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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 December 31, 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                 000-25769

ACCREDO HEALTH, INCORPORATED

(Exact name of registrant as specified in its charter)

|                                |  |                    
|------------------------------- |  | -------------------
|DELAWARE                        |  | 62-1642871         
|                                |  |                    
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)

1640 CENTURY CENTER PKWY, SUITE 101, MEMPHIS, TN 38134

(Address of principal executive offices)
(Zip Code)

(901) 385-3688

(Registrants telephone number, including area code)

(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   [ ]





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##### Table of Contents



APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.

Yes   [ ]                No   [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date.

|                              |  |                                 |            | 
|----------------------------- |  | ------------------------------- | ---------- | 
|CLASS                         |  | OUTSTANDING AT January 31, 2002
|                              |  |                                
|COMMON STOCK, $0.01 PAR VALUE |  |                                 | 26,098,680 | 
|                              |  |                                 |            | 
|TOTAL COMMON STOCK            |  |                                 | 26,098,680 | 
|                              |  |                                 |            | 





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TABLE OF CONTENTS



|                                                                                              |                                                      |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                                               
|ITEM 1. FINANCIAL STATEMENTS.                                                                
|                                                                                              | CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|                                                                                              | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                                                                              | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                                                              | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II  OTHER INFORMATION                                                                  
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                                 
|ITEM 5. OTHER INFORMATION.                                                                   
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                    
|Signature                                                                                    
|AMENDMENT TO AMENDED RESTATED DISTRIBUTION                                                   
|NON-QUALIFIED STOCK OPTION/WELSH                                                             
|NON-QUALIFIED STOCK OPTION/ROBERG                                                            
|NON-QUALIFIED STOCK OPTION/MELKUS                                                            
|NON-QUALIFIED STOCK OPTION/MASTERSON                                                         
|NON-QUALIFIED STOCK OPTION/GOURLEY                                                           



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ACCREDO HEALTH, INCORPORATED
INDEX

|          |  |                                                                                                                                       
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Part I -  |  | FINANCIAL INFORMATION                                                                                                                 
|Item 1.   |  | Financial Statements                                                                                                                  
|          |  | Condensed Consolidated Statements of Income (unaudited)
          For the three months and six months ended December 31, 2000 and 2001
|          |  | Condensed Consolidated Balance Sheets
          June 30, 2001 and December 31, 2001 (unaudited)                                       
|          |  | Condensed Consolidated Statements of Cash Flows (unaudited)
          For the six months ended December 31, 2000 and 2001             
|          |  | Notes to Condensed Consolidated Financial Statements                                                                                  
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                                 
|Item 3.   |  | Quantitative and Qualitative Disclosure About Market Risk                                                                             
|Part II - |  | OTHER INFORMATION                                                                                                                     
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                                   
|Item 5.   |  | Other Information                                                                                                                     
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                                                                      
|Note:     |  | Items 1, 2 and 3 of Part II are omitted because they are not applicable.                                                              





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PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS.

ACCREDO HEALTH, INCORPORATED




CONDENSED CONSOLIDATED STATEMENTS OF INCOME


(000S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)


|                                             |         |   |                               |      |                                 |   |         |      |      |   |         |      |  |   |         |      | 
|-------------------------------------------- | ------- | - | ----------------------------- | ---- | ------------------------------- | - | ------- | ---- | ---- | - | ------- | ---- |  | - | ------- | ---- | 
|                                             |         |   | Six Months Ended December 31, |      | Three Months Ended December 31,
|                                             |         |   |                               |      |                                
|                                             |         |   | 2001                          |      | 2000                            |   | 2001    |      | 2000
|                                             |         |   |                               |      |                                 |   |         |      |     
|Net patient service revenue                  |         | $ | 277,845                       |      |                                 | $ | 205,408 |      |      | $ | 155,550 |      |  | $ | 109,811 |     
|Other revenue                                |         |   | 8,116                         |      |                                 |   | 7,524   |      |      |   | 4,209   |      |  |   | 3,755   |     
|Equity in net income of joint ventures       |         |   | 873                           |      |                                 |   | 514     |      |      |   | 427     |      |  |   | 303     |     
|                                             |         |   |                               |      |                                 |   |         |      |      |   |         |      |  |   |         |     
|Total revenues                               |         |   | 286,834                       |      |                                 |   | 213,446 |      |      |   | 160,186 |      |  |   | 113,869 |     
|Cost of services                             |         |   | 242,771                       |      |                                 |   | 182,458 |      |      |   | 135,759 |      |  |   | 97,450  |     
|                                             |         |   |                               |      |                                 |   |         |      |      |   |         |      |  |   |         |     
|Gross profit                                 |         |   | 44,063                        |      |                                 |   | 30,988  |      |      |   | 24,427  |      |  |   | 16,419  |     
|General & administrative                     |         |   | 19,303                        |      |                                 |   | 14,211  |      |      |   | 10,822  |      |  |   | 7,575   |     
|Bad debts                                    |         |   | 2,056                         |      |                                 |   | 3,194   |      |      |   | 1,001   |      |  |   | 1,642   |     
|Depreciation and amortization                |         |   | 1,462                         |      |                                 |   | 2,040   |      |      |   | 771     |      |  |   | 1,027   |     
|                                             |         |   |                               |      |                                 |   |         |      |      |   |         |      |  |   |         |     
|Income from operations                       |         |   | 21,242                        |      |                                 |   | 11,543  |      |      |   | 11,833  |      |  |   | 6,175   |     
|Interest income, net                         |         |   | 800                           |      |                                 |   | 1,256   |      |      |   | 286     |      |  |   | 882     |     
|Minority interest in consolidated subsidiary |         |   | (633                          | )    |                                 |   | (306    | )    |      |   | (314    | )    |  |   | (157    | )   
|                                             |         |   |                               |      |                                 |   |         |      |      |   |         |      |  |   |         |     
|Income before income taxes                   |         |   | 21,409                        |      |                                 |   | 12,493  |      |      |   | 11,805  |      |  |   | 6,900   |     
|Provision for income taxes                   |         |   | 8,315                         |      |                                 |   | 4,962   |      |      |   | 4,588   |      |  |   | 2,733   |     
|                                             |         |   |                               |      |                                 |   |         |      |      |   |         |      |  |   |         |     
|Net income                                   |         | $ | 13,094                        |      |                                 | $ | 7,531   |      |      | $ | 7,217   |      |  | $ | 4,167   |     
|                                             |         |   |                               |      |                                 |   |         |      |      |   |         |      |  |   |         |     
|Cash dividends declared on common stock      |         | $ |                              |      |                                 | $ |        |      |      | $ |        |      |  | $ |        |     
|                                             |         |   |                               |      |                                 |   |         |      |      |   |         |      |  |   |         |     
|Earnings per share:                          |         |   |                               |      |                                 |   |         |      |      |   |         |      |  |   |         |     
|                                             | Basic   |   | $                             | 0.50 |                                 |   | $       | 0.31 |      |   | $       | 0.28 |  |   | $       | 0.16 | 
|                                             | Diluted |   | $                             | 0.49 |                                 |   | $       | 0.30 |      |   | $       | 0.27 |  |   | $       | 0.16 | 

See accompanying notes to condensed consolidated financial
statements.





