##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549



---

FORM 10-Q

|           |  |                                                                                          
|---------- |  | -----------------------------------------------------------------------------------------
|          
|          
|          
|          
|(Mark One) |  |                                                                                          
|[X]        |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
	15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|           |  | For the quarterly period ended June 30,
	2001                                            
|           |  | 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: 0-27276

CAREMARK RX, INC.



|                                |  |                    
|------------------------------- |  | -------------------
|                               
|                               
|                               
|                               
|Delaware                        |  | 63-1151076         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)

3000 Galleria Tower, Suite 1000

Birmingham, Alabama 35244




(205) 733-8996



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 
o.

As of June 30, 2001, the registrant had 231,480,570 shares
(including 6,533,162 shares held in trust to be utilized in
employee benefit plans) of common stock, par value $.001 per
share, issued and outstanding.



---






---



##### Table of Contents



FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE
RESULTS

In passing the Private Securities Litigation Reform Act of 1995
(the Reform Act), 15 U.S.C.A.
Section 77z-2 and 78u-5 (Supp. 1996), Congress encouraged
public companies to make forward-looking statements
by creating a safe harbor to protect companies from securities
law liability in connection with forward-looking statements.
Caremark Rx, Inc. (the Company) intends to qualify
both its written and oral forward-looking statements for
protection under the Reform Act and any other similar safe
harbor provisions.

Forward-looking statements are defined by the Reform
Act. Generally, forward-looking statements include expressed
expectations of future events and the assumptions on which the
expressed expectations are based. All forward-looking statements
are inherently uncertain as they are based on various
expectations and assumptions concerning future events, and they
are subject to numerous known and unknown risks and
uncertainties which could cause actual events or results to
differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not
to place undue reliance on written or oral forward-looking
statements of the Company. The Company undertakes no obligation
to update or revise forward-looking statements to reflect
changed assumptions, the occurrence of unanticipated events or
changes to future operating results over time.

Forward-looking statements are contained in this
document and appear primarily in Part I 
Item 1, Notes to Condensed Consolidated Financial
Statements; Part I  Item 2,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Part II  Item 1, Legal
Proceedings. Moreover, the Company, through its senior
management, may from time to time make forward-looking
statements about matters described herein or about other
matters concerning the Company.

There are several factors which could adversely affect the
Companys operations and financial results including, but
not limited to, the following:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Risks relating to the Companys ability to successfully
	terminate leases and other contractual agreements related to its
	discontinued operations and the outcome of various litigation
	surrounding the closure or sale of Physician Practice Management
	(PPM) assets; risks relating to identification of
	and competition for growth and expansion opportunities; risks
	relating to declining reimbursement levels for products
	distributed; risks relating to exposure to professional
	liability in excess of the Companys insurance; risks
	relating to compliance with, or changes in, government
	regulation, including pharmacy licensing requirements and
	healthcare reform legislation; risks relating to adverse
	resolution of existing or future lawsuits; risks relating to
	costs of modification of the Companys information systems
	to comply with privacy and electronic interchange standards
	mandated by the Health Insurance Portability and Accountability
	Act of 1996 (HIPAA) and risks relating to the
	Companys liquidity and capital requirements.

More detailed discussions of certain of these risk factors can
be found in the Companys Annual Report on Form 10-K
for the year ended December 31, 2000, filed with the
Securities and Exchange Commission on March 21, 2001, under
the captions: Business  Government
Regulation, Legal Proceedings,
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Overview
and  Factors That May Affect Future
Results.

i



---

TABLE OF CONTENTS



|                                                                                      |                                                            |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- | ---------------------------------------------------------- |  |  |  |  |  |  | 
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                      
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                      
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                 
|MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II -- OTHER INFORMATION                                                         
|                                                                                      | Item 1.Legal Proceedings                                  
|                                                                                      | Item 4.Submission of Matters to a Vote of Security Holders
|                                                                                      | Item 6.Exhibits and Reports on Form 8-K                   
|SIGNATURES                                                                           



---



##### Table of Contents



CAREMARK RX, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

|                                                                                                 |                                                                                                                          |      |    |   | 
|------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ | ---- | -- | - | 
|                                                                                                 |                                                                                                                          | Page
|                                                                                                 |                                                                                                                          |     
|PART I  FINANCIAL
	INFORMATION                                                                  |                                                                                                                          |      |    |  
|Item 1.  Financial Statements                                                                    |                                                                                                                          |      |    |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Condensed Consolidated Balance Sheets 
	June 30, 2001 (Unaudited) and December 31, 2000                                 |      |    | 2 | 
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Condensed Consolidated Statements of Operations
	(Unaudited)  Three Months and Six Months Ended
	June 30, 2001 and 2000 |      |    | 3 | 
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Condensed Consolidated Statements of Cash Flows
	(Unaudited)  Six Months Ended June 30, 2001 and
	2000                  |      |    | 4 | 
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Notes to Condensed Consolidated Financial
	Statements (Unaudited)                                                        |      |    | 5 | 
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Item 2.  Managements
	Discussion and Analysis of Financial Condition and Results of
	Operations |                                                                                                                          |      | 11 |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Item 3.  Quantitative and
	Qualitative Disclosures About Market Risk                             |                                                                                                                          |      | 17 |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|PART II  OTHER
	INFORMATION                                                                     |                                                                                                                          |      |    |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Item 1.  Legal Proceedings                                                                       |                                                                                                                          |      | 18 |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Item 4.  Submission of Matters to
	a Vote of Security Holders                                    |                                                                                                                          |      | 20 |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Item 6.  Exhibits and Reports on
	Form 8-K                                                       |                                                                                                                          |      | 20 |  

1



---



##### Table of Contents



CAREMARK RX, INC. AND SUBSIDIARIES






CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands, except per share amounts)


|                                                                                                 |                                                                                                                                  |                                             |         |              |           |   |         |            |           |  
|------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------- | ------------ | --------- | - | ------- | ---------- | --------- | -
|                                                                                                 |                                                                                                                                  | June 30,                                    |         | December 31,
|                                                                                                 |                                                                                                                                  | 2001                                        |         | 2000        
|                                                                                                 |                                                                                                                                  |                                             |         |             
|                                                                                                 |                                                                                                                                  | (Unaudited)                                 |         |             
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|ASSETS                                                                                          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Current assets:                                                                                  |                                                                                                                                  |                                             |         |              |           |   |         |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Cash and cash equivalents                                                                                                        |                                             | $       | 60,731       |           |   | $       | 2,352      |          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Accounts receivable, less allowances for doubtful
	accounts of $19,333 in 2001 and $17,920 in 2000                               |                                             |         | 249,472      |           |   |         | 249,766    |          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Inventories                                                                                                                      |                                             |         | 141,257      |           |   |         | 186,231    |          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Prepaid expenses and other current assets                                                                                        |                                             |         | 9,785        |           |   |         | 8,757      |          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Current assets of discontinued operations                                                                                        |                                             |         | 1,478        |           |   |         | 6,221      |          
|                                                                                                 |                                                                                                                                  |                                             |         |              |           |   |         |           
|                                                                                                 |                                                                                                                                  | Total current assets                        |         |              | 462,723   |   |         |            | 453,327   |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Property and equipment, net of accumulated
	depreciation of $110,383 in 2001 and $99,965 in 2000 |                                                                                                                                  |                                             | 115,075 |              |           |   | 110,320 |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Intangible assets, net of accumulated
	amortization of $14,963 in 2001 and $21,563 in 2000       |                                                                                                                                  |                                             | 36,478  |              |           |   | 35,165  |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Other assets                                                                                     |                                                                                                                                  |                                             | 78,961  |              |           |   | 79,723  |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Non-current assets of discontinued operations                                                    |                                                                                                                                  |                                             | 9,827   |              |           |   | 7,001   |           
|                                                                                                 |                                                                                                                                  |                                             |         |              |           |   |         |           
|                                                                                                 |                                                                                                                                  | Total assets                                |         | $            | 703,064   |   |         | $          | 685,536   |  
|                                                                                                 |                                                                                                                                  |                                             |         |              |           |   |         |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|LIABILITIES AND STOCKHOLDERS
	DEFICIT                                                          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Current liabilities:                                                                             |                                                                                                                                  |                                             |         |              |           |   |         |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Accounts payable                                                                                                                 |                                             | $       | 410,516      |           |   | $       | 417,567    |          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Other accrued expenses and liabilities                                                                                           |                                             |         | 155,983      |           |   |         | 169,857    |          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Income taxes payable                                                                                                             |                                             |         | 5,815        |           |   |         | 2,533      |          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Current portion of long-term debt                                                                                                |                                             |         | 2,500        |           |   |         | 1,875      |          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Current liabilities of discontinued operations                                                                                   |                                             |         | 36,274       |           |   |         | 43,405     |          
|                                                                                                 |                                                                                                                                  |                                             |         |              |           |   |         |           
|                                                                                                 |                                                                                                                                  | Total current liabilities                   |         |              | 611,088   |   |         |            | 635,237   |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Long-term debt, net of current portion                                                           |                                                                                                                                  |                                             | 696,875 |              |           |   | 733,347 |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Other long-term liabilities                                                                      |                                                                                                                                  |                                             | 78,547  |              |           |   | 82,398  |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Long-term liabilities of discontinued operations                                                 |                                                                                                                                  |                                             | 2,727   |              |           |   | 3,618   |           
|                                                                                                 |                                                                                                                                  |                                             |         |              |           |   |         |           
|                                                                                                 |                                                                                                                                  | Total liabilities                           |         |              | 1,389,237 |   |         |            | 1,454,600 |  
|Commitments and contingencies                                                                    |                                                                                                                                  |                                             |         |              |           |   |         |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Convertible Preferred Securities                                                                 |                                                                                                                                  |                                             | 200,000 |              |           |   | 200,000 |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Stockholders deficit:                                                                           |                                                                                                                                  |                                             |         |              |           |   |         |           
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Common stock, $.001 par value per share; 400,000
	shares authorized; issued  231,481 shares in 2001 and
	230,755 shares in 2000 |                                             |         | 231          |           |   |         | 231        |          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Additional paid-in capital                                                                                                       |                                             |         | 1,391,836    |           |   |         | 1,399,902  |          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Shares held in trust  6,533 in 2001
	and 7,152 in 2000                                                                          |                                             |         | (105,239     | )         |   |         | (115,287   | )        
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                 | Accumulated deficit                                                                                                              |                                             |         | (2,173,001   | )         |   |         | (2,253,910 | )        
|                                                                                                 |                                                                                                                                  |                                             |         |              |           |   |         |           
|                                                                                                 |                                                                                                                                  | Total stockholders deficit                 |         |              | (886,173  | ) |         |            | (969,064  | )
|                                                                                                 |                                                                                                                                  |                                             |         |              |           |   |         |           
|                                                                                                 |                                                                                                                                  | Total liabilities and stockholders deficit |         | $            | 703,064   |   |         | $          | 685,536   |  
|                                                                                                 |                                                                                                                                  |                                             |         |              |           |   |         |           

