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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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, 2003

OR



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



Commission File Number: 0-21447



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AdvancePCS

(Exact name of registrant as specified in its charter)



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



750 West John
Carpenter Freeway, Suite 1200, Irving, TX 75039

(Address of principal executive offices)



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



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)



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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  þ  No ̈



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



Indicate by check mark whether
the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  þ  No ̈



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, 2003 as reported on the Nasdaq National Market, was approximately $2,467,051,469.



As of May 31, 2003, registrant had (1) 78,171,246 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 2003 annual meeting of stockholders are incorporated by reference in
Part III.



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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                                                                                     |  | 24  
|                                                  |  |                                                                                               
|Item 3.                                           |  | LEGAL PROCEEDINGS                                                                              |  | 24  
|                                                  |  |                                                                                               
|Item 4.                                           |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |  | 26  
|                                                  | 
|PART II                                           |  |                                                                                               
|                                                  |  |                                                                                               
|Item 5.                                           |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                          |  | 26  
|                                                  |  |                                                                                               
|Item 6.                                           |  | SELECTED FINANCIAL DATA                                                                        |  | 28  
|                                                  |  |                                                                                               
|Item 7.                                           |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS          |  | 29  
|                                                  |  |                                                                                               
|Item 7A.                                          |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |  | 42  
|                                                  |  |                                                                                               
|Item 8.                                           |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    |  | 42  
|                                                  |  |                                                                                               
|Item 9.                                           |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE           |  | 42  
|                                                  | 
|PART III                                          |  |                                                                                               
|                                                  |  |                                                                                               
|Item 10.                                          |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |  | 43  
|                                                  |  |                                                                                               
|Item 11.                                          |  | EXECUTIVE COMPENSATION                                                                         |  | 43  
|                                                  |  |                                                                                               
|Item 12.                                          |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                 |  | 43  
|                                                  |  |                                                                                               
|Item 13.                                          |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 |  | 43  
|                                                  |  |                                                                                               
|Item 14.                                          |  | CONTROLS AND PROCEDURES                                                                        |  | 43  
|                                                  | 
|PART IV                                           |  |                                                                                               
|                                                  |  |                                                                                               
|Item 15.                                          |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                                |  | 44  
|                                                  |  |                                                                                               
|                                                  |  | SIGNATURES                                                                                     |  | 45  
|                                                  |  |                                                                                               
|                                                  |  | CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT     |  | 46  
|                                                  |  |                                                                                               
|                                                  |  | CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT |  | 47  



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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, as amended, or the Exchange Act, (forward-looking statements). We
have based these forward-looking statements on our current expectations and projections about future events. These statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies
or projections involving anticipated revenues, earnings, level of capital expenditures or other aspects of operating results and the underlying assumptions including internal growth as well as general economic and financial market conditions. 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 set forth under the caption Risk Factors, as well as the following:



| | Risks associated with competition in our industry, including customer retention, the ability to consummate contracts with new customers and pricing and margin pressures from
competitors and customer demands;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Risks related to our relationships with pharmaceutical manufacturers or a change in pricing, discounts or other practices of these manufacturers;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------



| | Risks related to compliance with governmental legislation and regulations, including compliance with any changes in the interpretations of existing laws and regulations and the
passage of new legislation or regulations;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Risks related to our ability to develop, market and sell new products, services and technologies;
|- | -------------------------------------------------------------------------------------------------



| | Risks associated with adverse results in litigation or other liability claims asserted against us, including professional liability claims in excess of our insurance coverage and
challenges to our business practices;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Risks related to maintaining our pharmacy network affiliations;
|- | ---------------------------------------------------------------



| | Risks associated with managing and integrating past and future acquisitions;
|- | ----------------------------------------------------------------------------



| | Risks associated with maintaining and managing our growth;
|- | ----------------------------------------------------------



| | Risks associated with the general changes in the health care industry, including increases in health care costs, changes in drug utilization and the introduction rates of new drugs;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Risks associated with our ability or inability to attract and retain qualified personnel;
|- | -----------------------------------------------------------------------------------------



| | Risk associated with general economic and business conditions, including exposure to customers credit risks; and
|- | -----------------------------------------------------------------------------------------------------------------



| | Risks associated with our debt obligations, including compliance with covenants contained in our credit agreements.
|- | -------------------------------------------------------------------------------------------------------------------



Although we believe that our forward-looking statements are based upon reasonable
assumptions, we can give no assurance that these forward-looking statements 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, 2003. 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



Industry Background



Prescription drug costs in the United
States are the fastest growing component of health care costs. The U.S. Centers for Medicare & Medicaid, or CMS, estimate that prescription drugs accounted for approximately 10.4% of U.S. health care expenditures in 2002, representing
approximately a 14.3% increase in expenditures over 2001. CMS projects that the cost of prescription drugs will rise between 9% and 13% per year through 2012. We believe factors contributing to this historical and future trend of increasing
prescription drug expenditures include:



| |  |  | higher drug utilization due to the growing use of pharmaceuticals as a first line of attack in disease treatment;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | an aging population who will consume a greater number of prescriptions per year;
| | - |  | --------------------------------------------------------------------------------



| |  |  | increasing direct-to-consumer advertising by pharmaceutical manufacturers;
| | - |  | --------------------------------------------------------------------------



| |  |  | new drug introductions, primarily driven by 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 the FDA;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | higher costs for newly-developed, more effective drug therapies, including those in the expanding pipeline of biotechnology pharmaceuticals;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general inflation of pharmaceutical prices; and
| | - |  | -----------------------------------------------



| |  |  | the potential introduction of a Medicare prescription drug benefit.
| | - |  | -------------------------------------------------------------------



Prescription benefit management companies, or PBMs, originally were formed to provide health plan sponsors with a more efficient and less costly means of managing their
members prescription drug benefits, particularly the processing of pharmaceutical claims. Since their inception, PBMs have continually developed additional programs that provide opportunities for health plans to manage costs while improving
quality of patient care. PBMs now process hundreds of millions of pharmaceutical claims per year using automated, real-time transaction processing systems. In addition to processing claims, PBMs monitor potentially harmful drug interactions, improve
the safety and clinical effectiveness of pharmaceutical usage, improve administrative efficiencies of pharmaceutical dispensing, and reduce pharmaceutical expenditures for health plans. PBMs also have developed mail order pharmacy fulfillment for
the convenience of health plan members and to reduce health plan costs through providing a more efficient distribution mechanism. By designing and implementing effective pharmacy benefit plans, formularies, and formulary support services, PBMs have
the ability to influence the selection of pharmaceuticals used by health plan members. PBMs use this formulary influence and aggregated purchasing power to negotiate both rebates from pharmaceutical manufacturers and discounts from retail pharmacies
to generate savings for health plan sponsors.



Medicare, the primary health
insurer for more than 40 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.



Company Overview



We are a leading provider of health improvement services in the United States. Our customers
include a broad range of health plan sponsors, such as BlueCross BlueShield plans and other managed care organizations, employer groups, third-party



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administrators of health plans, insurance companies, government agencies and labor union-based trusts. As the largest PBM
based on number of lives covered, we currently serve more than 75 million health plan members and annually manage more than 540 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 respectively.



As a PBM, we offer tools to our customers to assist in managing their prescription drug expenditures, including on-line claims adjudication, discounted retail networks,
discounted mail pharmacy services, formulary development, rebate negotiation and management and other plan design and formulary support activities. In addition, we offer a wide range of other health improvement products and services, such as
specialty pharmacy services, disease management and prescription discount cards for the uninsured and under-insured. Our mission is to improve the quality of care delivered to health plan members while helping health plan sponsors reduce overall
costs. Our strategy as the largest provider of health improvement services is to increase the number of services offered to our customer base by internal development or acquisition, increase our core customer base and, most importantly, generate
additional value for our clients and stockholders through the cross-selling of our products into our customer base.



Our revenues are derived principally from sales of prescription drugs to health plan members, either through one of our three mail pharmacies, our network of
approximately 59,000 contractually affiliated retail pharmacies or one of our specialty pharmacies. We also provide clinical and other services as part of our overall health improvement service offerings.



In October 2000, we acquired PCS Holding Corporation, or PCS, a pharmacy benefit management
company that was wholly owned by Rite Aid Corporation. We have successfully completed integrating PCS so that we operate as a single, combined company. In addition, we successfully integrated nine acquisitions in the past five years.



THE COMPANY



Our goal is to create programs that improve health outcomes for patients and that lower
overall costs for our health plan sponsor customers. We offer a broad range of health improvement services to our customers. Our basic PBM services include claims adjudication, retail network development, mail pharmacy services, formulary
development and management, rebate negotiation and management, and benefit plan design and consultation. Broader health improvement services include specialty pharmacy, disease management, discount cash cards, and web-based health improvement
services. We offer these services to our customers on a fully integrated basis. However, we track these various services into three revenue categories: Data Services, Mail Services, and Clinical and Other Services.



Data Services



Retail Network Management. We develop and negotiate networks of retail pharmacies that agree to provide prescription drugs to
individual members of our health plan sponsors at pre-negotiated discounts. In developing these networks, we provide our customers the ability to balance access and discounts for their members. Some of our networks are customized for specific
customers and others we offer as pre-negotiated networks available to the plan. Overall, our networks incorporate approximately 59,000 retail pharmacies. The retail pharmacies in our networks are linked to us through our online, real-time claims
processing systems that are designed to significantly reduce the pharmacies cost of processing prescriptions. On behalf of health plan sponsors, we aggregate all pharmacy benefit claims on a system-wide basis and facilitate payments to retail
pharmacies.



Claims Adjudication.Through our data services operations,
we processed more than 488 million prescription claims for health plan sponsors in fiscal year 2003. As part of this service, when a member of one of our health plan sponsors presents a prescription with a health plan identification card to a retail
pharmacist in our network (or to a retail pharmacy under contract directly with our customer), within seconds, our online system provides the pharmacist with the following information:



| |  |  | verification of whether the individual is eligible for pharmacy 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 adverse drug consequences the patient may face if the prescription is taken, including drug-drug, drug-food, drug-age and
drug-pregnancy interactions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Discount Cash Card Services.According to the U.S. Census Bureau, in 2001 approximately 41 million
Americans had no health insurance coverage. We estimate that approximately 16 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 discounts from retail
pharmacies and rebates on prescription drugs from pharmaceutical manufacturers 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 adverse drug consequences. More than 52,000 retail pharmacies nationwide participate in our discount cash card programs. In addition, these programs
include a mail service option to provide additional savings to participants.



Mail Services



Mail Pharmacy Services. Our mail pharmacy operations are located in Fort Worth, Texas, Birmingham, Alabama and Wilkes-Barre,
Pennsylvania. During fiscal year 2003, we filled approximately 15 million prescriptions through our mail pharmacies. Our Wilkes-Barre facility opened in January 2003 and will be capable of processing 500,000 prescriptions per week when developed to
full capacity. With recent capacity growth, we see a significant opportunity to profitably expand penetration of our mail order business.



Mail service is ideal for maintenance medications because of the convenience of home delivery and improved patient compliance through methods such as refill reminders. We
believe that our mail pharmacies reduce costs to health plan sponsors through volume purchasing efficiencies, automated and centralized dispensing technology, generic dispensing and higher rebates through greater formulary compliance. 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 and the safety of health plan members, our mail service system is equipped with automated quality control features and a licensed pharmacist inspects each prescription.



The majority of our mail service prescriptions currently are submitted to us through the mail. We have and will continue to promote our
web-based and voice recognition technology capabilities to enhance our member experience and further reduce the costs associated with receiving prescription refills.



Specialty Pharmacy Services.In June 2001, we established AdvancePCS SpecialtyRx to provide our customers with a single-sourced
solution to their complex and growing specialty pharmacy needs. Specialty pharmacy services focus on pharmaceutical products that generally are biotechnological in nature and are usually 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 $10,000 annually, but can exceed $1 million annually. Our goal
is to improve overall health care for patients using these specialty pharmaceuticals, while helping to control the costs incurred by health plan sponsors to provide these therapies.



We dispense specialty pharmaceuticals from four facilities in Maryland, Florida, Texas and Georgia. We have specialty pharmacy services
contracts with health plans and other payors representing approximately 19 million lives. We offer our customers 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.



We also 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, medical device and diagnostics industries, including product coverage advocacy, insurance
verification, reimbursement processing, pharmacist counseling, clinical and dosage monitoring, adherence counseling, coordination of injection training, in-home nursing and retail/wholesale distribution. TheraCom also provides Internet, direct
marketing, advertising and product launch support services. For example, we have preferred distribution agreements with the manufacturers, among others, of the following products:



|                |  |  
|--------------- |  | -
|      Cerezyme |  | 
|                |  |  
|      Flolan   |  | 



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|                  |  |  
|----------------- |  | -
|      Glucowatch |  | 
|                  |  |  
|      Mirena     |  | 
|                  |  |  
|      Thyrogen   |  | 



Clinical and Other Services



Benefits Plan Design and Formulary Development. 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. We advise
our customers regarding a number of benefit plan design options that promote these goals, including prior authorizations, managed drug limitations and the incorporation of other financial incentives in the plan (e.g. reimbursement limitations on the
drugs covered by the plan, co-payment structuring and deductibles).



We also
advise our health plan customers in the development of their formulary, which is the list of drugs for which the plan provides coverage. In developing these formularies, our first priority is the clinical appropriateness and effectiveness of the
listed drugs. Our formulary system is designed so that our clinical recommendations are not affected by purchasing arrangements with manufacturers. Our formulary development process begins with a panel of independent physicians and pharmacists who
perform a rigorous clinical review of available drugs for inclusion in the formulary based on safety and efficacy. This panel does not consider any information regarding pricing or available discounts or rebates that may be available from the
manufacturer.



We also have developed our Performance Drug List, or PDL, which
is a subset of the AdvancePCS National Formulary and includes only those drugs that present the best economic and clinical values to our health plan customers and their members. The PDL is not a complete formulary, but is a prescribing guide to the
best values within select therapeutic categories. The list undergoes rigorous annual clinical reviews, both internally and externally, to determine if it meets the vast majority of patient needs in the therapeutic categories represented. During the
year, significant drug product events involving products (e.g. patent expirations) may require a change to the PDL. The PDL is an important element in our pharmaceutical care consultations. The PDL is not an endorsement of any particular class of
drugs. However, the PDL states a clear preference so that member and the prescriber can be aware of the best economic value alternatives available.



Manufacturer Contracting. After a formulary is developed, our customers obtain rebates through the arrangements we have negotiated with manufacturers. Depending on
the negotiations with the manufacturer, the rebates we collect on behalf of our customers may be based on overall volume, market share as compared to an overall therapeutic class, or other metrics. Volume-based discounts measure the amount of drug
purchased by a plan, and adjust the rebate based on that level. Market share rebates measure the volume of sales of a particular product to a plans members against the demand for drugs in that products therapeutic class. Certain of these
volume or market share rebates may be limited to those plans that include a particular product on its formulary. In general both volume-based and market share rebates are calculated as a percentage of the aggregate dollar value (based on the
manufacturers published wholesale price) of a particular drug dispensed to members of those health plans that meet the criteria for receiving the rebate.



Formulary Support Services. We encourage formulary and PDL compliance through programs that operate at the patient, prescribing physician and pharmacist levels.
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.



Disease Management Programs. Through our disease management programs, we also assist
health plans in managing 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 quality initiatives and fulfill the third party
accreditation requirements, such as those of the National Committee on Quality Assurance, or NCQA, 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. Together, AdvancePCS and our subsidiary Accordant have earned Full Practitioner Oriented Accreditation from NCQA for 18 disease management programs. AdvancePCS has received this accreditation for its asthma,
diabetes and coronary artery disease management programs and Accordant has received this accreditation for all 15 of its rare, chronic disease management programs, more than any other organization in the United States.



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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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Broader Disease Management. We have
designed disease management programs for cardiovascular secondary risk reduction, asthma, diabetes, heart failure, depression and hypertension. 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.



Accordant Health Services, Inc. In November 2002, we acquired Accordant Health Services, Inc., or Accordant, a disease management company that focuses on
helping patients with fifteen complex, chronic and progressive diseases including: seizure disorders, Parkinsons disease, sickle cell anemia, CIDP, ALS (Lou Gehrigs disease), rheumatoid arthritis, lupus, polymyositis, hemophilia,
dermatomyositis, multiple sclerosis, myasthenia gravis, cystic fibrosis, scleroderma and gaucher disease. The diseases managed by Accordant require significant costs for health plans (approximately $70 million per year per one million covered
lives). In addition, these managed diseases are progressive diseases resulting in steadily increasing costs. Patients with these diseases also use significant amounts of specialty pharmaceuticals for proper treatment. We now are in the process of
integrating the disease management programs offered by Accordant with our specialty pharmacy offerings.



Health plans engage Accordant to manage any number of these disease states for their members. First, Accordant analyzes a plans population using its proprietary system and identifies those members with the
specified disease state. Then, through its proprietary, complex disease management intervention system, Accordant contacts and assists members in managing their disease with the goal of reducing costly hospitalizations and emergency room visits.



Outcomes Studies. We conduct studies for pharmaceutical manufacturers
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.



Customers



We generate a significant portion of our revenues from contracts with
health plan sponsors. BlueCross BlueShield Association Federal Employee Program accounted for 12%, 13% and 11% of our revenues for the years ended March 31, 2003, 2002 and 2001, respectively. HealthNet, formerly Foundation Health Systems, accounted
for 14% of our revenues for the year ended March 31, 2001, yet accounted for less than 10% of our revenues in fiscal years 2003 and 2002. No other customer accounted for over 10% of our revenues in fiscal years 2003, 2002 or 2001.



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



Company Operations



Sales and Marketing. As of March 31, 2003, we had a staff of more than 710 customer
account management and support staff. Our sales force is complemented by customer service representatives in more than 30 offices throughout the United States. We organize our sales force into teams focused on each customer segment. With this
organization, our sales force is able to focus on the specific characteristics and needs of our current and prospective customers in each market segment.



The sales process for health plan sponsors usually lasts a minimum of six to nine months, but sometimes can extend for a year or longer. Often, we initiate the sales
process with potential customers 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.



Customer Service. Once we have contracted with a health plan sponsor for our services, we commit to provide them 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. A multi-functional team led by a senior-level account manager coordinates our designated
resources across our company to support each customer. The account management teams are organized by customer segment to enhance their understanding of the needs and complexities of our customers.



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 four 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
April 2002, we opened our fourth call center in Knoxville, Tennessee, which gives us coverage in all four time zones in the continental United States. During the year ended March 31, 2003, our call centers received on average approximately 360,000
calls per week.



Technology Enhanced 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 within 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.



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. 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
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 customer 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 customers by either co-branding our own e-health portal or creating a completely customized private-label web site on their behalf. Our corporate e-health portal,
www.AdvancePCS.com, 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.



Prescriber Connectivity. We are developing solutions to provide prescribers, principally physicians and their office staff, technology-based tools to automate
prescribing and other day-to day activities. In 2001, we acquired the software code and other assets of iScribe. The iScribe solution has supplemented our efforts to develop mobile applications to deliver pharmacy benefit and prescribing information
at the point of care. The iScribe system reduces the need for provider callbacks to pharmacies, provides protection against medication errors, simplifies the prescription renewal process, saves time and lowers costs for providers and health plans.



In February 2001, we began our investment in RxHub, a joint venture with
Express Scripts and Medco Health Solutions, Inc. RxHub is building an electronic framework that will enable standardized communications through the prescription writing and delivery process and connect all parties in the delivery chain 
physicians, pharmacies and PBMs. We believe that this



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connectivity will increase efficiency, reduce costs and improve patient safety. RxHub reported that in December 2002 over
one million transactions were processed over its network.



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 650 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 customer 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.



Suppliers. In April 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.



Acquisitions and Joint Ventures



During the last fiscal year, we completed two acquisitions. In February 2003, we acquired
Priority Healthcares minority interest in AdvancePriority SpecialtyRx, the joint venture we had formed in 2001. AdvancePriority SpecialtyRx is now a wholly owned subsidiary and provides specialty pharmacy services to patients with specialized
medical needs who require a higher level of pharmaceutical care, such as those who use injectable drugs or biotechnology products. We are relocating the operations from Lake Mary, Florida to our specialty pharmacy in Texas. In connection with this
acquisition, we also entered into a services agreement with Priority Healthcare under which Priority Healthcare will continue to provide selected therapies to our patients.



In November 2002, we acquired Accordant, a disease management company that focuses on helping patients with 15 complex, chronic and
progressive diseases including: seizure disorders, Parkinsons, sickle cell anemia, CIDP, ALS (Lou Gehrigs disease), rheumatoid arthritis, lupus, polymyositis, hemophilia, dermatomyositis, multiple sclerosis, myasthenia gravis, cystic
fibrosis, scleroderma and gaucher disease. Accordants health plan customers engage Accordant to manage any number of these diseases for its members. Accordant assists members in managing their disease with the goal of reducing costly
hospitalizations and emergency room visits. We now are in the process of integrating our specialty pharmacy offerings with the disease management programs offered by Accordant.



During the past five years, we have successfully completed and integrated the following ten acquisitions:



| |  |  | 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 HealthNet, in 1999;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | First Florida International, or FFI, which provides PBM services as well as unique direct-to-consumer capabilities, in 2000;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | PCS Holding Corporation, which provides PBM services, in 2000;
| | - |  | --------------------------------------------------------------



| |  |  | TheraCom Inc. and its parent corporation, Dresing-Lierman, Inc., which provides specialty pharmacy services in the biotechnology arena, in 2001;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consumer Health Interactive, Inc., or CHI, an internet health portal development company, in 2001;
| | - |  | --------------------------------------------------------------------------------------------------



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| |  |  | iScribe software code and other assets relating to physician connectivity, in 2001;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Accordant, a disease management company that focuses on helping patients with complex, chronic and progressive diseases, in 2002; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AdvancePriority SpecialtyRx (minority interest acquired from Priority), a provider of specialty pharmacy services to patients with specialized medical needs or who require a higher
level of pharmaceutical care in 2003.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Competition



We compete with a number of national companies, including national PBMs,
some of which are owned by health plans, retail pharmacies or pharmaceutical manufacturers (Medco Health Solutions, Inc., a subsidiary of Merck & Co., Inc., a pharmaceutical manufacturer, Express Scripts, Inc., and Caremark Rx, Inc.), insurers
and managed care organizations, such as CIGNA Corporation and WellPoint Health Networks, Inc. that offer prescription benefit plans using their own pharmacy benefit management facilities, as well as local and regional PBMs, mail order pharmacies and
claims processors. 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 and retail network pharmacies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the quality, scope and costs of programs offered;
| | - |  | -------------------------------------------------



| |  |  | the ability to use clinical strategies to improve patient outcomes and reduce health care costs; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | customer service satisfaction.
| | - |  | ------------------------------



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 our 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. Compliance with the privacy rule issued
under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, was required by April 14, 2003. This rule applies to both electronic and paper records and imposes extensive requirements on the way in which covered entities (health
care providers, health plans, and health care information clearinghouses and their business associates) use and disclose protected information. The rule gives patients significant rights to understand and control how their protected health
information is used and disclosed. Direct providers, such as pharmacies, may use patient information without specific authorization for treatment, payment and health care operations. As a condition to participation in our pharmacy networks, we
require retail pharmacies to certify as to their compliance with these rules at least annually. For all other uses or disclosures of protected information, the privacy rule requires all covered entities to obtain a written patient authorization. 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. Sanctions for failing to comply with standards issued pursuant to



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HIPAA include criminal penalties and civil sanctions. We have completed all implementation activities required to comply
with the privacy regulations issued to date.



In February 2003, regulations
were issued pursuant to HIPAA that govern the security of individually identifiable health information in addition to the privacy regulations previously required. These rules became effective April 21, 2003 and initial compliance is required by
April 20, 2005. These security regulations impose additional administrative burdens on health care providers, health plans and their business associates, relating to the storage, utilization and transmission of health information.



In addition to the federal HIPAA standards, many states have enacted laws dealing with the
use and disclosure of health information. Implementation and adaptations of business practices to these laws will likely continue to impose a significant burden on the healthcare industry this year. The state and Federal laws may vary widely, some
relating to only certain types of information, others to only certain uses yet and others to only certain types of entities.



Many 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. 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. Even without new legislation, or alterations to 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 and safe harbors, 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 that 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.



The federal anti-kickback statute has been interpreted broadly by courts, by the U. S. Department of Health and Human Service Office of Inspector General, or OIG, and by
administrative bodies. 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. 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.



On April 28, 2003, the OIG released its Compliance Program Guidance for Pharmaceutical Manufacturers, or HHS Guidance, aimed at advising pharmaceutical manufacturers on how to establish a compliance program that will
ensure adherence to applicable laws and regulations. Included in the HHS Guidance is a discussion of certain areas of legal risk for pharmaceutical manufacturers that the government encourages manufacturers to consider in structuring their
compliance programs. The HHS Guidance contains discussion of relationship between pharmaceutical manufactures and PBMs, including the negotiation of discounts rebates and administration fees, as well as formulary support activities. We believe that
our business practices and our arrangements with pharmaceutical manufacturers are consistent with the HHS Guidance. We also maintain a compliance program designed to include the key compliance program elements described in the HHS Guidance. However,
the OIGs application of the principles underlying the anti-kickback statute is an ongoing process, and the government could challenge our program in the future. Moreover, if the industry perceives the HHS Guidance as leading to greater
scrutiny of PBMs, pharmaceutical manufacturers and health plans, may seek to alter the ways in which they conduct business with AdvancePCS and other PBMs.



We believe that we are in substantial compliance with the legal requirements imposed by the anti-kickback 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. Moreover, we believe that our business model for the



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negotiation and handling of rebates and administrative fees is consistent with the principals that the OIG set forth in
the HHS Guidance. 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.



Since 1998, the United States Attorneys Office for the Eastern District of Pennsylvania
has been investigating 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
allegations or settlements have been made public. As part of this investigation, in November of 1999, PCS received a subpoena from the OIG requesting records and data about PCSs programs. This investigation remains on-going and we have
supplied the OIG documents and made employees available for interviews. The United States Attorneys Office also has 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. Investigations also are being conducted with respect to other PBMs by the United States Attorneys Office in Boston, Massachusetts and by various state attorneys.



At this time, we are unable to predict whether the government will commence any action
against us. We believe that our programs and those programs of PCS prior to the acquisition comply with the requirements imposed by the anti-kickback laws and other applicable laws and regulations. See Item 3. Legal Proceedings and
Risk FactorsRisks Related to Our Industry for more information regarding the OIG investigation.



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 and claims for breaching fiduciary duties in
connection with the services we provide to the plan. See Item 3. Legal Proceedings for a discussion of our current proceedings related to ERISA.



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, 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.



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, 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. We believe that our contractual relationships and business practices are compliant with consumer protection laws. See Item 3. Legal Proceedings for a discussion of
current proceedings related to these laws.



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, 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.
Any action by these



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bodies may influence states to adopt legislation or establish industry standards of practice that 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.



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.



Network Access Legislation. A significant number of states have adopted some form of legislation affecting our ability to manage our retail pharmacy networks or 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.



Legislation Affecting Plan Design. 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 of our business or the operations of our
health plan customers. Some 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. 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 states mandate coverage of certain benefits or conditions. These types of legislation generally do not apply to us, but 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.



In addition, the National Association of Insurance Commissioners has developed a model law on
drug formularies, currently known as the Health Carrier Prescription Benefit Management Model Act that is expected to be adopted at its annual meeting in June of 2003. If ultimately enacted by the states throughout the country, it may require less
flexibility 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 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 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 laws and policies as a disincentive to provide discounts to private purchasers,
such as our customers, which could adversely affect our ability to control plan 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
otherwise discourage the use of the full range of our services by current or future customers. 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.



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A number of states introduced legislation to require state agencies that purchase prescription drugs to combine their
purchasing activities under a single contract. If these programs are adopted, they could adversely impact our business if our agreements with individual state agencies are combined into one program. In addition, a number of states have introduced
legislation supporting the use of non-profit PBMs to leverage their purchase volume for prescription drugs. To the extent that these programs are instituted successfully, they could adversely impact our business. The State of Maine adopted such a
program, known as the Maine Rx program, through which the state would act as a bulk purchaser of drugs for its non-Medicaid population. The Maine Rx program has been challenged by several pharmaceutical manufacturers. On May 19, 2003, the United
States Supreme Court rejected initial legal challenges to the Maine Rx program. While other legal steps remain, to the extent that this program is implemented, it could adversely impact our business in Maine and other states that may implement
similar 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, HHS notified the president that it would not seek
the necessary funding to implement the law, since HHS 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 and a house Government Reform subcommittee has held hearings on the issue in 2003. 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 is Average Wholesale Price, or AWP. AWP is a standard pricing measure used throughout the pharmaceutical industry and by us as a
basis for calculating drug prices under contracts with health plans, pharmacies and pharmaceutical manufacturers. Various federal and state Medicaid agencies and other enforcement officials are investigating the effects of the pharmaceuticals
industrys pricing practices, such as the method for calculating AWP.



