                                       |                                                                                                                         | $                                          | 110,048   |     |           | $         | 139,145   |    
|                                                                                                             | Accounts receivable, net of allowance for doubtful
accounts of $18,840 and $26,150 respectively |                                                                                                                         |                                            | 1,055,927 |     |           |           | 1,225,929 |    
|                                                                                                             | Inventories                                                                                     |                                                                                                                         |                                            | 34,814    |     |           |           | 65,336    |    
|                                                                                                             | Prepaid expenses and other                                                                      |                                                                                                                         |                                            | 11,920    |     |           |           | 10,484    |    
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|                                                                                                             |                                                                                                 |                                                                                                                         | Total current assets                       |           |     | 1,212,709 |           |           |     | 1,440,894 | 
|Property and equipment, net of accumulated depreciation and
amortization of $37,720 and $64,999 respectively |                                                                                                 |                                                                                                                         | 96,640                                     |           |     |           | 121,277   |          
|Goodwill                                                                                                     |                                                                                                 |                                                                                                                         | 1,282,192                                  |           |     |           | 1,198,925 |          
|Intangible assets, net                                                                                       |                                                                                                 |                                                                                                                         | 382,937                                    |           |     |           | 373,041   |          
|Other noncurrent assets                                                                                      |                                                                                                 |                                                                                                                         | 27,372                                     |           |     |           | 89,827    |          
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|                                                                                                             |                                                                                                 |                                                                                                                         | Total assets                               |           | $   | 3,001,850 |           |           | $   | 3,223,964 | 
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |           |    
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                         |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|Current liabilities:                                                                                         |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|                                                                                                             | Current portion of long-term debt                                                               |                                                                                                                         | $                                          | 15,250    |     |           | $         | 1,523     |    
|                                                                                                             | Claims and accounts payable                                                                     |                                                                                                                         |                                            | 1,382,458 |     |           |           | 1,557,909 |    
|                                                                                                             | Accrued salaries and benefits                                                                   |                                                                                                                         |                                            | 23,871    |     |           |           | 38,602    |    
|                                                                                                             | Other accrued expenses                                                                          |                                                                                                                         |                                            | 90,524    |     |           |           | 79,308    |    
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|                                                                                                             |                                                                                                 |                                                                                                                         | Total current liabilities                  |           |     | 1,512,103 |           |           |     | 1,677,342 | 
|Noncurrent liabilities:                                                                                      |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|                                                                                                             | Long-term debt, less current portion                                                            |                                                                                                                         |                                            | 829,750   |     |           |           | 499,263   |    
|                                                                                                             | Deferred income taxes                                                                           |                                                                                                                         |                                            | 237,673   |     |           |           | 134,878   |    
|                                                                                                             | Other noncurrent liabilities                                                                    |                                                                                                                         |                                            | 17,788    |     |           |           | 35,221    |    
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|                                                                                                             |                                                                                                 |                                                                                                                         | Total liabilities                          |           |     | 2,597,314 |           |           |     | 2,346,704 | 
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|Commitments and contingencies                                                                                |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |    
|Stockholders equity:                                                                                        |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|                                                                                                             | Preferred stock, $.01 par value; 5,000,000 shares authorized                                    |                                                                                                                         |                                            |           |     |           |           |           |    
|                                                                                                             |                                                                                                 | Series A-1 convertible preferred stock, $.01 par value;
65,854 and no shares issued and outstanding respectively        |                                            |           | 1   |           |           |           |    |          
|                                                                                                             |                                                                                                 | Series A-2 convertible preferred stock, $.01 par value;
no shares issued or outstanding                                 |                                            |           |    |           |           |           |    |          
|                                                                                                             | Common stock, $.01 par value; 200,000,000 shares authorized                                     |                                                                                                                         |                                            |           |     |           |           |           |    
|                                                                                                             |                                                                                                 | Class A common stock, $.01 par value; 64,564,614
and 79,927,079 shares issued and outstanding respectively              |                                            |           | 645 |           |           |           | 799 |          
|                                                                                                             |                                                                                                 | Class B-1 convertible common stock, $.01 par value;
8,414,600 and 12,913,334 shares issued and outstanding
respectively |                                            |           | 84  |           |           |           | 130 |          
|                                                                                                             |                                                                                                 | Class B-2 convertible common stock, $.01 par value;
200 shares issued and outstanding                                   |                                            |           |    |           |           |           |    |          
|                                                                                                             | Additional paid-in capital                                                                      |                                                                                                                         |                                            | 351,256   |     |           |           | 716,887   |    
|                                                                                                             | Accumulated other comprehensive loss                                                            |                                                                                                                         |                                            | (3,849    | )   |           |           | (12,686   | )  
|                                                                                                             | Accumulated earnings                                                                            |                                                                                                                         |                                            | 56,399    |     |           |           | 172,130   |    
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|                                                                                                             |                                                                                                 |                                                                                                                         | Total stockholders equity                 |           |     | 404,536   |           |           |     | 877,260   | 
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |          
|                                                                                                             |                                                                                                 |                                                                                                                         | Total liabilities and stockholders equity |           | $   | 3,001,850 |           |           | $   | 3,223,964 | 
|                                                                                                             |                                                                                                 |                                                                                                                         |                                            |           |     |           |           |           |    

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

F- 4



---



##### Table of Contents



AdvancePCS and Subsidiaries

Consolidated Statements of Operations
(in thousands, except share and per share data)

|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |            |            | 
|------------------------------------------------------------ | ----------------------------------------------------------------------- | ------------------------ | --------- | --------------------- | --------- | ---- | --------- | ---------- | --------- | - | ---------- | ---------- | ---------- | 
|                                                             |                                                                         |                          |           | Years Ended March 31,
|                                                             |                                                                         |                          |           |                      
|                                                             |                                                                         |                          |           | 2000                  |           | 2001 |           | 2002      
|                                                             |                                                                         |                          |           |                       |           |      |           |           
|Revenues                                                     |                                                                         | $                        | 1,833,888 |                       |           | $    | 7,024,298 |            |           | $ | 13,107,290 |           
|Cost of operations:                                          |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Cost of revenues                                                        |                          |           | 1,758,386             |           |      |           | 6,795,138  |           |   |            | 12,655,699 |           
|                                                             | Selling, general and administrative
expenses                            |                          |           | 39,076                |           |      |           | 128,984    |           |   |            | 189,320    |           
|                                                             | Non-recurring and impairment expenses                                   |                          |           |                      |           |      |           | 11,129     |           |   |            | 1,760      |           
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             |                                                                         | Total cost of operations |           |                       | 1,797,462 |      |           |            | 6,935,251 |   |            |            | 12,846,779 | 
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Operating income                                                        |                          |           | 36,426                |           |      |           | 89,047     |           |   |            | 260,511    |           
|Interest income                                              |                                                                         |                          | 1,064     |                       |           |      | 3,450     |            |           |   | 6,606      |           
|Interest expense                                             |                                                                         |                          | (3,943    | )                     |           |      | (45,332   | )          |           |   | (64,185    | )         
|Loss from joint venture                                      |                                                                         |                          |          |                       |           |      |          |            |           |   | (2,871     | )         
|Merger costs and other                                       |                                                                         |                          | (160      | )                     |           |      | (1,200    | )          |           |   |           |           
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|Income before income taxes                                   |                                                                         |                          | 33,387    |                       |           |      | 45,965    |            |           |   | 200,061    |           
|Provision for income taxes                                   |                                                                         |                          | 12,684    |                       |           |      | 24,291    |            |           |   | 79,015     |           
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|Income before extraordinary loss                             |                                                                         |                          | 20,703    |                       |           |      | 21,674    |            |           |   | 121,046    |           
|Extraordinary loss on early retirement of
debt,
net of taxes |                                                                         |                          |          |                       |           |      |          |            |           |   | 5,315      |           
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|Net income                                                   |                                                                         | $                        | 20,703    |                       |           | $    | 21,674    |            |           | $ | 115,731    |           
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|Basic:                                                       |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Net income available to common
Stockholders                             |                          | $         | 20,703                |           |      | $         | 21,674     |           |   | $          | 115,731    |           
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Net income per share                                                    |                          | $         | 0.42                  |           |      | $         | 0.37       |           |   | $          | 1.37       |           
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Weighted average shares outstanding                                     |                          |           | 49,520,326            |           |      |           | 58,290,114 |           |   |            | 84,432,319 |           
|Diluted:                                                     |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Net income available to common
Stockholders                             |                          | $         | 20,703                |           |      | $         | 21,674     |           |   | $          | 115,731    |           
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Net income per share                                                    |                          | $         | 0.37                  |           |      | $         | 0.30       |           |   | $          | 1.18       |           
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Weighted average shares outstanding                                     |                          |           | 55,474,432            |           |      |           | 72,377,586 |           |   |            | 98,338,265 |           
|Basic                                                        |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Net income before extraordinary loss per
Share                          |                          | $         | 0.42                  |           |      | $         | 0.37       |           |   | $          | 1.43       |           
|                                                             | Extraordinary loss on early retirement of
debt, net of taxes, per share |                          |           |                      |           |      |           |           |           |   |            | (.06       | )         
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Net income per share                                                    |                          | $         | 0.42                  |           |      | $         | 0.37       |           |   | $          | 1.37       |           
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Weighted average shares outstanding                                     |                          |           | 49,520,326            |           |      |           | 58,290,114 |           |   |            | 84,432,319 |           
|Diluted                                                      |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Net income before extraordinary loss per
Share                          |                          | $         | 0.37                  |           |      | $         | 0.30       |           |   | $          | 1.23       |           
|                                                             | Extraordinary loss on early retirement of
debt, net of taxes, per share |                          |           |                      |           |      |           |           |           |   |            | (.05       | )         
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Net income per share                                                    |                          | $         | 0.37                  |           |      | $         | 0.30       |           |   | $          | 1.18       |           
|                                                             |                                                                         |                          |           |                       |           |      |           |            |           |   |            |           
|                                                             | Weighted average shares outstanding                                     |                          |           | 55,474,432            |           |      |           | 72,377,586 |           |   |            | 98,338,265 |           

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

F- 5



---



##### Table of Contents



AdvancePCS and Subsidiaries

Consolidated Statements of Stockholders Equity
(in thousands, except share amounts)

|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |            |  
|------------------------------------------ | ------------------------------------------------------------ |  | --------------------- | ---------- | ---- |  | ---- | ----------- | - |  | - | ---------- | -
|                                           |                                                              |  | Years Ended March 31,
|                                           |                                                              |  |                      
|                                           |                                                              |  | 2000                  |            | 2001 |  | 2002
|                                           |                                                              |  |                       |            |      |  |     
|Common stock  Class A (# of shares)       |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at beginning of year                                 |  |                       | 49,113,796 |      |  |      | 50,034,308  |   |  |   | 64,564,614 |  
|                                           | Conversion of Class B-2 Common Stock to Class A Common Stock |  |                       |           |      |  |      | 12,499,800  |   |  |   |           |  
|                                           | Conversion of Class B-1 Common Stock to Class A Common Stock |  |                       |           |      |  |      |            |   |  |   | 2,086,666  |  
|                                           | Issuance of stock for acquisitions                           |  |                       | 463,768    |      |  |      |            |   |  |   | 1,258,192  |  
|                                           | Stock issued with shelf offering                             |  |                       |           |      |  |      |            |   |  |   | 9,000,000  |  
|                                           | Stock issued with the exercise of options and warrants       |  |                       | 456,744    |      |  |      | 2,030,506   |   |  |   | 3,017,607  |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at end of year                                       |  |                       | 50,034,308 |      |  |      | 64,564,614  |   |  |   | 79,927,079 |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|Common Stock  Class A (dollars)           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at beginning of year                                 |  | $                     | 490        |      |  | $    | 500         |   |  | $ | 645        |  
|                                           | Conversion of Class B-2 Common Stock to Class A Common Stock |  |                       |           |      |  |      | 125         |   |  |   |           |  
|                                           | Conversion of Class B-1 Common Stock to Class A Common Stock |  |                       |           |      |  |      |            |   |  |   | 20         |  
|                                           | Issuance of stock for acquisitions                           |  |                       | 5          |      |  |      |            |   |  |   | 13         |  
|                                           | Stock issued with shelf offering                             |  |                       |           |      |  |      |            |   |  |   | 90         |  
|                                           | Stock issued with the exercise of options and warrants       |  |                       | 5          |      |  |      | 20          |   |  |   | 31         |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at end of year                                       |  | $                     | 500        |      |  | $    | 645         |   |  | $ | 799        |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|Common Stock  Class B-1 (# of shares)     |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at beginning of year                                 |  |                       |           |      |  |      |            |   |  |   | 8,414,600  |  
|                                           | Issuance of Series B-1 Common Stock                          |  |                       |           |      |  |      | 8,414,600   |   |  |   |           |  
|                                           | Conversion of Series A-1 Preferred Stock to B-1 Common Stock |  |                       |           |      |  |      |            |   |  |   | 6,585,400  |  
|                                           | Conversion of Class B-1 Common Stock to Class A Common Stock |  |                       |           |      |  |      |            |   |  |   | (2,086,666 | )
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at end of year                                       |  |                       |           |      |  |      | 8,414,600   |   |  |   | 12,913,334 |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|Common Stock  Class B-1 (dollars)         |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at beginning of year                                 |  | $                     |           |      |  | $    |            |   |  | $ | 84         |  
|                                           | Issuance of Class B-1 Common Stock                           |  |                       |           |      |  |      | 84          |   |  |   |           |  
|                                           | Conversion of Series A-1 Preferred Stock to B-1 Common Stock |  |                       |           |      |  |      |            |   |  |   | 66         |  
|                                           | Conversion of Class B-1 Common Stock to Class A Common Stock |  |                       |           |      |  |      |            |   |  |   | (20        | )
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at end of year                                       |  | $                     |           |      |  | $    | 84          |   |  | $ | 130        |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|Common Stock  Class B-2 (# of shares)     |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at beginning of year                                 |  |                       |           |      |  |      |            |   |  |   | 200        |  
|                                           | Conversion of Series A-2 Preferred Stock to B-2 Common Stock |  |                       |           |      |  |      | 12,500,000  |   |  |   |           |  
|                                           | Conversion of Class B-2 Common Stock to Class A Common Stock |  |                       |           |      |  |      | (12,499,800 | ) |  |   |           |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at end of year                                       |  |                       |           |      |  |      | 200         |   |  |   | 200        |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|Common Stock  Class B-2 (dollars)         |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at beginning of year                                 |  | $                     |           |      |  | $    |            |   |  | $ |           |  
|                                           | Conversion of Series A-2 Preferred Stock to B-2 Common Stock |  |                       |           |      |  |      | 125         |   |  |   |           |  
|                                           | Conversion of Class B-2 Common Stock to Class A Common Stock |  |                       |           |      |  |      | (125        | ) |  |   |           |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at end of year                                       |  | $                     |           |      |  | $    |            |   |  | $ |           |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|Preferred Stock  Series A-1 (# of shares) |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at beginning of year                                 |  |                       |           |      |  |      |            |   |  |   | 65,854     |  
|                                           | Issuance of Series A-1 Preferred Stock                       |  |                       |           |      |  |      | 65,854      |   |  |   |            |  
|                                           | Conversion of Series A-1 Preferred Stock to B-1 Common Stock |  |                       |           |      |  |      |            |   |  |   | (65,854    | )
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at end of year                                       |  |                       |           |      |  |      | 65,854      |   |  |   |           |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|Preferred Stock  Series A-1 (dollars)     |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at beginning of year                                 |  | $                     |           |      |  | $    |            |   |  | $ | 1          |  
|                                           | Issuance of Series A-1 Preferred Stock                       |  |                       |           |      |  |      | 1           |   |  |   |           |  
|                                           | Conversion of Series A-1 Preferred Stock to B-1 Common Stock |  |                       |           |      |  |      |            |   |  |   | (1         | )
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at end of year                                       |  | $                     |           |      |  | $    | 1           |   |  | $ |           |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|Preferred Stock  Series A-2 (# of shares) |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at beginning of year                                 |  |                       |           |      |  |      |            |   |  |   |           |  
|                                           | Issuance of Series A-2 Preferred Stock                       |  |                       |           |      |  |      | 125,000     |   |  |   |           |  
|                                           | Conversion of Series A-2 Preferred Stock to B-2 Common Stock |  |                       |           |      |  |      | (125,000    | ) |  |   |           |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at end of year                                       |  |                       |           |      |  |      |            |   |  |   |           |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|Preferred Stock  Series A-2 (dollars)     |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at beginning of year                                 |  | $                     |           |      |  | $    |            |   |  | $ |           |  
|                                           | Issuance of Series A-2 Preferred Stock                       |  |                       |           |      |  |      | 1           |   |  |   |           |  
|                                           | Conversion of Series A-2 Preferred Stock to B-2 Common Stock |  |                       |           |      |  |      | (1          | ) |  |   |           |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           
|                                           | Balance at end of year                                       |  | $                     |           |      |  | $    |            |   |  | $ |           |  
|                                           |                                                              |  |                       |            |      |  |      |             |   |  |   |           