The accompanying Notes to Condensed Consolidated Financial
Statements are



2



---



##### Table of Contents



CAREMARK RX, INC. AND SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(In thousands, except per share amounts)


|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |           |       |  
|-------------------------------------------------------------------- | -------------------------------------------- | ------------------ | --------- | ---------------- | ---- | ---- | --------- | --------- | ---- | - | --------- | --------- | ---- | - | --------- | --------- | ----- | -
|                                                                     |                                              |                    |           |                 
|                                                                     |                                              | Three Months Ended |           | Six Months Ended
|                                                                     |                                              | June 30,           |           | June 30,        
|                                                                     |                                              |                    |           |                 
|                                                                     |                                              | 2001               |           | 2000             |      | 2001 |           | 2000     
|                                                                     |                                              |                    |           |                  |      |      |           |          
|Net revenue                                                          |                                              | $                  | 1,373,388 |                  |      | $    | 1,083,904 |           |      | $ | 2,747,330 |           |      | $ | 2,135,894 |          
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Operating expenses:                                                  |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Cost of revenues                             |                    |           | 1,268,032        |      |      |           | 1,000,498 |      |   |           | 2,538,787 |      |   |           | 1,969,173 |      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Selling, general and administrative expenses |                    |           | 36,104           |      |      |           | 28,250    |      |   |           | 71,026    |      |   |           | 55,347    |      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Depreciation and amortization                |                    |           | 6,403            |      |      |           | 5,650     |      |   |           | 13,145    |      |   |           | 11,373    |      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Interest expense, net                        |                    |           | 17,101           |      |      |           | 25,432    |      |   |           | 36,903    |      |   |           | 54,301    |      
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|Income from continuing operations before
	provision for income taxes |                                              |                    | 45,748    |                  |      |      | 24,074    |           |      |   | 87,469    |           |      |   | 45,700    |          
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Provision for income taxes                                           |                                              |                    | 3,431     |                  |      |      | 1,807     |           |      |   | 6,560     |           |      |   | 3,428     |          
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|Income from continuing operations                                    |                                              |                    | 42,317    |                  |      |      | 22,267    |           |      |   | 80,909    |           |      |   | 42,272    |          
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Preferred security dividends                                         |                                              |                    | 3,305     |                  |      |      | 3,255     |           |      |   | 6,609     |           |      |   | 6,475     |          
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|Income from continuing operations available to
	common stockholders  |                                              |                    | 39,012    |                  |      |      | 19,012    |           |      |   | 74,300    |           |      |   | 35,797    |          
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Loss from discontinued operations                                    |                                              |                    |          |                  |      |      |          |           |      |   |          |           |      |   | (198,000  | )        
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|Net income (loss) to common stockholders                             |                                              | $                  | 39,012    |                  |      | $    | 19,012    |           |      | $ | 74,300    |           |      | $ | (162,203  | )        
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|Average number of common shares outstanding:                         |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Basic                                        |                    |           | 224,639          |      |      |           | 201,202   |      |   |           | 223,827   |      |   |           | 196,226   |      
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|                                                                     | Diluted                                      |                    |           | 261,994          |      |      |           | 207,616   |      |   |           | 261,193   |      |   |           | 200,658   |      
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|Earnings per common share  basic:                                   |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Income from continuing operations            |                    | $         | 0.17             |      |      | $         | 0.09      |      |   | $         | 0.33      |      |   | $         | 0.18      |      
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|                                                                     | Loss from discontinued operations            |                    | $         |                 |      |      | $         |          |      |   | $         |          |      |   | $         | (1.01     | )    
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|                                                                     |                                              | Net income (loss)  |           | $                | 0.17 |      |           | $         | 0.09 |   |           | $         | 0.33 |   |           | $         | (0.83 | )
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|Earnings per common share  diluted:                                 |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Income from continuing operations            |                    | $         | 0.16             |      |      | $         | 0.09      |      |   | $         | 0.31      |      |   | $         | 0.18      |      
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|                                                                     | Loss from discontinued operations            |                    | $         |                 |      |      | $         |          |      |   | $         |          |      |   | $         | (0.99     | )    
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          
|                                                                     |                                              | Net income (loss)  |           | $                | 0.16 |      |           | $         | 0.09 |   |           | $         | 0.31 |   |           | $         | (0.81 | )
|                                                                     |                                              |                    |           |                  |      |      |           |           |      |   |           |           |      |   |           |          

The accompanying Notes to Condensed Consolidated Financial
Statements are



3



---



##### Table of Contents



CAREMARK RX, INC. AND SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In thousands)


|                                                 |                                                                                            |                               |                                                                  |         |        |         |         |          |        |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------------------ | ----------------------------- | ---------------------------------------------------------------- | ------- | ------ | ------- | ------- | -------- | ------ | ------- | -
|                                                 |                                                                                            |                              
|                                                 |                                                                                            | Six Months Ended             
|                                                 |                                                                                            | June 30,                     
|                                                 |                                                                                            |                              
|                                                 |                                                                                            | 2001                          |                                                                  | 2000   
|                                                 |                                                                                            |                               |                                                                  |        
|Cash flows from operating activities:            |                                                                                            |                               |                                                                  |         |        |         |         |         
|                                                
|                                                
|                                                
|                                                
|                                                 | Income from continuing operations                                                          |                               | $                                                                | 80,909  |        |         | $       | 42,272   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Adjustments for non-cash items:                                                            |                               |                                                                  |         |        |         |         |          |       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                            | Depreciation and amortization |                                                                  |         | 13,145 |         |         |          | 11,373 |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                            | Non-cash interest expense     |                                                                  |         | 2,113  |         |         |          | 3,399  |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Changes in operating assets and liabilities, net
	of effects of acquisitions of businesses |                               |                                                                  | 37,534  |        |         |         | 88,615   |       
|                                                 |                                                                                            |                               |                                                                  |         |        |         |         |         
|                                                 |                                                                                            |                               | Net cash and cash equivalents provided by
	continuing operations |         |        | 133,701 |         |          |        | 145,659 |  
|                                                
|                                                
|                                                
|                                                
|Cash flows from investing activities:            |                                                                                            |                               |                                                                  |         |        |         |         |         
|                                                
|                                                
|                                                
|                                                
|                                                 | Capital expenditures, net                                                                  |                               |                                                                  | (20,713 | )      |         |         | (9,460   | )     
|                                                
|                                                
|                                                
|                                                
|Cash flows from financing activities:            |                                                                                            |                               |                                                                  |         |        |         |         |         
|                                                
|                                                
|                                                
|                                                
|                                                 | Proceeds from issuance of equity securities, net                                           |                               |                                                                  | 8,591   |        |         |         | 167,817  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Net repayments under credit facility                                                       |                               |                                                                  | (35,847 | )      |         |         | (224,245 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Long-term debt issuance costs                                                              |                               |                                                                  | (5,084  | )      |         |         |         |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Accounts receivable securitization                                                         |                               |                                                                  | 14,388  |        |         |         |         |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Dividend payments on Convertible Preferred
	Securities                                     |                               |                                                                  | (3,392  | )      |         |         | (7,068   | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Other                                                                                      |                               |                                                                  |        |        |         |         | (304     | )     
|                                                 |                                                                                            |                               |                                                                  |         |        |         |         |         
|                                                 |                                                                                            |                               | Net cash and cash equivalents used in financing
	activities      |         |        | (21,344 | )       |          |        | (63,800 | )
|                                                
|                                                
|                                                
|                                                
|Cash used in discontinued operations             |                                                                                            |                               | (32,389                                                          | )       |        |         | (64,568 | )       
|                                                
|                                                
|                                                
|                                                
|Cash paid for special charges                    |                                                                                            |                               | (876                                                             | )       |        |         | (3,509  | )       
|                                                 |                                                                                            |                               |                                                                  |         |        |         |         |         
|Net increase in cash and cash equivalents        |                                                                                            |                               | 58,379                                                           |         |        |         | 4,322   |         
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents  beginning
	of period |                                                                                            |                               | 2,352                                                            |         |        |         | 6,797   |         
|                                                 |                                                                                            |                               |                                                                  |         |        |         |         |         
|Cash and cash equivalents  end of
	period       |                                                                                            | $                             | 60,731                                                           |         |        | $       | 11,119  |         
|                                                 |                                                                                            |                               |                                                                  |         |        |         |         |         

