##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

|                                                                                              
|----------------------------------------------------------------------------------------------
|                                                                                              
|(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934   
|                                                                                              
|For the Quarterly Period Ended June 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.

YES X NO

As of August 9, 2002, the registrant had (1) 79,535,732 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.

TABLE OF CONTENTS



|                                                |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                                                |                                                                                               | Condensed Consolidated Balance Sheets               
|                                                |                                                                                               | Condensed Consolidated Statements of Operations     
|                                                |                                                                                               | Condensed Consolidated Statements of Cash Flows     
|                                                |                                                                                               | Notes to Condensed 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                           
|PART II. OTHER INFORMATION                     
|Signatures                                     
|EX-10.1 Amendment No. 5 to the Credit Agreement
|EX-99.1 Certification of CEO and CFO           



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##### Table of Contents



AdvancePCS and Subsidiaries

Index to Quarterly Report on Form 10-Q

|           |  |                       |      |          |    |                                                                                                          |   
|---------- |  | --------------------- | ---- | -------- | -- | -------------------------------------------------------------------------------------------------------- | --
|Part I.    |  | Financial Information | Page
|           |  |                      
|           |  |                       |      | Item  1. |    | Financial Statements                                                                                     | 8 
|           |  |                      
|           |  |                       |      |          |    | A. Condensed Consolidated Balance Sheets as of June 30, 2002 and March 31, 2002                          | 1 
|           |  |                      
|           |  |                       |      |          |    | B. Condensed
Consolidated Statements of Operations for the Three Months Ended June
30, 2002     and 2001 | 2 
|           |  |                      
|           |  |                       |      |          |    | C. Condensed
Consolidated Statements of Cash Flows for the Three Months Ended June
30, 2002     and 2001 | 3 
|           |  |                      
|           |  |                       |      |          |    | D.  Notes to Condensed Consolidated Financial Statements                                                 | 4 
|           |  |                      
|           |  |                       |      | Item 2.  |    | Managements Discussion and Analysis of Financial Condition and Results of Operations.                   | 8 
|           |  |                      
|           |  |                       |      | Item 3.  |    | Qualitative and Quantitative Disclosures About Market Risk                                               | 15
|           |  |                      
|Part II.   |  | Other Information     | 17  
|           |  |                      
|Signatures |  |                       |      |          | 20





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AdvancePCS and Subsidiaries




Condensed Consolidated Balance
Sheets
(in thousands, except share data)

(Unaudited)

