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UNITED STATESSECURITIES 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 September 30, 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
(State of Incorporation) |  | 75-2493381
(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.

YESX   NO

As of November 8, 2002, the registrant had (1) 76,983,292 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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|                                                   |                                                                                               |                                            |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|                                                   |                                                                                               | Consolidated Balance Sheets               
|                                                   |                                                                                               | Consolidated Statements of Operations     
|                                                   |                                                                                               | Consolidated Statements of Cash Flows     
|                                                   |                                                                                               | Notes to Consolidated Financial Statements
|                                                   | 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                        
|Signatures                                        
|Certifications                                    
|Exhibit Index                                     
|EX-10.1 Amendment No. 6 to Credit Agreement       
|EX-99.1 Certification of Chief Executive Officer  
|EX-99.2 Certification of Principle Financial Offic



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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 September 30, 2002 and March 31, 2002                                     |  |      |    |  | 1 |  |  | 
|           |  |                       |  |         |  |  |                                                                                       |  | B. |  |  | Consolidated Statements of Operations for the Three Months and Six Months Ended September 30, 2002 and 2001 |  |      |    |  | 2 |  |  | 
|           |  |                       |  |         |  |  |                                                                                       |  | C. |  |  | Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2002 and 2001                  |  |      |    |  | 3 |  |  | 
|           |  |                       |  |         |  |  |                                                                                       |  | D. |  |  | Notes to Consolidated Financial Statements                                                                  |  |      |    |  | 4 |  |  | 
|           |  |                       |  | Item 2. |  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |    |  |  | 11                                                                                                          |  |      |   
|           |  |                       |  | Item 3. |  |  | Qualitative and Quantitative Disclosures About Market Risk                            |  |    |  |  | 20                                                                                                          |  |     
|           |  |                       |  | Item 4. |  |  | Controls and Procedures                                                               |  |    |  |  | 21                                                                                                          |  |      |   
|Part II.   |  | Other Information     |  |         |  |  | 22                                                                                    |  |   
|Signatures |  |                       |  |         |  |  |                                                                                       |  |    |  |  |                                                                                                             |  |      | 26 |  |   | 





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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. We have based these forward-looking statements on our
current expectations and projections about future events. Statements that are
predictive in nature, that depend upon or refer to future events or conditions
or that include words such as expects, anticipates, intends, plans,
believes, estimates, thinks, and similar expressions are forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results and performance to be
materially different from any future results or performance expressed or
implied by these forward-looking statements. These factors include, among other
things, those matters set forth in our Form 10-K, 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 under ERISA;
| 
| |  | 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 these 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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AdvancePCS and Subsidiaries

Consolidated Balance Sheets
(in thousands, except share data)

(Unaudited)

|                              |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |                |           |           |   | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | --------- | ------------------ | ------- | -------------- | --------- | --------- | - | 
|                              |  |                                                                                                               |                                                                                             |                                                              |           | September 30, 2002 |         | March 31, 2002
|                              |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  |                                                                                                               |                                                                                             | ASSETS                                                       |           |                    |         |                |           |           |   | 
|Current assets:               |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  | Cash and cash equivalents                                                                                     |                                                                                             | $                                                            | 101,199   |                    |         | $              | 139,145   |          
|                              |  | Accounts receivable, net of allowance for doubtful accounts
of $36,608 and $26,150, respectively              |                                                                                             |                                                              | 1,507,428 |                    |         |                | 1,225,929 |          
|                              |  | Inventories                                                                                                   |                                                                                             |                                                              | 76,983    |                    |         |                | 65,336    |          
|                              |  | Prepaid expenses and other                                                                                    |                                                                                             |                                                              | 8,605     |                    |         |                | 10,484    |          
|                              |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  |                                                                                                               | Total current assets                                                                        |                                                              |           | 1,694,215          |         |                |           | 1,440,894 |  
|Noncurrent assets:            |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  | Property and equipment, net of accumulated depreciation and
amortization of $80,756 and $64,999, respectively |                                                                                             |                                                              | 146,606   |                    |         |                | 121,277   |          
|                              |  | Goodwill                                                                                                      |                                                                                             |                                                              | 1,198,925 |                    |         |                | 1,198,925 |          
|                              |  | Intangible assets, net                                                                                        |                                                                                             |                                                              | 367,283   |                    |         |                | 373,041   |          
|                              |  | Other noncurrent assets                                                                                       |                                                                                             |                                                              | 83,762    |                    |         |                | 89,827    |          
|                              |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  |                                                                                                               | Total assets                                                                                |                                                              | $         | 3,490,791          |         |                | $         | 3,223,964 |  
|                              |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  |                                                                                                               |                                                                                             | LIABILITIES AND STOCKHOLDERS EQUITY                         |           |                    |         |                |           |           |   | 
|Current liabilities:          |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  | Current portion of long-term debt                                                                             |                                                                                             | $                                                            |          |                    |         | $              | 1,523     |          
|                              |  | Claims and accounts payable                                                                                   |                                                                                             |                                                              | 1,828,608 |                    |         |                | 1,557,909 |          
|                              |  | Accrued salaries and benefits                                                                                 |                                                                                             |                                                              | 30,345    |                    |         |                | 38,602    |          
|                              |  | Other accrued expenses                                                                                        |                                                                                             |                                                              | 95,699    |                    |         |                | 79,308    |          
|                              |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  |                                                                                                               | Total current liabilities                                                                   |                                                              |           | 1,954,652          |         |                |           | 1,677,342 |  
|Noncurrent liabilities:       |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  | Long-term debt, less current portion                                                                          |                                                                                             |                                                              | 468,627   |                    |         |                | 499,263   |          
|                              |  | Deferred income taxes                                                                                         |                                                                                             |                                                              | 141,629   |                    |         |                | 134,878   |          
|                              |  | Other noncurrent liabilities                                                                                  |                                                                                             |                                                              | 30,977    |                    |         |                | 35,221    |          
|                              |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  |                                                                                                               | Total liabilities                                                                           |                                                              |           | 2,595,885          |         |                |           | 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; 80,845,892 and
79,927,079 shares issued, respectively |                                                              |           | 808                |         |                |           | 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                                                                                    |                                                                                             |                                                              | 726,260   |                    |         |                | 716,887   |          
|                              |  | Accumulated other comprehensive loss                                                                          |                                                                                             |                                                              | (10,132   | )                  |         |                | (12,686   | )        
|                              |  | Accumulated earnings                                                                                          |                                                                                             |                                                              | 249,681   |                    |         |                | 172,130   |          
|                              |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  |                                                                                                               | 966,747                                                                                     |                                                              |           |                    | 877,260 |               
|                              |  | Common stock in treasury, at cost:                                                                            |                                                                                             |                                                              |           |                    |         |                |           |          
|                              |  |                                                                                                               |                                                                                             | Class A common stock; 4,018,561, and no shares,
respectively |           |                    | (71,841 | )              |           |           |  | 
|                              |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  |                                                                                                               | Total stockholders equity                                                                  |                                                              |           | 894,906            |         |                |           | 877,260   |  
|                              |  |                                                                                                               |                                                                                             |                                                              |           |                    |         |               
|                              |  |                                                                                                               | Total liabilities and stockholders equity                                                  |                                                              | $         | 3,490,791          |         |                | $         | 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
(in thousands, except per share data)