The accompanying Notes to Condensed Consolidated Financial
Statements are



4



---



##### Table of Contents



CAREMARK RX, INC. AND SUBSIDIARIES






NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30, 2001


(Unaudited)


Note  1.     Business and
Basis of Presentation

Caremark Rx, Inc., a Delaware corporation (the
Company), is one of the largest pharmaceutical
services companies in the United States. The Companys
operations are conducted through Caremark Inc.
(Caremark), a wholly-owned subsidiary which assists
employers, insurance companies, unions, government employee
groups, managed care organizations and other sponsors of health
benefit plans and individuals throughout the United States in
delivering prescription drugs in a cost-effective manner.

The unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries and have been prepared in accordance with
accounting principles generally accepted in the United States
for interim financial reporting and in accordance with
Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally
accepted accounting principles for complete financial statements.

In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments (consisting of normal recurring items) necessary for
a fair presentation of results for the interim periods
presented. The results of operations for any interim period are
not necessarily indicative of results to be expected for a full
year. The condensed consolidated balance sheet of the Company at
December 31, 2000, has been derived from audited financial
statements but does not include all disclosures required by
generally accepted accounting principles. These financial
statements and footnote disclosures should be read in
conjunction with the Companys audited consolidated
financial statements and notes thereto for the year ended
December 31, 2000, which appear in the Companys
Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 21, 2001.

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
amounts could differ from those estimates and assumptions.

Certain prior period amounts have been reclassified to conform
to the current periods presentation. Such
reclassifications had no material effect on the Companys
previously reported consolidated financial position, results of
operations or cash flows.

Note  2.     Income
Taxes

Significant variations exist in the customary relationship
between income tax expense and pretax income because the Company
has generated net operating losses (NOLs) or
utilized NOL carry forwards to offset its taxable federal income
and certain taxable state income. Consequently, the Company has
provided for an income tax rate of 7.5% on income from
continuing operations, which represents its aggregate effective
state tax and federal alternative minimum tax rate.

Note  3.     Trade
Receivable Securitization

The Company has securitized certain of its accounts receivable
pursuant to a $150 million facility with General Electric
Capital Corporation (GECC) as funding agent and The
Chase Manhattan Bank (Chase) as group agent.
GECCs $125 million commitment under the facility is due
January 31, 2006, and Chases $25 million commitment
is due February 7, 2002, and may be extended for an
additional period of up to 364 days. As of June 30,
2001, and December 31, 2000, the Company had drawn
approximately $114.4 million and $100.0 million, respectively,
under this facility.

5



---



##### Table of Contents



CAREMARK RX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note  4.     Long-term
Debt

The Companys long-term debt at June 30, 2001, and
December 31, 2000, consisted of the following (in
thousands):

|                                  |                                             |          |         |              |  |   |         |         | 
|--------------------------------- | ------------------------------------------- | -------- | ------- | ------------ |  | - | ------- | ------- | 
|                                  |                                             | June 30, |         | December 31,
|                                  |                                             | 2001     |         | 2000        
|                                  |                                             |          |         |             
|Credit facility:                  |                                             |          |         |              |  |   |         |        
|                                 
|                                 
|                                 
|                                 
|                                  | Term loan facility (6.76% at June 30, 2001) |          | $       | 249,375      |  |   | $       | 27,668  | 
|                                 
|                                 
|                                 
|                                 
|                                  | Revolving facility                          |          |         |             |  |   |         | 257,554 | 
|                                  |                                             |          |         |              |  |   |         |        
|                                  |                                             |          | 249,375 |              |  |   | 285,222 |        
|                                 
|                                 
|                                 
|                                 
|7.375% senior notes due 2006      |                                             |          | 450,000 |              |  |   | 450,000 |        
|                                  |                                             |          |         |              |  |   |         |        
|                                  |                                             |          | 699,375 |              |  |   | 735,222 |        
|                                 
|                                 
|                                 
|                                 
|Less: amounts due within one year |                                             |          | (2,500  | )            |  |   | (1,875  | )      
|                                  |                                             |          |         |              |  |   |         |        
|                                  |                                             | $        | 696,875 |              |  | $ | 733,347 |        
|                                  |                                             |          |         |              |  |   |         |        

The Company has a credit facility with Bank of America, N.A. as
administrative agent. The credit facility is guaranteed by the
Companys material subsidiaries, including Caremark, and
the Company has granted a lien on substantially all of its
current and future personal property and pledged the capital
stock of Caremark International Inc., the parent company of
Caremark, as security for amounts outstanding.

The credit facility consists of: (i) a $250 million term
loan facility maturing on March 15, 2006 and (ii) a
$300 million revolving credit facility maturing on
March 15, 2005. The Company began making required principal
payments of $625,000 per quarter with respect to the term loan
facility on June 1, 2001. At June 30, 2001, the Company had
approximately $277.5 million available for borrowing under the
revolving facility, exclusive of approximately $22.5 million
reserved under letters of credit.

Borrowings under the credit facility currently bear interest at
variable rates based on the London Inter-bank Offered Rate
(LIBOR), plus varying margins. At the Companys
option, or upon certain defaults or other events, borrowings
under the credit facility may instead bear interest based on the
prime rate plus varying margins.

The credit facility provides for net cash proceeds received from
certain asset sales to be used to reduce the outstanding debt
under the term loan facility. The Company is also required to
repay the term loan facility with 100% of the net cash proceeds
received from certain issuances of equity or debt and with 50%
of the excess cash flow (as defined in the credit facility) for
each fiscal year.

The credit facility contains covenants that, among other things,
restrict the Companys ability to incur additional
indebtedness or guarantee obligations, engage in mergers or
consolidations, dispose of assets, make investments, loans or
advances, engage in certain transactions with affiliates,
conduct certain corporate activities, create liens, make capital
expenditures, prepay or modify the terms of other indebtedness,
pay dividends and other distributions or change its business. In
addition, the Company is required to comply with specified
financial covenants, including a maximum leverage ratio, a
minimum fixed charge coverage ratio and a minimum interest
expense coverage ratio. The credit facility includes various
customary and other events of default, including cross default
provisions and defaults for any material judgment or change in
control. The Company was in compliance with all debt covenants
at June 30, 2001.

Note  5.     Redeemable
Preferred Stock

In September 1999, the Company, through its wholly-owned
subsidiary Caremark Rx Capital Trust I (the Trust),
privately placed 4.0 million shares ($200.0 million aggregate
face value) of 7% shared preference redeemable securities
(Convertible Preferred Securities). The sole assets
of the Trust, which has

6



---



##### Table of Contents



CAREMARK RX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

no business operations apart from administration of the
Convertible Preferred Securities, are the 7% convertible
subordinated debentures of the Company, maturing October 1,
2029, with principal amount of $206.2 million (the Trust
Debentures). The Trust is the sole holder of the Trust
Debentures.

Each Convertible Preferred Security may be converted, at the
option of the holder, into shares of the Companys common
stock at the rate of 6.7125 shares of common stock for each
Convertible Preferred Security (equivalent to a conversion price
of $7.4488 per share of common stock). The conversion of all
Convertible Preferred Securities would result in the
Companys issuance of approximately 26.9 million shares of
common stock.

All Convertible Preferred Securities outstanding on
October 1, 2029, must be redeemed by the Company; however,
any or all of the Convertible Preferred Securities may be
redeemed at the option of the Company beginning October 15,
2002, at prices ranging from $50.00 to $52.00 plus accumulated
and unpaid dividends per Convertible Preferred Security.

Dividends on the Convertible Preferred Securities are cumulative
and are payable in arrears. Dividend payments are due no later
than the first day of each calendar quarter and accumulate at an
annual rate of 7% of the liquidation amount of $50.00 per
Convertible Preferred Security plus any accrued and unpaid
dividends thereon. As of June 30, 2001, the Company had
paid all dividends on the Convertible Preferred Securities on or
in advance of their respective due dates.

Considered together, (1) the Companys guaranty, to
the extent that the Trust has funds available, of distribution
and liquidation payments on the Convertible Preferred Securities
and (2) the Companys obligations under (a) the
Trust Debentures and the related indenture and (b) the
Trusts trust agreement, provide a full and unconditional
guarantee by the Company of amounts payable in respect to the
Convertible Preferred Securities issued by the Trust.