|                              |  |                                                                                                              |                                                                                                            |                                      |           |               |  |                |           |           |  | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------- | ------------------------------------ | --------- | ------------- |  | -------------- | --------- | --------- |  | 
|                              |  |                                                                                                              |                                                                                                            |                                      |           | June 30, 2002 |  | March 31, 2002
|                              |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  |                                                                                                              |                                                                                                            | ASSETS                               |           |               |  |                |           |           |  | 
|                              |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|Current assets:               |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  | Cash and cash equivalents                                                                                    |                                                                                                            | $                                    | 145,289   |               |  | $              | 139,145   |          
|                              |  | Accounts receivable, net of allowance for doubtful accounts
of $29,714 and $26,150 respectively              |                                                                                                            |                                      | 1,523,495 |               |  |                | 1,225,929 |          
|                              |  | Inventories                                                                                                  |                                                                                                            |                                      | 78,327    |               |  |                | 65,336    |          
|                              |  | Prepaid expenses and other                                                                                   |                                                                                                            |                                      | 8,239     |               |  |                | 10,484    |          
|                              |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  |                                                                                                              | Total current assets                                                                                       |                                      |           | 1,755,350     |  |                |           | 1,440,894 | 
|Noncurrent assets:            |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  | Property and equipment, net of accumulated depreciation and
amortization of $72,759 and $64,999 respectively |                                                                                                            |                                      | 132,079   |               |  |                | 121,277   |          
|                              |  | Goodwill                                                                                                     |                                                                                                            |                                      | 1,198,925 |               |  |                | 1,198,925 |          
|                              |  | Intangible assets, net                                                                                       |                                                                                                            |                                      | 370,162   |               |  |                | 373,041   |          
|                              |  | Other noncurrent assets                                                                                      |                                                                                                            |                                      | 86,683    |               |  |                | 89,827    |          
|                              |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  |                                                                                                              | Total assets                                                                                               |                                      | $         | 3,543,199     |  |                | $         | 3,223,964 | 
|                              |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  |                                                                                                              |                                                                                                            | LIABILITIES AND STOCKHOLDERS EQUITY |           |               |  |                |           |           |  | 
|Current liabilities:          |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  | Current portion of long-term debt                                                                            |                                                                                                            | $                                    |          |               |  | $              | 1,523     |          
|                              |  | Claims and accounts payable                                                                                  |                                                                                                            |                                      | 1,852,932 |               |  |                | 1,557,909 |          
|                              |  | Accrued salaries and benefits                                                                                |                                                                                                            |                                      | 26,030    |               |  |                | 38,602    |          
|                              |  | Other accrued expenses                                                                                       |                                                                                                            |                                      | 72,802    |               |  |                | 79,308    |          
|                              |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  |                                                                                                              | Total current liabilities                                                                                  |                                      |           | 1,951,764     |  |                |           | 1,677,342 | 
|Noncurrent liabilities:       |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  | Long-term debt, less current portion                                                                         |                                                                                                            |                                      | 500,000   |               |  |                | 499,263   |          
|                              |  | Deferred income taxes                                                                                        |                                                                                                            |                                      | 140,293   |               |  |                | 134,878   |          
|                              |  | Other noncurrent liabilities                                                                                 |                                                                                                            |                                      | 34,669    |               |  |                | 35,221    |          
|                              |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  |                                                                                                              | Total liabilities                                                                                          |                                      |           | 2,626,726     |  |                |           | 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; 80,108,726 and
79,927,079 shares issued and outstanding respectively |                                      |           | 801           |  |                |           | 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                                                                                   |                                                                                                            |                                      | 721,027   |               |  |                | 716,887   |          
|                              |  | Accumulated other comprehensive loss                                                                         |                                                                                                            |                                      | (12,959   | )             |  |                | (12,686   | )        
|                              |  | Accumulated earnings                                                                                         |                                                                                                            |                                      | 207,474   |               |  |                | 172,130   |          
|                              |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  |                                                                                                              | Total stockholders equity                                                                                 |                                      |           | 916,473       |  |                |           | 877,260   | 
|                              |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               
|                              |  |                                                                                                              | Total liabilities and stockholders equity                                                                 |                                      | $         | 3,543,199     |  |                | $         | 3,223,964 | 
|                              |  |                                                                                                              |                                                                                                            |                                      |           |               |  |               

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

1



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AdvancePCS and Subsidiaries




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

(Unaudited)

|                                                             |                                                                         |                          |           |                    |           |      |           |           |           | 
|------------------------------------------------------------ | ----------------------------------------------------------------------- | ------------------------ | --------- | ------------------ | --------- | ---- | --------- | --------- | --------- | 
|                                                             |                                                                         |                          |           | Three Months Ended
|                                                             |                                                                         |                          |           | June 30,          
|                                                             |                                                                         |                          |           |                   
|                                                             |                                                                         |                          |           | 2002               |           | 2001
|                                                             |                                                                         |                          |           |                    |           |     
|Revenues                                                     |                                                                         | $                        | 3,592,238 |                    |           | $    | 3,147,894 |          
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|Cost of operations:                                          |                                                                         |                          |           |                    |           |      |           |          
|                                                             | Cost of revenues                                                        |                          |           | 3,466,891          |           |      |           | 3,040,128 |          
|                                                             | Selling, general and administrative expenses                            |                          |           | 53,265             |           |      |           | 45,756    |          
|                                                             | Non-recurring expenses                                                  |                          |           |                   |           |      |           | 854       |          
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|                                                             |                                                                         | Total cost of operations |           |                    | 3,520,156 |      |           |           | 3,086,738 | 
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|                                                             | Operating income                                                        |                          |           | 72,082             |           |      |           | 61,156    |          
|Interest income                                              |                                                                         |                          | 1,424     |                    |           |      | 1,579     |          
|Interest expense                                             |                                                                         |                          | (11,588   | )                  |           |      | (20,878   | )        
|Loss from joint venture                                      |                                                                         |                          | (1,033    | )                  |           |      | (659      | )        
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|                                                             | Income before income taxes                                              |                          |           | 60,885             |           |      |           | 41,198    |          
|Provision for income taxes                                   |                                                                         |                          | (24,050   | )                  |           |      | (16,266   | )        
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|                                                             | Net income before extraordinary loss                                    |                          |           | 36,835             |           |      |           | 24,932    |          
|Extraordinary loss on early retirement of debt,
net of taxes |                                                                         |                          | (1,491    | )                  |           |      |          |          
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|                                                             | Net income                                                              |                          | $         | 35,344             |           |      | $         | 24,932    |          
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|Basic                                                        |                                                                         |                          |           |                    |           |      |           |          
|                                                             | Net income before extraordinary loss per share                          |                          | $         | 0.40               |           |      | $         | 0.34      |          
|                                                             | Extraordinary loss on early retirement of debt,
net of taxes, per share |                          |           | (0.02              | )         |      |           |          |          
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|                                                             | Net income per share                                                    |                          | $         | 0.38               |           |      | $         | 0.34      |          
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|                                                             | Weighted average shares outstanding                                     |                          |           | 93,022             |           |      |           | 73,478    |          
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|Diluted                                                      |                                                                         |                          |           |                    |           |      |           |          
|                                                             | Net income before extraordinary loss per
share                          |                          | $         | 0.36               |           |      | $         | 0.27      |          
|                                                             | Extraordinary loss on early retirement
of debt,
net of taxes, per share |                          |           | (0.01              | )         |      |           |          |          
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|                                                             | Net income per share                                                    |                          | $         | 0.35               |           |      | $         | 0.27      |          
|                                                             |                                                                         |                          |           |                    |           |      |           |          
|                                                             | Weighted average shares outstanding                                     |                          |           | 102,099            |           |      |           | 91,618    |          
|                                                             |                                                                         |                          |           |                    |           |      |           |          