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ACCREDO HEALTH, INCORPORATED




CONDENSED CONSOLIDATED BALANCE SHEETS


(000S OMITTED, EXCEPT SHARE DATA)


|                                                |                                                                                                                                                                          |   |              |         |          |   |         |         | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------------ | ------- | -------- | - | ------- | ------- | 
|                                                |                                                                                                                                                                          |   | (Unaudited)  |         |          |   |        
|                                                |                                                                                                                                                                          |   | December 31, |         | June 30,
|                                                |                                                                                                                                                                          |   | 2001         |         | 2001    
|                                                |                                                                                                                                                                          |   |              |         |         
|ASSETS                                          |                                                                                                                                                                          |   |              |         |          |   |         |        
|Current assets:                                 |                                                                                                                                                                          |   |              |         |          |   |         |        
|                                                | Cash and cash equivalents                                                                                                                                                |   | $            | 15,365  |          |   | $       | 54,520  | 
|                                                | Marketable securities                                                                                                                                                    |   |              | 3,500   |          |   |         | 2,000   | 
|                                                | Patient accounts receivable, less allowance for
doubtful accounts of $12,364 at December 31, 2001
and $10,808 at June 30, 2001                                           |   |              | 106,240 |          |   |         | 76,952  | 
|                                                | Due from affiliates                                                                                                                                                      |   |              | 1,977   |          |   |         | 2,440   | 
|                                                | Other accounts receivable                                                                                                                                                |   |              | 18,171  |          |   |         | 13,275  | 
|                                                | Inventories                                                                                                                                                              |   |              | 49,673  |          |   |         | 30,711  | 
|                                                | Prepaids and other current assets                                                                                                                                        |   |              | 1,044   |          |   |         | 537     | 
|                                                | Deferred income taxes                                                                                                                                                    |   |              | 5,445   |          |   |         | 4,703   | 
|                                                |                                                                                                                                                                          |   |              |         |          |   |         |         | 
|Total current assets                            |                                                                                                                                                                          |   | 201,415      |         |          |   | 185,138 |        
|Property and equipment, net                     |                                                                                                                                                                          |   | 11,045       |         |          |   | 8,195   |        
|Other assets:                                   |                                                                                                                                                                          |   |              |         |          |   |         |        
|                                                | Joint venture investments                                                                                                                                                |   |              | 3,543   |          |   |         | 2,809   | 
|                                                | Goodwill and other intangible assets, net                                                                                                                                |   |              | 126,612 |          |   |         | 93,102  | 
|                                                |                                                                                                                                                                          |   |              |         |          |   |         |         | 
|Total assets                                    |                                                                                                                                                                          | $ | 342,615      |         |          | $ | 289,244 |        
|                                                |                                                                                                                                                                          |   |              |         |          |   |         |         | 
|LIABILITIES AND STOCKHOLDERS EQUITY            |                                                                                                                                                                          |   |              |         |          |   |         |        
|Current liabilities:                            |                                                                                                                                                                          |   |              |         |          |   |         |        
|                                                | Accounts payable                                                                                                                                                         |   | $            | 121,455 |          |   | $       | 88,611  | 
|                                                | Accrued expenses                                                                                                                                                         |   |              | 8,565   |          |   |         | 7,168   | 
|                                                | Income taxes payable                                                                                                                                                     |   |              | 2,528   |          |   |         | 1,071   | 
|                                                |                                                                                                                                                                          |   |              |         |          |   |         |         | 
|Total current liabilities                       |                                                                                                                                                                          |   | 132,548      |         |          |   | 96,850  |        
|Deferred income taxes                           |                                                                                                                                                                          |   | 2,783        |         |          |   | 2,122   |        
|Minority interest in consolidated joint venture |                                                                                                                                                                          |   | 1,534        |         |          |   | 1,102   |        
|Stockholders equity:                           |                                                                                                                                                                          |   |              |         |          |   |         |        
|                                                | Undesignated Preferred Stock, 5,000,000 shares authorized, no shares issued                                                                                              |   |              |        |          |   |         |        | 
|                                                | Common Stock, $.01 par value; 50,000,000 shares authorized;
26,083,829 and 25,954,232 shares issued and outstanding at
December 31, 2001 and June 30, 2001, respectively |   |              | 261     |          |   |         | 259     | 
|                                                | Additional paid-in capital                                                                                                                                               |   |              | 164,575 |          |   |         | 161,091 | 
|                                                | Retained earnings                                                                                                                                                        |   |              | 40,914  |          |   |         | 27,820  | 
|                                                |                                                                                                                                                                          |   |              |         |          |   |         |         | 
|Total stockholders equity                      |                                                                                                                                                                          |   | 205,750      |         |          |   | 189,170 |        
|                                                |                                                                                                                                                                          |   |              |         |          |   |         |         | 
|Total liabilities and stockholders equity      |                                                                                                                                                                          | $ | 342,615      |         |          | $ | 289,244 |        
|                                                |                                                                                                                                                                          |   |              |         |          |   |         |         | 

See accompanying notes to condensed consolidated financial
statements.





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ACCREDO HEALTH, INCORPORATED




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(000S OMITTED)
(UNAUDITED)


|                                                                                            |                                                           |   |                  |         |      |   |         |         |  
|------------------------------------------------------------------------------------------- | --------------------------------------------------------- | - | ---------------- | ------- | ---- | - | ------- | ------- | -
|                                                                                            |                                                           |   | Six Months Ended
|                                                                                            |                                                           |   | December 31,    
|                                                                                            |                                                           |   |                 
|                                                                                            |                                                           |   | 2001             |         | 2000
|                                                                                            |                                                           |   |                  |         |     
|OPERATING ACTIVITIES:                                                                       |                                                           |   |                  |         |      |   |         |        
|Net income                                                                                  |                                                           | $ | 13,094           |         |      | $ | 7,531   |        
|Adjustments to reconcile net income to net cash provided by (used in)
operating activities: |                                                           |   |                  |         |      |   |         |        
|                                                                                            | Depreciation and amortization                             |   |                  | 1,462   |      |   |         | 2,040   |  
|                                                                                            | Provision for losses on accounts receivable               |   |                  | 2,056   |      |   |         | 3,194   |  
|                                                                                            | Deferred income tax benefit                               |   |                  | (117    | )    |   |         | (675    | )
|                                                                                            | Compensation resulting from stock transactions            |   |                  | 92      |      |   |         | 92      |  
|                                                                                            | Tax benefit of disqualifying disposition of stock options |   |                  | 1,946   |      |   |         | 1,138   |  
|                                                                                            | Minority interest in income of consolidated joint venture |   |                  | 632     |      |   |         | 306     |  
|Changes in operating assets and liabilities:                                                |                                                           |   |                  |         |      |   |         |        
|                                                                                            | Patient receivables and other                             |   |                  | (26,780 | )    |   |         | (12,195 | )
|                                                                                            | Due from affiliates                                       |   |                  | 464     |      |   |         | (1,561  | )
|                                                                                            | Inventories                                               |   |                  | (13,528 | )    |   |         | 1,075   |  
|                                                                                            | Prepaids and other current assets                         |   |                  | (484    | )    |   |         | 180     |  
|                                                                                            | Accounts payable and accrued expenses                     |   |                  | 28,700  |      |   |         | (5,843  | )
|                                                                                            | Income taxes payable                                      |   |                  | 1,416   |      |   |         | 234     |  
|                                                                                            |                                                           |   |                  |         |      |   |         |        
|Net cash provided by (used in) operating activities                                         |                                                           |   | 8,953            |         |      |   | (4,484  | )      
|INVESTING ACTIVITIES:                                                                       |                                                           |   |                  |         |      |   |         |        
|Purchases of marketable securities                                                          |                                                           |   | (6,000           | )       |      |   | (11,401 | )      
|Proceeds from sales and maturities of marketable securities                                 |                                                           |   | 4,500            |         |      |   |        |        
|Purchases of property and equipment                                                         |                                                           |   | (3,603           | )       |      |   | (1,037  | )      
|Business acquisitions and joint venture investments                                         |                                                           |   | (37,443          | )       |      |   | (103    | )      
|Change in joint venture investments, net                                                    |                                                           |   | (933             | )       |      |   | (140    | )      
|                                                                                            |                                                           |   |                  |         |      |   |         |        
|Net cash used in investing activities                                                       |                                                           |   | (43,479          | )       |      |   | (12,681 | )      
|FINANCING ACTIVITIES:                                                                       |                                                           |   |                  |         |      |   |         |        
|Decrease in long-term notes payable                                                         |                                                           |   | (6,111           | )       |      |   | (37,200 | )      
|Issuance of common stock                                                                    |                                                           |   | 1,482            |         |      |   | 89,917  |        
|Payment of costs related to public offerings                                                |                                                           |   |                 |         |      |   | (583    | )      
|                                                                                            |                                                           |   |                  |         |      |   |         |        
|Net cash provided by (used in) financing activities                                         |                                                           |   | (4,629           | )       |      |   | 52,134  |        
|                                                                                            |                                                           |   |                  |         |      |   |         |        
|Increase (decrease) in cash and cash equivalents                                            |                                                           |   | (39,155          | )       |      |   | 34,969  |        
|Cash and cash equivalents at beginning of period                                            |                                                           |   | 54,520           |         |      |   | 10,204  |        
|                                                                                            |                                                           |   |                  |         |      |   |         |        
|Cash and cash equivalents at end of period                                                  |                                                           | $ | 15,365           |         |      | $ | 45,173  |        
|                                                                                            |                                                           |   |                  |         |      |   |         |        

See accompanying notes to condensed consolidated financial
statements.