(Unaudited)

|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |           |           | 
|------------------------------------------------------------ | ----------------------------------------------------------------------- | ------------------------ | --------- | ------------------ | --------- | ---------------- | --------- | --------- | --------- | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | 
|                                                             |                                                                         |                          |           | Three Months Ended |           | Six Months Ended
|                                                             |                                                                         |                          |           | September 30,      |           | September 30,   
|                                                             |                                                                         |                          |           |                    |           |                 
|                                                             |                                                                         |                          |           | 2002               |           | 2001             |           | 2002      |           | 2001
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |     
|Revenues                                                     |                                                                         | $                        | 3,852,668 |                    |           | $                | 3,154,629 |           |           | $    | 7,444,906 |           |           | $ | 6,302,523 |          
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|Cost of operations:                                          |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             | Cost of revenues                                                        |                          |           | 3,717,206          |           |                  |           | 3,046,653 |           |      |           | 7,184,097 |           |   |           | 6,086,781 |          
|                                                             | Selling, general and administrative expenses                            |                          |           | 54,182             |           |                  |           | 43,334    |           |      |           | 107,447   |           |   |           | 89,089    |          
|                                                             | Non-recurring expenses                                                  |                          |           |                   |           |                  |           | 906       |           |      |           |          |           |   |           | 1,760     |          
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             |                                                                         | Total cost of operations |           |                    | 3,771,388 |                  |           |           | 3,090,893 |      |           |           | 7,291,544 |   |           |           | 6,177,630 | 
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             | Operating income                                                        |                          |           | 81,280             |           |                  |           | 63,736    |           |      |           | 153,362   |           |   |           | 124,893   |          
|Interest income                                              |                                                                         |                          | 1,257     |                    |           |                  | 1,823     |           |           |      | 2,681     |           |           |   | 3,402     |          
|Interest expense                                             |                                                                         |                          | (11,549   | )                  |           |                  | (18,063   | )         |           |      | (23,137   | )         |           |   | (38,941   | )        
|Loss from joint venture                                      |                                                                         |                          | (1,224    | )                  |           |                  | (431      | )         |           |      | (2,257    | )         |           |   | (1,090    | )        
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             | Income before income taxes                                              |                          |           | 69,764             |           |                  |           | 47,065    |           |      |           | 130,649   |           |   |           | 88,264    |          
|Provision for income taxes                                   |                                                                         |                          | (27,557   | )                  |           |                  | (18,589   | )         |           |      | (51,607   | )         |           |   | (34,856   | )        
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             | Net income before extraordinary loss                                    |                          |           | 42,207             |           |                  |           | 28,476    |           |      |           | 79,042    |           |   |           | 53,408    |          
|Extraordinary loss on early retirement of debt,
net of taxes |                                                                         |                          |          |                    |           |                  |          |           |           |      | (1,491    | )         |           |   |          |          
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             | Net income                                                              |                          | $         | 42,207             |           |                  | $         | 28,476    |           |      | $         | 77,551    |           |   | $         | 53,408    |          
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|Basic                                                        |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             | Net income before extraordinary loss per share                          |                          | $         | 0.46               |           |                  | $         | 0.36      |           |      | $         | 0.86      |           |   | $         | 0.70      |          
|                                                             | Extraordinary loss on early retirement of debt, net of
taxes, per share |                          |           |                   |           |                  |           |          |           |      |           | (0.02     | )         |   |           |          |          
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             | Net income per share                                                    |                          | $         | 0.46               |           |                  | $         | 0.36      |           |      | $         | 0.84      |           |   | $         | 0.70      |          
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             | Weighted average shares outstanding                                     |                          |           | 91,615             |           |                  |           | 79,499    |           |      |           | 92,319    |           |   |           | 76,489    |          
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|Diluted                                                      |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             | Net income before extraordinary loss per
share                          |                          | $         | 0.43               |           |                  | $         | 0.29      |           |      | $         | 0.79      |           |   | $         | 0.57      |          
|                                                             | Extraordinary loss on early retirement
of debt, net of taxes, per share |                          |           |                   |           |                  |           |          |           |      |           | (0.02     | )         |   |           |          |          
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             | Net income per share                                                    |                          | $         | 0.43               |           |                  | $         | 0.29      |           |      | $         | 0.77      |           |   | $         | 0.57      |          
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          
|                                                             | Weighted average shares outstanding                                     |                          |           | 98,412             |           |                  |           | 96,952    |           |      |           | 100,255   |           |   |           | 94,285    |          
|                                                             |                                                                         |                          |           |                    |           |                  |           |           |           |      |           |           |           |   |           |          

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
(in thousands)

(Unaudited)

|                                                 |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |          |        |         |         |  
|------------------------------------------------ | ---------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------------------------ | ----------------------------------------- | ------ | ------------------------------ | -------- | -------- | ------ | ------- | ------- | -
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        | Six Months Ended September 30,
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        |                               
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        | 2002                           |          | 2001    
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         
|Cash flows from operating activities:            |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 | Net income                                                                         |                                                              | $                                                                              | 77,551                                    |        |                                | $        | 53,408   |       
|                                                 | Adjustments to reconcile net income to net cash provided by
operating activities  |                                                              |                                                                                |                                           |        |                                |          |          |       
|                                                 |                                                                                    | Depreciation and amortization                                |                                                                                |                                           | 21,689 |                                |          |          | 18,597 |        
|                                                 |                                                                                    | Provision for doubtful accounts and reserves                 |                                                                                |                                           | 22,931 |                                |          |          | 8,532  |        
|                                                 |                                                                                    | Deferred income taxes                                        |                                                                                |                                           | 4,309  |                                |          |          | 2,887  |        
|                                                 |                                                                                    | Extraordinary loss on early retirement of debt, net of taxes |                                                                                |                                           | 1,491  |                                |          |          |       |        
|                                                 |                                                                                    | Change
in operating assets and liabilities                  |                                                                                |                                           |        |                                |          |          |        |        
|                                                 |                                                                                    |                                                              | Accounts receivable                                                            |                                           |        | (291,747                       | )        |          |        | (15,979 | )      
|                                                 |                                                                                    |                                                              | Inventories                                                                    |                                           |        | (11,647                        | )        |          |        | (11,146 | )      
|                                                 |                                                                                    |                                                              | Prepaid expenses and other noncurrent assets                                   |                                           |        | 2,903                          |          |          |        | 928     |        
|                                                 |                                                                                    |                                                              | Claims and accounts payable, accrued expenses and other
noncurrent liabilities |                                           |        | 281,593                        |          |          |        | 23,093  |        
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 |                                                                                    |                                                              |                                                                                | Net cash provided by operating activities |        |                                | 109,073  |          |        |         | 80,320  |  
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         
|Cash flows from investing activities:            |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 | Purchase of property and equipment                                                 |                                                              |                                                                                | (44,774                                   | )      |                                |          | (20,773  | )     
|                                                 | Other investing activities                                                         |                                                              |                                                                                | (1,900                                    | )      |                                |          | (2,850   | )     
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 |                                                                                    |                                                              |                                                                                | Net cash used in investing activities     |        |                                | (46,674  | )        |        |         | (23,623 | )
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         
|Cash flows from financing activities:            |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 | Net proceeds from issuance of Common Stock                                         |                                                              |                                                                                | 5,071                                     |        |                                |          | 298,428  |       
|                                                 | Purchase of Class A Common Stock  Treasury Stock                                  |                                                              |                                                                                | (71,841                                   | )      |                                |          |         |       
|                                                 | Deferred financing costs                                                           |                                                              |                                                                                | (1,416                                    | )      |                                |          | (567     | )     
|                                                 | Proceeds from long-term obligations                                                |                                                              |                                                                                | 1,212,585                                 |        |                                |          | 58,000   |       
|                                                 | Payments on long-term obligations                                                  |                                                              |                                                                                | (1,375,546                                | )      |                                |          | (409,066 | )     
|                                                 | Net borrowings on asset securitization facility                                    |                                                              |                                                                                | 130,802                                   |        |                                |          |         |       
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         
|                                                 |                                                                                    |                                                              |                                                                                | Net cash used in financing activities     |        |                                | (100,345 | )        |        |         | (53,205 | )
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         
|(Decrease) increase in cash and cash equivalents |                                                                                    |                                                              | (37,946                                                                        | )                                         |        |                                | 3,492    |         
|Cash and cash equivalents, beginning of period   |                                                                                    |                                                              | 139,145                                                                        |                                           |        |                                | 110,048  |         
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         
|Cash and cash equivalents, end of period         |                                                                                    | $                                                            | 101,199                                                                        |                                           |        | $                              | 113,540  |         
|                                                 |                                                                                    |                                                              |                                                                                |                                           |        |                                |          |         

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

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AdvancePCS and Subsidiaries

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been
prepared by AdvancePCS in accordance with accounting principles generally
accepted in the United States of America for the interim financial information
in the form prescribed by the Securities and Exchange Commission 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 of America for annual
financial statements. In the opinion of AdvancePCSs management, the September
30, 2002 and 2001 unaudited interim financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of results for this interim period. In the opinion of
AdvancePCS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 Notes to the Consolidated Financial Statements included in
the Form 10-K of AdvancePCS for the year ended March 31, 2002. The results of
operations for the three and six month periods ended September 30, 2002 are not
necessarily indicative of the results to be expected for the full year or for
any future period.