Proposals have also been made to change the AWP standard and implement other pricing reform measures for federal programs. These proposed changes and other legislative or regulatory adjustments to the Medicare and Medicaid drug
reimbursement programs, 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. 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 March 2002, the Senate Finance Committee held a hearing on Medicare outpatient drug pricing, at which the OIG stated that its studies
have consistently found that Medicare pays too much for prescription drugs. The CMS Administrator announced his intention to take action to change Medicare drug pricing policy. As an interim step, in December 2002 CMS announced that it was
establishing a new single drug pricer to eliminate differences among fiscal intermediaries in payment amounts for certain Medicare-covered drugs (but not including drugs billed to durable medical equipment regional carriers, such as home
infusion drugs, and certain other drugs). The new, unified rates went into effect January 1, 2003. Some members of Congress have also expressed an interest in changing the Medicare reimbursement formula as part of a pending Medicare prescription
drug benefit legislation.



In January of 2001, Bayer Corporation, or Bayer,
entered into a $14 million settlement with the Department of Justice regarding a qui tam suit 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
2002, a consolidated class action lawsuit against the large pharmaceutical manufacturers was filed in federal court in Massachusetts, asserting that they fraudulently manipulated the AWP, resulting in higher premiums and co-payments for consumers.
In May of 2003, the court dismissed a portion of the suit, but the litigation will likely continue on specific issues.



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In addition, in 2002, an action was filed in California against the nations four largest PBMs, including
AdvancePCS, asserting that they took advantage of the difference between AWPs and acquisition costs to achieve profits for themselves, resulting in higher premiums and co-payments for consumers. This litigation is in preliminary stages, and the PBMs
will defend the action. 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.



Medicare
Prescription Drug Benefit. Medicare reimbursement and coverage of prescription drugs continues to be actively debated in Congress. Medicare currently offers a very limited outpatient prescription drug benefit. Several legislative proposals are
under consideration in Congress to provide Medicare recipients with broader outpatient drug benefits administered in both a fee for service and Medicare + Choice type offering. It is possible that PBMs would be involved in administering the benefit
through one or both of these options. The proposals also include implementing a Medicare sponsored drug discount card programs administered through PBMs and other vendors as a transitional program to the expanded Medicare drug coverage. 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.



Recent developments in Congress appear to indicate that some form of Medicare prescription drug benefit is likely to be adopted. However,
significant uncertainty remains as to the exact structure and delivery of a funded benefit, as well as whether or not a Medicare drug discount card program will be included. We cannot assess at this stage whether or how we may participate in any
program, not how such programs, if enacted, will impact drug costs, our business or our profitability.



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.



ERISA Preemption. Many of the state laws described above may
be preempted in whole or in part by ERISA, which provides for comprehensive federal regulation of employee benefit plans. However, the scope of ERISA preemption is uncertain and is subject to conflicting court rulings, and we provide services to
certain customers that are not subject to ERISA. 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.
Therefore, 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.



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 its 1998 Draft guidance for industry, the FDA purported to have the
authority to hold pharmaceutical manufacturers responsible for the promotional activities of certain PBMs. In the fall of 1998, after receiving comments to the draft, 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. However, 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. 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 can provide no assurance that the FDA will
not at some point consider our compliance efforts to be inadequate and initiate administrative enforcement actions against us.



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, Birmingham, Alabama and Wilkes-Barre, Pennsylvania. We are licensed by the United States, Texas, Alabama and Pennsylvania authorities to do business as a pharmacy and to deliver controlled substances. 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



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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.



Regulation of Disease Management Programs. Our disease management programs are affected by many of the same types of state laws and
regulations as our other activities. All states regulate the practice of medicine and nursing. Accordant employs approximately 100 nurses in its disease management operations. All of these nurses maintain nursing licenses in one or more states. As
to our broader disease management services, we do not believe our programs constitute either the practice of medicine or the practice of nursing. However, there can be no assurance that a regulatory agency in one or more states may not assert a
contrary position, and we are not aware of any controlling legal precedent for services of this kind.



Employees



On March 31, 2003, we had
approximately 6,500 employees, including approximately 600 pharmacists and 15 doctors. None of our employees are represented by a labor union. In the opinion of management, we have good relationships with our employees.



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.



Company Information



Address and
Availability of Information. Our principal executive offices are located at 750 West John Carpenter Freeway, Suite 1200, Irving, Texas 75039. Our telephone number is (469) 524-4700 and our web site is www.advancepcs.com. We make available
through our web-site, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports (when applicable) and other filings with the SEC. In addition, the SEC maintains its web
site, www.sec.gov that contains reports, proxy and information statements and other information regarding issuers filing electronically, including us.



Code of Ethics. We have adopted a code of ethics, the AdvancePCS Guide for Business Conduct, that applies to all of our directors and employees,
including our Chief Executive Officer and senior financial and accounting officers. In addition to other matters, this Guide for Business Conduct establishes our standards designed to deter wrongdoing and to promote honest and ethical conduct,
including ethical handling of actual or apparent conflicts of interest, compliance with applicable laws, rules and regulations and prompt internal reporting violations of the code. We also have a Business Practices and Compliance Department charged
with the day-to-day responsibility to administer our entire ethics and compliance program, which includes our Guide for Business Conduct, HIPAA compliance, fair employment practices and other legal compliance programs. Our Chief Compliance Officer
reports quarterly to the Audit Committee of the Board of Directors and our Compliance Committee, which is a committee comprised of our Chief Executive Officer and three other member of senior management, and reports annually to the entire Board of
Directors. On or about August 1, 2003, a copy of the AdvancePCS Guide for Business Conduct will be available at www.advancepcs.com. We intend to post all amendments to this code of



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ethics and any waivers granted from the code to any director, the Chief Executive Officer or a senior finance or
accounting officers at our web-site, www.advancepcs.com.



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. Further consolidation within the PBM industry, as well as the acquisition of any of our competitors by larger companies, may also lead to increased competition.



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 36.8% of the claims we processed in fiscal year 2003. 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 rebates on behalf of our health plan sponsors based on use of selected drugs by their 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 rebates or purchase our programs or services; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | pharmaceutical manufacturers choose not to offer rebates or purchase our programs or services.
| | - |  | ----------------------------------------------------------------------------------------------



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 profitability 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.



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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 and
profitability 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 continually develop new products and services to
assist our customers in managing their costs and improving the health of their members. 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 increases in expenses 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.



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. If we are unable to overcome the potential problems and inherent risks related to such future 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 nine years in part due
to our acquisitions, with total revenues increasing from approximately $64.4 million in fiscal year 1995 to $14.1 billion in fiscal year 2003. 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 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, president 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, president 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



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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. We did, however, purchase certain life insurance policies that are used to fund our
obligations under our Deferred Compensation Plan. If we cannot recruit, train, retain and effectively manage key employees, our business, profitability and growth prospects could suffer.



Our debt covenants and obligations could limit management discretion and harm our business, financial condition and results of
operations.



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 indenture governing our senior notes 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 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. Any failure to meet our debt obligations could harm our business, profitability and growth prospects.



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 customers. While we intend to maintain professional and general liability insurance coverage at all times, we cannot provide assurances 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
| | - |  | --------------------------------------------------------------------





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| |  |  | 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, 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 Class A common stock on a
one-for-one basis. 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 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 14.2% of 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 JLL may differ from interests of other stockholders.



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



Arthur Andersen LLP audited our financial statements included in this report for the year ended March 31, 2001. We can provide no effective remedy against Arthur Andersen
LLP in connection with a material misstatement or omission in those financial statements.



Arthur Andersen LLP consented to the inclusion of their report in the annual reports and registration statements we filed prior to January 31, 2002. Should we seek to access the public capital markets, Securities and
Exchange Commission, or the 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, if for any reason the SEC ceases accepting financial statements audited
by Arthur Andersen LLP, 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. 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 year ended 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 our annual financial statements for 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.

Our ability to access
the capital markets and engage in certain transactions is impeded because of on-going discussions with the Securities and Exchange Commission.



We are in discussions with the Staff of the SEC concerning whether and to what extent we need to provide for certain past periods, under Rule 3-10(f) of Regulation S-X, a
footnote containing certain condensed consolidating audited and/or unaudited financial information in separate columns for AdvancePCS and its guarantor and non-guarantor subsidiaries with respect to our public debt. The Staff of the SEC has advised
us that until this issue is resolved, the Staff will not declare effective any registration statements or post-effective amendments to registration statements. We are also restricted from making offerings under effective registration statements or
under Rules 505 and 506 of Regulation D of the Securities Act of 1933 to any purchases that are not accredited investors under Rule 501(a) of Regulation D. We are not restricted from issuing securities upon the exercise of outstanding warrants or
options or pursuant to employee benefit plans. Additionally, the restriction does not apply to transactions involving secondary offering or sales of securities under Rule 144. This could impede our ability to access capital markets and to engage in
certain transactions. There can be no assurance as to the outcome of the Companys discussions with the SEC.

Our ability to access the capital
markets and engage in certain transactions is impeded because of on-going discussions with the Securities and Exchange Commission.



We are in discussions with the Staff of the SEC to determine the extent to which earlier periods may need to be augmented with audited and/or unaudited disaggregated
footnote information under Rule 3-10(f) of Regulation S-X. The Staff of the SEC has advised us that until this issue is resolved, the Staff will not declare effective any registration statements or post-effective amendments to registration
statements. We are also restricted from making offerings under effective registration statements or under Rules 505 and 506 of Regulation D of the Securities Act of 1933 to any purchases that are not accredited investors under Rule 501(a) of
Regulation D. (We are not restricted from issuing securities upon the exercise of outstanding warrants or options or pursuant to employee benefit plans. Additionally, the restriction does not apply to transactions involving secondary offering or
sales of securities under Rule 144.) This could impede our ability to access capital markets and to engage in certain transactions. There can be no assurance as to the outcome of our discussions with the SEC.



Risks Related to Our Industry



There are several ongoing investigations of PBMs being conducted by federal and state
agencies under federal and state anti-kickback and false claims statutes. Prior to our acquisition of PCS, PCS received a subpoena from the Department of Health and Human Services OIG in connection with an industry-wide investigation. The OIG has
since sought information about AdvancePCS as well. Although there have been no cases filed against us, 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. Currently investigations involving the industry and other PBMs are being conducted by the federal and state attorneys offices.



In November 1999, PCS received a subpoena issued by the OIG requesting the
production of certain documents regarding PCS programs and how they operate. We understand that this subpoena was issued 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 the investigation appears to be
PBMs relationships with pharmaceutical manufacturers and retail pharmacies; 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 in connection with therapeutic intervention activity. The United States Attorneys Office also contacted some of the pharmaceutical manufacturers with



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which we have agreements and asked these manufacturers to provide copies of documents relating to their agreements with
us. The United States Attorney General also issued CIDs, seeking to compel the depositions of eight of our current and former employees. In September 2002, the District Court entered an order holding in abeyance, pending good faith efforts to reach
a mutual resolution of the outstanding discovery issues, both our disputes with the OIG regarding the scope and enforcement of the subpoena and the issuance of the CIDs. Since entry of that order, AdvancePCS has provided documents responsive to the
subpoena, as well as to supplemental requests made by the government and facilitated interviews in lieu of the CIDs. The government recently requested the production of additional documents and interviews, including information relating to the
activities of the former Advance Paradigm and the activities of AdvancePCS subsequent to the PCS acquisition, as well as additional information regarding our arrangements with retail pharmacies. We are cooperating with the government and we have
produced some additional documents and intend to continue to work with the OIG to facilitate the production of further documents and arrange further interviews.



It is not possible to predict the outcome of this investigation, or any other investigation being conducted by other agencies or against other PBMs, or whether the
government will commence any action challenging any of our programs and practices. We believe that our programs, including those prior to the acquisition, are in compliance with the requirements of the anti-kickback and false claims statutes and
other applicable laws and regulations. Nevertheless, as a result of this investigation, we could be subject to scrutiny, further investigation or challenge under federal or state anti-kickback and false claims statutes or other laws and regulations
which could cause our business, profitability and growth prospects to suffer materially.



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 our 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. Laws and regulations have been enacted on the Federal and state levels, 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.



The privacy regulations, due to their complex and controversial nature, may be subject to court challenge, as well as further legislative
and regulatory actions that could alter their effect. Moreover, HIPAA implementation is in its early phases and the healthcare industry is just beginning to adapt its practices to these requirements. We cannot at this time predict with specificity
what impact the HIPAA privacy or security rules 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. Even without new legislation and regardless of the final federal HIPAA regulations, individual health plans could prohibit us from including their patients medical information in
our various medical databases. They could also prohibit us from offering services that involve the compilation of such information. There can be no assurance that the restrictions and duties imposed by the HIPAA privacy and security rules 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 customers, thereby reducing our profitability and growth prospects.



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 and claims for breaching fiduciary duties in connection with the services we provide to the plan.



We are a party to several lawsuits alleging that we act as an ERISA fiduciary and that we have breached certain fiduciary obligations under
ERISA. We do not believe that we act as an ERISA fiduciary or assume the ERISA fiduciary responsibilities as alleged in the complaints. We also believe that, in any event, our business practices are in compliance with ERISA. The lawsuits each seek
unspecified monetary damages and injunctive relief. Although the ultimate outcome is uncertain, an adverse determination could potentially cause changes to our business practices with respect to formularies,



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preferred drug listings, rebates, and intervention programs, potentially reducing our profitability and growth prospects.
We have denied all allegations of wrongdoing and we are vigorously defending these suits.



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. Efforts to control health care costs, including prescription drug costs, are underway at the federal and state governmental levels. 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. We cannot predict what effect, if any; pending proposals if enacted might have on our business, profitability and growth prospects. 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 could provide us with new business opportunities, the structure of such a program could also have a material adverse impact on our business, profitability
and growth prospects.



Several states, 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.
Any action by these bodies may influence states to adopt legislation or establish industry standards of practice that 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.



There is great
attention being paid to the pricing of prescription drug products and how they are reimbursed by government programs. Pharmaceutical manufacturers have settled lawsuits brought by Federal and state governments asserting that they inappropriately
calculated drug prices used by Federal healthcare programs. 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, resulting in higher premiums and co-payments for consumers. In 2002, most of these cases were consolidated for pretrial
proceedings in one federal court in Massachusetts. In May of 2003, the court dismissed a portion of the suit, but the litigation will likely continue on specific issues. In addition, in 2003, an action was filed in California against the
nations four largest PBMs, including AdvancePCS, asserting that they took advantage of the difference between drugs AWP and actual acquisition costs to achieve profits for themselves, resulting in higher premiums and co-payments for
consumers. As discussed in more detail in Item 3. Legal Proceedings, the litigation is in preliminary stages, and the PBMs will defend the action.



Legislative and regulatory proposals have been put forward that would alter the calculation of drug prices for federal programs and likely
reduce expenditures. For instance, in December 2002 the Centers for Medicare & Medicaid Services, or CMS, announced that it was establishing a new single drug pricer to eliminate differences among fiscal intermediaries in payment
amounts for certain Medicare-covered drugs (but not including drugs billed to durable medical equipment regional carriers, such as home infusion drugs, and certain other drugs). The new, unified rates went into effect January 1, 2003. In addition,
on May 15, 2003, the U.S. Senate approved an amendment that would limit reimbursement for drugs currently covered by Medicare. The House of Representatives has not voted on a similar payment change during the current Congress, although it could do
so if and when it takes up Medicare legislation later this year. Other pending proposals may increase governmental involvement in health care and health benefit management services and otherwise change the way our



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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 improvement 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. The agency withdrew the Draft Guidance in the fall of 1998 and to date, 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.



On April 28, 2003, the U.S. Department of Health and Human Services OIG released its
Compliance Program Guidance for Pharmaceutical Manufacturers (HHS Guidance) aimed at advising pharmaceutical manufacturers on how to establish a compliance program that will ensure adherence to applicable laws and regulations. Included in the HHS
Guidance is a discussion of certain areas of legal risk for pharmaceutical manufacturers that the government encourages manufacturers to consider in structuring their compliance programs. The HHS Guidance contains discussion of relationship between
pharmaceutical manufactures and PBMs, including the negotiation of discounts, rebates and administration fees, as well as formulary support activities. We believe that our business practices and our arrangements with pharmaceutical manufacturers
satisfy the intent of the HHS Guidance. We also maintain a compliance program designed to include the key compliance program elements described in the HHS Guidance. However, the OIGs application of the principles underlying the anti-kickback
statute is an ongoing process, and the government could challenge our program in the future. Moreover, if the industry perceives the HHS Guidance as leading to greater scrutiny of PBMs, pharmaceutical manufacturers and health plans may seek to alter
the ways in which they conduct business with AdvancePCS and other PBMs.



Proposals to provide Medicare recipients outpatient drug benefits through the use of PBMs could make the prescription drug benefits we offer less valuable to seniors, reduce the total market for PBM services or require us to adopt a new
business model for Medicare business.



The current federal Medicare program
provides comprehensive medical benefits for individuals age 65 or over, but currently covers only a few outpatient prescription drugs. Various proposed changes to the Medicare program under consideration in Congress would result in at least partial
coverage for prescription drugs and some contemplate the use of PBMs in providing those benefits. While recent developments in Congress appear to indicate that some form of Medicare drug benefit is likely to be adopted, significant uncertainty
remains as to the exact structure and how a funded benefit will be delivered. We cannot assess at this stage whether or how we may participate in any program nor how such a program, if enacted, will impact our costs, our business or our
profitability. However, if we do participate in such a program, depending upon its design, our business could be adversely affected, especially if such a program requires us to adopt a different business model for the program.



Some of our customers sell medical policies to seniors that provide a prescription drug
benefit that we administer. Other clients provide prescription drug benefits to their retirees. Depending upon the Medicare benefit plan that is ultimately adopted, a Medicare prescription drug benefit could make these policies or plans less
valuable to seniors and reduce the total market for PBM services. The adverse effects of these legislative proposals may outweigh any opportunities for new business generated by the new benefit.



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 for new uses for existing drugs. The conduct of clinical trials is regulated by the
FDA under the authority of the Federal Food, Drug and Cosmetic Act and the related regulations. Oversight of clinical trials has received increasing scrutiny in recent years. 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, as well as civil and criminal liability. 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.



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 provide assurances 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
2003. The following table sets forth information with respect to our principal facilities.



|Facility                  |  | Location                   |  | Approximate Square Footage |  | Lease/Own
|------------------------- |  | -------------------------- |  | -------------------------- |  | ---------
|Corporate Headquarters    |  | Irving, Texas              |  | 130,658                    |  | Lease    
|Operations Center         |  | Scottsdale, Arizona        |  | 354,888                    |  | Lease    
|Call Center               |  | Scottsdale, Arizona        |  | 53,762                     |  | Lease    
|Call Center               |  | Richardson, Texas          |  | 52,000                     |  | Lease    
|Call Center               |  | Mather, California         |  | 42,395                     |  | Lease    
|Call Center               |  | Knoxville, Tennessee       |  | 59,748                     |  | Lease    
|Clinical Services         |  | Bloomington, Minnesota     |  | 45,332                     |  | Lease    
|Clinical Services         |  | Hunt Valley, Maryland      |  | 40,635                     |  | Lease    
|Mail Service Pharmacy     |  | Birmingham, Alabama        |  | 112,000                    |  | Own      
|Mail Service Pharmacy     |  | Fort Worth, Texas          |  | 93,764                     |  | Lease    
|Mail Service Pharmacy     |  | Wilkes-Barre, Pennsylvania |  | 160,000                    |  | Lease    
|Specialty Pharmacy        |  | Bethesda, Maryland         |  | 24,651                     |  | Lease    
|Specialty Pharmacy        |  | Richardson, Texas          |  | 38,400                     |  | Own      
|e-Solutions               |  | Richardson, Texas          |  | 48,312                     |  | Lease    
|e-Solutions               |  | San Francisco, California  |  | 4,394                      |  | Lease    
|Accordant Health Services |  | Greensboro, North Carolina |  | 23,490                     |  | 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
|--------------- |  | -----------



In November 1999, PCS Health Systems, Inc., or PCS, a subsidiary of PCS Holding Corporation, which was acquired by us in October 2000, received a subpoena from the Department of Health and Human Services OIG
requesting that PCS produce documents in connection with an industry-wide investigation. The investigation is ongoing and being pursued under the direction of the United States Attorneys Office for the Eastern District of Pennsylvania. Based
on public statements from that office, the investigation appears to involve a review of the practices of pharmacy benefit management companies, or PBMs, under federal anti-kickback statutes and other laws and regulations. Specifically, the focus of
the 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 in connection with therapeutic intervention activity. We provided documents responsive to the subpoena. The United States Attorneys Office also contacted some of the pharmaceutical
manufacturers with which we have agreements and has asked them to provide copies of documents relating to their agreements with us. The United States Attorney General also issued Civil Investigative Demands, or CIDs, seeking to compel the
depositions of eight of our current and former employees.



On September 17,
2002, the United States District Court for the Eastern District of Pennsylvania entered an order holding in abeyance, pending the good faith efforts to reach a mutual resolution of the outstanding discovery issues, both our dispute with the OIG
regarding the scope and enforcement of the subpoena for documents and employee e-mail as well as the issuance of the CIDs. Since entry of that order we have reached agreement with the United States Attorneys office regarding the scope of its
document requests and facilitated interviews of certain employees in lieu of the CIDs. The government recently requested the production of additional documents and interviews, including information relating to the activities of the former Advance
Paradigm and the activities of AdvancePCS subsequent to the PCS acquisition, as well as additional information regarding our arrangements with retail pharmacies. We continue to cooperate with the OIG. We already have produced certain requested
materials and we intend to continue to work with the OIG to facilitate the production of further documents and arrange the requested interviews.



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It is not possible to predict the outcome of this investigation or whether the government will commence any action
challenging any of our programs and practices. We believe that our programs, including those prior to the PCS acquisition, are in compliance with the requirements of the anti-kickback and false claims statutes and other applicable laws and
regulations. Moreover, other than those actions filed in connection with the enforcement of the subpoena, neither the OIG nor United States Attorney has filed any actions or claims against us nor have they indicated their intention to do so.
Nevertheless, as a result of this investigation, we could be subject to scrutiny, further investigation or challenge under federal or state anti-kickback and false claims statutes or other laws and regulations which could cause our business,
profitability and growth prospects to suffer materially.



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 a fiduciary, as that term is defined in the
Employee Retirement Income Security Act, or ERISA, 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. We believe that we do not assume any of the plan fiduciary responsibilities that would subject us to regulation under ERISA as alleged in the complaint. 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, intervention programs, and rebates, potentially reducing our profitability and growth prospects.
A class of plaintiffs has not yet been certified and we have opposed such certification. We have denied all allegations of wrongdoing and are vigorously defending this suit.



We are also a party to the following lawsuits, each filed by the same counsel for different plaintiffs in the United States District Court
in Arizona, that allege that we act as an ERISA fiduciary and that we have breached certain fiduciary obligations under ERISA.



| |  |  | Marantz v. AdvancePCS, case number CIV-01-2413PHX EHC, was a class action filed on or about December 17, 2001. The plaintiff withdrew the class action allegations in April
2002. In March 2003, the court dismissed the plaintiffs apparent effort to reassert possible class action claims. In May 2003, the Marantz case was dismissed based on inadequacies in the plaintiffs pleadings and subsequently the
plaintiff filed and amended complaint purporting to address these inadequacies. Currently, the case is proceeding as a single plaintiff seeking to represent one health plan.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Glanton v. AdvancePCS, case number CIV-02-0507 PHX SRB, previously referred to as Lewis v. AdvancePCS is a class action that was served on or about April 19, 2002.The case purports to be brought on behalf of a class of self-funded health plans; however, a class has not been certified and we will oppose such certification. On about March 31, 2003, we were served with another complaint (Mackner v.
AdvancePCS, case number CIV-03-0607 PHX MHM) in which the plaintiff, a purported participant in a self-funded plan customer of AdvancePCS, sought to bring action on behalf of that plan. Because the Glanton case purports to be brought as a class
action on behalf of self-funded plans we moved to consolidate the Glanton and Mackner cases. On May 14, 2003, the United States District Court consolidated Mackner into Glanton.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As to all the Arizona ERISA cases, we believe that we do not act as an ERISA fiduciary or
assume the ERISA fiduciary responsibilities as alleged in the complaints. We believe that, in any event, our business practices are in compliance with ERISA. The ERISA lawsuits seek unspecified monetary damages and injunctive relief.



We were served as a defendant in two California state court cases in 2003, one of which was
brought by the same plaintiffs counsel that represents the plaintiffs in the Arizona ERISA cases. One was filed on or about March 17, 2003 in Los Angeles County Superior Court (American Federation of State, County & Municipal
Employees (AFSCME) v. AdvancePCS, et al., case number BC292227) against us and other leading PBMs. The other was filed on or about March 26, 2003 in Alameda County Superior Court against us and several other defendants
(Irwin v. AdvancePCS, et al., case number RG03088693) and is styled as a class action brought on behalf of a class of all public employees that participate in non-ERISA prescription drug benefit plans; however, a class has not
been certified and we will oppose such certification. These two California cases allegedly involve non-ERISA plans and make the same general allegations of wrongdoing as made in the Arizona ERISA actions but are brought under Californias
Unfair Competition Law rather than ERISA. Since the two California actions are related, we will seek to have them coordinated.



Although the ultimate outcome in these Arizona ERISA and California non-ERISA cases is uncertain, an adverse determination could potentially cause us to change our
business practices with respect to formularies, preferred drug listings,



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rebates, and intervention programs, potentially reducing our profitability and growth prospects. We have denied all
allegations of wrongdoing and are vigorously defending these suits.



On
December 17, 2001, AARP and United Healthcare Insurance Co., or United, filed a multi-count complaint against us 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 us for violation of Minnesotas deceptive trade practices act, tortious interference with prospective economic advantage and unjust enrichment. Specifically, AARP
and United claim that we created confusion among certain AARP members and pharmacists through the launch of our prescription drug discount program. AARP and United requested preliminary and permanent injunctive relief. We moved to dismiss the
complaint. Without holding an evidentiary hearing, the district court granted AARP and Uniteds request for preliminary injunctive relief. We appealed the district courts order and on November 1, 2002, the Eighth Circuit Federal Court of
Appeals affirmed the district courts order. In addition to the injunctive relief requested, AARP and United have asserted monetary damages of $24 million, including attorneys fees and costs. In April 2003, AARP and United amended their
complaint to include a punitive damages allegation. We have denied AARP and Uniteds allegations, moved to dismiss the complaint and are vigorously defending this matter. In addition, in May 2003 we amended our answer to include a
cross-complaint against both AARP and United for monetary damages arising out of asserted inappropriate activities by AARP and United that interfered with the operation of our prescription drug discount program. Discovery in connection with these
claims is ongoing.



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 year 2003.



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, affected 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, 2001: |  |      |       |    
|First Quarter                     |  | $    | 11.32 |    
|Second Quarter                    |  |      | 21.10 |    
|Third Quarter                     |  |      | 25.82 |    
|Fourth Quarter                    |  |      | 29.63 |    
|                                  |  |     
|Fiscal year ended March 31, 2002: |  |      |       |    
|First Quarter                     |  | $    | 34.30 |    
|Second Quarter                    |  |      | 38.23 |    
|Third Quarter                     |  |      | 40.15 |    
|Fourth Quarter                    |  |      | 33.69 |    
|                                  |  |     
|Fiscal year ended March 31, 2003: |  |      |       |    
|First Quarter                     |  | $    | 35.17 |    
|Second Quarter                    |  |      | 24.32 |    
|Third Quarter                     |  |      | 27.95 |    
|Fourth Quarter                    |  |      | 30.06 |    



On March 31, 2003, there were
approximately 23,000 beneficial owners, based on our most recent mailing to stockholders, of our Class A common stock represented by 136 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



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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, 2003, 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, 2003, is reflected in the table below. All of our stock based compensation plans have been approved by our stockholders.