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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
December 31, 2001


1.     BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to
present fairly the condensed consolidated financial position, results
of operations and cash flows of Accredo Health, Incorporated ( the
Company or Accredo ) have been included. Operating results for
the three and six-month periods ended December 31, 2001 are not
necessarily indicative of the results that may be expected for the
fiscal year ended June 30, 2002.

The balance sheet at June 30, 2001 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.

For further information, refer to the consolidated financial
statements and footnotes thereto included in the Companys Annual
Report on Form 10-K for the year ended June 30, 2001.

2.     ACQUISITIONS

As previously reported on a Form 8-K filed on December 20, 2001,
the Company acquired all of the outstanding stock of BioPartners in
Care, Inc. (BioPartners) from its shareholders effective December
1, 2001. BioPartners is headquartered in Dayton, Ohio and is a
provider of pharmaceutical care for certain chronic, long-term
patient populations, including those requiring hemophilia clotting
factor and intravenous immunoglobulin.

The aggregate purchase price paid for BioPartners was
approximately $37.4 million, which included a payment of
approximately $280,000 for equity in excess of specified amounts
required in the purchase agreement, plus a potential earn-out payment
of up to $16.0 million if certain financial goals are achieved by
BioPartners during the twelve-month period ending December 31, 2002.
In consideration for a portion of the purchase price ($1.0 million),
the Company also received agreements from the selling shareholders of
BioPartners not to compete with the Company in certain product lines
for periods up to seven years.

This transaction was accounted for using the purchase method of
accounting. Total assets acquired and liabilities assumed were $15.2
million and $11.7 million, respectively. The excess of the total
purchase price of $37.5 million, including acquisition costs of
$80,000, over the fair value of the net assets acquired of $3.5
million, was allocated to goodwill and other identifiable intangible
assets. The Company preliminarily recorded $32.3 million in goodwill,
$0.7 million in acquired patient population, and $1.0 million
associated with non-compete agreements. The acquired patient
population, also called patient base, is being amortized using the
straight-line method over its estimated useful life of 5 years. The
non-compete agreements are being amortized using the straight-line
method over their lives of five and seven years, respectively. The
operating results of BioPartners are included in the Companys
consolidated statement of operations beginning December 1, 2001.

Pro forma amounts for the six months and three months ended
December 31, 2001 and 2000, as if the acquisition of Biopartners had
occurred on July 1, 2000, are as follows:

|                                   |  |                               |         |                                 |  |      |         |      |  |   |         |  |  |   |         | 
|---------------------------------- |  | ----------------------------- | ------- | ------------------------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                   |  | Six Months Ended December 31, |         | Three Months Ended December 31,
|                                   |  |                               |         |                                
|                                   |  | 2001                          |         | 2000                            |  | 2001 |         | 2000
|                                   |  |                               |         |                                 |  |      |         |     
|Pro forma total revenues           |  | $                             | 304,630 |                                 |  | $    | 231,997 |      |  | $ | 168,165 |  |  | $ | 123,905 | 
|Pro forma net income               |  |                               | 13,574  |                                 |  |      | 7,174   |      |  |   | 7,408   |  |  |   | 4,026   | 
|Basic earnings per common share:   |  |                               |         |                                 |  |      |         |      |  |   |         |  |  |   |         | 
|Pro forma net income               |  | $                             | 0.52    |                                 |  | $    | 0.30    |      |  | $ | 0.28    |  |  | $ | 0.16    | 
|Diluted earnings per common share: |  |                               |         |                                 |  |      |         |      |  |   |         |  |  |   |         | 
|Pro forma net income               |  | $                             | 0.50    |                                 |  | $    | 0.28    |      |  | $ | 0.28    |  |  | $ | 0.15    | 

Note  The three and six month periods ended December 2000 also
reflect the acquisitions of Pharmacare Resources and NCL Management
that occurred in May 2001 as if the acquisitions had occurred on July
1, 2000.





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##### Table of Contents



3.     STOCKHOLDERS EQUITY

During the quarter ended December 31, 2001, employees exercised
stock options to acquire 27,369 shares of Accredo common stock for a
weighted average exercise price of $13.10 per share.

Employees of the Company also acquired 13,707 shares of Accredo
common stock during the quarter pursuant to the provisions of the
Companys Employee Stock Purchase Plan at a price of approximately
$28.90 per share. Shares acquired under the plan were purchased on
December 31, 2001 from employee funds accumulated via payroll
deductions from July through December, 2001.

4.     SUBSEQUENT EVENT

On January 2, 2002, the Company announced that it had entered
into an agreement with Gentiva Health Services, Inc. to purchase the
SPS business of Gentiva for $415,000,000, subject to adjustment as
set forth in the asset purchase agreement. The purchase price is to
be paid in an equal combination of cash and the Companys common
stock, with the stock portion of the purchase price being subject to
a price collar set forth in the asset purchase agreement. The
acquisition is scheduled to close in the second quarter of 2002 and
is contingent upon approval by the shareholders of each company and
approval by the applicable federal regulatory agencies.

5.     EARNINGS PER SHARE

The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except share data) :

|                                                                         |                                                                                                    |  |                               |            |                                 |  |      |            |      |  |   |            |  |  |   |            | 
|------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---------- | ------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                                                                         |                                                                                                    |  | Six Months Ended December 31, |            | Three Months Ended December 31,
|                                                                         |                                                                                                    |  |                               |            |                                
|                                                                         |                                                                                                    |  | 2001                          |            | 2000                            |  | 2001 |            | 2000
|                                                                         |                                                                                                    |  |                               |            |                                 |  |      |            |     
|Numerator for basic and diluted income per share to common
stockholders: |                                                                                                    |  |                               |            |                                 |  |      |            |      |  |   |            |  |  |   |           
|                                                                         | Net income                                                                                         |  | $                             | 13,094     |                                 |  | $    | 7,531      |      |  | $ | 7,217      |  |  | $ | 4,167      | 
|                                                                         |                                                                                                    |  |                               |            |                                 |  |      |            |      |  |   |            |  |  |   |            | 
|Denominator:                                                             |                                                                                                    |  |                               |            |                                 |  |      |            |      |  |   |            |  |  |   |           
|                                                                         | Denominator for basic income per
share to common stockholders -
weighted-average shares            |  |                               | 26,026,013 |                                 |  |      | 24,230,211 |      |  |   | 26,055,208 |  |  |   | 25,442,693 | 
|                                                                         | Effect of dilutive stock options                                                                   |  |                               | 860,703    |                                 |  |      | 1,264,570  |      |  |   | 869,326    |  |  |   | 1,255,696  | 
|                                                                         |                                                                                                    |  |                               |            |                                 |  |      |            |      |  |   |            |  |  |   |           
|                                                                         | Denominator for diluted income per
share to common stockholders -
adjusted weighted-average shares |  |                               | 26,886,716 |                                 |  |      | 25,494,781 |      |  |   | 26,924,534 |  |  |   | 26,698,389 | 
|                                                                         |                                                                                                    |  |                               |            |                                 |  |      |            |      |  |   |            |  |  |   |            | 
|Earnings per common share:                                               |                                                                                                    |  |                               |            |                                 |  |      |            |      |  |   |            |  |  |   |           
|                                                                         | Basic                                                                                              |  | $                             | 0.50       |                                 |  | $    | 0.31       |      |  | $ | 0.28       |  |  | $ | 0.16       | 
|                                                                         | Diluted                                                                                            |  | $                             | 0.49       |                                 |  | $    | 0.30       |      |  | $ | 0.27       |  |  | $ | 0.16       | 





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##### Table of Contents



6.     GOODWILL AND OTHER INTANGIBLE ASSETS

On July 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. The Company is providing transitional, pro-forma, disclosure
in the table below for net income and earnings per share for the
comparative prior periods as if SFAS No. 142 had also been adopted in
those periods (in thousands, except for earnings-per-share amounts).

