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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2002

OR

(   ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to

Commission File Number 0-21447

AdvancePCS

(Exact name of registrant as specified in its charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 75-2493381                          
|(State of Incorporation) |  | (IRS Employer Identification Number)

750 West John Carpenter Freeway
Suite 1200
Irving, Texas 75039
(Address of principal executive offices)

(469) 524-4700
(Registrants Telephone Number, including area code)

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

YES[X]        NO[   ]

As of February 7, 2003, the registrant had (1) 77,189,510 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.





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|                                                                                                |                                                                                               |                                                        |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                                                                  
|                                                                                                | ITEM I. FINANCIAL STATEMENTS                                                                 
|                                                                                                |                                                                                               | Consolidated Balance Sheets (Unaudited)               
|                                                                                                |                                                                                               | Consolidated Statements of Operations (Unaudited)     
|                                                                                                |                                                                                               | Consolidated Statements of Cash Flows (Unaudited)     
|                                                                                                |                                                                                               | Notes to Consolidated Financial Statements (Unaudited)
|                                                                                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                                | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                                                                                                | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                                                                     
|                                                                                                | Item 1. Legal Proceedings                                                                    
|                                                                                                | Item 6. Exhibits and Reports on Form 8-K.                                                    
|Signatures                                                                                     
|CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
|CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
|EXHIBIT INDEX                                                                                  
|EX-4.1 First Supplemental Indenture                                                            
|EX-4.2 Second Supplemental Indenture                                                           
|EX-4.3 Third Supplemental Indenture                                                            
|EX-99.1 Certification of Chief Executive Officer                                               
|EX-99.2 Certification of Chief Financial Officer                                               



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AdvancePCS and Subsidiaries

Index to Quarterly Report on Form 10-Q

|                                                                                               |  |                       |    |         |  |  |                                                                                       |  |    |         |  |                                                                                                                         |  |      |        | 
|---------------------------------------------------------------------------------------------- |  | --------------------- | -- | ------- |  |  | ------------------------------------------------------------------------------------- |  | -- | ------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | 
|                                                                                               |  |                       |    |         |  |  |                                                                                       |  |    |         |  |                                                                                                                         |  | Page
|                                                                                               |  |                       |    |         |  |  |                                                                                       |  |    |         |  |                                                                                                                         |  |     
|Part I.                                                                                        |  | Financial Information |    |         |  | 
|                                                                                               |  |                       |    | Item 1. |  |  | Financial Statements                                                                  |  |    |         | 
|                                                                                               |  |                       |    |         |  |  |                                                                                       |  | A. |         |  | Consolidated Balance Sheets as of December 31, 2002
and March 31, 2002 (Unaudited)                                      |  |      | 1      | 
|                                                                                               |  |                       |    |         |  |  |                                                                                       |  | B. |         |  | Consolidated Statements of Operations for the Three
Months and Nine Months Ended December 31, 2002 and
2001 (Unaudited) |  |      | 2      | 
|                                                                                               |  |                       |    |         |  |  |                                                                                       |  | C. |         |  | Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2002 and 2001 (Unaudited)                  |  |      | 3      | 
|                                                                                               |  |                       |    |         |  |  |                                                                                       |  | D. |         |  | Notes to Consolidated Financial Statements (Unaudited)                                                                  |  |      | 4 - 14 | 
|                                                                                               |  |                       |    | Item 2. |  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |    | 15 - 26 | 
|                                                                                               |  |                       |    | Item 3. |  |  | Qualitative and Quantitative Disclosures About Market Risk                            |  |    | 26      | 
|                                                                                               |  |                       |    | Item 4. |  |  | Controls and Procedures                                                               |  |    | 27      | 
|Part II.                                                                                       |  | Other Information     |    |         |  | 
|                                                                                               |  |                       |    | Item 1. |  |  | Legal Proceedings                                                                     |  |    | 28 - 29 | 
|                                                                                               |  |                       |    | Item 6. |  |  | Exhibits and Reports on Form 8-K                                                      |  |    | 29 - 30 | 
|Signatures                                                                                     |  |                       | 31 |        
|Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act     |  |                       | 32 |        
|Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act |  |                       | 33 |        





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PART I. FINANCIAL INFORMATION

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q 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 (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 in our Form 10-K for the
fiscal year ended March 31, 2002, as it may be amended from time to time, under
the caption Risk Factors, as well as the following:



| |  | Risks associated with competition in our industry, including client retention, the ability to consummate contracts with new
clients and pricing and margin pressures from competitors and client 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 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 clients credit risks; and                                                                                                            
| 
| |  | Risks associated with our debt obligations, including compliance with covenants contained in our credit agreements.                                                                                                        





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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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ITEM I. FINANCIAL STATEMENTS

AdvancePCS and Subsidiaries




Consolidated Balance Sheets
(Dollars in thousands, except share data)
(Unaudited)

|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |                |           |   |           | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | --------- | ----------------- | --------- | -------------- | --------- | - | --------- | 
|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           | December 31, 2002 |           | March 31, 2002
|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|ASSETS                               |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|Current assets:                      |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|                                     |                                                                                                               | Cash and cash equivalents                                                                        |                                                                               | $                                                                                           | 71,236    |                   |           | $              | 139,145   |  
|                                     |                                                                                                               | Accounts receivable, net of allowance for doubtful accounts
of $39,490 and $26,150, respectively |                                                                               |                                                                                             | 1,630,751 |                   |           |                | 1,225,929 |  
|                                     |                                                                                                               | Inventories                                                                                      |                                                                               |                                                                                             | 125,073   |                   |           |                | 65,336    |  
|                                     |                                                                                                               | Prepaid expenses and other                                                                       |                                                                               |                                                                                             | 7,839     |                   |           |                | 10,484    |  
|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|                                     |                                                                                                               |                                                                                                  |                                                                               | Total current assets                                                                        |           |                   | 1,834,899 |                |           |   | 1,440,894 | 
|Noncurrent assets:                   |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|                                     | Property and equipment, net of accumulated depreciation and
amortization of $91,916 and $64,999, respectively |                                                                                                  |                                                                               | 152,658                                                                                     |           |                   |           | 121,277        |          
|                                     | Goodwill                                                                                                      |                                                                                                  |                                                                               | 1,251,484                                                                                   |           |                   |           | 1,198,925      |          
|                                     | Intangible assets, net                                                                                        |                                                                                                  |                                                                               | 384,105                                                                                     |           |                   |           | 373,041        |          
|                                     | Other noncurrent assets                                                                                       |                                                                                                  |                                                                               | 82,648                                                                                      |           |                   |           | 89,827         |          
|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|                                     |                                                                                                               |                                                                                                  |                                                                               | Total assets                                                                                |           | $                 | 3,705,794 |                |           | $ | 3,223,964 | 
|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |                |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|Current liabilities:                 |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|                                     |                                                                                                               | Current portion of long-term debt                                                                |                                                                               | $                                                                                           | 219       |                   |           | $              | 1,523     |  
|                                     |                                                                                                               | Claims and accounts payable                                                                      |                                                                               |                                                                                             | 1,999,569 |                   |           |                | 1,557,909 |  
|                                     |                                                                                                               | Accrued salaries and benefits                                                                    |                                                                               |                                                                                             | 40,565    |                   |           |                | 38,602    |  
|                                     |                                                                                                               | Other accrued expenses                                                                           |                                                                               |                                                                                             | 101,611   |                   |           |                | 79,308    |  
|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|                                     |                                                                                                               |                                                                                                  |                                                                               | Total current liabilities                                                                   |           |                   | 2,141,964 |                |           |   | 1,677,342 | 
|Noncurrent liabilities:              |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|                                     |                                                                                                               | Long-term debt, less current portion                                                             |                                                                               |                                                                                             | 457,918   |                   |           |                | 499,263   |  
|                                     |                                                                                                               | Deferred income taxes                                                                            |                                                                               |                                                                                             | 146,951   |                   |           |                | 134,878   |  
|                                     |                                                                                                               | Other noncurrent liabilities                                                                     |                                                                               |                                                                                             | 29,408    |                   |           |                | 35,221    |  
|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|                                     |                                                                                                               |                                                                                                  |                                                                               | Total liabilities                                                                           |           |                   | 2,776,241 |                |           |   | 2,346,704 | 
|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|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 authorized:                                     |                                                                               |                                                                                             |           |                   |           |                |           |  
|                                     |                                                                                                               |                                                                                                  |                                                                               | Class A common stock, $.01 par value; 81,123,363 and
79,927,079 shares issued, respectively |           |                   | 810       |                |           |   | 799       | 
|                                     |                                                                                                               |                                                                                                  |                                                                               | Class B-1 common stock, $.01 par value; 12,913,334 shares
issued and outstanding            |           |                   | 130       |                |           |   | 130       | 
|                                     |                                                                                                               |                                                                                                  |                                                                               | Class B-2 common stock, $.01 par value; 200 shares issued
and outstanding                   |           |                   |          |                |           |   |          | 
|                                     |                                                                                                               | Additional paid-in capital                                                                       |                                                                               |                                                                                             | 730,469   |                   |           |                | 716,887   |  
|                                     | Treasury stock, at cost:                                                                                      |                                                                                                  |                                                                               |                                                                                             |           |                   |           |                |          
|                                     | Class A common stock; 4,669,961, and no shares, respectively                                                  |                                                                                                  |                                                                               | (87,739                                                                                     | )         |                   |           |               |          
|                                     |                                                                                                               | Accumulated other comprehensive loss                                                             |                                                                               |                                                                                             | (8,770    | )                 |           |                | (12,686   | )
|                                     |                                                                                                               | Accumulated earnings                                                                             |                                                                               |                                                                                             | 294,653   |                   |           |                | 172,130   |  
|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|                                     |                                                                                                               |                                                                                                  |                                                                               | Total stockholders equity                                                                  |           |                   | 929,553   |                |           |   | 877,260   | 
|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |               
|                                     |                                                                                                               |                                                                                                  |                                                                               | Total liabilities and stockholders equity                                                  |           | $                 | 3,705,794 |                |           | $ | 3,223,964 | 
|                                     |                                                                                                               |                                                                                                  |                                                                               |                                                                                             |           |                   |           |                |           |  