Principles of Consolidation

In September 2001, the Company acquired the remaining outstanding 81% of
Consumer Health Interactive, Inc. (CHI) which was previously accounted for
under the cost method of accounting. As required by Accounting Principals
Board Opinion No. 18 (APB 18) the prior periods have been restated to reflect
CHI as if it had been accounted for under the equity method. The impact of the
restatement on the six months ended September 30, 2001 was $226,000 (or diluted
net income per share of $.002).

Reclassification

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

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.
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 six months ended September 30, 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.

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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
144 addresses financial accounting and reporting for the impairment of
long-lived assets and for the disposal of long-lived assets. The adoption of
SFAS 144 had no impact on the Companys consolidated financial statements.

2. 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 in the same manner as basic net income per share but includes the
number of additional common shares that would have been outstanding for the
period if the other dilutive securities had been issued. The difference between
the number of weighted average shares used in the basic and diluted calculation
are convertible preferred stock outstanding, stock options and stock warrants,
all calculated under the treasury stock method in accordance with SFAS No.
128 Earnings Per Share.

3. Income Taxes

In the three months and six months ended September 30, 2002 and 2001, the
Companys income tax expense approximated an effective tax rate of 39.5%.

4. Debt Transactions

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

|                                                                                                                                                                                    |                      |                                                                    |         |                    |   |                |         |       |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------------------------------------------------ | ------- | ------------------ | - | -------------- | ------- | ----- | ------- | 
|                                                                                                                                                                                    |                      |                                                                    |         | September 30, 2002 |   | March 31, 2002
|                                                                                                                                                                                    |                      |                                                                    |         |                    |   |               
|Senior Secured Credit Facility:                                                                                                                                                     |                      |                                                                    |         |                    |   |                |         |      
|                                                                                                                                                                                    |                      | Revolver, with interest at LIBOR plus 2.00%, expires October, 2005 |         | $                  |  |                |         | $     |        | 
|                                                                                                                                                                                    |                      | Term B, with interest at LIBOR plus 3.25%, paid June, 2002         |         |                    |  |                |         |       | 150,786 | 
|Senior Notes, with interest at 8.50%, due March, 2008                                                                                                                               |                      |                                                                    | 187,825 |                    |   |                | 200,000 |      
|Asset Securitization Facility, with interest at funding agents A-1+/P-1
commercial paper rate of 1.84% and 1.91% respectively, plus .85%
and .65% respectively, due December, 2006 |                      |                                                                    | 280,802 |                    |   |                | 150,000 |      
|                                                                                                                                                                                    |                      |                                                                    |         |                    |   |                |         |      
|                                                                                                                                                                                    |                      |                                                                    | 468,627 |                    |   |                | 500,786 |      
|                                                                                                                                                                                    | Less current portion |                                                                    |         |                   |   |                |         | 1,523 |        
|                                                                                                                                                                                    |                      |                                                                    |         |                    |   |                |         |      
|Total Long Term Debt                                                                                                                                                                |                      | $                                                                  | 468,627 |                    |   | $              | 499,263 |      
|                                                                                                                                                                                    |                      |                                                                    |         |                    |   |                |         |      

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. In addition, the Companys $100 million interim revolver was eliminated.
In June of 2002, the Company completed an increase in 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 September 30, 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 to write-off $2.4 million
of the deferred financing fees related to the Term B note financing agreements.
After adjusting for the $953,000 tax impact, the net charge was $1.5 million.

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During the three months ended September 30, 2002, the Company repurchased
Senior Notes with a face value of approximately $12.2 million in open market
transactions. The Senior Notes contain covenants that are typical for this
type of debt including, among others, fixed charge ratio, payment of dividends
and sales of assets. The Senior Notes are unconditionally guaranteed, jointly
and severally, by all of the Company's existing and future domestic subsidiaries, other
than subsidiaries treated as unrestricted subsidiaries or receivables
subsidiaries, each as defined in the Indenture. There are no restrictions on
the ability of the guarantors to pay dividends, make loans or advances to the
parent.

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. As of September 30, 2002, nothing was outstanding under this facility.

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 the Companys debt it 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 dropped to $300 million in October 2001 and dropped to
$200 million in October 2002. 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 $10.3 million at September 30, 2002 and $14.5 million at
March 31, 2002, was based upon quoted market prices. The fair value represents
the estimated amount the Company would have to pay to terminate the swap
agreement taking into account current interest rates. The related gains or
losses on this agreement are deferred in stockholders equity as a component of
other comprehensive income. The net amount of changes in other comprehensive
income and the net amount reclassified into earnings during the six-month
period ended September 30, 2002 were $4.2 million and $7.3 million,
respectively.

5. Stock Transactions

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

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 September 30, 2002, the Company
purchased approximately 4.0 million shares under this repurchase program at a
cost of approximately $71.8 million.

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 in August
2001 and 384,006 shares of additional Class A common stock were placed in
escrow, subject to achievement of future financial performance goals. The
Company believes that TheraCom will achieve all of its financial performance
goals and, accordingly, all 384,006 shares of Class A common stock have been
included in the Companys calculation of basic earnings beginning the quarter
ended September 30, 2002.

6. Commitments and Contingencies

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

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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 includes 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.

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.

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

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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 has 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.

7. Condensed Consolidating Financial Information

In March 2001, the Company issued $200 million Senior Notes, which were
unconditionally guaranteed, jointly and severally, by all of the existing and
future domestic subsidiaries, other than subsidiaries treated as unrestricted
subsidiaries or receivables subsidiaries, each as defined in the
Indenture.
Subsequent to the issuance of the Senior Notes and in accordance with the terms
of the Indenture, the Company has created unrestricted subsidiaries and
receivables subsidiaries that have not guaranteed these notes. Presented below
are Condensed Consolidating Balance Sheets as of September 30, 2002 and March
31, 2002, the Condensed Consolidating Statements of Operations for the three
and six months ended September 30, 2002 and 2001 and the Condensed
Consolidating Statement of Cash Flows for the six months ended September 30,
2002 and 2001 of AdvancePCS (Parent and Issuer), guarantor subsidiaries
(Guarantor Subsidiaries) and the subsidiaries which are not guarantors
(Non-guarantor Subsidiaries) (in thousands):

Condensed Consolidating Balance Sheets:

|                         |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |           |           | 
|------------------------ | ------------------------------------ | ------------------------------------------ | - | ------- | --------- | ------------ | - | ------------ | --------- | ------------- | - | ------------ | ------- |  | - | -------- | -------- | - | - | --------- | --------- | 
|                         |                                      |                                            |   |         |           |              |   | Guarantor    |           | Non-guarantor |   |              |         |  |   |          |          |  
|                         |                                      |                                            |   | Parent  |           | Subsidiaries |   | Subsidiaries |           | Eliminations  |   | Consolidated
|                         |                                      |                                            |   |         |           |              |   |              |           |               |   |             
|As of September 30, 2002 |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |          
|                         | Current assets                       |                                            | $ | 94,607  |           |              | $ | 1,115,663    |           |               | $ | 483,945      |         |  | $ |         |          |   | $ | 1,694,215 |          
|                         | Property and equipment, net          |                                            |   |        |           |              |   | 145,526      |           |               |   | 1,080        |         |  |   |         |          |   |   | 146,606   |          
|                         | Investment in subsidiaries           |                                            |   | 312,221 |           |              |   | 1,275        |           |               |   |             |         |  |   | (313,496 | )        |   |   |          |          
|                         | Intercompany                         |                                            |   | 687,086 |           |              |   | (512,140     | )         |               |   | (174,946     | )       |  |   |         |          |   |   |          |          
|                         | Goodwill and intangible assets, net  |                                            |   |        |           |              |   | 1,566,208    |           |               |   |             |         |  |   |         |          |   |   | 1,566,208 |          
|                         | Other assets                         |                                            |   | 19,458  |           |              |   | 64,304       |           |               |   |             |         |  |   |         |          |   |   | 83,762    |          
|                         |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |          
|                         |                                      | Total assets                               |   | $       | 1,113,372 |              |   | $            | 2,380,836 |               |   | $            | 310,079 |  |   | $        | (313,496 | ) |   | $         | 3,490,791 | 
|                         |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |          
|                         | Current liabilities                  |                                            | $ | 11,616  |           |              | $ | 1,931,408    |           |               | $ | 11,628       |         |  | $ |         |          |   | $ | 1,954,652 |          
|                         | Long-term debt, less current portion |                                            |   | 187,825 |           |              |   |             |           |               |   | 280,802      |         |  |   |         |          |   |   | 468,627   |          
|                         | Other liabilities                    |                                            |   | 19,025  |           |              |   | 151,110      |           |               |   | 2,471        |         |  |   |         |          |   |   | 172,606   |          
|                         | Stockholders equity                 |                                            |   | 894,906 |           |              |   | 298,318      |           |               |   | 15,178       |         |  |   | (313,496 | )        |   |   | 894,906   |          
|                         |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |          
|                         |                                      | Total liabilities and stockholders equity |   | $       | 1,113,372 |              |   | $            | 2,380,836 |               |   | $            | 310,079 |  |   | $        | (313,496 | ) |   | $         | 3,490,791 | 
|                         |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |          
|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 | 
|                         |                                      |                                            |   |         |           |              |   |              |           |               |   |              |         |  |   |          |          |   |   |          