|                                |  |                               |        |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|------------------------------- |  | ----------------------------- | ------ | ------------------------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                |  | Six Months Ended December 31, |        | Three Months Ended December 31,
|                                |  |                               |        |                                
|                                |  | 2001                          |        | 2000                            |  | 2001 |       | 2000
|                                |  |                               |        |                                 |  |      |       |     
|Reported net income             |  | $                             | 13,904 |                                 |  | $    | 7,531 |      |  | $ | 7,217 |  |  | $ | 4,167 | 
|Add back: Goodwill amortization |  |                               |       |                                 |  |      | 716   |      |  |   |      |  |  |   | 358   | 
|                                |  |                               |        |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|Adjusted net income             |  | $                             | 13,094 |                                 |  | $    | 8,247 |      |  | $ | 7,217 |  |  | $ | 4,525 | 
|                                |  |                               |        |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|Basic earnings per share:       |  |                               |        |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|Reported net income             |  | $                             | 0.50   |                                 |  | $    | 0.31  |      |  | $ | 0.28  |  |  | $ | 0.16  | 
|Goodwill amortization           |  |                               |       |                                 |  |      | 0.03  |      |  |   |      |  |  |   | 0.01  | 
|                                |  |                               |        |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|Adjusted net income             |  | $                             | 0.50   |                                 |  | $    | 0.34  |      |  | $ | 0.28  |  |  | $ | 0.17  | 
|                                |  |                               |        |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|Diluted earnings per share:     |  |                               |        |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|Reported net income             |  | $                             | 0.49   |                                 |  | $    | 0.30  |      |  | $ | 0.27  |  |  | $ | 0.16  | 
|Goodwill amortization           |  |                               |       |                                 |  |      | 0.03  |      |  |   |      |  |  |   | 0.01  | 
|                                |  |                               |        |                                 |  |      |       |      |  |   |       |  |  |   |       | 
|Adjusted net income             |  | $                             | 0.49   |                                 |  | $    | 0.33  |      |  | $ | 0.27  |  |  | $ | 0.17  | 
|                                |  |                               |        |                                 |  |      |       |      |  |   |       |  |  |   |       | 

The impact of the adoption of SFAS No. 142 resulted in an increase in
net income for the six month and three month periods ended December
31,2001 of approximately $880,000 and $440,000, respectively and an
increase in diluted earnings per share of approximately $0.033 and
$0.016, respectively.





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##### Table of Contents






ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

Some of the information in this quarterly report contains
forward-looking statements that involve substantial risks and
uncertainties. You can identify these statements by forward-looking
words such as may, will, expect, anticipate, believe,
intend, estimate and continue or similar words. You should read
statements that contain these words carefully for the following
reasons:



| |  |  | the statements discuss our future expectations;                                             
| | - |  | --------------------------------------------------------------------------------------------
| |  |  | the statements contain projections of our future earnings or of our financial condition; and
| |  |  | the statements state other forward-looking information.                                   

There may be events in the future that we are not accurately able to
predict or over which we have no control. The risk factors discussed
below, as well as any cautionary language in this quarterly report,
provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we
describe in our forward-looking statements. Examples of these risks,
uncertainties and events include the availability of new drugs, our
relationships with the manufacturers whose drugs we handle,
competitive or regulatory factors affecting the drugs we handle or
their manufacturers, the demand for our services, our ability to
expand through joint ventures and acquisitions, our ability to
maintain existing pricing arrangements with suppliers, the impact of
government regulation, our need for additional capital, the
seasonality of our operations and our ability to implement our
strategies and objectives.

Investors in our common stock should be aware that the occurrence of
any of the events described in the risk factors discussed elsewhere
in this quarterly report and other events that we have not predicted
or assessed could have a material adverse effect on our earnings,
financial condition and business. In such case, the trading price of
our common stock could decline and you may lose all or part of your
investment.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2000

REVENUES

Total revenues increased 41% from $113.9 million to $160.2 million
from the three months ended December 31, 2000 to the three months
ended December 31, 2001. Net patient service revenues increased 42%
from $109.8 million to $155.6 million from the three months ended
December 31, 2000 to the three months ended December 31, 2001. We
continue to experience growth in all of our core products for the
treatments of multiple sclerosis, growth hormone disorders,
hemophilia and Gaucher Disease as a result of the addition of new
patients as well as additional sales to existing patients. We also
experienced an increase in our seasonal drug SYNAGIS® for the
treatment of Respiratory Synctial Virus as a result of increased
patient volume. Revenues from acquisitions, which consist primarily
of the sales of hemophilia factor and intravenous immunoglobulin
(IVIG), amounted to $8.8 million of the increase in the three
months ended December 31, 2001.

COST OF SERVICES

Cost of services increased from $97.5 million to $135.8 million, or
39%, from the three months ended December 31, 2000 to the three
months ended December 31, 2001, which is commensurate with the
increase in revenues discussed above. As a percentage of revenues,
cost of services decreased from 85.6% to 84.8% from the three months
ended December 31, 2000 to the three months ended December 31, 2001
resulting in gross margins of 14.4% and 15.2% for the three months
ended December 31, 2000 and 2001, respectively. Gross margins for the
individual products have remained relatively stable; however, a
change in product mix resulted in an increase in the composite gross
margin in the three months ended December 31, 2001. The primary
drivers for the improvement in gross margins were increased revenues
from hemophilia factor and IVIG, which have lower acquisition costs
as a percentage of revenue than most of the other products we
distribute.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased from $7.6 million to
$10.8 million, or 42%, from the three months ended December 31, 2000
to the three months ended December 31, 2001. This increase was
primarily the result of increased
salaries and benefits associated with the expansion of our
reimbursement, sales and marketing, administrative and support
staffs, and the addition of office space and related furniture and
fixtures to support the revenue growth and acquisitions. General and
administrative expenses represented 6.7% and 6.8% of revenues for the
three months ended December 31, 2000 and 2001, respectively.





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##### Table of Contents



BAD DEBTS

Bad debts decreased from $1,642,000 to $1,001,000 from the three
months ended December 31, 2000 to the three months ended December 31,
2001. As a percentage of revenues, bad debt expense decreased from
1.4% to .6% from the three months ended December 31, 2000 to the
three months ended December 31, 2001. The decrease in bad debts as a
percentage of revenues is primarily due to the increased percentage
of our revenues that was reimbursed by prescription card benefits
versus major medical benefit plans. The majority of the reimbursement
provided by prescription card benefit plans is subject to much lower
co-payment and deductible amounts (typically $10 to $15) resulting in
lower bad debt.

DEPRECIATION AND AMORTIZATION

Depreciation expense increased from $380,000 to $507,000 from the
three months ended December 31, 2000 to the three months ended
December 31, 2001 as a result of purchases of property and equipment
associated with our revenue growth and expansion of our leasehold
facility improvements. Amortization expense decreased from $647,000
to $264,000 from the three months ended December 31, 2000 to the
three months ended December 31, 2001. The decrease is due to the
adoption of SFAS 142, Goodwill and Other Intangible Assets during the
first quarter of fiscal year 2002. The application of the
non-amortization of goodwill provisions of the pronouncement resulted
in a reduction in amortization expense of approximately $612,000 in
the three months ended December 31, 2001.

INTEREST INCOME, NET

Interest income, net, decreased from $882,000 to $286,000 from the
three months ended December 31, 2000 to the three months ended
December 31, 2001. The decrease is due to a decrease in the average
amount of cash invested during the quarter as a result of cash used
for acquisitions and a decrease in interest rates earned on
investments.

INCOME TAX EXPENSE

The effective tax rate was 39.6% and 38.9% for the three months ended
December 31, 2000 and 2001, respectively. The decrease in the
effective tax rate is primarily due to the adoption of the
non-amortization provisions of SFAS 142 discussed above. The
difference between the recognized effective tax rate and the
statutory rate is primarily attributed to state income taxes.

SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 2000

REVENUES

Total revenues increased 34% from $213.4 million to $286.8 million
from the six months ended December 31, 2000 to the six months ended
December 31, 2001. Net patient service revenues increased 35% from
$205.4 million to $277.8 million from the six months ended December
31, 2000 to the six months ended December 31, 2001. We continue to
experience growth in all of our core products for the treatments of
multiple sclerosis, growth hormone disorders, hemophilia and Gaucher
Disease as a result of the addition of new patients as well as
additional sales to existing patients. We also experienced an
increase in our seasonal drug SYNAGIS® for the treatment of
Respiratory Synctial Virus as a result of increased patient volume.
Revenues from acquisitions, which consist primarily of the sales of
hemophilia factor and IVIG, amounted to $13.7 million of the increase
in the six months ended December 31, 2001.

COST OF SERVICES

Cost of services increased from $182.5 million to $242.8 million, or
33%, from the six months ended December 31, 2000 to the six months
ended December 31, 2001, which is commensurate with the increase in
revenues discussed above. As a percentage of revenues, cost of
services decreased from 85.5% to 84.6% from the six months ended
December 31, 2000 to the six months ended December 31, 2001 resulting
in gross margins of 14.5% and 15.4% for the six months ended December
31, 2000 and 2001, respectively. Gross margins for the individual
products have remained relatively stable; however, a change in
product mix resulted in an increase in the composite gross margin in
the six months ended December 31, 2001. The primary drivers for the
improvement in gross margins were increased revenues from hemophilia
factor and IVIG, which have lower acquisition costs as a percentage
of revenue than most of the other products we distribute.