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

1



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AdvancePCS and Subsidiaries

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

|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |           |           |  
|------------------------------------------------------------ | ----------------------------------------------------------------------- | -------------------------- | --------- | ------------------ | --------- | ----------------- | --------- | --------- | --------- | ---- | ---------- | ---------- | ---------- | - | --------- | --------- | --------- | -
|                                                             |                                                                         |                            |           | Three Months Ended |           | Nine Months Ended
|                                                             |                                                                         |                            |           | December 31,       |           | December 31,     
|                                                             |                                                                         |                            |           |                    |           |                  
|                                                             |                                                                         |                            |           | 2002               |           | 2001              |           | 2002      |           | 2001
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |     
|Revenues                                                     |                                                                         | $                          | 4,106,375 |                    |           | $                 | 3,365,895 |           |           | $    | 11,551,281 |            |            | $ | 9,668,418 |          
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|Cost of operations:                                          |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|                                                             | Cost of revenues                                                        |                            |           | 3,965,418          |           |                   |           | 3,251,077 |           |      |            | 11,149,515 |            |   |           | 9,337,859 |          
|                                                             | Selling, general and administrative expenses                            |                            |           | 56,387             |           |                   |           | 48,252    |           |      |            | 163,834    |            |   |           | 137,341   |          
|                                                             | Non-recurring expenses                                                  |                            |           |                   |           |                   |           |          |           |      |            |           |            |   |           | 1,760     |          
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|                                                             |                                                                         | Total cost of operations   |           |                    | 4,021,805 |                   |           |           | 3,299,329 |      |            |            | 11,313,349 |   |           |           | 9,476,960 |  
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|Operating income                                             |                                                                         |                            | 84,570    |                    |           |                   | 66,566    |           |           |      | 237,932    |            |            |   | 191,458   |          
|Interest income                                              |                                                                         |                            | 1,266     |                    |           |                   | 1,561     |           |           |      | 3,947      |            |            |   | 4,963     |          
|Interest expense                                             |                                                                         |                            | (10,249   | )                  |           |                   | (13,396   | )         |           |      | (33,386    | )          |            |   | (52,337   | )        
|Loss from joint venture                                      |                                                                         |                            | (1,253    | )                  |           |                   | (741      | )         |           |      | (3,510     | )          |            |   | (1,831    | )        
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|Income before provision for income taxes                     |                                                                         |                            | 74,334    |                    |           |                   | 53,990    |           |           |      | 204,983    |            |            |   | 142,253   |          
|                                                             |                                                                         | Provision for income taxes |           |                    | (29,362   | )                 |           |           | (21,326   | )    |            |            | (80,969    | ) |           |           | (56,181   | )
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|Net income before extraordinary loss                         |                                                                         |                            | 44,972    |                    |           |                   | 32,664    |           |           |      | 124,014    |            |            |   | 86,072    |          
|Extraordinary loss on early retirement of debt,
net of taxes |                                                                         |                            |          |                    |           |                   | (5,315    | )         |           |      | (1,491     | )          |            |   | (5,315    | )        
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|Net income                                                   |                                                                         | $                          | 44,972    |                    |           | $                 | 27,349    |           |           | $    | 122,523    |            |            | $ | 80,757    |          
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|Basic                                                        |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|                                                             | Net income before extraordinary loss per share                          |                            | $         | 0.50               |           |                   | $         | 0.36      |           |      | $          | 1.35       |            |   | $         | 1.05      |          
|                                                             | Extraordinary loss on early retirement of debt, net of
taxes, per share |                            |           |                   |           |                   |           | (0.06     | )         |      |            | (0.01      | )          |   |           | (0.06     | )        
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|                                                             | Net income per share                                                    |                            | $         | 0.50               |           |                   | $         | 0.30      |           |      | $          | 1.34       |            |   | $         | 0.99      |          
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|                                                             | Weighted average shares outstanding                                     |                            |           | 89,983             |           |                   |           | 91,912    |           |      |            | 91,540     |            |   |           | 81,630    |          
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|Diluted                                                      |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|                                                             | Net income before extraordinary loss per
share                          |                            | $         | 0.46               |           |                   | $         | 0.32      |           |      | $          | 1.25       |            |   | $         | 0.89      |          
|                                                             | Extraordinary loss on early retirement
of debt, net of taxes, per share |                            |           |                   |           |                   |           | (0.05     | )         |      |            | (0.02      | )          |   |           | (0.06     | )        
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|                                                             | Net income per share                                                    |                            | $         | 0.46               |           |                   | $         | 0.27      |           |      | $          | 1.23       |            |   | $         | 0.83      |          
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          
|                                                             | Weighted average shares outstanding                                     |                            |           | 97,394             |           |                   |           | 102,321   |           |      |            | 99,302     |            |   |           | 96,964    |          
|                                                             |                                                                         |                            |           |                    |           |                   |           |           |           |      |            |            |            |   |           |          

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

2



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AdvancePCS and Subsidiaries

Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |          |        |          |         |  
|------------------------------------------------ | --------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------------------------ | ----------------------------------------- | ------ | ------------------------------ | -------- | -------- | ------ | -------- | ------- | -
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        | Nine Months Ended December 31,
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                               
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        | 2002                           |          | 2001    
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |         
|Cash flows from operating activities:            |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                               
|                                                 | Net income                                                                        |                                                              | $                                                                              | 122,523                                   |        |                                | $        | 80,757   |       
|                                                 | Adjustments to reconcile net income to net cash provided by
operating activities |                                                              |                                                                                |                                           |        |                                |          |          |       
|                                                 |                                                                                   | Depreciation and amortization                                |                                                                                |                                           | 33,469 |                                |          |          | 28,174 |         
|                                                 |                                                                                   | Provision for doubtful accounts                              |                                                                                |                                           | 24,214 |                                |          |          | 11,649 |         
|                                                 |                                                                                   | Deferred income taxes                                        |                                                                                |                                           | 2,816  |                                |          |          | 19,022 |         
|                                                 |                                                                                   | Extraordinary loss on early retirement of debt, net of taxes |                                                                                |                                           | 1,491  |                                |          |          | 5,315  |         
|                                                 |                                                                                   | Change
in operating assets and liabilities                  |                                                                                |                                           |        |                                |          |          |        |         
|                                                 |                                                                                   |                                                              | Accounts receivable                                                            |                                           |        | (415,147                       | )        |          |        | (134,320 | )      
|                                                 |                                                                                   |                                                              | Inventories                                                                    |                                           |        | (59,679                        | )        |          |        | (10,879  | )      
|                                                 |                                                                                   |                                                              | Prepaid expenses and other noncurrent assets                                   |                                           |        | 2,131                          |          |          |        | (10,043  | )      
|                                                 |                                                                                   |                                                              | Claims and accounts payable, accrued expenses and other
noncurrent liabilities |                                           |        | 478,946                        |          |          |        | 130,636  |        
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 |                                                                                   |                                                              |                                                                                | Net cash provided by operating activities |        |                                | 190,764  |          |        |          | 120,311 |  
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |         
|Cash flows from investing activities:            |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 | Purchase of property and equipment                                                |                                                              |                                                                                | (58,670                                   | )      |                                |          | (35,101  | )     
|                                                 | Acquisition, net of cash acquired and investment in affiliate                     |                                                              |                                                                                | (75,883                                   | )      |                                |          | (12,399  | )     
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 |                                                                                   |                                                              |                                                                                | Net cash used in investing activities     |        |                                | (134,553 | )        |        |          | (47,500 | )
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |         
|Cash flows from financing activities:            |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 | Net proceeds from issuance of Common Stock                                        |                                                              |                                                                                | 8,296                                     |        |                                |          | 303,286  |       
|                                                 | Purchase of Class A Common Stock  Treasury Stock                                 |                                                              |                                                                                | (87,739                                   | )      |                                |          |         |       
|                                                 | Deferred financing costs                                                          |                                                              |                                                                                | (1,655                                    | )      |                                |          | (2,444   | )     
|                                                 | Proceeds from long-term debt                                                      |                                                              |                                                                                | 1,852,212                                 |        |                                |          | 111,000  |       
|                                                 | Payments on long-term debt                                                        |                                                              |                                                                                | (2,015,234                                | )      |                                |          | (615,454 | )     
|                                                 | Net borrowings on asset securitization facility                                   |                                                              |                                                                                | 120,000                                   |        |                                |          | 150,000  |       
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 |                                                                                   |                                                              |                                                                                | Net cash used in financing activities     |        |                                | (124,120 | )        |        |          | (53,612 | )
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |         
|(Decrease) increase in cash and cash equivalents |                                                                                   |                                                              | (67,909                                                                        | )                                         |        |                                | 19,199   |         
|Cash and cash equivalents, beginning of period   |                                                                                   |                                                              | 139,145                                                                        |                                           |        |                                | 110,048  |         
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |         
|Cash and cash equivalents, end of period         |                                                                                   | $                                                            | 71,236                                                                         |                                           |        | $                              | 129,247  |         
|                                                 |                                                                                   |                                                              |                                                                                |                                           |        |                                |          |          |       

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

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AdvancePCS and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

1.     Background and Basis of Presentation

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, clinical
services, 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. In addition,
the Company transacts business with pharmaceutical manufacturers as both
suppliers and customers.

The accompanying unaudited consolidated financial statements include the
accounts of AdvancePCS and its majority 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 18 (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 impact of
the restatement on the nine months ended December 31, 2001 was a reduction of
net income in the amount of $227,000 (or diluted net income per share of
$.002). The Company believes that the impact of the restatement did not have a
material effect on its financial position or results of operations.

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-Q have been retroactively
adjusted to reflect the impact of the stock split.

The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States for the interim financial information in the form
prescribed by the Securities and Exchange Commission (the SEC) in
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for annual financial
statements. In the opinion of the Companys management, all adjustments, which
include normal recurring adjustments, necessary for a fair presentation of
financial position, results of operations and cash flows at the dates and for
the periods presented have been included. In the opinion of the Companys
management, the disclosures contained in this Form 10-Q are adequate to make
the information presented not misleading when read in conjunction with the
Companys Annual Report on Form 10-K for the year ended March 31, 2002. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year or for any future period. Certain
prior year amounts have been reclassified to conform to the current year
presentation.

2.     Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Effective April 1, 2002 the Company adopted SFAS 144 Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS 121. SFAS
No. 144 requires that long-lived assets to be disposed of by sale, including
those of discontinued operations, be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or

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in discontinued operations. Under these rules, discontinued
operations will no longer be measured at net realizable value or include
amounts for operating losses that have not yet been incurred. SFAS No. 144 also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
and that will be eliminated from the ongoing operations of the entity in a
disposal transaction. The adoption of SFAS 144 had no impact on the Companys
consolidated financial statements.

Recent Accounting Pronouncements

In May 2002, the FASB issued SFAS 145 Rescission of FAS Nos. 4, 44, and
64, Amendment of FASB 13, and Technical Corrections as of April 2002. This
Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, an amendment of that Statement No. 4, and FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. SFAS 145 restricts the classification of gains and losses from
extinguishment of debt as extraordinary to only those transactions that are
unusual and infrequent in nature as defined by APB Opinion 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 $5.3 million, net of tax for the nine months ended December 31, 2002 and
the year ended March 31, 2002, respectively, will be reclassified to income
before extraordinary loss to conform to the requirements under SFAS 145.

In July 2002, the FASB issued SFAS 146 Accounting for Costs Associated
with Exit or Disposal Activities. 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. SFAS 146 will
be effective for exit or disposal activities that are initiated after December
31, 2002.

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 clarifies the
requirements of FASB 5, Accounting for Contingencies, relating to a
guarantors accounting for, and disclosure of, the issuance of certain types of
guarantees. The initial recognition and measurement provisions of FIN 45 are
required to be applied on a prospective basis to guarantees issued or modified
after December 31, 2002. The Company has adopted the disclosure requirements,
which are effective for interim periods ending after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation- Transition and Disclosure  an amendment of FASB Statement No.
123. 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 will be effective
for the Company beginning with the Companys year ended March 31, 2003. The
Company has not yet completed the final evaluation of the alternatives
presented by SFAS 148. However, during the quarter ending June 30, 2003, the
Company expects to reach a determination of whether and, if so, when to change
the Companys existing accounting for stock-based compensation to the fair
value method in accordance with the transition alternatives of SFAS 148.