F- 6



---



##### Table of Contents



AdvancePCS and Subsidiaries

Consolidated Statements of Stockholders Equity (cont.)
(in thousands)

|                                                   |                                                              |  |                       |        |      |  |      |         |   |  |   |         |  
|-------------------------------------------------- | ------------------------------------------------------------ |  | --------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                   |                                                              |  | Years Ended March 31,
|                                                   |                                                              |  |                      
|                                                   |                                                              |  | 2000                  |        | 2001 |  | 2002
|                                                   |                                                              |  |                       |        |      |  |     
|Additional Paid-In Capital                         |                                                              |  |                       |        |      |  |      |         |   |  |   |        
|                                                   | Balance at beginning of year                                 |  | $                     | 48,795 |      |  | $    | 58,677  |   |  | $ | 351,256 |  
|                                                   | Stock issued with shelf offering                             |  |                       |       |      |  |      |        |   |  |   | 291,120 |  
|                                                   | Tax benefit of stock options                                 |  |                       |       |      |  |      | 7,266   |   |  |   | 18,489  |  
|                                                   | Stock split in form of stock dividend                        |  |                       | (250   | )    |  |      | (116    | ) |  |   | (91     | )
|                                                   | Capital contribution from joint venture partner              |  |                       |       |      |  |      |        |   |  |   | 1,225   |  
|                                                   | Conversion of Series A-2 Preferred Stock to B-2 Common Stock |  |                       |       |      |  |      | (124    | ) |  |   |        |  
|                                                   | Conversion of Series A-1 Preferred Stock to B-1 Common Stock |  |                       |       |      |  |      |        |   |  |   | (65     | )
|                                                   | Issuance of stock for acquisitions                           |  |                       | 5,242  |      |  |      | 274,896 |   |  |   | 39,061  |  
|                                                   | Stock issued with the exercise of options and warrants       |  |                       | 4,890  |      |  |      | 10,657  |   |  |   | 15,892  |  
|                                                   |                                                              |  |                       |        |      |  |      |         |   |  |   |        
|                                                   | Balance at end of year                                       |  | $                     | 58,677 |      |  | $    | 351,256 |   |  | $ | 716,887 |  
|                                                   |                                                              |  |                       |        |      |  |      |         |   |  |   |        
|Accumulated Other Comprehensive Loss, Net of Taxes |                                                              |  |                       |        |      |  |      |         |   |  |   |        
|                                                   | Balance at beginning of year                                 |  | $                     |       |      |  | $    |        |   |  | $ | (3,849  | )
|                                                   | Pension liability adjustment                                 |  |                       |       |      |  |      | (3,849  | ) |  |   |        |  
|                                                   | Mark to market interest rate swap                            |  |                       |       |      |  |      |        |   |  |   | (8,837  | )
|                                                   |                                                              |  |                       |        |      |  |      |         |   |  |   |        
|                                                   | Balance at end of year                                       |  | $                     |       |      |  | $    | (3,849  | ) |  | $ | (12,686 | )
|                                                   |                                                              |  |                       |        |      |  |      |         |   |  |   |        
|Accumulated Earnings                               |                                                              |  |                       |        |      |  |      |         |   |  |   |        
|                                                   | Balance at beginning of year                                 |  | $                     | 19,942 |      |  | $    | 38,695  |   |  | $ | 56,399  |  
|                                                   | Net income                                                   |  |                       | 20,703 |      |  |      | 21,674  |   |  |   | 115,731 |  
|                                                   | Distributions to FFI owners                                  |  |                       | (1,950 | )    |  |      | (3,970  | ) |  |   |        |  
|                                                   |                                                              |  |                       |        |      |  |      |         |   |  |   |        
|                                                   | Balance at end of year                                       |  | $                     | 38,695 |      |  | $    | 56,399  |   |  | $ | 172,130 |  
|                                                   |                                                              |  |                       |        |      |  |      |         |   |  |   |        
|Comprehensive Income                               |                                                              |  |                       |        |      |  |      |         |   |  |   |        
|                                                   | Net income                                                   |  | $                     | 20,703 |      |  | $    | 21,674  |   |  | $ | 115,731 |  
|                                                   | Other comprehensive loss                                     |  |                       |       |      |  |      | (3,849  | ) |  |   | (8,837  | )
|                                                   |                                                              |  |                       |        |      |  |      |         |   |  |   |        
|                                                   | Total comprehensive income                                   |  | $                     | 20,703 |      |  | $    | 17,825  |   |  | $ | 106,894 |  
|                                                   |                                                              |  |                       |        |      |  |      |         |   |  |   |        

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

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AdvancePCS and Subsidiaries

Consolidated Statements of Cash Flows
(in thousands)

|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |          |        |          |         |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------------------------ | --------------------------------------------------- | ----- | --------------------- | ------- | -------- | ------ | -------- | -------- | -------- | ------ | -------- | ------- | -
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       | Years Ended March 31,
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       |                      
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       | 2000                  |         | 2001     |        | 2002    
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |         
|Cash flows from operating activities:                |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|                                                     | Net income                                                                         |                                                              | $                                                                              | 20,703                                              |       |                       | $       | 21,674   |        |          | $        | 115,731  |       
|                                                     | Adjustments to reconcile net income to net cash
provided by operating activities - |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|                                                     |                                                                                    | Depreciation and amortization                                |                                                                                |                                                     | 9,110 |                       |         |          | 47,797 |          |          |          | 38,161 |         
|                                                     |                                                                                    | Non-recurring and impairment expenses                        |                                                                                |                                                     |      |                       |         |          | 7,862  |          |          |          |       |         
|                                                     |                                                                                    | Provision for doubtful accounts and reserves                 |                                                                                |                                                     | 923   |                       |         |          | 8,204  |          |          |          | 13,329 |         
|                                                     |                                                                                    | Deferred income taxes                                        |                                                                                |                                                     | 1,197 |                       |         |          | (2,855 | )        |          |          | 25,948 |         
|                                                     |                                                                                    | Extraordinary loss on early retirement of debt,
net of taxes |                                                                                |                                                     |      |                       |         |          |       |          |          |          | 5,315  |         
|                                                     |                                                                                    | Value of options and warrants issued                         |                                                                                |                                                     |      |                       |         |          | 3,785  |          |          |          |       |         
|                                                     |                                                                                    | Change in certain assets and liabilities -                   |                                                                                |                                                     |       |                       |         |         
|                                                     |                                                                                    |                                                              | Accounts receivable                                                            |                                                     |       | (76,050               | )       |          |        | (277,558 | )        |          |        | (212,552 | )      
|                                                     |                                                                                    |                                                              | Inventories                                                                    |                                                     |       | (1,950                | )       |          |        | (2,068   | )        |          |        | (24,239  | )      
|                                                     |                                                                                    |                                                              | Prepaid expenses and other noncurrent assets                                   |                                                     |       | (305                  | )       |          |        | (2,632   | )        |          |        | 32,417   |        
|                                                     |                                                                                    |                                                              | Claims and accounts payable, accrued expenses
and other noncurrent liabilities |                                                     |       | 78,644                |         |          |        | 288,071  |          |          |        | 149,177  |        
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|                                                     |                                                                                    |                                                              |                                                                                | Net cash provided by operating
activities           |       |                       | 32,272  |          |        |          | 92,280   |          |        |          | 143,287 |  
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|Cash flows from investing activities:                |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|                                                     | Purchases of property and equipment                                                |                                                              |                                                                                | (22,807                                             | )     |                       |         | (41,197  | )      |          |          | (51,112  | )     
|                                                     | Acquisition and joint venture, net of cash
acquired                                |                                                              |                                                                                |                                                    |       |                       |         | (722,045 | )      |          |          | (13,349  | )     
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|                                                     |                                                                                    |                                                              |                                                                                | Net cash used in investing activities               |       |                       | (22,807 | )        |        |          | (763,242 | )        |        |          | (64,461 | )
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|Cash flows from financing activities:                |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|                                                     | Net proceeds from issuance of Common Stock                                         |                                                              |                                                                                | 1,811                                               |       |                       |         | 6,759    |        |          |          | 306,636  |       
|                                                     | Capital contribution, AdvancePriority SpecialtyRx                                  |                                                              |                                                                                |                                                    |       |                       |         |         |        |          |          | 1,225    |       
|                                                     | Stock issued to fund acquisition                                                   |                                                              |                                                                                |                                                    |       |                       |         | 150,000  |        |          |          |         |       
|                                                     | Issuance of debt to fund acquisition                                               |                                                              |                                                                                |                                                    |       |                       |         | 620,000  |        |          |          |         |       
|                                                     | Issuance of senior notes to fund acquisition                                       |                                                              |                                                                                |                                                    |       |                       |         | 200,000  |        |          |          |         |       
|                                                     | Borrowings on credit facilities                                                    |                                                              |                                                                                | 37,022                                              |       |                       |         | 255,000  |        |          |          | 218,000  |       
|                                                     | Net borrowings on asset securitization facility                                    |                                                              |                                                                                |                                                    |       |                       |         |         |        |          |          | 150,000  |       
|                                                     | Repayment of Rite Aid senior subordinated notes                                    |                                                              |                                                                                |                                                    |       |                       |         | (200,000 | )      |          |          |         |       
|                                                     | Payments on credit facilities                                                      |                                                              |                                                                                | (37,000                                             | )     |                       |         | (280,000 | )      |          |          | (722,834 | )     
|                                                     | Deferred financing costs                                                           |                                                              |                                                                                |                                                    |       |                       |         | (22,022  | )      |          |          | (2,756   | )     
|                                                     | Distributions to FFI owners                                                        |                                                              |                                                                                | (1,950                                              | )     |                       |         | (3,970   | )      |          |          |         |       
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|                                                     |                                                                                    |                                                              |                                                                                | Net cash provided by (used in) financing
activities |       |                       | (117    | )        |        |          | 725,767  |          |        |          | (49,729 | )
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|Net increase in cash and cash equivalents            |                                                                                    |                                                              | 9,348                                                                          |                                                     |       |                       | 54,805  |          |        |          | 29,097   |         
|Cash and cash equivalents, beginning of year         |                                                                                    |                                                              | 45,895                                                                         |                                                     |       |                       | 55,243  |          |        |          | 110,048  |         
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|Cash and cash equivalents, end of year               |                                                                                    | $                                                            | 55,243                                                                         |                                                     |       | $                     | 110,048 |          |        | $        | 139,145  |         
|                                                     |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |          |       
|Supplementary information:                           |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         
|                                                     | Cash paid for interest                                                             |                                                              | $                                                                              | 3,943                                               |       |                       | $       | 32,974   |        |          | $        | 53,807   |       
|                                                     | Cash paid for income taxes                                                         |                                                              | $                                                                              | 7,000                                               |       |                       | $       | 21,000   |        |          | $        | 18,906   |       
|Assets acquired and liabilities assumed (see Note
3) |                                                                                    |                                                              |                                                                                |                                                     |       |                       |         |          |        |          |          |         

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

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AdvancePCS and Subsidiaries

Notes to Consolidated Financial Statements

1. Nature of Business

AdvancePCS and its subsidiaries (the Company, AdvancePCS or, prior to
October 2, 2000, Advance), a Delaware corporation, is a leading independent
provider of health benefit management services, providing integrated pharmacy
benefit management, disease management, clinical trials and other health
related programs. The Company markets its services to managed care
organizations, third-party health plan administrators, insurance companies,
government agencies, employer groups and labor union-based trusts. In addition,
the Company transacts business with pharmaceutical manufacturers as both
suppliers and customers.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
AdvancePCS and its 50% or more owned subsidiaries and affiliates. These
statements give retroactive effect, for all periods presented, to the
combination of Advance and First Florida International (FFI) on July 5, 2000,
which has been accounted for as a pooling of interests. In January 2000,
Advance acquired a 19% equity interest in Consumer Health Interactive, Inc.
(CHI), an internet health portal development company, with an option to acquire
the additional interest. The acquisition of the remaining 81% equity interest
was completed effective September 30, 2001 with cash of $9.2 million, making
CHI a wholly owned subsidiary. The Company had previously accounted for its
interest in CHI on the cost basis. As a result of the acquisition of the
remaining 81% interest, APB 18 requires the Companys prior years financial
statements to be restated to reflect CHI as if it had been accounted for under
the equity method. Accordingly, the prior years have been restated to reflect
after tax losses of CHI (unaudited) for the years ended March 31, 2000 and 2001
of $173,000 (or diluted net income per share of $0.003 (unaudited)) and
$994,000 (or diluted net income per share of $0.014 (unaudited)), respectively.
The Company believes that the impact of the restatement does not have a
material effect on our financial position or results of operations (See Note 15
to the financial statements included in this report).

All significant intercompany accounts and transactions have been
eliminated in consolidation.

Use of Estimates

Preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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 consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. The Company has made
significant estimates of the purchase price, and the fair market value of the
assets acquired and liabilities assumed in its acquisitions, clinical service
revenues and costs, reserves for uncollectable accounts and contract losses and
the value of our various investments. The Company continually evaluates the
appropriateness of the amounts recorded and revises these estimates regularly.
Actual results could differ from those estimates.

Operating Segment

The Company operates as a single operating segment. The chief executive
officer (CEO) of the Company is considered the chief operating decision-maker
and reviews the financial information on a consolidated basis. Typically, all
of our services are offered to each of our customers and are negotiated as part
of a single contract. Our services have similar economic characteristics and
are interdependent. The CEO reviews discrete revenue information by service as
reflected below for each of the periods presented.

|          |                             |                |   |                                       |           |         |   |           |           |  |   |            |            | 
|--------- | --------------------------- | -------------- | - | ------------------------------------- | --------- | ------- | - | --------- | --------- |  | - | ---------- | ---------- | 
|          |                             |                |   | Year Ended March 31,                 
|          |                             |                |   |                                      
|          |                             |                |   | 2000                                  |           | 2001(1) |   | 2002     
|          |                             |                |   |                                       |           |         |   |          
|          |                             |                |   | (In thousands, except per share data)
|Revenues: |                             |                |   |                                       |           |         |   |           |           |  |   |           
|          | Data services               |                | $ | 1,558,113                             |           |         | $ | 6,010,692 |           |  | $ | 10,986,747 |           
|          | Mail services               |                |   | 184,103                               |           |         |   | 714,294   |           |  |   | 1,555,319  |           
|          | Clinical and other services |                |   | 91,672                                |           |         |   | 299,312   |           |  |   | 565,224    |           
|          |                             |                |   |                                       |           |         |   |           |           |  |   |           
|          |                             | Total revenues |   | $                                     | 1,833,888 |         |   | $         | 7,024,298 |  |   | $          | 13,107,290 | 
|          |                             |                |   |                                       |           |         |   |           |           |  |   |           



---

|(1) |  | Includes PCS data since the acquisition of PCS on
October 2, 2000.
|--- |  | ------------------------------------------------------------------

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Cash and Cash Equivalents

Cash and cash equivalents include overnight investments, money market
accounts and high-grade commercial paper with original maturities of three
months or less. On December 10, 2001 AdvancePCS entered into a receivables
purchase and servicing agreement with GE Capital Corporation. As a result of
the agreement and the structure of the transfer of funds, approximately $19.7
million of cash is restricted as of March 31, 2002.

Accounts Receivable

Accounts receivable balances represent trade receivables generated from
health benefit management and related services. To reduce the potential for
credit risk, the Company performs ongoing evaluations of its customers
financial condition but does not generally require significant collateral.
Accounts receivable balances are used as collateral for the Companys debt. As
of March 31, 2001 and 2002, unbilled receivables were $418.6 million and $495.7
million, respectively. Unbilled receivables to plan sponsors are typically
billed within 15 days and unbilled receivables to manufacturers are typically
billed within 90 days, based on the respective contractual billing schedule.
The Company establishes an allowance for doubtful accounts based on performance
factors, historical trends and other pertinent information.

Inventories

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

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed on the straight-line method over
estimated useful lives of the respective classes of assets (see Note 4).
Amortization of internal use software and leasehold improvements is computed
over the lives of the assets or the lease terms, whichever is shorter. Major
renewals and betterments are added to the property and equipment accounts while
costs of repairs and maintenance are charged to operating expenses in the
period incurred. The cost of assets retired, sold, or otherwise disposed of and
the applicable accumulated depreciation are removed from the accounts and the
resultant gain or loss, if any, is reflected in the statement of operations.