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

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AdvancePCS and Subsidiaries




Condensed Consolidated Statements of Cash Flows
(in thousands)

(Unaudited)

|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |         |       |         |         |  
|---------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------------------------ | ----------------------------------------- | ------ | --------------------------- | ------- | ------- | ----- | ------- | ------- | -
|                                               |                                                                                    |                                                              |                                                                                |                                           |        | Three Months Ended June 30,
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                            
|                                               |                                                                                    |                                                              |                                                                                |                                           |        | 2002                        |         | 2001   
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|Cash flows from operating activities:          |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|                                               | Net income                                                                         |                                                              | $                                                                              | 35,344                                    |        |                             | $       | 24,932  |      
|                                               | Adjustments to reconcile net income to net cash provided by
operating activities - |                                                              |                                                                                |                                           |        |                             |         |         |      
|                                               |                                                                                    | Depreciation and amortization                                |                                                                                |                                           | 10,760 |                             |         |         | 9,117 |        
|                                               |                                                                                    | Provision for doubtful accounts and reserves                 |                                                                                |                                           | 9,398  |                             |         |         | 5,986 |        
|                                               |                                                                                    | Deferred income taxes                                        |                                                                                |                                           | 2,413  |                             |         |         | 1,548 |        
|                                               |                                                                                    | Extraordinary loss on early retirement of debt, net of taxes |                                                                                |                                           | 1,491  |                             |         |         | -    |        
|                                               |                                                                                    | Change in certain assets and liabilities -                   |                                                                                |                                           |        |                             |         |         |       |        
|                                               |                                                                                    |                                                              | Accounts
receivable                                                            |                                           |        | (299,255                    | )       |         |       | (43,104 | )      
|                                               |                                                                                    |                                                              | Inventories                                                                    |                                           |        | (12,991                     | )       |         |       | (1,507  | )      
|                                               |                                                                                    |                                                              | Prepaid expenses and other noncurrent assets                                   |                                           |        | 1,560                       |         |         |       | 1,131   |        
|                                               |                                                                                    |                                                              | Claims and accounts payable, accrued expenses and other
noncurrent liabilities |                                           |        | 277,428                     |         |         |       | 61,944  |        
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|                                               |                                                                                    |                                                              |                                                                                | Net cash provided by operating activities |        |                             | 26,148  |         |       |         | 60,047  |  
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|Cash flows from investing activities:          |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|                                               | Purchase of property and equipment                                                 |                                                              |                                                                                | (18,895                                   | )      |                             |         | (6,885  | )    
|                                               | Acquisition and joint venture  net of cash acquired                               |                                                              |                                                                                | (950                                      | )      |                             |         | (1,425  | )    
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|                                               |                                                                                    |                                                              |                                                                                | Net cash used in investing activities     |        |                             | (19,845 | )       |       |         | (8,310  | )
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|Cash flows from financing activities:          |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|                                               | Net proceeds from issuance of Common Stock                                         |                                                              |                                                                                | 1,528                                     |        |                             |         | 2,300   |      
|                                               | Deferred financing costs                                                           |                                                              |                                                                                | (901                                      | )      |                             |         | (298    | )    
|                                               | Proceeds from long-term obligations                                                |                                                              |                                                                                | 341,000                                   |        |                             |         | 13,000  |      
|                                               | Net borrowings on asset securitization facility                                    |                                                              |                                                                                | 150,000                                   |        |                             |         |        |      
|                                               | Payments on long-term obligations                                                  |                                                              |                                                                                | (491,786                                  | )      |                             |         | (26,812 | )    
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|                                               |                                                                                    |                                                              |                                                                                | Net cash used in financing activities     |        |                             | (159    | )       |       |         | (11,810 | )
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|Increase in cash                               |                                                                                    |                                                              | 6,144                                                                          |                                           |        |                             | 39,927  |        
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|Cash and cash equivalents, beginning of period |                                                                                    |                                                              | 139,145                                                                        |                                           |        |                             | 110,048 |        
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        
|Cash and cash equivalents, end of period       |                                                                                    | $                                                            | 145,289                                                                        |                                           |        | $                           | 149,975 |        
|                                               |                                                                                    |                                                              |                                                                                |                                           |        |                             |         |        