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

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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 2.7 million and 2.5 million shares of common stock were outstanding at
December 31, 2002 but were excluded from the computation of diluted earnings
per share for the three months and nine-month periods, respectively, because
the options exercise prices were greater than the average market price of the
Companys common stock during the applicable period (antidilutive).
Anitdilutive options to purchase shares of common stock for the three and
nine-month periods ended December 31, 2001 were immaterial.

|                                                     |                            |  |                    |       |                   |  |         |        |      |  |        |       |  |  |        |        | 
|---------------------------------------------------- | -------------------------- |  | ------------------ | ----- | ----------------- |  | ------- | ------ | ---- |  | ------ | ----- |  |  | ------ | ------ | 
|                                                     |                            |  | Three Months Ended |       | Nine Months Ended
|                                                     |                            |  | December 31,       |       | December 31,     
|                                                     |                            |  |                    |       |                  
|                                                     |                            |  | 2002               |       | 2001              |  | 2002    |        | 2001
|                                                     |                            |  |                    |       |                   |  |         |        |     
|Weighted average common shares
outstanding 
Basic   |                            |  | 89,983             |       |                   |  | 91,912  |        |      |  | 91,540 |       |  |  | 81,630 |       
|Dilutive common stock equivalents:                   |                            |  |                    |       |                   |  |         |        |      |  |        |       |  |  |        |       
|                                                     | Stock options and
warrants |  |                    | 7,411 |                   |  |         | 10,409 |      |  |        | 7,762 |  |  |        | 11,015 | 
|                                                     | Preferred
stock            |  |                    |      |                   |  |         |       |      |  |        |      |  |  |        | 4,319  | 
|                                                     |                            |  |                    |       |                   |  |         |        |      |  |        |       |  |  |        |       
|Weighted average common shares
outstanding  Diluted |                            |  | 97,394             |       |                   |  | 102,321 |        |      |  | 99,302 |       |  |  | 96,964 |       
|                                                     |                            |  |                    |       |                   |  |         |        |      |  |        |       |  |  |        |       

4.     Goodwill and Intangible Assets

The Company adopted Financial Accounting Standards Board Statement No.
(SFAS) 142 Goodwill and Other Intangible Assets 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.

Goodwill Impairment Evaluation

The goodwill impairment testing requires the Company to evaluate goodwill
for impairment based on the fair value of its applicable identified reporting
units. Examples of impairment indicators include a significant adverse change
in legal factors, liquidity or the business climate; an adverse action or
assessment by a regulator; unanticipated competition; loss of key personnel; or
new circumstances that would cause an expectation that is more likely than not
that the Company would sell or otherwise dispose of a reporting segment or a
significant portion of a reporting segment.

The Company completed its first annual impairment test at March 31, 2002,
which did not result in an impairment charge. No events or changes in
circumstances since that date have indicated that the carrying amounts may not
be recoverable.

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

|                                       |  |   |           | 
|-------------------------------------- |  | - | --------- | 
|March 31, 2002                         |  | $ | 1,198,925 | 
|Change due to acquisition (see Note 8) |  |   | 52,559    | 
|                                       |  |   |           | 
|December 31, 2002                      |  | $ | 1,251,484 | 
|                                       |  |   |           | 

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

|                              |                  |                                     |   |                   |         |                |   |                |        |              |   |         |         |  |   |        |        | 
|----------------------------- | ---------------- | ----------------------------------- | - | ----------------- | ------- | -------------- | - | -------------- | ------ | ------------ | - | ------- | ------- |  | - | ------ | ------ | 
|                              |                  |                                     |   | December 31, 2002 |         | March 31, 2002
|                              |                  |                                     |   |                   |         |               
|                              |                  |                                     |   | Gross Carrying    |         | Accumulated    |   | Gross Carrying |        | Accumulated 
|                              |                  |                                     |   | Amount            |         | Amortization   |   | Amount         |        | Amortization
|                              |                  |                                     |   |                   |         |                |   |                |        |             
|Amortized intangible assets   |                  |                                     |   |                   |         |                |   |                |        |              |   |         |         |  |   |       
|                              | Customer base    |                                     | $ | 285,600           |         |                | $ | 20,218         |        |              | $ | 265,600 |         |  | $ | 13,280 |       
|                              | Other            |                                     |   | 19,100            |         |                |   | 5,644          |        |              |   | 19,100  |         |  |   | 3,646  |       
|                              |                  |                                     |   |                   |         |                |   |                |        |              |   |         |         |  |   |        |       
|                              |                  | Total amortizable intangible assets |   | $                 | 304,700 |                |   | $              | 25,862 |              |   | $       | 284,700 |  |   | $      | 16,926 | 
|                              |                  |                                     |   |                   |         |                |   |                |        |              |   |         |         |  |   |        |       
|Unamortized intangible assets |                  |                                     |   |                   |         |                |   |                |        |              |   |         |         |  |   |       
|                              | Trade Name - PCS |                                     |   | 105,267           |         |                |   |                |        |              |   | 105,267 |         |  |   |        |       
|                              |                  |                                     |   |                   |         |                |   |                |        |              |   |         |         |  |   |        |       
|                              |                  | Total intangible assets             |   | $                 | 409,967 |                |   |                |        |              |   | $       | 389,967 |  |   |        |        | 
|                              |                  |                                     |   |                   |         |                |   |                |        |              |   |         |         |  |   |        |       

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 $3.2 million and
$2.8 million for the three months ended December 31, 2002 and 2001,
respectively, and $8.6 million and $8.1 million for the nine months ended
December 31, 2002 and 2001, respectively. The future estimated amount of
amortization expense of amortizable intangible assets is summarized below (in
thousands):

|            |  |                      |        | 
|----------- |  | -------------------- | ------ | 
|            |  | Estimated           
|Fiscal Year |  | Amortization Expense
|            |  |                     
|2004        |  | $                    | 13,484 | 
|2005        |  | $                    | 13,484 | 
|2006        |  | $                    | 12,380 | 
|2007        |  | $                    | 12,272 | 
|2008        |  | $                    | 11,576 | 

Upon adoption of FAS 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.

5.     Debt Transactions

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

|                                                                                                                                                                                    |                                                                   |                      |         |                   |     |                |         |         |       | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------- | ------- | ----------------- | --- | -------------- | ------- | ------- | ----- | 
|                                                                                                                                                                                    |                                                                   |                      |         | December 31, 2002 |     | March 31, 2002
|                                                                                                                                                                                    |                                                                   |                      |         |                   |     |               
|Asset Securitization Facility, with interest at funding agents A-1+/P-1
commercial paper rate of 1.42% and 1.91% respectively, plus .85%
and .65% respectively, due December, 2006 |                                                                   | $                    | 270,000 |                   |     | $              | 150,000 |        
|Senior Notes, with interest at 8.50%, due March, 2008                                                                                                                               |                                                                   |                      | 187,825 |                   |     |                | 200,000 |        
|Other                                                                                                                                                                               |                                                                   |                      | 312     |                   |     |                |        |        
|Senior Secured Credit Facility:                                                                                                                                                     |                                                                   |                      |         |                   |     |                |         |        
|                                                                                                                                                                                    | Term B, with interest at LIBOR plus 3.25%, paid June, 2002        |                      |         |                  |     |                |         | 150,786 |      
|                                                                                                                                                                                    | Revolver, with interest at LIBOR plus 2.00%, expires
October 2005 |                      |         |                  |     |                |         |        |      
|                                                                                                                                                                                    |                                                                   |                      |         |                   |     |                |         |        
|                                                                                                                                                                                    |                                                                   |                      | 458,137 |                   |     |                | 500,786 |        
|                                                                                                                                                                                    |                                                                   | Less current portion |         |                   | 219 |                |         |         | 1,523 | 
|                                                                                                                                                                                    |                                                                   |                      |         |                   |     |                |         |        
|Total Long Term Debt                                                                                                                                                                |                                                                   | $                    | 457,918 |                   |     | $              | 499,263 |        
|                                                                                                                                                                                    |                                                                   |                      |         |                   |     |                |         |        

In March 2001, the Company issued $200 million of Senior Notes (Senior
Notes). 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

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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 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
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.

On September 30, 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
December 31, 2002.

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 of 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 December 31, 2002 and March 31, 2002 and will
continue to be reflected on-balance sheet.

In connection with the repayment of the Term B note in June 2002, the
Company recorded an extraordinary loss associated with the early retirement of
debt. The loss was attributable to a non-cash charge of $2.4 million ($1.5
million net of tax) to write-off previously capitalized deferred financing fees
related to the Term B note financing agreements. For the nine months ended
December 31, 2001, in connection with bank debt repayments made in the second
and third quarters of fiscal year 2002 and the securitization, the Company
recorded an extraordinary loss associated with the early retirement of debt.
The loss was attributable to a non-cash charge to write-off a portion of the
deferred financing fees related to the secured bank agreement in the amount of
$8.8 million ($5.3 million net of tax).

Effective April 1, 2001, the Company adopted SFAS 133 Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137 and SFAS
138. In order to hedge variable rate interest payments made in conjunction
with its 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 was reduced by $100 million in October 2001 and 2002. As of
October 2002, 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 $8.1 million at December 31, 2002 and $14.5 million at March 31,
2002, was based upon quoted market prices. The related gains or losses on this
agreement are deferred in stockholders equity as a component of other
comprehensive income. The amount of changes in other comprehensive income, net
of taxes of $2.5 million, and the net amount reclassified into earnings
(interest expense) during the nine-month period ended December 31, 2002 were
$3.9 million and $9.9 million, respectively.

6.     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 its existing and
future domestic subsidiaries, other than subsidiaries treated as unrestricted
subsidiaries or receivables subsidiaries, each as defined in the Senior Notes
indenture, or subsidiaries not otherwise required to guarantee the Senior Notes
under the terms of the Indenture. Subsequent to the issuance of the Senior
Notes, the Company has created subsidiaries that are not required to guarantee the

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Senior Notes. Each subsidiary guarantor
is directly or indirectly 100% owned by AdvancePCS. Presented below are
Condensed Consolidating Balance Sheets as of December 31, 2002 and March 31,
2002, the Condensed Consolidating Statements of Operations for the three and
nine months ended December 31, 2002 and 2001 and the Condensed Consolidating
Statements of Cash Flows for the nine months ended December 31, 2002 and 2001
of AdvancePCS (Parent and Issuer), the guarantor subsidiaries (Guarantor
Subsidiaries) on a combined basis and the subsidiaries which are not guarantors
(Non-guarantor Subsidiaries) on a combined basis (in thousands):