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##### Table of Contents



GENERAL AND ADMINISTRATIVE

General and administrative expenses increased from $14.2 million to
$19.3 million, or 36%, from the six months ended December 31, 2000 to
the six months ended December 31, 2001. This increase was primarily
the result of increased salaries and benefits associated with the
expansion of our reimbursement, sales and marketing, administrative
and support staffs, and the addition of office space and related
furniture and fixtures to support the revenue growth and
acquisitions. General and administrative expenses represented 6.7% of
revenues in both of the six-month periods ended December 31, 2000 and
2001.

BAD DEBTS

Bad debts decreased from $3,194,000 to $2,056,000 from the six months
ended December 31, 2000 to the six months ended December 31, 2001. As
a percentage of revenues, bad debt expense decreased from 1.5% to .7%
from the six months ended December 31, 2000 to the six months ended
December 31, 2001. The decrease in bad debts as a percentage of
revenues is primarily due to the increased percentage of our revenues
that was reimbursed by prescription card benefits versus major
medical benefit plans. The majority of the reimbursement provided by
prescription card benefit plans is subject to much lower co-payment
and deductible amounts (typically $10 to $15) resulting in lower bad
debt.

DEPRECIATION AND AMORTIZATION

Depreciation expense increased from $748,000 to $960,000 from the six
months ended December 31, 2000 to the six months ended December 31,
2001 as a result of purchases of property and equipment associated
with our revenue growth and expansion of our leasehold facility
improvements. Amortization expense decreased from $1,292,000 to
$502,000 from the six months ended December 31, 2000 to the six
months ended December 31, 2001. The decrease is due to the adoption
of SFAS 142, Goodwill and Other Intangible Assets during the first
quarter of fiscal year 2002. The application of the non-amortization
of goodwill provisions of the pronouncement resulted in a reduction
in amortization expense of approximately $1,224,000 in the six months
ended December 31, 2001.

INTEREST INCOME, NET

Interest income, net, decreased from $1,256,000 to $800,000 from the
six months ended December 31, 2000 to the six months ended December
31, 2001. The decrease is due to a decrease in the average amount of
cash invested during the period as a result of cash used for
acquisitions and a decrease in interest rates earned on investments.

INCOME TAX EXPENSE

The effective tax rate was 39.7% and 38.8% for the six months ended
December 31, 2000 and 2001, respectively. The decrease in the
effective tax rate is primarily due to the adoption of the
non-amortization provisions of SFAS 142 discussed above. The
difference between the recognized effective tax rate and the
statutory rate is primarily attributed to state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2001, our working capital was $68.9 million, cash
and cash equivalents were $15.4 million, marketable securities were
$3.5 million and the current ratio was 1.5 to 1.0.

Our net cash provided by operations was $9.0 million for the six
months ended December 31, 2001. During the six months ended December
31, 2001, accounts receivable increased $24.8 million, inventories
increased $13.5 million and accounts payable, accrued expenses and
income taxes increased $30.1 million. These increases are due
primarily to our revenue growth and the timing of the collection of
receivables, inventory purchases and payments of accounts payable.

Net cash used in investing activities was $43.5 million for the six
months ended December 31, 2001. Cash used in investing activities
consisted of $37.5 million for the acquisition of BioPartners in
Care, Inc., $1.5 million for net purchases of marketable securities,
which have an initial maturity date of greater than 90 days, $3.6
million for purchases of property and equipment and $.9 million of
undistributed equity in joint ventures.

Net cash used in financing activities was $4.6 million for the six
months ended December 31, 2001. Net cash used in financing activities
consisted of $6.1 million of repayments of debt assumed in the
acquisition of BioPartners in Care, Inc. less $1.5 million from the
proceeds of stock option exercises.

Historically, we have funded our operations and continued internal
growth through cash provided by operations. We anticipate that our
capital expenditures for the fiscal year ending June 30, 2002 will
consist primarily of additional computer hardware, a fully integrated
pharmacy and reimbursement software system and costs to build out and
furnish additional space needed to meet the needs of our growth. We
expect the cost of our capital expenditures in fiscal year 2002 to be
approximately $7.5 million, exclusive of any acquisitions of
businesses. We expect to fund these expenditures through cash
provided by operating activities and/or borrowings under the
revolving credit agreement with our bank. In addition, in connection
with two of our acquisitions that were completed in 1999 and 2001, we
may be obligated to make up to $6.9 million in earn-out payments
during the next twelve months.





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We have a revolving credit facility under the terms of our existing
credit agreement. The agreement has an initial commitment of $30
million. We may increase the commitment up to $60 million upon (i) 15
days written notice, (ii) the payment of an additional commitment fee
and (iii) delivery of a current compliance certificate demonstrating
that no event of default exists and will not exist following the
increase in the commitment. All outstanding principal and interest on
loans made under the credit agreement is due and payable on December
1, 2003. There were no borrowings under the credit agreement during
the six months ended December 31, 2001.

Interest on loans under the credit agreement accrues at a variable
rate index based on the prime rate or the London Inter-Bank Offered
Rate for one, two, three or six months (as selected by us), plus a
margin depending on the amount of our debt to cash flow ratio as
defined by the credit agreement and measured at the end of each
quarter for prospective periods.

Our obligations under the credit agreement are secured by a lien on
substantially all of our assets, including a pledge of all of the
common stock or partnership interest of each of our subsidiaries in
which we own an 80% or more interest.

The credit agreement contains operating and financial covenants,
including requirements to maintain a certain debt to equity ratio and
minimum leverage and debt service coverage ratios. In addition, the
credit agreement includes customary affirmative and negative
covenants, including covenants relating to transactions with
affiliates, uses of proceeds, restrictions on subsidiaries,
limitations on indebtedness, limitations on capital expenditures,
limitations on mergers, acquisitions and sales of assets, limitations
on investments, prohibitions on payment of dividends and stock
repurchases, limitations on debt payments (including payment of
subordinated indebtedness) and other distributions. The credit
agreement also contains customary events of default, including events
relating to changes in control of our company.

On January 2, 2002, we agreed to acquire substantially all of the
assets of Gentiva Health Services, Inc.s specialty pharmaceutical
services (SPS) business. The terms of the asset purchase agreement
provide that the purchase price to be paid to Gentiva is $415
million, which is subject to adjustment as described in the
agreement. The purchase price is payable 50% in cash and 50% in
Accredo common stock. The number of shares of Accredo common stock to
be issued will be equal to one-half of the purchase price divided by
the average closing price for Accredo common stock for the 20 trading
days ending on the second business day prior to the closing of the
acquisition. However,



| |  |  | if this average is greater than $41.00 per share, the
number of shares to be issued will be equal to one-half of the
purchase price divided by $41.00, or 5,060,976 (assuming no
adjustment to the purchase price)
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | if this average is less than $31.00 per share, the
number of shares to be issued will be equal to one-half of the
purchase price divided by $31.00, or 6,693,548 (assuming no
adjustment to the purchase price).  

We plan on obtaining a $275 million credit facility to finance the
cash portion of the purchase price and to provide for working capital
needs and other general corporate purposes. This credit facility
would replace the existing revolving credit facility. We intend to
incur approximately $227 million of indebtedness under this credit
facility to finance the cash portion of the purchase price and
transaction related costs. Giving effect to the incurrence of such debt as of December 31, 2001,
Accredo would have had approximately $227 million of total debt and a
total debt to total capitalization ratio of 36%.

In addition, Accredo will assume identified liabilities of Gentiva,
which include the liabilities disclosed on the SPS business closing
balance sheet to be prepared by the parties, obligations regarding employees of the SPS business, and obligations arising from
and after the closing date of the acquisition with respect to
assigned leases and contracts, open inventory and open customer
orders. All other liabilities of Gentiva are retained by Gentiva.

While we anticipate that our cash from operations, along with the
short-term use of the existing revolving credit facility or the new
credit facility described above will be sufficient to meet our
internal operating requirements and growth plans for at least the
next 12 months, we expect that additional funds may be required in
the future to successfully continue our growth beyond such period. We
may be required to raise additional funds through sales of equity or
debt securities or seek additional financing from financial
institutions. There can be no assurance, however, that financing will
be available on terms that are favorable to us or, if obtained, will
be sufficient for our needs.