Goodwill and Other Intangible Assets

Goodwill is the cost in excess of fair value of identifiable assets in
business combinations accounted for using the purchase method of accounting.
The Company has adopted Statement of Accounting Financial Standards (SFAS) 142
effective April 1, 2001. Under SFAS 142 goodwill is no longer amortized. In
addition, certain identified intangibles with indefinite lives are also not
amortized but are subject to periodic impairment testing. The remaining
identified intangibles will be amortized over 4 to 30 years on a straight line
basis. Amortization expense for the fiscal year ended March 31, 2002 was $10.9
million, which represented the amortization relating to the identified
intangible assets with finite lives . Over the next five years intangible
amortization expense relating to these identified intangibles will be as
follows (in thousands):

|                       |       |   |        |        | 
|---------------------- | ----- | - | ------ | ------ | 
|Years Ending March 31, |       |   |        |       
|2003                   |       | $ | 11,515 |       
|2004                   |       |   | 11,515 |       
|2005                   |       |   | 11,515 |       
|2006                   |       |   | 10,706 |       
|2007                   |       |   | 10,301 |       
|                       |       |   |        |       
|                       | Total |   | $      | 55,552 | 
|                       |       |   |        |       

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Under SFAS 142 assembled workforce is not a recognized intangible asset
and accordingly has been reclassified as goodwill. In addition, the trade name
is deemed to have an indefinite life as it is expected to generate cash flows
indefinitely. Accordingly, the trade name is no longer amortized. The effect
of the adoption of SFAS 142 is summarized in the following table (in
thousands):

|                                                             |                                      |          |           |         |                |         |         |              |          |              |                |         |             |         |             |        |         |        |         |         |         |         |  
|------------------------------------------------------------ | ------------------------------------ | -------- | --------- | ------- | -------------- | ------- | ------- | ------------ | -------- | ------------ | -------------- | ------- | ----------- | ------- | ----------- | ------ | ------- | ------ | ------- | ------- | ------- | ------- | -
|                                                             |                                      |          |           |         | 03/31/2001     |         |         |              |          |              | 03/31/2002     |         | 03/31/2001  |         | 03/31/2002 
|                                                             |                                      |          |           |         | Gross Carrying |         |         |              |          |              | Gross Carrying |         | Accumulated |         | Accumulated
|Description (useful lives)                                   |                                      | Amount   |           | Change  |                | Amount  |         | Amortization |          | Amortization
|                                                             |                                      |          |           |         |                |         |         |              |          |             
|Goodwill:                                                    |                                      |          |           |         |                |         |         |              |          |              |                |         |             |         |             |        |         |        |         |        
|                                                             |                                      | PCS      |           | $       | 1,212,257      |         |         | $            | (136,605 | )            |                | $       | 1,075,652   |         |             | $      | (20,421 | )      |         | $       | (20,421 | )      
|                                                             |                                      | TheraCom |           |         |               |         |         |              | 39,134   |              |                |         | 39,134      |         |             |        |        |        |         |         |        |        
|                                                             |                                      | CHI      |           |         |               |         |         |              | 10,562   |              |                |         | 10,562      |         |             |        |        |        |         |         |        |        
|                                                             |                                      | Other    |           |         | 99,232         |         |         |              | 3,800    |              |                |         | 103,032     |         |             |        | (8,876  | )      |         |         | (9,034  | )      
|                                                             |                                      |          |           |         |                |         |         |              |          |              |                |         |             |         |             |        |         |        |         |        
|Total Goodwill                                               |                                      | $        | 1,311,489 |         |                | $       | (83,109 | )            |          | $            | 1,228,380      |         |             | $       | (29,297     | )      |         | $      | (29,455 | )      
|                                                             |                                      |          |           |         |                |         |         |              |          |              |                |         |             |         |             |        |         |        |         |        
|Intangible assets with indefinite
lives as of April 1, 2001: |                                      |          |           |         |                |         |         |              |          |              |                |         |             |         |             |        |         |        |         |        
|                                                             | Trade name                           |          | $         | 106,600 |                |         | $       |             |          |              | $              | 106,600 |             |         | $           | (1,333 | )       |        | $       | (1,333  | )      
|                                                             |                                      |          |           |         |                |         |         |              |          |              |                |         |             |         |             |        |         |        |         |        
|Intangible assets with finite lives:                         |                                      |          |           |         |                |         |         |              |          |              |                |         |             |         |             |        |         |        |         |        
|                                                             | Customer Base & contracts (4-30
yrs) |          | $         | 272,600 |                |         | $       | 4,700        |          |              | $              | 277,300 |             |         | $           | (5,360 | )       |        | $       | (15,332 | )      
|                                                             | Other (7 to 15 yrs)                  |          |           | 11,200  |                |         |         | (3,800       | )        |              |                | 7,400   |             |         |             | (770   | )       |        |         | (1,594  | )      
|                                                             |                                      |          |           |         |                |         |         |              |          |              |                |         |             |         |             |        |         |        |         |        
|                                                             |                                      |          | Total     |         | $              | 283,800 |         |              | $        | 900          |                |         | $           | 284,700 |             |        | $       | (6,130 | )       |         | $       | (16,926 | )
|                                                             |                                      |          |           |         |                |         |         |              |          |              |                |         |             |         |             |        |         |        |         |        

During fiscal year 2002, the Company finalized the purchase price
allocation related to its acquisition of PCS. The net adjustment primarily
decreased goodwill with a corresponding decrease in deferred taxes. As
required by SFAS 142 the results for the prior years financials have not been
restated. Net income as if SFAS 142 had been adopted is presented below:

|                                                   |                     |   |                   |      |                   |   |        |      | 
|-------------------------------------------------- | ------------------- | - | ----------------- | ---- | ----------------- | - | ------ | ---- | 
|                                                   |                     |   | Fiscal Year Ended |      | Fiscal Year Ended
|                                                   |                     |   | March 31,         |      | March 31,        
|                                                   |                     |   | 2000              |      | 2001             
|                                                   |                     |   |                   |      |                  
|                                                   |                     |   | (in thousands)    |      | (in thousands)   
|Reported net income                                |                     | $ | 20,703            |      |                   | $ | 21,674 |     
|Add back: Goodwill amortization (net of tax)       |                     |   | 2,446             |      |                   |   | 21,562 |     
|Add back: Amortization of trade name and workforce |                     |   |                  |      |                   |   | 1,491  |     
|                                                   |                     |   |                   |      |                   |   |        |     
|Adjusted net income                                |                     | $ | 23,149            |      |                   | $ | 44,727 |     
|                                                   |                     |   |                   |      |                   |   |        |     
|Basic net income per share:                        |                     |   |                   |      |                   |   |        |     
|                                                   | Reported net income |   | $                 | 0.42 |                   |   | $      | 0.37 | 
|                                                   | Adjusted net income |   | $                 | 0.47 |                   |   | $      | 0.76 | 
|Diluted net income per share:                      |                     |   |                   |      |                   |   |        |     
|                                                   | Reported net income |   | $                 | 0.37 |                   |   | $      | 0.30 | 
|                                                   | Adjusted net income |   | $                 | 0.42 |                   |   | $      | 0.62 | 

Other Noncurrent Assets

Other assets include advances, deposits, deferred financing costs,
implementation costs and investments in equity securities. Deferred financing
costs consist of fees incurred in connection with the issuance of our credit
facilities and are amortized over the life of the related debt. Implementation
costs are capitalized and amortized over the life of the respective customer
contract.

Impairment of Long-Lived Assets

The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets, including
goodwill and other intangibles, may warrant revision or that the remaining
balance of an asset may not be recoverable. The assessment of possible
impairment is based on the ability to recover the carrying amount of the asset
from expected future cash flows on an undiscounted basis. Impairments are
calculated as the total by which the carrying amount of the asset exceeds its
fair value. The fair value of long-lived assets and goodwill is estimated based
on quoted market prices, if available, or the expected total value of the cash
flows on a discounted basis. See Note 6 of the Consolidated Financial
Statements.

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##### Table of Contents



Fair Value of Financial Instruments

The carrying values of cash, receivables, payables and accrued liabilities
approximate the fair values of these instruments because of their short-term
maturities. The fair value of the Companys bank debt and Senior Notes, which
approximates the carrying value, was estimated at current rates for similar
debt with similar maturity.

Derivative Financial Instruments

Effective April 1, 2001, we adopted FAS 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by FAS 137 and 138 (FAS 133).
FAS 133 requires all derivative financial instruments, such as interest rate
swaps, to be recognized as either assets or liabilities in the statement of
financial position and measured at fair value. The adoption of FAS 133 did not
have a material effect on our results of operations, but did reduce other
comprehensive income during 2002 by $8.8 million, net of taxes, in the
accompanying Consolidated Statement of Changes in Stockholders Equity due to a
cumulative effect of change in accounting principle of $7.7 million as of April
1, 2001, and additional net deferred gains and losses recorded during 2002 of
$1.2 million.

We have entered into an interest rate swap as of November 2000 in order to
manage exposure to interest rate risk. The interest rate swap is designated as
a hedge of variable interest rate payments under our credit facilities. Amounts
received or paid are recorded as interest expense. The fair value of the swap,
an obligation of $14.5 million at March 31, 2002 was based upon quoted market
prices. The fair value represents the estimated amount the Company would have
to pay to terminate the swap agreement taking into account current interest
rates at March 31, 2002.

This swap agreement is a cash flow hedge, as it requires us to pay
fixed-rates of interest, which hedges against changes in the amount of future
cash flows associated with variable interest obligations. Accordingly, the
fair value of our swap agreement is reported on the balance sheet in other
liabilities ($14.5 million pre-tax at March 31, 2002) and the related gains or
losses on this agreement are deferred in shareholders equity as a component of
other comprehensive income (a charge of $8.8 million, net of taxes). These
deferred gains or losses are then recognized as an adjustment to interest
expense over the same period in which the related interest payments being
hedged are recorded in income. For the year ended March 31, 2002, the gains
and losses on the ineffective portion of our swap agreement were not material
to the consolidated financial statements.

Other Noncurrent Liabilities

Other noncurrent liabilities are primarily composed of deferred
compensation and pension obligations and the fair market value of the interest
rate swap.

Revenue Recognition

At the point of sale, pharmacy claims are adjudicated using the Companys
on-line claims processing system. When the Company independently contracts to
pay its network pharmacy providers, it assumes credit risk and acts as a
principal in the transaction, therefore the Company includes payments from plan
sponsors for these benefits as revenues and payments to its pharmacy providers
as cost of revenues (i.e. gross reporting) in accordance with EIFT 99-19
Reporting Gross Revenue as a Principal vs Net as an Agent. When the Company
is only administering the plan sponsors network pharmacy contracts, it does
not assume credit risk or act as a principal in the transaction, therefore, the
Company only records the claims processing fees as revenues (i.e. net
reporting).

Revenues from the dispensing of pharmaceuticals from the Companys mail
service pharmacies are recognized when each prescription is shipped. Revenues
from the sales of prescription drugs by pharmacies in the Companys nationwide
network and claims processing fees are recognized when the claims are
adjudicated.

Clinical services fees received from the plan sponsors or pharmaceutical
manufacturers are recognized in revenues as earned in accordance with the
contractual agreements. Clinical services revenue includes service fees for
negotiating rebates with pharmaceutical manufacturers on behalf of its health
plan sponsor customers. The rebate due from the manufacturer is determined
based on a complex formula including such factors as volume and quarterly drug
utilization. The Company estimates the most recent quarters rebate receivables
from the manufacturers, rebate payable to plan sponsors and its fees based on
the terms of its contracts and claims for the quarter. Following the end of
the quarter, the Company invoices the drug manufacturer. The Company revises
its estimates based upon the invoiced amounts. Rebates received from
pharmaceutical manufacturers on behalf of plan sponsors are excluded from
revenues. Clinical services revenues from

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certain disease management and health benefit management products are
reimbursed at predetermined contractual rates based on the delivery or
completion of the services.

Cost of Revenues

Cost of revenues includes product costs, pharmacy claims payments made to
our retail network pharmacies and other direct costs associated with the
provision of customer services and the sale and/or dispensing of prescriptions
including our call center operations. Rebate amounts paid to plan sponsors,
collected from pharmaceutical manufacturers, are excluded from cost of
revenues.

Selling, General and Administrative

Selling, general and administrative expenses reflect the costs of
operations dedicated to generating new sales and maintaining existing client
relationships. These expenses also include costs relating to certain corporate
functions including executive oversight, accounting, treasury, tax, legal,
public affairs, human resources, procurement and other services.

Loss from Joint Venture

In February 2001, we entered into an agreement with Express Scripps and
Merck-Medco, to form RxHub, LLC (RxHub) to develop electronic prescribing
technology. We own one third of the equity of RxHub. We have recorded our
investment in RxHub under the equity method of accounting and record our
percentage interest in RxHubs results in our Consolidated Statement of
Operations.

Stock Split

On October 1, 2001 the Company announced a two-for-one stock split,
effected in the form of a stock dividend, of its common stock. The record date
was October 23, 2001 and the date of payment was November 2, 2001. On October
12, 1999 the Company announced a two-for-one stock split, effected in the form
of a stock dividend of the Companys common stock. The record date was November
11, 1999 and the date of payment was November 30, 1999. Financial information
and stock prices contained throughout this Form 10-K have been retroactively
adjusted to reflect the impact of the stock splits in all periods presented.

Net Income Per Share

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

|        |                            |                                                      |                      |                      |        |                      |      |      |        |      |      |   |         |      |      | 
|------- | -------------------------- | ---------------------------------------------------- | -------------------- | -------------------- | ------ | -------------------- | ---- | ---- | ------ | ---- | ---- | - | ------- | ---- | ---- | 
|        |                            |                                                      |                      |                      |        | Year Ended March 31,
|        |                            |                                                      |                      |                      |        |                     
|        |                            |                                                      |                      |                      |        | 2000                 |      | 2001 |        | 2002
|        |                            |                                                      |                      |                      |        |                      |      |      |        |     
|Basic   |                            |                                                      |                      |                      |        |                      |      |      |        |      |      |  
|        | Numerator:                 |                                                      |                      |                      |        |                      |      |      |        |      |      |   |        
|        |                            | Net income                                           |                      | $                    | 20,703 |                      |      | $    | 21,674 |      |      | $ | 115,731 |     
|        |                            |                                                      |                      |                      |        |                      |      |      |        |      |      |  
|        | Denominator:               |                                                      |                      |                      |        |                      |      |      |        |      |      |   |        
|        |                            | Weighted average common stock
outstanding            |                      |                      | 49,520 |                      |      |      | 58,290 |      |      |   | 84,432  |     
|        |                            |                                                      |                      |                      |        |                      |      |      |        |      |      |  
|        |                            |                                                      | Net income per share |                      | $      | 0.42                 |      |      | $      | 0.37 |      |   | $       | 1.37 |     
|
|
|Diluted |                            |                                                      |                      |                      |        |                      |      |      |        |      |      |  
|        | Numerator:                 |                                                      |                      |                      |        |                      |      |      |        |      |      |   |        
|        |                            | Net income                                           |                      | $                    | 20,703 |                      |      | $    | 21,674 |      |      | $ | 115,731 |     
|        |                            |                                                      |                      |                      |        |                      |      |      |        |      |      |  
|        | Denominator:               |                                                      |                      |                      |        |                      |      |      |        |      |      |   |        
|        |                            | Weighted average common stock
outstanding            |                      |                      | 49,520 |                      |      |      | 58,290 |      |      |   | 84,432  |     
|        | Other Dilutive Securities: |                                                      |                      |                      |        |                      |      |      |        |      |      |   |        
|        |                            | Preferred stock                                      |                      |                      |       |                      |      |      | 7,500  |      |      |   |        |     
|        |                            | Options and warrants using the treasury
stock method |                      |                      | 5,954  |                      |      |      | 6,588  |      |      |   | 13,906  |     
|        |                            |                                                      |                      |                      |        |                      |      |      |        |      |      |  
|        |                            | Weighted average shares outstanding                  |                      |                      | 55,474 |                      |      |      | 72,378 |      |      |   | 98,338  |     
|        |                            |                                                      |                      |                      |        |                      |      |      |        |      |      |  
|        |                            |                                                      |                      | Net income per share |        | $                    | 0.37 |      |        | $    | 0.30 |   |         | $    | 1.18 | 
|        |                            |                                                      |                      |                      |        |                      |      |      |        |      |      |  

Reclassification

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

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Recent Accounting Pronouncements

In June 2001 the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) 143, Accounting for Asset
Retirement Obligations. SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. It applies to all entities and
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset. SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset and are subsequently allocated to expense over
the assets useful life. This statement is effective for the financial
statements issued for fiscal years beginning after June 15, 2002. The Company
has not yet determined the impact that SFAS 143 will have on its financial
position or results of operations.