Condensed Consolidating Balance Sheets:

|                        |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |           |           | 
|----------------------- | ------------------------------------ | ------------------------------------------ | - | ------- | --------- | ------------ | - | ------------ | --------- | ------------- | - | ------------ | ------- |  | - | -------- | -------- | - | - | --------- | --------- | 
|                        |                                      |                                            |   |         |           |              |   | Guarantor    |           | Non-guarantor |   |              |         |  |   |          |          |  
|                        |                                      |                                            |   | Parent  |           | Subsidiaries |   | Subsidiaries |           | Eliminations  |   | Consolidated
|                        |                                      |                                            |   |         |           |              |   |              |           |               |   |             
|As of December 31, 2002 |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |          
|                        | Current assets                       |                                            | $ | 22,508  |           |              | $ | 1,189,024    |           |               | $ | 623,367      |         |  | $ |         |          |   | $ | 1,834,899 |          
|                        | Property and equipment, net          |                                            |   |        |           |              |   | 151,490      |           |               |   | 1,168        |         |  |   |         |          |   |   | 152,658   |          
|                        | Investment in subsidiaries           |                                            |   | 361,827 |           |              |   | 1,275        |           |               |   |             |         |  |   | (363,102 | )        |   |   |          |          
|                        | Intercompany                         |                                            |   | 733,604 |           |              |   | (428,989     | )         |               |   | (304,615     | )       |  |   |         |          |   |   |          |          
|                        | Goodwill and intangible assets, net  |                                            |   |        |           |              |   | 1,635,589    |           |               |   |             |         |  |   |         |          |   |   | 1,635,589 |          
|                        | Other assets                         |                                            |   | 18,515  |           |              |   | 64,131       |           |               |   | 2            |         |  |   |         |          |   |   | 82,648    |          
|                        |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |          
|                        |                                      | Total assets                               |   | $       | 1,136,454 |              |   | $            | 2,612,520 |               |   | $            | 319,922 |  |   | $        | (363,102 | ) |   | $         | 3,705,794 | 
|                        |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |           |          
|                        | Current liabilities                  |                                            | $ | 6,590   |           |              | $ | 2,109,540    |           |               | $ | 25,834       |         |  | $ |         |          |   | $ | 2,141,964 |          
|                        | Long-term debt, less current portion |                                            |   | 187,825 |           |              |   | 93           |           |               |   | 270,000      |         |  |   |         |          |   |   | 457,918   |          
|                        | Other liabilities                    |                                            |   | 12,486  |           |              |   | 161,102      |           |               |   | 2,771        |         |  |   |         |          |   |   | 176,359   |          
|                        | Stockholders equity                 |                                            |   | 929,553 |           |              |   | 341,785      |           |               |   | 21,317       |         |  |   | (363,102 | )        |   |   | 929,553   |          
|                        |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |          
|                        |                                      | Total liabilities and stockholders equity |   | $       | 1,136,454 |              |   | $            | 2,612,520 |               |   | $            | 319,922 |  |   | $        | (363,102 | ) |   | $         | 3,705,794 | 
|                        |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |           |          
|As of March 31, 2002    |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |          
|                        | Current assets                       |                                            | $ | 117,929 |           |              | $ | 958,078      |           |               | $ | 364,887      |         |  | $ |         |          |   | $ | 1,440,894 |          
|                        | Property and equipment, net          |                                            |   |        |           |              |   | 121,008      |           |               |   | 269          |         |  |   |         |          |   |   | 121,277   |          
|                        | Investment in subsidiaries           |                                            |   | 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  |           |              |   | 65,526       |           |               |   |             |         |  |   |         |          |   |   | 89,827    |          
|                        |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |          
|                        |                                      | 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   |          
|                        | Other liabilities                    |                                            |   | 14,487  |           |              |   | 155,574      |           |               |   | 38           |         |  |   |         |          |   |   | 170,099   |          
|                        | 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 | 
|                        |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |           |          

9



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##### Table of Contents



Condensed Consolidating Statement of Operations:

|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |         | 
|--------------------------------------------------------------- | --------------------------------- | - | ------- | ------- | ------------ | - | ------------ | ------- | ------------- | - | ------------ | ------ |  | - | -------- | -------- | - | - | ---------- | ------- | 
|                                                                |                                   |   |         |         |              |   | Guarantor    |         | Non-guarantor |   |              |        |  |   |          |          |  
|                                                                |                                   |   | Parent  |         | Subsidiaries |   | Subsidiaries |         | Eliminations  |   | Consolidated
|                                                                |                                   |   |         |         |              |   |              |         |               |   |             
|Three Months Ended December 31, 2002                            |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        
|Total revenues                                                  |                                   | $ |        |         |              | $ | 4,092,387    |         |               | $ | 51,973       |        |  | $ | (37,985  | )        |   | $ | 4,106,375  |        
|Cost of operations                                              |                                   |   |        |         |              |   | 4,038,590    |         |               |   | 21,200       |        |  |   | (37,985  | )        |   |   | 4,021,805  |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        
|                                                                | Operating income                  |   |         |        |              |   |              | 53,797  |               |   |              | 30,773 |  |   |          |         |   |   |            | 84,570  | 
|Interest (expense) income, net                                  |                                   |   | (5,665  | )       |              |   | 3,058        |         |               |   | (6,376       | )      |  |   |         |          |   |   | (8,983     | )      
|Loss from joint venture                                         |                                   |   | (836    | )       |              |   | (417         | )       |               |   |             |        |  |   |         |          |   |   | (1,253     | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        
|                                                                | Income (loss) before income taxes |   |         | (6,501  | )            |   |              | 56,438  |               |   |              | 24,397 |  |   |          |         |   |   |            | 74,334  | 
|Income tax provision                                            |                                   |   | 2,568   |         |              |   | (23,396      | )       |               |   | (8,534       | )      |  |   |         |          |   |   | (29,362    | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        
|Net income (loss) before equity earnings and
extraordinary loss |                                   |   | (3,933  | )       |              |   | 33,042       |         |               |   | 15,863       |        |  |   |         |          |   |   | 44,972     |        
|Equity earnings in subsidiaries                                 |                                   |   | 48,905  |         |              |   |             |         |               |   |             |        |  |   | (48,905  | )        |   |   |           |        
|Extraordinary loss on early retirement of debt,
net of taxes    |                                   |   |        |         |              |   |             |         |               |   |             |        |  |   |         |          |   |   |           |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        
|                                                                | Net income                        |   | $       | 44,972  |              |   | $            | 33,042  |               |   | $            | 15,863 |  |   | $        | (48,905  | ) |   | $          | 44,972  | 
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        
|Nine Months Ended December 31, 2002                             |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        
|Total revenues                                                  |                                   | $ |        |         |              | $ | 11,515,009   |         |               | $ | 98,886       |        |  | $ | (62,614  | )        |   | $ | 11,551,281 |        
|Cost of operations                                              |                                   |   |        |         |              |   | 11,325,926   |         |               |   | 50,037       |        |  |   | (62,614  | )        |   |   | 11,313,349 |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        
|                                                                | Operating income                  |   |         |        |              |   |              | 189,083 |               |   |              | 48,849 |  |   |          |         |   |   |            | 237,932 | 
|Interest (expense) income, net                                  |                                   |   | (28,258 | )       |              |   | 9,339        |         |               |   | (10,520      | )      |  |   |         |          |   |   | (29,439    | )      
|Loss from joint venture                                         |                                   |   | (3,510  | )       |              |   |             |         |               |   |             |        |  |   |         |          |   |   | (3,510     | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        
|                                                                | Income (loss) before income taxes |   |         | (31,768 | )            |   |              | 198,422 |               |   |              | 38,329 |  |   |          |         |   |   |            | 204,983 | 
|Income tax provision                                            |                                   |   | 12,548  |         |              |   | (80,143      | )       |               |   | (13,374      | )      |  |   |         |          |   |   | (80,969    | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        
|Net income (loss) before equity earnings and
extraordinary loss |                                   |   | (19,220 | )       |              |   | 118,279      |         |               |   | 24,955       |        |  |   |         |          |   |   | 124,014    |        
|Equity earnings in subsidiaries                                 |                                   |   | 143,234 |         |              |   |             |         |               |   |             |        |  |   | (143,234 | )        |   |   |           |        
|Extraordinary loss on early retirement of debt,
net of taxes    |                                   |   | (1,491  | )       |              |   |             |         |               |   |             |        |  |   |         |          |   |   | (1,491     | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        
|                                                                | Net income                        |   | $       | 122,523 |              |   | $            | 118,279 |               |   | $            | 24,955 |  |   | $        | (143,234 | ) |   | $          | 122,523 | 
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |          |          |   |   |            |        

|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |         | 
|--------------------------------------------------------------- | --------------------------------- | - | ------- | ------- | ------------ | - | ------------ | ------- | ------------- | - | ------------ | ---- | - | - | -------- | -------- | - | - | --------- | ------- | 
|                                                                |                                   |   |         |         |              |   | Guarantor    |         | Non-guarantor |   |              |      |   |   |          |          |  
|                                                                |                                   |   | Parent  |         | Subsidiaries |   | Subsidiaries |         | Eliminations  |   | Consolidated
|                                                                |                                   |   |         |         |              |   |              |         |               |   |             
|Three Months Ended December 31, 2001                            |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        
|Total revenues                                                  |                                   | $ |        |         |              | $ | 3,365,821    |         |               | $ | 961          |      |   | $ | (887     | )        |   | $ | 3,365,895 |        
|Cost of operations                                              |                                   |   |        |         |              |   | 3,299,702    |         |               |   | 514          |      |   |   | (887     | )        |   |   | 3,299,329 |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        
|                                                                | Operating income                  |   |         |        |              |   |              | 66,119  |               |   |              | 447  |   |   |          |         |   |   |           | 66,566  | 
|Interest (expense) income, net                                  |                                   |   | (8,534  | )       |              |   | (3,016       | )       |               |   | (285         | )    |   |   |         |          |   |   | (11,835   | )      
|Loss from joint venture                                         |                                   |   | (741    | )       |              |   |             |         |               |   |             |      |   |   |         |          |   |   | (741      | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        
|                                                                | Income (loss) before income taxes |   |         | (9,275  | )            |   |              | 63,103  |               |   |              | 162  |   |   |          |         |   |   |           | 53,990  | 
|Income tax provision                                            |                                   |   | 3,663   |         |              |   | (24,943      | )       |               |   | (46          | )    |   |   |         |          |   |   | (21,326   | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        
|Net income (loss) before equity earnings and
extraordinary loss |                                   |   | (5,612  | )       |              |   | 38,160       |         |               |   | 116          |      |   |   |         |          |   |   | 32,664    |        
|Equity earnings in subsidiaries                                 |                                   |   | 38,276  |         |              |   |             |         |               |   |             |      |   |   | (38,276  | )        |   |   |          |        
|Extraordinary loss on early retirement of debt,
net of taxes    |                                   |   | (5,315  | )       |              |   |             |         |               |   |             |      |   |   |         |          |   |   | (5,315    | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        
|                                                                | Net income                        |   | $       | 27,349  |              |   | $            | 38,160  |               |   | $            | 116  |   |   | $        | (38,276  | ) |   | $         | 27,349  | 
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        
|Nine Months Ended December 31, 2001                             |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        
|Total revenues                                                  |                                   | $ |        |         |              | $ | 9,668,344    |         |               | $ | 961          |      |   | $ | (887     | )        |   | $ | 9,668,418 |        
|Cost of operations                                              |                                   |   |        |         |              |   | 9,476,990    |         |               |   | 857          |      |   |   | (887     | )        |   |   | 9,476,960 |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        
|                                                                | Operating income                  |   |         |        |              |   |              | 191,354 |               |   |              | 104  |   |   |          |         |   |   |           | 191,458 | 
|Interest (expense) income, net                                  |                                   |   | (51,763 | )       |              |   | 4,674        |         |               |   | (285         | )    |   |   |         |          |   |   | (47,374   | )      
|Loss from joint venture                                         |                                   |   | (1,831  | )       |              |   |             |         |               |   |             |      |   |   |         |          |   |   | (1,831    | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        
|                                                                | Income (loss) before income taxes |   |         | (53,594 | )            |   |              | 196,028 |               |   |              | (181 | ) |   |          |         |   |   |           | 142,253 | 
|Income tax provision                                            |                                   |   | 21,170  |         |              |   | (77,441      | )       |               |   | 90           |      |   |   |         |          |   |   | (56,181   | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        
|Net income (loss) before equity earnings and
extraordinary loss |                                   |   | (32,424 | )       |              |   | 118,587      |         |               |   | (91          | )    |   |   |         |          |   |   | 86,072    |        
|Equity earnings in subsidiaries                                 |                                   |   | 118,496 |         |              |   |             |         |               |   |             |      |   |   | (118,496 | )        |   |   |          |        
|Extraordinary loss on early retirement of debt,
net of taxes    |                                   |   | (5,315  | )       |              |   |             |         |               |   |             |      |   |   |         |          |   |   | (5,315    | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        
|                                                                | Net income                        |   | $       | 80,757  |              |   | $            | 118,587 |               |   | $            | (91  | ) |   | $        | (118,496 | ) |   | $         | 80,757  | 
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |      |   |   |          |          |   |   |           |        