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

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AdvancePCS and Subsidiaries




Notes to Condensed Consolidated Financial Statements

1.  Summary of Significant Accounting Policies

The accompanying unaudited condensed 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 June 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
month period ended June 30, 2002 are not necessarily indicative of the results
to be expected for the full year or for any future period.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
AdvancePCS and its 50% or more owned subsidiaries and affiliates. In January
2000, Advance acquired a 19% equity interest in Consumer Health Interactive,
Inc. (CHI), an internet health portal development company, with an option to
acquire the additional interest. The acquisition of the remaining 81% equity
interest was completed effective September 30, 2001 with cash of $9.2 million,
making CHI a wholly owned subsidiary. The Company had previously accounted for
its interest in CHI on the cost basis. As a result of the acquisition of the
remaining 81% interest, Opinions of the Accounting Principles Board (APB) No.
18 requires the Companys prior years financial statements to be restated to
reflect CHI as if it had been accounted for under the equity method.
Accordingly, the three month period ended June 30, 2001 has been restated to
reflect after tax losses of CHI of $226,000 (or diluted net income per share of
$.002).

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

Reclassification

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

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) 143, Accounting for Asset
Retirement Obligations. SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. It applies to all entities and
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset. SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset and are subsequently allocated to expense over
the assets useful life. This statement is effective for the financial
statements issued for fiscal years beginning after June 15, 2002. The Company
is assessing the impact that SFAS 143 will have on its financial position or
results of operations.

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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 amends FASB Statement No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. SFAS 145 is effective for fiscal years
beginning after May 15, 2002. The Company is assessing the impact that SFAS 145
will have on its financial position or results of operations.

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.

2. Acquisitions

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

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

On June 18, 2001, the Company announced the launch of AdvancePCS
SpecialtyRx to provide products and services to patients using injectable and
other expensive, high technology drugs, while controlling the costs incurred by
medical plan sponsors to provide these therapies. Also, the Company established
a joint venture, AdvancePriority SpecialtyRx (the Venture), with Priority
Healthcare Corp., a national specialty pharmacy and distribution company
located in Lake Mary, Florida. AdvancePCS owns 51% of the Venture and Priority
Healthcare Corp. owns 49%.

3. Net Income Per Share

Basic net income per share is computed using the weighted average number
of common shares (including both Class A common stock and Class B common stock)
outstanding during the periods presented. Diluted net income per share is
computed in the same manner as basic net income per share

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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.

4. Income Taxes

In the three months ended June 30, 2002 and 2001, our income tax expense
approximated an effective tax rate of 39.5%.

5.  Debt Transactions  Extraordinary Loss

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

|                                                                                                                                                                                    |                      |                                                                    |         |               |   |                |         |       |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------------------------------------------------ | ------- | ------------- | - | -------------- | ------- | ----- | ------- | 
|                                                                                                                                                                                    |                      |                                                                    |         | June 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                                                                                                                               |                      |                                                                    | 200,000 |               |   |                | 200,000 |      
|Asset Securitization Facility, with interest at funding agents A-1+/P-1
commercial paper rate of 1.86% and 1.91% respectively, plus .85%
and .65% respectively, due December, 2006 |                      |                                                                    | 300,000 |               |   |                | 150,000 |      
|                                                                                                                                                                                    |                      |                                                                    |         |               |   |                |         |      
|                                                                                                                                                                                    |                      |                                                                    | 500,000 |               |   |                | 500,786 |      
|                                                                                                                                                                                    | Less current portion |                                                                    |         |              |   |                |         | 1,523 |        
|                                                                                                                                                                                    |                      |                                                                    |         |               |   |                |         |      
|Total Long Term Debt                                                                                                                                                                |                      | $                                                                  | 500,000 |               |   | $              | 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 June 30, 2002 and will continue to be
reflected on-balance sheet.