Equity Compensation Plan Information (amounts, other than dollars, in
thousands)



|Plan Category                                             |  | Number of shares ofcommon stock to beissued upon exercise ofoutstanding options(1) |  | Weighted-averageexercise price per share of outstanding options |       | Number of shares of commonstock remaining available forfuture issuance under
equitycompensation plans (excludingsecurities issuable upon exerciseof outstanding options) |      
|--------------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | --------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----
|Equity compensationplans approved bysecurity holders      |  | 13,340                                                                             |  | $                                                               | 14.56 |                                                                                                                                                                          | 4,389
|Equity compensationplans, not approvedby security holders |  |                                                                                   |  |                                                                 |      |                                                                                                                                                                          |     
|                                                          |  |                                                                                    |  |                                                                 |       |                                                                                                                                                                          |      
|Total                                                     |  | 13,340                                                                             |  | $                                                               | 14.56 |                                                                                                                                                                          | 4,389
|                                                          |  |                                                                                    |  |                                                                 |       |                                                                                                                                                                          |      

---

|(1) |  | All options are outstanding under our two stock-based compensation plans: Amended and Restated Incentive Stock Option Plan and the 1997 Nonstatutory Stock Option
Plan.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 1,866 shares available for future issuance under our Employee Stock Purchase Plan which was approved by the stockholders.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------



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|ITEM 6. |  | SELECTED FINANCIAL DATA
|------- |  | -----------------------



The following financial information should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto included elsewhere in this filing. Certain reclassifications have been made to prior period statements to conform them to the March 31, 2003 classifications.



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.



AdvancePCS



|                                                                            |  | Year Ended March 31,                  |            
|--------------------------------------------------------------------------- |  | ------------------------------------- | -----------
|                                                                            |  | 2003(1)                               |            
|                                                                            |  | (In thousands, except per share data) |            
|Statement of Operations Data:                                               |  |                                       |            
|Revenues(5)                                                                 |  | $                                     | 14,110,879 
|Cost of revenues                                                            |  |                                       | (13,555,231
|                                                                            |  |                                       |            
|Gross profit                                                                |  |                                       | 555,648    
|Selling, general and administrative expenses                                |  |                                       | 231,245    
|Non-recurring and impairment expenses                                       |  |                                       |           
|                                                                            |  |                                       |            
|Operating income                                                            |  |                                       | 324,403    
|Net interest expense                                                        |  |                                       | (38,572    
|Loss from joint venture                                                     |  |                                       | (5,036     
|Merger costs and asset disposal                                             |  |                                       |           
|                                                                            |  |                                       |            
|Income before income taxes                                                  |  |                                       | 280,795    
|Provision for income taxes                                                  |  |                                       | (110,914   
|                                                                            |  |                                       |            
|Income before extraordinary loss                                            |  |                                       | 169,881    
|Extraordinary loss on early retirement of debt, net of taxes                |  |                                       | (1,491     
|                                                                            |  |                                       |            
|Net income                                                                  |  | $                                     | 168,390    
|                                                                            |  |                                       |            
|Basic:                                                                      |  |                                       |            
|Income before extraordinary loss per share                                  |  | $                                     | 1.86       
|Extraordinary loss on early extinguishment of debt, net of taxes, per share |  |                                       | (.01       
|                                                                            |  |                                       |            
|Net income per share                                                        |  | $                                     | 1.85       
|                                                                            |  |                                       |            
|Weighted average shares outstanding                                         |  |                                       | 91,094     
|Diluted:                                                                    |  |                                       |            
|Income before extraordinary loss per share                                  |  | $                                     | 1.72       
|Extraordinary loss on early extinguishment of debt, net of taxes, per share |  |                                       | (.01       
|                                                                            |  |                                       |            
|Net income per share                                                        |  | $                                     | 1.71       
|                                                                            |  |                                       |            
|Weighted average shares outstanding                                         |  |                                       | 98,508     
|                                                                            |  |                                       |            
|Balance Sheet Data (as of end of period):                                   |  |                                       |            
|Cash and cash equivalents                                                   |  | $                                     | 111,247    
|Total assets                                                                |  |                                       | 3,712,744  
|Total debt                                                                  |  |                                       | 448,011    
|Stockholders equity                                                        |  |                                       | 970,474    
|                                                                            |  |                                       |            
|Supplemental Data (unaudited):                                              |  |                                       |            
|Capital expenditures                                                        |  |                                       | 69,339     
|Goodwill amortization                                                       |  |                                       |           
|Pharmacy network claims processed                                           |  |                                       | 487,804    
|Mail pharmacy prescriptions filled                                          |  |                                       | 15,425     



|(1) |  | Includes Accordant data since the acquisition in November 2002.
|--- |  | ---------------------------------------------------------------



|(2) |  | Reflects the adoption of SFAS 142 effective April 1, 2001.
|--- |  | ----------------------------------------------------------



|(3) |  | Includes PCS data since the acquisition in October 2000.
|--- |  | --------------------------------------------------------



|(4) |  | Financial information for 2001 has been restated for the purchase of CHI (See Item 8. Financial Statements and Supplementary Data, Note 2. Summary of Significant
Accounting Policies).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | The historical revenues of AdvancePCS have been retroactively reclassified to reflect the adoption of EITF 02-16 in the fourth quarter of fiscal 2003. The adjustments for fiscal
years 2003, 2002, 2001, 2000 and 1999 were ($1,429,620), ($933,169), ($533,907), ($229,463) and ($184,792), respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

EXPLANATORY NOTE



Beginning in the fiscal year ended March 31, 2003, the Company has included in its Quarterly Reports on Form 10-Q (including its Form 10-Q/A for the quarter end June 30, 2002 filed today) and in this Annual Report on Form 10-K a footnote
containing certain condensed consolidating financial information in separate columns for the Company and its guarantor and non-guarantor subsidiaries with respect to the Companys public debt, as contemplated by Rule 3-10(f) of Regulation S-X
(see Footnote 8 to the Financial Statements).



The Staff of the Securities and
Exchange Commission (the SEC) has advised the Company that it believes such footnote should have been provided in the Companys financial statements filed with the SEC for earlier periods. The Staff of the SEC has also advised the
Company that the information provided in Footnote 8 to the Financial Statements in this Annual Report on Form 10-K for the fiscal year ended March 31, 2001 should be audited rather than unaudited as presented (Arthur Andersen LLP was the
Companys auditors for the fiscal year ended March 31, 2001). Such footnote information disaggregates financial information previously provided on a consolidated basis into separate columns for the Company and its guarantor and non-guarantor
subsidiaries. The information provided in the footnote has no impact on the consolidated finanical information of the Company.



The Company is in discussions with the Staff of the SEC to determine the extent to which earlier periods may need to be augmented with similar audited and/or unaudited
disaggregated footnote information. The Company believes that the disclosure of this footnote information would not provide any additional material information to the Companys stockholders and noteholders. There can be no assurance as to the
outcome of the Companys discussions with the Staff.



See Footnote 8 of
the Financial Statements in this Annual Report on Form 10-K for the condensed consolidating financial information for the Company and its guarantor and non-guarantor subsidiaries with respect to the Companys public debt; the liquidity
discussion contained in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations; and Risk Factors.



The Sarbanes-Oxley Act of 2002 requires the CFOs and CEOs of public companies to make certain certifications relating to the financial statements included in SEC filings.
Such certifications are not included in this Annual Report on Form 10-K but will be filed once this issue has been resolved with the Staff of the SEC.



Overview



We are a leading provider of health improvement services in the United States. Our customers include a broad range of health plan sponsors, such as 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. As the largest PBM based on number of lives covered, we currently serve more than 75 million health plan members and
annually manage more than 540 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.



As a PBM, we offer tools to our customers to assist in
managing their prescription drug expenditures, including on-line claims adjudication, discounted retail networks, discounted mail pharmacy services, formulary development, rebate negotiation and management and other plan design and formulary support
activities. In addition, we offer a wide range of other health improvement products and services, such as specialty pharmacy services, disease management and prescription discount cards for the uninsured and under-insured. Our mission is to improve
the quality of care delivered to health plan members while helping health plan sponsors reduce overall costs. Our strategy as the largest provider of health improvement services is to increase the breadth of services offered to our customer base,
increase our core customer base and, most importantly, generate additional value through the cross-selling of our products into our customer base.



Critical Accounting Policies



The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires that management establish accounting
policies and make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain. While judgments and estimates
made by us are based on historical experience and other assumptions that we believe are appropriate and reasonable under current circumstances, actual resolution of these matters may differ from recorded estimated amounts, resulting in charges or
credits that could materially affect future financial statements. The following are accounting policies and use of estimates applied in the preparation of our financial statements as well as the residual accounting risk inherent for these areas that
should be considered. Residual accounting risk is defined as the inherent risk that remains after the application of our policies and processes and is generally outside of our control.



Revenue Recognition



Our revenues are derived principally from sales of prescription drugs to members of our customers, either through our mail and specialty service pharmacies (Mail
Services) or our networks of contractually affiliated retail pharmacies (Data Services). We also provide clinical and other services as part of our overall health improvement service offerings.



We adopted Emerging Issues Task Force (EITF) released Issue No. 02-16, Accounting by a
Reseller for Cash Consideration Received from a Vendor (EITF 02-16) in the fourth quarter of fiscal 2003 by retroactively reclassifying all prior years to conform with the presentation for fiscal 2003. When we provide formulary management
services to a customer in conjunction with claims processing, we record rebates and administrative fees received from pharmaceutical manufacturers as a reduction of cost of revenues and the portion of the rebate payable to customers is treated as a
reduction of revenue. As a result of the adoption, fiscal years 2003, 2002 and 2001 revenues have been reduced by $1.4 billion, $933.2 million and $533.9 million, respectively, representing the gross amounts of rebates and administrative fees
received from pharmaceutical manufacturers. Cost of revenues have been reduced by the same amounts (See Recently Adopted Accounting Pronouncements).



Data Services



We evaluate our plan sponsor customer contracts using the indicators of EITF No. 99-19 Reporting Gross Revenue as a Principal vs. Net as an Agent (EITF 99-19)
to determine whether we act as a principal or an agent in the fulfillment of prescriptions through the retail pharmacy network.



Revenues are recorded gross when we adjudicate claims for plan sponsor customers that have contractually agreed to use our contracted pharmacy network. We act as
principal under EITF 99-19 when adjudicating claims for plan sponsors through our contracted pharmacy network for the following reasons:



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| | We negotiate a contract with the plan sponsor customer and also negotiate contracts with retail pharmacies. Neither the plan sponsor nor the retail pharmacy can look through us and
claim directly against the other party. Both contracts with these parties are separate and each only contracts with us. Each party deals directly with us and does not deal with each other directly;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We determine through negotiations which retail pharmacies will be included or excluded in our network to be offered to the plan sponsor customer, based on price, access, etc.;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We are responsible to the plan sponsor customer: (1) to provide the fulfillment to the plans members, (2) to validate a claim and (3) to manage the claim economically for the
plan through our adjudication process;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We set total prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled; however, the plan sponsor customer determines the
portion of the total price relating to co-pay amounts that will be paid by its members;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We manage the overall prescription drug relationship with the plan sponsor customers members;
|- | ----------------------------------------------------------------------------------------------



| | We have credit risk for the price due to the pharmacy from the plan sponsor customer; and
|- | -----------------------------------------------------------------------------------------



| | We may realize a positive or negative margin represented by the difference between the negotiated ingredient costs we will receive from the plan sponsor customer and the negotiated
ingredient costs we will pay to our network pharmacies.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



When
adjudicated claims are recorded gross, the plan sponsors aggregate pharmacy benefit claim payment to us is recorded as revenue and our payment to the pharmacy provider is recorded as cost of revenue in our consolidated statement of operations.
In contrast, when we adjudicate prescriptions at pharmacies that are under contract directly with our plan sponsor customer and there are no financial risks to us, we record only our claims processing fees as revenues and do not include prescription
costs in revenues or cost of revenues (net reporting). If we had reported all of our data services revenues using net reporting, revenues and cost of revenues would have decreased by $11.0 billion, $10.0 billion and $5.4 billion for the
fiscal years ended March 31, 2003, 2002 and 2001, respectively.



We do not have
responsibility to collect co-payments to be made by members to the retail pharmacy. Accordingly, we do not record member co-payments collected in the retail pharmacy as either revenue or cost of sales. As has been widely reported the SEC is in the
process of reviewing the topic of co-payments and whether co-payments should or should not be included as a component of revenues and cost of sales in the PBM and other related industries including insurance companies. If the SEC should ultimately
decide that co-payments should be included in revenues and cost of sales it would result in an increase in reported revenue and a corresponding increase in cost of revenues. Thus, our consolidated results of operations, including gross profit and
net income, and the consolidated balance sheets and consolidated statements of cash flows would not be affected.



Certain implementation and other fees paid to customers upon the initiation of a contractual agreement are considered an integral part of overall contract pricing and are
capitalized and amortized as a reduction of revenue on a straight-line basis over the life of the contract.



Mail Services



We contract directly with plan sponsor customers to provide prescription drugs to their members. We are contractually committed to specific turn around times, which is
the time it takes to ship the prescription after receiving the written order. We also assume the credit and inventory risk and collect co-payments from members. Therefore, for prescriptions dispensed through our own mail service pharmacies, we
recognize the total amounts paid by both the customer and the member (in the form of a co-payment) as revenue. Revenues from the dispensing of pharmaceuticals from our mail service pharmacies are recognized when each prescription is shipped.



Clinical and Other Services



When we earn rebates and administrative fees in conjunction with formulary
management services (formulary development and manufacturer contracting) for customers, but do not process the underlying claims (rebate utility), we record rebates and administrative fees received from pharmaceutical manufacturers, net of the
portion payable to customers, in revenue. In contrast, when we provide formulary management services and process the claims, we record rebates and administrative fees received as a reduction of cost of revenues and the portion deliverable to the
customer as a reduction of revenue.



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We recognize rebates and administrative fees receivable from pharmaceutical manufacturers and the corresponding amounts
payable to customers when the prescriptions covered under the contractual agreements with the manufacturers are dispensed. We estimate the amount of rebates to be delivered to customers based on historical rates of rebates received as well as
estimates of current rebates receivable from pharmaceutical manufacturers. These estimates are adjusted to actual when amounts are received from manufacturers and the portion deliverable to the customer is disbursed.



We also earn other revenue from pharmaceutical manufacturers for services such as formulary
support services, outcomes studies and clinical trials. These services are negotiated separately with each pharmaceutical manufacturer and specify the services we are to perform and the revenues and fees we are to earn based on the delivery or
completion of the services. We also earn revenues from our customers (primarily managed care organizations) for disease management services provided by Accordant, our wholly owned subsidiary acquired in November 2002. Accordant focuses on helping
patients with complex, chronic and progressive diseases. The revenues of Accordant have been included in Clinical and Other Services revenue since the date of acquisition.



Cost of Revenues



Cost of revenues includes prescription drug costs, labor, call center operations, information technology and other costs associated with the sale and/or dispensing of
prescription drugs and providing clinical and other services.



Rebates
collected from pharmaceutical manufacturers on behalf of our health plan sponsor customers are recognized as a reduction of cost of revenues in accordance with EITF No. 02-16.



Accounts Receivable



Accounts receivable balances represent customer trade receivables generated from our Data and Mail Services health improvement services. Also included in accounts
receivable are receivables from vendors for our Clinical and Other Services whereby we recognize rebates and administrative fees receivable from pharmaceutical manufacturers. Based on our revenue recognition policies, certain claims at the end of
the period are unbilled. Revenue and unbilled receivables for those claims are estimated each period based on the amount to be paid to the pharmacies and historical gross margin. Estimates are adjusted to actual at the time of billing. In addition,
revenue and unbilled receivables for rebates are calculated quarterly based on an estimate of rebatable prescriptions and rebate per prescription. These estimates are adjusted to actual when the number of rebatable prescriptions and rebate per
prescription have been determined and the billings to the pharmaceutical manufacturers have been completed. As of March 31, 2003 and 2002, unbilled receivables were $883.5 million and $686.2 million, respectively. Corresponding amounts payable to
retail pharmacies (for claims) or to plan sponsor customers (for rebates) are recorded at the time the unbilled receivables are recorded. Unbilled receivables to plan sponsor customers are typically billed within 15 days and unbilled receivables to
manufacturers are typically billed within 90 days, based on the respective contractual billing schedules.



To reduce the potential for credit risk, we evaluate the collectibility of customer balances based on a combination of factors but do not generally require significant collateral. We regularly analyze significant
customer balances, and, when it becomes evident a specific customer will be unable to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customers operating results or financial position, a
specific allowance for doubtful account is recorded to reduce the related receivable to the amount that is believed reasonably collectible. We also record allowances for doubtful accounts for all other customers based on a variety of factors
including the length of time the receivables are past due, the financial health of the customer and historical experiences. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further
adjusted.



Asset Impairment



Long-lived assets and intangible assets are tested for recoverability whenever events or
changes in circumstances indicate that the assets carrying amount may not be recoverable. Examples of such events could include a significant adverse change in the extent or manner in which the asset is used, a change in its physical
condition, or new circumstances that would cause an expectation that it is more likely than not we would sell or otherwise dispose of a long-lived asset significantly before the end of its previously estimated useful life.



The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment shall be based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss shall be measured as
the amount by which the carrying amount of a long-lived asset exceeds its fair value.



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We evaluate goodwill for impairment based on a two-step process. The first step compares the fair value of a reporting
unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the
carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is necessary to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill
with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess. The results of our fiscal
2003 testing resulted in no impairment charges.



We determine the fair value of
reporting units by using a discounted cash flow model based on future operations. Goodwill is tested annually during the fourth quarter of each fiscal year and when events or circumstances occur indicating possible impairment.



The current discount rate applied to future cash flows in determining the fair value of
reporting units is 13.8%. A significant increase in the discount rate may adversely impact the fair value of reporting units that would result in a non-cash charge to earnings.



Rebate Guarantees



Agreements with certain health plan sponsor customers contain provisions that require us to obtain a minimum rebate per claim from pharmaceutical manufacturers in order
to generate additional savings for health plan sponsor customers. Failure to achieve the minimum rebate per claim results in an obligation by us to the health plan sponsor customer. The obligation is equivalent to the difference between the actual
rebate per claim obtained and the minimum stated in the health plan sponsor customer agreement, which is then multiplied by the number of claims processed in a specified period. We continually monitor the health plan sponsor customers rebate
per claim and recognize a liability when it appears unlikely the average rebate per claim will meet or exceed the stated minimum.



If circumstances related to collectibility assumptions of pharmaceutical manufacturers rebates change, including changes in market conditions (e.g., drug patent
expiration) or member quantity, that materially alter drug utilization patterns and adversely affect the pharmaceutical manufacturers rebates obtained, rebate guarantee obligations could increase, resulting in a charge to earnings.



Performance Guarantees



Agreements with certain health plan sponsor customers contain plan performance guarantees that require us to meet various operational
standards, including items such as customer service wait time, abandoned customer service calls and mail pharmacy turn around time. Certain contracts require 100% guarantee in achieving various operational standards. Failure to achieve the
operational standards results in penalty payments to the health plan sponsors by us. We continually monitor our operational performance against the standards outlined in health plan sponsor customer contracts. A loss is recorded as a liability. If
we experience changes in events or circumstances that adversely impact operations, performance guarantee obligations could increase resulting in a charge to earnings.



Service Guarantees



Agreements with certain health plan sponsor customers contain guarantees relating to an efficient and effective transition into our services (implementations). Failure to
achieve an efficient and effective transition on our part results in an obligation to health plan sponsor customers. Obligations are estimated based on the success of recently transitioned health plan sponsor customers. If we experience changes in
events or circumstances that adversely impact the transition of new health plan sponsor customers to our products and services, a charge to earnings may result.



Employee Benefit Plans



Retirement plan benefits include both a defined contribution retirement plan and defined benefit pension plan. The defined benefit pension plan was acquired with the PCS
acquisition and has been frozen to new participants since the acquisition date. In addition, employees may participate in an Employee Stock Purchase Plan.



Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 87 Employers Accounting for Pensions, measurement of the obligations
under the defined benefit pension plan are subject to a number of assumptions. These include the rate of return of plan assets, health care costs and compensation trend rates, and the rate at which the future obligations are discounted to value the
liability at year-end.



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Changes in assumptions used to measure the obligation under the defined benefit pension plan could materially impact our
future obligation. 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, 2003 accumulated
post retirement benefit obligation would increase by $2.0 million and the aggregate of the service cost and interest components of the 2003 annual expense would increase by $544,000. A one percentage point decrease in these rates would decrease the
March 31, 2003 accumulated post retirement benefit obligation by $1.6 million and the aggregate of the 2003 service cost and interest cost components of the 2003 annual expense would decrease by $435,000.



Other Loss Contingencies



Other loss contingencies are recorded as liabilities when it is probable that a liability
has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time
periods. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or results of
operations. Estimating probable losses requires varying levels of analysis that often depend on judgments about potential actions by third parties such as arbitrators.



Acquisitions



In November 2002, we acquired 100% of the common stock of privately held Accordant, a disease management company that focuses on helping patients with complex, chronic
and progressive diseases. The aggregate purchase price of $71.5 million, net of cash acquired, includes the final determination of the working capital adjustment and transaction costs. The results of Accordant have been included in the consolidated
financial statements since the acquisition date. The agreement includes a provision for the payment of up to an additional $25 million, dependent upon Accordant achieving certain financial and operating targets in calendar year 2003. Any additional
consideration will be paid during calendar year 2004 and treated as an adjustment to the purchase price. The final purchase price will be allocated based on appraisals, which are currently being finalized. The acquisition of Accordant was accounted
for using the purchase method of accounting, in accordance with SFAS No. 141, Business Combinations.



In August 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 included the issuance of 1.3 million shares of Class A common stock, of which 384,006 shares were placed in escrow. Of these, 166,956 shares were held
in escrow as additional consideration for the acquisition of TheraCom, the payment of which was conditioned upon TheraCom achieving specific future financial performance goals. The remaining 217,050 shares were held in escrow to satisfy any
indemnification claims we may have arising out of the acquisition, including those related to the settlement of certain outstanding TheraCom litigation. 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 customer contracts.



We determined that TheraCom achieved
the specified performance goals and in January 2003, 166,956 shares were released to the former TheraCom stockholders from the additional consideration escrow. In January 2003, 34,188 shares were also withdrawn from the indemnification claims escrow
and returned to us to satisfy our indemnification claim arising from the settlement of litigation between TheraCom and one of its former stockholders. Any shares returned to us are held in treasury.



In June 2001, we established a joint venture, AdvancePriority SpecialtyRx, with Priority
Healthcare Corp., a national specialty pharmacy and distribution company. Priority Healthcare owned 49% of the venture and we owned 51%. Effective February 2003, we purchased Priority Healthcares 49% of the venture, making AdvancePriority
SpecialtyRx a wholly owned subsidiary. The acquisition was accounted for using the purchase method of accounting, in accordance with SFAS 141, Business Combinations.



In October 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 Joseph, Littlejohn & Levy, Inc., or 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



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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.



In July 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 Accounting Principals Board Opinion (APB) No. 16 Business Combinations (APB 16) to reflect the merger as though FFI had always been a part of AdvancePCS.



In January 2000, we acquired a 19% interest in 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 consolidated subsidiary. Prior to the complete acquisition of CHI, we had accounted for our 19%
interest in CHI on the cost basis. In accordance with APB No. 18 The Equity Method of Accounting for Investments in Common Stock (APB 18), all prior period financial statements have been restated to account for CHI as though we had
accounted for the investment on the equity method.



Sources of Revenue



Our revenues are derived principally from sales of prescription drugs to
members of our customers, either through our mail and specialty service pharmacies (Mail Services) or our networks of contractually affiliated retail pharmacies (Data Services.) We also provide Clinical and Other Services as part of our overall
health improvement service offerings.



When we provide formulary management
services to a customer in conjunction with claims processing, we record rebates and administrative fees received from pharmaceutical manufacturers as a reduction of cost of revenues and the portion of the rebate payable to customers is treated as a
reduction of revenue.



Our cost of revenues include drug ingredient costs,
labor, call center operations, information technology and other costs associated with the sale and/or dispensing of prescription drugs and providing clinical and other 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 with a 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-payment to the retail pharmacy and the pharmacist fills the prescription. We do not record as revenue any co-payment due from the member to the retail pharmacy as we are not responsible for the
collection of these co-payments. 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 to the retail pharmacies.



We have established a nationwide network of over 59,000 retail pharmacies, each of which generally 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. When we have an independent obligation to pay retail pharmacies for the cost of the prescription dispensed, we are acting as the principal in that transaction and record as revenue the aggregate pharmacy benefit claim
payment from our plan sponsor customers (which includes ingredient cost, the dispensing fee paid to the pharmacist, and our claims adjudication fee); and the payments to our pharmacy providers for these prescriptions is recorded as cost of revenues.
By contrast, some of our other plan sponsor customers have established their own pharmacy networks. When we adjudicate prescriptions under contracts with these customers and there is no financial risk to us, we record only our claims processing fees
as revenues and do not include prescription costs in revenues or cost of revenues (net reporting).



As a result, our revenues are higher from plan sponsor customers that use our networks of contractually affiliated retail pharmacies instead of using retail pharmacies that are under contract directly with the plan
sponsor customer. Similarly, while a customer who uses our network may contribute the same gross profit in terms of dollars as a customer that uses its



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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 from our mail pharmacies and specialty pharmacies. These revenues include the cost of the pharmaceuticals we bill our health plan sponsors, the co-pay we collect from members, plus a dispensing fee.



Clinical and other services



When we collect rebates and administrative fees in conjunction with formulary management
services, but do not process the underlying claims (rebate utility), we record rebates and administrative fees received from pharmaceutical manufacturers, net of the portion delivered to customers, in revenue. We recognize rebates and administrative
fees from pharmaceutical manufacturers and the corresponding amounts payable to customers when the prescriptions covered under the contractual agreements with the manufacturers are dispensed.



We also earn other revenue from pharmaceutical manufacturers for services such as formulary
support services, outcome studies and clinical trials. These services are negotiated separately with each pharmaceutical manufacturer and specify the services we are to perform and the revenues and fees we are to earn based on the delivery or
completion of the services. We also earn revenues from our customers (primarily managed care organizations) for disease management services provided by Accordant, our wholly owned subsidiary acquired in November 2002. Accordant focuses on helping
patients with complex, chronic and progressive diseases. The revenues of Accordant have been included in Clinical and Other Services revenue since the date of acquisition.



Results of OperationsAdvancePCS



The following table sets forth certain consolidated historical financial data of AdvancePCS.



|                                                           |  | Year Ended March 31,                  |           
|---------------------------------------------------------- |  | ------------------------------------- | ----------
|                                                           |  | 2003                                  |           
|                                                           |  | (in thousands, except per share data) |           
|Revenues (1)                                               |  |                                       |           
|Data services                                              |  | $                                     | 11,609,479
|Mail services                                              |  |                                       | 2,303,117 
|Clinical and other services                                |  |                                       | 198,283   
|                                                           |  |                                       |           
|Total revenues                                             |  |                                       | 14,110,879
|Cost of revenues                                           |  |                                       | 13,555,231
|                                                           |  |                                       |           
|Gross profit                                               |  |                                       | 555,648   
|Selling, general and administrative expenses               |  |                                       | 231,245   
|Non-recurring and impairment expenses                      |  |                                       |          
|                                                           |  |                                       |           
|Operating income                                           |  |                                       | 324,403   
|Net interest expense                                       |  |                                       | (38,572   
|Loss from joint venture                                    |  |                                       | (5,036    
|Merger costs & asset disposal                              |  |                                       |          
|                                                           |  |                                       |           
|Income before income taxes                                 |  |                                       | 280,795   
|                                                           |  |                                       |           
|Provision for income taxes                                 |  |                                       | (110,914  
|                                                           |  |                                       |           
|Income before extraordinary loss                           |  |                                       | 169,881   
|Extraordinary loss on early retirement of debt, net of tax |  |                                       | (1,491    
|                                                           |  |                                       |           
|Net income                                                 |  | $                                     | 168,390   
|                                                           |  |                                       |           
|Basic net income per share                                 |  | $                                     | 1.85      
|Diluted net income per share                               |  | $                                     | 1.71      



|(1) |  | Revenues have been retroactively reclassified to reflect the adoption of EITF 02-16 in the fourth fiscal quarter of fiscal 2003.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------



Fiscal Year 2003 Compared to Fiscal Year 2002



Revenues



During 2003 we adopted EITF 02-16. Under this pronouncement, any consideration received from a vendor is presumed to be a reduction of the
prices of the vendors products and should, therefore, be characterized as a reduction of cost of revenues. This EITF applies to rebates and administrative fees received from pharmaceutical manufacturers related to customers for whom we process
claims. Accordingly, our revenues for fiscal years 2003, 2002 and 2001 have been reduced by $1.4 billion, $933.2 million, and $533.9 million, respectively. Cost of revenues has been reduced by the same amounts.



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These amounts represent the gross amount of rebates and administrative fees received from pharmaceutical manufacturers.
We have previously recorded rebates, net of the amount paid to our customers and administrative fees as components of our Clinical Services revenue. Our consolidated gross profit was not impacted as a result of adopting this EITF.