10



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##### Table of Contents



Condensed Consolidating Statement of Cash Flows:

|                                                    |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|--------------------------------------------------- |  | ------ | ------- | ------------ |  | ------------ | -------- | ------------- |  | ------------ | -------- | - |  | - | - |  |  | - | -------- | -
|                                                    |  |        |         |              |  | Guarantor    |          | Non-guarantor |  |              |          |   |  |   |   | 
|                                                    |  | Parent |         | Subsidiaries |  | Subsidiaries |          | Eliminations  |  | Consolidated
|                                                    |  |        |         |              |  |              |          |               |  |             
|Nine Months Ended December 31, 2002                 |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|Net cash provided by (used in) operating activities |  | $      | (75,655 | )            |  | $            | 458,160  |               |  | $            | (191,741 | ) |  | $ |  |  |  | $ | 190,764  |  
|Net cash used in investing activities               |  |        | (1,900  | )            |  |              | (131,630 | )             |  |              | (1,023   | ) |  |   |  |  |  |   | (134,553 | )
|Net cash provided by (used in) financing activities |  |        | (16,920 | )            |  |              | (326,530 | )             |  |              | 219,329  |   |  |   |  |  |  |   | (124,120 | )
|                                                    |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|Increase (decrease) in cash and cash equivalents    |  |        | (94,475 | )            |  |              |         |               |  |              | 26,565   |   |  |   |  |  |  |   | (67,909  | )
|Cash and cash equivalents, beginning of period      |  |        | 116,983 |              |  |              |         |               |  |              | 22,162   |   |  |   |  |  |  |   | 139,145  |  
|                                                    |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|Cash and cash equivalents, end of period            |  | $      | 22,508  |              |  | $            |         |               |  | $            | 48,727   |   |  | $ |  |  |  | $ | 71,236   |  
|                                                    |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  

|                                                 |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |         |  
|------------------------------------------------ |  | ------ | ------- | ------------ |  | ------------ | -------- | ------------- |  | ------------ | -------- | - |  | - | - |  |  | - | ------- | -
|                                                 |  |        |         |              |  | Guarantor    |          | Non-guarantor |  |              |          |   |  |   |   | 
|                                                 |  | Parent |         | Subsidiaries |  | Subsidiaries |          | Eliminations  |  | Consolidated
|                                                 |  |        |         |              |  |              |          |               |  |             
|Nine Months Ended December 31, 2001              |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |         |  
|Net cash provided by operating activities        |  | $      | (43,068 | )            |  | $            | 559,361  |               |  | $            | (395,982 | ) |  | $ |  |  |  | $ | 120,311 |  
|Net cash used in investing activities            |  |        | 950     |              |  |              | (48,422  | )             |  |              | (28      | ) |  |   |  |  |  |   | (47,500 | )
|Net cash used in financing activities            |  |        | 31,121  |              |  |              | (510,939 | )             |  |              | 426,206  |   |  |   |  |  |  |   | (53,612 | )
|                                                 |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |         |  
|Increase (decrease) in cash and cash equivalents |  |        | (10,997 | )            |  |              |         |               |  |              | 30,196   |   |  |   |  |  |  |   | 19,199  |  
|Cash and cash equivalents, beginning of period   |  |        | 110,048 |              |  |              |         |               |  |              |         |   |  |   |  |  |  |   | 110,048 |  
|                                                 |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |         |  
|Cash and cash equivalents, end of period         |  | $      | 99,051  |              |  | $            |         |               |  | $            | 30,196   |   |  | $ |  |  |  | $ | 129,247 |  
|                                                 |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |         |  

7.     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 three months ended December 31, 2002, the Company
purchased 0.7 million shares under this repurchase program at a cost of $15.9
million. From inception of the repurchase program through December 31, 2002,
the Company has repurchased 4.7 million shares, which are included in treasury
stock, at a cost of $87.7 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
shareholders from the additional consideration escrow. In January 2003, 34,188
shares of Class A common stock also were withdrawn from the indemnification
claims escrow and returned to the Company to satisfy the
Companys indemnification claim

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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.

8.     Acquisitions

Effective as of November 1, 2002, the Company acquired 100% of the common
stock of privately-held Accordant Health Services, Inc. (Accordant), a
disease management company that focuses on helping patients with complex,
chronic and progressive diseases. The aggregate purchase price of $73.0
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.

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               |  |                      | 52,559 |  
|Customer base          |  |                      | 20,000 |  
|Liabilities assumed    |  |                      | (5,616 | )
|                       |  |                      |        |  
|Net assets acquired    |  | $                    | 73,034 |  

The final allocation of the purchase price will be based on appraisals,
which are currently in process.

9.     Commitments and Contingencies

The Company has entered into long-term employment and non-compete
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., or 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 Office of
Inspector General, or OIG, requesting that PCS produce documents in connection
with an industry-wide investigation. The investigation is 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 involves a review of the practices of pharmacy benefit management
companies, or PBMs, under federal anti-kickback statutes and other laws and
regulations. This investigation appears to focus on PBMs relationships with
pharmaceutical manufacturers and retail pharmacies and PBMs programs relating
to drug formulary compliance, which include rebate and other payments made by
pharmaceutical manufacturers to PBMs. The investigation also appears to focus
on payments made by PBMs to retail pharmacies or others in connection with
therapeutic intervention activities. AdvancePCS has turned over documents
responsive to the subpoena. In December 2001, the OIG filed a motion in the
United States District Court of the Eastern District of Pennsylvania seeking to
enforce its demand under the subpoena for AdvancePCS to produce certain
employee e-mails. AdvancePCS opposed the enforcement motion, objecting to the
scope and breadth of this request.

In related proceedings, on April 10, 2002, the United States Attorney
General issued Civil Investigative Demands, or CIDs, seeking to compel
interviews with eight of the Companys employees and former employees in
connection with a purported Federal False Claims Act inquiry related to its
ongoing investigation. These eight individuals filed a joint petition in the
United States District Court for the Eastern District of Pennsylvania seeking
to set aside the CIDs.

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On September 17, 2002, upon motion of the Company, OIG and the eight
individuals, the District Court entered an order holding the matters in
abeyance pending the outcome of the good faith efforts to reach a mutual
resolution of the outstanding discovery issues. The Company has since produced
additional documents and witnesses in response to the OIGs requests.

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 and those of
PCS 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, 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 its business, profitability and growth prospects to suffer
materially.

AdvancePCS is a party to three lawsuits alleging that the Company acts as
a fiduciary, as that term is defined in the Employee Retirement Income Security
Act, or ERISA, and that AdvancePCS has breached certain fiduciary obligations
under ERISA. 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 lawsuits each seek unspecified monetary damages and
injunctive relief. 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, rebates, and
intervention programs, potentially reducing its profitability and growth
prospects. AdvancePCS 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 AdvancePCS for violation of Minnesotas deceptive trade
practices act, tortious interference with prospective economic advantage and
unjust enrichment. Specifically, AARP and United claim that AdvancePCS created
confusion among certain AARP members and pharmacists through the launch of the
AdvancePCS prescription drug discount program. AARP and United requested
preliminary and permanent injunctive relief. AdvancePCS moved to dismiss the
complaint. Without holding an evidentiary hearing, the district court granted
AARP and Uniteds request for preliminary injunctive relief. AdvancePCS
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 also asserted monetary
damages of $30 million, including attorneys fees and costs. AdvancePCS also
moved to dismiss this count of the complaint. Discovery in connection with the
monetary claim is ongoing. AdvancePCS denied AARP and Uniteds allegations and
is vigorously defending this matter.

In addition, the Company is a defendant in lawsuits from time to time
arising in the ordinary course of business, the outcome of which the Company
believes will not have a material adverse effect on its business, profitability
and growth prospects.

10.     Comprehensive Income (Loss)

The components of the ending balances of accumulated other comprehensive
loss, net of tax, as reflected in stockholders equity are shown as follows (in
thousands):

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|                                                              |                                      |   |                   |        |                |   |        |         |  
|------------------------------------------------------------- | ------------------------------------ | - | ----------------- | ------ | -------------- | - | ------ | ------- | -
|                                                              |                                      |   | December 31, 2002 |        | March 31, 2002
|                                                              |                                      |   |                   |        |               
|Interest rate swap contracts designated,
unrealized loss,
net |                                      | $ | (4,921            | )      |                | $ | (8,837 | )      
|Minimum pension liability
adjustment                          |                                      |   | (3,849            | )      |                |   | (3,849 | )      
|                                                              |                                      |   |                   |        |                |   |        |         |  
|                                                              | Accumulated other comprehensive
loss |   | $                 | (8,770 | )              |   | $      | (12,686 | )
|                                                              |                                      |   |                   |        |                |   |        |         |  

The components of total comprehensive income (loss), net of tax, are shown as
follows (in thousands):

|                                  |                                                                |   |                    |        |                   |   |        |        |      |   |         |         |  |   |        |        |  
|--------------------------------- | -------------------------------------------------------------- | - | ------------------ | ------ | ----------------- | - | ------ | ------ | ---- | - | ------- | ------- |  | - | ------ | ------ | -
|                                  |                                                                |   | Three Months Ended |        | Nine Months Ended
|                                  |                                                                |   | December 31,       |        | December 31,     
|                                  |                                                                |   |                    |        |                  
|                                  |                                                                |   | 2002               |        | 2001              |   | 2002   |        | 2001
|                                  |                                                                |   |                    |        |                   |   |        |        |     
|Net income                        |                                                                | $ | 44,972             |        |                   | $ | 27,349 |        |      | $ | 122,523 |         |  | $ | 80,757 |       
|Other comprehensive income (loss) |                                                                |   |                    |        |                   |   |        |        |      |   |         |         |  |   |        |       
|                                  | Designated interest rate swap contracts
unrealized gain (loss) |   |                    | 1,362  |                   |   |        | 1,465  |      |   |         | 3,916   |  |   |        | (5,673 | )
|                                  |                                                                |   |                    |        |                   |   |        |        |      |   |         |         |  |   |        |        |  
|                                  | Total comprehensive income                                     |   | $                  | 46,334 |                   |   | $      | 28,814 |      |   | $       | 126,439 |  |   | $      | 75,084 |  
|                                  |                                                                |   |                    |        |                   |   |        |        |      |   |         |         |  |   |        |        |  

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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Revenue Recognition

Our revenues are derived principally from sales of prescription drugs to
members of our clients, either through our mail 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.

Data Services

We evaluate our plan sponsor customers contacts using the indicators of
Emerging Issues Task Force No. 99-19 (EITF 99-19) Reporting Gross Revenue as
a Principal vs. Net as an Agent 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 sponsors
that have contractually agreed to use our contracted pharmacy network. We act
as principals under EITF 99-19 when adjudicating claims for plan sponsors
through our contracted pharmacy network for the following reasons:



| |  | We negotiate a contract with the plan sponsor customer and also negotiate contracts with the 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 must deal directly with us and cannot 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s members;                                                                                                                                                                                                                                                                                                                   
| 
| |  | We have credit risk for the price due to the pharmacy from the plan sponsor; 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 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. We do not record as
revenue or cost of revenue any co-payments due from the member to the retail
pharmacy.