In connection with the repayment of the Term B note in June 2002 from the
increase in the securitization facility, 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.

In March 2001, the Company issued $200 million of 8.50% Senior Notes (the
Senior Notes). The proceeds from this offering were used to retire the $200
million senior subordinated notes due 2010 that were issued to Rite Aid in
connection with the PCS acquisition. The Senior Notes contain covenants that
are typical for this type of debt including, among others, fixed charge ratio,
payment of dividends and sales of assets. The Senior Notes have been
unconditionally guaranteed, jointly and severally, by all of our subsidiaries,
which are all 100% owned. There are no restrictions on the ability of the
guarantors to pay dividends, make loans or advances to the parent.

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6.  Stock Split

On October 1, 2001, the Company announced a two-for-one stock split,
effected in the form of a stock dividend, of its common stock. The record date
was October 23, 2001 and the date of payment was November 2, 2001. 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.

7.  Subsequent Events 
Stock and Debt Transactions

On June 6, 2002, we filed a Form 8-K announcing the authorization from the
board of directors of a stock repurchase program of up to $150 million of its
outstanding shares of Class A common stock in the open market or private
transactions. As of August 9, 2002, the Company has purchased 2.8 million
shares under this repurchase program at a cost of approximately
$50.2 million. In addition, as of August 8, 2002 the
Company has repurchased Senior Notes with a face value of
approximately $6.2 million in open market transactions.

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

Critical Accounting Policies

Revenue Recognition

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

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

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

Cost of Revenues

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

Selling, General and Administrative

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

Use of Estimates

Preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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

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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. 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 June 30, 2002, unbilled receivables were $330.1 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.

Results Of Operations  AdvancePCS

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

|                                                             |                             |                |         |                                       |           |         |         |           |           | 
|------------------------------------------------------------ | --------------------------- | -------------- | ------- | ------------------------------------- | --------- | ------- | ------- | --------- | --------- | 
|                                                             |                             |                |         | Three Months Ended                   
|                                                             |                             |                |         | June 30,                             
|                                                             |                             |                |         |                                      
|                                                             |                             |                |         | 2002                                  |           | 2001(1)
|                                                             |                             |                |         |                                       |           |        
|                                                             |                             |                |         | (in thousands, except per share data)
|Revenues:                                                    |                             |                |         |                                       |           |         |         |          
|                                                             | Data services               |                | $       | 2,911,015                             |           |         | $       | 2,677,524 |          
|                                                             | Mail services               |                |         | 516,918                               |           |         |         | 335,647   |          
|                                                             | Clinical and other services |                |         | 164,305                               |           |         |         | 134,723   |          
|                                                             |                             |                |         |                                       |           |         |         |          
|                                                             |                             | Total revenues |         |                                       | 3,592,238 |         |         |           | 3,147,894 | 
|Gross profit                                                 |                             |                | 125,347 |                                       |           |         | 107,766 |          
|Selling, general and administrative expenses                 |                             |                | 53,265  |                                       |           |         | 45,756  |          
|Non-recurring expenses                                       |                             |                |        |                                       |           |         | 854     |          
|Operating income                                             |                             |                | 72,082  |                                       |           |         | 61,156  |          
|Net interest expense                                         |                             |                | (10,164 | )                                     |           |         | (19,299 | )        
|Loss from joint venture                                      |                             |                | (1,033  | )                                     |           |         | (659    | )        
|Extraordinary loss on early retirement of
debt, net of taxes |                             |                | (1,491  | )                                     |           |         |        |          
|Net income                                                   |                             | $              | 35,344  |                                       |           | $       | 24,932  |          
|Diluted net income per share                                 |                             | $              | .35     |                                       |           | $       | .27     |          



---

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

Revenues. Our revenues for the three months ended June 30, 2002 increased
by $444 million, or 14%, compared to revenues for the three months ended June
30, 2001. The increase in revenues was

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primarily the result of an increase in pharmacy claims and a corresponding
increase in claims processing revenue. Approximately $233 million, or 52%, of
the increase in revenues was attributable to data services and a 5.1% increase
in the number of pharmacy claims processed during the period. Claims processed
increased to 118.7 million in the three months ended June 30, 2002 from 113.0
million for the three months ended June 30, 2001. Approximately 41% of the
increase was attributable to additional sales of our mail pharmacy services
including our specialty pharmacy services, resulting from a 34.1% increase in
the number of mail prescriptions dispensed. Mail pharmacy prescriptions
dispensed increased to 3.5 million for the three months ended June 30, 2002
from 2.6 million in the three months ended June 30, 2001. Approximately 7% of
the increase in revenues resulted from an increase in clinical and other
services revenues derived from formulary and health improvement services, as
well as clinical trials and other products and services for pharmaceutical
manufacturers.