Data Services  Data services revenues for fiscal year 2003 increased by $1.1
billion, or 11%, compared to revenues for fiscal year 2002. Over 65% of the increase in revenues was attributable to an increase in the Average Wholesale Price index for drug ingredient costs, which is used to establish the price of a prescription
at the point of sale. The increase in the Average Wholesale Price index was due to higher costs for newly introduced drugs, as well as, price increases for existing drugs. The remaining increase was due to a 7% increase in the number of pharmacy
claims processed during the year offset by decreases in claims processing fees, primarily within with our discount cash card program. Claims processed increased from approximately 456 million in fiscal year 2002 to more than 488 million for fiscal
year 2003.



Mail Services  Mail services revenues rose $802
million, or 53% during the year. Of this increase, approximately $585 million resulted from a 40% increase in the number of mail prescriptions dispensed which was driven by the addition of several customers whose members are high mail utilizers, and
increased utilization of our mail services by existing members. The number of mail pharmacy prescriptions dispensed increased from 11.0 million in fiscal year 2002 to 15.4 million for fiscal year 2003. Also contributing to the increase was the
growth of specialty pharmacy services revenue, which increased from $80.7 million in 2002 to $254.1 million in 2003. The increased volume of shipments of 231% and adjudicated specialty pharmacy claims of over 5,000% was the result of our launch into
the specialty pharmacy business with the establishment of the joint venture, AdvancePriority SpecialtyRx, with Priority Healthcare in June 2001 and the acquisition of TheraCom in August 2001. The revenue increase attributable to the full year volume
of shipments and claims in fiscal year 2003 was offset in part by the mix of pharmaceuticals shipped from TheraCom and lower pricing within the joint venture as compared to fiscal year 2002. The remaining increase in mail revenue was due to higher
revenue per mail claim resulting from an increase in drug ingredient costs, which were offset in part by greater pricing discounts to our customers and a higher mix of generic prescriptions filled.



Clinical and Other Services  Clinical and Other Services revenue increased by 5%
compared to fiscal 2002. Included in clinical and other services are revenues relating to the acquisition in November 2002 of Accordant, a disease management company focusing on patients with complex chronic and progressive diseases. The addition of
Accordants revenues in fiscal year 2003 was offset by decreases in revenue from other clinical programs.



Cost of Revenues. Overall cost of revenues increased $1.8 billion, or 16%, compared to fiscal 2002. Of this increase, drug ingredient costs grew by $1.7 billion to $13.0 billion. This increase was driven
primarily by an increase in the Average Wholesale Price index of pharmaceuticals, which in turn was driven by higher costs for newly introduced drugs, as well as, price increases for existing drugs and an increase in the number of claims adjudicated
during the period. Cost of revenues, excluding drug ingredient costs, increased $119.0 million, or 27%, as compared to fiscal year 2002. The majority of the increases were attributable to non-ingredient costs associated with filling mail order
prescriptions; the opening of our third mail order facility in Wilkes-Barre, Pennsylvania; increased call center operations to handle the increased volume of calls associated with implementing new mail utilizing members and promoting the use of our
mail services to existing members; performance and service guarantees and non-pharmaceutical cost of revenues associated with our specialty pharmacy operations which included a full year of activity in fiscal 2003.



Selling, general and administrative expenses. Our selling, general and administrative
expenses for fiscal year 2003 increased by $41.9 million, or 22%, compared to fiscal year 2002. The increase was due primarily to increased fees paid to account brokers and other costs associated with generating new sales and managing accounts.
Additional rent and operating expenses associated with the new corporate headquarters building in Irving, Texas also contributed to the increase. Recent acquisitions, including Accordant, and legal expenses associated with HIPAA compliance and the
OIG investigation also contributed to the increase. Selling, general and administrative expenses as a percentage of revenues remained unchanged at 1.6% in fiscal year 2003 compared to fiscal year 2002.



Non-recurring and impairment expenses. Net income for fiscal year 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 us 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. There were no corresponding expenses for fiscal year 2003.



Net interest expense. Interest expense, net of interest income, for fiscal year 2003 decreased $19 million compared to fiscal year 2002. As of March 31, 2003
total debt was $448.0 million compared to $500.8 million at March 31, 2002. The decrease in interest expense resulted from: (1) the repayment of debt throughout fiscal year 2003 with excess cash, (2) the increased usage of the Asset Securitization
Facility, which incurs interest at a lower rate than the debt it replaced and (3) the expiration in October 2002 of $100 million of the interest rate swap.



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Loss from joint venture.In February 2001, we entered into an agreement with Express Scripts and Medco Health
Solutions, Inc., Inc., to form RxHub, LLC, or 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 proportionate share of RxHubs loss for fiscal year 2003 was $5.0 million compared to $2.9 million in fiscal year 2002.



Income taxes. For fiscal years 2003 and 2002 our effective tax rate was approximately
39.5%.



Extraordinary loss on early retirement of debt, net of tax. For
fiscal years 2003 and 2002, in connection with the refinancing and the debt repayment, 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 $2.4 million and $8.8 million ($1.5 million and $5.3 million, net of taxes) for fiscal years 2003 and 2002, respectively.



Diluted net income per share. We reported diluted net income per share of $1.71 per
share for fiscal year 2003 compared to $1.18 per share in fiscal year 2002. The weighted average shares outstanding were 98.5 million and 98.3 million for fiscal years 2003 and 2002, respectively. During fiscal year 2003, we bought back 5.5 million
shares of our Class A common stock. These shares were repurchased under our stock repurchase program announced in June 2002. During fiscal year 2002 we completed a two-for-one stock split affected 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. In August 2001 we completed the sale of nine million shares of Class A common stock.



Fiscal Year 2002 Compared to Fiscal Year 2001



Revenues. Our revenues for fiscal year 2002 increased by $5.7 billion, or 88%,
compared to revenues for fiscal year 2001. Over 70% of this increase was due to the acquisition of PCS in October 2000. Approximately $4.8 billion or 85% of the increase in revenues was attributable to growth in Data Services as a result of a 69%
increase in the number of pharmacy claims processed during the period. Claims processed increased from 270 million in fiscal year 2001 to 456 million for fiscal year 2002. Approximately 13% of the increase in revenue 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.



Cost of Revenues. Overall cost of revenues increased $5.5 billion, or 87%, compared
to fiscal year 2001. Of this increase, over 70% was attributable to the PCS acquisition. Drug ingredient costs grew by $5.2 billion to $11.3 billion. Cost of revenues, excluding drug ingredient costs, increased $211 million, or 94% as compared to
fiscal year 2001. These increases were attributable primarily to the additional revenue and cost of revenue associated with the PCS acquisition.



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 SFAS 142 Goodwill and Other Intangible Assets (SFAS 142). Selling, general and administrative expenses as a percentage of revenues was approximately 1.6% in
fiscal year 2002 compared to 2.0% 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, 2002 reflected a non-recurring charge of $1.8 million ($1.1 million net of 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.



Net income for the fiscal year ended March
31, 2001 reflected a non-recurring charge of $11.1 million ($6.8 million net of 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.



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Net 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 Scripts and Medco Health Solutions, Inc., 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 proportionate share of RxHubs loss for fiscal year 2002 and 2001 was $2.9 million and zero, respectively.



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 was approximately $21 million. Goodwill amortization was not recorded in fiscal year 2002 due to the
implementation of SFAS 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. In August 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 affected 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.



Liquidity and Capital Resources



Net cash provided by operating activities.Net cash provided by operating activities was $268.6 million, $143.3 million and $92.3 million for the fiscal years
ended March 31, 2003, 2002 and 2001, respectively. The increase of $125.3 million in 2003 and $51.0 million in 2002 was primarily due to increased earnings of $52.7 million in fiscal year 2003 and $94.1 million in fiscal year 2002, as well as
changes in our working capital components. Although we had a working capital deficit of $248.3 million and $228.9 million as of March 31, 2003 and 2002, respectively, 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 credit facilities, which results in a net deficit in our working capital. Our net cash provided by operating activities improved due to the timing of receivables and payables
resulting from our claims processing cycle. A majority of our claims billings are processed on a fourteen-day cycle, beginning on Saturdays. As a result, cash balances, accounts receivable and accounts payable reflected in our consolidated balance
sheets may fluctuate period to period depending on the day of the week that the fiscal year actually ends in relationship to the timing of invoicing, receipt of cash from our customers and our payments to the pharmacies. Therefore, we experience
fluctuations in our cash balances depending upon the day of the cycle. We manage the effect of these fluctuations by borrowing on our bank revolving line of credit during certain cycle days. Inventory increased $34.0 million and $24.2 million as of
March 31, 2003 and 2002, respectively, reflecting inventory investment buying programs in the latter part of each year and increased inventory requirements as a result of the opening of our Wilkes-Barre, Pennsylvania mail facility in 2003.



Net cash used in investing activities.Net cash used in investing
activities was $147.4 million, $64.5 million and $763.2 million for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. Investing activities in each year principally consisted of acquisitions and capital expenditures. Cash used for
acquisitions, net of cash acquired, and investments in affiliates principally consisted of $71.5 million for Accordant in 2003 and $675.0 million for the acquisition of PCS in 2001.



In November 2002, we acquired 100% of the common stock of privately held Accordant, a disease management company that focuses on helping
patients with complex, chronic and progressive diseases. The aggregate purchase price for Accordant of $71.5 million, net of cash acquired, includes the final determination of the working capital adjustment and transaction costs. The results of
Accordant have been included in our consolidated financial statements since the acquisition date. The acquisition agreement includes a provision for the payment of up to an additional $25 million, dependent upon Accordant achieving certain financial
and operating targets during calendar year 2003. Any additional consideration will be paid during calendar year 2004 and treated as an adjustment to the purchase price. The final allocation of the purchase price will be based on appraisals, which
are currently being finalized.



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Capital expenditures, which principally included investments in our systems and facilities, were $69.3 million in 2003,
$51.1 million in 2002 and $41.2 million in 2001. The 2003 amounts principally related to our new mail pharmacy in Wilkes-Barre, Pennsylvania, software and system upgrades including HIPAA compliance and the build-out of our new call center in
Knoxville, Tennessee. The 2002 amounts related to purchases of property and equipment associated with the growth and expansion of our systems and facilities.



Net cash (used in) provided by financing activities.Net cash (used in) provided by financing activities was ($149.1) million, ($49.7) million and $725.8 million
for the years ended March 31, 2003, 2002 and 2001, respectively. The 2003 activity consisted of $111.5 million for repurchases of approximately 5.5 million shares of our common stock under our stock repurchase program and net debt repayments of
$53.1 million, which included $12.2 million for repurchases of our 8 1⁄2% Senior Notes Due 2008 (Senior Notes), offset in part by proceeds from stock option exercises of $17.2 million. In 2002, we completed the sale of nine million shares of
Class A common stock. The proceeds, net of offering costs, of approximately $291.0 million, were used to fund debt repayments. The 2001 activity primarily reflected $970.0 million in debt issued to fund the acquisition of PCS as described below,
partially offset by $251.0 million in net debt repayments and deferred financing costs. Additional stock and Senior Notes purchases, if any, will be made in such amounts and at such times, as we deem appropriate based upon prevailing market and
business conditions.



Indebtedness. In conjunction with the acquisition
of PCS, 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 (Term A and Term B) totaling $550 million. The Term A note
was due on October 2, 2005 but was fully repaid in fiscal 2002 from the proceeds of our shelf offering along with a portion of the Term B note, see Item 8. Financial Statements and Supplementary Data, Note 12. Stockholders Equity.
The remainder of the Term B note was repaid with the proceeds from the $150 million facility (Asset Securitization Facility), discussed below. The $100 million interim facility was eliminated, and the revolving credit facility expires on October 2,
2005. As of March 31, 2003, we had no amount outstanding under this revolving credit facility.



In September 2002 we amended our Senior Secured Credit Facility to increase the size of the revolver from $175 million to $275 million. No amounts were outstanding under the revolving facility at March 31, 2003. 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. We are in compliance with all covenants.



Also in connection with our acquisition of PCS, we issued to Rite Aid $200 million in senior
subordinated notes. In March 2001, we issued $200 million of Senior Notes due 2008. The proceeds from this offering were used to retire the $200 million senior subordinated notes that were issued to Rite Aid. In the second quarter of fiscal year
2003, we repurchased a portion of the Senior Notes with a face value of approximately $12.2 million in open market transactions. 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. There are no restrictions on the ability of the guarantors to pay dividends, make loans or advances to the parent. We are in compliance with all covenants.



The Senior Notes are guaranteed by all of our existing and future domestic subsidiaries
(Guarantors), other than receivables subsidiaries, as defined in the Senior Notes indenture, and certain other subsidiaries not otherwise required to be guarantors under the terms of the indenture. After issuance of the Senior Notes, we created
subsidiaries that are not required to guarantee the Senior Notes. All of the subsidiaries that have guaranteed the Senior Notes are 100% owned, directly or indirectly by us. Each of the Guarantors jointly and severally, unconditionally guarantees
that the principal, and interest, as well as, penalties, fees, indemnifications, reimbursements and damages, if any, payable under the Senior Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or
otherwise.



In December 2001, we securitized certain of our accounts receivable
pursuant to the Asset Securitization Facility. We used the proceeds to repay $150 million of our Term B note that had a balance outstanding of approximately $300 million at that time. In June 2002, we increased the Asset Securitization Facility to
$300 million. We used the proceeds to pay the remaining $150 million of our Term B note. The Asset Securitization Facility is included in our debt balance as of March 31, 2003 and 2002 and will continue to be reflected on-balance sheet.



In connection with the bank debt repayments made during fiscal year 2003 and
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 $2.4 million and $8.8 million ($1.5 million and $5.3 million net of taxes), respectively.



In order to hedge variable rate interest payments made in conjunction with our debt, we entered into an interest rate protection agreement that fixed the LIBOR rate in November 2000 at 6.60% for $400 million. The
notional amount was



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reduced by $100 million in October 2001 and 2002. As of March 31, 2003, the notional amount was $200 million. The swap
will expire in October 2003. We are accounting for this interest rate swap as a cash flow hedge in accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The fair value of the swap, an
obligation of $5.6 million and $14.5 million at March 31, 2003 and 2002, respectively, was based upon quoted market prices. The fair value represents the estimated amount we would have to pay to terminate the swap agreement taking into account
current interest rates. The related gains or losses on this agreement are deferred in stockholders equity as a component of other comprehensive income. During the fiscal years ended March 31, 2003 and 2002, the amount charged to other
comprehensive income, net of taxes was $5.4 million and $8.8 million, respectively, and the net amount reclassified into earnings (interest expense) was $5.8 million and $1.6 million. The estimated net amount of the existing losses reported in
accumulated other comprehensive income at March 31, 2003 that are expected to be reclassified into earnings as interest expense within the next 12 months is $5.6 million.



Contractual Obligations



The following table sets forth our schedule of current maturities of long-term debt, excluding the deferred interest rate swap loss of $5.6 million at March 31, 2003, and
future minimum lease payments due under noncancellable operating leases (in thousands):



|Years Ending March 31, |  | Leases |         | Debt |   | Total  
|---------------------- |  | ------ | ------- | ---- | - | -------
|2004                   |  | $      | 37,224  |      | $ | 188    
|2005                   |  |        | 27,079  |      |   |       
|2006                   |  |        | 21,060  |      |   | 259,998
|2007                   |  |        | 14,490  |      |   |       
|2008 and thereafter    |  |        | 127,200 |      |   | 187,825
|                       |  |        |         |      |   |        
|Total payments         |  | $      | 227,053 |      | $ | 448,011
|                       |  |        |         |      |   |        



Share Repurchases



In June 2002, we filed a Form 8-K announcing the authorization from the board of
directors of a stock repurchase program of up to $150 million of our outstanding shares of Class A common stock in the open market or private transactions. During the year ended March 31, 2003, we purchased 5.5 million shares under this repurchase
program, which are included in treasury stock, at a cost of $111.5 million.



Outlook



Historically, we have been able to fund our
operations and continued growth through cash flow from operations. In fiscal years 2003, 2002 and 2001 our operating cash flow funded our capital expenditures and was used to reduce our debt, repurchase shares, make acquisitions and invest in money
market funds.



We anticipate that cash flows from operations, combined with our
current cash balances and amounts available under our credit facility, will be sufficient to meet our currently planned internal operating requirements and expansion programs, including capital expenditures and our stock repurchase program, 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 those plans. There is no guarantee that such debt or equity financing
will be available at terms acceptable to us, if at all.



As disclosed in the
Explanatory Note of Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K, the Company is in discussions with the Staff of the SEC to determine the extent to
which earlier periods may need to be augmented with audited and/or unaudited disaggregated footnote information under Rule 3-10(f) of Regulation S-X. The Staff of the SEC has advised the Company that until this issue is resolved, the Staff will not
declare effective any registration statements or post-effective amendments to registration statements. The Company is also restricted from making offerings under effective registration statements or under Rules 505 and 506 of Regulation D of the
Securities Act of 1933 to any purchases that are not accredited investors under Rule 501(a) of Regulation D. (The Company is not restricted from issuing securities upon the exercise of outstanding warrants or options or pursuant to employee benefit
plans. Additionally, the restriction does not apply to transactions involving secondary offering or sales of securities under Rule 144.) This could impede our ability to access capital markets and to engage in certain transactions. There can be no
assurance as to the outcome of the Companys discussions with the SEC. Please see the Explanatory Note to Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on
Form 10-K for additional information about these discussions with the SEC.



Recently Adopted Accounting Pronouncements



In December 2002,
the FASB issued SFAS No. 148 Accounting for Stock-Based Compensation- Transition and Disclosure, an amendment of FASB Statement No. 123 (SFAS 148). This statement amends SFAS No. 123 Accounting for Stock Based Compensation to
provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 to require disclosure of the method used to
account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The disclosure provisions were adopted as of March 31, 2003. We have not yet reached a determination of
whether and, if so, when to change the existing accounting for stock-based compensation to the fair value method in accordance with the transition alternatives of SFAS 148.



In November 2002, the FASB issued FASB Interpretation (FIN) No. 45 Guarantors Accounting and Disclosures Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires an entity to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our financial position or results of operations.



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In September 2002, the Emerging Issues Task Force released Issue No. 02-16, Accounting by a Reseller for Cash
Consideration Received from a Vendor (EITF 02-16). Under this pronouncement, any consideration received from a vendor is presumed to be a reduction of the prices of the vendors products and should, therefore, be characterized as a
reduction of cost of revenues. This EITF applies to rebates and administrative fees received from pharmaceutical manufacturers. We have previously recorded rebates, net of the amount distributed to our customers and administrative fees as components
of our Clinical Services revenue. Prior period reclassification is allowed to the extent there is no impact on net income. The application of the provisions of EITF 02-16 does not change our net income, gross profit or cash flows. As a result of the
adoption, our fiscal year 2003, 2002 and 2001 revenues have been reduced by $1.4 billion, $933.2 million and $533.9 million, respectively. Cost of revenues have been reduced by the same amounts.



In July 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated with Exit or
Disposal Activities (SFAS 146). SFAS 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance of Emerging Issues Task Force (EITF) in
EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 also establishes that fair value is the objective for
the initial measurement of the liability. The adoption of SFAS 146 did not have a material impact on our financial position or results of operations.



In May 2002, the FASB issued SFAS No. 145 Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002 (SFAS 145).
This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, and FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement restricts the classification of gains and losses from extinguishment of debt to only those transactions that are unusual and infrequent in nature as defined by APB Opinion No. 30 as extraordinary. We adopted SFAS
145 on April 1, 2003. For subsequent periods, gains and losses on certain future debt extinguishment, if any, will be recorded in pre-tax income. In addition, extraordinary losses of $1.5 million and $5.3 million, net of tax for the years ended
March 31, 2003 and 2002, respectively, will be reclassified to income before income taxes to conform to the requirements under SFAS 145.



In November 2001, EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (EITF 01-9) was issued. Under the pronouncement, any
consideration given to a customer is characterized as a reduction of revenues. This EITF applies to rebates we collect on behalf of our plan sponsor customers and was effective for interim periods beginning after December 15, 2001. We have
previously recorded our revenues, net of the amount amounts paid to our customers, which is consistent with that specified in EITF 01-9, which we adopted in fiscal year 2002, with no impact to our financial position or results of operations.



Recently Issued Accounting Pronouncements



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), which clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not provide sufficient equity at risk for the entity to support its activities. FIN 46 is effective for all variable
interest entities created after January 31, 2003. For variable interest entities acquired or created prior to February 1, 2003, the provisions of FIN 46 must be applied to the first interim or annual period beginning after June 15, 2003. We do not
have any variable interest entities and therefore, do not expect the adoption of FIN 46 to have a material impact on our financial position or results of operations.



In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS
149). This statement amends SFAS 133 by requiring that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash
flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and must be applied prospectively. We do not expect the adoption of SFAS 149 to have a material
impact on our financial position or results of operations.



In May 2003, the
FASB issued SFAS No. 150 Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). This statement established standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003 and must be applied prospectively by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. We do not expect the adoption of SFAS 150 to have a material



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impact on our financial position or results of operations since we do not currently have any financial instruments with
characteristics of both liabilities and equity.



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. There can be no guarantee that we will be able to pass on the effect of such future price changes to our customers.



|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------



We have not entered into derivatives or other financial instruments for trading purposes. We have entered into interest rate protection agreements (interest rate swaps  see Item 8. Financial Statements and
Supplementary Data, Note 2. Summary of Significant Accounting Policies) 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 was reduced by
$100 million in October 2001 and 2002. As of March 31, 2003, the notional amount was $200 million. The swap will expire in October 2003. We use the interest rate swaps to manage our interest rate risk on future interest payments. As of March 31,
2003, our outstanding variable rate debt was $260 million. Based on the amount of variable rate debt in excess of the notional amount of the interest rate protection agreement at March 31, 2003, we do not believe that a change in interest rates
would have a material effect on our results 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 there under, 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-35 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 fiscal year 2001 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 audit for AdvancePCS fiscal year 2001 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 fiscal year 2001 and through February 12, 2002, there were 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 fiscal year 2001 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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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 2003 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.



|ITEM 14. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------



Disclosure Controls and Internal Controls. Disclosure controls are procedures that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Companys Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our
assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.



Evaluation of Disclosure Controls and Procedures.The Companys
management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-14(c) under the Exchange Act) as of a date
within 90 days prior to the filing date of this annual report (the Evaluation Date). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys reports filed or submitted under the Exchange Act and that our
internal controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.



Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in the Companys internal
controls or in other factors that could significantly affect such controls. There were no significant deficiencies or material weaknesses and therefore there were no corrective actions taken.



Limitations on the Effectiveness of Controls. The Companys management, including
the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or



43



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##### Table of Contents

procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.



PART IV



|ITEM 15. |  | 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 statements on page F-1 of this report.
| | --- |  | --------------------------------------------------------------------------------------------



| | (3) |  | Exhibits. See index to exhibits.
| | --- |  | --------------------------------



| | (b) |  | Reports on Form 8-K. We filed no reports on Form 8-K during the quarter ended March 31, 2003.
| | --- |  | ---------------------------------------------------------------------------------------------



44



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##### Table of Contents

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 30, 2003 |  |  |  | ADVANCEPCS
|------------- |  |  |  | ----------
|              |  |  |  |           
|              |  |  |  |           
|              |  |  |  |           



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, President & Chief Executive Officer (Principal Executive Officer)     |  | June 30, 2003
|                                            |  |                                                                                             
|/s/    JON S.
HALBERTJon S. Halbert         |  | Vice Chairman & Director                                                                     |  | June 30, 2003
|                                            |  |                                                                                             
|/s/    DANNY
PHILLIPSDanny Phillips         |  | Senior Executive Vice President, Director                                                    |  | June 30, 2003
|                                            |  |                                                                                             
|/s/    YON Y.
JORDENYon Y. Jorden           |  | Executive Vice President, Chief Financial Officer (Principal Financial & Accounting Officer) |  | June 30, 2003
|                                            |  |                                                                                             
|/s/    RAMSEY A.
FRANKRamsey A. Frank       |  | Director                                                                                     |  | June 30, 2003
|                                            |  |                                                                                             
|/s/    STEPHEN L.
GREENStephen L.
Green     |  | Director                                                                                     |  | June 30, 2003
|                                            |  |                                                                                             
|/s/    PAUL S. LEVYPaul S. Levy             |  | Director                                                                                     |  | June 30, 2003
|                                            |  |                                                                                             
|/s/    JEAN-PIERRE MILLONJean-Pierre Millon |  | Director                                                                                     |  | June 30, 2003
|                                            |  |                                                                                             
|/s/    DR. GEORGE
POSTEDr. George Poste     |  | Director                                                                                     |  | June 30, 2003
|                                            |  |                                                                                             
|/s/    MICHAEL D. WAREMichael D. Ware       |  | Director                                                                                     |  | June 30, 2003



The Sarbanes-Oxley Act of 2002
requires the CFOs and CEOs of public companies to make certain certifications relating to the financial statements included in SEC filings. Such certifications are not included in this Annual Report on Form 10-K but will be filed once the issue
described in the Explanatory Note of Managements Discussion and Analysis of Financial Condition and Results of Operations has been resolved with the Staff of the SEC.



45



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INDEX TO FINANCIAL STATEMENTS



AdvancePCS and Subsidiaries



|                                                                                                  | 
|------------------------------------------------------------------------------------------------- | 
|Report of Independent Accountants                                                                 | 
|                                                                                                  | 
|Report of Independent Accountants                                                                 | 
|                                                                                                  | 
|Consolidated Balance Sheets as of March 31, 2003 and 2002                                         | 
|                                                                                                  | 
|Consolidated Statements of Operations for the Years Ended March 31, 2003, 2002 and 2001           | 
|                                                                                                  | 
|Consolidated Statements of Stockholders Equity for the Years Ended March 31, 2003, 2002 and 2001 | 
|                                                                                                  | 
|Consolidated Statements of Cash Flows for the Years Ended March 31, 2003, 2002 and 2001           | 
|                                                                                                  | 
|Notes to Consolidated Financial Statements                                                        | 
|                                                                                                  | 
|Schedule II. Valuation and Qualifying Accounts for the Years Ended March 31, 2003, 2002 and 2001  | 



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, 2003 and 2002, and the results of their operations and their cash flows for the years 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. The financial statements of the Company for the year ended March 31, 2001, prior to the revisions discussed in Note 2 to the consolidated financial
statements, and the 2001 financial statement schedule information, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those statements and that schedule
information dated May 29, 2001 (except with respect to the matter discussed in Note 15 to the previously issued financial statements, as to which the date is June 18, 2001).



As discussed above, the financial statements of the Company for the year ended March 31, 2001, were audited by other independent accountants
who have ceased operations. As a result of the adoption of EITF 02-16 as described in Note 2 to the consolidated financial statements, these financial statements have been revised to classify amounts previously reported as Revenues as a
reduction to Cost of Revenues. We audited the adjustment described in Note 2 that was applied to revise the 2001 consolidated financial statements. In our opinion, such adjustment described in Note 2 is appropriate and has been properly
applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such adjustment and, accordingly, we do not express an opinion or any other form
of assurance on the 2001 consolidated financial statements taken as a whole.



/s/    PRICEWATERHOUSECOOPERS LLP



Dallas, Texas

May 9, 2003 (except with respect to the matter discussed in Basis of Presentation in Note 2 relating
to the adoption of EITF 02-16, as to which the date is June 18, 2003)



F-2



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##### Table of Contents

THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP.

THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP AND ARTHUR ANDERSEN LLP

DID NOT CONSENT TO THE USE OF THIS REPORT IN THIS FORM 10-K OR ANY

PREVIOUSLY
FILED REGISTRATION STATEMENTS.



As discussed in Note 2, the Company has
revised its financial statements for the year ended March 31, 2001 to include the adjustment as in accordance with EITF 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor. The Arthur Anderson LLP report does
not extend to these changes. The revisions to the 2001 financial statements related to this adjustment were reported on by PricewaterhouseCoopers LLP, as stated in their report appearing herein.



As discussed in Note 2, due to the acquisition of the remaining 81% interest in Consumer
Health Interactive (CHI) on September 30, 2001, as required by APB 18, the financial statements for the year ended March 31, 2001, 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. Arthur Andersen LLP 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 fiscal year ended March 31, 2001.



** The Companys Consolidated Balance Sheet as of March 31, 2000 is not included in this Form 10-K.



*** The Companys Consolidated Statement of Operations, Stockholders Equity and
Cash Flows for the years ended March 31, 2000 and 1999 are not included in this Form 10-K.



Note: This is a copy of the report previously issued by Arthur Andersen LLP in connection with its audits of the financial statements appearing in AdvancePCS Annual Report on Form 10-K for the year ended March
31, 2001, which was filed with the SEC on June 29, 2001. This report has not been reissued by Arthur Andersen LLP in connection with the financial statements appearing in the Annual Report on Form 10-K for the year ended March 31, 2003.