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Condensed Consolidating Statement of Operations:

|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |         | 
|--------------------------------------------------------------- | --------------------------------- | - | ------- | ------- | ------------ | - | ------------ | ------- | ------------- | - | ------------ | ------ |  | - | ------- | ------- | - | - | --------- | ------- | 
|                                                                |                                   |   |         |         |              |   | Guarantor    |         | Non-guarantor |   |              |        |  |   |         |         |  
|                                                                |                                   |   | Parent  |         | Subsidiaries |   | Subsidiaries |         | Eliminations  |   | Consolidated
|                                                                |                                   |   |         |         |              |   |              |         |               |   |             
|Three Months Ended September 30, 2002                           |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        
|Total revenues                                                  |                                   | $ |        |         |              | $ | 3,841,923    |         |               | $ | 25,397       |        |  | $ | (14,652 | )       |   | $ | 3,852,668 |        
|Cost of operations                                              |                                   |   |        |         |              |   | 3,771,287    |         |               |   | 14,753       |        |  |   | (14,652 | )       |   |   | 3,771,388 |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        
|                                                                | Operating income                  |   |         |        |              |   |              | 70,636  |               |   |              | 10,644 |  |   |         |        |   |   |           | 81,280  | 
|Interest (expense) income, net                                  |                                   |   | (9,553  | )       |              |   | 1,760        |         |               |   | (2,499       | )      |  |   |        |         |   |   | (10,292   | )      
|Loss from joint venture                                         |                                   |   | (1,224  | )       |              |   |             |         |               |   |             |        |  |   |        |         |   |   | (1,224    | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        
|                                                                | Income (loss) before income taxes |   |         | (10,777 | )            |   |              | 72,396  |               |   |              | 8,145  |  |   |         |        |   |   |           | 69,764  | 
|Income tax provision                                            |                                   |   | 4,257   |         |              |   | (28,976      | )       |               |   | (2,838       | )      |  |   |        |         |   |   | (27,557   | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        
|Net income (loss) before equity earnings and
extraordinary loss |                                   |   | (6,520  | )       |              |   | 43,420       |         |               |   | 5,307        |        |  |   |        |         |   |   | 42,207    |        
|Equity earnings in subsidiaries                                 |                                   |   | 48,727  |         |              |   |             |         |               |   |             |        |  |   | (48,727 | )       |   |   |          |        
|Extraordinary loss on early retirement of debt,
net of taxes    |                                   |   |        |         |              |   |             |         |               |   |             |        |  |   |        |         |   |   |          |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        
|                                                                | Net income                        |   | $       | 42,207  |              |   | $            | 43,420  |               |   | $            | 5,307  |  |   | $       | (48,727 | ) |   | $         | 42,207  | 
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        
|Six Months Ended September 30, 2002                             |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        
|Total revenues                                                  |                                   | $ |        |         |              | $ | 7,428,849    |         |               | $ | 40,680       |        |  | $ | (24,623 | )       |   | $ | 7,444,906 |        
|Cost of operations                                              |                                   |   |        |         |              |   | 7,293,789    |         |               |   | 22,378       |        |  |   | (24,623 | )       |   |   | 7,291,544 |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        
|                                                                | Operating income                  |   |         |        |              |   |              | 135,060 |               |   |              | 18,302 |  |   |         |        |   |   |           | 153,362 | 
|Interest (expense) income, net                                  |                                   |   | (19,827 | )       |              |   | 3,518        |         |               |   | (4,147       | )      |  |   |        |         |   |   | (20,456   | )      
|Loss from joint venture                                         |                                   |   | (2,257  | )       |              |   |             |         |               |   |             |        |  |   |        |         |   |   | (2,257    | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        
|                                                                | Income (loss) before income taxes |   |         | (22,084 | )            |   |              | 138,578 |               |   |              | 14,155 |  |   |         |        |   |   |           | 130,649 | 
|Income tax provision                                            |                                   |   | 8,723   |         |              |   | (55,402      | )       |               |   | (4,928       | )      |  |   |        |         |   |   | (51,607   | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        
|Net income (loss) before equity earnings and
extraordinary loss |                                   |   | (13,361 | )       |              |   | 83,176       |         |               |   | 9,227        |        |  |   |        |         |   |   | 79,042    |        
|Equity earnings in subsidiaries                                 |                                   |   | 92,403  |         |              |   |             |         |               |   |             |        |  |   | (92,403 | )       |   |   |          |        
|Extraordinary loss on early retirement of debt,
net of taxes    |                                   |   | (1,491  | )       |              |   |             |         |               |   |             |        |  |   |        |         |   |   | (1,491    | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        
|                                                                | Net income                        |   | $       | 77,551  |              |   | $            | 83,176  |               |   | $            | 9,227  |  |   | $       | (92,403 | ) |   | $         | 77,551  | 
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |        |  |   |         |         |   |   |           |        