7



---



##### Table of Contents



CAREMARK RX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note  6.     Earnings per
Common Share

The following tables reconcile income (numerator) and
shares (denominator) used in the Companys computations of
income from continuing operations per common share (in
thousands, except per share amounts):

|                                                                   |                                     |                                     |         |                  |        |      |         |        |        |   |         |        |        |   |         |        |        |  
|------------------------------------------------------------------ | ----------------------------------- | ----------------------------------- | ------- | ---------------- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                                   |                                     |                                     |         |                 
|                                                                   |                                     | Three Months Ended                  |         | Six Months Ended
|                                                                   |                                     | June 30,                            |         | June 30,        
|                                                                   |                                     |                                     |         |                 
|                                                                   |                                     | 2001                                |         | 2000             |        | 2001 |         | 2000  
|                                                                   |                                     |                                     |         |                  |        |      |         |       
|Numerator                                                          |                                     |                                     |         |                  |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Income from continuing operations   |                                     | $       | 42,317           |        |      | $       | 22,267 |        |   | $       | 80,909 |        |   | $       | 42,272 |       
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   |                                     | Less preferred security dividends   |         |                  | (3,305 | )    |         |        | (3,255 | ) |         |        | (6,609 | ) |         |        | (6,475 | )
|                                                                   |                                     |                                     |         |                  |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                   | Basic numerator                     |                                     |         | 39,012           |        |      |         | 19,012 |        |   |         | 74,300 |        |   |         | 35,797 |       
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   |                                     | Add preferred security dividends(1) |         |                  | 3,305  |      |         |        |       |   |         |        | 6,609  |   |         |        |       |  
|                                                                   |                                     |                                     |         |                  |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                   | Diluted numerator                   |                                     | $       | 42,317           |        |      | $       | 19,012 |        |   | $       | 80,909 |        |   | $       | 35,797 |       
|                                                                   |                                     |                                     |         |                  |        |      |         |        |        |   |         |        |        |   |         |       
|Denominator                                                        |                                     |                                     |         |                  |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Average number of common shares outstanding
	(basic denominator)   |                                     |                                     | 224,639 |                  |        |      | 201,202 |        |        |   | 223,827 |        |        |   | 196,226 |       
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Common stock equivalents:                                          |                                     |                                     |         |                  |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Stock options                       |                                     |         | 10,505           |        |      |         | 6,414  |        |   |         | 10,516 |        |   |         | 4,432  |       
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Convertible Preferred Securities(1) |                                     |         | 26,850           |        |      |         |       |        |   |         | 26,850 |        |   |         |       |       
|                                                                   |                                     |                                     |         |                  |        |      |         |        |        |   |         |        |        |   |         |       
|Average number of common shares outstanding
	(diluted denominator) |                                     |                                     | 261,994 |                  |        |      | 207,616 |        |        |   | 261,193 |        |        |   | 200,658 |       
|                                                                   |                                     |                                     |         |                  |        |      |         |        |        |   |         |        |        |   |         |       
|Income from continuing operations per common
	share  basic        |                                     | $                                   | 0.17    |                  |        | $    | 0.09    |        |        | $ | 0.33    |        |        | $ | 0.18    |       
|                                                                   |                                     |                                     |         |                  |        |      |         |        |        |   |         |        |        |   |         |       
|Income from continuing operations per common
	share  diluted      |                                     | $                                   | 0.16    |                  |        | $    | 0.09    |        |        | $ | 0.31    |        |        | $ | 0.18    |       
|                                                                   |                                     |                                     |         |                  |        |      |         |        |        |   |         |        |        |   |         |       






|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Conversion of the Convertible Preferred Securities is not
	reflected for the 2000 periods due to the anti-dilutive effect
	of such presumed conversion. See Note 5, Redeemable
	Preferred Stock.

Options to purchase approximately 6.4 million shares of the
Companys common stock at $14.25 to $26.19 per share were
outstanding at and during the six months ended June 30,
2001, but were excluded from the Companys computation of
average number of common shares outstanding  diluted
because the options exercise prices were greater than the
average market price of the common shares underlying such
options during the period.

Note  7.     Discontinued
Operations

During the six months ended June 30, 2000, the Company
recorded a charge of $198.0 million as a result of its progress
in completing the exit from its PPM operations. This charge
included a $153.3 million adjustment in the net assets of the
Companys remaining PPM operations and $44.7 million in
adjustments to reserves for potential future obligations such as
rents and litigation. These amounts were estimates, and the
Company subsequently recorded a $70 million adjustment to this
estimated amount in December 2000. Actual results could continue
to differ from amounts estimated by the Company. As of
June 30, 2001, the Company continued to operate one
remaining PPM practice.

The net liabilities of discontinued operations ($27.7 million at
June 30, 2001) represent primarily the remaining working
capital deficiency of the Companys discontinued PPM
subsidiaries. The Company has also accrued $85.8 million of
estimated remaining discontinued operations exit costs, which
are included in Other accrued expenses and
liabilities ($46.8 million) and Other long-term
liabilities ($39.0 million) in the

8



---



##### Table of Contents



CAREMARK RX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

accompanying condensed consolidated balance sheet at
June 30, 2001. These amounts are estimates, and actual
amounts could differ from those recorded.

Note 
8.     Contingencies

The Company is party to certain legal actions arising in the
ordinary course of business. The Company is named as a defendant
in various legal actions arising from its continuing operations
and its discontinued PPM operations, including employment
disputes, contract disputes, personal injury claims and
professional liability claims. Management does not view any of
these actions as likely to result in an uninsured award that
would have a material adverse effect on the operating results
and financial condition of the Company.

In March 2000, a lawsuit entitled Taff v. Caremark Rx, Inc.,
claiming that a Termination Event had occurred with respect to
the Companys Threshold Appreciation Price Securities
(TAPS), issued in September 1997, was filed in the
Circuit Court of Franklin County, Alabama (the Circuit
Court). A Termination Event, as defined in the Purchase
Contract Agreement pursuant to which the TAPS were issued, would
have resulted in the TAPS holders receiving U.S. Treasury Notes
which secured the TAPS. This lawsuit was subsequently certified
as a non-opt out class action, and therefore
included all remaining TAPS holders except for those that had
previously reached settlement with the Company in similar
lawsuits. The Company reached a settlement in this class action
lawsuit (the Alabama Settlement), which received
final court approval by the Circuit Court on June 9, 2000
(the Final Order). On September 13, 2000,
pursuant to an Order from the Circuit Court, the Company issued
shares of the Companys common stock to class members in
the manner required by, and in full compliance with, the Alabama
Settlement.

Certain TAPS holders filed notices of appeal to the Supreme
Court of Alabama challenging the Circuit Courts denial of
their motion to intervene in the class action and objecting to
the adequacy of the Alabama Settlement. Some of the TAPS holders
who sought to appeal the Alabama Settlement had previously filed
a suit entitled Aragon Investments Ltd., et al. v. Caremark Rx,
Inc. in the Supreme Court of the State of New York which also
alleged that a Termination Event had occurred. After the
Companys motion to dismiss that suit was granted and the
case was dismissed, the plaintiffs filed a notice of appeal to
the Appellate Division of the Supreme Court of the State of New
York. The Appellate Division granted the Companys motion
to stay the appeal pending resolution of the prior appeal of the
Alabama Settlement to the Alabama Supreme Court.

On August 10, 2001, all of the TAPS holders who had filed
notices of appeal in Alabama or New York withdrew their appeals,
abandoned their objections to the Alabama Settlement and
released the Company from all claims of any kind related to the
TAPS. The withdrawal of all appeals in Alabama and in New York
resulted from an agreement whereby counsel for the class
plaintiff who had negotiated the Alabama Settlement on behalf of
the class agreed to pay a portion of their legal fees received
from the Alabama Settlement to the TAPS holders that had
objected to the Alabama Settlement. The Company paid no money
and contributed no stock as part of this agreement. In
connection with this agreement, the class plaintiff, the Company
and the TAPS holders that had objected to the Alabama Settlement
all executed full, general mutual releases of all claims
relating to the TAPS and the litigation pertaining to the TAPS.
The execution of these releases and the complete withdrawal of
the appeals pending in Alabama and New York mark the end of all
TAPS-related litigation.

In 1993, approximately 3,900 independent and retail chain
pharmacies filed a group of antitrust lawsuits and a class
action lawsuit against brand name pharmaceutical manufacturers,
wholesalers and PBM companies. Caremark was named as a defendant
in a number of these lawsuits in 1994, but was not named in the
class action. The lawsuits, which were transferred to the United
States District Court for the Northern District of Illinois for
pretrial proceedings, alleged that at least 24 pharmaceutical
manufacturers provided unlawful price and service discounts to
certain favored buyers and conspired among themselves to deny
similar discounts to the plaintiffs in violation of the Sherman
Act and the Robinson-Patman Act. The complaints that included
Caremark charged that certain defendant PBM companies, including
Caremark, were favored buyers

9



---



##### Table of Contents



CAREMARK RX, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

who knowingly induced or received discriminatory prices from the
manufacturers in violation of the Robinson-Patman Act. Each
complaint sought unspecified treble damages, declaratory and
equitable relief and attorneys fees and expenses.

