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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

OR

Commission file number 000-23249

PRIORITY HEALTHCARE CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (407) 804-6700

No Change

(Former name, former address and former fiscal year, if changed since last report)

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  ¨

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

As of July 23, 2003, the number of shares outstanding of each of the issuer’s classes of common stock were as follows:

Class A Common Stock – 6,760,712

Class B Common Stock – 36,684,711

PART I—FINANCIAL INFORMATION

PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS

(000’s omitted, except share data)

(unaudited)

See accompanying notes to consolidated financial statements.

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PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED BALANCE SHEETS

(000’s omitted, except share data)

See accompanying notes to consolidated financial statements.

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PRIORITY HEALTHCARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(000’s omitted)

(unaudited)

See accompanying notes to consolidated financial statements.

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PRIORITY HEALTHCARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Options to purchase 3.5 million and 2.9 million shares with exercise prices greater than the average market prices of common stock during the three-month periods ended June 28, 2003 and June 29, 2002 were outstanding at June 28, 2003 and June 29, 2002, respectively. These options were excluded from the respective computations of diluted earnings per share because their effect would be anti-dilutive.

In accordance with the provision of SFAS No. 123, the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accounting

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for its stock option plans. Accordingly, the Company uses the intrinsic-value method of accounting for stock options granted to employees and does not currently recognize compensation expense for its stock option awards to employees in the consolidated statements of earnings. If the Company had elected to recognize compensation expense based on the fair value of the options at the grant date as prescribed by SFAS No. 123, pro forma net income and earnings would have been:

Forward-Looking Statements

Certain statements included in this quarterly report, which are not historical facts, are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our expectations or beliefs and involve certain risks and uncertainties including, but not limited to, changes in interest rates, competitive pressures, changes in customer mix, changes in third party reimbursement rates, financial stability of major customers, changes in government regulations or the interpretation of these regulations, changes in supplier relationships, growth opportunities, cost savings, revenue enhancements, synergies and other benefits anticipated from acquisition transactions, difficulties related to integrating acquired businesses, the accounting and tax treatment of acquisitions, and asserted and unasserted claims, which could cause actual results to differ from those in the forward-looking statements. The forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors. You are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date herein.

Introduction

Priority Healthcare Corporation was formed in June 1994 to succeed to the business operations of companies previously acquired by Bindley Western Industries, Inc. (“BWI”). From our formation through our initial public offering, or IPO, on October 24, 1997, we operated as a wholly owned subsidiary of BWI, and procured a number of services from, and engaged in a number of financial and other transactions with, BWI. After the IPO, we continued to be controlled by BWI, but operated on a stand-alone basis. On December 31, 1998, BWI distributed to the holders of BWI common stock on December 15, 1998 all of the shares of our Class A Common Stock owned by BWI, making Priority Healthcare Corporation a stand-alone public company.

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Priority is a national specialty pharmacy and distributor that provides biopharmaceuticals, complex therapies and related disease treatment programs and services to individuals with chronic diseases. We sell over 5,000 SKUs of specialty pharmaceuticals and medical supplies to outpatient renal care centers and office-based physicians in oncology and other physician specialty markets. Priority offers value-added services to meet the specific needs of these markets by shipping refrigerated pharmaceuticals overnight in special packaging to maintain appropriate temperatures, offering automated order entry services and offering customized distribution for group accounts. From distribution centers in Sparks, Nevada and Grove City, Ohio, we service over 4,000 customers in all 50 states, including office-based oncologists, renal dialysis clinics, ambulatory surgery centers and primary care physicians.

Priority also fills individual patient prescriptions, primarily for self-administered biopharmaceuticals. These patient-specific prescriptions are filled at licensed pharmacies in Lake Mary, Florida, Byfield, Massachusetts, New Castle, Delaware, Memphis, Tennessee, Oldsmar, Florida and New York, New York and are shipped directly to the patient overnight in specialized packages. We also provide disease treatment programs for hepatitis, cancer, infertility, hemophilia, human growth hormone deficiency, rheumatoid arthritis, Crohn’s disease, respiratory syncytial virus (RSV), pulmonary hypertension, pain management, multiple sclerosis and other diseases.