In August 2001 the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. This statement supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
however, this statement retains the fundamental provisions of SFAS 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale.
This statement also supersedes the accounting and reporting provisions of APB
Opinion 30, Reporting the Results of Operations Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions for segments of a business to be disposed
of. SFAS 144 is effective for fiscal years beginning after December 15, 2001.
The Company does not believe that the adoption of SFAS 144 will have a material
effect on its financial position or results of operations.

In May 2002, the FASB issued SFAS No. 145 Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections as of April 2002. This
Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement No.
64, and Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. SFAS 145 is effective
for fiscal years beginning after May 15, 2002. The Company has not yet
determined the impact that SFAS No. 145 will have on its financial position or
results of operations.

3. Acquisitions

In January 2000, Advance acquired a 19% interest in CHI with an option to
acquire the additional interest. Effective September 30, 2001 the Company
acquired the remaining equity interests of CHI for $9.2 million in cash. The
acquisition of the remaining interest was accounted for using the purchase
method of accounting. The Company had previously accounted for its interest in
CHI on the cost basis (See Notes 2 and 15 to the financial statements included
in this report). Under the terms of the acquisition the Company may pay
additional cash upon the achievement by CHI of certain account growth targets.

Effective August 1, 2001 the Company completed the acquisition of 100% of
the equity of Dresing-Lierman, Inc. and its wholly owned subsidiary, TheraCom
Inc. (collectively, TheraCom), a specialty pharmacy and distribution company
located in Bethesda, Maryland. The aggregate purchase price paid by the Company
was 1.3 million shares of Class A common stock. An additional 384,006 shares
of Class A common stock were placed in escrow, subject to achievement of future
financial performance. In addition, the Company paid $10.6 million to eliminate
TheraComs outstanding indebtedness. The acquisition was accounted for using
the purchase method of accounting. The excess of the purchase price paid over
the net identifiable assets and liabilities of TheraCom, $39.1 million, was
recorded as goodwill. The Company also recognized $4.7 million in intangible
customer contracts. The portion of the purchase price allocated to the net
identifiable assets and goodwill is preliminary and subject to revision
following the results of an appraisal and further identification of intangible
assets. Unaudited pro forma financial information is not presented because the
acquisition of TheraCom was not a material business combination for the
Company.

On June 18, 2001 the Company announced the launch of AdvancePCS
SpecialtyRx to provide products and services to patients using injectable and
other expensive, high technology drugs, while controlling the costs incurred by
medical plan sponsors to provide these therapies. Also, the Company established
a joint venture, AdvancePriority SpecialtyRx (the

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##### Table of Contents



venture), with Priority Healthcare Corp., a national specialty pharmacy
and distribution company located in Lake Mary, Florida. AdvancePCS owns 51% of
the venture and Priority Healthcare Corp. owns 49%.

Effective October 1, 2000 Advance acquired all of the equity of PCS. The
aggregate purchase price paid by Advance was approximately $1.0 billion, of
which Advance paid Rite Aid, the seller, $675 million in cash and issued to
Rite Aid $200 million in senior subordinated notes and $125 million in Advance
convertible preferred stock. The senior subordinated notes were paid in full in
March 2001 through proceeds obtained from the issuance of $200 million in
Senior Notes. The cash portion of the purchase price was financed with the
proceeds of an $825 million senior secured credit facility and $150 million in
equity financing committed by Joseph, Littlejohn & Levy, Inc. (JLL). The
acquisition of PCS has been accounted for using the purchase method of
accounting. The Company incurred approximately $50 million in acquisition
costs.

The allocation of the net purchase price is as follows (in thousands):

|                              |  |   |           |  
|----------------------------- |  | - | --------- | -
|Assets                        |  | $ | 667,274   |  
|Goodwill                      |  |   | 1,075,652 |  
|Intangible assets             |  |   | 382,400   |  
|Liabilities assumed           |  |   | (968,514  | )
|Deferred income tax liability |  |   | (106,812  | )
|                              |  |   |           |  
|Net purchase price            |  | $ | 1,050,000 |  
|                              |  |   |           |  

The excess of the purchase price paid over the net identifiable assets and
liabilities of PCS has been recorded as goodwill.

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

|                                     |         |   |           |        |      |   |            |        | 
|------------------------------------ | ------- | - | --------- | ------ | ---- | - | ---------- | ------ | 
|                                     |         |   | 2000      |        | 2001
|                                     |         |   |           |        |     
|Revenues                             |         | $ | 9,960,119 |        |      | $ | 11,311,942 |       
|Net income (loss)                    |         |   | (8,060    | )      |      |   | 495        |       
|Net income (loss) per share:         |         |   |           |        |      |   |            |       
|                                     | Basic   |   | $         | (0.14  | )    |   | $          | 0.01   | 
|                                     | Diluted |   | $         | (0.14  | )    |   | $          | 0.01   | 
|Weighted average shares outstanding: |         |   |           |        |      |   |            |       
|                                     | Basic   |   |           | 57,934 |      |   |            | 62,498 | 
|                                     | Diluted |   |           | 57,934 |      |   |            | 86,120 | 

Pro forma information includes non-recurring and impairment expenses of
$11.1 million for 2001.

On July 5, 2000, Advance completed a merger with FFI (the Combination).
The Company issued seven million shares of its common stock in exchange for all
the outstanding shares of FFI. The merger constituted a tax-free reorganization
and has been accounted for as a pooling of interests. Accordingly, all prior
period consolidated financial statements presented have been restated to
include the combined results of operations, financial position and cash flows
as though FFI had always been a part of the Company. Total combination related
costs and provisions were approximately $1.2 million and reflected as an
expense in the second fiscal quarter of 2001.

The table below presents a reconciliation of revenues and net income, as
reported in the consolidated statements of operations with those previously
reported by the Company. The references to Advance in this table are to the
Companys historical operating results prior to the merger with FFI.

|            |         |                               |   |           |                |  | 
|----------- | ------- | ----------------------------- | - | --------- | -------------- |  | 
|            |         |                               |   |           | Fiscal Year   
|            |         |                               |   |           | Ended 2000    
|            |         |                               |   |           | (in thousands)
|            |         |                               |   |           |               
|Revenues:   |         |                               |   |          
|            | Advance |                               | $ | 1,773,557 |               
|            | FFI     |                               |   | 60,331    |               
|            |         |                               |   |          
|            |         | Total consolidated revenues   |   | $         | 1,833,888      | 
|            |         |                               |   |           |               
|Net income: |         |                               |   |          
|            | Advance |                               | $ | 20,382    |               
|            | FFI     |                               |   | 321       |               
|            |         |                               |   |          
|            |         | Total consolidated net income |   | $         | 20,703         | 
|            |         |                               |   |           |               

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4. Property and Equipment

Property and equipment and their respective useful lives consisted of the
following (in thousands):

|                                                 |  |           |         |      |  |              |         |   |  |                |  | 
|------------------------------------------------ |  | --------- | ------- | ---- |  | ------------ | ------- | - |  | -------------- |  | 
|                                                 |  | March 31, |         |      |  |             
|                                                 |  |           |         |      |  |             
|                                                 |  | 2001      |         | 2002 |  | Useful Lives
|                                                 |  |           |         |      |  |             
|Land and Building                                |  | $         | 11,916  |      |  | $            | 11,770  |   |  | 15 to 20 years
|Leasehold Improvements                           |  |           | 12,725  |      |  |              | 14,379  |   |  | 8 to 10 years 
|Furniture and Fixtures                           |  |           | 11,542  |      |  |              | 13,573  |   |  | 8 to 10 years 
|Computer Equipment and Software                  |  |           | 89,365  |      |  |              | 136,812 |   |  | 3 to 5 years  
|Equipment                                        |  |           | 8,812   |      |  |              | 9,742   |   |  | 3 to 5 years  
|                                                 |  |           |         |      |  |              |         |   |  |                |  | 
|                                                 |  |           | 134,360 |      |  |              | 186,276 |   |  |                |  | 
|Less  Accumulated depreciation and amortization |  |           | (37,720 | )    |  |              | (64,999 | ) |  |                |  | 
|                                                 |  |           |         |      |  |              |         |   |  |                |  | 
|                                                 |  | $         | 96,640  |      |  | $            | 121,277 |   |  |                |  | 
|                                                 |  |           |         |      |  |              |         |   |  |                |  | 

Depreciation and amortization expense for 2000, 2001 and 2002 was $5.2 million,
$17.1 million and $27.2 million respectively.

5. Debt

Long term debt consists of the following (in thousands):

|                                                                                                                             |                                                                              |                      |         |           |         |      |         |         |        |  
|---------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | -------------------- | ------- | --------- | ------- | ---- | ------- | ------- | ------ | -
|                                                                                                                             |                                                                              |                      |         | March 31,
|                                                                                                                             |                                                                              |                      |         |          
|                                                                                                                             |                                                                              |                      |         | 2001      |         | 2002
|                                                                                                                             |                                                                              |                      |         |           |         |     
|Senior Secured Credit Facility:                                                                                              |                                                                              |                      |         |           |         |      |         |        
|                                                                                                                             | Revolver, with interest at LIBOR plus 2.00%, expires October, 2005           |                      | $       | 95,000    |         |      | $       |        |       
|                                                                                                                             | Interim revolver with interest at LIBOR plus 2.75%, cancelled December, 2001 |                      |         |          |         |      |         |        |       
|                                                                                                                             | Term A, with interest at LIBOR plus 2.75%, paid August, 2002                 |                      |         | 150,000   |         |      |         |        |       
|                                                                                                                             | Term B, with interest at LIBOR plus 3.25%, due October, 2007                 |                      |         | 400,000   |         |      |         | 150,786 |       
|Senior Notes, with interest at 8 1/2%, due March, 2008                                                                       |                                                                              |                      | 200,000 |           |         |      | 200,000 |        
|Asset Securitization Facility, with interest at funding agents A-1+/P-1
commercial paper rate plus .65%, due December, 2006 |                                                                              |                      |        |           |         |      | 150,000 |        
|                                                                                                                             |                                                                              |                      |         |           |         |      |         |        
|                                                                                                                             |                                                                              |                      | 845,000 |           |         |      | 500,786 |        
|                                                                                                                             |                                                                              | Less current portion |         |           | (15,250 | )    |         |         | (1,523 | )
|                                                                                                                             |                                                                              |                      |         |           |         |      |         |        
|Total Long Term Debt                                                                                                         |                                                                              | $                    | 829,750 |           |         | $    | 499,263 |        
|                                                                                                                             |                                                                              |                      |         |           |         |      |         |         |       

In conjunction with our acquisition of PCS, the Company obtained an $825
million Senior Secured Credit Facility. The Term A note was due on October 2,
2005 but was fully repaid in fiscal 2002 from the proceeds of the Companys
shelf offering along with a portion of the Term B note. The credit facility
contains covenants that are typical for this type of debt, including
limitations on capital expenditures, minimum fixed charge, interest coverage
and total leverage ratios. The Company is in compliance with all covenants.

In March 2001 the Company issued $200 million Senior Notes (Senior Notes).
The proceeds from this offering were used to retire the $200 million senior
subordinated notes due 2010 that were issued to Rite Aid in connection with the
PCS acquisition. The Senior Notes contain covenants that are typical for this
type of debt including, among others, fixed charge ratio, payment of dividends
and sales of assets. The Senior Notes have been unconditionally guaranteed,
jointly and severally, by all of our subsidiaries, which are all 100% owned.
There are no restrictions on the ability of the guarantors to pay dividends,
make loans or advances to the parent.

On August 23, 2001 the Company completed the sale of nine million shares
of Class A common stock. The proceeds, net of offering costs, of approximately
$291 million were used to reduce debt. The Term A note of approximately $147
million was fully repaid and the remaining $144 million was used to repay a
portion of the outstanding Term B note.

We have entered into interest rate swap agreements as of November 2000 in
order to manage exposure to interest rate risk. These agreements have fixed the
LIBOR rate as of November 7, 2000 at 6.60% for $400 million of our variable
rate debt under our credit facility. The notional amount dropped to $300
million in October 2001 and drops to $200 million in October 2002. The interest
rate swap is designated as a hedge of variable interest rate payments under our
credit facilities. Amounts received or paid are recorded as interest expense.
The fair value of the swap, an obligation of $14.5 million at March 31, 2002
was based upon quoted market prices. The fair value represents the estimated
amount the Company would have to pay to terminate the swap agreement taking
into account current interest rates at March 31, 2002.

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This agreement is a cash flow hedge, as it required us to pay fixed-rates
of interest, which hedges against changes in the amount of future cash flows
associated with variable interest obligations. Accordingly, the fair value of
our swap agreement is reported on the balance sheet in other liabilities ($14.5
million pre-tax at March 31, 2002) and the related gains or losses on this
agreement are deferred in shareholders equity as a component of other
comprehensive income (a charge of $8.8 million, net of taxes). These deferred
gains or losses are then recognized as an adjustment to interest expense over
the same period in which the related interest payments being hedged are
recorded in income. For the year ended March 31, 2002, the gains and losses on
the ineffective portion of our swap agreement were not material to the
consolidated financial statements.

In December 2001 the Company securitized certain of its accounts
receivable pursuant to a $150 million facility (the Asset Securitization
Facility). The Asset Securitization Facility is included in the Companys debt
balance as of March 31, 2002 and will continue to be reflected on-balance
sheet. The Company used the proceeds to repay $150 million of its Term B
note. In addition, the Companys $100 million interim revolver was eliminated.

In addition, the Company has a $175 million revolving credit facility that
expires in 2005. At March 31, 2002 no amounts were drawn on this revolver. In
connection with the bank debt repayments made during the fiscal year 2002 and
the securitization, the Company recorded an extraordinary loss associated with
the early retirement of debt. The loss was attributable to a non-cash charge
to write-off a portion of the deferred financing fees related to the secured
bank agreement in the amount of $5.3 million, net of taxes of $3.5 million.

The following represents, as of March 31, 2002, the schedule of current
maturities for our long-term debt (in thousands):

|                       |            |                      |   |         |         | 
|---------------------- | ---------- | -------------------- | - | ------- | ------- | 
|Years Ending March 31, |            |                      |   |        
|                       | 2003       |                      | $ | 1,523   |        
|                       | 2004       |                      |   | 1,523   |        
|                       | 2005       |                      |   | 1,523   |        
|                       | 2006       |                      |   | 1,523   |        
|                       | 2007       |                      |   | 222,728 |        
|                       | Thereafter |                      |   | 271,966 |        
|                       |            |                      |   |        
|                       |            | Total long-term debt |   | $       | 500,786 | 
|                       |            |                      |   |         |        

6. Acquisition Integration

Merger costs

Net income for the year ended March 31, 2001 reflected a pre-tax charge of
$1.2 million ($926,000 after taxes, or $.01 per diluted share) relating to
merger costs incurred in connection with the merger with FFI.

Non-recurring and impairment expenses

Net income for the year ended March 31, 2001 reflects non-recurring and
impairment expenses of $11.1 million ($6.8 million after taxes, or $0.09 per
diluted share) and represents facility impairment costs and severance costs
related to the integration and rationalization of PCS and Advance personnel and
facilities. The determination of the impairment loss was based on an evaluation
of future cash flows from operation of the mail facility to be abandoned. The
net book value of the facility and its assets including property, equipment and
software totaled $2.9 million. In addition, the expenses include severance
costs for mail facility and other AdvancePCS management employees that were
terminated or resigned as a result of the acquisition with PCS. All of these
severance costs to management employees were paid prior to March 31, 2001.
Payments made to terminated employees were based substantially on a standard
severance package available to employees. The following summarizes the
expenses (in thousands):

|                                          |                                    |   |        |       | 
|----------------------------------------- | ---------------------------------- | - | ------ | ----- | 
|Facility closure                          |                                    | $ | 8,768  |      
|                                          | Severance and other employee costs |   |        | 2,185 | 
|                                          | Other                              |   |        | 176   | 
|                                          |                                    |   |        |      
|Total non-recurring & impairment expenses |                                    | $ | 11,129 |      
|                                          |                                    |   |        |      

Net income for the year ended March 31, 2002 reflects non-recurring and
impairment expenses of $1.8 million ($1.1 million after taxes, or $0.01 per
diluted share). This amount primarily represents a human resources information
system write-off and retention costs related to the integration and
rationalization of PCS and Advance personnel and facilities.