In April 1995, the court entered a stay of pretrial proceedings
as to certain Robinson-Patman Act claims in this litigation,
including the Robinson-Patman Act claims against Caremark,
pending a trial of price discrimination claims brought by a
limited number of plaintiffs against five defendants not
including Caremark. The stay involving claims against Caremark
has remained in place to date. Numerous settlements by parties
other than Caremark have been reached, including a partial
settlement of the class action which provided for a cash payment
of approximately $351 million by the settling manufacturers as
well as a commitment to abide by certain injunctive provisions.

The remaining defendants received a judgment in their favor in
1998 on the class action conspiracy claims. On appeal, that
judgment was affirmed in part and reversed and remanded in part
and is currently undergoing further proceedings in the district
court and the court of appeals. It is expected that trials of
the remaining non-class action conspiracy claims brought under
the Sherman Act, to the extent they have not otherwise been
settled or dismissed on summary judgment, will ultimately be
remanded and move forward to trial and likely will also precede
the trial of any Robinson-Patman Act claims.

Pursuant to the Provider Self-Disclosure Protocol of the Office
of Inspector General (OIG), the Company has
conducted a voluntary investigation of the practices of an
affiliate which is included in the Companys discontinued
operations and was known as Home Health Agency of Greater Miami,
doing business as AmCare (AmCare). The investigation
uncovered several potentially inappropriate practices by certain
managers at AmCare, some of which may have resulted in
overpayments from federal programs for AmCares home health
services. The Company has since terminated these managers,
ceased AmCares operations, and reported the matter to the
OIG. While the OIG has not yet responded to the Companys
internal investigation report, and therefore the resolution of
this matter is as yet unknown, it is likely that the government
will determine that overpayments were made which require
repayment by the Company. The Companys estimates of the
repayments due have been accrued in the financial statements.

Although the Company believes that it has meritorious defenses
to the claims of liability or for damages in the actions that
have been made against it, there can be no assurance that
pending lawsuits will not have a disruptive effect upon the
operations of the business, that the defense of the lawsuits
will not consume the time and attention of the Companys
senior management, or that the resolution of the lawsuits will
not have a material adverse effect on the operating results and
financial condition of the Company. The Company intends to
vigorously defend each of its pending lawsuits. The Company
believes that these lawsuits will not have a material adverse
effect on the operating results and financial condition of the
Company.

As previously discussed, the Company is a party to certain
claims and proceedings related to its discontinued operations.
Additionally, the Company has assigned to various parties
approximately $116 million of lease obligations related to its
discontinued operations. The Company and/or one or more of its
subsidiaries, affiliates or managed physician practices remain
named as guarantor or obligor on these lease obligations.

10



---



##### Table of Contents



CAREMARK RX, INC. AND SUBSIDIARIES






MANAGEMENTS DISCUSSION AND ANALYSIS OF


FINANCIAL CONDITION AND RESULTS OF OPERATIONS


June 30, 2001

The following managements discussion and analysis of
financial condition and results of operations
(MD&A) should be read in conjunction with the
Companys unaudited condensed consolidated financial
statements and notes thereto contained in this Quarterly Report
on Form 10-Q. Additionally, the reader is also encouraged
to refer to the Companys audited consolidated financial
statements and notes thereto and MD&A for the year ended
December 31, 2000, contained in the Companys Annual
Report on Form 10-K, which was filed with the Securities
and Exchange Commission on March 21, 2001.

The following MD&A contains forward-looking
statements as described on page i of this Quarterly Report
on Form 10-Q.

Overview

The Company is one of the largest pharmaceutical services
companies in the United States. The Companys services
assist employers, insurance companies, unions, government
employee groups, managed care organizations and other sponsors
of health benefit plans and individuals throughout the United
States in delivering prescription drugs in a cost-effective
manner.

The Companys pharmaceutical services are generally
referred to as pharmacy benefit management, or PBM,
services and involve the design and administration of programs
aimed at reducing the costs and improving the safety,
effectiveness and convenience of prescription drug use. The
Company dispenses prescription drugs on behalf of its customers
through its three large, automated mail service pharmacies and
its seventeen smaller regional pharmacies as well as through an
independent, nationwide retail network composed of over 96% of
all retail pharmacies in the United States.

The Companys net revenue generally includes payments by
its customers based on the price of prescription drugs dispensed
on their behalf and administrative fees. The preponderance of
the Companys net revenue is earned on a fee-for-service
basis through contracts covering one to three-year periods.
Revenues for selected types of services are earned based on a
percentage of savings achieved or on a per-capita basis. The
Companys cost of revenues is primarily composed of
prescription drug acquisition costs and associated dispensing
costs.

Factors That May Affect Future Results

The Companys future operating results and financial
condition are dependent on its ability to market its services
profitably, successfully increase market share and manage
expense growth relative to revenue growth. The future operating
results and financial condition of the Company may be affected
by a number of additional factors, including: (i) its
ability to successfully terminate leases and other contractual
agreements related to its discontinued operations and the
outcome of various litigation surrounding the closure or sale of
PPM assets; (ii) identification of and competition for
growth and expansion opportunities; (iii) declining
reimbursement levels for products distributed;
(iv) exposure to professional liability in excess of the
Companys insurance; (v) compliance with, or changes
in, government regulation, including pharmacy licensing
requirements and healthcare reform legislation;
(vi) adverse resolution of existing or future lawsuits;
(vii) costs of modifications of its information systems to
comply with HIPAA privacy and electronic interchange standards
and (viii) liquidity and capital requirements. Changes in
one or more of these factors could have a material adverse
effect on the future operating results and financial condition
of the Company.

There are various legal matters which, if adversely determined,
could have a material adverse effect on the Companys
operating results and financial condition. See Part
II  Item 1, Legal Proceedings
and Note 8, Contingencies to the Companys
unaudited condensed consolidated financial statements set forth
elsewhere herein.

11



---



##### Table of Contents



Results of Continuing Operations

The following tables set forth selected unaudited information
about the Companys results of continuing operations for
the three months and the six months ended June 30, 2001 and
2000. The results of continuing operations presented in these
tables are not necessarily indicative of results to be expected
for a full year.

The discussion of factors influencing the periodic changes in
the Companys results of continuing operations which
follows these tables refers to both the three-month and the
six-month periods unless otherwise specified.

|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |       |   
|--------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------ | --------- | --------- |  | ------------------- | --------- | --------- |  | - | ------- | ------- | - |  | ---- | ----- | --
|                                                                            |                                              |                                                  |           |           |  |                    
|                                                                            |                                              | Three Months Ended                               |           |           |  |                    
|                                                                            |                                              | June 30,                                         |           |           |  |                    
|                                                                            |                                              |                                                  |           |           |  |                    
|                                                                            |                                              | 2001                                             |           | 2000      |  | Increase/(Decrease)
|                                                                            |                                              |                                                  |           |           |  |                    
|                                                                            |                                              |                                                 
|                                                                            |                                              | (Dollars in thousands, except per share amounts)
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net revenue                                                                 |                                              | $                                                | 1,373,388 |           |  | $                   | 1,083,904 |           |  | $ | 289,484 |         |   |  | 26.7 | %    
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Operating expenses:                                                         |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Cost of revenues                             |                                                  |           | 1,268,032 |  |                     |           | 1,000,498 |  |   |         | 267,534 |   |  |      | 26.7  | % 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Selling, general and administrative expenses |                                                  |           | 36,104    |  |                     |           | 28,250    |  |   |         | 7,854   |   |  |      | 27.8  | % 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Depreciation and amortization                |                                                  |           | 6,403     |  |                     |           | 5,650     |  |   |         | 753     |   |  |      | 13.3  | % 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Interest expense, net                        |                                                  |           | 17,101    |  |                     |           | 25,432    |  |   |         | (8,331  | ) |  |      | (32.8 | )%
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Income from continuing operations before
        provision for income taxes |                                              |                                                  | 45,748    |           |  |                     | 24,074    |           |  |   | 21,674  |         |   |  | 90.0 | %    
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Provision for income taxes                                                  |                                              |                                                  | 3,431     |           |  |                     | 1,807     |           |  |   | 1,624   |         |   |  | 89.9 | %    
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Income from continuing operations                                           |                                              | $                                                | 42,317    |           |  | $                   | 22,267    |           |  | $ | 20,050  |         |   |  | 90.0 | %    
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Income from continuing operations per common
        share  diluted        |                                              | $                                                | 0.16      |           |  | $                   | 0.09      |           |  | $ | 0.07    |         |   |  | 77.8 | %    
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Operating Income(1)                                                         |                                              | $                                                | 62,849    |           |  | $                   | 49,506    |           |  | $ | 13,343  |         |   |  | 27.0 | %    
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Operating Margin                                                            |                                              |                                                  | 4.58      | %         |  |                     | 4.57      | %         |  |   |         |         |   |  |      |      
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Pharmacy claims processed (millions):                                       |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Mail                                         |                                                  |           | 4.5       |  |                     |           | 3.6       |  |   |         | 0.9     |   |  |      | 23.5  | % 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Retail                                       |                                                  |           | 15.7      |  |                     |           | 13.2      |  |   |         | 2.5     |   |  |      | 19.7  | % 
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|                                                                            |                                              |                                                  | 20.2      |           |  |                     | 16.8      |           |  |   | 3.4     |         |   |  | 20.4 | %    
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      