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##### Table of Contents



RISK FACTORS

You should carefully consider the risks and uncertainties we describe
below before investing in Accredo. The risks and uncertainties
described below arenotthe only risks and uncertainties that could
develop. Other risks and uncertainties that we have not predicted or
evaluated could also affect our company. You should also review the
risk factors specifically related to our proposed acquisition of the
specialty pharmaceutical services business of Gentiva Health
Services, Inc., which are included in Item 5 of this Form 10-Q.

If any of the following risks occur, our earnings, financial
condition or business could be materially harmed, and the trading
price of our common stock could decline, resulting in the loss of all
or part of your investment.

We are highly dependent on our relationships with a limited number of
biopharmaceutical suppliers and the loss of any of these
relationships could significantly impact our ability to sustain or
grow our revenues.

We derive a substantial majority of our revenue and
profitability from our relationships with Biogen, Genzyme, MedImmune
and Genentech. The table below shows the concentration of our
revenue derived from these relationships as a percentage of revenue
for the periods indicated:

|                                       |  |                   |    |                   |  |               |    |               |  |  |    |   |  |  |    |  
|-------------------------------------- |  | ----------------- | -- | ----------------- |  | ------------- | -- | ------------- |  |  | -- | - |  |  | -- | -
|                                       |  | SIX MONTHS        |    | FISCAL YEAR ENDED
|                                       |  | ENDED             |    |                  
|                                       |  | DECEMBER 30, 2001 |    | JUNE 30, 2001     |  | JUNE 30, 2000 |    | JUNE 30, 1999
|                                       |  |                   |    |                   |  |               |    |              
|Biogen, Genzyme,
MedImmune & Genentech |  |                   | 70 | %                 |  |               | 72 | %             |  |  | 72 | % |  |  | 73 | %

Our agreements with these suppliers are short-term and
cancelable by either party without cause on 60 to 90 days prior
notice. These agreements also generally limit our ability to handle
competing drugs during and, in some cases, after the term of the
agreement, but allow the supplier to distribute through channels
other than us. Further, these agreements provide that pricing and
other terms of these relationships be periodically adjusted for
changed market conditions or required service levels. Any
termination or adverse adjustment to any of these relationships could
have a material adverse effect on a significant portion of our
business, financial condition and results of operations.

Our ability to grow could be limited if we do not expand our existing
base of drugs or if we lose patients.

We focus almost exclusively on a limited number of complex and
expensive drugs that serve small patient populations. The drugs that
we currently sell are prescribed for Multiple Sclerosis, Gaucher
Disease, Hemophilia and Autoimmune Disorders, Growth Hormone-Related
Disorders, Crohns Disease, and Respiratory Syncytial Virus.

Due to the small patient populations that use the drugs we
handle, our future growth is highly dependent on expanding our base
of drugs. Further, a loss of patient base or reduction in demand for
any reason of the drugs we currently handle could have a material
adverse effect on a significant portion of our business, financial
condition and results of operation.

Our business would be harmed if demand for our products and services
is reduced.

Reduced demand for our products and services could be caused by
a number of circumstances, including:



| |  | patient shifts to treatment regimens other than those we offer;                                                 
|- |  | ----------------------------------------------------------------------------------------------------------------
| |  | new treatments or methods of delivery of existing drugs that do not require our specialty products and services;
| |  | a recall of a drug;                                                                                             
| |  | adverse reactions caused by a drug;                                                                             
| |  | the expiration or challenge of a drug patent;                                                                   
| |  | competing treatment from a new drug or a new use of an existing drug;                                           
| |  | the loss of a managed care or other payor relationship covering a number of high revenue patients;              
| |  | the cure of a disease we service; or                                                                            
| |  | the death of a high-revenue patient.                                                                            

There is substantial competition in our industry, and we may not be
able to compete successfully.

The specialty pharmacy industry is highly competitive and is
continuing to become more competitive. All of the drugs, supplies and
services that we provide are also available from our competitors. Our
current and potential competitors include:



| |  | other specialty pharmacy distributors;                      
|- |  | ------------------------------------------------------------
| |  | specialty pharmacy divisions of wholesale drug distributors;
| |  | pharmacy benefit management companies;                      
| |  | hospital-based pharmacies;                                  
| |  | retail pharmacies;                                          





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##### Table of Contents





| |  | home infusion therapy companies;               
|- |  | -----------------------------------------------
| |  | comprehensive hemophilia treatment centers; and
| |  | other alternative site health care providers.  

Many of our competitors have substantially greater resources and
more established operations and infrastructure than we have. We are
particularly at risk from any of our suppliers deciding to pursue its
own distribution and services and not outsource these needs to
companies like us. A significant factor in effective competition
will be an ability to maintain and expand relationships with managed
care companies, pharmacy benefit managers and other payors who can
effectively determine the pharmacy source for their enrollees.

If any of our relationships with medical centers are disrupted or
cancelled, our business could be harmed.

We have significant relationships with four medical centers that
provide services primarily related to hemophilia, growth
hormone-related disorders and respiratory syncytial virus. For the
fiscal years ended June 30, 2000 and 2001 and the six months ended
December 31, 2001, we received approximately 12%, 4% and 4%,
respectively, of our earnings before income taxes and extraordinary
item from equity in the net income of unconsolidated joint ventures.

We own 80% of one of our joint ventures with Childrens Home
Care, Inc. and the financial results of this joint venture are
included in our consolidated financial results. This consolidated
joint venture represented approximately 12% of our income before
income taxes for the six months ended December 31, 2001.

Our agreements with medical centers have terms of between one
and five years, and may be cancelled by either party without cause
upon notice of between one and twelve months. Adverse changes in our
relationships with those medical centers could be caused, for
example, by:



| |  | changes caused by consolidation within the hospital industry;                                
|- |  | ---------------------------------------------------------------------------------------------
| |  | changes caused by regulatory uncertainties inherent in the structure of the relationships; or
| |  | restrictive changes to regulatory requirements.                                              

Any termination or adverse change of these relationships could
have a material adverse effect on our business, financial condition
and results of operations.

If additional providers obtain access to favorably priced drugs we
handle, our business could be harmed.

We are not eligible to participate directly in the federal
pricing program of the Public Health Service, commonly known as PHS,
which allows hospitals and hemophilia treatment centers to obtain
discounts on clotting factor. Increased competition from hospitals
and hemophilia treatment centers may reduce our profit margins.

Our acquisition and joint venture strategy may not be successful,
which could cause our business and future growth prospects to suffer.

As part of our growth strategy, we continue to evaluate joint
venture and acquisition opportunities, but we cannot predict or
provide assurance that we will complete any future acquisitions or
joint ventures. Acquisitions and joint ventures involve many risks,
including:



| |  | difficulty in identifying suitable candidates and negotiating and consummating acquisitions on attractive terms;
|- |  | ----------------------------------------------------------------------------------------------------------------
| |  | difficulty in assimilating the new operations;                                                                  
| |  | increased transaction costs;                                                                                    
| |  | diversion of our managements attention from existing operations;                                               
| |  | dilutive issuances of equity securities that may negatively impact the market price of our stock;               
| |  | increased debt; and                                                                                             
| |  | increased amortization expense related to intangible assets that would decrease our earnings.                   

We could also be exposed to unknown or contingent liabilities
resulting from the pre-acquisition operations of the entities we
acquire, such as liability for failure to comply with health care or
reimbursement laws.

Fluctuations in our quarterly financial results may cause our stock
price to decline.

Our results of operations may fluctuate on a quarterly basis,
which could adversely affect the market price of our common stock.
Our results may fluctuate as a result of:



| |  | lower prices paid by Medicare or Medicaid for the drugs
that we sell, including lower prices resulting from recent
revisions in the method of establishing average wholesale price
(AWP);
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | below-expected sales or delayed launch of a new drug;                                                                                                                                      
| |  | price and term adjustments with our drug suppliers;                                                                                                                                        





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| |  | increases in our operating expenses in anticipation of the launch of a new drug;                    
|- |  | ----------------------------------------------------------------------------------------------------
| |  | product shortages;                                                                                  
| |  | inaccuracies in our estimates of the costs of ongoing programs;                                     
| |  | the timing and integration of our acquisitions;                                                     
| |  | changes in governmental regulations;                                                                
| |  | the annual renewal of deductibles and co-payment requirements that affect patient ordering patterns;
| |  | our provision of drugs to treat seasonal illnesses, such as respiratory syncytial virus;            
| |  | physician prescribing patterns; and                                                                 
| |  | general political and economic conditions.                                                          

Our business would be harmed if the biopharmaceutical industry ceases
research, development and production of the types of drugs that are
compatible with the services we provide.