F-3



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##### Table of Contents

AdvancePCS and Subsidiaries



Consolidated Balance Sheets

(in thousands, except share data)



|                                                                                                                                                       |  | March 31, |          
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | ---------
|                                                                                                                                                       |  | 2003      |          
|ASSETS                                                                                                                                                 |  |           |          
|                                                                                                                                                       |  |          
|Current assets:                                                                                                                                        |  |           |          
|Cash and cash equivalents                                                                                                                              |  | $         | 111,247  
|Accounts receivable, net of allowance for doubtful accounts of $15,586 and $26,150, respectively                                                       |  |           | 1,627,931
|Inventories                                                                                                                                            |  |           | 99,429   
|Prepaid expenses and other                                                                                                                             |  |           | 25,647   
|                                                                                                                                                       |  |           |          
|Total current assets                                                                                                                                   |  |           | 1,864,254
|Property and equipment, net of accumulated depreciation and amortization of $100,641 and $64,999, respectively                                         |  |           | 151,200  
|Goodwill                                                                                                                                               |  |           | 1,248,514
|Intangible assets, net                                                                                                                                 |  |           | 380,806  
|Other noncurrent assets                                                                                                                                |  |           | 67,970   
|                                                                                                                                                       |  |           |          
|Total assets                                                                                                                                           |  | $         | 3,712,744
|                                                                                                                                                       |  |           |          
|                                                                                                                                                       |  |          
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                   |  |           |          
|                                                                                                                                                       |  |          
|Current liabilities:                                                                                                                                   |  |           |          
|Current portion of long-term debt                                                                                                                      |  | $         | 188      
|Claims and accounts payable                                                                                                                            |  |           | 2,005,306
|Accrued salaries and benefits                                                                                                                          |  |           | 46,960   
|Other accrued expenses                                                                                                                                 |  |           | 60,088   
|                                                                                                                                                       |  |           |          
|Total current liabilities                                                                                                                              |  |           | 2,112,542
|Noncurrent liabilities:                                                                                                                                |  |           |          
|Long-term debt, less current portion                                                                                                                   |  |           | 447,823  
|Deferred income taxes                                                                                                                                  |  |           | 147,803  
|Other noncurrent liabilities                                                                                                                           |  |           | 34,102   
|                                                                                                                                                       |  |           |          
|Total liabilities                                                                                                                                      |  | $         | 2,742,270
|                                                                                                                                                       |  |           |          
|Commitments and contingencies                                                                                                                          |  |           |          
|Stockholders equity:                                                                                                                                  |  |           |          
|Preferred stock, $.01 par value; 5,000,000 shares authorized convertible preferred stock, $.01 par value; no shares issued and
outstanding             |  | $         |         
|Common stock, $.01 par value; 200,000,000 shares authorizedClass A common stock, $.01 par value; 82,502,362 and 79,927,079
shares issued, respectively |  |           | 825      
|Class B-1 convertible common stock, $.01 par value; 12,913,334 shares issued and outstanding                                                           |  |           | 130      
|Class B-2 convertible common stock, $.01 par value; 200 shares issued and outstanding                                                                  |  |           |         
|Additional paid-in capital                                                                                                                             |  |           | 750,446  
|Accumulated other comprehensive loss                                                                                                                   |  |           | (11,596  
|Accumulated earnings                                                                                                                                   |  |           | 340,520  
|Treasury stock, at cost                                                                                                                                |  |           |          
|Class A common stock, 5,459,573 and no shares, respectively                                                                                            |  |           | (109,851 
|                                                                                                                                                       |  |           |          
|Total stockholders equity                                                                                                                             |  |           | 970,474  
|                                                                                                                                                       |  |           |          
|Total liabilities and stockholders equity                                                                                                             |  | $         | 3,712,744
|                                                                                                                                                       |  |           |          



The accompanying notes
are an integral part of these

consolidated financial statements.



F-4



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##### Table of Contents

AdvancePCS and Subsidiaries



Consolidated Statements of Operations

(in thousands, except share and per share data)



|                                                                                                  |  | Years Ended March 31, |           
|------------------------------------------------------------------------------------------------- |  | --------------------- | ----------
|                                                                                                  |  | 2003                  |           
|                                                                                                  |  |                       |           
|Revenues                                                                                          |  | $                     | 14,110,879
|Cost of revenues                                                                                  |  |                       | 13,555,231
|                                                                                                  |  |                       |           
|Gross profit                                                                                      |  |                       | 555,648   
|Selling, general and administrative expenses                                                      |  |                       | 231,245   
|Non-recurring and impairment expenses                                                             |  |                       |          
|                                                                                                  |  |                       |           
|Operating income                                                                                  |  |                       | 324,403   
|Interest income                                                                                   |  |                       | 5,086     
|Interest expense                                                                                  |  |                       | (43,658   
|Loss from joint venture                                                                           |  |                       | (5,036    
|Merger costs and other                                                                            |  |                       |          
|                                                                                                  |  |                       |           
|Income before income taxes                                                                        |  |                       | 280,795   
|Provision for income taxes                                                                        |  |                       | (110,914  
|                                                                                                  |  |                       |           
|Income before extraordinary loss                                                                  |  |                       | 169,881   
|Extraordinary loss on early retirement of debt, net of taxes of ($953) and ($3,469), respectively |  |                       | (1,491    
|                                                                                                  |  |                       |           
|Net income                                                                                        |  | $                     | 168,390   
|                                                                                                  |  |                       |           
|                                                                                                  |  |                       |           
|Basic                                                                                             |  |                       |           
|Income before extraordinary loss per share                                                        |  | $                     | 1.86      
|Extraordinary loss on early retirement of debt, net of taxes, per share                           |  |                       | (.01      
|                                                                                                  |  |                       |           
|Net income per share                                                                              |  | $                     | 1.85      
|                                                                                                  |  |                       |           
|                                                                                                  |  |                       |           
|Weighted average shares outstanding                                                               |  |                       | 91,094,114
|Diluted                                                                                           |  |                       |           
|Income before extraordinary loss per share                                                        |  | $                     | 1.72      
|Extraordinary loss on early retirement of debt, net of taxes, per share                           |  |                       | (.01      
|                                                                                                  |  |                       |           
|Net income per share                                                                              |  | $                     | 1.71      
|                                                                                                  |  |                       |           
|Weighted average shares outstanding                                                               |  |                       | 98,508,329



The accompanying notes
are an integral part of these

consolidated financial statements.



F-5



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##### Table of Contents

AdvancePCS and Subsidiaries



Consolidated Statements of Stockholders Equity

(in thousands, except share amounts)



|                                                             |  | Years Ended March 31, |           
|------------------------------------------------------------ |  | --------------------- | ----------
|                                                             |  | 2003                  |           
|Common StockClass A (# of shares)                           |  |                       |           
|Balance at beginning of year                                 |  |                       | 79,927,079
|Conversion of Class B-2 Common Stock to Class A Common Stock |  |                       |          
|Conversion of Class B-1 Common Stock to Class A Common Stock |  |                       |          
|Issuance of stock for acquisitions                           |  |                       |          
|Stock issued with shelf offering                             |  |                       |          
|Stock issued with the exercise of options and warrants       |  |                       | 2,575,283 
|                                                             |  |                       |           
|Balance at end of year                                       |  |                       | 82,502,362
|                                                             |  |                       |           
|                                                             |  |                       |           
|Common StockClass A (dollars)                               |  |                       |           
|Balance at beginning of year                                 |  | $                     | 799       
|Conversion of Class B-2 Common Stock to Class A Common Stock |  |                       |          
|Conversion of Class B-1 Common Stock to Class A Common Stock |  |                       |          
|Issuance of stock for acquisitions                           |  |                       |          
|Stock issued with shelf offering                             |  |                       |          
|Stock issued with the exercise of options and warrants       |  |                       | 26        
|                                                             |  |                       |           
|Balance at end of year                                       |  | $                     | 825       
|                                                             |  |                       |           
|                                                             |  |                       |           
|Common StockClass B-1 (# of shares)                         |  |                       |           
|Balance at beginning of year                                 |  |                       | 12,913,334
|Issuance of Series B-1 Common Stock                          |  |                       |          
|Conversion of Series A-1 Preferred Stock to B-1 Common Stock |  |                       |          
|Conversion of Class B-1 Common Stock to Class A Common Stock |  |                       |          
|                                                             |  |                       |           
|Balance at end of year                                       |  |                       | 12,913,334
|                                                             |  |                       |           
|                                                             |  |                       |           
|Common StockClass B-1 (dollars)                             |  |                       |           
|Balance at beginning of year                                 |  | $                     | 130       
|Issuance of Class B-1 Common Stock                           |  |                       |          
|Conversion of Series A-1 Preferred Stock to B-1 Common Stock |  |                       |          
|Conversion of Class B-1 Common Stock to Class A Common Stock |  |                       |          
|                                                             |  |                       |           
|Balance at end of year                                       |  | $                     | 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 |  |                       |          
|Conversion of Class B-2 Common Stock to Class A Common Stock |  |                       |          
|                                                             |  |                       |           
|Balance at end of year                                       |  |                       | 200       
|                                                             |  |                       |           
|                                                             |  |                       |           
|Common Stock  Class B-2 (dollars)                           |  |                       |           
|Balance at beginning of year                                 |  | $                     |          
|Conversion of Series A-2 Preferred Stock to B-2 Common Stock |  |                       |          
|Conversion of Class B-2 Common Stock to Class A Common Stock |  |                       |          
|                                                             |  |                       |           
|Balance at end of year                                       |  | $                     |          
|                                                             |  |                       |           
|                                                             |  |                       |           
|Preferred Stock  Series A-1 (# of shares)                   |  |                       |           
|Balance at beginning of year                                 |  |                       |          
|Issuance of Series A-1 Preferred Stock                       |  |                       |          
|Conversion of Series A-1 Preferred Stock to B-1 Common Stock |  |                       |          
|                                                             |  |                       |           
|Balance at end of year                                       |  |                       |          
|                                                             |  |                       |           
|                                                             |  |                       |           
|Preferred Stock  Series A-1 (dollars)                       |  |                       |           
|Balance at beginning of year                                 |  | $                     |          
|Issuance of Series A-1 Preferred Stock                       |  |                       |          
|Conversion of Series A-1 Preferred Stock to B-1 Common Stock |  |                       |          
|                                                             |  |                       |           
|Balance at end of year                                       |  | $                     |          
|                                                             |  |                       |           
|                                                             |  |                       |           
|Preferred Stock  Series A-2 (# of shares)                   |  |                       |           
|Balance at beginning of year                                 |  |                       |          
|Issuance of Series A-2 Preferred Stock                       |  |                       |          
|Conversion of Series A-2 Preferred Stock to B-2 Common Stock |  |                       |          
|                                                             |  |                       |           
|Balance at end of year                                       |  |                       |          
|                                                             |  |                       |           
|                                                             |  |                       |           
|Preferred Stock  Series A-2 (dollars)                       |  |                       |           
|Balance at beginning of year                                 |  | $                     |          
|Issuance of Series A-2 Preferred Stock                       |  |                       |          
|Conversion of Series A-2 Preferred Stock to B-2 Common Stock |  |                       |          
|                                                             |  |                       |           
|Balance at end of year                                       |  | $                     |          
|                                                             |  |                       |           



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##### Table of Contents

AdvancePCS and Subsidiaries



Consolidated Statements of Stockholders Equity (cont.)

(in thousands, except share amounts)



|                                                                                     |  | Years Ended March 31, |          
|------------------------------------------------------------------------------------ |  | --------------------- | ---------
|                                                                                     |  | 2003                  |          
|Additional Paid-In Capital                                                           |  |                       |          
|Balance at beginning of year                                                         |  | $                     | 716,887  
|Stock issued with shelf offering                                                     |  |                       |         
|Tax benefit of stock options                                                         |  |                       | 16,904   
|Capital contribution from joint venture partner                                      |  |                       |         
|Issuance of stock for acquisitions                                                   |  |                       |         
|Stock issued with the exercise of options and warrants                               |  |                       | 17,880   
|Other                                                                                |  |                       | (1,225   
|                                                                                     |  |                       |          
|Balance at end of year                                                               |  | $                     | 750,446  
|                                                                                     |  |                       |          
|                                                                                     |  |                       |          
|Accumulated Other Comprehensive Loss, Net of Taxes                                   |  |                       |          
|Balance at beginning of year                                                         |  | $                     | (12,686  
|Pension liability adjustment, net of taxes of $2,749 and $2,586, respectively        |  |                       | (4,305   
|Mark to market interest rate swap, net of taxes of $3,443 and ($5,650), respectively |  |                       | 5,395    
|                                                                                     |  |                       |          
|Balance at end of year                                                               |  | $                     | (11,596  
|                                                                                     |  |                       |          
|                                                                                     |  |                       |          
|Accumulated Earnings                                                                 |  |                       |          
|Balance at beginning of year                                                         |  | $                     | 172,130  
|Net income                                                                           |  |                       | 168,390  
|Distributions to FFI owners                                                          |  |                       |         
|                                                                                     |  |                       |          
|Balance at end of year                                                               |  | $                     | 340,520  
|                                                                                     |  |                       |          
|                                                                                     |  |                       |          
|Treasury Stock (# of shares)                                                         |  |                       |          
|Balance at beginning of year                                                         |  |                       |         
|Purchase of Class A Common Stock                                                     |  |                       | 5,549,761
|Other                                                                                |  |                       | (90,188  
|                                                                                     |  |                       |          
|Balance at end of year                                                               |  |                       | 5,459,573
|                                                                                     |  |                       |          
|                                                                                     |  |                       |          
|Treasury Stock (dollars)                                                             |  |                       |          
|Balance at beginning of year                                                         |  | $                     |         
|Purchase of Class A Common Stock                                                     |  |                       | (111,468 
|Other                                                                                |  |                       | 1,617    
|                                                                                     |  |                       |          
|Balance at end of year                                                               |  | $                     | (109,851 
|                                                                                     |  |                       |          
|                                                                                     |  |                       |          
|Comprehensive Income                                                                 |  |                       |          
|Net income                                                                           |  | $                     | 168,390  
|Pension liability adjustment, net of taxes of $2,749 and $2,586, respectively        |  |                       | (4,305   
|Mark to market interest rate swap, net of taxes of $3,443 and ($5,650), respectively |  |                       | 5,395    
|                                                                                     |  |                       |          
|Total comprehensive income                                                           |  | $                     | 169,480  
|                                                                                     |  |                       |          



The accompanying notes
are an integral part of these

consolidated financial statements.



F-7



---

##### Table of Contents

AdvancePCS and Subsidiaries



Consolidated Statements of Cash Flows

(in thousands)



|                                                                                                                 |  | Years Ended March 31, |         
|---------------------------------------------------------------------------------------------------------------- |  | --------------------- | --------
|                                                                                                                 |  | 2003                  |         
|Cash flows from operating activities:                                                                            |  |                       |         
|Net income                                                                                                       |  | $                     | 168,390 
|Adjustments to reconcile net income to net cash provided by operating activities  Depreciation and
amortization |  |                       | 47,001  
|Non-recurring and impairment expenses                                                                            |  |                       |        
|Provision for doubtful accounts                                                                                  |  |                       | 10,996  
|Deferred income taxes                                                                                            |  |                       | 1,714   
|Extraordinary loss on early retirement of debt, net of taxes                                                     |  |                       | 1,491   
|Value of options and warrants issued                                                                             |  |                       |        
|Change in certain assets and liabilities Accounts receivable                                                    |  |                       | (397,285
|Inventories                                                                                                      |  |                       | (34,035 
|Prepaid expenses and other noncurrent assets                                                                     |  |                       | (964    
|Claims and accounts payable, accrued expenses and other noncurrent liabilities                                   |  |                       | 471,295 
|                                                                                                                 |  |                       |         
|Net cash provided by operating activities                                                                        |  |                       | 268,603 
|                                                                                                                 |  |                       |         
|                                                                                                                 |  |                       |         
|Cash flows from investing activities:                                                                            |  |                       |         
|Proceeds from sale of property & equipment                                                                       |  |                       | 1,201   
|Purchases of property and equipment                                                                              |  |                       | (69,339 
|Acquisition, net of cash acquired, and investment in affiliates                                                  |  |                       | (79,261 
|                                                                                                                 |  |                       |         
|Net cash used in investing activities                                                                            |  |                       | (147,399
|                                                                                                                 |  |                       |         
|                                                                                                                 |  |                       |         
|Cash flows from financing activities:                                                                            |  |                       |         
|Net proceeds from issuance of Common Stock                                                                       |  |                       | 17,170  
|Capital contribution, AdvancePriority SpecialtyRx                                                                |  |                       |        
|Purchase of Class A Common StockTreasury Stock                                                                  |  |                       | (111,468
|Stock issued to fund acquisition                                                                                 |  |                       |        
|Issuance of debt to fund acquisition                                                                             |  |                       |        
|Issuance of Senior Notes to fund acquisition                                                                     |  |                       |        
|Net activity on credit facilities                                                                                |  |                       |        
|Net borrowings on asset securitization facility                                                                  |  |                       | 109,998 
|Repayment of Rite Aid senior subordinated notes                                                                  |  |                       |        
|Repayment of debt                                                                                                |  |                       | (163,147
|Deferred financing costs                                                                                         |  |                       | (1,655  
|Distributions to FFI owners                                                                                      |  |                       |        
|                                                                                                                 |  |                       |         
|Net cash (used in) provided by financing activities                                                              |  |                       | (149,102
|                                                                                                                 |  |                       |         
|Net (decrease) increase in cash and cash equivalents                                                             |  |                       | (27,898 
|Cash and cash equivalents, beginning of year                                                                     |  |                       | 139,145 
|                                                                                                                 |  |                       |         
|Cash and cash equivalents, end of year                                                                           |  | $                     | 111,247 
|                                                                                                                 |  |                       |         
|Supplementary information:                                                                                       |  |                       |         
|Cash paid for interest                                                                                           |  | $                     | 47,037  
|Cash paid for income taxes                                                                                       |  | $                     | 91,979  
|                                                                                                                 |  |                       |         
|Non-cash transactions:                                                                                           |  |                       |         
|Assets acquired and liabilities assumed (see Note 5)                                                             |  |                       |         



The accompanying notes
are an integral part of these

consolidated financial statements.



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##### Table of Contents

AdvancePCS and Subsidiaries



Notes to Consolidated Financial Statements



1.
Description of Business



AdvancePCS, a Delaware corporation, and its
subsidiaries (the Company or AdvancePCS) provide a wide range of health improvement services designed to manage costs and improve the quality of care delivered to health plan members. Services include integrated mail service
and retail pharmacy networks, formulary development and management, rebate negotiation and management, specialty pharmacy, disease management, clinical trials, outcomes research, information management, prescription drug services for the uninsured
and online health information. 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.



On October 1, 2001, the Company announced a two-for-one split of its common stock, affected
in the form of a stock dividend. The record date was October 23, 2001 and the date of payment was November 2, 2001. Financial and share information contained throughout this Form 10-K have been retroactively adjusted to reflect the impact of the
stock split.



2. Summary of Significant Accounting Policies



Basis of Presentation



The accompanying consolidated financial statements include the accounts of AdvancePCS and
its 100% owned subsidiaries and affiliates. Effective September 30, 2001 the Company acquired the remaining equity interests of Consumer Health Interactive, Inc. (CHI) which it did not previously own. The acquisition of the remaining 81% equity
interest was accounted for using the purchase method of accounting and made CHI a wholly owned consolidated subsidiary. Prior to the complete acquisition of CHI, the Company had accounted for its 19% interest in CHI on the cost basis. In accordance
with Accounting Principals Board Opinion (APB) No. 18 The Equity Method of Accounting for Investments in Common Stock (APB 18) all prior period financial statements have been restated to account for CHI as though the Company had
accounted for its investment on the equity method.



The Company adopted
Emerging Issues Task Force (EITF) released Issue No. 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor (EITF 02-16) in the fourth quarter of fiscal 2003 by retroactively reclassifying all prior years to
conform with the presentation for fiscal 2003. As a result of the adoption, fiscal years 2003, 2002 and 2001 revenues have been reduced by $1.4 billion, $933.2 million and $533.9 million, respectively, representing the gross amounts of rebates and
administrative fees received from pharmaceutical manufacturers. Cost of revenues have been reduced by the same amounts (See Recently Adopted Accounting Pronouncements). All significant intercompany accounts and transactions have been
eliminated in consolidation.



Use of Estimates



The preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Estimates are used for, but not limited to, 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 performance and service guarantees, reserves for uncollectible accounts and contract losses, pension and other post-retirement benefits, depreciation and amortization
rates for property and equipment and computer software and the value of 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 segment. Over 98% of its revenues are derived from sales of
prescription drugs to members of the Companys customers, either through its mail and specialty pharmacies (Mail Services) or its networks of contractually affiliated retail pharmacies (Data Services). Data Services and Mail Services are both
within the Companys pharmacy benefit management business and are not distinct business activities but merely separate methods of distribution of its prescription services products. The Companys pharmacy benefit management business
services are offered to each of its customers as part of the Companys overall customer offering and are negotiated as part of a single contract.



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##### Table of Contents

In addition to the review of the consolidated financial information, the chief executive officer of the Company, who is
considered the chief operating decision-maker (CODM) also reviews discrete revenue information. The information reviewed by the CODM does not correlate revenues to expenses by product offering. The CODM does not make resource allocation decisions
based on profitability of individual product offerings. Revenue information is reflected below for each of the periods presented.



|                            |  | Year Ended March 31,                 
|--------------------------- |  | -------------------------------------
|                            |  | 2003(1)                              
|                            |  | (in thousands, except per share data)
|Revenues(3):                |  |                                      
|Data Services               |  | $                                    
|Mail Services               |  |                                      
|Clinical and Other Services |  |                                      
|                            |  |                                      
|Total revenues              |  | $                                    
|                            |  |                                      

(1) Includes Accordant data since the acquisition in November 2002.

(2) Includes PCS data since the acquisition in October 2000.

(3) Revenues have been retroactively reclassified to reflect the adoption of EITF 02-16 in the fourth quarter of fiscal 2003.



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:



|                         |  | 2003 |   |  | 2002 |   |  | 2001 |  
|------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|Federal Employee Program |  | 12   | % |  | 13   | % |  | 11   | %
|HealthNet                |  | *    |   |  | *    |   |  | 14   | %



*
less than 10%



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. The Companys practice is to invest cash with financial institutions that have acceptable credit ratings and to limit the amount of credit exposure to any one
financial institution. In December 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 $9.9 million and
$19.7 million of cash is restricted as of March 31, 2003 and 2002, respectively.



Accounts Receivable



Accounts receivable balances represent
customer trade receivables generated from the Companys Data and Mail Services. Also included in accounts receivable are receivables from vendors for the Companys Clinical and Other Services whereby the Company recognizes rebates and
administrative fees receivable from pharmaceutical manufacturers. Based on the Companys revenue recognition policies, certain claims at the end of the period are unbilled. Revenue and unbilled receivables for those claims are estimated each
period based on the amount to be paid to the pharmacies and historical gross margin. Estimates are adjusted to actual at the time of billing. In addition, revenue and unbilled receivables for rebates are calculated quarterly based on an estimate of
rebatable prescriptions and rebate per prescription. These estimates are adjusted to actual when the number of rebatable prescriptions and rebate per prescription have been determined and the billings to the pharmaceutical manufacturers have been
completed. As of March 31, 2003 and 2002, unbilled receivables were $883.5 million and $686.2 million, respectively. Corresponding amounts payable to retail pharmacies (for claims) or to plan sponsors (for rebates) are recorded at the time the
unbilled receivables are recorded. Unbilled receivables to plan sponsor customers are typically billed within 15 days and unbilled receivables to manufacturers are typically billed within 90 days, based on the respective contractual billing
schedules.



To reduce the potential for credit risk, the Company evaluates the
collectibility of customer balances based on a combination of factors but does not generally require significant collateral. The Company regularly analyzes significant customer balances, and, when it becomes evident a specific customer will be
unable to meet its financial obligations to the Company, such as in the case of bankruptcy filings or deterioration in the customers operating results or financial position, a specific allowance for doubtful account is recorded to reduce the
related receivable to the amount that is believed reasonably collectible. The Company also records allowances for doubtful accounts for all other customers based on a variety of factors



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##### Table of Contents

including the length of time the receivables are past due, the financial health of the customer and historical
experiences. If circumstances related to specific customers change, estimates of the recoverability of receivables could be further adjusted.



Inventories



Inventories consist of purchased pharmaceuticals and are 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 6). Leasehold improvements are amortized 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 consolidated statement of operations.



Computer
Software



The Company capitalizes costs related to software developed or
obtained for internal use in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. These assets, included in property and equipment in the consolidated balance
sheets, relate to the Companys Mail Operating, Claims Processing and Customer Relations Management systems. Such costs generally consist of professional services provided by third parties and employee compensation, in each case incurred either
during the application development stage or in connection with upgrades and enhancements that increase functionality. Such costs are amortized over their estimated useful lives, generally three to ten years. Costs incurred during the preliminary
project stage of development as well as maintenance costs are expensed as incurred.



Joint Venture



In February 2001, the Company entered into an
agreement with Express Scripts and Medco Health Solutions, Inc., to form RxHub, LLC (RxHub) to develop electronic prescribing technology. The Company owns one third of the equity of RxHub. The Company has recorded its investment in RxHub under the
equity method of accounting and records its proportionate share of RxHubs loss in the Companys consolidated statement of operations.



Asset Impairment



Long-lived assets and intangible assets are tested for recoverability whenever events or changes in circumstances indicate that the assets carrying amount may not be recoverable. Examples of such events could
include a significant adverse change in the extent or manner in which the asset is used, a change in its physical condition, or new circumstances that would cause an expectation that it is more likely than not the Company would sell or otherwise
dispose of a long-lived asset significantly before the end of its previously estimated useful life.



The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment shall be based
on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.



The Company evaluates goodwill for impairment based on a two-step process. The first step
compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the
impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is necessary to measure the amount of impairment loss, if any. The second step compares the implied
fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that
excess. The results of the Companys fiscal 2003 fourth quarter testing resulted in no impairment charges.



The Company determines the fair value of reporting units by using a discounted cash flow model based on future operations. Goodwill is tested annually during the fourth
quarter of each fiscal year and when events or circumstances occur indicating possible impairment.



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Asset Securitization Facility



In December 2001, the Company securitized certain of its accounts receivable pursuant to a $150 million facility (the Asset Securitization
Facility). The proceeds were used to repay $150 million of the Term B note that had a balance outstanding of approximately $300 million at that time. In June 2002, the Company increased the Asset Securitization Facility to $300 million and used the
proceeds to repay the remaining $150 million of its Term B note. The Asset Securitization Facility is included in the debt balance at March 31, 2003 and will continue to be reflected on-balance sheet.



Fair Value of Financial Instruments



The carrying values of cash, receivables, payables and accrued liabilities approximate the
fair values of these instruments because of their short-term maturities. The carrying value of the Companys bank debt approximated fair value at March 31, 2003 and 2002. The carrying value of the Companys Senior Notes, was 107% of par
value at March 31, 2003 and approximated fair value at March 31, 2002.



Derivative Financial Instruments



The Company accounts for
derivative financial instruments in accordance with Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 137 and 138 (SFAS 133), which 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 Company has entered into an interest rate swap as of November 2000 in order to manage exposure to interest rate risk. This swap
agreement is a cash flow hedge, as it requires the Company 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 the swap
agreement is reported on the consolidated balance sheets in other accrued expenses and the related gains or losses on this agreement are deferred in consolidated statements of stockholders equity as a component of other comprehensive income.
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 the consolidated statements of operations. The fair value of the swap
was based upon quoted market prices and represents the estimated amount the Company would have to pay to terminate the swap agreement taking into account current interest rates at March 31, 2003.



Rebate Guarantees



Agreements with certain health plan sponsor customers contain provisions that require the Company to obtain a minimum rebate per claim from
pharmaceutical manufacturers in order to generate additional savings for health plan sponsor customers. Failure to achieve the minimum rebate per claim results in an obligation by the Company to the health plan sponsor customer. The obligation is
equivalent to the difference between the actual rebate per claim obtained and the minimum stated in the health plan sponsor customer agreement, which is then multiplied by the number of claims processed in a specified period. The Company continually
monitors the health plan sponsor customers rebate per claim and recognizes a liability when it appears unlikely the average rebate per claim will meet or exceed the stated minimum.



If circumstances related to collectibility assumptions of pharmaceutical manufacturers rebates change, including changes in market
conditions (e.g., drug patent expiration) or member quantity, that materially alter drug utilization patterns and adversely affect the pharmaceutical manufacturers rebates obtained, rebate guarantee obligations could increase, resulting in a charge
to earnings.



Performance Guarantees



Agreements with certain health plan sponsor customers contain plan performance guarantees
that require the Company to meet various operational standards, including items such as customer service wait time, abandoned customer service calls and mail pharmacy turn around time. Certain contracts require 100% guarantee in achieving various
operational standards. Failure to achieve the operational standards results in penalty payments to the health plan sponsors by AdvancePCS. The Company continually monitors operational performance against the standards outlined in health plan sponsor
customer contracts. A loss is recorded as a liability. If the Company experiences changes in events or circumstances that adversely impact operations, performance guarantee obligations could increase resulting in a charge to earnings.