|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |         | 
|--------------------------------------------------------------- | --------------------------------- | - | ------- | ------- | ------------ | - | ------------ | ------- | ------------- | - | ------------ | - |  | - | ------- | ------- | - | - | --------- | ------- | 
|                                                                |                                   |   |         |         |              |   | Guarantor    |         | Non-guarantor |   |              |   |  |   |         |         |  
|                                                                |                                   |   | Parent  |         | Subsidiaries |   | Subsidiaries |         | Eliminations  |   | Consolidated
|                                                                |                                   |   |         |         |              |   |              |         |               |   |             
|Three Months Ended September 30, 2001                           |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        
|Total revenues                                                  |                                   | $ |        |         |              | $ | 3,154,629    |         |               | $ |             |   |  | $ |        |         |   | $ | 3,154,629 |        
|Cost of operations                                              |                                   |   |        |         |              |   | 3,090,893    |         |               |   |             |   |  |   |        |         |   |   | 3,090,893 |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        
|                                                                | Operating income                  |   |         |        |              |   |              | 63,736  |               |   |              |  |  |   |         |        |   |   |           | 63,736  | 
|Interest (expense) income, net                                  |                                   |   | (17,877 | )       |              |   | 1,637        |         |               |   |             |   |  |   |        |         |   |   | (16,240   | )      
|Loss from joint venture                                         |                                   |   | (431    | )       |              |   |             |         |               |   |             |   |  |   |        |         |   |   | (431      | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        
|                                                                | Income (loss) before income taxes |   |         | (18,308 | )            |   |              | 65,373  |               |   |              |  |  |   |         |        |   |   |           | 47,065  | 
|Income tax provision                                            |                                   |   | 7,232   |         |              |   | (25,821      | )       |               |   |             |   |  |   |        |         |   |   | (18,589   | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        
|Net income (loss) before equity earnings and
extraordinary loss |                                   |   | (11,076 | )       |              |   | 39,552       |         |               |   |             |   |  |   |        |         |   |   | 28,476    |        
|Equity earnings in subsidiaries                                 |                                   |   | 39,552  |         |              |   |             |         |               |   |             |   |  |   | (39,552 | )       |   |   |          |        
|Extraordinary loss on early retirement of debt,
net of taxes    |                                   |   |        |         |              |   |             |         |               |   |             |   |  |   |        |         |   |   |          |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        
|                                                                | Net income                        |   | $       | 28,476  |              |   | $            | 39,552  |               |   | $            |  |  |   | $       | (39,552 | ) |   | $         | 28,476  | 
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        
|Six Months Ended September 30, 2001                             |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        
|Total revenues                                                  |                                   | $ |        |         |              | $ | 6,302,523    |         |               | $ |             |   |  | $ |        |         |   | $ | 6,302,523 |        
|Cost of operations                                              |                                   |   |        |         |              |   | 6,177,630    |         |               |   |             |   |  |   |        |         |   |   | 6,177,630 |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        
|                                                                | Operating income                  |   |         |        |              |   |              | 124,893 |               |   |              |  |  |   |         |        |   |   |           | 124,893 | 
|Interest (expense) income, net                                  |                                   |   | (38,550 | )       |              |   | 3,011        |         |               |   |             |   |  |   |        |         |   |   | (35,539   | )      
|Loss from joint venture                                         |                                   |   | (1,090  | )       |              |   |             |         |               |   |             |   |  |   |        |         |   |   | (1,090    | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        
|                                                                | Income (loss) before income taxes |   |         | (39,640 | )            |   |              | 127,904 |               |   |              |  |  |   |         |        |   |   |           | 88,264  | 
|Income tax provision                                            |                                   |   | 15,658  |         |              |   | (50,514      | )       |               |   |             |   |  |   |        |         |   |   | (34,856   | )      
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        
|Net income (loss) before equity earnings and
extraordinary loss |                                   |   | (23,982 | )       |              |   | 77,390       |         |               |   |             |   |  |   |        |         |   |   | 53,408    |        
|Equity earnings in subsidiaries                                 |                                   |   | 77,390  |         |              |   |             |         |               |   |             |   |  |   | (77,390 | )       |   |   |          |        
|Extraordinary loss on early retirement of debt,
net of taxes    |                                   |   |        |         |              |   |             |         |               |   |             |   |  |   |        |         |   |   |          |        
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        
|                                                                | Net income                        |   | $       | 53,408  |              |   | $            | 77,390  |               |   | $            |  |  |   | $       | (77,390 | ) |   | $         | 53,408  | 
|                                                                |                                   |   |         |         |              |   |              |         |               |   |              |   |  |   |         |         |   |   |           |        

9



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##### Table of Contents



Condensed Consolidating Statement of Cash Flows:

|                                                    |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|--------------------------------------------------- |  | ------ | ------- | ------------ |  | ------------ | -------- | ------------- |  | ------------ | -------- | - |  | - | - |  |  | - | -------- | -
|                                                    |  |        |         |              |  | Guarantor    |          | Non-guarantor |  |              |          |   |  |   |   | 
|                                                    |  | Parent |         | Subsidiaries |  | Subsidiaries |          | Eliminations  |  | Consolidated
|                                                    |  |        |         |              |  |              |          |               |  |             
|Six Months Ended September 30, 2002                 |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|Net cash provided by (used in) operating activities |  | $      | 3,317   |              |  | $            | 220,925  |               |  | $            | (115,169 | ) |  | $ |  |  |  | $ | 109,073  |  
|Net cash used in investing activities               |  |        | (1,900  | )            |  |              | (43,911  | )             |  |              | (863     | ) |  |   |  |  |  |   | (46,674  | )
|Net cash provided by (used in) financing activities |  |        | (23,793 | )            |  |              | (177,014 | )             |  |              | 100,462  |   |  |   |  |  |  |   | (100,345 | )
|                                                    |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|Increase
(decrease) in cash and cash equivalents    |  |        | (22,376 | )            |  |              |         |               |  |              | (15,570  | ) |  |   |  |  |  |   | (37,946  | )
|Cash and cash equivalents, beginning of period      |  |        | 116,983 |              |  |              |         |               |  |              | 22,162   |   |  |   |  |  |  |   | 139,145  |  
|                                                    |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|Cash and cash equivalents, end of period            |  | $      | 94,607  |              |  | $            |         |               |  | $            | 6,592    |   |  | $ |  |  |  | $ | 101,199  |  
|                                                    |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|                                                   
|                                                    |  |        |         |              |  | Guarantor    |          | Non-guarantor |  |              |          |   |  |   |   | 
|                                                    |  | Parent |         | Subsidiaries |  | Subsidiaries |          | Eliminations  |  | Consolidated
|                                                    |  |        |         |              |  |              |          |               |  |             
|Six Months Ended September 30, 2001                 |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|Net cash provided by operating activities           |  | $      | 48,976  |              |  | $            | 31,344   |               |  | $            |         |   |  | $ |  |  |  | $ | 80,320   |  
|Net cash used in investing activities               |  |        | (2,850  | )            |  |              | (20,773  | )             |  |              |         |   |  |   |  |  |  |   | (23,623  | )
|Net cash used in financing activities               |  |        | (42,634 | )            |  |              | (10,571  | )             |  |              |         |   |  |   |  |  |  |   | (53,205  | )
|                                                    |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|Increase
(decrease) in cash and cash equivalents    |  |        | 3,492   |              |  |              |         |               |  |              |         |   |  |   |  |  |  |   | 3,492    |  
|Cash and cash equivalents, beginning of period      |  |        | 110,048 |              |  |              |         |               |  |              |         |   |  |   |  |  |  |   | 110,048  |  
|                                                    |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  
|Cash and cash equivalents, end of period            |  | $      | 113,540 |              |  | $            |         |               |  | $            |         |   |  | $ |  |  |  | $ | 113,540  |  
|                                                    |  |        |         |              |  |              |          |               |  |              |          |   |  |   |   |  |  |   |          |  

8. Subsequent Event

On October 9, 2002, the Company announced the signing of a definitive
agreement to acquire privately-held Accordant Health Services (Accordant), a
disease management company that focuses on helping patients with complex,
chronic and progressive diseases. Effective as of November 1, 2002, the Company
acquired 100% of Accordant for $75 million cash, with up to an additional $25
million cash payable dependant upon Accordant achieving certain financial and
operating targets in calendar year 2003. Any additional cash earned will be
paid during calendar year 2004 and treated as an adjustment to the purchase
price. The acquisition will be accounted for using the purchase method of
accounting.

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##### Table of Contents






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

Critical Accounting Policies

Revenue Recognition

Data Services

At the point-of-sale, the pharmacy claims are adjudicated using our
on-line claims processing system. When we independently contract to pay our
network pharmacy providers, we assume credit risk and act as a principal in the
transaction, therefore, we include payments from plan sponsors for these
benefits, including the cost of the pharmaceutical and claims processing fee,
as revenues and payments to its pharmacy providers as cost of revenues (i.e.
gross reporting) in accordance with EITF 99-19 Reporting Gross Revenue as a
Principle vs. Net as an Agent. If we are only administering plan sponsors
network pharmacy contracts, we record the claims processing fee as revenue
(i.e. net reporting). Revenues from the sale of prescription drugs by retail
pharmacies in our nationwide network and claims processing fees are recognized
when the claims are adjudicated. We do not include any member co-payments
collected in retail pharmacies as revenue or cost of revenue.

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 co-pay) as revenue.

Clinical and Other Services

Clinical services fees received from the plan sponsor customers or
pharmaceutical manufacturers are recognized in revenues as earned in accordance
with the contractual agreements. Clinical services revenues include fees for
negotiating rebates with pharmaceutical manufacturers and formulary management
services on behalf of our health plan sponsor customers. As part of our
contracted services to our plan sponsor customers, we bill and collect rebates
on their behalf. Only the fee that we retain per our negotiated contract with
our customers is recorded as revenue in our statement of operations. In
addition, we collect separate administrative fees from pharmaceutical
manufacturers for services rendered in connection with rebate agreements,
including aggregating membership data, performing market share analysis and
consolidating billing for clients.