Our business is highly dependent on continued research,
development, manufacturing and marketing expenditures of
biopharmaceutical companies, and the ability of those companies to
develop, supply and generate demand for drugs that are compatible
with the services we provide. Our business would be materially and
adversely affected if those companies stopped outsourcing the
services we provide or failed to support existing drugs or develop
new drugs. Our business could also be harmed if the
biopharmaceutical industry undergoes any of the following
developments:



| |  | supply shortages;                                                                                                                                      
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | adverse drug reactions;                                                                                                                                
| |  | drug recalls;                                                                                                                                          
| |  | increased competition among biopharmaceutical companies;                                                                                               
| |  | an inability of drug companies to finance product development because of capital shortages;                                                            
| |  | a decline in product research, development or marketing;                                                                                               
| |  | a reduction in the retail price of drugs from governmental or private market initiatives;                                                              
| |  | changes in the Food and Drug Administration (FDA) approval process; or                                                                               
| |  | governmental or private initiatives that would alter how
drug manufacturers, health care providers or pharmacies promote
or sell products and services.

Our business could be harmed if the supply of any of the products
that we distribute becomes scarce.

The biopharmaceutical industry is susceptible to product
shortages. Some of the products that we distribute, such as IVIG and
blood-related products, are collected and processed from human
donors. Accordingly, the supply of these products is highly
dependent on human donors and their availability has been constrained
from time to time. An industry wide recombinant factor VIII product
shortage has existed for some time, as a result of the manufacturers
being unable to increase production to meet rising global demand.
Future availability of product is unclear and we are not certain when
the manufacturers will return to normal product allocations. If
these products, or any of the other drugs that we distribute, are in
short supply for long periods of time, our business could be harmed.

If some of the drugs that we provide lose their orphan drug status,
we could face more competition.

Our business could also be adversely affected by the expiration
or challenge to the orphan drug status that has been granted by the
FDA to some of the drugs that we handle. When the FDA grants orphan
drug status, it will not approve a second drug for the same
treatment for a period of seven years unless the new drug is
chemically different or clinically superior. The orphan drug status
applicable to drugs that we handle expires as follows:



| |  | Cerezyme® expired May 2001;          
|- |  | -------------------------------------
| |  | AVONEX® expires May 2003;            
| |  | REMICADE expires September 2005; And
| |  | Tracleer expires October 2008.      

The loss of orphan drug status could result in competitive drugs
entering the market, which could harm our business.

Recent investigations into reporting of average wholesale prices
could reduce our pricing and margins.

Many government payors, including Medicare and Medicaid, pay us
directly or indirectly at the drugs average wholesale price (or AWP)
or at a percentage off AWP. We have also contracted with a number of
private payors to sell drugs at AWP or at a percentage off AWP. AWP
for most drugs is compiled and published by a private company, First
DataBank, Inc. In February 2000, First DataBank published a
Market Price Survey of 437 drugs, which was significantly lower than
the historic AWP for a number of the clotting factor and IVIG
products that we sell.





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Various federal and state government agencies have been
investigating whether the reported AWP of many drugs, including some
that we sell, is an appropriate or accurate measure of the market
price of the drugs. As reported in the Wall Street Journal, there
are also several whistleblower lawsuits pending against various drug
manufacturers. These government investigations and lawsuits involve
allegations that manufacturers reported artificially inflated AWP
prices of various drugs to First DataBank. Bayer Corporation, one of
the Companys suppliers of clotting factor, recently agreed to pay
$14 million in a settlement with the federal government and 45 states
regarding these charges. Bayer also entered into a 5 year corporate
integrity agreement with the government, in which Bayer agreed to
provide average selling prices of its drugs to the government. In a
separate action involving alleged inflated pricing, TAP
Pharmaceutical Products agreed to pay federal and state governments
$875 million to settle charges associated with the marketing of
Lupron.

A number of state Medicaid agencies have revised their payment
methodology as a result of the Market Price Survey. The Centers for
Medicare and Medicaid Services (CMMS) had also announced that
Medicare intermediaries should calculate the amount that they pay for
certain drugs by using the lower prices on the First DataBank Market
Price Survey. However, the proposal to include clotting factor in
the lower Medicare pricing was withdrawn. Instead, CMMS has
announced that it will seek legislation that would establish payments
to cover the administrative costs of suppliers of clotting factor as
a supplement to lower AWP pricing for factor.

On September 21, 2001, the United States House Subcommittees on
Health and Oversight & Investigations held hearings to examine how
Medicare reimburses providers for the cost of drugs. In conjunction
with that hearing, the U.S. General Accounting Office issued its
Draft Report recommending that Medicare establish payment levels for
part-B prescription drugs and their delivery and administration that
are more closely related to their costs, and that payments for drugs
be set at levels that reflect actual market transaction prices and
the likely acquisition costs to providers.

On October 26, 2001, a proposed class action lawsuit was filed
in California by a Los Angeles based physician on behalf of thousands
of patients, third party payors and the state of California. This
lawsuit, which names several pharmaceutical manufacturers as
defendants, alleges that the inflation of AWP violates the California
Unfair Competition law.

We cannot predict the eventual results of the government
investigations, lawsuits and the changes made by First DataBank. If
reduced average wholesale prices for the drugs that we sell are
ultimately adopted as the standard by which we are paid by government
payors or private payors, this could have a material adverse effect
on our business, financial condition and results of operation,
including reducing the pricing and margins on certain of our
products.

Our business could be harmed by changes in Medicare or Medicaid.

Changes in the Medicare, Medicaid or similar government programs
or the amounts paid by those programs for our services may adversely
affect our earnings. For example, these programs could revise their
pricing based on new methods of calculating the AWP for drugs we
handle. For the fiscal years ended June 30, 2000 and 2001 and the
six months ended December 31, 2001, we estimate that approximately
18%, 19%, and 19% respectively of our gross patient service revenues
consisted of reimbursements from federal and state programs,
excluding sales to private physicians whose ultimate payor is
typically Medicare. Any reductions in amounts reimbursable by
government programs for our services or changes in regulations
governing such reimbursements could materially and adversely affect
our business, financial condition and results of operations.

Our business will suffer if we lose relationships with payors.

We are highly dependent on reimbursement from non-governmental
payors. For the fiscal years ended June 30, 2000 and 2001 and the
six months ended December 31, 2001, we derived approximately 82%, 81%
and 81% respectively of our gross patient service revenue from
non-governmental payors (including self-pay), which included 5%, 4%
and 3%, respectively for those periods, from sales to private
physician practices whose ultimate payor is typically Medicare. In
fiscal year 2001 and the six months ended December 31, 2001, our
private payor, Aetna, Inc. and affiliates accounted for approximately
16% of the Companys revenue.

Many payors seek to limit the number of providers that supply
drugs to their enrollees. For example, we were selected by Aetna,
Inc. as one of three providers of injectible medications. From time
to time, payors with whom we have relationships require that we and
our competitors bid to keep their business, and there can be no
assurance that we will be retained or that our margins will not be
adversely affected when that happens. The loss of a payor
relationship, for example, our relationship with Aetna (which is
terminable on 90 days notice), or an adverse change in the financial
condition of a payor like Aetna, could result in the loss of a
significant number of patients and have a material adverse effect on
our business, financial condition and results of operations.





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We rely heavily on a single shipping provider, and our business would
be harmed if our rates are increased or our provider is unavailable.

Almost all of our revenues result from the sale of drugs we
deliver to our patients and principally all of our products are
shipped by a single carrier, FedEx. We depend heavily on these
outsourced shipping services for efficient, cost effective delivery
of our product. The risks associated with this dependence include:



| |  | any significant increase in shipping rates;                                                                            
|- |  | -----------------------------------------------------------------------------------------------------------------------
| |  | strikes or other service interruptions by our primary carrier, FedEx, or by another carrier that could affect FedEx; or
| |  | spoilage of high cost drugs during shipment, since our drugs often require special handling, such as refrigeration.    

Disruption in New York City and in U.S. commercial activities
generally following the September 2001 terrorist attacks on the U.S.
may adversely impact our results of operations, our ability to raise
capital or our future growth.