The Company expects to consolidate certain additional operations in
connection with the integration of PCS, which may result in additional
non-recurring and impairment expenses consisting primarily of severance costs
and other related costs in the year ended March 31, 2003.

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7. Leases

The Company leases office and dispensing facility space, equipment and
automobiles under various operating leases. The Company was obligated to make
future minimum payments under noncancelable operating lease agreements as of
March 31, 2002, as follows (in thousands):

|                       |                     |                              |   |        |        | 
|---------------------- | ------------------- | ---------------------------- | - | ------ | ------ | 
|Years Ending March 31, |                     |                              |   |       
|                       | 2003                |                              | $ | 23,757 |       
|                       | 2004                |                              |   | 17,224 |       
|                       | 2005                |                              |   | 8,031  |       
|                       | 2006                |                              |   | 6,570  |       
|                       | 2007 and thereafter |                              |   | 31,343 |       
|                       |                     |                              |   |       
|                       |                     | Total minimum lease payments |   | $      | 86,925 | 
|                       |                     |                              |   |        |       

Total rent expense incurred in the years ended March 31, 2000, 2001 and
2002 was approximately $6.3 million, $18.7 million and $34.7 million
respectively. Certain office and facility leases include renewal options at
the prevailing market rates at the time of renewal.

8. Commitments and Contingencies

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

AdvancePCS was served with a purported private class action lawsuit filed
in the United States District Court in Arizona on or about December 17, 2001.
The lawsuit alleges that AdvancePCS acts as a fiduciary, as that term is
defined in the ERISA, and that AdvancePCS has breached certain fiduciary
obligations under ERISA. AdvancePCS believes that it does not act as an ERISA
fiduciary or assume the ERISA fiduciary responsibilities as alleged in the
complaint. AdvancePCS believes that its business practices are in compliance
with ERISA. The lawsuit seeks unspecified monetary damages and injunctive
relief. AdvancePCS believes that it does not assume any of the plan fiduciary
responsibilities that would subject it to regulations under ERISA. Although
the ultimate outcome is uncertain, an adverse determination could potentially
cause us to change our business practices with respect to formularies,
preferred drug listings and intervention programs, potentially reducing our
profitability and growth prospects. A class of plaintiffs has not yet been
certified and we intend to oppose such certification. AdvancePCS has denied
all allegations of wrongdoing and is vigorously defending this suit.

On December 17, 2001, AARP and United Healthcare Insurance Co. (United)
filed a multi-count complaint against AdvancePCS in federal court in
Minneapolis, Minnesota in a matter captioned United Healthcare Insurance Co.
and AARP v. AdvancePCS, Civ. No. 01-CV-2320 (D. Minn.). AARP and United have
asserted claims against AdvancePCS for violation of Minnesotas deceptive trade
practices act, tortious interference with prospective economic advantage and
unjust enrichment. Specifically, AARP and United claim that AdvancePCS created
confusion among certain AARP members and pharmacists through the launch of the
AdvancePCS prescription drug discount program. AARP and United have requested
preliminary and permanent injunctive relief and recently quantified their
compensatory damage claim of $30 million, including attorneys fees and costs.
AdvancePCS has moved to dismiss all counts of the Complaint. On March 18,
2002, without holding an evidentiary hearing, the district court granted AARP
and Uniteds request for preliminary injunctive relief. The courts order was
modified on March 22, 2002. AdvancePCS has appealed the district courts
orders and this appeal is pending. AdvancePCS has denied AARP and Uniteds
allegations and is vigorously defending this matter.

In November 1999, PCS received a subpoena by the Department of Health and
Human Services Office of Inspector General, or OIG, requesting PCS to produce
certain documents about its programs and how they operate in connection with an
industry-wide investigation. The investigation was instigated and is being
pursued by the United States Attorneys Office for the Eastern District of
Pennsylvania, which indicated an intention to review PBMs programs in light of
anti-kickback and other laws and regulations. Specifically, the focus of this
investigation appears to be PBMs relationships with pharmaceutical
manufacturers and retail pharmacies and PBMs programs relating to drug
formulary compliance, including rebate and other payments made by
pharmaceutical manufacturers to PBMs and payments made by PBMs to retail
pharmacies or others, and therapeutic intervention activity. AdvancePCS has
turned over documents responsive to the subpoena. There is litigation pending
in the Eastern District of Pennsylvania regarding further enforcement of the
subpoena and other matters relating to the propriety of the United States
Governments investigation. It is impossible to predict the outcome.

The United States Attorneys Office has also contacted some of the
pharmaceutical manufacturers with which we have agreements and has asked these
manufacturers to provide copies of documents relating to their agreements with
us. At this time, we are unable to predict whether the federal or state
government will commence any action challenging any of our programs and
practices. AdvancePCS believes that its programs and those of PCS prior to the
acquisition are in compliance with the requirements imposed by anti-kickback
laws and other applicable laws and regulations. Nevertheless, we could be
subject to scrutiny, investigation or challenge under these laws and
regulations as a result of the OIG investigation or otherwise, which could have
a material adverse effect on our business, profitability and growth prospects.

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result of the OIG investigation or otherwise, which could have a material
adverse effect on our business, profitability and growth prospects.

In March 1998, a class action lawsuit captioned Mulder v. PCS Health
Systems, Inc., case number 98-1003, was filed in the United States District
Court of the District of New Jersey. This action alleges that PCS is an ERISA
fiduciary and that we have breached our fiduciary obligations under ERISA in
connection with our development and implementation of formularies, preferred
drug listings and intervention programs for our sponsors of ERISA health plans.
In particular, plaintiffs allege that our therapeutic interchange programs and
negotiation of formulary rebates and discounts from pharmaceutical
manufacturers violate fiduciary obligations. The plaintiffs are seeking
injunctive relief and monetary damages in an unspecified amount. AdvancePCS
believes that it does not assume any of the plan fiduciary responsibilities
that would subject it to regulations under ERISA. Although the ultimate outcome
is uncertain, an adverse determination could potentially cause us to change our
business practices with respect to formularies, preferred drug listings and
intervention programs, potentially reducing our profitability and growth
prospects. A class of plaintiffs has not yet been certified and we intend to
oppose such certification. AdvancePCS has denied all allegations of wrongdoing
and is vigorously defending this suit.

Various aspects of the Companys businesses are governed by federal and
state laws and regulations and compliance is a significant operational
requirement for the Company. Management believes that the Company is in
substantial compliance with all existing legal requirements material to the
operation of its business; however, the application of complex standards to the
detailed operation of the business always creates areas of uncertainty.
Moreover, regulation of the field is in a state of flux. Numerous health care
laws and regulations have been proposed at the state and federal level, many of
which could affect the Companys business. Management cannot predict what
additional federal or state legislation or regulatory initiatives may be
enacted in the future regarding health care, or the business of pharmacy
benefit management. It is possible that federal or state governments might
impose additional restrictions or adopt interpretations of existing laws that
could have a material adverse affect on the Companys business or financial
position.

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

9. Concentration of Business

A significant portion of the Companys revenues result from contracts with
certain key customers. These contracts normally have terms of one to ten years
with renewal options. Customers accounting for over 10% of total revenues
consisted of the following at March 31:

|                         |  |      |    |      |  |      |    |   |  |  |    |  
|------------------------ |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                         |  | 2000 |    | 2001 |  | 2002
|                         |  |      |    |      |  |     
|Federal Employee Program |  |      | *  |      |  |      | 11 | % |  |  | 13 | %
|Health Net               |  |      | 41 | %    |  |      | 14 | % |  |  | *  |  
|* less than 10%          |  |      |    |      |  |      |    |   |  |  |    |  

10. Stockholders Equity

Common Stock

At the 2001 Annual Meeting of Stockholders held on November 1, 2001, the
Company amended and restated the Certificate of Incorporation to provide as
follows:



| |  |  | Increased the number of authorized shares of Class A common stock to 186,999,000,    
| | - |  | -------------------------------------------------------------------------------------
|
| |  |  | Increased the number of authorized shares of Class B-1 common stock to 13,000,000 and
|
| |  |  | Decreased the number of authorized shares of Class B-2 common stock to 1,000.        

On October 1, 2001 the Company announced a two-for-one stock split,
effected in the form of a stock dividend of our Class A common stock. The
record date was October 23, 2001 and the date of payment was November 2, 2001.
Also, on October 12, 1999 the Company announced a two-for-one stock split,
effected in the form of a stock dividend of our Class A common stock. The
record date was November 11, 1999 and the date of distribution was November 30,
1999. Financial and share information contained throughout this Form 10-K has
been retroactively adjusted to reflect the impact of the stock splits.

On August 23, 2001 the Company completed the sale of nine million shares
of Class A common stock pursuant to an S-3 shelf registration. The proceeds,
net of offering costs, of approximately $291 million were used to reduce debt.
The Term A

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debt of approximately $147 million was fully repaid and the remaining $144
million was used to repay a portion of the outstanding Term B debt. Of the
11.4 million shares registered, approximately 2.4 million shares remain
available under the shelf registration. In addition, during the three-month
period ended September 30, 2001 the Companys preferred stockholders converted
their preferred shares totaling 65,854 shares, into 6.6 million shares of Class
B-1 common stock. No preferred shares are issued and outstanding as of March
31, 2002.

On August 1, 2001 the Company completed the acquisition of TheraCom. The
Company issued 1.3 million shares of Class A common stock and an additional
384,006 shares of Class A common stock were placed in escrow, subject to
certain contingencies.

In connection with our acquisition of PCS in fiscal year 2001, the Company
issued Rite Aid 125,000 shares of Series A-2 Convertible Preferred Stock that
was convertible into Class B-2 common stock for $125 million. In addition, the
Company issued JLL 8.4 million shares of Class B-1 common stock and 65,854
shares of Series A-1 Preferred Convertible Stock for $150 million. Both Rite
Aid and JLL have converted 100% of their preferred shares to common stock. In
addition, both Rite Aid and JLL have converted a portion of their Class B
common stock to Class A common stock. As of March 31, 2002, JLL holds 12.9
million shares of Class B-1 common stock and Rite Aid holds 200 shares of Class
B-2 common stock. Class B common stock is convertible into Class A common
stock on a one for one basis.

Common Stock Voting Rights

Class A common stock entitles the holder to one vote on each matter
submitted to stockholders for vote. Class B-1 and B-2 common stock entitles
the holder to vote as a single class with the holders of Class A common stock.
The affirmative vote of at least 2/3 of the outstanding shares of Class B-1 and
B-2 common stock is required to authorize certain actions including, a change
in bylaws to adversely affect this class of stock, amendment or repeal of
Series A-1 and A-2 certificates of designation, authorization of the issuance
of additional shares of Class B-1 and B-2 common stock, increasing the number
of Company directors and incurring certain indebtedness.

Series A Convertible Preferred Stock

On October 2, 2000, in conjunction with our acquisition of PCS we issued
to Rite Aid 125,000 shares of Series A-2 Convertible Preferred Stock. In
addition, the Company issued to JLL 65,854 shares of Series A-1 Convertible
Preferred Stock. All Series A Convertible Preferred Stock has been converted to
common stock as of March 31, 2002.

Warrants to Purchase Common Stock

In connection with the issuance of the senior subordinated notes described
in Note 5 to the Consolidated Financial Statements, the Company issued Rite Aid
warrants to purchase 1.6 million shares of our Class A common stock. The
warrants terminated once we repaid the senior subordinated notes in March 2001.

The Company has issued warrants to five of our key health plan sponsor
customers representing the right to purchase up to a total of 1.2 million
shares of our common stock at prices per share ranging from $8.16 to $30.10.
The right to exercise each warrant vests in equal installments on the first
five anniversaries of the date of grant so long as the customers service
agreement remains in effect.

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

The Company has reserved shares of common stock at March 31, 2002, for the
following:

|                          |  |  |            | 
|------------------------- |  |  | ---------- | 
|Exercise of stock options |  |  | 17,947,166 | 
|Conversion of B shares    |  |  | 12,913,534 | 
|Exercise of warrants      |  |  | 1,173,932  | 
|                          |  |  |            | 
|                          |  |  | 32,034,632 | 
|                          |  |  |            | 

11. Stock Option Plan

At March 31, 2002, the Company has three stock-based compensation plans:
Incentive Stock Option Plan, Amended and Restated Incentive Stock Option Plan
and the 1997 Nonstatutory Stock Option Plan (the Plans). The Plans provide
for the granting of qualified stock options and incentive options to officers,
directors, advisors and employees of the Company. The options must be granted
with exercise prices which equal or exceed the market value of the Common Stock
at the date of

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grant. As of March 31, 2002, the number of shares of Common Stock issuable
under the Plans may not exceed 24.8 million shares. The Plans are administered
by a compensation committee appointed by the Board of Directors of the Company.

The stock options generally vest over 5-year periods. In the event of the
sale or merger in which an outside corporation gains 50% or greater ownership
of the Company, options granted to certain employees become 100% vested. The
options are exercisable for a period not to exceed 10 years from the date of
grant. As of March 31, 2002, 5.2 million options were vested at exercise prices
of $0.30 to $34.65 per share. The Company recognized compensation expense
related to options granted and the acceleration of option vesting of $1.3
million and $824,000 for the years ended March 31, 2001 and 2002 respectively.

SFAS 123 establishes a fair value-based method of accounting for
stock-based compensation. The Company has elected to adopt SFAS 123 through
disclosure with respect to employee stock-based compensation. The following
table summarizes the Companys stock option activity.

|                                               |           |   |                |           |           |   |           |       |           |   |                 |            |           |   |      |       |  |   |                 |            |   |   |       |       | 
|---------------------------------------------- | --------- | - | -------------- | --------- | --------- | - | --------- | ----- | --------- | - | --------------- | ---------- | --------- | - | ---- | ----- |  | - | --------------- | ---------- | - | - | ----- | ----- | 
|                                               |           |   | 2000           |           | 2001      |   | 2002      |      
|                                               |           |   |                |           |           |   |          
|                                               |           |   |                |           |           |   | Wtd. Avg. |       |           |   |                 |            | Wtd. Avg. |   |      |       |  |   | Wtd. Avg.      
|                                               |           |   | Shares         |           | Ex. Price |   | Shares    |       | Ex. Price |   | Shares          |            | Ex. Price
|                                               |           |   |                |           |           |   |           |       |           |   |                 |            |          
|Outstanding at beginning of
year               |           |   | 9,106,552      |           |           | $ | 4.30      |       |           |   | 11,147,104      |            |           | $ | 5.79 |       |  |   | 16,245,324      |            |   | $ | 9.34  |      
|                                               | Granted   |   |                | 2,917,400 |           |   |           | 10.41 |           |   |                 | 7,767,500  |           |   |      | 12.75 |  |   |                 | 2,348,771  |   |   |       | 30.70 | 
|                                               | Exercised |   |                | (375,468  | )         |   |           | 3.11  |           |   |                 | (2,177,300 | )         |   |      | 3.17  |  |   |                 | (2,724,290 | ) |   |       | 5.28  | 
|                                               | Canceled  |   |                | (501,380  | )         |   |           | 7.60  |           |   |                 | (491,980   | )         |   |      | 9.83  |  |   |                 | (292,740   | ) |   |       | 14.02 | 
|                                               |           |   |                |           |           |   |           |       |           |   |                 |            |           |   |      |       |  |   |                 |            |   |   |       |      
|Outstanding at end of
year                     |           |   | 11,147,104     |           |           | $ | 5.79      |       |           |   | 16,245,324      |            |           | $ | 9.34 |       |  |   | 15,577,065      |            |   | $ | 11.56 |      
|                                               |           |   |                |           |           |   |           |       |           |   |                 |            |           |   |      |       |  |   |                 |            |   |   |       |      
|Exercisable at end of
year                     |           |   | 4,976,184      |           |           | $ | 2.71      |       |           |   | 4,666,782       |            |           | $ | 4.48 |       |  |   | 5,157,508       |            |   | $ | 7.89  |      
|Price range                                    |           | $ | 0.25 to $14.54 |           |           |   |           |       |           | $ | 0.30 to  $15.59 |            |           |   |      |       |  | $ | 0.30 to  $34.65 |            |   |   |      
|Weighted average fair value
of options granted |           | $ | 5.29           |           |           |   |           |       |           | $ | 8.80            |            |           |   |      |       |  | $ | 13.58           |            |   |   |       |      

The following table reflects the weighted average exercise price and
weighted average contractual life of various exercise price ranges of the 15.6
million options outstanding as of March 31, 2002.