The rebate due from the manufacturer is determined based on a complex
formula including such factors as volume and quarterly drug utilization. We
estimate the most recent quarters rebate receivables from the manufacturers
and rebate payable to plan sponsors and its fees based on the terms of its
contracts and claims at the end of the quarter. Following the end of the
quarter, we invoice the drug manufacturer. We revise our estimates based upon
the invoiced amounts.

Other clinical services revenues include those from disease management
programs, physician and member education programs, clinical consulting,
clinical trials, outcomes research, prescription review and other health
improvement products, paid at predetermined contractual rates based on the
delivery or completion of the services.

11



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##### Table of Contents



Use of Estimates

Preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and reported
amounts of revenues and expenses during the reporting periods. The Company has
made significant estimates of the purchase price and fair market value of the
assets acquired and liabilities assumed in our acquisitions. Other significant
estimates include clinical services revenues and costs, reserves for
uncollectable accounts, liabilities relating to customer rebate guarantees,
performance commitments and service warranties. The Company has also made
significant estimates relating to contract losses, the value of our various
investments and recoverability of the capitalized amounts for internally
developed software. The Company bases its estimates on historical experience
and on various assumptions that the Company believes are reasonable under the
circumstances. The Company continually evaluates the appropriateness of the
amounts recorded and revises these estimates regularly. Actual results could
differ from those estimates, and any such change could adversely affect the
Companys results of operations.

Accounts Receivable

Accounts receivable balances represent trade receivables generated from
health benefit management and related services (data services, mail services
and clinical and other services). To reduce the potential for credit risk, the
Company performs ongoing evaluations of its customers financial condition but
does not generally require significant collateral. Accounts receivable
balances are used as collateral for the Companys debt. As of September 30,
2002, unbilled receivables were $862.8 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 respective
contractual billing schedule. The Company establishes an allowance for
doubtful accounts based on performance factors, historical trends and other
pertinent information.

12



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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                    |           | Six Months Ended                     
|                                                             |                             |                |         | September 30,                         |           | September 30,                        
|                                                             |                             |                |         | 2002                                  |           | 2001                                  |         | 2002      |           | 2001 (1)
|                                                             |                             |                |         |                                       |           |                                       |         |           |           |         
|                                                             |                             |                |         | (in thousands, except per share data) |           | (in thousands, except per share data)
|Revenues:                                                    |                             |                |         |                                       |           |                                       |         |           |           |          |         |           |           |   |         |          
|                                                             | Data services               |                | $       | 3,086,898                             |           |                                       | $       | 2,665,062 |           |          | $       | 5,997,913 |           |   | $       | 5,342,586 |          
|                                                             | Mail services               |                |         | 597,183                               |           |                                       |         | 354,785   |           |          |         | 1,114,101 |           |   |         | 690,432   |          
|                                                             | Clinical and other services |                |         | 168,587                               |           |                                       |         | 134,782   |           |          |         | 332,892   |           |   |         | 269,505   |          
|                                                             |                             |                |         |                                       |           |                                       |         |           |           |          |         |           |           |   |         |          
|                                                             |                             | Total revenues |         |                                       | 3,852,668 |                                       |         |           | 3,154,629 |          |         |           | 7,444,906 |   |         |           | 6,302,523 | 
|Gross profit                                                 |                             |                | 135,462 |                                       |           |                                       | 107,976 |           |           |          | 260,809 |           |           |   | 215,742 |          
|Selling, general and administrative expenses                 |                             |                | 54,182  |                                       |           |                                       | 43,334  |           |           |          | 107,447 |           |           |   | 89,089  |          
|Non-recurring expenses                                       |                             |                |        |                                       |           |                                       | 906     |           |           |          |        |           |           |   | 1,760   |          
|Operating income                                             |                             |                | 81,280  |                                       |           |                                       | 63,736  |           |           |          | 153,362 |           |           |   | 124,893 |          
|Net interest expense                                         |                             |                | (10,292 | )                                     |           |                                       | (16,240 | )         |           |          | (20,456 | )         |           |   | (35,539 | )        
|Loss from joint venture                                      |                             |                | (1,224  | )                                     |           |                                       | (431    | )         |           |          | (2,257  | )         |           |   | (1,090  | )        
|Extraordinary loss on early retirement of
debt, net of taxes |                             |                |        |                                       |           |                                       |        |           |           |          | (1,491  | )         |           |   |        |          
|Net income                                                   |                             | $              | 42,207  |                                       |           | $                                     | 28,476  |           |           | $        | 77,551  |           |           | $ | 53,408  |          
|Diluted net income per share                                 |                             | $              | 0.43    |                                       |           | $                                     | 0.29    |           |           | $        | 0.77    |           |           | $ | 0.57    |          



---

|(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 September 30, 2002 Compared to Three Months Ended September 30, 2001

Revenues. Our revenues for the three months ended September 30, 2002
increased by $698 million, or 22%, compared to revenues for the three months
ended September 30, 2001. The increase in revenues was primarily the result of
an increase in pharmacy claims and a corresponding increase in claims
processing revenue. Approximately $422 million, or 60%, of the increase in
revenues was attributable to data services and a 9.8% increase in the number of
pharmacy claims processed during the period. Pharmacy network claims processed
increased to 120.1 million in the three months ended September 30, 2002 from
109.3 million for the three months ended September 30, 2001. Approximately 35%
of the increase in revenues was attributable to additional sales of our mail
pharmacy services including our specialty pharmacy services, resulting from a
52% increase in the number of mail prescriptions dispensed. Mail pharmacy
prescriptions dispensed increased to 3.9 million for the three months ended
September 30, 2002 from 2.6 million in the three months ended September 30,
2001. Approximately 5% of the increase in revenues resulted from an increase
in clinical and other services revenues. If we had reported our data services
revenues using net reporting, revenues and cost of revenues would have
decreased by $3.0 billion and $2.6 billion for the three month periods ended
September 30, 2002 and 2001, respectively.

Gross profit. Our gross profit for the three months ended September 30,
2002 increased by $27 million, or 25%, compared to the same period in 2001. As
a percentage of revenues, gross profit was approximately 3.5% in the three
months ended September 30, 2002 and 3.4% in the same period in 2001. Data
services revenues as a percentage of total revenue decreased and mail services
revenue as a percentage of total revenue increased. Mail services revenues
generally have a higher percentage margin than data services.

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Selling, general and administrative expenses. Our selling, general and
administrative expenses for the three months ended September 30, 2002 increased
by $10.8 million, or 25% 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 three months ended September 30, 2002
and 2001.

Interest income and interest expense. Interest expense, net of interest
income, for the three months ended September 30, 2002 decreased $5.9 million
compared to the same period in 2001. The decrease was due primarily to the
reduction in outstanding debt through proceeds from the sale of nine million
shares of Class A common stock in August of 2001. During the three months
ended September 30, 2002, the Company also repurchased Senior Notes with a fair
value of approximately $12.2 million. In addition, the Asset Securitization
Facility incurs interest at a lower rate than the debt it replaced.

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 September 30, 2002 and
2001, we recorded net losses of $1.2 million and $431,000 from our interest in
RxHub, respectively.

Income taxes. For the three months ended September 30, 2002 and 2001, our
effective tax rate was approximately 39.5%.

Diluted net income per share. We reported diluted net income of $0.43 per
share for the three months ended September 30, 2002 compared to $0.29 per share
for the same period in 2001. The weighted average shares outstanding were 98.4
million and 97.0 million for the three months ended September 30, 2002 and
2001, respectively. On August 23, 2001 we completed the sale of nine million
shares of Class A common stock. In addition, during the three months ended
September 30, 2002, we purchased approximately 4.0 million shares under our
stock repurchase program at a cost of approximately $71.8 million.