Gross profit. Our gross profit for the three months ended June 30, 2002
increased by $18 million, or 16%, compared to the same period in 2001. As a
percentage of revenues, gross profit was approximately 3.5% in the three months
ended June 30, 2002 and 3.4% in the same period in 2001. Data services revenues
decreased and mail services increased as a percentage of total revenues. 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 three months ended June 30, 2002 increased by
$7.5 million, or 16% compared to the same period in 2001. Selling, general and
administrative expenses as a percentage of revenues were 1.5% for the three
months ended June 30, 2002 and 2001.

Interest income and interest expense. Interest expense, net of interest
income, for the three months ended June 30, 2002 decreased $9.1 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. 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 month period ending June 30, 2002 and
2001, we recorded a net loss of $1,033,000 and $659,000 from our interest in
RxHub respectively.

Income taxes. For the three months ended June 30, 2002 and June 30, 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 $0.35 per
share for the three months ended June 30, 2002 compared to $0.27 per share for
the same period in 2001. The weighted average shares outstanding were 102.1
million and 91.6 million for the three months ended June 30, 2002 and 2001,
respectively. On August 23, 2001 the Company completed the sale of nine million
shares of Class A common stock.

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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
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 June 30, 2002, we had a working capital deficit of $196.4 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
cash provided by operating activities was $26.1 million for the three months
ended June 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 three months ended June 30, 2002, we used cash of $18.9 million for
purchases of property and equipment associated with the growth and expansion of
our systems and facilities.

Historically, we have been able to fund our operations and continued
growth through cash flow from operations. In fiscal years 2001, 2002 and in the
1st Quarter of 2003 our operating cash flow funded our capital expenditures and
our short-term excess cash was used to reduce our debt or invested in money
market funds. We anticipate that cash flow from operations, combined with our
current cash balances and amounts available under our credit facility, will be
sufficient to meet our internal operating requirements and expansion programs,
including capital expenditures and our stock repurchase program, for at least
the next 18 months. As of August 9, 2002, we have purchased 2.8 million shares
under our stock repurchase program at a cost of approximately $50.2 million.
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 June 30, 2002,
we had drawn $300 million under this facility. The Asset Securitization
Facility is included in our debt balance as of June 30, 2002 and will continue
to be reflected on-balance sheet. The proceeds were used to repay $300
million of our Term B debt. In addition, our $100 million interim revolving
credit facility was eliminated. As of June 30, 2002 our debt consists of the
following in thousands:

|                              |  |   |         | 
|----------------------------- |  | - | ------- | 
|Asset Securitization Facility |  | $ | 300,000 | 
|Senior Notes                  |  |   | 200,000 | 
|                              |  |   |         | 
|                              |  | $ | 500,000 | 
|                              |  |   |         | 

In addition, we have a $175 million revolving credit facility that expires
in 2005. As of June 30, 2002, no amounts were drawn on this revolving
facility. In connection with the bank debt repayment made in June 2002, we
recorded an extraordinary loss, associated with the early retirement of debt.
The loss was attributable to a non-cash charge to write-off a portion of the
deferred financing fees related to the secured bank agreement in the amount of
$1.5 million, net of taxes.

Effective April 1, 2001, we adopted SFAS 133 Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS 137 and SFAS 138. In
order to hedge variable rate interest payments made in conjunction with our
debt we entered into interest rate protection agreements that have fixed the
LIBOR rate as of November 7, 2000 at 6.60% for $400 million. The notional
amount dropped to $300 million in October 2001 and drops to $200 million in
October 2002. We have designated these agreements fair value hedges in
accordance with SFAS 133, as amended and have reflected the fair value

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of these financial instruments in the condensed consolidated balance sheet
effective April 1, 2001 upon adoption of SFAS 133. As a portion of the debt
interest rates and underlying index of the interest rate protection agreements
do not coincide, we test for hedge effectiveness using the hypothetical
derivative method. The results of this test at June 30, 2002 indicate that the
hedge is highly effective and any ineffectiveness is not significant to the
results of operations. These instruments have been marked to market at June
30, 2002, with the adjustment recognized as a component of other comprehensive
income in stockholders equity. The fair value of our interest rate swaps, a
liability of $14.9 million at June 30, 2002 and $14.5 million at March 31,
2002, was based upon quoted market prices. Under SFAS 133, we have recorded a
charge to other comprehensive income of $273,000, net of taxes, for the three
months ended June 30, 2002.