|                     |  |                     |            |                     |  |               |             |           |  |               |     |  |  |          |           |  |  |   |       | 
|-------------------- |  | ------------------- | ---------- | ------------------- |  | ------------- | ----------- | --------- |  | ------------- | --- |  |  | -------- | --------- |  |  | - | ----- | 
|                     |  | Options Outstanding |            | Options Exercisable
|                     |  |                     |            |                    
|                     |  |                     |            |                     |  | Weighted      |             | Wtd. Avg. |  |               |     |  |  | Weighted
|                     |  |                     |            |                     |  | Avg. Exercise | Contractual |           |  | Avg. Exercise
|Exercise Price Range |  | Shares              |            | Price               |  | Life (yrs.)   |             | Shares    |  | Price        
|                     |  |                     |            |                     |  |               |             |           |  |              
|$0.30 to $1.20       |  |                     | 664,496    |                     |  | $             | 0.80        |           |  |               | 1.4 |  |  |          | 664,496   |  |  | $ | 0.80  | 
|$2.25 to $3.13       |  |                     | 864,178    |                     |  |               | 2.71        |           |  |               | 4.8 |  |  |          | 769,578   |  |  |   | 2.66  | 
|$4.16 to $6.23       |  |                     | 196,058    |                     |  |               | 5.74        |           |  |               | 7.1 |  |  |          | 71,058    |  |  |   | 5.19  | 
|$6.26 to $9.34       |  |                     | 3,848,012  |                     |  |               | 8.33        |           |  |               | 7.0 |  |  |          | 2,010,056 |  |  |   | 8.34  | 
|$9.50 to $13.34      |  |                     | 4,533,400  |                     |  |               | 10.41       |           |  |               | 8.1 |  |  |          | 1,070,024 |  |  |   | 10.48 | 
|$14.32 to $19.75     |  |                     | 3,029,650  |                     |  |               | 15.79       |           |  |               | 8.5 |  |  |          | 534,716   |  |  |   | 16.18 | 
|$22.75 to $32.75     |  |                     | 2,345,871  |                     |  |               | 29.10       |           |  |               | 9.5 |  |  |          | 18,500    |  |  |   | 23.67 | 
|$34.65 to $34.65     |  |                     | 95,400     |                     |  |               | 34.65       |           |  |               | 9.5 |  |  |          | 19,080    |  |  |   | 34.65 | 
|                     |  |                     |            |                     |  |               |             |           |  |               |     |  |  |          |           |  |  |   |       | 
|$0.30 to $34.65      |  |                     | 15,577,065 |                     |  | $             | 11.56       |           |  |               | 7.6 |  |  |          | 5,157,508 |  |  | $ | 7.89  | 

The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average ranges of assumptions for the years ended March 31, 2000, 2001 and
2002, respectively: risk-free interest rates of 3.2% to 6.6%; expected lives of
three to five years; expected volatility of 64% to 75%. The Company continues
to account for stock based compensation under APB 25, Accounting for Stock
Issued to Employees, as allowed by SFAS 123. Had compensation cost for these
plans been determined consistent with SFAS 123, the Companys net income and
net income per share would have been reduced to the following pro forma
amounts:

|                              |                       |  |      |            |      |  |      |            |  |  |   |             | 
|----------------------------- | --------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ----------- | 
|                              |                       |  | 2000 |            | 2001 |  | 2002
|                              |                       |  |      |            |      |  |     
|Net income:                   |                       |  |      |            |      |  |      |            |  |  |   |            
|                              | As currently reported |  | $    | 20,703,000 |      |  | $    | 21,674,000 |  |  | $ | 115,731,000 | 
|                              | Pro forma             |  | $    | 17,176,000 |      |  | $    | 8,735,000  |  |  | $ | 96,063,000  | 
|Basic net income per share:   |                       |  |      |            |      |  |      |            |  |  |   |            
|                              | As currently reported |  | $    | 0.42       |      |  | $    | 0.37       |  |  | $ | 1.37        | 
|                              | Pro forma             |  | $    | 0.35       |      |  | $    | 0.15       |  |  | $ | 1.14        | 
|Diluted net income per share: |                       |  |      |            |      |  |      |            |  |  |   |            
|                              | As currently reported |  | $    | 0.37       |      |  | $    | 0.30       |  |  | $ | 1.18        | 
|                              | Pro forma             |  | $    | 0.31       |      |  | $    | 0.12       |  |  | $ | 0.98        | 

Because SFAS 123 method of accounting has not been applied to options
granted prior to April 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

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12. Related Party Transactions

In fiscal 2001 and 2002, the Company had an interest bearing note
receivable of $500,000 and $400,000, respectively, due from an executive
officer of the Company issued in conjunction with his relocation as a result of
the acquisition of PCS.

13. Retirement Plan Benefits

In connection with the acquisition of PCS, the Company acquired certain
existing retirement plans. Pursuant to the acquisition, the Defined Benefit
Pension Plan was amended to, among other things, prohibit new entrants and
freeze certain benefits. The funded status and amounts recognized in the
consolidated balance sheets at March 31, 2002 for the Companys defined benefit
pension and retiree health benefit plans, as well as changes in the benefit
obligation and plan assets subsequent to the acquisition, were as follows (in
thousands):

|                                                                |                                             |   |                 |        |                 |   |         |        |  
|--------------------------------------------------------------- | ------------------------------------------- | - | --------------- | ------ | --------------- | - | ------- | ------ | -
|                                                                |                                             |   | Defined Benefit |        | Retiree        
|                                                                |                                             |   | Pension Plan    |        | Health Benefits
|                                                                |                                             |   |                 |        |                
|Change in benefit obligation:                                   |                                             |   |                 |        |                 |   |         |       
|                                                                | Benefit obligation at March 31, 2001        |   | $               | 25,083 |                 |   | $       | 8,546  |  
|                                                                | Service cost                                |   |                 | 2,046  |                 |   |         | 1,939  |  
|                                                                | Interest cost                               |   |                 | 1,499  |                 |   |         | 776    |  
|                                                                | Plan Amendment (Gain)/Loss                  |   |                 |       |                 |   |         | (2,009 | )
|                                                                | Actuarial loss                              |   |                 | (3,146 | )               |   |         | 3,140  |  
|                                                                | Benefits paid                               |   |                 | (509   | )               |   |         | (149   | )
|                                                                |                                             |   |                 |        |                 |   |         |        |  
|                                                                | Benefit obligation at March 31, 2002        |   |                 | 24,973 |                 |   |         | 12,243 |  
|Change in plan assets:                                          |                                             |   |                 |        |                 |   |         |       
|                                                                | Fair value of plan assets at March 31, 2001 |   |                 | 23,153 |                 |   |         |       |  
|                                                                | Actual return on plan assets                |   |                 | 374    |                 |   |         |       |  
|                                                                | Employer contribution                       |   |                 | 15     |                 |   |         | 149    |  
|                                                                | Benefits paid                               |   |                 | (509   | )               |   |         | (149   | )
|                                                                |                                             |   |                 |        |                 |   |         |        |  
|                                                                | Fair value of plan assets at March 31, 2002 |   |                 | 23,033 |                 |   |         |       |  
|Funded status                                                   |                                             |   | (1,940          | )      |                 |   | (12,243 | )     
|                                                                | Plan Amendment (Gain)/Loss                  |   |                 |       |                 |   |         | (2,009 | )
|Unrecognized net actuarial loss                                 |                                             |   | 6,728           |        |                 |   | 3,500   |       
|                                                                |                                             |   |                 |        |                 |   |         |        |  
|Net amount recognized                                           |                                             |   | 4,788           |        |                 |   | (10,752 | )     
|                                                                |                                             |   |                 |        |                 |   |         |        |  
|Amounts recognized in consolidation balance sheet consisted of: |                                             |   |                 |        |                 |   |         |       
|                                                                | Accrued benefit liability                   |   |                 | 1,647  |                 |   |         | 10,752 |  
|                                                                | Deferred Tax (Asset)                        |   |                 | (2,586 | )               |   |         |       |  
|                                                                | (Charge) to Equity, net of tax              |   |                 | (3,849 | )               |   |         |       |  
|                                                                |                                             |   |                 |        |                 |   |         |        |  
|Net amount recognized                                           |                                             | $ | (4,788          | )      |                 | $ | 10,752  |       
|                                                                |                                             |   |                 |        |                 |   |         |        |  
|Weighted-average assumptions as of March 31, 2002:              |                                             |   |                 |        |                 |   |         |       
|                                                                | Discount rate as of 3/31                    |   |                 | 7.25   | %               |   |         | 7.25   | %
|                                                                | Expected return on plan assets              |   |                 | 8.50   | %               |   |         |       |  
|                                                                | Rate of compensation increase               |   |                 | 5.90   | %               |   |         |       |  

Health care trend rates were assumed to increase at an annual rate of 8.5%
in 2002 and decrease 1/2% per year to 5.5% in 2009 and held constant
thereafter.

Net pension and retiree health benefit expense for the year ended March
31, 2002 include the following components (in thousands):

|                                         |                                     |   |              |        |          |   |       |       | 
|---------------------------------------- | ----------------------------------- | - | ------------ | ------ | -------- | - | ----- | ----- | 
|                                         |                                     |   | Defined      |        | Retiree 
|                                         |                                     |   | Benefit      |        | Health  
|                                         |                                     |   | Pension Plan |        | Benefits
|                                         |                                     |   |              |        |         
|Components of net periodic benefit cost: |                                     |   |              |        |          |   |       |      
|                                         | Service cost                        |   | $            | 2,046  |          |   | $     | 1,939 | 
|                                         | Interest cost                       |   |              | 1,499  |          |   |       | 776   | 
|                                         | Expected return on plan assets      |   |              | (2,501 | )        |   |       |      | 
|                                         | Amortization of Prior Service Costs |   |              |       |          |   |       | 107   | 
|                                         | Amortization of net (Gain)/Loss     |   |              |       |          |   |       | 12    | 
|                                         |                                     |   |              |        |          |   |       |       | 
|Net periodic benefit cost                |                                     | $ | 1,044        |        |          | $ | 2,834 |      
|                                         |                                     |   |              |        |          |   |       |       | 

The assumed health care cost trend rates have a significant effect on the
retiree health benefits amounts reported. If these trend rates were to be
increased by one percentage point each future year, the March 31, 2002
accumulated post retirement

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benefit obligation would increase by 16.0% and the aggregate of the
service cost and interest components of the 2002 annual expense would increase
by 22.6%. A one percentage point decrease in these rates would decrease the
March 31, 2002 accumulated post retirement benefit obligation by 12.6% and the
aggregate of the 2002 service cost and interest cost components of the 2002
annual expense would decrease by 17.6%.

All defined plan benefit obligations have been adjusted to reflect the
effect of plan changes adopted as of the acquisition of PCS. Any associated
gain or loss relating to these changes is not reflected in the operations of
the Company.

The Company also sponsors defined contribution retirement plans for all
eligible employees, as defined in the plan documents. These plans are qualified
under Section 401(k) of the Internal Revenue Code. Company contributions to
the plans are based on employee contributions and the level of Company match.
Expenses under the plan totaled $2.7 million during fiscal year 2001 and $5.8
million during fiscal year 2002.

14. Income Taxes

AdvancePCS accounts for income taxes under the provisions of SFAS 109
Accounting for Income Taxes. The provision for income taxes for the years
ended March 31, 2000, 2001 and 2002 differed from the amounts computed applying
the federal tax rate of 35% to pretax earnings as a result of the following (in
thousands):

|                                                    |  |      |        |      |  |      |        |   |  |   |        | 
|--------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                                    |  | 2000 |        | 2001 |  | 2002
|                                                    |  |      |        |      |  |     
|Tax at U.S. federal income tax rate                 |  | $    | 11,701 |      |  | $    | 16,088 |   |  | $ | 70,021 | 
|Non-deductible goodwill and
intangible amortization |  |      | 338    |      |  |      | 9,548  |   |  |   |       | 
|State taxes, net of federal benefit                 |  |      | 529    |      |  |      | 2,238  |   |  |   | 8,104  | 
|Intangible amortization                             |  |      |       |      |  |      | (4,067 | ) |  |   |       | 
|Other, net                                          |  |      | 116    |      |  |      | 484    |   |  |   | 890    | 
|                                                    |  |      |        |      |  |      |        |   |  |   |        | 
|Provision for income taxes                          |  | $    | 12,684 |      |  | $    | 24,291 |   |  | $ | 79,015 | 
|                                                    |  |      |        |      |  |      |        |   |  |   |        | 

The income tax provision consists of the following (in thousands):

|         |  |      |        |      |  |      |        |  |  |   |        | 
|-------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|         |  | 2000 |        | 2001 |  | 2002
|         |  |      |        |      |  |     
|Current  |  | $    | 11,267 |      |  | $    | 23,798 |  |  | $ | 53,067 | 
|Deferred |  |      | 1,417  |      |  |      | 493    |  |  |   | 25,948 | 
|         |  |      |        |      |  |      |        |  |  |   |        | 
|         |  | $    | 12,684 |      |  | $    | 24,291 |  |  | $ | 79,015 | 
|         |  |      |        |      |  |      |        |  |  |   |        | 

Deferred tax assets reflect the tax consequences on future years of
temporary differences between the tax bases of assets and liabilities and their
financial reporting bases and the potential benefits of certain tax
carryforwards. The significant deferred tax assets and liabilities and the
changes in those assets and liabilities are as follows (in thousands):

|                          |                                      |                                    |          |           |          |         |        |        |         |           |          |          |          |  
|------------------------- | ------------------------------------ | ---------------------------------- | -------- | --------- | -------- | ------- | ------ | ------ | ------- | --------- | -------- | -------- | -------- | -
|                          |                                      |                                    |          | March 31, |          |         |        |        |         | March 31,
|                          |                                      |                                    |          | 2001      |          | Changes |        | 2002  
|                          |                                      |                                    |          |           |          |         |        |       
|Deferred tax assets:      |                                      |                                    |          |           |          |         |        |        |         |           |          |         
|                          | Accruals and reserves                |                                    | $        | 4,577     |          |         | $      | 8,343  |         |           | $        | 12,920   |         
|                          | Non-recurring and impairment charges |                                    |          | 4,361     |          |         |        | (651   | )       |           |          | 3,710    |         
|                          | Investment in Joint Venture          |                                    |          |          |          |         |        | 1,044  |         |           |          | 1,044    |         
|                          | Other                                |                                    |          | 657       |          |         |        | 191    |         |           |          | 848      |         
|                          |                                      |                                    |          |           |          |         |        |        |         |           |          |         
|                          |                                      |                                    | 9,595    |           |          |         | 8,927  |        |         |           | 18,522   |         
|                          |                                      |                                    |          |           |          |         |        |        |         |           |          |         
|Deferred tax liabilities: |                                      |                                    |          |           |          |         |        |        |         |           |          |         
|                          | Intangible assets                    |                                    |          | (239,933  | )        |         |        | 96,638 |         |           |          | (143,295 | )       
|                          | Amortization of deductible goodwill  |                                    |          | (3,081    | )        |         |        | (2,113 | )       |           |          | (5,194   | )       
|                          | Depreciation                         |                                    |          | (3,608    | )        |         |        | (2,433 | )       |           |          | (6,041   | )       
|                          | Other                                |                                    |          | (646      | )        |         |        | 544    |         |           |          | (102     | )       
|                          |                                      |                                    |          |           |          |         |        |        |         |           |          |         
|                          |                                      |                                    | (247,268 | )         |          |         | 92,636 |        |         |           | (154,632 | )       
|                          |                                      |                                    |          |           |          |         |        |        |         |           |          |         
|                          |                                      | Net deferred tax liability         |          | $         | (237,673 | )       |        | $      | 101,563 |           |          | $        | (136,110 | )
|                          |                                      |                                    |          |           |          |         |        |        |         |           |          |          |         
|                          |                                      | Deferred tax liability, short term |          | $         |         |         |        | $      | (1,232  | )         |          | $        | (1,232   | )
|                          |                                      |                                    |          |           |          |         |        |        |         |           |          |          |         
|                          |                                      | Deferred tax liability, long term  |          | $         | (237,673 | )       |        | $      | 102,795 |           |          | $        | (134,878 | )
|                          |                                      |                                    |          |           |          |         |        |        |         |           |          |          |         