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

Six Months Ended September 30, 2002 Compared to Six Months Ended September 30, 2001

Revenues. Our revenues for the six months ended September 30, 2002
increased by $1,142 million, or 18%, compared to revenues for the six months
ended September 30, 2001. The increase in revenues was primarily the result of
an increase in pharmacy claims and a corresponding increase in claims
processing revenue. Approximately $655 million, or 57%, of the increase in
revenues was attributable to data services and a 7% increase in the number of
pharmacy claims processed during the period. Pharmacy network claims processed
increased to 238.8 million in the six months ended September 30, 2002 from
222.3 million for the six months ended September 30, 2001. Approximately 37%
of the increase in revenues was attributable to additional sales of our mail
pharmacy services including our specialty pharmacy services, resulting from a
43% increase in the number of mail prescriptions dispensed. Mail pharmacy
prescriptions dispensed increased to 7.3 million for the six months ended
September 30, 2002 from 5.1 million in the six months ended September 30, 2001.
Approximately 6% of the increase in revenues resulted from an increase in
clinical and other services revenues. If we had reported our data services
revenues using net reporting, revenues and cost of revenues would have
decreased by $5.9 billion and $5.3 billion for the six month periods ended
September 30, 2002 and 2001, respectively.

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Gross profit. Our gross profit for the six months ended September 30,
2002 increased by $45 million, or 21%, compared to the same period in 2001. As
a percentage of revenues, gross profit was approximately 3.5% in the six months
ended September 30, 2002 and 3.4% in the same period in 2001. Data services
revenues as a percentage of total revenue decreased and mail services revenue
as a percentage of total revenue increased. Mail services revenues generally
have a higher percentage margin than data services.

Selling, general and administrative expenses. Our selling, general and
administrative expenses for the six months ended September 30, 2002 increased
by $18.4 million, or 21% 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 six months ended September 30, 2002
and 2001.

Interest income and interest expense. Interest expense, net of interest
income, for the six months ended September 30, 2002 decreased $15.1 million
compared to the same period in 2001. The decrease was due primarily to the
reduction in outstanding debt through proceeds from the sale of nine million
shares of Class A common stock in August of 2001. During the six months ended
September 30, 2002, we also repurchased Senior Notes with a fair value of
approximately $12.2 million. In addition, the Asset Securitization Facility
incurs interest at a lower rate than the debt it replaced.

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 six months ended September 30, 2002 and 2001,
we recorded net losses of $2.3 million and $1.1 million from our interest in
RxHub respectively.

Income taxes. For the six months ended September 30, 2002 and 2001, our
effective tax rate was approximately 39.5%.

Extraordinary loss on early retirement of debt, net of taxes.In
connection with the refinancing and the bank debt repayment, 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
$1.5 million, net of taxes.

Diluted net income per share. We reported diluted net income of $0.77 per
share for the six months ended September 30, 2002 compared to $0.57 per share
for the same period in 2001. The weighted average shares outstanding were
100.3 million and 94.3 million for the six months ended September 30, 2002 and
2001, respectively. On August 23, 2001 we completed the sale of nine million
shares of Class A common stock. In addition, during the three months ended
September 30, 2002, we purchased approximately 4.0 million shares under our
stock repurchase program at a cost of approximately $71.8 million.

On October 1, 2001, we announced a two-for-one stock split, effected in
the form of a stock dividend, of its common stock. The record date was October
23, 2001 and the date of payment was November 2, 2001. 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 September 30, 2002, we had a working capital deficit of $260.4
million. The majority of our current obligations are not due until cash is
collected from our customers. We use our excess cash balances to reduce debt
under our credit facilities, which results in a net deficit in working capital.
Our net

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cash provided by operating activities was $109.1 million for the six
months ended September 30, 2002 resulting primarily from net income and also
due to the timing of receivables and payables resulting from our claims
processing cycle. During the six months ended September 30, 2002, we used cash
of $44.8 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. In addition, during the three months ended September 30, 2002, we
purchased approximately 4.0 million shares under our stock repurchase program
at a cost of approximately $71.8 million. During the three months ended
September 30, 2002, we also repurchased Senior Notes with a face value of
approximately $12.2 million in open market transactions. 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, 2002 and in the
six months ended September 30, 2002 our operating cash flow funded our capital
expenditures and our short-term excess cash was used to reduce our debt or
invested in money market funds. In addition, on September 30, 2002, we amended
our Senior Secured Credit Facility to increase the size of our revolver from
$175 million to $275 million. The revolving credit facility expires in 2005.

On October 9, 2002, we announced the acquisition of Accordant. Effective
as of November 1, 2002, we completed our acquisition of Accordant for $75
million cash, with up to an additional $25 million cash payable depending upon
Accordant achieving certain financial and operating targets in calendar year
2003. Any additional cash earned will be paid during calendar year 2004. The
initial $75 million payment was funded through cash on hand and borrowings
under our Senior Secured Credit Facility revolver.

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 these plans.

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 September 30,
2002, we had drawn $281 million under this facility. The Asset Securitization
Facility is included in our debt balance as of September 30, 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 $1.5 million, net of taxes.

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As of September 30, 2002 our debt consists of the following in thousands:

|                              |  |   |         | 
|----------------------------- |  | - | ------- | 
|Senior Notes                  |  | $ | 187,825 | 
|Asset Securitization Facility |  |   | 280,802 | 
|                              |  |   |         | 
|                              |  | $ | 468,627 | 
|                              |  |   |         | 

As of September 30, 2002, no amounts were drawn on the revolving credit
facility.

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 dropped to $300 million in October 2001 and dropped to $200 million in
October 2002. 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 $10.3 million at September 30, 2002 and $14.5 million at March 31, 2002, was
based upon quoted market prices. The fair value represents the estimated amount
the Company would have to pay to terminate the swap agreement taking into
account current interest rates. The related gains or losses on this agreement
are deferred in stockholders equity as a component of other comprehensive
income. The net amount of changes in other comprehensive income and the net
amount reclassified into earnings during the six-month period ended September
30, 2002 were $4.2 million and $7.3 million, respectively.

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. 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, and establish new standards for electronic transmission of certain
types of health care data, including on-line pharmacy claims transactions.
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, and a final effective date for those
regulations has not yet been established.

Legal Proceedings and Regulatory Developments

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.

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This investigation appears to focus on PBMs relationships with
pharmaceutical manufacturers and retail pharmacies and PBMs programs relating
to drug formulary compliance, which includes 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.

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.

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In March 1998, a class action lawsuit captioned Mulder v. PCS Health
Systems, Inc., case number 98-1003, was filed in the United States District
Court of the District of New Jersey. This action alleges that PCS is an ERISA
fiduciary and that we have breached our fiduciary obligations under ERISA in
connection with our development and implementation of formularies, preferred
drug listings and intervention programs for our sponsors of ERISA health plans.
In particular, plaintiffs allege that our therapeutic interchange programs and
negotiation of formulary rebates and discounts from pharmaceutical
manufacturers violate fiduciary obligations. The plaintiffs are seeking
injunctive relief and monetary damages in an unspecified amount. AdvancePCS
believes that it does not assume any of the plan fiduciary responsibilities
that would subject it to regulation under ERISA 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 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. AdvancePCS has reviewed the draft guidance and 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 the Companys businesses are governed by federal and
state laws and regulations and compliance is a significant operational
requirement for the Company. Management believes that the Company is in
substantial compliance with all existing legal requirements material to the
operation of its business; however, the application of complex standards to the
detailed operation of the business always creates areas of uncertainty.
Moreover, regulation of the field is in a state of flux. Numerous health care

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laws and regulations have been proposed at the state and federal level,
many of which could affect the Companys business. Management cannot predict
what additional federal or state legislation or regulatory initiatives may be
enacted in the future regarding health care, or the business of pharmacy
benefit management. It is possible that federal or state governments might
impose additional restrictions or adopt interpretations of existing laws that
could have a material adverse affect on the Companys business or financial
position.

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.
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 six months ended September 30, 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.

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 144
addresses financial accounting and reporting for the impairment of long-lived
assets and for the disposal of long-lived assets. The adoption of SFAS 144 had
no impact on the Companys consolidated financial statements.

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

The Company has not entered into derivatives or other financial
instruments for trading purposes. We have entered into interest rate
protection agreements that have fixed the LIBOR rate as of November 7, 2000 at
6.60% for $400 million of our variable rate debt under our credit facility.
The notional amount dropped to $300 million in October 2001 and dropped to $200
million in October 2002. We use the interest rate swaps to manage our interest
rate risk on future interest payments. In addition, the Company has $188
million of 8.50% Senior Notes outstanding. As a result, virtually all of our
debt is effectively fixed rate debt as of September 30, 2002. Due to these
measures a change in interest rates would have no material effect on our
statement of operations but could impact the fair value of debt outstanding
relative to current market rates.