Service Guarantees



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##### Table of Contents

Agreements with certain health plan sponsor customers contain guarantees relating to an efficient and effective
transition into the Companys services (implementations). Failure to achieve an efficient and effective transition on the Companys part results in an obligation to health plan sponsor customers. Obligations are estimated based on the
success of recently transitioned health plan sponsor customers.



Income Taxes



Deferred tax assets and liabilities are
recognized using statutory tax rates based on temporary differences between the financial statement basis and tax basis of assets and liabilities.



In assessing the need for a valuation allowance, the Company estimates future taxable income, considering the feasibility of ongoing tax planning strategies and the
realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event it is determined that all or a portion
of the deferred tax assets cannot be realized in the future, the Company will adjust such amounts by increasing the valuation allowance through a charge to income in the period that such determination was made. Conversely, if it were determined that
the deferred tax assets were realizable in the future in excess of the net carrying amounts, the Company would decrease the recorded valuation allowance through an increase to income in the period that such determination was made.



Employee Benefit Plans



Retirement plan benefits include both a defined contribution retirement plan and a defined benefit pension plan. The defined benefit pension
plan was acquired with the PCS acquisition and has been frozen to new participants since the acquisition date. In addition, employees may participate in an Employee Stock Purchase Plan.



Under the provisions of SFAS No. 87 Employers Accounting for Pensions, measurement of the obligations under the defined
benefit pension plan are subject to a number of assumptions. These include the rate of return of plan assets, health care costs and compensation trend rates, and the rate at which the future obligations are discounted to value the liability at
year-end.



Other Loss Contingencies



Other loss contingencies are recorded as liabilities when it is probable that a liability
has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time
periods. The Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss.



Revenue Recognition



The Companys revenues are derived principally from sales of prescription drugs to members of its customers, either through its mail and specialty service pharmacies
(Mail Services) or its networks of contractually affiliated retail pharmacies (Data Services). The Company also provides clinical and other services as part of its overall health improvement service offerings.



When the Company provides formulary management services (formulary development and
manufacturing contracting) to a customer in conjunction with claims processing, it records rebates and administrative fees received from pharmaceutical manufacturers as a reduction of cost of revenues and the portion of the rebate payable to
customers is treated as a reduction of revenue.



Data Services



Plan sponsor customer
contracts are evaluated using the indicators of EITF No. 99-19 Reporting Gross Revenue as a Principal vs. Net as an Agent (EITF 99-19) to determine whether the Company acts as a principal or an agent in the fulfillment of prescriptions
through the retail pharmacy network.



Revenues are recorded gross when the
Company adjudicates claims for plan sponsor customers that have contractually agreed to use the AdvancePCS contracted pharmacy network. The Company acts as principal under EITF 99-19 when adjudicating claims for plan sponsors through its contracted
pharmacy network for the following reasons:



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##### Table of Contents

| |  |  | The Company negotiates a contract with the plan sponsor customer and also negotiates contracts with retail pharmacies. Neither the plan sponsor nor the retail pharmacy can look
through the Company and claim directly against the other party. Both contracts with these parties are separate and each only contracts with the Company. Each party must deal directly with AdvancePCS and cannot deal with each other directly;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company determines through negotiations which retail pharmacies will be included or excluded in its network to be offered to the plan sponsor customer, based on price, access,
etc.;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company is responsible to the plan sponsor customer: (1) to provide the fulfillment to the plans members, (2) to validate a claim and (3) to manage the claim economically
for the plan through its adjudication process;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company sets total prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled; however, the plan sponsor customer determines
the portion of the total price relating to co-pay amounts that will be paid by its members;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company manages the overall prescription drug relationship with the plan sponsor customers members;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | The Company has credit risk for the price due to the pharmacy from the plan sponsor customer; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | The Company may realize a positive or negative margin represented by the difference between the negotiated ingredient costs received from the plan sponsor customer and the
negotiated ingredient costs paid to its network pharmacies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



When
adjudicated claims are recorded gross, the plan sponsors aggregate pharmacy benefit claim payment to the Company is recorded as revenue and the Companys payment to the pharmacy provider is recorded as cost of revenue in the consolidated
statement of operations. In contrast, when the Company adjudicates prescriptions at pharmacies that are under contract directly with its plan sponsor customer and there are no financial risks to the Company, the Company records only its claims
processing fees as revenues and do not include prescription costs in revenues or cost of revenues (net reporting). If the Company had reported all of its data services revenues using net reporting, revenues and cost of revenues would
have decreased by $11.0 billion, $10.0 billion and $5.4 billion for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. Certain incentive and other fees paid to customers upon the initiation of a contractual agreement are considered
an integral part of overall contract pricing and are capitalized and amortized as a reduction of revenue on a straight-line basis over the life of the contract.



Mail Services



The Company contracts directly with plan sponsor customers to provide prescription drugs to their members. The Company is contractually committed to agreed upon turn around times, which is the time it takes to ship
the prescription after receiving the written order. The Company also assumes the credit and inventory risk and collects co-payments from members. Therefore, for prescriptions dispensed through the AdvancePCS mail service pharmacy, the Company
recognizes the total amounts paid by both the customer and the member (in the form of a co-payment) as revenue. Revenues from the dispensing of pharmaceuticals from the Companys mail service pharmacy are recognized when each prescription is
shipped.



Clinical and Other Services



When the Company earns rebates and administrative fees in conjunction with formulary
management services (formulary development and manufacturer contracting) for customers, but does not process the underlying claims (rebate utility), it records rebates and administrative fees received from pharmaceutical manufacturers, net of the
portion payable to customers, in revenue. In contrast, when the Company provides formulary management services and processes the claims, it records rebates and administrative fees received as a reduction of cost of revenues and the portion
deliverable to the customer as a reduction of revenue.



The Company recognizes
rebates and administrative fees receivable from pharmaceutical manufacturers and the corresponding amounts payable to customers when the prescriptions covered under the contractual agreements with the manufacturers are dispensed. The Company
estimates the amount of rebates to be delivered to customers based on historical rates of rebates received as well as estimates of current rebates receivable from pharmaceutical manufacturers. These estimates are adjusted to actual when amounts are
received from manufacturers and the portion deliverable to the customer is disbursed.



The Company also earns other revenue from pharmaceutical manufacturers for services such as formulary support services, outcomes studies and clinical trials. These services are negotiated separately with each pharmaceutical manufacturer and



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##### Table of Contents

specify the services to be performed and the revenues and fees to be earned based on the delivery or completion of the
services. The Company also earns revenues from its customers (primarily managed care organizations) for disease management services provided by Accordant Health Services, Inc. (Accordant), a wholly owned subsidiary acquired in November 2002.
Accordant focuses on helping patients with complex, chronic and progressive diseases. The revenues of Accordant have been included in Clinical and Other services revenue since the date of the acquisition.



Cost of Revenues



Cost of revenues includes drug ingredient costs, labor, call center operations, information technology and other costs associated with the
sale and/or dispensing of prescription drugs and providing clinical and other services. Rebates collected from pharmaceutical manufacturers on behalf of the Companys health plan sponsor customers are recognized as a reduction of cost of
revenues in accordance with EITF 02-16.



Selling, General and Administrative



Selling, general and administrative expenses reflect the costs of
operations dedicated to generating new sales and maintaining existing customer 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.



Employee Stock-Based
Compensation



SFAS No. 148 Accounting for Stock-Based
Compensation-Transition and Disclosure an Amendment of FASB Statement No. 123, (SFAS 148) was issued to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 Accounting for Stock-Based Compensation (SFAS 123) to require prominent disclosure about the effects on reported net income of an entitys
accounting policy decisions with respect to the stock-based employee compensation and it amends APB No. 28 Interim Financial Reporting to require disclosure about those effects in interim financial information.



The Company adopted the new disclosure provisions but continues to account for stock options
using the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Under this method, compensation expense is recorded over the related service period when the market price
exceeds the option price at the measurement date, which is the grant date for the options. Beginning in fiscal year 2001, all options were issued with an exercise price equal to the market price of the Companys stock on the grant date. For the
years ended March 31, 2003, 2002 and 2001, compensation expense of $824,000, $824,000 and $1.3 million, respectively, was recorded in each year for options granted in 2000. SFAS 123 grants an exception that allows companies currently applying APB 25
to continue using that method. Therefore, the Company has elected to continue applying the intrinsic value method under APB 25. Had compensation cost for these plans been determined consistent with SFAS 123 and 148, the Companys net income and
net income per share would have been reduced to the following pro forma amounts (in thousands):



|                                        |  | 2003 |         | 2002 |   | 2001   
|--------------------------------------- |  | ---- | ------- | ---- | - | -------
|Stock-based compensation, net of taxes: |  |      |         |      |   |        
|As currently reported                   |  | $    | 499     |      | $ | 499    
|Pro forma                               |  | $    | 13,447  |      | $ | 11,573 
|                                        |  |      |        
|                                        |  | 2003 |         | 2002 |   | 2001   
|Net income:                             |  |      |         |      |   |        
|As currently reported                   |  | $    | 168,390 |      | $ | 115,731
|Pro forma                               |  | $    | 155,442 |      | $ | 104,657
|Basic net income per share:             |  |      |         |      |   |        
|As currently reported                   |  | $    | 1.85    |      | $ | 1.37   
|Pro forma                               |  | $    | 1.71    |      | $ | 1.24   
|Diluted net income per share:           |  |      |         |      |   |        
|As currently reported                   |  | $    | 1.71    |      | $ | 1.18   
|Pro forma                               |  | $    | 1.58    |      | $ | 1.06   



The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes option-pricing model using the following assumptions:



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##### Table of Contents

|                             |  | 2003      |  | 2002      |  | 2001     
|---------------------------- |  | --------- |  | --------- |  | ---------
|                             |  |           | 
|Expected life of options     |  | 3-5 years |  | 3-5 years |  | 3-5 years
|                             |  |           | 
|Risk-free interest rate      |  | 2.68%     |  | 3.86%     |  | 5.74%    
|                             |  |           | 
|Expected volatility of stock |  | 58%       |  | 64%       |  | 75%      
|                             |  |           | 
|Expected dividend yield      |  | None      |  | None      |  | None     



During each reporting period, fully
diluted earnings per share are calculated by assuming that in-the-money options are exercised and the exercise proceeds are used to repurchase shares in the marketplace. When options are actually exercised, option proceeds are credited
to equity and issued shares are included in the computation of earnings per common share, with no effect on reported earnings. Equity is also increased by the tax benefit that the Company will receive in its tax return for income reported by the
optionees in their individual tax returns.



Reclassification



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



Recently Adopted Accounting Pronouncements



In December 2002, the FASB issued SFAS 148 which amends SFAS 123 to provide alternative
methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 to require disclosure of the method used to account for stock-based
employee compensation and the effect of the method on reported results in both annual and interim financial statements. The disclosure provisions were adopted as of March 31, 2003. The Company has not yet reached a determination of whether and, if
so, when to change the existing accounting for stock-based compensation to the fair value method in accordance with the transition alternatives of SFAS 148.



In November 2002, the FASB issued FASB Interpretation (FIN) No. 45 Guarantors Accounting and Disclosures Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires an entity to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the
liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Companys financial position or results of operations.



In September 2002, the EITF released Issue No. 02-16, Accounting by a Reseller for Cash
Consideration Received from a Vendor (EITF 02-16). Under this pronouncement, any consideration received from a vendor is presumed to be a reduction of the prices of the vendors products and should, therefore, be characterized as a
reduction of cost of revenues. This EITF applies to rebates and administrative fees received from pharmaceutical manufacturers. The Company had previously recorded rebates, net of the amount distributed to its customers and administrative fees as
components of Clinical Services revenue. Prior period reclassification is allowed to the extent there is no impact on net income. The application of EITF 02-16 does not change the Companys net income, gross profit or cash flows. As a result of
the adoption, fiscal year 2003, 2002 and 2001 revenues have been reduced by $1.4 billion, $933.2 million and $533.9 million, respectively. Cost of revenues have been reduced by the same amounts.



In July 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated with Exit or
Disposal Activities (SFAS 146). SFAS 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance in EITF Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 also establishes that fair value is the objective for the initial measurement of the
liability. The adoption of SFAS 146 did not have a material impact on the Companys financial position or results of operations.



In May 2002, the FASB issued SFAS No. 145 Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002 (SFAS 145).
This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, and FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement restricts the classification of gains and losses from extinguishment of debt to only those transactions that are unusual and infrequent in nature as defined by APB Opinion No. 30 as extraordinary. The Company is
required to adopt SFAS 145 by April 1, 2003. Upon adoption, gains and losses on certain future debt extinguishment, if any, will be recorded in pre-tax income. In addition, extraordinary losses of $1.5 million and



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$5.3 million, net of tax for the years ended March 31, 2003 and 2002, respectively, will be reclassified to income before
income taxes to conform to the requirements under SFAS 145.



In November 2001,
the EITF released Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (EITF 01-9). Under the pronouncement, any consideration given to a customer is characterized as a reduction of revenues. This EITF applies to
rebates the Company collects on behalf of its plan sponsor customers and was effective for interim periods beginning after December 15, 2001. The Company had previously recorded its revenues, net of the amount amounts paid to its customers, which is
consistent with that specified in EITF 01-9, which the Company adopted in fiscal year 2002, with no impact to its financial position or results of operations.



Recently Issued Accounting Pronouncements



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities (FIN 46), which clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not provide sufficient equity at risk for the entity to support its activities. FIN 46 is effective for all variable interest entities created after January 31, 2003. For variable interest entities acquired or
created prior to February 1, 2003, the provisions of FIN 46 must be applied to the first interim or annual period beginning after June 15, 2003. The Company does not have any variable interest entities and therefore, does not expect the adoption of
FIN 46 to have a material impact on its financial position or results of operations.



In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). This statement amends SFAS 133 by requiring that contracts with comparable characteristics be
accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003 and must be applied prospectively. The Company does not expect the adoption of SFAS 149 to have a material impact on its financial position or results of operations.



In May 2003, the FASB issued SFAS No. 150 Accounting For Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS 150). This statement established standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 and must be applied
prospectively by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The Company
does not expect the adoption of SFAS 150 to have a material impact on its financial position or results of operations since the Company does not currently have any financial instruments with characteristics of both liabilities and equity.



3. Net Income Per Share



Basic net income per share is computed using the weighted average number of common shares
(including both Class A common stock and Class B common stock) outstanding during the periods presented. Diluted net income per share is computed giving effect to all potentially dilutive common shares, assuming that such shares were outstanding
during the periods presented. The weighted average diluted common shares outstanding were calculated under the treasury stock method in accordance with SFAS No. 128 Earnings Per Share.



Below is a reconciliation of basic weighted average shares outstanding to diluted weighted
average shares outstanding (in thousands). Options to purchase 2.4 million shares of common stock were outstanding at March 31, 2003 but were excluded from the computation of diluted earnings per share because the options exercise prices were
greater than the average market price of the Companys common stock during the applicable period (antidilutive). Antidilutive options to purchase shares of common stock at March 31, 2002 and 2001 were not material.



|                                                   |  | Year Ended March 31,
|-------------------------------------------------- |  | --------------------
|                                                   |  | 2003                
|Weighted average common shares outstandingBasic   |  | 91,094              
|Preferred stock                                    |  |                    
|Dilutive common stock equivalents:                 |  |                     
|Stock options and warrants                         |  | 7,414               
|                                                   |  |                     
|Weighted average common shares outstandingDiluted |  | 98,508              
|                                                   |  |                     



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4. Goodwill and Intangibles



The Company adopted SFAS No. 142 Goodwill and Other Intangible Assets (SFAS 142) effective April 1, 2001. SFAS 142 requires that
goodwill no longer be amortized. Instead, all goodwill (including goodwill associated with acquisitions consummated prior to the adoption of SFAS 142) is to be evaluated for impairment annually or when events or circumstances occur indicating that
goodwill might be impaired.



The Company completed its annual impairment test
during the fourth quarter of fiscal year 2003, which did not result in an impairment charge.



The following is a summary of goodwill activity for the dates indicated (amounts in thousands):



|March 31, 2001                      |  | $ | 1,282,192 |  
|----------------------------------- |  | - | --------- | -
|PCS final purchase price adjustment |  |   | (136,605  | )
|TheraCom acquisition                |  |   | 39,134    |  
|CHI                                 |  |   | 10,562    |  
|Other                               |  |   | 3,642     |  
|                                    |  |   |           |  
|March 31, 2002                      |  |   | 1,198,925 |  
|Accordant acquisition (see Note 5)  |  |   | 51,074    |  
|Other                               |  |   | (1,485    | )
|                                    |  |   |           |  
|March 31, 2003                      |  | $ | 1,248,514 |  
|                                    |  |   |           |  



The following is a summary of
intangible assets at the dates indicated (amounts in thousands):



|                                                         |  | Year EndedMarch 31, 2003 |         |   | Year EndedMarch 31, 2002 |  
|-------------------------------------------------------- |  | ------------------------ | ------- | - | ------------------------ | -
|Amortized intangible assets, gross:                      |  |                          |         |   |                          |  
|Customer base                                            |  | $                        | 285,600 |   |                          | $
|Other                                                    |  |                          | 19,130  |   |                          |  
|                                                         |  |                          |         |   |                          |  
|                                                         |  |                          | 304,730 |   |                          |  
|                                                         |  |                          |         |   |                          |  
|Accumulated amortization of amortized intangible assets: |  |                          |         |   |                          |  
|Customer base                                            |  |                          | (22,881 | ) |                          |  
|                                                         |  |                         
|Other                                                    |  |                          | (6,310  | ) |                          |  
|                                                         |  |                          |         |   |                          |  
|                                                         |  |                          | (29,191 | ) |                          |  
|                                                         |  |                          |         |   |                          |  
|Amortized intangible assets, net                         |  |                          | 275,539 |   |                          |  
|                                                         |  |                          |         |   |                          |  
|Non-amortized intangible assets:                         |  |                          |         |   |                          |  
|Trade NamePCS                                           |  |                          | 105,267 |   |                          |  
|                                                         |  |                          |         |   |                          |  
|                                                         |  | $                        | 380,806 |   |                          | $
|                                                         |  |                          |         |   |                          |  



The $20.0 million increase in
amortizable intangible assets during the fiscal year represents the customer base acquired in the Accordant acquisition, see Note 5. The weighted average amortization period for amortizable intangible assets is 27.6 years (28.0 yearscustomer
base and 8.1 yearsother).



Amortization expense of amortizable intangible
assets was $12.3 million, $10.9 million and $14.0 million for the years ended March 31, 2003, 2002 and 2001, respectively. The future estimated amount of amortization expense of amortizable intangible assets is summarized below (in thousands):



|Years Ending March 31, |  |   |       
|---------------------- |  | - | ------
|2004                   |  | $ | 13,484
|2005                   |  |   | 13,484
|2006                   |  |   | 12,380
|2007                   |  |   | 12,272
|2008                   |  |   | 11,576
|                       |  |   |       
|Total                  |  | $ | 63,196
|                       |  |   |       



Upon adoption of SFAS 142, the Company
determined that the $105.3 million in trade names, acquired with the acquisition of PCS, had an indefinite useful life. Current circumstances and conditions continue to support that determination.



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As required by SFAS 142 the results for the prior years financials have not been restated. The following table
reflects net income and basic and diluted earnings per share, giving effect to SFAS 142 as if it were adopted on April 1, 2000 (in thousands):



|                                                   |  | Year EndedMarch 31, |         | Year EndedMarch 31, |   | Year EndedMarch 31,
|-------------------------------------------------- |  | ------------------- | ------- | ------------------- | - | -------------------
|                                                   |  | 2003                |         | 2002                |   | 2001               
|Reported net income                                |  | $                   | 168,390 |                     | $ | 115,731            
|                                                   |  |                     |        
|Add back: Goodwill amortization (net of tax)       |  |                     |        |                     |   |                   
|Add back: Amortization of trade name and workforce |  |                     |        |                     |   |                   
|                                                   |  |                     |         |                     |   |                    
|Adjusted net income                                |  | $                   | 168,390 |                     | $ | 115,731            
|                                                   |  |                     |         |                     |   |                    
|                                                   |  |                     |        
|Basic net income per share:                        |  |                     |         |                     |   |                    
|Reported net income per share                      |  | $                   | 1.85    |                     | $ | 1.37               
|Adjusted net income per share                      |  | $                   | 1.85    |                     | $ | 1.37               
|                                                   |  |                     |        
|Diluted net income per share:                      |  |                     |         |                     |   |                    
|Reported net income per share                      |  | $                   | 1.71    |                     | $ | 1.18               
|Adjusted net income per share                      |  | $                   | 1.71    |                     | $ | 1.18               



5. Acquisitions and Joint Ventures



In November 2002, the Company acquired 100% of the common stock of
privately held Accordant, a disease management company that focuses on helping patients with complex, chronic and progressive diseases. The aggregate purchase price of $71.5 million, net of cash acquired, includes the final determination of the
working capital adjustment and transaction costs. The results of Accordant have been included in the Companys consolidated financial statements since the acquisition date. The agreement includes a provision for the payment of up to an
additional $25 million, dependent upon Accordant achieving certain financial and operating targets in calendar year 2003. Any additional consideration will be paid during calendar year 2004 and treated as an adjustment to the purchase price. The
acquisition of Accordant was accounted for using the purchase method of accounting, in accordance with SFAS 141, Business Combinations.



Shown below is the preliminary purchase price allocation (in thousands), which summarizes the fair values of the assets acquired and liabilities assumed at the date of
acquisition.



|                       |  | Preliminary Purchase Price Allocation |       
|---------------------- |  | ------------------------------------- | ------
|Current assets         |  | $                                     | 5,524 
|Property and equipment |  |                                       | 567   
|Goodwill               |  |                                       | 51,074
|Customer base          |  |                                       | 20,000
|Liabilities assumed    |  |                                       | (5,616
|                       |  |                                       |       
|Net assets acquired    |  | $                                     | 71,549
|                       |  |                                       |       



The final allocation of the purchase
price will be based on appraisals, which are currently being finalized. The $51.1 million of acquired goodwill is not tax deductible.



In August 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 included the issuance of 1.3 million shares of Class A common stock, of which 384,006 shares were placed in escrow. Of these, 166,956 of
the escrowed shares were held in escrow as additional consideration for the acquisition of TheraCom, the payment of which was conditioned upon TheraCom achieving specific future financial performance goals. The remaining 217,050 shares were held in
escrow to satisfy any indemnification claims the Company may have arising out of the acquisition, including those related to the settlement of certain outstanding TheraCom litigation. 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 Company determined that TheraCom achieved the specified performance goals and in January 2003, 166,956 shares were released to the former TheraCom shareholders from the additional consideration escrow. In January 2003, 34,188 shares



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of Class A common stock were also withdrawn from the indemnification claims escrow and returned to the Company to satisfy
the indemnification claim arising from the settlement of litigation between TheraCom and one of its former shareholders. Any shares returned to the Company will be held in treasury.



In June 2001, the Company established a joint venture, AdvancePriority SpecialtyRx (the
venture), with Priority Healthcare Corp. (Priority Health), a national specialty pharmacy and distribution company. Priority Health owned 49% and AdvancePCS owned 51% of the venture. Effective February 2003, the Company purchased Priority
Healths 49% of the venture, making AdvancePriority SpecialtyRx a wholly owned subsidiary. The acquisition was accounted for using the purchase method of accounting, in accordance with SFAS 141, Business Combinations.



In October 2000, the Company acquired all of the equity of PCS. The aggregate purchase price
paid by the Company was approximately $1.0 billion, of which the Company paid Rite Aid, the seller, $675 million in cash and issued to Rite Aid $200 million in senior subordinated notes and $125 million in the Companys 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.



In July 2000, the Company completed a merger with First Florida International (FFI). The Company issued seven million shares of its 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 Accounting Principles Board Opinion (APB) No. 16 Business Combinations (APB 16) to reflect the
merger as though FFI had always been a part of the Company.



In January 2000,
the Company acquired a 19% interest in CHI, an Internet health portal development company, with an option to acquire the additional interest. Effective September 30, 2001 the Company acquired the remaining equity interests of CHI, which the Company
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
consolidated subsidiary. Prior to the complete acquisition of CHI, the Company had accounted for its 19% interest in CHI on the cost basis. In accordance with APB 18, all prior period financial statements have been restated to account for CHI as
though the Company had accounted for its investment on the equity method.



6. Property and Equipment



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



|                                                 |  | March 31, |          |   | Useful Lives
|------------------------------------------------ |  | --------- | -------- | - | ------------
|                                                 |  | 2003      |          |   | 2002        
|Land and Building                                |  | $         | 11,988   |   |             
|Leasehold Improvements                           |  |           | 23,917   |   |             
|Furniture and Fixtures                           |  |           | 17,696   |   |             
|Computer Equipment and Software                  |  |           | 186,366  |   |             
|Equipment                                        |  |           | 11,874   |   |             
|                                                 |  |           |          |   |             
|                                                 |  |           | 251,841  |   |             
|Less  Accumulated depreciation and amortization |  |           | (100,641 | ) |             
|                                                 |  |           |          |   |             
|                                                 |  | $         | 151,200  |   |             
|                                                 |  |           |          |   |             



Depreciation and amortization expense
for 2003, 2002 and 2001 was $34.7 million, $27.2 million and $17.1 million respectively.



7. Debt



The Companys long-term
debt consists of the following (in thousands):



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|                                                                                                                                                                                     |  | March 31, |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | -------
|                                                                                                                                                                                     |  | 2003      |        
|Asset Securitization Facility, with interest at funding agents A-1 +/P-1commercial paper rate of 1.33% and 1.91%,
respectively,plus .85% and .65%, respectively, due December, 2006 |  | $         | 259,998
|                                                                                                                                                                                     |  |          
|Senior Notes, with interest at 8 1⁄2%, due March, 2008                                                                                                                                 |  |           | 187,825
|                                                                                                                                                                                     |  |          
|Other                                                                                                                                                                                |  |           | 188    
|                                                                                                                                                                                     |  |          
|Term B, with interest at LIBOR plus 3.25%, due October, 2007                                                                                                                         |  |           |       
|                                                                                                                                                                                     |  |           |        
|                                                                                                                                                                                     |  |           | 448,011
|Less current portion                                                                                                                                                                 |  |           | (188   
|                                                                                                                                                                                     |  |           |        
|Total Long Term Debt                                                                                                                                                                 |  | $         | 447,823
|                                                                                                                                                                                     |  |           |        



In conjunction with the acquisition of
PCS, the Company 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 (Term A and Term B) totaling $550 million. The Term
A note was due on October 2, 2005 but was fully repaid in fiscal 2002 from the proceeds of the Companys equity offering along with a portion of the Term B note, see Note 12. The remainder of the Term B note was repaid with the proceeds from
the Asset Securitization Facility, discussed below. The $100 million interim facility was eliminated, and the revolving credit facility expires on October 2, 2005. As of March 31, 2003, the Company had no amount outstanding under this revolving
credit facility.



In September 2002, the Company amended its Senior Secured
Credit Facility to increase the size of its revolver from $175 million to $275 million. No amounts were outstanding under the revolving facility at March 31, 2003. 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.



Also in connection with its acquisition of PCS, the Company issued to Rite Aid, $200 million in senior subordinated notes. In March 2001,
the Company issued $200 million of 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 the second quarter of fiscal year 2003,
the Company repurchased a portion of the Senior Notes with a face value of approximately $12.2 million in open market transactions. 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. There are no restrictions on the ability of the guarantors to pay dividends, make loans or advances to the parent.



The Senior Notes are guaranteed until the due date or when repaid, if sooner, for the outstanding balance, by all of the Companys
existing and future domestic subsidiaries (Guarantors), other than receivables subsidiaries, as defined in the Senior Notes indenture, and certain other subsidiaries not otherwise required to be guarantors under the terms of the indenture. After
issuance of the Senior Notes, the Company created subsidiaries that are not required to guarantee the Senior Notes. All of the subsidiaries that have guaranteed the Senior Notes are 100% owned, directly or indirectly by AdvancePCS. Each of the
Guarantors jointly and severally, unconditionally guarantee that the principal, and interest, as well as, penalties, fees, indemnifications, reimbursements and damages, if any, payable under the Senior Notes will be promptly paid in full when due,
whether at maturity, by acceleration, redemption or otherwise. See the guarantor condensed consolidating financial statements in Note 8.



In December 2001, the Company securitized certain of its accounts receivable pursuant to a $150 million facility (the Asset Securitization Facility). The Company used the
proceeds to repay $150 million of its Term B note that had a balance outstanding of approximately $300 million at that time. In June 2002, the Company increased its Asset Securitization Facility to $300 million. The Company used the proceeds to pay
the remaining $150 million of its Term B note. The Asset Securitization Facility is included in the Companys debt balance as of March 31, 2003 and 2002 and will continue to be reflected on-balance sheet.