By contrast, we do not act as a principal when adjudicating claims for a
plan sponsor that uses its own retail pharmacy network rather than our network.
In these cases we record revenue net  the only revenue recorded is the
amount of the administrative fee earned by us for processing the claim.

Under both gross and net reporting for data services, revenue is
recognized when the claim is processed.

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Mail Services

Revenues from the dispensing of pharmaceuticals from our mail service
pharmacy are recognized when each prescription is shipped. We contract directly
with plan sponsor customers to provide prescription drugs to their members. We
are contractually committed to agreed upon 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. Therefore, for prescriptions dispensed
through our own mail service pharmacy, we recognize the total amounts paid by
both the customer and the member (in the form of a co-payment) as revenue.

Clinical and Other Services

Rebate service fees are recognized in revenues as earned in accordance
with the contractual agreements with our plan sponsor customers. Rebate
service fee revenues are fees we receive from our health plan customers for
providing clinical services, which includes negotiating for appropriate rebates
with pharmaceutical manufacturers on behalf of our health plan sponsor
customers. Only the rebate service fee that we earn per our negotiated
contract with our customers is recorded as revenue in our statement of
operations.

Separately, we earn administrative fees from pharmaceutical manufacturers for
services rendered in connection with rebate agreements, including aggregating
members, performing market share analysis used to calculate rebates and
consolidating billing for clients. We also earn other revenue from
pharmaceutical manufacturers for services such as clinical consulting, physician and member
education programs, clinical trials, outcome research, disease management
programs, prescription review and other health improvement
products. 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.

Cost of Revenues

Cost of revenues includes product 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.
Rebate amounts collected from pharmaceutical manufacturers on behalf of our
plan sponsor customers and passed through to our customers are excluded from
cost of revenues.

Use of Estimates

Preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and related disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and reported
amounts of revenues and expenses during the reporting periods. We have made
significant estimates of the purchase price allocation in our acquisitions,
including the fair value of the assets acquired and liabilities assumed,
intangible assets and goodwill. Actual results may differ from these estimates
under different assumptions or conditions. Other significant estimates include
clinical services revenues and costs, reserves for uncollectable accounts,
liabilities relating to customer rebate guarantees, network guarantees,
performance commitments and service warranties. We have also made significant
estimates relating to contract losses, the value of our various investments and
recoverability of the capitalized amounts for internally developed software.
We base our estimates on historical experience and on various assumptions that
we believe are reasonable under the circumstances. We continually evaluate the
appropriateness of the amounts recorded and revise our estimates regularly.
Actual results could differ from those estimates, and any such change could
adversely affect our results of operations.

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Accounts Receivable

Accounts receivable balances represent trade receivables generated from
health improvement services (data services, mail services and clinical and
other services). To reduce the potential for credit risk, we perform ongoing
evaluations of our customers financial condition but we do not generally
require significant collateral to support these receivables. Accounts
receivable balances are used as collateral for our debt. As of December 31,
2002, unbilled receivables were $668.3 million. Unbilled receivables to plan
sponsors are typically billed within 15 days and unbilled receivables to
manufacturers are typically billed within 90 days, based on the applicable
contractual billing schedule. We establish an allowance for doubtful accounts
based on performance factors, historical trends and other pertinent
information.

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##### Table of Contents



Results of Operations  AdvancePCS

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

|                                                             |                             |                |         |                                       |           |                                       |         |           |           |         |         |           |            |   |         |           |           | 
|------------------------------------------------------------ | --------------------------- | -------------- | ------- | ------------------------------------- | --------- | ------------------------------------- | ------- | --------- | --------- | ------- | ------- | --------- | ---------- | - | ------- | --------- | --------- | 
|                                                             |                             |                |         | Three Months Ended                    |           | Nine Months Ended                    
|                                                             |                             |                |         | December 31,                          |           | December 31,                         
|                                                             |                             |                |         |                                       |           |                                      
|                                                             |                             |                |         | 2002                                  |           | 2001                                  |         | 2002      |           | 2001(1)
|                                                             |                             |                |         |                                       |           |                                       |         |           |           |        
|                                                             |                             |                |         | (in thousands, except per share data) |           | (in thousands, except per share data)
|Revenues:                                                    |                             |                |         |                                       |           |                                       |         |           |           |         |         |           |            |   |         |          
|                                                             | Data services               |                | $       | 3,289,693                             |           |                                       | $       | 2,837,013 |           |         | $       | 9,287,606 |            |   | $       | 8,179,600 |          
|                                                             | Mail services               |                |         | 642,586                               |           |                                       |         | 392,891   |           |         |         | 1,756,687 |            |   |         | 1,083,323 |          
|                                                             | Clinical and other services |                |         | 174,096                               |           |                                       |         | 135,991   |           |         |         | 506,988   |            |   |         | 405,495   |          
|                                                             |                             |                |         |                                       |           |                                       |         |           |           |         |         |           |            |   |         |          
|                                                             |                             | Total revenues |         |                                       | 4,106,375 |                                       |         |           | 3,365,895 |         |         |           | 11,551,281 |   |         |           | 9,668,418 | 
|Gross profit                                                 |                             |                | 140,957 |                                       |           |                                       | 114,818 |           |           |         | 401,766 |           |            |   | 330,559 |          
|Selling, general and administrative expenses                 |                             |                | 56,387  |                                       |           |                                       | 48,252  |           |           |         | 163,834 |           |            |   | 137,341 |          
|Operating income                                             |                             |                | 84,570  |                                       |           |                                       | 66,566  |           |           |         | 237,932 |           |            |   | 191,458 |          
|Net interest expense                                         |                             |                | 8,983   |                                       |           |                                       | 11,835  |           |           |         | 29,439  |           |            |   | 47,374  |          
|Loss from joint venture                                      |                             |                | 1,253   |                                       |           |                                       | 741     |           |           |         | 3,510   |           |            |   | 1,831   |          
|Extraordinary loss on early retirement of
debt, net of taxes |                             |                |        |                                       |           |                                       | 5,315   |           |           |         | 1,491   |           |            |   | 5,315   |          
|Net income                                                   |                             | $              | 44,972  |                                       |           | $                                     | 27,349  |           |           | $       | 122,523 |           |            | $ | 80,757  |          
|Diluted net income per share                                 |                             | $              | 0.46    |                                       |           | $                                     | 0.27    |           |           | $       | 1.23    |           |            | $ | 0.83    |          



---

|(1) |  | Financial information for 2001 has been restated for the purchase
of CHI (see Note 1 to the financial statements included in this
report).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

Three Months Ended December 31, 2002 Compared to Three Months Ended December
31, 2001

Revenues. Data services revenue increased $452.7 million, or 16%, for the
three months ended December 31, 2002 compared to the same period one year ago.
The increase is due to an increase in clients whose claims are processed
through our contractual pharmacy network, an increase in the utilization of
prescription drugs by members, and higher drug ingredient costs. The increase
in drug ingredient costs is due to increases in average wholesale prices used
to calculate the payments due from clients and due to pharmacies. Pharmacy
network claims processed increased 10% to 125.7 million in the three months
ended December 31, 2002 from 114.0 million for the three months ended December
31, 2001.

The average data services revenue per network pharmacy claim increased 5%
to $26.17 for the three months ended December 31, 2002 due to higher ingredient
costs and a higher mix of plan sponsor customers utilizing retail pharmacy
networks contracted by us versus retail pharmacy networks contracted by the
customer. As discussed earlier under Critical Accounting Policies, we use
gross reporting of revenues for claims adjudicated through our contractual
pharmacy network.

Mail services revenue increased $249.7 million or 64% due to the addition
of several customers whose members are high mail utilizers, increased rate of
utilization of prescription drugs by our members, and higher ingredient costs.
Mail pharmacy prescriptions dispensed increased 50% to 4.0 million for the
three months ended December 31, 2002 from 2.7 million in the three months ended
December 31, 2001. For the three months ended December 31, 2002, the average
revenue per mail pharmacy claim increased 6% primarily due to higher drug
ingredient costs.

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Clinical and other services increased $38.1 million and 28% due to new
customers which use our clinical services, as well as increased utilization of
prescription drugs by our members, and greater formulary compliance.

Gross profit. Our gross profit for the three months ended December 31, 2002
increased by $26.1 million, or 23%, compared to the same period in 2001. As a
percentage of revenues, gross profit was approximately 3.4% for both
three-month periods ended December 31, 2002 and 2001. We have been successful
in offsetting margin pressure caused by lower pricing on administrative fees
and other services with increased utilization of our mail service pharmacies,
improved formulary compliance, and increased utilization of generic drugs.

Selling, general and administrative expenses. Our selling, general and
administrative expenses for the three months ended December 31, 2002 increased
by $8.1 million, or 17% compared to the same period in 2001. The increase is
primarily due to increased costs associated with the expansion of our call
centers, corporate offices and mail facilities along with an increase in our
sales commissions. Selling, general and administrative expenses as a
percentage of revenues were 1.4% for both three-month periods ended December
31, 2002 and 2001.

Interest income and interest expense. Interest expense, net of interest
income, for the three months ended December 31, 2002 decreased $2.9 million
compared to the same period in 2001. The decrease was due primarily to the
reduction in outstanding debt and increased usage of the Asset Securitization
Facility, which incurs interest at a lower rate than the debt it replaced, and
the expiration in October 2002 of $100 million of the interest rate swap.

Loss from joint venture.In February 2001, we entered into an agreement
with Express Scripts and Merck-Medco, to form RxHub, LLC (RxHub) to develop
electronic prescribing technology. We own one third of the equity of RxHub.
We have recorded our investment in RxHub under the equity method of accounting
and record our percentage interest in RxHubs results in our Consolidated
Statement of Operations. For the three months ended December 31, 2002 and
2001, we recorded net losses of $1.3 million and $0.7 million from our interest
in RxHub, respectively.

Income taxes. For the three months ended December 31, 2002 and 2001, our
effective tax rate was approximately 39.5%.

Diluted net income per share. We reported diluted net income of $0.46 per
share for the three months ended December 31, 2002 compared to $0.27 per share
for the same period in 2001. The weighted average shares outstanding were 97.4
million and 102.3 million for the three months ended December 31, 2002 and
2001, respectively.

On October 1, 2001, we announced a two-for-one split of our common stock,
effected 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-Q have been retroactively adjusted to reflect
the impact of the stock split.

Nine Months Ended December 31, 2002
Compared to Nine Months Ended December 31,
2001

Revenues. Data services revenue increased $1.1 billion, or 14%, for the
nine months ended December 31, 2002 compared to the same period one year ago.
The increase is due to an increase in clients whose claims are processed
through our contractual pharmacy network, an increase in the utilization of
prescription drugs by members, and higher drug ingredient costs. The increase
in drug ingredient costs is due to increases in average wholesale prices used
to calculate the payments due from clients and due to pharmacies. Pharmacy
network claims processed increased 8% to 364.5 million in the nine months ended
December 31, 2002 from 336.3 million for the nine months ended December 31,
2001.

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The average data services revenue per network pharmacy claim increased 5%
to $25.48 for the nine months ended December 31, 2002 due to higher ingredient
costs and a higher mix of plan sponsor customers utilizing retail pharmacy
networks contracted by us versus retail pharmacy networks contracted by the
customer. As discussed earlier under Critical Accounting Policies, we use
gross reporting of revenue for claims that are adjudicated through our
contractual pharmacy network.