Results of Operations

The following table sets forth for the periods indicated, the percentages of net sales represented by the respective financial items:

Net sales increased to $702.0 million in the first six months of 2003 from $557.5 million in the first six months of 2002, an increase of 26%. Net sales increased to $350.5 million in the three months ended June 28, 2003, from $291.0 million in the three months ended June 29, 2002, an increase of 20%. The growth primarily reflected the addition of new customers, new product introductions, additional sales to existing customers, the acquisition of Hemophilia of the Sunshine State (“HOSS”) effective March 11, 2002 and inflationary price increases. The additional net sales attributed to the acquisition of HOSS in the first six months of 2003 (prior to March 11, 2003) represented approximately 1% of the total net sales in the first six months of 2003.

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Gross profit increased to $78.1 million in the first six months of 2003 from $62.7 million in the first six months of 2002, an increase of 24%. Gross profit as a percentage of net sales decreased in the first six months of 2003 to 11.1% from 11.3% in the first six months of 2002. Gross profit increased to $37.8 million in the three months ended June 28, 2003, from $32.9 million in the three months ended June 29, 2002, an increase of 15%. Gross profit as a percentage of net sales decreased in the three months ended June 28, 2003, to 10.8% from 11.3% in the three months ended June 29, 2002. The increases in gross profit reflected increased sales and the acquisition of HOSS. The decreases in gross profit as a percentage of net sales was primarily attributable to infertility sales being negatively impacted by a change in the spread between Average Wholesale Price (AWP) and Wholesale Acquisition Cost (WAC), as published by First Databank, during part of the three months ended June 28, 2003, contraction on gross profit related to oncology distribution products and the change in sales mix, as lower margin products experienced increased sales. Competition continues to exert pressure on margins.

Selling, general and administrative (“SGA”) expense increased to $37.5 million in the first six months of 2003 from $30.4 million in the first six months of 2002, an increase of 23%. SGA expense as a percentage of net sales decreased in the first six months of 2003 to 5.3% from 5.5% in the first six months of 2002. SGA expense increased to $18.8 million in the three months ended June 28, 2003, from $15.8 million in the three months ended June 29, 2002, an increase of 19%. SGA expense as a percentage of net sales remained the same at 5.4% for both the three months ended June 28, 2003 and the three months ended June 29, 2002. The increases in SGA expense reflected the growth in our business, costs related to new business relationships with drug manufacturers, significant premium increases for property and liability insurance, increased costs attributable to providing more clinically oriented services and the acquisition of HOSS. The decrease in SGA expense as a percentage of net sales in the first six months of 2003 compared to the first six months of 2002 resulted from spreading fixed costs over a larger sales base in 2003. Management continually monitors SGA expense and remains focused on controlling these increases through improved technology and efficient asset management.

Depreciation and amortization (“D&A”) increased to $2.0 million in the first six months of 2003 from $1.3 million in the first six months of 2002, an increase of 54%. D&A increased to $1.1 million in the three months ended June 28, 2003, from $657,000 in the three months ended June 29, 2002, an increase of 65%. The increases in D&A were primarily the result of depreciation on newly acquired computer hardware and software, furniture and equipment, transportation equipment, telephone equipment and leasehold improvements.

Interest income decreased to $812,000 in the first six months of 2003 from $1.5 million in the first six months of 2002, a decrease of 47%. Interest income decreased to $351,000 in the three months ended June 28, 2003 from $671,000 in the three months ended June 29, 2002, a decrease of 48%. In the first six months of 2003 we earned 1.97% on an average invested balance of $82.6 million. In the first six months of 2002 we earned 2.75% on an average invested balance of $111.7 million. In the three months ended June 28, 2003 we earned 1.68% on an average invested balance of $83.7 million. In the three months ended June 29, 2002 we earned 2.86% on an average invested balance of $93.9 million. The decreases in interest income were due to the lower average invested balances and the lower interest rates earned. In the three-month and six-month periods ended June 28, 2003 and June 29, 2002 the interest income was primarily related to amounts earned by investing cash and funds received from operations, the secondary public offering of our Class B Common Stock and stock option exercises in overnight repurchase agreements with major financial institutions and in marketable securities.

The provision for income taxes in the three-month and six-month periods ended June 28, 2003 and June 29, 2002 represented 37.5% of earnings before income taxes.