|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |       |   
|--------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------ | --------- | --------- |  | ------------------- | --------- | --------- |  | - | ------- | ------- | - |  | ---- | ----- | --
|                                                                            |                                              |                                                  |           |           |  |                    
|                                                                            |                                              | Six Months Ended                                 |           |           |  |                    
|                                                                            |                                              | June 30,                                         |           |           |  |                    
|                                                                            |                                              |                                                  |           |           |  |                    
|                                                                            |                                              | 2001                                             |           | 2000      |  | Increase/(Decrease)
|                                                                            |                                              |                                                  |           |           |  |                    
|                                                                            |                                              |                                                 
|                                                                            |                                              | (Dollars in thousands, except per share amounts)
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net revenue                                                                 |                                              | $                                                | 2,747,330 |           |  | $                   | 2,135,894 |           |  | $ | 611,436 |         |   |  | 28.6 | %    
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Operating expenses:                                                         |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Cost of revenues                             |                                                  |           | 2,538,787 |  |                     |           | 1,969,173 |  |   |         | 569,614 |   |  |      | 28.9  | % 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Selling, general and administrative expenses |                                                  |           | 71,026    |  |                     |           | 55,347    |  |   |         | 15,679  |   |  |      | 28.3  | % 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Depreciation and amortization                |                                                  |           | 13,145    |  |                     |           | 11,373    |  |   |         | 1,772   |   |  |      | 15.6  | % 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Interest expense, net                        |                                                  |           | 36,903    |  |                     |           | 54,301    |  |   |         | (17,398 | ) |  |      | (32.0 | )%
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Income from continuing operations before
        provision for income taxes |                                              |                                                  | 87,469    |           |  |                     | 45,700    |           |  |   | 41,769  |         |   |  | 91.4 | %    
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Provision for income taxes                                                  |                                              |                                                  | 6,560     |           |  |                     | 3,428     |           |  |   | 3,132   |         |   |  | 91.4 | %    
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Income from continuing operations                                           |                                              | $                                                | 80,909    |           |  | $                   | 42,272    |           |  | $ | 38,637  |         |   |  | 91.4 | %    
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Income from continuing operations per common
        share  diluted        |                                              | $                                                | 0.31      |           |  | $                   | 0.18      |           |  | $ | 0.13    |         |   |  | 72.2 | %    
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Operating Income(1)                                                         |                                              | $                                                | 124,372   |           |  | $                   | 100,001   |           |  | $ | 24,371  |         |   |  | 24.4 | %    
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Operating Margin                                                            |                                              |                                                  | 4.53      | %         |  |                     | 4.68      | %         |  |   |         |         |   |  |      |      
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|Pharmacy claims processed (millions):                                       |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Mail                                         |                                                  |           | 8.9       |  |                     |           | 7.2       |  |   |         | 1.7     |   |  |      | 24.5  | % 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Retail                                       |                                                  |           | 32.0      |  |                     |           | 26.3      |  |   |         | 5.7     |   |  |      | 21.4  | % 
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      
|                                                                            |                                              |                                                  | 40.9      |           |  |                     | 33.5      |           |  |   | 7.4     |         |   |  | 22.1 | %    
|                                                                            |                                              |                                                  |           |           |  |                     |           |           |  |   |         |         |   |  |      |      






|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company defines Operating Income as net revenue less cost of
        revenue; selling, general and administrative expenses and
        depreciation and amortization.

12



---



##### Table of Contents



Net Revenue. The growth in net revenue in 2001 was due
primarily to new customer contracts which began on
January 1, 2001, coupled with retention and growth of
existing customers, additional services provided to existing
customers, increases in the volume of pharmacy claims processed
and drug cost inflation.

Cost of Revenues. Cost of revenues increased on an
absolute basis for the periods presented due to the factors
cited above for the increase in net revenue but remained
relatively constant as a percentage of revenues.

Selling, General and Administrative Expenses. Selling,
general end administrative expenses increased in 2001 in line
with the overall growth in the Companys business and
remained constant as a percentage of net revenue for the periods
presented.

Depreciation and Amortization. The increase in
depreciation and amortization in 2001 was due primarily to an
increase in depreciation expense related to capital expenditures
made in 2000 and 2001.

Interest Expense, Net. The decrease in net interest
expense in 2001 resulted primarily from the Companys
retirement of its $420 million senior subordinated notes in
September 2000, as well as a reduction in amounts due under the
credit facility which were funded from operating cash flows and
the TAPS proceeds. Interest expense was also positively impacted
by lower average interest rates applicable to the Companys
variable-rate debt instruments in the 2001 periods. See
Historical Liquidity and Capital Resources.

Provision for Income Taxes. The Companys effective
tax rate on income from continuing operations was 7.5% for both
the 2001 and 2000 periods. This effective rate is significantly
below the statutorily enacted corporate income tax rates
applicable to the Companys taxable income for each period
and is the result of: (i) the tax NOL carry forwards
discussed below and (ii) state tax planning strategies
which will allow the Company to utilize its consolidated state
tax NOLs in certain states.

Results of Discontinued Operations

During the six months ended June 30, 2000, the Company
recorded a charge of $198.0 million as a result of its progress
in completing the exit from its PPM operations. This charge
included a $153.3 million adjustment in the net assets of the
Companys remaining PPM operations and $44.7 million in
adjustments to reserves for potential future obligations such as
rents and litigation. These amounts were estimates, and the
Company subsequently recorded a $70 million adjustment to this
estimated amount in December 2000. Actual results could continue
to differ from amounts estimated by the Company. As of
June 30, 2001, the Company continued to operate one
remaining PPM practice.

Historical Liquidity and Capital Resources

General. The Company broadly defines liquidity as its
ability to generate sufficient operating cash flow to meet its
obligations and commitments. In addition, liquidity includes the
ability to obtain appropriate financing objectives. Therefore,
liquidity cannot be considered separately from capital resources
that consist of current or potentially available funds for use
in achieving business objectives and meeting debt service
commitments.

13



---



##### Table of Contents



The following tables set forth selected unaudited information
concerning the Companys liquidity and capital resources
and changes therein at and for the six months ended
June 30, 2001 (in millions):

|                                                                                  |                         |   |      |        |  
|--------------------------------------------------------------------------------- | ----------------------- | - | ---- | ------ | -
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net cash and cash equivalents provided by (used
	in):                             |                         |   |      |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Continuing operations   |   | $    | 133.7  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Investing activities    |   |      | (20.7  | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Financing activities    |   |      | (21.3  | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Discontinued operations |   |      | (32.4  | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Special charges         |   |      | (0.9   | )
|                                                                                  |                         |   |      |       
|Net increase in cash and cash equivalents for the
	six months ended June 30, 2001 |                         |   | 58.4 |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents 
	December 31, 2000                                    |                         |   | 2.4  |       
|                                                                                  |                         |   |      |       
|Cash and cash equivalents  June 30,
	2001                                        |                         | $ | 60.8 |       
|                                                                                  |                         |   |      |       
|Net working capital deficiency(1):                                                |                         |   |      |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | December 31, 2000       |   | $    | (181.9 | )
|                                                                                  |                         |   |      |       
|                                                                                  | June 30, 2001           |   | $    | (148.4 | )
|                                                                                  |                         |   |      |       

|                                             |  |          |       |              |  |   |       | 
|-------------------------------------------- |  | -------- | ----- | ------------ |  | - | ----- | 
|                                             |  | June 30, |       | December 31,
|                                             |  | 2001     |       | 2000        
|                                             |  |          |       |             
|Long-term debt:                              |  |          |       |              |  |   |       | 
|                                            
|                                            
|                                            
|                                            
|Fixed-rate debt                              |  | $        | 450.0 |              |  | $ | 450.0 | 
|                                             |  |          |       |              |  |   |       | 
|Variable-rate debt                           |  | $        | 249.4 |              |  | $ | 285.2 | 
|                                             |  |          |       |              |  |   |       | 
|Availability under revolving credit facility |  | $        | 277.5 |              |  | $ | 118.2 | 
|                                             |  |          |       |              |  |   |       | 






|    |                                                                              
|--- | -----------------------------------------------------------------------------
|(1) | Working capital equals total current assets minus total current
	liabilities.

Cash Flows from Continuing Operations. The Companys
performance relative to cash and cash equivalents provided by
continuing operations for the six months ended June 30,
2001, resulted from factors discussed above related to income
from continuing operations coupled with focused management of
working capital.

Cash Flows from Investing Activities. Cash flows from
investing activities for the six months ended June 30,
2001, consist entirely of capital expenditures. Approximately
$7.0 million of these capital expenditures relate to the
Companys relocation of its Illinois automated mail service
pharmacy from Lincolnshire to a larger facility located in
nearby Mount Prospect. The Company expects to make an additional
$4.8 million of capital expenditures related to the Mount
Prospect pharmacy through the remainder of 2001, with most of
this amount being paid in the third quarter.

The Company began dispensing prescriptions from the Mount
Prospect pharmacy during the second quarter of 2001 and expects
to have all Lincolnshire operations transitioned to Mount
Prospect during the third quarter of 2001.

Cash Flows from Financing Activities. The Company
increased amounts drawn under the trade receivable
securitization facility referred to below by $14.4 million and
received proceeds of $8.6 million from issuance of its common
stock under employee benefit plans during the six months ended
June 30, 2001. These amounts were offset by payments of
preferred security dividends of $3.4 million, payment of $5.0
million of costs associated with renewing the Companys
credit facility, and principal payments on long-term debt of
$35.8 million.