Mail services revenue increased $673.4 million or 62% over the nine months
ended December 31, 2002 due to the addition of several customers whose members
are high mail utilizers, increased rate of utilization of prescription drugs by
our members, and higher ingredient costs. Mail pharmacy prescriptions
dispensed increased 45% to 11.4 million for the nine months ended December 31,
2002 from 7.8 million in the nine months ended December 31, 2001. For the nine
months ended December 31, 2002, the average revenue per mail pharmacy claim
increased 8% primarily due to higher drug ingredient costs.

Clinical and other services increased $101.0 million and 25% due to new
customers which use our clinical services, as well as increased utilization of
prescription drugs by our members, and greater formulary compliance.

Gross profit. Our gross profit for the nine months ended December 31,
2002 increased by $71.2 million, or 22%, compared to the same period in 2001.
As a percentage of revenues, gross profit was approximately 3.5% in the nine
months ended December 31, 2002 and 3.4% in the same period in 2001. We have
been successful in offsetting margin pressure caused by lowering pricing on
administrative fees and other services with increased utilization of our mail
service pharmacies, improved formulary compliance, and increased utilization of
generic drugs.

Selling, general and administrative expenses. Our selling, general and
administrative expenses for the nine months ended December 31, 2002 increased
by $26.5 million, or 19% compared to the same period in 2001. The increase is
primarily due to increased costs associated with the expansion of our call
centers, corporate offices and mail facilities along with an increase in our
sales commissions. Selling, general and administrative expenses as a
percentage of revenues were 1.4% for the nine months ended December 31, 2002
and 2001.

Interest income and interest expense. Interest expense, net of interest
income, for the nine months ended December 31, 2002 decreased $17.9 million
compared to the same period in 2001. The decrease was due primarily to the
reduction in outstanding debt and increased usage of the Asset Securitization
Facility, which incurs interest at a lower rate than the debt it replaced, and
the expiration in October 2002 of $100 million of the interest rate swap.

Loss from joint venture.In February 2001, we entered into an agreement
with Express Scripts and Merck-Medco, to form RxHub, LLC (RxHub) to develop
electronic prescribing technology. We own one third of the equity of RxHub.
We have recorded our investment in RxHub under the equity method of accounting
and record our percentage interest in RxHubs results in our Consolidated
Statement of Operations. For the nine months ended December 31, 2002 and 2001,
we recorded net losses of $3.5 million and $1.8 million from our interest in
RxHub, respectively.

Income taxes. For the nine months ended December 31, 2002 and 2001, our
effective tax rate was approximately 39.5%.

Extraordinary loss on early retirement of debt, net of taxes.For the nine
months ended December 31, 2002 and 2001, in connection with the refinancing and
the bank 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 $1.5 million and $5.3 million, net of taxes for the
nine months ended December 31, 2002 and 2001, respectively.

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Diluted net income per share. We reported diluted net income of $1.23 per
share for the nine months ended December 31, 2002 compared to $0.83 per share
for the same period in 2001. The weighted average shares outstanding were 99.3
million and 97.0 million for the nine months ended December 31, 2002 and 2001,
respectively. On August 23, 2001 we completed the sale of 9.0 million shares
of Class A common stock.

On October 1, 2001, we announced a two-for-one split of our common stock,
effected 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-Q have been retroactively adjusted to reflect
the impact of the stock split.

Liquidity and Capital Resources

As of December 31, 2002, we had a working capital deficit of $307.1
million. The majority of our current obligations are not due until cash is
collected from our customers. We use our excess cash balances to reduce debt
under our credit facilities, which results in a net deficit in working capital.
Our net cash provided by operating activities was $190.8 million for the nine
months ended December 31, 2002, resulting primarily from net income and also
due to the timing of receivables and payables resulting from our claims
processing cycle. A majority of our claim billings are processed on a
fourteen-day cycle, beginning on Saturdays. As a result, cash balances,
accounts receivable and accounts payable reflected in our balance sheet may
fluctuate period to period depending on the day of the week that the quarterly
period 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.

During the nine months ended December 31, 2002, we used cash of $58.7
million for purchases of property and equipment associated with the growth and
expansion of our systems and facilities which includes 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.

Effective as of November 1, 2002, we acquired 100% of the common stock of
privately-held Accordant Health Services, Inc. (Accordant), a disease
management company that focuses on helping patients with complex, chronic and
progressive diseases. The aggregate purchase price for Accordant of $73.0
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 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 in process.

In addition, during the nine months ended December 31, 2002, we purchased
approximately 4.7 million shares under our stock repurchase program at a cost
of approximately $87.7 million. During the nine months ended December 31,
2002, we repurchased $12.2 million of Senior Notes. 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.

Historically, we have been able to fund our operations and continued
growth through cash flow from operations. In fiscal years 2001 and 2002 and in
the nine months ended December 31, 2002 our operating cash flow funded our
capital expenditures and was used to reduce our debt, repurchase shares, make
acquisitions or invest in money market funds.

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We anticipate that cash flow from operations, combined with our current
cash balances and amounts available under our credit facility, will be
sufficient to meet our 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.

In December 2001, we securitized certain of our accounts receivable
pursuant to a $150 million facility (the Asset Securitization Facility). In
June 2002, we completed an increase to the Asset Securitization Facility of an
additional $150 million. The $300 million commitment under the facility is due
December 10, 2006. The Asset Securitization Facility incurs interest at the
funding agents A-1+/P-1 commercial paper rate plus .85%. As of December 31,
2002, we had drawn $270 million under this facility. The Asset Securitization
Facility is included in our debt balance as of December 31, 2002 and March 31,
2002 and will continue to be reflected on-balance sheet. The proceeds of the
$150 million increase were used to repay $150 million of our Term B debt.

In connection with the repayment of our Term B debt in June 2002 with the
increased asset securitization proceeds, 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 Term B debt in the amount of $ 2.4 million ($1.5 million, net of taxes).

On September 30, 2002 we amended its Senior Secured Credit Facility to
increase the size of its revolver from $175 million to $275 million. No amounts
were outstanding on the revolving facility at December 31, 2002.

As of December 31, 2002 our debt consists of the following (in thousands):

|                          |  |   |         | 
|------------------------- |  | - | ------- | 
|Asset Securitization      |  | $ | 270,000 | 
|Senior Notes              |  |   | 187,825 | 
|Other                     |  |   | 312     | 
|Revolving Credit Facility |  |   |        | 
|                          |  |   |         | 
|                          |  | $ | 458,137 | 
|                          |  |   |         | 

Effective April 1, 2001, we adopted SFAS 133 Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS 137 and SFAS 138. In
order to hedge variable rate interest payments made in conjunction with our
debt we entered into 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 October
2002, 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 133. The fair value of the swap, an obligation of $8.1
million at December 31, 2002 and $14.5 million at March 31, 2002, 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. The amount
of changes in other comprehensive income, net of taxes of $2.5 million, and the
net amount reclassified into earnings (interest expense) during the nine-month
period ended December 31, 2002 were $3.9 million and $9.9 million,
respectively.

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 three months ended December 31, 2002, the Company
purchased 0.7 million shares under this repurchase program at a cost of $15.9
million.

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From inception of the repurchase program through December 31, 2002, the
Company has repurchased 4.7 million shares, which are included in treasury
stock, at a cost of $87.7 million.

HIPAA

Pursuant to the Health Insurance Portability and Accountability Act of
1996, or HIPAA, the Department of Health and Human Services, or HHS, issued
final Standards for Electronic Transactions in August 2000. These regulations
established new standards for electronic transmission of certain types of
health care data, including on-line pharmacy claims transactions. AdvancePCS
met the original compliance date of October 16, 2002 despite the extension that
was granted to Covered Entities that applied for an extension.

The HIPAA Privacy Regulations were issued in December 2000 and
subsequently modified on August 14, 2002. Compliance with the Privacy
Regulations is required by April 14, 2003. These regulations govern the use
and disclosure of individually identifiable health information by certain
entities. Significant system and operational changes are required to comply
with these regulations. An assessment was completed last year comparing our
current practices with those practices required by the regulations. We are in
the process of implementing all required changes to our practices and have
substantially completed all implementation activities required to comply with
the regulations issued to date.

We also have preliminarily assessed the compliance requirements under
HHSs proposed HIPAA Security Regulations. These Security Regulations have not
yet been finalized, nor have we finalized our costs estimates associated with
complying with those regulations. A final effective date for those regulations
has not yet been established; however, we expect final regulations to be issued
in the spring of 2003.

Legal Proceedings and Regulatory Developments

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 Office of Inspector
General, or OIG, requesting that PCS produce documents in connection with an
industry-wide investigation. The investigation is 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
involves a review of the practices of pharmacy benefit management companies, or
PBMs, under federal anti-kickback statutes and other laws and regulations. This
investigation appears to focus on PBMs relationships with pharmaceutical
manufacturers and retail pharmacies and PBMs programs relating to drug
formulary compliance, which include rebate and other payments made by
pharmaceutical manufacturers to PBMs. The investigation also appears to focus
on payments made by PBMs to retail pharmacies or others in connection with
therapeutic intervention activities. AdvancePCS has turned over documents
responsive to the subpoena. The United States Attorneys Office has 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.

In December 2001, the OIG filed a motion in the United States District
Court for the Eastern District of Pennsylvania seeking to enforce its demand
under the subpoena for AdvancePCS to produce certain employee e-mails.
AdvancePCS opposed the enforcement motion, objecting to the scope and breadth
of this request.

On April 10, 2002, the United States Attorney General issued Civil
Investigative Demands, or CIDs, seeking to compel interviews with eight of our
employees and former employees in connection with a purported Federal False
Claims Act inquiry related to its ongoing investigation. These eight
individuals filed a joint petition in the United States District Court for the
Eastern District of Pennsylvania seeking to set aside the CIDs. The United
States Attorney filed a petition seeking an order enforcing the CIDs and filed
a response to the petition to set aside the CIDs.

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On September 16, 2002, the OIG, we and the eight individuals filed a
motion requesting that the District Court hold proceedings relating to both the
employee e-mails and the CIDs in abeyance as the parties were working to reach
a mutually acceptable resolution of the outstanding issues that would obviate
the need for any judicial action on the subpoena and CID enforcement actions.
On September 17, 2002, the District Court entered an order holding the matters
in abeyance pending the outcome of the good faith efforts to reach a mutual
resolution of the outstanding discovery issues. We have since produced
additional documents and witnesses in response to the OIGs requests

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 and those of PCS prior to the
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, 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.

AdvancePCS was served with two purported private class action lawsuits
filed by the same counsel for different plaintiffs in the United States
District Court in Arizona. One was filed on or about December 17, 2001 and the
other was served on or about April 19, 2002. The lawsuits allege that
AdvancePCS acts as a fiduciary, as that term is defined in the Employee
Retirement Income Security Act, or ERISA, and that AdvancePCS has breached
certain fiduciary obligations under ERISA. In the earlier of the two cases
filed, the plaintiff withdrew the class action allegations in April 2002 and
the case is proceeding as a single plaintiff seeking to represent one health
plan. As to both cases, AdvancePCS 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 lawsuit seeks unspecified monetary damages and
injunctive relief. 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, rebates, and intervention
programs, potentially reducing our profitability and growth prospects. In the
later of the two cases filed, class allegations remain, but a class of
plaintiffs has not yet been certified and we intend to oppose such
certification. AdvancePCS has denied all allegations of wrongdoing and is
vigorously defending this suit.