In connection with the bank debt repayments made during fiscal year 2003 and 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 $2.4 million and $8.8 million ($1.5 million and $5.3 million, net of taxes), respectively.



In order to hedge variable rate interest payments made in conjunction with the Companys debt, the Company entered into an interest rate protection agreement that
has fixed the LIBOR rate as of November 7, 2000 at 6.60% for $400 million. The notional amount was reduced by $100 million in October 2001 and 2002. As of March 31, 2003, the notional amount was $200 million. The swap will expire in October 2003.
The Company is accounting for this interest rate swap as a cash flow hedge in accordance with SFAS 133. The fair value of the swap, an obligation of $5.6 million and $14.5 million at March 31,



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2003 and 2002, respectively, 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. The related gains or losses on this agreement are deferred in stockholders equity as a component of other comprehensive income. 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. During the years ended March 31, 2003 and 2002, the amount of changes
in other comprehensive income, net of taxes was $5.4 million and $8.8 million, respectively, and the net amount reclassified into earnings (interest expense) was $5.8 million and $1.6 million, respectively. The estimated net amount of the existing
losses reported in accumulated other comprehensive income at March 31, 2003 that are expected to be reclassified into earnings as interest expense within the next 12 months is $5.6 million.



This agreement is a cash flow hedge, as it requires the Company 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 the Companys swap agreement is reported on the consolidated balance sheets in other
liabilities ($5.6 million pre-tax at March 31, 2003) and the related gains or losses on this agreement are deferred in stockholders equity as a component of other comprehensive income (a charge of $5.4 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. As the hedge expires in October 2003, the entire amount of the existing gains
or losses reported in accumulated other comprehensive income at March 31, 2003 is expected to be reclassified into earnings in fiscal 2004.



The following represents, as of March 31, 2003, the schedule of current maturities for the Companys debt (in thousands):



|Years Ending March 31, |  |   |        
|---------------------- |  | - | -------
|2004                   |  | $ | 188    
|2005                   |  |   |       
|2006                   |  |   | 259,998
|2007                   |  |   |       
|2008                   |  |   | 187,825
|Thereafter             |  |   |       
|                       |  |   |        
|Total long-term debt   |  | $ | 448,011
|                       |  |   |        



8. Condensed Consolidating
Financial Information



In March 2001, the Company issued $200 million of
Senior Notes, which were unconditionally guaranteed, jointly and severally, by all of the existing and future domestic subsidiaries, other than subsidiaries treated as unrestricted subsidiaries or receivables subsidiaries, each as defined in the
Indenture. Subsequent to the issuance of the Senior Notes and in accordance with the terms of the Indenture, the Company has created unrestricted subsidiaries and receivables subsidiaries that have not guaranteed these notes. Presented below are
condensed consolidating balance sheets as of March 31, 2003 and 2002, the condensed consolidating statements of operations for the year ended March 31, 2003, 2002 and 2001, and the condensed consolidating statement of cash flows for the year ended
March 31, 2003, 2002 and 2001 of AdvancePCS (Parent and Issuer), guarantor subsidiaries (Guarantor Subsidiaries) and the subsidiaries which are not guarantors (Non-guarantor Subsidiaries) (in thousands):



Condensed Consolidating Balance Sheets:



|                                     |  | Parent |           | GuarantorSubsidiaries |   |           | Non-guarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated
|------------------------------------ |  | ------ | --------- | --------------------- | - | --------- | ------------------------- |  | - | ------------ | - |  | ------------
|As of March 31, 2003                 |  |        |           |                       |   |           |                           |  |   |              |   |  |             
|Cash                                 |  | $      | 96,490    |                       | $ |          |                           |  | $ | 14,757       |   |  | $           
|Accounts receivable                  |  |        |          |                       |   | 1,087,425 |                           |  |   | 540,506      |   |  |             
|Inventories                          |  |        |          |                       |   | 95,756    |                           |  |   | 3,673        |   |  |             
|Prepaid expenses and other           |  |        |          |                       |   | 25,647    |                           |  |   |             |   |  |             
|                                     |  |        |           |                       |   |           |                           |  |   |              |   |  |             
|Current assets                       |  |        | 96,490    |                       |   | 1,208,828 |                           |  |   | 558,936      |   |  |             
|Property and equipment, net          |  |        |          |                       |   | 150,543   |                           |  |   | 657          |   |  |             
|Equity investment                    |  |        | 413,829   |                       |   |          |                           |  |   |             |   |  |             
|Intercompany                         |  |        | 649,175   |                       |   | (398,569  | )                         |  |   | (250,606     | ) |  |             
|Goodwill and intangible assets, net  |  |        |          |                       |   | 1,628,677 |                           |  |   | 643          |   |  |             
|Other assets                         |  |        | 14,899    |                       |   | 53,069    |                           |  |   | 2            |   |  |             
|                                     |  |        |           |                       |   |           |                           |  |   |              |   |  |             
|Total assets                         |  | $      | 1,174,393 |                       | $ | 2,642,548 |                           |  | $ | 309,632      |   |  | $           
|                                     |  |        |           |                       |   |           |                           |  |   |              |   |  |             
|Current liabilities                  |  | $      | 10,446    |                       | $ | 2,081,692 |                           |  | $ | 20,404       |   |  | $           
|Long-term debt, less current portion |  |        | 187,825   |                       |   |          |                           |  |   | 259,998      |   |  |             
|Deferred income taxes                |  |        |          |                       |   | 147,739   |                           |  |   | 64           |   |  |             
|Other liabilities                    |  |        | 5,648     |                       |   | 25,711    |                           |  |   | 2,743        |   |  |             
|                                     |  |        |           |                       |   |           |                           |  |   |              |   |  |             
|Total liabilities                    |  |        | 203,919   |                       |   | 2,255,142 |                           |  |   | 283,209      |   |  |             
|Common stock                         |  |        | 955       |                       |   |          |                           |  |   |             |   |  |             
|Additional paid in capital           |  |        | 750,446   |                       |   | (1,275    | )                         |  |   | 1,275        |   |  |             



F-22



---

##### Table of Contents

|Other comprehensive income                 |  |   | (11,596   | ) |  |   |          |   |  |   |         |   |  |   |         |   |  |   | (11,596   | )
|------------------------------------------ |  | - | --------- | - |  | - | --------- | - |  | - | -------- | - |  | - | -------- | - |  | - | --------- | -
|Equity earnings                            |  |   | 413,829   |   |  |   |          |   |  |   |         |   |  |   | (413,829 | ) |  |   |          |  
|Accumulated earnings                       |  |   | (73,309   | ) |  |   | 388,681   |   |  |   | 25,148   |   |  |   |         |   |  |   | 340,520   |  
|Treasury stock                             |  |   | (109,851  | ) |  |   |          |   |  |   |         |   |  |   |         |   |  |   | (109,851  | )
|                                           |  |   |           |   |  |   |           |   |  |   |          |   |  |   |          |   |  |   |           |  
|Stockholders equity                       |  |   | 970,474   |   |  |   | 387,406   |   |  |   | 26,423   |   |  |   | (413,829 | ) |  |   | 970,474   |  
|                                           |  |   |           |   |  |   |           |   |  |   |          |   |  |   |          |   |  |   |           |  
|Total liabilities and stockholders equity |  | $ | 1,174,393 |   |  | $ | 2,642,548 |   |  | $ | 309,632  |   |  | $ | (413,829 | ) |  | $ | 3,712,744 |  
|                                           |  |   |           |   |  |   |           |   |  |   |          |   |  |   |          |   |  |   |           |  
|                                           |  |   |           |   | 
|As of March 31, 2002                       |  |   |           |   |  |   |           |   |  |   |          |   |  |   |          |   |  |   |           |  
|Cash                                       |  | $ | 116,983   |   |  | $ |          |   |  | $ | 22,162   |   |  | $ |         |   |  | $ | 139,145   |  
|Accounts receivable                        |  |   |          |   |  |   | 883,204   |   |  |   | 342,725  |   |  |   |         |   |  |   | 1,225,929 |  
|Inventories                                |  |   |          |   |  |   | 65,336    |   |  |   |         |   |  |   |         |   |  |   | 65,336    |  
|Prepaid expenses and other                 |  |   | 946       |   |  |   | 17,062    |   |  |   |         |   |  |   |         |   |  |   | 18,008    |  
|                                           |  |   |           |   |  |   |           |   |  |   |          |   |  |   |          |   |  |   |           |  
|Current assets                             |  |   | 117,929   |   |  |   | 965,602   |   |  |   | 364,887  |   |  |   |         |   |  |   | 1,448,418 |  
|Property and equipment, net                |  |   |          |   |  |   | 121,008   |   |  |   | 269      |   |  |   |         |   |  |   | 121,277   |  
|Equity investment                          |  |   | 219,818   |   |  |   | 1,275     |   |  |   |         |   |  |   | (221,093 | ) |  |   |          |  
|Intercompany                               |  |   | 894,441   |   |  |   | (689,155  | ) |  |   | (205,286 | ) |  |   |         |   |  |   |          |  
|Goodwill and intangible assets, net        |  |   |          |   |  |   | 1,571,966 |   |  |   |         |   |  |   |         |   |  |   | 1,571,966 |  
|Other assets                               |  |   | 24,301    |   |  |   | 58,002    |   |  |   |         |   |  |   |         |   |  |   | 82,303    |  
|                                           |  |   |           |   |  |   |           |   |  |   |          |   |  |   |          |   |  |   |           |  
|Total assets                               |  | $ | 1,256,489 |   |  | $ | 2,028,698 |   |  | $ | 159,870  |   |  | $ | (221,093 | ) |  | $ | 3,223,964 |  
|                                           |  |   |           |   |  |   |           |   |  |   |          |   |  |   |          |   |  |   |           |  
|Current liabilities                        |  | $ | 15,479    |   |  | $ | 1,657,982 |   |  | $ | 3,881    |   |  | $ |         |   |  | $ | 1,677,342 |  
|Long-term debt, less current portion       |  |   | 349,263   |   |  |   |          |   |  |   | 150,000  |   |  |   |         |   |  |   | 499,263   |  
|Deferred income taxes                      |  |   |          |   |  |   | 134,840   |   |  |   | 38       |   |  |   |         |   |  |   | 134,878   |  
|Other liabilities                          |  |   | 14,487    |   |  |   | 20,734    |   |  |   |         |   |  |   |         |   |  |   | 35,221    |  
|                                           |  |   |           |   |  |   |           |   |  |   |          |   |  |   |          |   |  |   |           |  
|Total liabilities                          |  |   | 379,229   |   |  |   | 1,813,556 |   |  |   | 153,919  |   |  |   |         |   |  |   | 2,346,704 |  
|Common stock                               |  |   | 929       |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   | 929       |  
|Additional paid in capital                 |  |   | 715,662   |   |  |   |          |   |  |   | 2,500    |   |  |   | (1,275   | ) |  |   | 716,887   |  
|Other comprehensive income                 |  |   | (12,686   | ) |  |   |          |   |  |   |         |   |  |   |         |   |  |   | (12,686   | )
|Equity earnings                            |  |   | 219,818   |   |  |   |          |   |  |   |         |   |  |   | (219,818 | ) |  |   |          |  
|Accumulated earnings                       |  |   | (46,463   | ) |  |   | 215,142   |   |  |   | 3,451    |   |  |   |         |   |  |   | 172,130   |  
|                                           |  |   |           |   |  |   |           |   |  |   |          |   |  |   |          |   |  |   |           |  
|Stockholders equity                       |  |   | 877,260   |   |  |   | 215,142   |   |  |   | 5,951    |   |  |   | (221,093 | ) |  |   | 877,260   |  
|                                           |  |   |           |   |  |   |           |   |  |   |          |   |  |   |          |   |  |   |           |  
|Total liabilities and stockholders equity |  | $ | 1,256,489 |   |  | $ | 2,028,698 |   |  | $ | 159,870  |   |  | $ | (221,093 | ) |  | $ | 3,223,964 |  
|                                           |  |   |           |   |  |   |           |   |  |   |          |   |  |   |          |   |  |   |           |  



F-23



---

##### Table of Contents

Condensed Consolidating Statement of Operations:



|                                                                |  | Parent |         |   | GuarantorSubsidiaries |   |            | Non-guarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |         
|--------------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ---------- | ------------------------- |  | - | ------------ | - |  | ------------ | --------
|Year Ended March 31, 2003                                       |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Total revenues                                                  |  | $      |        |   |                       | $ | 14,035,895 |                           |  | $ | 128,969      |   |  | $            | (53,985 
|Cost of operations                                              |  |        |        |   |                       |   | 13,753,040 |                           |  |   | 87,421       |   |  |              | (53,985 
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Operating income                                                |  |        |        |   |                       |   | 282,855    |                           |  |   | 41,548       |   |  |              |        
|Interest (expense) income, net                                  |  |        | (36,871 | ) |                       |   | 6,488      |                           |  |   | (8,189       | ) |  |              |        
|Loss from joint venture                                         |  |        | (5,036  | ) |                       |   |           |                           |  |   |             |   |  |              |        
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Income (loss) before income taxes                               |  |        | (41,907 | ) |                       |   | 289,343    |                           |  |   | 33,359       |   |  |              |        
|Income tax benefit (provision)                                  |  |        | 16,553  |   |                       |   | (115,805   | )                         |  |   | (11,662      | ) |  |              |        
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Net income (loss) before equity earnings and extraordinary loss |  |        | (25,354 | ) |                       |   | 173,538    |                           |  |   | 21,697       |   |  |              |        
|Equity earnings in subsidiaries                                 |  |        | 195,235 |   |                       |   |           |                           |  |   |             |   |  |              | (195,235
|Extraordinary loss on early retirement of debt, net of taxes    |  |        | (1,491  | ) |                       |   |           |                           |  |   |             |   |  |              |        
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Net income                                                      |  | $      | 168,390 |   |                       | $ | 173,538    |                           |  | $ | 21,697       |   |  | $            | (195,235
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|                                                                |  |        |         |   |                      
|Year Ended March 31, 2002                                       |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Total revenues                                                  |  | $      |        |   |                       | $ | 12,172,394 |                           |  | $ | 10,361       |   |  | $            | (8,634  
|Cost of operations                                              |  |        |        |   |                       |   | 11,918,747 |                           |  |   | 3,497        |   |  |              | (8,634  
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Operating income                                                |  |        |        |   |                       |   | 253,647    |                           |  |   | 6,864        |   |  |              |        
|Interest (expense) income, net                                  |  |        | (65,143 | ) |                       |   | 9,176      |                           |  |   | (1,612       | ) |  |              |        
|Loss from joint venture                                         |  |        | (2,871  | ) |                       |   |           |                           |  |   |             |   |  |              |        
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Income (loss) before income taxes                               |  |        | (68,014 | ) |                       |   | 262,823    |                           |  |   | 5,252        |   |  |              |        
|Income tax benefit (provision)                                  |  |        | 26,865  |   |                       |   | (104,079   | )                         |  |   | (1,801       | ) |  |              |        
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Net income (loss) before equity earnings and extraordinary loss |  |        | (41,149 | ) |                       |   | 158,744    |                           |  |   | 3,451        |   |  |              |        
|Equity earnings in subsidiaries                                 |  |        | 162,195 |   |                       |   |           |                           |  |   |             |   |  |              | (162,195
|Extraordinary loss on early retirement of debt, net of taxes    |  |        | (5,315  | ) |                       |   |           |                           |  |   |             |   |  |              |        
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Net income                                                      |  | $      | 115,731 |   |                       | $ | 158,744    |                           |  | $ | 3,451        |   |  | $            | (162,195
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|                                                                |  |        |         |   |                      
|Year Ended March 31, 2001 (unaudited)                           |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Total revenues                                                  |  | $      |        |   |                       | $ | 6,490,391  |                           |  | $ |             |   |  | $            |        
|Cost of operations                                              |  |        |        |   |                       |   | 6,401,344  |                           |  |   |             |   |  |              |        
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Operating income                                                |  |        |        |   |                       |   | 89,047     |                           |  |   |             |   |  |              |        
|Interest (expense) income, net                                  |  |        | (45,036 | ) |                       |   | 3,154      |                           |  |   |             |   |  |              |        
|Merger costs and other                                          |  |        | (1,200  | ) |                       |   |           |                           |  |   |             |   |  |              |        
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Income (loss) before income taxes                               |  |        | (46,236 | ) |                       |   | 92,201     |                           |  |   |             |   |  |              |        
|Income tax benefit (provision)                                  |  |        | 24,413  |   |                       |   | (48,704    | )                         |  |   |             |   |  |              |        
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Net income (loss) before equity earnings                        |  |        | (21,823 | ) |                       |   | 43,497     |                           |  |   |             |   |  |              |        
|Equity earnings in subsidiaries                                 |  |        | 43,497  |   |                       |   |           |                           |  |   |             |   |  |              | (43,497 
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         
|Net income                                                      |  | $      | 21,674  |   |                       | $ | 43,497     |                           |  | $ |             |   |  | $            | (43,497 
|                                                                |  |        |         |   |                       |   |            |                           |  |   |              |   |  |              |         



F-24



---

##### Table of Contents

Condensed Consolidating Statement of Cash Flows:



|                                                    |  | Parent |          |   | GuarantorSubsidiaries |   |          | Non-guarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |       
|--------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | -------- | ------------------------- |  | - | ------------ | - |  | ------------ | ------
|Year Ended March 31, 2003                           |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Net cash (used in) provided by operating activities |  | $      | (27,183  | ) |                       | $ | 456,054  |                           |  | $ | (160,268     | ) |  | $            |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|Cash flows from investing activities:               |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Proceeds from sale of property, plant and equipment |  |        |         |   |                       |   | 1,201    |                           |  |   |             |   |  |              |      
|Purchase of property and equipment                  |  |        |         |   |                       |   | (68,750  | )                         |  |   | (589         | ) |  |              |      
|Other investing activities                          |  |        | (1,900   | ) |                       |   | (75,493  | )                         |  |   | (1,868       | ) |  |              |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Net cash used in investing activities               |  |        | (1,900   | ) |                       |   | (143,042 | )                         |  |   | (2,457       | ) |  |              |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|Cash flows from financing activities:               |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Net proceeds from issuance of Common Stock          |  |        | 17,170   |   |                       |   |         |                           |  |   |             |   |  |              |      
|Purchase of Class A Common StockTreasury Stock     |  |        | (111,468 | ) |                       |   |         |                           |  |   |             |   |  |              |      
|Deferred financing costs                            |  |        | (1,655   | ) |                       |   |         |                           |  |   |             |   |  |              |      
|Repayment of debt                                   |  |        | (163,147 | ) |                       |   |         |                           |  |   |             |   |  |              |      
|Net borrowings on asset securitization facility     |  |        |         |   |                       |   |         |                           |  |   | 109,998      |   |  |              |      
|Net intercompany transactions                       |  |        | 267,690  |   |                       |   | (313,012 | )                         |  |   | 45,322       |   |  |              |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Net cash provided by (used in) financing activities |  |        | 8,590    |   |                       |   | (313,012 | )                         |  |   | 155,320      |   |  |              |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|Decrease in cash and cash equivalents               |  |        | (20,493  | ) |                       |   |         |                           |  |   | (7,405       | ) |  |              |      
|                                                    |  |        |          |   |                      
|Cash and cash equivalents, beginning of year        |  |        | 116,983  |   |                       |   |         |                           |  |   | 22,162       |   |  |              |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|Cash and cash equivalents, end of year              |  | $      | 96,490   |   |                       | $ |         |                           |  | $ | 14,757       |   |  | $            |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|                                                    |  | Parent |          |   | GuarantorSubsidiaries |   |          | Non-guarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |       
|Year Ended March 31, 2002                           |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Net cash (used in) provided by operating activities |  | $      | (45,180  | ) |                       | $ | 523,814  |                           |  | $ | (335,347     | ) |  | $            |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|Cash flows from investing activities:               |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Purchase of property and equipment                  |  |        |         |   |                       |   | (50,836  | )                         |  |   | (276         | ) |  |              |      
|Other investing activities                          |  |        | (14,624  | ) |                       |   |         |                           |  |   | 2,500        |   |  |              | (1,225
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Net cash (used in) provided by investing activities |  |        | (14,624  | ) |                       |   | (50,836  | )                         |  |   | 2,224        |   |  |              | (1,225
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|Cash flows from financing activities:               |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Net proceeds from issuance of Common Stock          |  |        | 306,636  |   |                       |   |         |                           |  |   |             |   |  |              |      
|Capital contributionSpecialtyRx                    |  |        |         |   |                       |   |         |                           |  |   |             |   |  |              | 1,225 
|Deferred financing costs                            |  |        | (2,756   | ) |                       |   |         |                           |  |   |             |   |  |              |      
|Repayment of debt                                   |  |        | (409,834 | ) |                       |   |         |                           |  |   |             |   |  |              |      
|Net activity on credit facilities                   |  |        | (95,000  | ) |                       |   |         |                           |  |   |             |   |  |              |      
|Net borrowings on asset securitization facility     |  |        |         |   |                       |   |         |                           |  |   | 150,000      |   |  |              |      
|Net intercompany transactions                       |  |        | 267,693  |   |                       |   | (472,978 | )                         |  |   | 205,285      |   |  |              |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Net cash provided by (used in) financing activities |  |        | 66,739   |   |                       |   | (472,978 | )                         |  |   | 355,285      |   |  |              | 1,225 
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|Increase in cash and cash equivalents               |  |        | 6,935    |   |                       |   |         |                           |  |   | 22,162       |   |  |              |      
|                                                    |  |        |          |   |                      
|Cash and cash equivalents, beginning of year        |  |        | 110,048  |   |                       |   |         |                           |  |   |             |   |  |              |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|Cash and cash equivalents, end of year              |  | $      | 116,983  |   |                       | $ |         |                           |  | $ | 22,162       |   |  | $            |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|                                                    |  | Parent |          |   | GuarantorSubsidiaries |   |          | Non-guarantorSubsidiaries |  |   | Eliminations |   |  | Consolidated |       
|Year Ended March 31, 2001 (unaudited)               |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Net cash provided by operating activities           |  | $      | (15,369  | ) |                       | $ | 107,649  |                           |  | $ |             |   |  | $            |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|Cash flows from investing activities:               |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Purchase of property and equipment                  |  |        |         |   |                       |   | (41,197  | )                         |  |   |             |   |  |              |      
|Other investing activities                          |  |        | (722,045 | ) |                       |   |         |                           |  |   |             |   |  |              |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Net cash used in investing activities               |  |        | (722,045 | ) |                       |   | (41,197  | )                         |  |   |             |   |  |              |      
|                                                    |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|                                                    |  |        |          |   |                      
|Cash flows from financing activities:               |  |        |          |   |                       |   |          |                           |  |   |              |   |  |              |       
|Net proceeds from issuance of Common Stock          |  |        | 6,759    |   |                       |   |         |                           |  |   |             |   |  |              |      
|Stock issued to fund acquisition                    |  |        | 150,000  |   |                       |   |         |                           |  |   |             |   |  |              |      
|Issuance of debt to fund acquisition                |  |        | 620,000  |   |                       |   |         |                           |  |   |             |   |  |              |      
|Issuance of senior notes to fund acquisition        |  |        | 200,000  |   |                       |   |         |                           |  |   |             |   |  |              |      
|Deferred financing costs                            |  |        | (18,903  | ) |                       |   | (3,119   | )                         |  |   |             |   |  |              |      
|Net activity on credit facilities                   |  |        | (25,000  | ) |                       |   |         |                           |  |   |             |   |  |              |      
|Repayment of Rite Aid senior subordinated notes     |  |        | (200,000 | ) |                       |   |         |                           |  |   |             |   |  |              |      



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##### Table of Contents

|Distributions to FFI owners                         |  |   | (3,970  | ) |  |   |        |   |  |   |  |  |   |  |  |   | (3,970  | )
|--------------------------------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | - |  | - | - |  | - | ------- | -
|Net intercompany transactions                       |  |   | 63,333  |   |  |   | (63,333 | ) |  |   |  |  |   |  |  |   |        |  
|                                                    |  |   |         |   |  |   |         |   |  |   |   |  |   |   |  |   |         |  
|Net cash provided by (used in) financing activities |  |   | 792,219 |   |  |   | (66,452 | ) |  |   |  |  |   |  |  |   | 725,767 |  
|                                                    |  |   |         |   |  |   |         |   |  |   |   |  |   |   |  |   |         |  
|                                                    |  |   |         |   | 
|Increase in cash and cash equivalents               |  |   | 54,805  |   |  |   |        |   |  |   |  |  |   |  |  |   | 54,805  |  
|                                                    |  |   |         |   | 
|Cash and cash equivalents, beginning of year        |  |   | 55,243  |   |  |   |        |   |  |   |  |  |   |  |  |   | 55,243  |  
|                                                    |  |   |         |   |  |   |         |   |  |   |   |  |   |   |  |   |         |  
|                                                    |  |   |         |   | 
|Cash and cash equivalents, end of year              |  | $ | 110,048 |   |  | $ |        |   |  | $ |  |  | $ |  |  | $ | 110,048 |  
|                                                    |  |   |         |   |  |   |         |   |  |   |   |  |   |   |  |   |         |  



9. Stock Option Plan



At March 31, 2003, the Company had two stock-based compensation plans:
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 that equal or exceed the market value of the Common Stock at the date of grant; however, exceptions to this requirement may be granted by the compensation committee or Board under the
1997 Nonstatutory Stock Option Plan. As of March 31, 2003, the number of shares of Common Stock issuable under the Plans may not exceed 24.0 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. In addition, options granted to certain employees may become 100% vested in certain
circumstances involving termination of their employment with the Company. The options are exercisable for a period not to exceed 10 years from the date of grant. As of March 31, 2003, 6.0 million options were vested at exercise prices of $0.30 to
$34.65 per share. The Company recognized compensation expense related to options granted in 2000 of approximately $824,000, $824,000 and $1.3 million for the years ended March 31, 2003, 2002 and 2001, 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.



|                                               |  | 2003              |   | 2002 |                     | 2001 
|---------------------------------------------- |  | ----------------- | - | ---- | ------------------- | -----
|                                               |  | Shares            |   |      | Wtd. Avg. Ex. Price |      
|Outstanding at beginning of year               |  | 15,387,000        |   |      | $                   | 12.99
|Granted                                        |  | 1,053,000         |   |      |                     | 25.62
|Exercised                                      |  | (2,188,000        | ) |      |                     | 7.84 
|Canceled                                       |  | (912,000          | ) |      |                     | 16.92
|                                               |  |                   |   |      |                     |      
|Outstanding at end of year                     |  | 13,340,000        |   |      | $                   | 14.56
|                                               |  |                   |   |      |                     |      
|Exercisable at end of year                     |  | 5,964,000         |   |      | $                   | 10.68
|Price range                                    |  | $ 0.30 to $ 34.65 |   |      |                     |      
|Weighted average fair value of options granted |  | $10.49            |   |      |                     |      



The following table reflects the
weighted average exercise price and weighted average contractual life of various exercise price ranges of the 13.3 million options outstanding as of March 31, 2003.



|                     |  | Options Outstanding |  | Options Exercisable         
|-------------------- |  | ------------------- |  | ----------------------------
|Exercise Price Range |  | Shares              |  | Weighted Avg. Exercise Price
|$0.30 to $ 3.46      |  | 898,000             |  | $                           
|$3.47 to $ 6.93      |  | 177,000             |  |                             
|$6.94 to $10.39      |  | 6,303,000           |  |                             
|$10.40 to $13.86     |  | 477,000             |  |                             
|$13.87 to $17.32     |  | 2,156,000           |  |                             
|$17.33 to $20.79     |  | 268,000             |  |                             
|$20.80 to $24.25     |  | 270,000             |  |                             
|$24.26 to $27.72     |  | 365,000             |  |                             
|$27.73 to $31.18     |  | 2,032,000           |  |                             
|$31.19 to $34.65     |  | 394,000             |  |                             
|                     |  |                     |  |                             
|                     |  |                     |  |                             
|$0.30 to $34.65      |  | 13,340,000          |  | $                           



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10. 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, 2003 and 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):



|                                                                |  | Year Ended March 31, 2003    |         |   | Year Ended March 31, 2002 |  
|--------------------------------------------------------------- |  | ---------------------------- | ------- | - | ------------------------- | -
|                                                                |  | Defined Benefit Pension Plan |         |   | Retiree Health Benefits   |  
|Change in benefit obligation:                                   |  |                              |         |   |                           |  
|Benefit obligation at beginning of fiscal year                  |  | $                            | 24,973  |   |                           | $
|Service cost                                                    |  |                              | 945     |   |                           |  
|Interest cost                                                   |  |                              | 1,782   |   |                           |  
|Plan amendment loss / (gain)                                    |  |                              | 16      |   |                           |  
|Actuarial loss / (gain)                                         |  |                              | 4,285   |   |                           |  
|Benefits paid                                                   |  |                              | (590    | ) |                           |  
|                                                                |  |                              |         |   |                           |  
|Benefit obligation end of fiscal year                           |  |                              | 31,411  |   |                           |  
|                                                                |  |                              |         |   |                           |  
|                                                                |  |                              |         |  
|Change in plan assets:                                          |  |                              |         |   |                           |  
|Fair value of plan assets at beginning of fiscal year           |  |                              | 23,033  |   |                           |  
|Actual return on plan assets                                    |  |                              | (2,499  | ) |                           |  
|Employer contribution                                           |  |                              | 15      |   |                           |  
|Benefits paid                                                   |  |                              | (590    | ) |                           |  
|                                                                |  |                              |         |   |                           |  
|Fair value of plan assets at end of fiscal year                 |  |                              | 19,959  |   |                           |  
|                                                                |  |                              |         |  
|Funded status                                                   |  |                              | (11,452 | ) |                           |  
|Plan amendment loss / (gain)                                    |  |                              | 15      |   |                           |  
|Unrecognized net actuarial loss                                 |  |                              | 15,904  |   |                           |  
|                                                                |  |                              |         |   |                           |  
|Net amount recognized loss / (gain)                             |  |                              | 4,467   |   |                           |  
|                                                                |  |                              |         |  
|Amounts recognized in consolidated balance sheets consisted of: |  |                              |         |   |                           |  
|Accrued benefit liability                                       |  |                              | (9,052  | ) |                           |  
|Intangible asset                                                |  |                              | 30      |   |                           |  
|Deferred tax asset                                              |  |                              | 5,335   |   |                           |  
|Charge to other comprehensive income, net of tax                |  |                              | 8,154   |   |                           |  
|                                                                |  |                              |         |   |                           |  
|Net amount recognized loss / (gain)                             |  | $                            | 4,467   |   |                           | $
|                                                                |  |                              |         |   |                           |  
|                                                                |  |                              |         |  
|Weighted-average assumptions as of end of fiscal year:          |  |                              |         |   |                           |  
|Discount rate                                                   |  |                              | 6.5     | % |                           |  
|Expected return on plan assets                                  |  |                              | 8.5     | % |                           |  
|Rate of compensation increase                                   |  |                              | 5.0     | % |                           |  



Health care trend rates were assumed
to increase at an annual rate of 8.5% in 2004 and decrease 0.5% per year to 5.5% in 2010 and held constant thereafter.