Cash Flows from Discontinued Operations. In addition to
the amounts paid through June 30, 2001, to service
liabilities which arose from the Companys discontinued PPM
operations, the Company has accrued approximately $113.5 million
of remaining net liabilities related to its discontinued
operations. The Company expects to pay approximately $57 million
of this accrued amount throughout the remainder of 2001. These
amounts are estimates, and actual amounts could differ from
those recorded.

14



---



##### Table of Contents



Working Capital. The Company generally operates with
negative working capital due to the inclusion of:
(i) amounts drawn under the trade receivable securitization
facility referred to below and (ii) liabilities related to
its discontinued operations in the computation of working
capital. The increase in working capital from December 31,
2000, to June 30, 2001, is due primarily to the
Companys operating cash flow performance during the period.

Credit Facility. The Company has a $550 million credit
facility with Bank of America, N.A. as administrative agent
which was put in place on March 15, 2001. This credit
facility consists of a $300 million revolving credit facility
which matures in March 2005 and a $250 million term loan
facility which matures in March 2006 and replaced the
Companys former credit facility, which was scheduled to
mature in June 2001.

At June 30, 2001, borrowings under the credit facility bore
interest at variable rates based on LIBOR, plus varying margins
and consisted of outstanding term loans of $249.4 million. The
Company began making required principal payments of $625,000 per
quarter with respect to the term loan facility on June 1,
2001. At June 30, 2001, the Company had approximately
$277.5 million available for borrowing under the revolving
credit facility, exclusive of approximately $22.5 million
reserved under letters of credit.

The credit facility is secured and guaranteed by the
Companys material subsidiaries, contains prepayment
provisions with respect to certain non-operating cash proceeds
and contains other customary restrictive covenants. The security
interests, guarantees and covenants applicable to the credit
agreement are described in further detail in Note 4,
Long-term debt to the Companys unaudited
condensed consolidated financial statements set forth elsewhere
herein.

Senior Notes. The Companys senior notes are in an
aggregate principal amount of $450 million and bear interest at
7 3/8% annually, with all principal amounts due in October
2006. The indenture for the senior notes contains, among other
things, restrictions on subsidiary indebtedness, sale and
leaseback transactions, and consolidation, merger and sale of
assets. The senior notes are not guaranteed by any subsidiary.
The indenture for the senior notes also contains restrictions on
indebtedness secured by liens. To comply with this covenant, the
Company has secured the senior notes on an equal and ratable
basis with the credit facility.

Trade Receivable Securitization. The Company has
securitized certain of its accounts receivable pursuant to a
$150 million facility with General Electric Capital Corporation
(GECC) as funding agent and The Chase Manhattan Bank
(Chase) as group agent. GECCs $125 million
commitment under the facility is due January 31, 2006, and
Chases $25 million commitment is due February 7,
2002, and may be extended for an additional period of up to 364
days. As of June 30, 2001, and December 31, 2000, the
Company had drawn approximately $114.4 million and $100 million,
respectively, under this facility.

Outlook

Liquidity and Capital Resources Overview. Currently, the
Companys liquidity needs arise primarily from:
(i) funding discontinued operations (including the funding
of any retained liabilities); (ii) commitments related to
financing obtained through the issuance of long-term debt and
the Convertible Preferred Securities; (iii) working capital
requirements and (iv) capital expenditures. The Company believes
that cash flows from operations and amounts available for
borrowing under its revolving credit facility are sufficient to
meet its liquidity needs.

Anticipated Impact of Patent Expirations for Certain Drugs. Patents held by the inventors of several high-utilization
drugs are scheduled to begin expiring in the near future. The
Company anticipates that these patent expirations will have the
effect of lowering net revenue as prescriptions begin to be
filled with generic equivalent drugs instead of the
formerly-patented drugs; however, the Company believes that the
near-term impact to net income will be minimal due to the
associated lower cost of the generic equivalent drugs.

Anticipated Changes in Inventory Levels. In March 2001,
the Company entered into a pharmaceutical wholesale supply
agreement with McKesson Corporation (McKesson) which
became effective on July 1, 2001, and replaced an existing
agreement with another supplier. Under this agreement, the
Company will continue to purchase pharmaceuticals both directly
from certain manufacturers and from McKesson; however, it will
shift purchases of several products which are currently
purchased on a direct basis to McKesson in order

15



---



##### Table of Contents





Planned Capital Expenditures.The Company plans to build
a fourth automated mail service pharmacy in order to meet
projected demand. The Company has announced that this pharmacy
will be located in Phoenix, Arizona and expects to begin
construction in late 2001. The Company has entered into a
long-term operating lease for the associated real property and
expects to make approximately $14 million to $16 million of
capital expenditures, consisting primarily of leasehold
improvements, computer equipment and specialized mail service
pharmacy automation equipment, prior to the commencement of
operations from this pharmacy, which the Company expects to
begin in mid-2002.

Additionally, the Company is currently evaluating the scope of
modifications of its information systems needed to comply with
recently issued rules implementing the HIPAA standards for
privacy and electronic data interchange. The Company expects
that HIPAA requirements will result in additional capital
expenditures over the level required for maintenance and growth
of its operations through April 2003, which is the scheduled
deadline for HIPAA compliance.

Discontinued Operations.Cash used to fund the remaining
net liabilities of discontinued operations and estimated exit
costs, which totaled approximately $113.5 million, in aggregate,
at June 30, 2001, will be funded by cash flows from
continuing operations and by borrowings under the revolving
credit facility. The Company expects to pay approximately $100
million of this amount through the end of 2002 and believes that
these sources will be sufficient to fund costs related to its
discontinued operations.

Deferred Income Taxes.The Company had NOL carry forwards
of approximately $2.1 billion as of December 31, 2000. If
not utilized to offset future taxable income, these NOL carry
forwards will expire on various dates through 2020. In addition
to these NOL carry forwards, the Company had approximately $127
million of future additional income tax deductions as of
December 31, 2000, related to its discontinued operations.
The Company also has a federal alternative minimum tax credit
carry forward of approximately $17.1 million, which may be used
to offset its ordinary federal corporate income taxes in the
future.

Under Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, the Company is required
to record a net deferred tax asset for the future tax benefits
of tax loss and tax credit carry forwards, as well as for other
temporary differences, if realization of such benefits is more
likely than not.

Management believes that, based upon all available historical
information and after considering appropriate tax planning
strategies in light of the uncertainty of forecasting future
taxable income, it is more likely than not that the deferred tax
assets will not be realized. Accordingly, the Company has
recorded a valuation allowance for the amount of the deferred
tax assets in excess of the deferred tax liabilities. However,
the ultimate realization of the deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which temporary differences become deductible and NOLs can be
carried forward.

Recent Accounting Pronouncements

On July 20, 2001, the Financial Accounting Standards Board
(FASB) issued Statements of Financial Accounting
Standards No. 141, Business Combinations
(FAS 141) and No. 142, Goodwill and Other
Intangible Assets (FAS 142). Business
combinations initiated after June 30, 2001, must be
accounted for under the provisions of these two statements. The
Company must also apply these provisions to previously recorded
business combinations as of January 1, 2002. The principal
provisions of FAS 141 and FAS 142 are as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | All business combinations initiated after June 30, 2001,
	will be accounted for using the purchase method,
	under which the identifiable assets and liabilities of the
	acquired business are recorded at their respective fair market
	values with the residual amount being recorded as goodwill. The
	pooling-of-interests method, under which the
	financial statements of the acquirer and the acquiree were
	combined as if the two businesses had always been one, will no
	longer be used.

16



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Goodwill and identifiable intangible assets will no longer be
	amortized over a maximum period of forty years. Goodwill will
	not be amortized but will instead be tested for impairment
	annually or upon the occurrence of certain triggering
	events. Identifiable intangible assets will be amortized
	over their expected useful lives; those with indefinite expected
	useful lives will not be amortized. Identifiable intangible
	assets will continue to be tested for impairment under
	previously existing accounting standards.

The Company will adopt FAS 141 and FAS 142 on January 1,
2002, and expects the adoption of these standards to have no
material impact on its financial condition, results of
operations or cash flows.




QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest
rates related to debt outstanding under the credit facility and
for amounts drawn under its trade accounts receivable
securitization facility. The Companys earnings and the
market value of its fixed-rate debt are subject to change as a
result of movements in market interest rates. At June 30,
2001, the Company had $363.8 million of obligations, including
$114.4 million drawn under its trade accounts receivable
securitization facility, which were subject to variable rates of
interest. A hypothetical increase in interest rates of 1% from
the rate at June 30, 2001, would result in an increase in
annual interest expense of $3.6 million, presuming that
indebtedness subject to variable interest rates remained
constant. The impact of such a change on the carrying value of
long-term debt would not be significant. These amounts are
determined based on only the impact of the hypothetical interest
rates on the Companys long-term debt balances and do not
consider the effects, if any, of the potential changes in the
overall level of economic activity that could exist in such an
environment.