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 plans
to meet the original compliance date of October 16, 2002 despite the extension
that may be granted to Covered Entities that apply. Final Privacy Regulations
were issued in December 2000 with a compliance date of 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 will be
required to comply with these regulations. An assessment was completed last
year comparing current practices with what the regulations require and we are
in the process of implementing all required changes. We have also tentatively
assessed compliance requirements under HHSs proposed Security Regulations,
which have not yet been finalized and thus for which a final effective date has
not yet been established. We expect that HIPAA requirements will result in
additional capital expenditures over the level required for maintenance and
growth of our operations though 2003, which is the scheduled deadline for HIPAA
compliance. Currently, we do not expect the cost of implementation to have a
material effect to our financial condition, results of operations, or cash
flows. We can give no assurances that our current estimate of the cost of
implementation will prove to be accurate.

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 2001,
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.

There is litigation pending in the Eastern District of Pennsylvania
regarding further enforcement of the subpoena and other matters relating to the
propriety of the governments investigation. In December 2001, the OIG filed a
motion seeking to enforce its demand under the subpoena for AdvancePCS to
produce certain employee e-mails. AdvancePCS has opposed the enforcement
motion, objecting to the scope and breadth of this request. This matter has
been fully briefed and the parties are awaiting the courts ruling. On April
10, 2002, the United States Attorney General issued Civil Investigative

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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 have
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 has filed a petition seeking an order enforcing the CIDs and has filed
a response to the petition to set aside the CIDs. The court has not ruled on
these requests. Although AdvancePCS is not a party to the CID related
litigation, these proceedings are related to the ongoing OIG investigation.

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

AdvancePCS was served with two purported private class action lawsuits
filed by the same counsel for different plaintiffs in the United States
District Court in Arizona. One was filed on or about December 17, 2001 and the
other was served on or about April 19, 2002. The lawsuits allege that AdvancePCS acts as
a fiduciary, as that term is defined in the Employee Retirement Income Security
Act, or ERISA, and that AdvancePCS has breached certain fiduciary obligations
under ERISA. In the earlier of the two cases filed, the plaintiff withdrew the class action allegations in April 2002 and the case is proceeding as a single
plaintiff seeking to represent one health plan. As to both cases, AdvancePCS
believes that it does not act as an ERISA fiduciary or assume the ERISA
fiduciary responsibilities as alleged in the complaints. AdvancePCS believes
that, in any event, its business practices are in compliance with ERISA. The
lawsuit seeks unspecified monetary damages and injunctive relief. Although the
ultimate outcome is uncertain, an adverse determination could potentially cause
us to change our business practices with respect to formularies, preferred drug
listings, rebates, and intervention programs, potentially reducing our
profitability and growth prospects. In the later of the two cases filed, class
allegations remain, but a class of plaintiffs has not yet been certified and we
intend to oppose such certification. AdvancePCS has denied all allegations of
wrongdoing and is vigorously defending this suit.

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

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

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and United claim that AdvancePCS created confusion among certain AARP
members and pharmacists through the launch of the AdvancePCS prescription drug
discount program. AARP and United have requested preliminary and permanent
injunctive relief and recently quantified their compensatory damage claim of
$30 million, including attorneys fees and costs. AdvancePCS has moved to
dismiss all counts of the complaint. On March 18, 2002, without holding an
evidentiary hearing, the district court granted AARP and Uniteds request for
preliminary injunctive relief. The courts order was modified on March 22,
2002. AdvancePCS has appealed the district courts orders and this appeal is
pending. AdvancePCS has denied AARP and Uniteds allegations and is vigorously
defending this matter.

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

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.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to all entities and legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or the normal operation of
a long-lived asset. SFAS 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and are subsequently allocated to expense over the assets
useful life. This statement is effective for the financial statements issued
for fiscal years beginning after June 15, 2002. The Company is assessing the
impact that SFAS 143 will have on its financial position or results of
operations.

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 amends FASB Statement No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. SFAS 145 is effective for fiscal years
beginning after May 15, 2002. The Company is assessing the impact that SFAS
145 will have on its financial position or results of operations.