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15. Selected Quarterly Financial Data (Unaudited)

|                                      |                                     |   |                                       |        |             |   |             |        |             |   |           |        |  |   |           |        | 
|------------------------------------- | ----------------------------------- | - | ------------------------------------- | ------ | ----------- | - | ----------- | ------ | ----------- | - | --------- | ------ |  | - | --------- | ------ | 
|                                      |                                     |   | Year Ended March 31, 2001            
|                                      |                                     |   |                                      
|                                      |                                     |   | 1st Quarter                           |        | 2nd Quarter |   | 3rd Quarter |        | 4th Quarter
|                                      |                                     |   |                                       |        |             |   |             |        |            
|                                      |                                     |   | (In thousands, except per share data)
|Statement of Operations Data:         |                                     |   |                                       |        |             |   |             |        |             |   |           |        |  |   |           |       
|Revenues                              |                                     | $ | 553,214                               |        |             | $ | 563,218     |        |             | $ | 2,916,471 |        |  | $ | 2,991,394 |       
|Gross profit                          |                                     |   | 22,180                                |        |             |   | 21,052      |        |             |   | 91,420    |        |  |   | 94,931    |       
|Non-recurring and impairment expenses |                                     |   |                                      |        |             |   |            |        |             |   | 680       |        |  |   | 10,449    |       
|Net income                            |                                     | $ | 5,935                                 |        |             | $ | 6,351       |        |             | $ | 6,978     |        |  | $ | 3,405     |       
|                                      |                                     |   |                                       |        |             |   |             |        |             |   |           |        |  |   |           |       
|Basic:                                |                                     |   |                                       |        |             |   |             |        |             |   |           |        |  |   |           |       
|                                      | Net income per share                |   | $                                     | 0.12   |             |   | $           | 0.13   |             |   | $         | 0.12   |  |   | $         | 0.05   | 
|                                      |                                     |   |                                       |        |             |   |             |        |             |   |           |        |  |   |           |       
|                                      | Weighted average shares outstanding |   |                                       | 50,075 |             |   |             | 50,280 |             |   |           | 59,826 |  |   |           | 72,980 | 
|Diluted:                              |                                     |   |                                       |        |             |   |             |        |             |   |           |        |  |   |           |       
|                                      | Net income per share                |   | $                                     | 0.11   |             |   | $           | 0.11   |             |   | $         | 0.08   |  |   | $         | 0.04   | 
|                                      |                                     |   |                                       |        |             |   |             |        |             |   |           |        |  |   |           |       
|                                      | Weighted average shares outstanding |   |                                       | 53,957 |             |   |             | 56,860 |             |   |           | 89,014 |  |   |           | 89,654 | 

|                                                             |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |         | 
|------------------------------------------------------------ | ----------------------------------- | - | ------------------------------------- | ------ | ----------- | - | ----------- | ------ | ----------- | - | --------- | ------- |  | - | --------- | ------- | 
|                                                             |                                     |   | Year Ended March 31, 2002            
|                                                             |                                     |   |                                      
|                                                             |                                     |   | 1st Quarter                           |        | 2nd Quarter |   | 3rd Quarter |        | 4th Quarter
|                                                             |                                     |   |                                       |        |             |   |             |        |            
|                                                             |                                     |   | (In thousands, except per share data)
|Statement of Operations Data:                                |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|Revenues                                                     |                                     | $ | 3,147,894                             |        |             | $ | 3,154,629   |        |             | $ | 3,365,895 |         |  | $ | 3,438,872 |        
|Gross profit                                                 |                                     |   | 107,766                               |        |             |   | 107,976     |        |             |   | 114,818   |         |  |   | 121,032   |        
|Non-recurring and impairment expenses                        |                                     |   | 854                                   |        |             |   | 906         |        |             |   |          |         |  |   |          |        
|Loss from joint venture(1)                                   |                                     |   | 659                                   |        |             |   | 431         |        |             |   | 741       |         |  |   | 1,040     |        
|Net income before extraordinary loss                         |                                     | $ | 24,932                                |        |             | $ | 28,476      |        |             | $ | 32,663    |         |  | $ | 34,974    |        
|                                                             |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|Extraordinary loss on early retirement of
debt, net of taxes |                                     |   |                                      |        |             |   |            |        |             |   | 5,314     |         |  |   |          |        
|                                                             |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|Net income                                                   |                                     | $ | 24,932                                |        |             | $ | 28,476      |        |             | $ | 27,349    |         |  | $ | 34,974    |        
|                                                             |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|Basic before extraordinary loss:                             |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|                                                             | Net income per share                |   | $                                     | 0.34   |             |   | $           | 0.36   |             |   | $         | 0.36    |  |   | $         | 0.38    | 
|                                                             |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|                                                             | Weighted average shares outstanding |   |                                       | 73,478 |             |   |             | 79,499 |             |   |           | 91,912  |  |   |           | 92,840  | 
|Diluted before extraordinary loss:                           |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|                                                             | Net income per share                |   | $                                     | 0.27   |             |   | $           | 0.29   |             |   | $         | 0.32    |  |   | $         | 0.34    | 
|                                                             |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|                                                             | Weighted average shares outstanding |   |                                       | 91,618 |             |   |             | 96,952 |             |   |           | 102,321 |  |   |           | 102,462 | 
|Basic:                                                       |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|                                                             | Net income per share                |   | $                                     | 0.34   |             |   | $           | 0.36   |             |   | $         | 0.30    |  |   | $         | 0.38    | 
|                                                             |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|                                                             | Weighted average shares outstanding |   |                                       | 73,478 |             |   |             | 79,499 |             |   |           | 91,912  |  |   |           | 92,840  | 
|Diluted:                                                     |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|                                                             | Net income per share                |   | $                                     | 0.27   |             |   | $           | 0.29   |             |   | $         | 0.27    |  |   | $         | 0.34    | 
|                                                             |                                     |   |                                       |        |             |   |             |        |             |   |           |         |  |   |           |        
|                                                             | Weighted average shares outstanding |   |                                       | 91,618 |             |   |             | 96,952 |             |   |           | 102,321 |  |   |           | 102,462 | 



---

|(1) |  | Previously reported as a component of Gross Profit.
|--- |  | ---------------------------------------------------

In January 2000, Advance acquired a 19% interest in CHI. The acquisition
of the remaining 81% interest was completed effective September 2001, making
CHI a wholly owned subsidiary. The Company had originally accounted for its
interest in CHI on the cost basis. As a result of the acquisition of the
remaining 81%, APB 18 requires the Companys prior years quarterly financial
statements to be restated as if CHI had been accounted for on the equity
method. Accordingly, fiscal year 2002 financial statements have been restated
to account for CHI as though we had accounted for our investment on the equity
method. In addition, the Company has reflected the impact of the restatement
of CHI for the 1st, 2nd, 3rd and 4th quarters of 2001 of net losses (in
thousands) of $223 ($0.004 diluted net income per share), $266 ($0.005 diluted
net income per share), $257 ($0.003 diluted net income per share) and $248
($0.002 diluted net income per share), respectively and net losses for the
years ended March 2000 and 2001 of $173 and $994, respectively in the
accompanying financial statements. The Company believes that the impact of the
restatement does not have a material effect on our financial position or result
of operations. Also, in October 2001 the Company completed a two-for-one stock
split, effected in the form of a stock dividend, of its common stock. Financial
information and stock prices contained throughout this Form 10-K have been
retroactively adjusted to reflect the impact of the stock split in all periods
presented.

F- 24



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##### Table of Contents



|                                              |                            |   |                                       |      |             |   |            |       |           |   |            |      | 
|--------------------------------------------- | -------------------------- | - | ------------------------------------- | ---- | ----------- | - | ---------- | ----- | --------- | - | ---------- | ---- | 
|                                              |                            |   | Fiscal Year 2000                     
|                                              |                            |   |                                      
|                                              |                            |   | (in thousands, except per share date)
|                                              |                            |   | As                                    |      |             |   |            |       | As       
|                                              |                            |   | Previously                            |      |             |   |            |       | Currently
|                                              |                            |   | Reported                              |      | Adjustments |   | Reported  
|                                              |                            |   |                                       |      |             |   |           
|Statement of Operations Data:                 |                            |   |                                       |      |             |   |            |       |           |   |            |     
|Revenues(1)                                   |                            | $ | 1,833,888                             |      |             | $ |           |       |           | $ | 1,833,888  |     
|Selling, general & administrative expenses(1) |                            |   | 38,793                                |      |             |   | 283        |       |           |   | 39,076     |     
|Operating income(1)                           |                            |   | 36,709                                |      |             |   | (283       | )     |           |   | 36,426     |     
|Provision for income taxes(1)                 |                            |   | (12,794                               | )    |             |   | 110        |       |           |   | (12,684    | )   
|Net income(1)                                 |                            | $ | 20,876                                |      |             | $ | (173       | )     |           | $ | 20,703     |     
|                                              |                            |   |                                       |      |             |   |            |       |           |   |            |      | 
|Basic:                                        |                            |   |                                       |      |             |   |            |       |           |   |            |     
|Weighted average shares outstanding(2)        |                            |   | 24,760,163                            |      |             |   | 24,760,163 |       |           |   | 49,520,326 |     
|                                              | Net income per share(1)(2) |   | $                                     | 0.84 |             |   | $          | (0.42 | )         |   | $          | 0.42 | 
|Diluted:                                      |                            |   |                                       |      |             |   |            |       |           |   |            |     
|Weighted average shares outstanding(2)        |                            |   | 27,737,216                            |      |             |   | 27,737,216 |       |           |   | 55,474,432 |     
|                                              | Net income per share(1)(2) |   | $                                     | 0.75 |             |   | $          | (0.37 | )         |   | $          | 0.37 | 

|                                                |                            |   |                                       |      |             |   |            |       |           |   |            |      | 
|----------------------------------------------- | -------------------------- | - | ------------------------------------- | ---- | ----------- | - | ---------- | ----- | --------- | - | ---------- | ---- | 
|                                                |                            |   | Fiscal Year 2001                     
|                                                |                            |   |                                      
|                                                |                            |   | (in thousands, except per share date)
|                                                |                            |   | As                                    |      |             |   |            |       | As       
|                                                |                            |   | Previously                            |      |             |   |            |       | Currently
|                                                |                            |   | Reported                              |      | Adjustments |   | Reported  
|                                                |                            |   |                                       |      |             |   |           
|Statement of Operations Data:                   |                            |   |                                       |      |             |   |            |       |           |   |            |     
|Revenues(1)                                     |                            | $ | 7,024,298                             |      |             | $ |           |       |           | $ | 7,024,298  |     
|Cost of revenues(1)                             |                            |   | 6,794,715                             |      |             |   | 423        |       |           |   | 6,795,138  |     
|Selling, general and administrative expenses(1) |                            |   | 127,777                               |      |             |   | 1,207      |       |           |   | 128,984    |     
|Operating income(1)                             |                            |   | 90,677                                |      |             |   | (1,630     | )     |           |   | 89,047     |     
|Provision for income taxes(1)                   |                            |   | (24,927                               | )    |             |   | 636        |       |           |   | (24,291    | )   
|Net income(1)                                   |                            | $ | 22,668                                |      |             | $ | (994       | )     |           | $ | 21,674     |     
|                                                |                            |   |                                       |      |             |   |            |       |           |   |            |      | 
|Basic:                                          |                            |   |                                       |      |             |   |            |       |           |   |            |     
|Weighted average shares outstanding(2)          |                            |   | 29,145,057                            |      |             |   | 29,145,057 |       |           |   | 58,290,114 |     
|                                                | Net income per share(1)(2) |   | $                                     | 0.78 |             |   | $          | (0.39 | )         |   | $          | 0.37 | 
|Diluted:                                        |                            |   |                                       |      |             |   |            |       |           |   |            |     
|Weighted average shares outstanding(2)          |                            |   | 36,188,793                            |      |             |   | 36,188,793 |       |           |   | 72,377,586 |     
|                                                | Net income per share(1)(2) |   | $                                     | 0.63 |             |   | $          | (0.32 | )         |   | $          | 0.30 | 



---

|(1) |  | Different than previously reported due to CHI restatement.         
|--- |  | -------------------------------------------------------------------
|   
|(2) |  | Different than previously reported due to October 2001 stock split.

16. Subsequent Events

On June 5, 2002 the Company completed an increase in its Asset
Securitization Facility. The $150 million commitment under the facility was
expanded to $300 million and is due December 10, 2006. The Asset
Securitization Facility now incurs interest at the funding agents A-1+/P-1
commercial paper rate plus .85%. The Asset Securitization Facility is included
in the Companys debt balance as of March 31, 2002 and will continue to be
reflected on-balance sheet. The Company used the proceeds to repay the
remaining $150 million of its Term B note.

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ADVANCEPCS
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                           |  |            |            |            |  |            |            |               |  |      |           |     |  |   |           |  |  |   |            | 
|-------------------------- |  | ---------- | ---------- | ---------- |  | ---------- | ---------- | ------------- |  | ---- | --------- | --- |  | - | --------- |  |  | - | ---------- | 
|                           |  | Balance at |            | Additions  |  | Balance at |            |               |  |      |           |     |  |  
|                           |  | Beginning  |            | Charged to |  | End of     |            |               |  |      |           |     |  |  
|                           |  | of Year    |            | Expenses   |  | Other      |            | Deductions(1) |  | Year
|                           |  |            |            |            |  |            |            |               |  |     
|Year ended March 31, 2000: |  |            |            |            |  |            |            |               |  |      |           |     |  |   |           |  |  |   |            | 
|Allowance for doubtful A/R |  | $          | 4,743,000  |            |  | $          | 923,000    |               |  | $    |          |     |  | $ | 27,000    |  |  | $ | 5,639,000  | 
|Year ended March 31, 2001: |  |            |            |            |  |            |            |               |  |      |           |     |  |   |           |  |  |   |            | 
|Allowance for doubtful A/R |  | $          | 5,639,000  |            |  | $          | 8,204,000  |               |  | $    | 5,750,000 | (2) |  | $ | 753,000   |  |  | $ | 18,840,000 | 
|Year ended March 31, 2002: |  |            |            |            |  |            |            |               |  |      |           |     |  |   |           |  |  |   |            | 
|Allowance for doubtful A/R |  | $          | 18,840,000 |            |  | $          | 10,166,000 |               |  | $    | 934,000   | (3) |  | $ | 3,790,000 |  |  | $ | 26,150,000 | 



---

|(1) |  | Uncollectible accounts written off, net of recoveries and billing
adjustments
|--- |  | -----------------------------------------------------------------------------
|   
|(2) |  | Assumed in the acquisition of PCS                                            
|   
|(3) |  | Assumed in the acquisition of Theracom                                       