Net pension and retiree health benefit expense for the fiscal years ended March 31, 2003, 2002 and 2001, respectively, include the following components (in thousands):



|                                         |  | March 31, 2003               |        |   | March 31, 2002          |   | March 31, 2001
|---------------------------------------- |  | ---------------------------- | ------ | - | ----------------------- | - | --------------
|                                         |  | Defined Benefit Pension Plan |        |   | Retiree Health Benefits |   |               
|Components of net periodic benefit cost: |  |                              |        |   |                         |   |               
|Service cost                             |  | $                            | 945    |   |                         | $ | 1,839         
|Interest cost                            |  |                              | 1,782  |   |                         |   | 787           
|Expected return on plan assets           |  |                              | (2,393 | ) |                         |   |              
|Amortization of prior service costs      |  |                              | 1      |   |                         |   | (348          
|Amortization of net loss (gain)          |  |                              | 1      |   |                         |   | 201           
|                                         |  |                              |        |   |                         |   |               
|Net periodic benefit cost                |  | $                            | 336    |   |                         | $ | 2,479         
|                                         |  |                              |        |   |                         |   |               



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, 2003 accumulated post retirement benefit obligation would increase by
$2.0 million and the aggregate of the service cost and interest components of the 2003 annual expense would increase by $544,000. A one percentage point decrease in these rates would decrease the March 31, 2003 accumulated post retirement benefit
obligation by $1.6 million and the aggregate of the 2003 service cost and interest cost components of the 2003 annual expense would decrease by $435,000.



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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 defined benefit pension plan was acquired with the PCS acquisition and was frozen to new participants since the
acquisition date.



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 $6.7 million, $5.8 million and $2.7 million during fiscal years 2003, 2002 and 2001, respectively.



11. Stock Transactions



Share Repurchase Program



On June 6,
2002, the Company filed a Form 8-K announcing the authorization from the board of directors of a stock repurchase program of up to $150 million of its outstanding shares of Class A common stock in the open market or private transactions. During the
year ended March 31, 2003, the Company purchased 5.5 million shares under this repurchase program, which are included in treasury stock, at a cost of $111.5 million.



TheraCom



In August 2001, the Company acquired Dresing-Lierman, Inc. and its wholly owned subsidiary, TheraCom Inc. (collectively, TheraCom). The purchase price included the
issuance of 1.3 million shares of Class A common stock, of which 384,006 shares were placed in escrow. Of these, 166,956 of the escrowed shares were held in escrow as additional consideration for the acquisition of TheraCom, the payment of which was
conditioned upon TheraCom achieving specific future financial performance goals. The remaining 217,050 shares were held in escrow to satisfy any indemnification claims the Company may have arising out of the acquisition, including those related to
the settlement of certain outstanding TheraCom litigation. All 384,006 shares held in escrow were included in the Companys calculation of basic earnings per share beginning with the quarter ended September 30, 2002.



The Company determined that TheraCom achieved the specified performance goals and in January
2003, 166,956 shares were released to the former TheraCom stockholders from the additional consideration escrow. In January 2003, 34,188 shares of Class A common stock were also withdrawn from the indemnification claims escrow and returned to the
Company to satisfy the Companys indemnification claim arising from the settlement of litigation between TheraCom and one of its former stockholders. Any shares returned to the Company will be held in treasury.



12. 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.
| | - |  | -----------------------------------------------------------------------------



In August 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 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. 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, 2003.



In connection with the 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 Joseph, Littlejohn & Levy, Inc. (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



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common stock. As of March 31, 2003, 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s 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.



Warrants to Purchase Common Stock



In connection with the issuance of the senior subordinated notes described in Note 7, the
Company issued Rite Aid warrants to purchase 1.6 million shares of its Class A common stock. The warrants terminated once the senior subordinated notes were repaid in March 2001.



The Company has issued warrants to five of its key health plan sponsor customers representing the right to purchase up to a total of 1.4
million shares of its 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. At March 31, 2003, approximately one million warrants were exercisable. Subsequent to March 31, 2003, 640,000 warrants were exercised.



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, 2003, for the following (in
thousands):



|Exercise of stock options |  | 17,729
|------------------------- |  | ------
|Conversion of B shares    |  | 12,194
|Exercise of warrants      |  | 1,413 
|                          |  |       
|                          |  | 31,336



13. 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 Paradigm 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 the Company personnel and facilities.



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14. 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, 2003, as follows (in thousands):



|Years Ending March 31, 2004  |  | $ | 37,224 
|---------------------------- |  | - | -------
|2005                         |  |   | 27,079 
|2006                         |  |   | 21,060 
|2007                         |  |   | 14,490 
|2008 and thereafter          |  |   | 127,200
|                             |  |   |        
|Total minimum lease payments |  | $ | 227,053
|                             |  |   |        



Total rent expense incurred in the
years ended March 31, 2003, 2002 and 2001 was approximately $40.9 million, $34.7 million and $18.7 million, respectively. Certain office and facility leases include renewal options at the prevailing market rates at the time of renewal.



15. 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.



In November 1999, PCS Health Systems, Inc. (PCS), a subsidiary of PCS Holding Corporation, which was acquired by the Company in October 2000, received a subpoena from the
Department of Health and Human Services OIG requesting that PCS produce documents in connection with an industry-wide investigation. The investigation is ongoing and being pursued under the direction of the United States Attorneys Office for
the Eastern District of Pennsylvania. Based on public statements from that office, the investigation appears to involve a review of the practices of pharmacy benefit management companies (PBMs) under federal anti-kickback statutes and other laws and
regulations. Specifically, the focus of the 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 in connection with therapeutic intervention activity. The Company provided documents responsive to the subpoena. The United States Attorneys
Office also contacted some of the pharmaceutical manufacturers with which the Company has agreements and has asked them to provide copies of documents relating to their agreements with the Company. The United States Attorney General also issued
Civil Investigative Demands (CIDs) seeking to compel the depositions of eight of the Companys current and former employees.



On September 17, 2002, the United States District Court for the Eastern District of Pennsylvania entered an order holding in abeyance, pending the good faith efforts to
reach a mutual resolution of the outstanding discovery issues, both the Companys dispute with the OIG regarding the scope and enforcement of the subpoena for documents and employee e-mails as well as the issuance of the CIDs. Since entry of
that order the Company has reached agreement with the United States Attorneys office regarding the scope of its document requests and facilitated interviews of certain employees in lieu of the CIDs. The government recently requested the
production of additional documents and interviews, including information relating to the activities of the former Advance Paradigm and the activities of AdvancePCS subsequent to the PCS acquisition, as well as additional information regarding the
Companys arrangements with retail pharmacies. The Company continues to cooperate with the OIG. The Company already has produced certain requested materials and intends to continue to work with the OIG to facilitate the production of further
documents and arrange the requested interviews.



It is not possible to predict
the outcome of this investigation or whether the government will commence any action challenging any of the Companys programs and practices. The Company believes that its programs, including those prior to the PCS acquisition, are in
compliance with the requirements of the anti-kickback and false claims statutes and other applicable laws and regulations. Moreover, other than those actions filed in connection with the enforcement of the subpoena, neither the OIG nor United States
Attorney has filed any actions or claims against AdvancePCS nor have they indicated their intention to do so. Nevertheless, as a result of this investigation, the Company could be subject to scrutiny, further investigation or challenge under federal
or state anti-kickback and false claims statutes or other laws and regulations which could cause the Companys business, profitability and growth prospects to suffer materially.



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 a fiduciary, as that term is defined in the Employee Retirement Income Security Act (ERISA), and that the Company has breached its fiduciary obligations under ERISA
in connection with its development and implementation of formularies, preferred drug listings and intervention



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##### Table of Contents

programs for its sponsors of ERISA health plans. In particular, plaintiffs allege that the Companys 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 as alleged in the complaint. Although the ultimate outcome is uncertain, an adverse determination could potentially cause the Company
to change its business practices with respect to formularies, preferred drug listings, intervention programs, and rebates, potentially reducing its profitability and growth prospects. A class of plaintiffs has not yet been certified and the Company
has opposed such certification. AdvancePCS has denied all allegations of wrongdoing and is vigorously defending this suit.



AdvancePCS is also a party to the following lawsuits, each filed by the same counsel for different plaintiffs in the United States District Court in Arizona, that allege
that AdvancePCS acts as an ERISA fiduciary and that its has breached certain fiduciary obligations under ERISA.



| |  |  | Marantz v. AdvancePCS, case number CIV-01-2413PHX EHC, was a class action filed on or about December 17, 2001. The plaintiff withdrew the class action allegations in April
2002. In March 2003, the court dismissed the plaintiffs apparent effort to reassert possible class action claims. In May 2003, the Marantz case was dismissed based on inadequacies in the plaintiffs pleadings and subsequently the
plaintiff filed and amended complaint purporting to address these inadequacies. Currently, the case is proceeding as a single plaintiff seeking to represent one health plan.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Glanton v. AdvancePCS, case number CIV-02-0507 PHX SRB, previously referred to as Lewis v. AdvancePCS is a class action that was served on or about April 19,
2002. The case purports to be brought on behalf of a class of self-funded health plans; however, a class has not been certified and the Company will oppose such certification. On about March 31, 2003, the Company was served with another
complaint (Mackner v. AdvancePCS, case number CIV-03-0607 PHX MHM) in which the plaintiff, a purported participant in a self-funded plan customer of AdvancePCS, sought to bring action on behalf of that plan. Because the Glanton case purports
to be brought as a class action on behalf of self-funded plans the Company moved to consolidate the Glanton and Mackner cases. On May 14, 2003, the United States District Court consolidated Mackner into Glanton.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As to all the Arizona ERISA cases, the Company believes that it does not act as an ERISA
fiduciary or assume the ERISA fiduciary responsibilities as alleged in the complaints. AdvancePCS believes that, in any event, its business practices are in compliance with ERISA. The ERISA lawsuits seek unspecified monetary damages and injunctive
relief.



The Company was served as a defendant in two California state court
cases in 2003, one of which was brought by the same plaintiffs counsel that represents the plaintiffs in the Arizona ERISA cases. One was filed on or about March 17, 2003 in Los Angeles County Superior Court (American Federation of State,
County & Municipal Employees (AFSCME) v. AdvancePCS, et al., case number BC292227) against AdvancePCS and other leading PBMs. The other was filed on or about March 26, 2003 in Alameda County Superior Court against AdvancePCS and
several other defendants (Irwin v. AdvancePCS, et al., case number RG03088693) and is styled as a class action brought on behalf of a class of all public employees that participate in non-ERISA prescription drug benefit plans; however, a
class has not been certified and the Company will oppose such certification. These two California cases allegedly involve non-ERISA plans and make the same general allegations of wrongdoing as made in the Arizona ERISA actions but are brought under
Californias Unfair Competition Law rather than ERISA. Since the two California actions are related, the Company will seek to have them coordinated.



Although the ultimate outcome in these Arizona ERISA and California non-ERISA cases is uncertain, an adverse determination could potentially cause the Company to change
its business practices with respect to formularies, preferred drug listings, rebates, and intervention programs, potentially reducing the Companys profitability and growth prospects. The Company has denied all allegations of wrongdoing and is
vigorously defending these suits.



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 the Company for violation of Minnesotas deceptive trade practices act, tortious interference with prospective economic advantage and unjust enrichment. Specifically, AARP and United claim that the
Company created confusion among certain AARP members and pharmacists through the launch of its prescription drug discount program. AARP and United requested preliminary and permanent injunctive relief. The Company moved to dismiss the complaint.
Without holding an evidentiary hearing, the district court



F-31



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##### Table of Contents

granted AARP and Uniteds request for preliminary injunctive relief. The Company appealed the district courts
order and on November 1, 2002, the Eighth Circuit Federal Court of Appeals affirmed the district courts order. In addition to the injunctive relief requested, AARP and United have asserted monetary damages of $24 million, including
attorneys fees and costs. In April 2003, AARP and United amended their complaint to include a punitive damages allegation. The Company has denied AARP and Uniteds allegations, moved to dismiss the complaint and are vigorously defending
this matter. In addition, in May 2003 the Company amended its answer to include a cross-complaint against both AARP and United for monetary damages arising out of asserted inappropriate activities by AARP and United that interfered with the
operation of its prescription drug discount program. Discovery in connection with these claims is ongoing.



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.



16. Income Taxes



AdvancePCS accounts for income taxes under
the provisions of SFAS 109 Accounting for Income Taxes. A reconciliation of the statutory federal incomes tax rate and the effective tax rate for the years ended March 31, 2003, 2002 and 2001 is provided below:



|                                                    |  | 2003 |   |  | 2002 |   |  | 2001 |   
|--------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | --
|Tax at U.S. federal income tax rate                 |  | 35.0 | % |  | 35.0 | % |  | 35.0 | % 
|Non-deductible goodwill and intangible amortization |  |     |   |  |     |   |  | 20.7 | % 
|State taxes, net of federal benefit                 |  | 4.0  | % |  | 4.1  | % |  | 4.9  | % 
|Intangible amortization                             |  |     |   |  |     |   |  | (8.8 | )%
|Other, net                                          |  | 0.5  | % |  | 0.4  | % |  | 1.0  | % 
|                                                    |  |      |   |  |      |   |  |      |   
|Effective tax rate                                  |  | 39.5 | % |  | 39.5 | % |  | 52.8 | % 
|                                                    |  |      |   |  |      |   |  |      |   



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



|         |  | 2003 |         | 2002 |   | 2001  
|-------- |  | ---- | ------- | ---- | - | ------
|Current  |  | $    | 109,200 |      | $ | 53,067
|Deferred |  |      | 1,714   |      |   | 25,948
|         |  |      |         |      |   |       
|         |  | $    | 110,914 |      | $ | 79,015
|         |  |      |         |      |   |       



Deferred taxes reflect the tax
consequences on future years due to temporary differences between the tax basis of assets and liabilities and their financial reporting basis 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, 2003 |          |   | Changes |   |         | March 31, 2002 | 
|-------------------------------------------- |  | -------------- | -------- | - | ------- | - | ------- | -------------- | 
|Deferred tax assets:                         |  |                |          |   |         |   |         |                | 
|Accruals and reserves                        |  | $              | 23,095   |   |         | $ | 10,175  |                | 
|Non-recurring and impairment charges         |  |                | 3,710    |   |         |   |        |                | 
|Investment in Joint Venture                  |  |                | 1,117    |   |         |   | 73      |                | 
|Federal net operating loss                   |  |                | 5,413    |   |         |   | 5,413   |                | 
|Other                                        |  |                | 1,174    |   |         |   | 326     |                | 
|                                             |  |                |          |   |         |   |         |                | 
|                                             |  |                | 34,509   |   |         |   | 15,987  |                | 
|                                             |  |                |          |   |         |   |         |                | 
|                                             |  |                |         
|Deferred tax liabilities:                    |  |                |          |   |         |   |         |                | 
|Intangible assets                            |  |                | (156,673 | ) |         |   | (13,378 | )              | 
|Amortization of deductible goodwill          |  |                | (7,146   | ) |         |   | (1,952  | )              | 
|Depreciation                                 |  |                | (8,174   | ) |         |   | (2,133  | )              | 
|Prepaids                                     |  |                | (1,984   | ) |         |   | (1,984  | )              | 
|Other                                        |  |                | (515     | ) |         |   | (413    | )              | 
|                                             |  |                |          |   |         |   |         |                | 
|                                             |  |                | (174,492 | ) |         |   | (19,860 | )              | 
|                                             |  |                |          |   |         |   |         |                | 
|Net deferred tax liability                   |  | $              | (139,983 | ) |         | $ | (3,873  | )              | 
|                                             |  |                |          |   |         |   |         |                | 
|Deferred tax asset / (liability), short term |  | $              | 7,820    |   |         | $ | 9,052   |                | 
|                                             |  |                |          |   |         |   |         |                | 
|Deferred tax liability, long term            |  | $              | (147,803 | ) |         | $ | (12,925 | )              | 
|                                             |  |                |          |   |         |   |         |                | 



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##### Table of Contents

At March 31, 2003, the Company had cumulative federal and state income tax net operating loss carryforwards of
approximately $44.8 million, which are generally available to reduce future taxable income. If not utilized to offset future taxable income, these net operating loss carryforwards will expire on various dates through 2021, with 65% of the total
carryforwards expiring from 2014 to 2021. In addition to these carryforwards, the Company has approximately $11.5 million of state tax credit carryforwards which if not utilized to offset future income tax, will expire ratably from 2004 through
2021. Currently the Company has recorded a valuation allowance for the full value of the state tax credits as the Company may not be able to utilize the state tax credits prior to their expiration. Upon subsequent utilization of the state tax
credits, the valuation allowance will be allocated as a reduction of goodwill.



17. Selected Quarterly Financial Data (Unaudited)



During
2003, the Company adopted EITF 02-16. Under this pronouncement, any consideration received from a vendor is presumed to be a reduction of the prices of the vendors products and should, therefore, be characterized as a reduction of cost of
revenues. This EITF applies to rebates and administrative fees received from pharmaceutical manufacturers. Accordingly, the Companys revenues for the first through fourth quarters of 2003 and 2002 have been reduced by $357,000, $349,900,
$348,700 and $374,100 and $226,300, $219,300, $219,700 and $267,900, respectively. Cost of revenues has been reduced by the same amounts. These amounts represent the gross amount of rebates and administrative fees received from pharmaceutical
manufacturers. The Company has previously recorded rebates, net of the amount paid to customers and administrative fees as components of the Companys Clinical services and other revenue. The Companys consolidated gross profit was not
impacted as a result of adopting this EITF.



|                                                             |  | Year Ended March 31, 2003             |          
|------------------------------------------------------------ |  | ------------------------------------- | ---------
|                                                             |  | 1stQuarter                            |          
|                                                             |  | (in thousands, except per share data) |          
|Statement of Operations Data:                                |  |                                       |          
|Revenues(1)                                                  |  | $                                     | 3,235,272
|Gross profit                                                 |  |                                       | 125,347  
|Loss from joint venture                                      |  |                                       | (1,033   
|Net income before extraordinary loss                         |  |                                       | 36,835   
|                                                             |  |                                       |          
|Extraordinary loss on early retirement of debt, net of taxes |  |                                       | 1,491    
|                                                             |  |                                       |          
|Net income                                                   |  | $                                     | 35,344   
|                                                             |  |                                       |          
|                                                             |  |                                       |          
|Basic before extraordinary loss:                             |  |                                       |          
|Net income per share                                         |  | $                                     | 0.40     
|                                                             |  |                                       |          
|Weighted average shares outstanding                          |  |                                       | 93,022   
|Diluted before extraordinary loss:                           |  |                                       |          
|Net income per share                                         |  | $                                     | 0.36     
|                                                             |  |                                       |          
|Weighted average shares outstanding                          |  |                                       | 102,099  
|                                                             |  |                                       |          
|Basic:                                                       |  |                                       |          
|Net income per share                                         |  | $                                     | 0.38     
|                                                             |  |                                       |          
|Weighted average shares outstanding                          |  |                                       | 93,022   
|Diluted:                                                     |  |                                       |          
|Net income per share                                         |  | $                                     | 0.35     
|                                                             |  |                                       |          
|Weighted average shares outstanding                          |  |                                       | 102,099  



| | (1) |  | Revenues for all years have been retroactively reclassified to reflect the adoption of EITF 02-16 in the fourth quarter of fiscal 2003.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------



|                                                             |  | Year Ended March 31, 2002            
|------------------------------------------------------------ |  | -------------------------------------
|                                                             |  | 1stQuarter                           
|                                                             |  | (in thousands, except per share data)
|Statement of Operations Data:                                |  |                                      
|Revenues (1)                                                 |  | $                                    
|Gross profit                                                 |  |                                      
|Non-recurring and impairment expenses                        |  |                                      
|Loss from joint venture (2)                                  |  |                                      
|Net income before extraordinary loss                         |  |                                      
|                                                             |  |                                      
|Extraordinary loss on early retirement of debt, net of taxes |  |                                      
|                                                             |  |                                      
|Net income                                                   |  | $                                    
|                                                             |  |                                      
|                                                             |  |                                      
|Basic before extraordinary loss:                             |  |                                      
|Net income per share                                         |  | $                                    
|                                                             |  |                                      
|Weighted average shares outstanding                          |  |                                      



F-33



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##### Table of Contents

|                                    |  | Year Ended March 31, 2002            
|----------------------------------- |  | -------------------------------------
|                                    |  | 1stQuarter                           
|                                    |  | (in thousands, except per share data)
|Statement of Operations Data:       |  |                                      
|Diluted before extraordinary loss:  |  |                                      
|Net income per share                |  | $                                    
|                                    |  |                                      
|Weighted average shares outstanding |  |                                      
|                                    |  |                                      
|Basic:                              |  |                                      
|Net income per share                |  | $                                    
|                                    |  |                                      
|Weighted average shares outstanding |  |                                      
|Diluted:                            |  |                                      
|Net income per share                |  | $                                    
|                                    |  |                                      
|Weighted average shares outstanding |  |                                      



| | (1) |  | Revenues for all years have been retroactively reclassified to reflect the adoption of EITF 02-16 in the fourth quarter of fiscal 2003.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Previously reported as a component of gross profit.
| | --- |  | ---------------------------------------------------



18. Related Party Transactions



In fiscal 2003 and 2002, the Company had interest bearing notes receivable and relocation advances totaling $4.8 million and $1.0 million, respectively, due from
executive officers and employees of the Company. At March 31, 2003 and 2002 these notes were classified as current assets. Subsequent to March 31, 2003, $1.4 million in notes receivable and relocation advances were repaid.





F-34



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##### Table of Contents

ADVANCEPCS

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS



In thousands:



|                                           |  | Balance atBeginning of Year |        | Additions Charged toExpenses |   | Other  |  |   | Deductions (1) |     | Balance at End of Year
|------------------------------------------ |  | --------------------------- | ------ | ---------------------------- | - | ------ |  | - | -------------- | --- | ----------------------
|                                           |  |                             |        |                              |  
|Year ended March 31, 2001:                 |  |                             |        |                              |   |        |  |   |                |     |                       
|Allowance for doubtful accounts receivable |  | $                           | 5,639  |                              | $ | 8,204  |  | $ | 5,750          | (2) |                       
|                                           |  |                             |        |                              |  
|Year ended March 31, 2002:                 |  |                             |        |                              |   |        |  |   |                |     |                       
|Allowance for doubtful accounts receivable |  | $                           | 18,840 |                              | $ | 10,169 |  | $ | 934            | (3) |                       
|                                           |  |                             |        |                              |  
|Year ended March 31, 2003:                 |  |                             |        |                              |   |        |  |   |                |     |                       
|Allowance for doubtful accounts receivable |  | $                           | 26,150 |                              | $ | 10,996 |  | $ |               |     |                       



|(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
|--- |  | --------------------------------------





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|           |  | INDEX TO EXHIBITS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           | 
|EXHIBITNO. |  | 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        |  | First Supplemental Indenture dated November 15, 2002, but effective as of August 30, 2001, by and among AdvancePCS Health Systems, L.L.C., AdvancePCS SpecialtyRx, L.L.C.,
Dresing-Lierman, Inc., TheraCom, Inc. and The Bank of New York Trust Company of Florida, N.A., successor trustee to U.S. Trust Company of Texas, N.A. (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 February 13, 2003).                   
|           | 
|4.4        |  | Second Supplemental Indenture dated November 15, 2002, but effective as of December 10, 2001, by and among Consumer Health Interactive, AdvancePCS Puerto Rico, Inc. and AFC
Receivables Holding Corporation and The Bank of New York Trust Company of Florida, N.A., successor trustee to U.S. Trust Company of Texas, N.A. (incorporated by reference to Exhibit 4.2 of AdvancePCSs Quarterly Report on Form 10-Q as filed
with the Securities and Exchange Commission on February 13, 2003).                       
|           | 
|4.5        |  | Third Supplemental Indenture dated November 15, 2002, but effective as of November 10, 2001, by and among Accordant Health Services, Inc., Accordant Health Services of North
Carolina, Inc., Accordant Integrated Services, Inc. and The Bank of New York Trust Company of Florida, N.A., successor trustee to U.S. Trust Company of Texas, N.A. . (incorporated by reference to Exhibit 4.3 of AdvancePCSs Quarterly Report on
Form 10-Q as filed with the Securities and Exchange Commission on February 13, 2003).
|           | 
|4.6        |  | 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).                       
|           | 
|4.7        |  | 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                                                                                                                                                                                                                                                                                                                                 



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##### Table of Contents

|     | 
|---- | 
|     | 
|     | 
|4.8  | 
|     | 
|4.9  | 
|     | 
|4.10 | 
|     | 
|4.11 | 
|     | 
|4.12 | 
|     | 
|4.13 | 
|     | 
|4.14 | 
|     | 
|4.15 | 
|     | 
|4.16 | 
|     | 
|10.1 | 
|     | 
|10.2 | 
|     | 
|10.3 | 
|     | 
|10.4 | 
|     | 
|10.5 | 
|     | 
|10.6 | 
|     | 
|10.7 | 
|     | 
|10.8 | 
|     | 
|10.9 | 



---

##### Table of Contents

|      | 
|----- | 
|      | 
|      | 
|10.10 | 
|      | 
|10.11 | 
|      | 
|10.12 | 
|      | 
|10.13 | 
|      | 
|10.14 | 
|      | 
|10.15 | 
|      | 
|10.16 | 
|      | 
|10.17 | 
|      | 
|10.18 | 
|      | 
|10.19 | 
|      | 
|10.20 | 
|      | 
|10.21 | 
|      | 
|10.22 | 
|      | 
|10.23 | 
|      | 
|10.24 | 



---

##### Table of Contents

|      | 
|----- | 
|10.25 | 
|      | 
|10.26 | 
|      | 
|10.27 | 
|      | 
|10.28 | 
|      | 
|10.29 | 
|      | 
|10.30 | 
|      | 
|10.33 | 
|      | 
|10.34 | 
|      | 
|10.35 | 
|      | 
|10.36 | 
|      | 
|10.37 | 
|      | 
|10.38 | 
|      | 
|10.39 | 



---

##### Table of Contents

|      | 
|----- | 
|      | 
|      | 
|10.40 | 
|      | 
|10.41 | 
|      | 
|21.1* | 
|      | 
|23.1* | 
|      | 
|99.1* | 



|* |  | Filed herewith.
|- |  | ---------------