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 the Emerging Issues
Task Force

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(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.

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 drops to $200
million in October 2002. We use the interest rate swaps to manage our interest
rate risk on future interest payments. In addition the Company has $200
million of 8.50% Senior Notes outstanding. As a result, virtually all of our
debt is effectively fixed rate debt as of June 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.

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.

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:



| |  |  | general economic and business conditions;                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------
| |   |  |                                                                                                               
| |  |  | competition;                                                                                                  
|
| |  |  | demographic changes;                                                                                          
|
| |  |  | new governmental regulations and changes in, or the failure to
comply with, existing governmental regulations;
|
| |  |  | legislative proposals that impact our industry or the way we do business;                                     

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| |  |  | changes in our industry;                              
| | - |  | ------------------------------------------------------
|
| |  |  | changes in Medicare and Medicaid payment levels;      
|
| |  |  | liability and other claims asserted against us; and   
|
| |  |  | our ability to attract and retain qualified personnel.

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

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PART 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 2001,
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.

There is litigation pending in the Eastern District of Pennsylvania
regarding further enforcement of the subpoena and other matters relating to the
propriety of the governments investigation. In December 2001, the OIG filed a
motion seeking to enforce its demand under the subpoena for AdvancePCS to
produce certain employee e-mails. AdvancePCS has opposed the enforcement
motion, objecting to the scope and breadth of this request. This matter has
been fully briefed and the parties are awaiting the courts ruling. 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 have
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 has filed a petition seeking an order enforcing the CIDs and has filed
a response to the petition to set aside the CIDs. The court has not ruled on
these requests. Although AdvancePCS is not a party to the CID related
litigation, these proceedings are related to the ongoing OIG investigation.

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

AdvancePCS was served with two purported private class action lawsuits
filed by the same counsel for different plaintiffs in the United States
District Court in Arizona. One was filed on or about December 17, 2001 and the
other was served on or about April 19, 2002. The lawsuits allege that AdvancePCS acts as
a fiduciary, as that term is defined in the Employee Retirement Income Security
Act, or ERISA, and that AdvancePCS has breached certain fiduciary obligations
under ERISA. In the earlier of the two cases filed, the plaintiff withdrew the class action allegations in April 2002 and the case is proceeding as a single
plaintiff seeking to represent one health plan. As to both cases, AdvancePCS
believes that it does not act as an ERISA fiduciary or assume the ERISA
fiduciary responsibilities as alleged in the complaints. AdvancePCS believes
that, in any event, its business practices are in compliance with ERISA. The
lawsuit seeks unspecified monetary damages and injunctive relief. Although the
ultimate outcome is uncertain, an adverse determination could potentially cause
us to change our business practices with respect to formularies, preferred drug
listings, rebates, and intervention programs, potentially reducing our
profitability and growth prospects. In the later of the two cases filed, class
allegations remain, but a class of plaintiffs has not yet been certified and we
intend to oppose such certification. AdvancePCS has denied all allegations of
wrongdoing and is vigorously defending this suit.

In 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.

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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.

Not applicable.

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).                               
|           |  |                                                                                                                                                                                                                                                                        
|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. 5 to Credit Agreement dated as of July 17, 2002
by and among AdvancePCS, Merrill Lynch Capital Corporation and
a syndicate of banks.                                                                                                                     
|           |  |                                                                                                                                                                                                                                                                        
|99.1*      |  | Certification of Chief Executive Officer and Principle
Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                           



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

(b)  Reports on Form 8-K.

On June 6, 2002, we filed a Form 8-K announcing the authorization from the
board of directors of a stock repurchase program of up to $150 million of its
outstanding shares of Class A common stock in the open market or private
transactions.

On June 30, 2002, we filed a Form 8-K announcing the appointment to the
board of directors of Dr. George Poste. Dr. Poste fills a vacancy in the
Companys independent class of directors and will be up

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for re-nomination at the shareholders meeting in 2003. The Company also
announced the resignations of board members Robert G. Miller and David R.
Jessick, effective June 30, 2002.

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

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INDEX TO 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).                               
|           |  |                                                                                                                                                                                                                                                                        
|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. 5 to Credit Agreement dated as of July 17, 2002
by and among AdvancePCS, Merrill Lynch Capital Corporation and
a syndicate of banks.                                                                                                                     
|           |  |                                                                                                                                                                                                                                                                        
|99.1*      |  | Certification of Chief Executive Officer and Principle
Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                           



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