Reclassification

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

F- 26



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##### Table of Contents



INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|NO.     |  | EXHIBIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|2.1     |  | Stock Purchase Agreement dated as of July 11, 2000 by and between
AdvancePCS and Rite Aid (incorporated by reference to Exhibit 2.1
to our Form 8-K as filed with the Securities and Exchange
Commission on July 31, 2000)                                                                                                                                                                                                                                                                     
|2.2     |  | Securities Purchase Agreement dated as of July 11, 2000 by and
between AdvancePCS and JLL (incorporated by reference to Exhibit
2.2 to our Form 8-K as filed with the Securities and Exchange
Commission on October 16, 2000)                                                                                                                                                                                                                                                                  
|2.3     |  | Stock Purchase Agreement, dated as of June 18, 2001 by and among
AdvancePCS and the several selling shareholders named on Schedule
I (incorporated by referenced to Exhibit 2.1 of AdvancePCSs
Quarterly Report on Form 10-Q as filed with the Securities and
Exchange Commission on August 14, 2001)                                                                                                                                                                                         
|2.4     |  | Purchase Agreement Amendment, dated July 25, 2001 by and among
AdvancePCS and the several selling shareholders named on Schedule
I (incorporated by referenced to Exhibit 2.1 of AdvancePCSs
Quarterly Report on Form 10-Q as filed with the Securities and
Exchange Commission on August 14, 2001)                                                                                                                                                                                           
|3.1     |  | Second Amended and Restated Certificate of Incorporation of
AdvancePCS (incorporated by reference to Exhibit 99.1 of
AdvancePCSs Current Report on Form 8-K as filed with the
Securities and Exchange Commission on December 11, 2000)                                                                                                                                                                                                                                                        
|3.2     |  | Second Amended and Restated Bylaws of AdvancePCS (incorporated by
reference to Exhibit 3.1 of AdvancePCSs Current Report on Form
8-K as filed with the Securities and Exchange Commission on
October 16, 2000)                                                                                                                                                                                                                                                                                
|3.3     |  | Certificate of Amendment to the Second Amended and Restated
Certificate of Incorporation of AdvancePCS (incorporated by
reference to Exhibit 99.1 of Advance PCSs Current Report on Form
8-K as filed with the Securities and Exchange Commission on
November 9, 2001)                                                                                                                                                                                                                        
|4.1     |  | Form of Stock Certificate of Class A Common Stock of AdvancePCS
(incorporated by reference to Exhibit 4.1 of AdvancePCSs
Registration Statement on Form 8-A/A as filed with the Securities
and Exchange Commission on December 14, 2000)                                                                                                                                                                                                                                                      
|4.2     |  | Indenture dated as of March 13, 2001 by and among AdvancePCS,
various guarantors and U.S. Trust Company of Texas, N.A.
(incorporated by reference to Exhibit 4.2 of AdvancePCSs
Registration Statement on Form S-4 as filed with the Securities
and Exchange Commission on April 18, 2001)                                                                                                                                                                                                    
|4.3     |  | Registration Rights Agreement dated as of March 13, 2001 by and
among AdvancePCS, various guarantors named therein and Banc of
America Securities LLC, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Banc One Capital Markets, Inc., Chase Securities,
Inc., CIBC World Markets Corp. and Scotia Capital USA, Inc.
(incorporated by reference to Exhibit 4.3 of AdvancePCSs
Registration Statement on Form S-4 as filed with the Securities
and Exchange Commission on April 18, 2001)
|4.4     |  | Stockholders Agreement dated as of October 2, 2000 by and among
AdvancePCS, Rite Aid Corporation, JLL and various other investors
named therein (incorporated by reference to Exhibit 10.1 to
AdvancePCSs Form 8-K as filed with the Securities and Exchange
Commission on October 16, 2000)                                                                                                                                                                                                 
|4.5     |  | Amendment No. 1 to Stockholders Agreement dated as of October 20,
2000 by and among AdvancePCS, Rite Aid Corporation, JLL and
various other investors named therein (incorporated by reference
to Exhibit 10.3 to AdvancePCSs Form 10-Q as filed with the
Securities and Exchange Commission on February 14, 2001)                                                                                                                                                                           
|4.6     |  | Warrant Agreement, dated as of September 12, 1996, by and between
AdvancePCS and VHA, Inc. (incorporated by reference to Exhibit
4.16 to AdvancePCSs Form S-1 as filed with the Securities and
Exchange Commission on October 8, 1996 (No. 333-06931))                                                                                                                                                                                                                                        
|4.7     |  | Warrant Agreement, dated as of February 26, 1999, by and between
AdvancePCS and Foundation Health Systems, Inc. (incorporated by
reference to Exhibit 4.1 to AdvancePCSs Current Report on Form
8-K as filed with the Securities and Exchange Commission dated
April 15, 1999)                                                                                                                                                                                                                
|4.8     |  | Warrant Agreement, dated as of February 25, 1999, by and between
AdvancePCS and Arkansas BlueCross BlueShield (incorporated by
reference to Exhibit 4.8 to AdvancePCSs Annual Report on Form
10-K as filed with the Securities and Exchange Commission dated
March 31, 1999)                                                                                                                                                                                                                  
|4.9     |  | Warrant Agreement, dated as of June 12, 1998, by and between
AdvancePCS and Wellmark, Inc. (incorporated by reference to
Exhibit 4.9 to AdvancePCSs Annual Report on Form 10-K as filed
with the Securities and Exchange Commission dated March 31, 1999)                                                                                                                                                                                                                                     



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|NO.     |  | EXHIBIT                                                                                                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|4.10    |  | Warrant Agreement, dated December 10, 1999, by and between
AdvancePCS and CareFirst of Maryland, Inc., Group Hospitalization
and Medical Services, Inc., FreeState Health Plan, Inc., Delmarva
Health Plan, Inc. and Capital Care, Inc. (incorporated by
reference to Exhibit 4.10 to AdvancePCSs Annual Report on Form
10-K as filed with the Securities and Exchange Commission on June
29, 2001)
|4.11    |  | Warrant Agreement, dated January 1, 2001, by and between
AdvancePCS and Empire Blue Cross and Blue Shield (incorporated by
reference to Exhibit 4.1 of AdvancePCSs Quarterly Report on Form
10-Q as filed with the Securities and Exchange Commission on
November 14, 2001)                                                                                                                        
|4.12    |  | Warrant Agreement, dated January 2, 2001, by and between
AdvancePCS and Wellmark, Inc. (incorporated by reference to
Exhibit 4.1 of AdvancePCSs Quarterly Report on Form 10-Q as filed
with the Securities and Exchange Commission on November 14, 2001)                                                                                                                                           
|4.13*   |  | Warrant Agreement, dated November 5, 2001, by and between
AdvancePCS and Arkansas Blue Cross and Blue Shield                                                                                                                                                                                                                                                                                        
|10.1    |  | Amended and Restated Incentive Stock Option Plan (incorporated by
reference from AdvancePCSs Definitive Proxy Statement on Schedule
14A as filed with the Securities and Exchange Commission on
October 22, 1999)                                                                                                                                                                                  
|10.2    |  | Amendment Number 1 to Amended and Restated Incentive Stock Option
Plan (incorporated by reference to Exhibit 4.5 to AdvancePCSs
Registration Statement on Form S-8 as filed with the Securities
and Exchange Commission on May 3, 2001)                                                                                                                                                            
|10.3    |  | Amended and Restated Nonstatutory Stock Option Plan (incorporated
by reference to Exhibit 4.3 to AdvancePCSs Registration Statement
on Form S-8 as filed with the Securities and Exchange Commission
on January 28, 2000)                                                                                                                                                                          
|10.4    |  | Corporate Officer Incentive Plan (incorporated by reference from
AdvancePCSs Proxy Statement on Schedule 14A as filed with the
Securities and Exchange Commission on October 22, 1999)                                                                                                                                                                                                             
|10.5    |  | Lease, dated March 6, 1994, by and between Hill Management
Services, Inc. and Advance Clinical (formerly ParadigM)
(incorporated by reference to Exhibit 10.11 to AdvancePCSs Form
S-1 as filed with the Securities and Exchange Commission on
October 8, 1996 (No. 333-06931))                                                                                                                    
|10.6    |  | Amendment to Lease, dated October 19, 1996, by and between Hill
Management Services, Inc. and AdvancePCS Clinical Services, Inc.
(incorporated by reference to Exhibit 10.6 to AdvancePCSs Annual
Report on Form 10-K as filed with the Securities and Exchange
Commission on June 29, 2001)                                                                                                       
|10.7    |  | Second Amendment to Lease, dated September 30, 1998, by and
between Hill Management Services, Inc. and AdvancePCS Clinical
Services, Inc. (incorporated by reference to Exhibit 10.7 to
AdvancePCSs Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on June 29, 2001)                                                                                              
|10.8    |  | Third Amendment to Lease, dated December 1, 1999, by and between
Hill Management Services, Inc. and AdvancePCS Clinical Services,
Inc. (incorporated by reference to Exhibit 10.8 to AdvancePCSs
Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on June 29, 2001)                                                                                                 
|10.9    |  | Fourth Amendment to Lease, dated April 25, 2000, by and between
Hill Management Services, Inc. and AdvancePCS Clinical Services,
Inc. (incorporated by reference to Exhibit 10.9 to AdvancePCSs
Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on June 29, 2001)                                                                                                  
|10.10   |  | Fifth Amendment to Lease, dated December 18, 2000, by and between
Hill Management Services, Inc. and AdvancePCS Clinical Services,
Inc. (incorporated by reference to Exhibit 10.10 to AdvancePCSs
Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on June 29, 2001)                                                                                               
|10.11   |  | Commercial Lease Agreement, commencing November 1, 1998, by and
between Crin-Richardson I, L.P. and AdvancePCS (incorporated by
reference to Exhibit 10.19 to AdvancePCSs Form 10-K as filed with
the Securities and Exchange Commission for the year ended March
31, 1999)                                                                                                                        
|10.12   |  | Credit Agreement dated as of October 2, 2000 by and among
AdvancePCS, Merrill Lynch Capital Corporation and a syndicate of
banks (incorporated by reference to Exhibit 10.4 to our Form 8-K
as filed with the Securities and Exchange Commission on October
16, 2000)                                                                                                                               
|10.13   |  | Amendment No. 1 to Credit Agreement dated as of October 2, 2000 by
and among AdvancePCS, Merrill Lynch Capital Corporation and a
syndicate of banks (incorporated by reference to Exhibit 10.13 to
AdvancePCSs Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on June 29, 2001)                                                                                   



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|NO.     |  | EXHIBIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.14   |  | Form of Employment Agreement dated as of October 2, 2000 by and
between AdvancePCS and each of Jon S. Halbert, David A. George, T.
Danny Phillips, Joseph J. Filipek, Jr., Susan S. de Mars, Jeffrey
G. Sanders, Laura I. Johansen, Andrew C. Garling, Rudy Mladenovic
and John H. Sattler (incorporated by reference to Exhibit 10.5 to
AdvancePCSs Form 10-Q as filed with the Securities and Exchange
Commission on February 14, 2001)                                                                                                                                                                                                                                             
|10.15   |  | Employment Agreement dated as of July 11, 2000, by and between
AdvancePCS and David D. Halbert (incorporated by reference to
Exhibit 10.15 to AdvancePCSs Annual Report on Form 10-K as filed
with the Securities and Exchange Commission on June 29, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.16   |  | Sublease, dated December 16, 1999, by and between TIG Insurance
Company and AdvancePCS (incorporated by reference to Exhibit
10.16 to AdvancePCSs Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on June 29, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.17   |  | Lease Agreement, dated April 30, 2000, by and between Cardinal
Technology Center II, Inc. and AdvancePCS, as amended by the First
Amendment to the Lease Agreement dated June 19, 2000, the Second
Amendment to the Lease Agreement dated September 15, 2000 and the
Third Amendment to the Lease Agreement dated March 2001
(incorporated by reference to Exhibit 10.17 to AdvancePCSs Annual
Report on Form 10-K as filed with the Securities and Exchange
Commission on June 29, 2001)                                                                                                                                                                                             
|10.18   |  | Lease Agreement, dated March 26, 1996, by and between Alliance
Commerce Center No 5, Ltd. and PCS Mail Services, Inc., as amended
by the Amendment to the Lease Agreement, dated June 9, 1999, by
and between Alliance Commerce Center No. 5, Ltd. and PCS Mail
Services of Fort Worth, Inc. (incorporated by reference to Exhibit
10.18 to AdvancePCSs Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on June 29, 2001)                                                                                                                                                                                                                             
|10.19   |  | Lease Agreement, effective September 30, 2000, by and between DRUG
(AZ) QRS 14-42, Inc. and PCS Health Systems, Inc. (incorporated by
reference to Exhibit 10.19 to AdvancePCSs Annual Report on Form
10-K as filed with the Securities and Exchange Commission on June
29, 2001)                                                                                                                                                                                                                                                                                                                                                                                                     
|10.20   |  | Office Lease, dated April 18, 1997, by and between 9060 East Via
Linda Co. Ltd. Limited Partnership and PCS Health Systems, Inc.
(incorporated by reference to Exhibit 10.20 to AdvancePCSs Annual
Report on Form 10-K as filed with the Securities and Exchange
Commission on June 29, 2001)                                                                                                                                                                                                                                                                                                                                                                                         
|10.21   |  | Lease Agreement, dated August 6, 1993, by and between MEPC
American Properties, Inc. and McKesson Corporation, as amended by
the First Lease Amendment, dated November 1999, by and between
Duke-Weeks Realty Limited Partnership and PCS Health Systems, Inc.
(incorporated by reference to Exhibit 10.21 to AdvancePCSs Annual
Report on Form 10-K as filed with the Securities and Exchange
Commission on June 29, 2001)                                                                                                                                                                                                                                                           
|10.22   |  | Office Lease, dated May 18, 1999, by and between Signature
Services and AdvancePCS, as amended by the First Amendment to the
Lease, dated October 28, 1999 by and between Signature Services
and AdvancePCS, the Second Amendment to the Lease, dated November
30, 1999, by and between Signature Services and AdvancePCS, the
Third Amendment to Lease, dated March 23, 2000, by and between
Signature Services and AdvancePCS and the Fourth Amendment to the
Lease, by and between North Parkcenter LLC and AdvancePCS
(incorporated by reference to Exhibit 10.22 to AdvancePCSs Annual
Report on Form 10-K as filed with the Securities and Exchange
Commission on June 29, 2001)
|10.23   |  | Amendment No. 2 to Credit Agreement dated October 2, 2000 by and
among Advance PCS, Merrill Lynch Capital Corporation and a
syndicate of banks (incorporated by referenced to Exhibit 10.1 of
AdvancePCSs Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on August 14, 2001)                                                                                                                                                                                                                                                                                                                                                                      
|10.24   |  | Purchase Agreement, dated August 20, 2001, by and among
AdvancePCS, David Halbert, Jon S. Halbert, Joseph Littlejohn &

Levy Fund III, L.P. and Merrill Lynch & Co. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (incorporated by reference to
Exhibit 99.1 1 of Advance PCSs Current Report on Form 8-K as
filed with the Securities and Exchange Commission on August 8,
2001)                                                                                                                                                                                                                                                                                            
|10.25   |  | Amendment No. 2 to Advance PCS Amended and Restated Incentive
Stock Option Plan (incorporated by referenced to Exhibit 10.1 of
AdvancePCSs Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on November 14, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.26   |  | Amendment No. 1 to Advance PCS Amended and Restated Incentive
Stock Option Plan (incorporated by referenced to Exhibit 10.2 of
AdvancePCSs Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on November 14, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.27   |  | Amendment No. 3 to Credit Agreement dated October 2, 2000 by and
among Advance PCS, Merrill Lynch Capital Corporation and a
syndicate of banks (incorporated by referenced to Exhibit 10.1 of
AdvancePCSs Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on November 14, 2001)                                                                                                                                                                                                                                                                                                                                                                    



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|NO.     |  | EXHIBIT                                                                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.28   |  | Receivables Purchase and Contribution Agreement dated as of
December 10, 2001 by and among AdvancePCS Health, L.P., AFC
Receivables Holding Corporation, ADVP Management, L.P. and
AdvancePCS (incorporated by referenced to Exhibit 10.4 of
AdvancePCSs Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on February 11, 2002)                                                     
|10.29   |  | Receivables Sale and Contribution Agreement dated as of December
10, 2001 by and among AFC Receivables Holding Corporation, Advance
Funding Corporation, ADVP Management, L.P. and Advance PCS
(incorporated by referenced to Exhibit 10.5 of AdvancePCSs
Quarterly Report on Form 10-Q as filed with the Securities and
Exchange Commission on February 11, 2002)                                                    
|10.30   |  | Receivables Purchase and Servicing Agreement dated as of December
10, 2001 by and among Advance Funding Corporation, Redwood
Receivables Corporation, ADVP Management, L.P. and General
Electric Capital Corporation (incorporated by referenced to
Exhibit 10.6 of AdvancePCSs Quarterly Report on Form 10-Q as
filed with the Securities and Exchange Commission on February 11,
2002)                              
|10.31   |  | Annex X to Receivables Purchase and Contribution Agreement,
Receivables Sale and Contribution Agreement and Receivables
Purchase and Servicing Agreement each dated December 10, 2001
(incorporated by referenced to Exhibit 10.7 of AdvancePCSs
Quarterly Report on Form 10-Q as filed with the Securities and
Exchange Commission on February 11, 2002)                                                             
|10.32   |  | Parent Guaranty dated as of December 10, 2001 by AdvancePCS in
favor of AdvancePCS Health, L.P., AFC Receivables Holding
Corporation, Advance Funding Corporation and ADVP Management, L.P.
(incorporated by referenced to Exhibit 10.9 of AdvancePCSs
Quarterly Report on Form 10-Q as filed with the Securities and
Exchange Commission on February 11, 2002)                                                       
|10.33*  |  | Employment Agreement dated as of May 31, 2002 by and between
AdvancePCS and Yon Y. Jorden.                                                                                                                                                                                                                                                                                                                             
|10.34*  |  | Amendment No. 4 to Credit Agreement dated May 31, 2002 by and
among AdvancePCS, Bank of America N.A. and a syndicate of banks                                                                                                                                                                                                                                                                                          
|10.35*  |  | Omnibus Amendment No. 1 to Receivables Purchase and Contribution
Agreement, Receivables Sale and Contribution Agreement and
Receivables Purchase and Servicing Agreement, Dated as of May 31,
2002 by and among, AdvancePCS, AdvancePCS Health L.P., AFC
Receivables Holding Corporation, Advance Funding Corporation, ADVP
Management L.P., Redwood Receivables Corporation, and General
Electric Capital Corporation.
|10.36*  |  | Amended and Restated Annex X to Receivables Purchase and
Contribution Agreement, Receivables Sale and Contribution
Agreement and Receivables Purchase and Servicing Agreement each
dated as of December 10, 2001.                                                                                                                                                                                                      
|11.1*   |  | Statement Regarding Computation of Per Share Earnings.                                                                                                                                                                                                                                                                                                                                                                 
|21.1*   |  | Subsidiaries of AdvancePCS.                                                                                                                                                                                                                                                                                                                                                                                            
|23.1*   |  | Consent of PricewaterhouseCoopers LLP.