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

On December 17, 2001, AARP and United Healthcare Insurance Co. (United)
filed a multi-count complaint against AdvancePCS in federal court in
Minneapolis, Minnesota in a matter captioned United Healthcare Insurance Co.
and AARP v. AdvancePCS, Civ. No. 01-CV-2320 (D. Minn.). AARP and

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United have asserted claims against AdvancePCS for violation of
Minnesotas deceptive trade practices act, tortious interference with
prospective economic advantage and unjust enrichment. Specifically, AARP and
United claim that AdvancePCS created confusion among certain AARP members and
pharmacists through the launch of the AdvancePCS prescription drug discount
program. AARP and United requested preliminary and permanent injunctive
relief. AdvancePCS moved to dismiss the complaint. Without holding an
evidentiary hearing, the district court granted AARP and Uniteds request for
preliminary injunctive relief. AdvancePCS 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 $30 million, including
attorneys fees and costs. AdvancePCS has also moved to dismiss this count of
the complaint. Discovery in connection with AARPs monetary claim is ongoing.
AdvancePCS has denied AARP and Uniteds allegations and is vigorously defending
this matter.

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

On October 1, 2002, the U.S. Department of Health and Human Services OIG
released its Draft Compliance Program Guidance for Pharmaceutical Manufacturers
(the HHS Draft 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 Draft 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. We submitted our comments to the HHS Draft Guidance in December
2002. We believe that our business practices and our arrangements with
pharmaceutical manufacturers satisfy the intent of the HHS Draft Guidance.
AdvancePCS also maintains a compliance program designed to include the key
compliance program elements described in the HHS Draft Guidance. We do not
believe that the HHS Draft Guidance, in its current form, would have a material
effect on our business operations or financial results. However, because the
HHS Draft Guidance has not been finalized, there is the possibility that it
could be changed prior to publication of the final version. Any such changes
could impact our business operations, possibly materially.

Various aspects of our businesses are governed by federal and state laws
and regulations and compliance is a significant operational requirement. 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 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 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 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 effect on our business or financial position.

Recently Adopted Accounting Pronouncements

Effective April 1, 2002 we adopted SFAS 144 Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes SFAS 121. SFAS No. 144
requires that long-lived assets to be disposed of by sale, including those of
discontinued operations, be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Under these rules, discontinued operations will no
longer be measured at net realizable value or include amounts for operating
losses that have not yet been incurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity
with operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a disposal
transaction. The adoption of SFAS 144 had no impact on our consolidated
financial statements.

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Recent Accounting Pronouncements

In May 2002, the FASB issued SFAS 145 Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections as of April 2002. This
Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, 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 as extraordinary to only those transactions that are
unusual and infrequent in nature as defined by APB Opinion 30 as extraordinary.
We are 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 $5.3
million, net of tax for the nine months ended December 31, 2002 and the year
ended March 31, 2002, respectively, will be reclassified to income before
extraordinary loss to conform to the requirements under SFAS 145.

In July 2002, the FASB issued SFAS 146 Accounting for Costs Associated
with Exit or Disposal Activities. 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. SFAS 146 will
be effective for exit or disposal activities that are initiated after December
31, 2002.

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 clarifies the
requirements of FASB 5, Accounting for Contingencies, relating to a
guarantors accounting for, and disclosure of, the issuance of certain types of
guarantees. The initial recognition and measurement provisions of FIN 45 are
required to be applied on a prospective basis to guarantees issued or modified
after December 31, 2002. We have adopted the disclosure requirements, which are
effective for interim periods ending after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation- Transition and Disclosure, an amendment of FASB Statement No.
123. 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 will be effective
for us beginning with the year ended March 31, 2003. We have not yet completed
the final evaluation of the alternatives presented by SFAS 148. However, during
the quarter ending June 30, 2003, we expect to reach 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.

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.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

During October 2002, the notional amount of the interest rate protection
agreement that has a fixed LIBOR rate of 6.60% decreased from $300 million to
$200 million. As of December 31, 2002, our outstanding variable rate debt was
$270 million. Based on the amount of variable rate debt in excess of
the notional amount of the interest rate protection agreement at December
31, 2002, 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.

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Item 4. 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,
such as this Form 10-Q, 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 Procedure.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 Securities Exchange Act
of 1934, as amended (the Exchange Act)) as of a date within 90 days prior to
the filing date of this quarterly 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.

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
error 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 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.

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PART II. OTHER INFORMATION




Item 1. Legal Proceedings

In November 1999, PCS Health Systems, Inc., or 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 Office of
Inspector General, or OIG, requesting that PCS produce documents in connection
with an industry-wide investigation. The investigation is 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 involves a review of the practices of pharmacy benefit management
companies, or PBMs, under federal anti-kickback statutes and other laws and
regulations. This investigation appears to focus on PBMs relationships with
pharmaceutical manufacturers and retail pharmacies and PBMs programs relating
to drug formulary compliance, which include rebate and other payments made by
pharmaceutical manufacturers to PBMs. The investigation also appears to focus
on payments made by PBMs to retail pharmacies or others in connection with
therapeutic intervention activities. AdvancePCS has turned over documents
responsive to the subpoena. The United States Attorneys Office has 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.

In December 2001, the OIG filed a motion in the United States District
Court for the Eastern District of Pennsylvania seeking to enforce its demand
under the subpoena for AdvancePCS to produce certain employee e-mails.
AdvancePCS opposed the enforcement motion, objecting to the scope and breadth
of this request.

On April 10, 2002, the United States Attorney General issued Civil
Investigative Demands, or CIDs, seeking to compel interviews with eight of our
employees and former employees in connection with a purported Federal False
Claims Act inquiry related to its ongoing investigation. These eight
individuals filed a joint petition in the United States District Court for the
Eastern District of Pennsylvania seeking to set aside the CIDs. The United
States Attorney filed a petition seeking an order enforcing the CIDs and filed
a response to the petition to set aside the CIDs.

On September 16, 2002, the OIG, the Company and the eight individuals
filed a motion requesting that the District Court hold proceedings relating to
both the employee e-mails and the CIDs in abeyance as the parties were working
to reach a mutually acceptable resolution of the outstanding issues that would
obviate the need for any judicial action on the subpoena and CID enforcement
actions. On September 17, 2002, the District Court entered an order holding
the matters in abeyance pending the outcome of the good faith efforts to reach
a mutual resolution of the outstanding discovery issues. We have since
produced additional documents and witnesses in response to the
OIGs requests.

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 and those of PCS prior to the
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, 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.

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. Advance PCS, Civ. No.

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01-CV-2320 (D.Minn.). AARP and United have asserted claims against AdvancePCS for violation
of Minnesotas deceptive trade practices act, tortious interference with
prospective economic advantage and unjust enrichment. Specifically, AARP and
United claim that AdvancePCS created confusion among certain AARP members and
pharmacists through the launch of the AdvancePCS prescription drug discount
program. AARP and United requested preliminary and permanent injunctive
relief. AdvancePCS moved to dismiss the complaint. Without holding an
evidentiary hearing, the district court granted AARP and Uniteds request for
preliminary injunctive relief. AdvancePCS 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 $30 million, including
attorneys fees and costs. AdvancePCS has also moved to dismiss this count of
the complaint. Discovery in connection with AARPs monetary claim is ongoing.
AdvancePCS has denied AARP and Uniteds allegations and is vigorously defending
this matter.

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




Item 6. Exhibits and Reports on Form 8-K.

(a)  Exhibits.

|            |  |                                                                                                                                                                                                                                                                                                                                  |  |  |  | 
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit No. |  | Exhibits                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|            |  |                                                                                                                                                                                                                                                                                                                                  |  |  |  | 
|3.          |  | Articles of Incorporation and By-Laws                                                                                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                 
|3.1         |  | Certificate of Amendment to the 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 November 9, 2001).                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                 
|3.2         |  | 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).                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                 
|3.3         |  | 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).                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                 
|4.          |  | Instruments Defining the Rights of Security Holder, Including Indentures                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                 
|4.1*        |  | 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.
|            |  |                                                                                                                                                                                                                                                                                                                                 
|4.2*        |  | 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.    

29



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##### Table of Contents



|      |  |                                                                                                                                                                                                                                                                                                                                                   |  |  |  | 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|4.3*  |  | 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.
|      |  |                                                                                                                                                                                                                                                                                                                                                  
|99.   |  | Additional Exhibits                                                                                                                                                                                                                                                                                                                              
|      |  |                                                                                                                                                                                                                                                                                                                                                  
|99.1* |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                                                  
|99.2* |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                 



---

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

(b)  Reports on Form 8-K.

The Company filed a Current Report on Form 8-K on October 10, 2002, on which
information was reported under Item 9. announcing our definitive agreement to
acquire Accordant Health Services, Inc.

30



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##### Table of Contents






Signatures

Pursuant to the requirements 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.

|                        |  |     |  |                                                                                                                 
|----------------------- |  | --- |  | ----------------------------------------------------------------------------------------------------------------
|                        |  |     |  | AdvancePCS
(Registrant)                                                                                         
|                        |  |     |  |                                                                                                                 
|                        |  |     |  |                                                                                                                 
|Date: February 13, 2003 |  | By: |  | /s/ David D. Halbert                                                                                            
|                        |  |     |  |                                                                                                                 
|                        |  |     |  | David D. Halbert, Chairman of the Board and
Chief Executive Officer                                             
|                        |  |     |  |                                                                                                                 
|                        |  |     |  |                                                                                                                 
|Date: February 13, 2003 |  | By: |  | /s/ Yon Y. Jorden                                                                                               
|                        |  |     |  |                                                                                                                 
|                        |  |     |  | Yon Y. Jorden, Chief Financial Officer and
Executive Vice President (Principal Financial and
Accounting Officer)

31



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##### Table of Contents






CHIEF EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, David D. Halbert, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AdvancePCS;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5. The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing
equivalent function):



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weakness in
internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                      

6. The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

| |  |                                                       |  | 
| |  | ----------------------------------------------------- |  | 
| |  | Date: February 13, 2003                               |  | 
| |  |                                                       |  | 
| |  | /s/ David D. Halbert                                  |  | 
| |  |                                                       |  | 
| |  | David D. Halbert
Chairman and Chief Executive Officer |  | 

32



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##### Table of Contents






CHIEF FINANCIAL OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Yon Y. Jorden, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AdvancePCS;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5. The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing
equivalent function):



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weakness in
internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                      

6. The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

| |  |                                       |  | 
| |  | ------------------------------------- |  | 
| |  | Date: February 13, 2003               |  | 
| |  |                                       |  | 
| |  | /s/ Yon Y. Jorden                     |  | 
| |  |                                       |  | 
| |  | Yon Y. Jorden
Chief Financial Officer |  | 

33



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##### Table of Contents






EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                                   |  |  |  | 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit No. |  | Exhibits                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|            |  |                                                                                                                                                                                                                                                                                                                                                   |  |  |  | 
|3.          |  | Articles of Incorporation and By-Laws                                                                                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                  
|3.1         |  | Certificate of Amendment to the 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 November 9, 2001).                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                  
|3.2         |  | 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).                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                  
|3.3         |  | 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).                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                  
|4.          |  | Instruments Defining the Rights of Security Holder, Including Indentures                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                  
|4.1*        |  | 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.                 
|            |  |                                                                                                                                                                                                                                                                                                                                                  
|4.2*        |  | 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.                     
|            |  |                                                                                                                                                                                                                                                                                                                                                  
|4.3*        |  | 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.
|            |  |                                                                                                                                                                                                                                                                                                                                                  
|99.         |  | Additional Exhibits                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                  
|99.1*       |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                  
|99.2*       |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                 



---

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