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




Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedure.The Companys 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.

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.

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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 includes 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.

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. AdvancePCS, Civ. No. 01-CV-2320 (D. Minn.). AARP and

22



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##### Table of Contents



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 2. Changes in Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

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

AdvancePCS held its 2002 Annual Meeting of Stockholders on September 17,
2002. Detailed information regarding the proposals considered by the
stockholders is contained in the Companys Definitive Proxy Statement on
Schedule 14A, filed with the Securities and Exchange Commission on July 29,
2002. At the meeting, the stockholders considered and approved the proposals
described below.



| | 1. |  | The Class A stockholders elected David D. Halbert as a Class A
director and Michael D. Ware as a Class C director, and the Class B-1
stockholder elected Ramsey A Frank as a Class B-1 director. All were
elected to serve as directors until the Companys Annual Meeting of
Stockholders in 2005 by the following vote:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                 |  |                  |            |                 |  |  |            | 
|---------------- |  | ---------------- | ---------- | --------------- |  |  | ---------- | 
|Class A          |  |                  |            |                 |  |  |            | 
|Stockholder Vote |  | David D. Halbert |            | Michael D. Ware
|For:             |  |                  | 52,483,442 |                 |  |  | 63,538,278 | 
|Withheld:        |  |                  | 13,969,459 |                 |  |  | 2,914,623  | 

23



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##### Table of Contents



|                 |  |                 |            | 
|---------------- |  | --------------- | ---------- | 
|Class B-1        |  |                 |            | 
|Stockholder Vote |  | Ramsey A. Frank
|For:             |  |                 | 12,913,334 | 
|Withheld:        |  |                 |           | 



| | 2. |  | The AdvancePCS Employee Stock Purchase Plan was approved by the
following vote:
| | -- |  | -------------------------------------------------------------------------------

|            |  |  |            | 
|----------- |  |  | ---------- | 
|For:        |  |  | 78,080,021 | 
|Against:    |  |  | 1,246,766  | 
|Abstention: |  |  | 39,648     | 



| | 3. |  | The Companys Amended and Restated Corporate Officer Incentive Plan
was approved by the following vote:
| | -- |  | -------------------------------------------------------------------------------------------------------

|            |  |  |            | 
|----------- |  |  | ---------- | 
|For:        |  |  | 76,391,725 | 
|Against:    |  |  | 2,886,484  | 
|Abstention: |  |  | 88,226     | 



| | 4. |  | PricewaterhouseCoopers LLP was ratified as the Companys
independent public accountants for the fiscal year ending March 31,
2003. This proposal was approved by the following vote:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|            |  |  |            | 
|----------- |  |  | ---------- | 
|For:        |  |  | 77,469,757 | 
|Against:    |  |  | 1,869,210  | 
|Abstention: |  |  | 27,468     | 

Item 5. Other Information.

Not applicable.

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

(a)  Exhibits.

|            |  |  |  |                                                                                                                                                                                                                                                                        
|----------- |  |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |  |  | Exhibits                                                                                                                                                                                                                                                               
|            |  |  |  |                                                                                                                                                                                                                                                                        
|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).                               

24



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##### Table of Contents



|            |  |  |  |                                                                                                                                                                                                                         
|----------- |  |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |  |  | Exhibits                                                                                                                                                                                                                
|            |  |  |  |                                                                                                                                                                                                                         
|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).        
|            |  |  |  |                                                                                                                                                                                                                         
|10.1*       |  |  |  | Amendment No. 6 to Credit Agreement dated as of September 13, 2002 by and among
AdvancePCS, Merrill Lynch Capital Corporation and a syndicate of banks.                                                                 
|            |  |  |  |                                                                                                                                                                                                                         
|10.2        |  |  |  | AdvancePCS Employee Stock Purchase Plan (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 September 20, 2002).              
|            |  |  |  |                                                                                                                                                                                                                         
|10.3        |  |  |  | Amended and Restated Corporate Officer Incentive Plan (incorporated by
reference to Exhibit 99.2 of AdvancePCSs Current Report on Form 8-K as filed
with the Securities and Exchange Commission on September 20,
2002).
|            |  |  |  |                                                                                                                                                                                                                         
|99.1*       |  |  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                            
|            |  |  |  |                                                                                                                                                                                                                         
|99.2*       |  |  |  | Certification of Principle Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                        



---

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

(b)  Reports on Form 8-K.

On August 2, 2002, we filed a Form 8-K responding to an article appearing
in the Wall Street Journal regarding an ongoing U.S. Attorney investigation of
the pharmacy benefit management industry and the pending case in the U.S.
District Court for the Eastern District of Pennsylvania.

On August 13, 2002, we filed a Form 8-K containing an update provided by
David D. Halbert, to all of the Companys employees that discussed and
commented on recent events related to the Company and its industry and a
related fact sheet regarding the Companys Rebate Practices and Relationships
with Pharmaceutical Manufacturers.

On August 14, 2002, we filed an 8-K announcing a speech by David D.
Halbert to be delivered on August 14, 2002. In addition, the Company announced
David D. Halbert, Chief Executive Officer of the Company and Yon Y. Jorden,
Chief Financial Officer of the Company, submitted to the Securities and
Exchange Commission sworn statements pursuant to Securities and Exchange
Commission Order No. 4-460.

On August 15, 2002, we filed a Form 8-K/A including the investor
presentation materials presented by Mr. Halbert on August 14, 2002 and
additional sworn statements by the Chief Executive Officer and Chief Financial
Officer.

On September 20, 2002, we filed a Form 8-K announcing the voting results
of the Annual Meeting of Stockholders held on September 17, 2002.

25



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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: November 13, 2002 |  | By: |  | /s/ David D. Halbert                                                                                            
|                        |  |     |  |                                                                                                                 
|                        |  |     |  | David D. Halbert, Chairman of the Board and
Chief Executive Officer                                             
|                        |  |     |  |                                                                                                                 
|Date: November 13, 2002 |  | By: |  | /s/ Yon Y. Jorden                                                                                               
|                        |  |     |  |                                                                                                                 
|                        |  |     |  | Yon Y. Jorden, Chief Financial Officer and
Executive Vice President (Principal Financial and
Accounting Officer)

26



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##### Table of Contents






Certifications

Certification of Chief Executive Officer

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: November 13, 2002                               | 
| |                                                       | 
| | /s/ DAVID D. HALBERT                                  | 
| |                                                       | 
| | David D. Halbert
Chairman and Chief Executive Officer | 

27



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##### Table of Contents



Certification of Principal Financial Officer

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: November 13, 2002               | 
| |                                       | 
| | /s/ YON Y. JORDEN                     | 
| |                                       | 
| | Yon Y. Jorden
Chief Financial Officer | 

28



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##### Table of Contents






Exhibit Index

|            |  |  |  |                                                                                                                                                                                                                                                                        
|----------- |  |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |  |  | Exhibits                                                                                                                                                                                                                                                               
|            |  |  |  |                                                                                                                                                                                                                                                                        
|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).                                                       
|            |  |  |  |                                                                                                                                                                                                                                                                        
|10.1*       |  |  |  | Amendment No. 6 to Credit Agreement dated as of September 13, 2002 by and among
AdvancePCS, Merrill Lynch Capital Corporation and a syndicate of banks.                                                                                                                
|            |  |  |  |                                                                                                                                                                                                                                                                        
|10.2        |  |  |  | AdvancePCS Employee Stock Purchase Plan (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 September 20, 2002).                                                             
|            |  |  |  |                                                                                                                                                                                                                                                                        
|10.3        |  |  |  | Amended and Restated Corporate Officer Incentive Plan (incorporated by
reference to Exhibit 99.2 of AdvancePCSs Current Report on Form 8-K as filed
with the Securities and Exchange Commission on September 20,
2002).                                               
|            |  |  |  |                                                                                                                                                                                                                                                                        
|99.1*       |  |  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                           
|            |  |  |  |                                                                                                                                                                                                                                                                        
|99.2*       |  |  |  | Certification of Principle Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                       



---

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

29