Liquidity—Capital Resources.

Net cash provided by operating activities. Our operations generated $12.9 million in cash during the first six months of 2003. Receivables increased $9.1 million during the first six months of 2003, primarily to support the increase in sales and due to the extension of credit terms to meet competitive conditions. Finished goods inventory decreased $1.4 million during the first six months of 2003 partly due to our concerted effort to closely monitor inventory and maintain it at an optimal level and partly due to our taking advantage of purchasing opportunities during the fourth quarter of 2002 for certain inventory items that were sold during the first six months of 2003. The $11.7 million increase in accounts payable was attributable to the timing of payments and

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credit terms negotiated with vendors. Other current assets and liabilities decreased cash by $19.5 million primarily due to the payment of 2002 income taxes, the payment of 2002 accrued expenses and an initial installment on 2003 property and liability insurance. We anticipate that our operations may require cash to fund our growth. D&A totaled $2.0 million, our provision for doubtful accounts totaled $1.1 million and our compensation expense on stock grants totaled $464,000 during the first six months of 2003. During the first six months of 2003, we also generated $246,000 from the tax benefit related to stock option exercises.

Net cash provided by investing activities. During the first six months of 2003, we sold $22.8 million of marketable securities that were in the over three month maturity category and placed them in the under three month maturity category (cash and cash equivalents). Capital expenditures during the first six months of 2003 totaled $8.5 million. Primarily these purchases were for our new enterprise wide information technology system, computer hardware and software, telecommunications equipment, furniture and equipment and leasehold improvements. We expect that capital expenditures during the last six months of 2003 will be approximately $5 to $7 million and during 2004 will be approximately $11 to $15 million. We anticipate that these expenditures will relate primarily to our new enterprise wide information technology system, computer hardware and software, telecommunications equipment, furniture and equipment and leasehold improvements. During the first six months of 2003, other assets decreased $4.5 million due to recovering our investment in our joint venture upon its sale to AdvancePCS. During the first six months of 2003, we also paid $8.0 million related to the 2001 acquisitions of Freedom Drug and InfuRx because Freedom Drug and InfuRx achieved certain predetermined financial results during the year ended December 28, 2002.

Net cash used by financing activities. During the first six months of 2003, we received proceeds of $1.0 million from stock option exercises. Also during the first six months of 2003, we purchased treasury stock for $3.4 million.

On July 17, 2003, the Board of Directors approved the purchase of up to 3,000,000 shares of our outstanding shares of Class B Common Stock. The purchases are approved through July 16, 2004. The purchases may be made from time to time in the open market or in privately negotiated transactions depending on market conditions and other considerations.

Our principal capital requirements have been to fund working capital needs to support internal growth, for acquisitions and for capital expenditures. Our principal working capital needs are for inventory and accounts receivable. Management controls inventory levels in order to minimize carrying costs and maximize purchasing opportunities. We sell inventory to our customers on various payment terms. This requires significant working capital to finance inventory purchases and entails accounts receivable exposure in the event any of our major customers encounter financial difficulties. Although we monitor closely the creditworthiness of our major customers, there can be no assurance that we will not incur some collection loss on major customer accounts receivable in the future.

On June 28, 2003, we had cash and cash equivalents of $58.2 million, marketable securities of $23.5 million and working capital of $207.6 million. We believe that the cash and cash equivalents, marketable securities, working capital and cash from operations will be sufficient to meet our working capital needs for at least one year.

Our primary exposure to market risk consists of a decline in the market value of our investments in marketable debt securities as a result of potential changes in interest rates. Market risk was estimated as the potential decrease in fair value resulting from a hypothetical 10% increase in interest rates on securities included in our portfolio, and given the short term maturities of all of our investments in interest-sensitive securities, this hypothetical fair value was not materially different from the period end carrying value.

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended (“Exchange

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Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 28, 2003 pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 28, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

In addition, the following directors continue in office until the annual meeting of shareholders in the year indicated:

On July 17, 2003 the Board of Directors of the Company appointed Glenn D. Steele, Jr. to the Company’s Board of Directors. The appointment is for a term expiring on the date of the 2004 annual meeting of shareholders.

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SIGNATURE

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.

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