17



---



##### Table of Contents






PART II  OTHER INFORMATION




Item  1.     Legal
Proceedings

The Company is party to certain legal actions arising in the
ordinary course of business. The Company is named as a defendant
in various legal actions arising from its continuing operations
and its discontinued PPM operations, including employment
disputes, contract disputes, personal injury claims and
professional liability claims. Management does not view any of
these actions as likely to result in an uninsured award that
would have a material adverse effect on the operating results
and financial condition of the Company.

In March 2000, a lawsuit entitled Taff v. Caremark Rx, Inc.,
claiming that a Termination Event had occurred with respect to
the Companys Threshold Appreciation Price Securities
(TAPS), issued in September 1997, was filed in the
Circuit Court of Franklin County, Alabama (the Circuit
Court). A Termination Event, as defined in the Purchase
Contract Agreement pursuant to which the TAPS were issued, would
have resulted in the TAPS holders receiving U.S. Treasury Notes
which secured the TAPS. This lawsuit was subsequently certified
as a non-opt out class action, and therefore
included all remaining TAPS holders except for those that had
previously reached settlement with the Company in similar
lawsuits. The Company reached a settlement in this class action
lawsuit (the Alabama Settlement), which received
final court approval by the Circuit Court on June 9, 2000
(the Final Order). On September 13, 2000,
pursuant to an Order from the Circuit Court, the Company issued
shares of the Companys common stock to class members in
the manner required by, and in full compliance with, the Alabama
Settlement.

Certain TAPS holders filed notices of appeal to the Supreme
Court of Alabama challenging the Circuit Courts denial of
their motion to intervene in the class action and objecting to
the adequacy of the Alabama Settlement. Some of the TAPS holders
who sought to appeal the Alabama Settlement had previously filed
a suit entitled Aragon Investments Ltd., et al. v. Caremark Rx,
Inc. in the Supreme Court of the State of New York which also
alleged that a Termination Event had occurred. After the
Companys motion to dismiss that suit was granted and the
case was dismissed, the plaintiffs filed a notice of appeal to
the Appellate Division of the Supreme Court of the State of New
York. The Appellate Division granted the Companys motion
to stay the appeal pending resolution of the prior appeal of the
Alabama Settlement to the Alabama Supreme Court.

On August 10, 2001, all of the TAPS holders who had filed
notices of appeal in Alabama or New York withdrew their appeals,
abandoned their objections to the Alabama Settlement and
released the Company from all claims of any kind related to the
TAPS. The withdrawal of all appeals in Alabama and in New York
resulted from an agreement whereby counsel for the class
plaintiff who had negotiated the Alabama Settlement on behalf of
the class agreed to pay a portion of their legal fees received
from the Alabama Settlement to the TAPS holders that had
objected to the Alabama Settlement. The Company paid no money
and contributed no stock as part of this agreement. In
connection with this agreement, the class plaintiff, the Company
and the TAPS holders that had objected to the Alabama Settlement
all executed full, general mutual releases of all claims
relating to the TAPS and the litigation pertaining to the TAPS.
The execution of these releases and the complete withdrawal of
the appeals pending in Alabama and New York mark the end of all
TAPS-related litigation.

In 1993, approximately 3,900 independent and retail chain
pharmacies filed a group of antitrust lawsuits and a class
action lawsuit against brand name pharmaceutical manufacturers,
wholesalers and PBM companies. Caremark was named as a defendant
in a number of lawsuits in 1994, but was not named in the class
action. The lawsuits, which were transferred to the United
States District Court for the Northern District of Illinois for
pretrial proceedings, alleged that at least 24 pharmaceutical
manufacturers provided unlawful price and service discounts to
certain favored buyers and conspired among themselves to deny
similar discounts to the plaintiffs in violation of the Sherman
Act and the Robinson-Patman Act. The complaints that included
Caremark charged that certain defendant PBM companies, including
Caremark, were favored buyers who knowingly induced or received
discriminatory prices from the manufacturers in violation of the
Robinson-Patman Act. Each complaint sought unspecified treble
damages, declaratory and equitable relief and attorneys
fees and expenses.

18



---



##### Table of Contents



In April 1995, the court entered a stay of pretrial proceedings
as to certain Robinson-Patman Act claims in this litigation,
including the Robinson-Patman Act claims against Caremark,
pending a trial of price discrimination claims brought by a
limited number of plaintiffs against five defendants not
including Caremark. The stay involving claims against Caremark
has remained in place to date. Numerous settlements by parties
other than Caremark have been reached, including a partial
settlement of the class action which provided for a cash payment
of approximately $351 million by the settling manufacturers as
well as a commitment to abide by certain injunctive provisions.

The remaining defendants received a judgment in their favor in
1998 on the class action conspiracy claims. On appeal, that
judgment was affirmed in part and reversed and remanded in part
and is currently undergoing further proceedings in the district
court and the court of appeals. It is expected that trials of
the remaining non-class action conspiracy claims brought under
the Sherman Act, to the extent they have not otherwise been
settled or dismissed on summary judgment, will ultimately be
remanded and move forward to trial and likely will also precede
the trial of any Robinson-Patman Act claims.

The Companys California PPM operations included MPN, a
wholly-owned subsidiary of the Company and a healthcare service
plan licensed by the State of California (the State)
under the Knox-Keene Health Care Service Plan Act of 1975. In
March 1999, the California Department of Corporations (the
DOC) appointed a conservator and assumed control of
the business operations of MPN. The conservator, purportedly on
behalf of MPN, filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Central District of California (the
Bankruptcy Court).

The Company, MPN and representatives of the State subsequently
executed an agreement to settle the dispute relating to MPN (as
amended, the Settlement Agreement). The Company,
various of its subsidiaries, MPN, certain managed physician
practices and various health plans executed a supplemental
agreement (as amended, the Supplemental Plan
Agreement), pursuant to which, among other things, the
parties agreed to subordinate, waive and/or release various
claims against one another on the terms and conditions set forth
therein. On September 14, 2000, the Bankruptcy Court entered an
order which: (i) confirmed the Second Amended
Chapter 11 Plan of MPN dated July 7, 2000 (the
Plan); (ii) approved the Settlement Agreement;
and (iii) approved the Supplemental Plan Agreement.
Following the occurrence of the Effective Date of
the Plan on October 16, 2000, distributions commenced to
the creditors of MPN from assets of MPN and from letters of
credit in the aggregate amount of $40.0 million provided by the
Company pursuant to its funding commitment described in the
Plan. All required distributions are expected to be completed
approximately one year following the Effective Date of the Plan.

KPC Medical Management, Inc. and certain of its affiliates,
which purchased a substantial portion of the California PPM
operations, filed for bankruptcy in November 2000. They
subsequently rejected certain assumed lease and other
contractual obligations for which Caremark and/or its
subsidiaries, affiliates and managed physician practices remain
responsible. The obligations resulting from this bankruptcy have
been included in the Companys accrual for discontinued
operations exit costs. See Note 7, Discontinued
Operations to the Companys unaudited condensed
consolidated financial statements set forth elsewhere herein.

Pursuant to the Provider Self-Disclosure Protocol of the OIG,
the Company has conducted a voluntary investigation of the
practices of an affiliate known as Home Health Agency of Greater
Miami, doing business as AmCare (AmCare). The
investigation uncovered several potentially inappropriate
practices by certain managers at AmCare, some of which may have
resulted in overpayments from federal programs for AmCares
home health services. The Company has since terminated these
managers, ceased AmCares operations and reported the
matter to the OIG. While the OIG has not yet responded to the
Companys internal investigation report, and therefore the
resolution of this matter is as yet unknown, it is likely that
the government will determine that overpayments were made which
require repayment by the Company. The Companys estimates
of the repayments due have been accrued in its financial
statements.

Although the Company believes that it has meritorious defenses
to the claims of liability or for damages in the actions that
have been instituted against it, there can be no assurance that
pending lawsuits will not have a disruptive effect upon the
Companys operations, that the defense of the lawsuits will
not consume the time

19



---



##### Table of Contents








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

The Companys Annual Meeting of Stockholders was held on
May 31, 2001. The sole matter voted upon by the
Companys stockholders at this meeting was the uncontested
election of three directors as follows:

|                     |  |           |             |                  |  |  |            | 
|-------------------- |  | --------- | ----------- | ---------------- |  |  | ---------- | 
|                     |  |           |             | Votes Against or
|                     |  | Votes For |             | Withheld        
|                     |  |           |             |                 
|Edwin M. Banks       |  |           | 169,239,739 |                  |  |  | 34,913,885 | 
|                    
|                    
|                    
|                    
|Colleen Conway-Welch |  |           | 199,800,903 |                  |  |  | 4,352,721  | 
|                    
|                    
|                    
|                    
|Roger L. Headrick    |  |           | 159,445,978 |                  |  |  | 44,707,645 | 




Item  6.     Exhibits and
Reports on Form 8-K

(a)  Exhibits. None.

(b)  Reports on Form 8-K. The Company filed no
current reports on Form 8-K during the three months ended
June 30, 2001.

20



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.



| |                  
| | -----------------
| | Caremark Rx, Inc.



| |     |                     
| | --- | --------------------
| | By: | /s/ HOWARD A. MCLURE

| |                            
| | ---------------------------
| |                            
| | Howard A. McLure           
| | Executive Vice President   
| | and Chief Financial Officer

Date: August 14, 2001

21