Our operations have been and may continue to be harmed by the
recent terrorist attacks on the U.S. For example, transportation
systems and couriers that we rely upon to deliver our drugs have been
and may continue to be disrupted, thereby causing a decrease in our
revenues. In addition, we may experience a rise in operating costs,
such as costs for transportation, courier services, insurance and
security. We also may experience delays in receiving payments from
payors that have been affected by the attacks, which, in turn, would
harm our cash flow. The U.S. economy in general may be adversely
affected by the terrorist attacks or by any related outbreak of
hostilities. Any such economic downturn could adversely impact our
results of operations, impair our ability to raise capital or impede
our ability to continue growing our business.

Our business could be harmed if payors decrease or delay their
payments to us.

Our profitability depends on payment from governmental and
non-governmental payors, and we could be materially and adversely
affected by cost containment trends in the health care industry or by
financial difficulties suffered by non-governmental payors. Cost
containment measures affect pricing, purchasing and usage patterns in
health care. Payors also influence decisions regarding the use of a
particular drug treatment and focus on product cost in light of how
the product may impact the overall cost of treatment. Further, some
payors, including large managed care organizations and some private
physician practices, have recently experienced financial trouble.
The timing of payments and our ability to collect from payors also
affects our revenue and profitability. If we are unable to collect
from payors or if payors fail to pay us in a timely manner, it could
have a material adverse effect on our business and financial
condition.

If we are unable to manage our growth effectively, our business will
be harmed.

Our rapid growth over the past several years has placed a strain
on our resources, and if we cannot effectively manage our growth, our
business, financial condition and results of operations could be
materially and adversely affected. We have experienced a large
increase in the number of our employees, the size of our programs and
the scope of our operations. Our ability to manage this growth and
be successful in the future will depend partly on our ability to
retain skilled employees, enhance our management team and improve our
management information and financial control systems.

We could be adversely affected by an impairment of the significant
amount of goodwill on our financial statements.

Our formation and our acquisitions of Southern Health Systems,
Inc., Hemophilia Health Services, Inc., Sunrise Health Management,
Inc., Pharmacare Resources, Inc., NCL Management, Inc., BioPartners
in Care, Inc. and the specialty pharmacy businesses of Home Medical
of America, Inc. resulted in the recording of a significant amount of
goodwill on our financial statements. The goodwill was recorded
because the fair value of the net assets acquired was less than the
purchase price. There can be no assurance that we will realize the
full value of this goodwill. We evaluate on an on-going basis
whether events and circumstances indicate that all or some of the
carrying value of goodwill is no longer recoverable, in which case we
would write off the unrecoverable goodwill in a charge to our
earnings.

We are not presently aware of any persuasive evidence that any
material portion of our goodwill will be impaired and written off
against earnings. As of December 31, 2001, we had goodwill, net of
accumulated amortization, of approximately $121.8 million, or 36% of
total assets and 59% of stockholders equity.

Since our growth strategy may involve the acquisition of other
companies, we may record additional goodwill in the future. The
possible write-off of this goodwill could negatively impact our
future earnings. We will also be required to allocate a portion of
the purchase price of any acquisition to the value of non-competition
agreements, patient base and contracts that are acquired. The
amount allocated to these items could be amortized over a fairly
short period. As a result, our earnings and the market price of our
common stock could be negatively impacted.

We rely on a few key employees whose absence or loss could adversely
affect our business.

We depend on a few key executives, and the loss of their
services could cause a material adverse effect to our company. We do
not maintain key person life insurance policies on any of those
executives. As a result, we are not insured against the losses
resulting from the death of our key executives. Further, we must be
able to attract and retain other qualified, essential employees for
our technical operating and professional staff, such as pharmacists.
If we are unable to attract and retain these essential employees, our
business could be harmed.

We may need additional capital to finance our growth and capital
requirements, which could prevent us from fully pursuing our growth
strategy.
Table of Contents

In order to implement our growth strategy, we will need
substantial capital resources and will incur, from time to time,
short- and long-term indebtedness, the terms of which will depend on
market and other conditions. We cannot be certain that existing or
additional financing will be available to us on acceptable terms, if
at all. As a result, we could be unable to fully pursue our growth
strategy. Further, additional financing may involve the issuance of
equity securities that would reduce the percentage ownership of our
then current stockholders.

Our industry is subject to extensive government regulation and
noncompliance by us or our suppliers could harm our business.

The marketing, sale and purchase of drugs and medical supplies
is extensively regulated by federal and state governments, and if we
fail or are accused of failing to comply with laws and regulations,
we could suffer a material adverse effect on our business, financial
condition and results of operations. Our business could also be
materially and adversely affected if the suppliers or clients we work
with are accused of violating laws or regulations. The applicable
regulatory framework is complex, and the laws are very broad in
scope. Many of these laws remain open to interpretation, and have not
been addressed by substantive court decisions.

The health care laws and regulations that especially apply to
our activities include:



| |  | The federal Anti-Kickback Law prohibits the offer or
solicitation of compensation in return for the referral of
patients covered by almost all governmental programs, or the
arrangement or recommendation of the purchase of any item,
facility or service covered by those programs. The Health
Insurance Portability and Accountability Act of 1996, or HIPAA,
created new violations for fraudulent activity applicable to
both public and private health care benefit programs and
prohibits inducements to Medicare or Medicaid eligible patients.
The potential sanctions for violations of these laws range from
significant fines, to exclusion from participation in the
Medicare and Medicaid programs, to criminal sanctions. Although
some safe harbor regulations attempt to clarify when an
arrangement will not violate the Anti-Kickback Law, our business
arrangements and the services we provide may not fit within
these safe harbors. Failure to satisfy a safe harbor requires
analysis of whether the parties intended to violate the
Anti-Kickback Law. The finding of a violation could have a
material adverse effect on our business.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Department of Health and Human Services recently
issued regulations implementing the Administrative
Simplification provision of HIPAA concerning the maintenance and
transmission and security of electronic health information,
particularly individually identifiable information. The new
regulations, when effective, will require the development and
implementation of security and transaction standards for all
electronic health information and impose significant use and
disclosure obligations on entities that send or receive
individually identifiable electronic health information.
Failure to comply with these regulations, or wrongful disclosure
of confidential patient information could result in the
imposition of administrative or criminal sanctions, including
exclusion from the Medicare and state Medicaid programs. In
addition, if we choose to distribute drugs through new
distribution channels such as the Internet, we will have to
comply with government regulations that apply to those
distribution channels, which could have a material adverse
effect on our business.                                            
| |  | The Ethics in Patient Referrals Act of 1989, as amended,
commonly referred to as the Stark Law, prohibits physician
referrals to entities with which the physician or their
immediate family members have a financial relationship. A
violation of the Stark Law is punishable by civil sanctions,
including significant fines and exclusion from participation in
Medicare and Medicaid.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | State laws prohibit the practice of medicine, pharmacy and
nursing without a license. To the extent that we assist
patients and providers with prescribed treatment programs, a
state could consider our activities to constitute the practice
of medicine. If we are found to have violated those laws, we
could face civil and criminal penalties and be required to
reduce, restructure, or even cease our business in that state.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Pharmacies and pharmacists must obtain state licenses to
operate and dispense drugs. Pharmacies must also obtain
licenses in some states to operate and provide goods and
services to residents of those states. If we are unable to
maintain our licenses or if states place burdensome restrictions
or limitations on non-resident pharmacies, this could limit or
affect our ability to operate in some states which could
adversely impact our business and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Federal and state investigations and enforcement actions
continue to focus on the health care industry, scrutinizing a
wide range of items such as joint venture arrangements, referral
and billing practices, product discount arrangements,
home health care services, dissemination of confidential patient
information, clinical drug research trials and gifts for patients.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | The False Claims Act encourages private individuals to
file suits on behalf of the government against health care
providers such as us. Such suits could result in significant
financial sanctions or exclusion from participation in the
Medicare and Medicaid programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

The market price of our common stock may experience substantial
fluctuations for reasons over which we have little control.

Our common stock is traded on the Nasdaq National Market. Since
our common stock has only been publicly traded for a short time, an
active trading market for the stock may not develop or be maintained.
Also, the market price of our common stock could fluctuate
substantially based on a variety of factors, including the following:
Table of Contents



| |  | future announcements concerning us, our competitors, the
drug manufacturers with whom we have relationships or the health
care market;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in government regulations;                                                                                                    
| |  | overall volatility of the stock market;                                                                                               
| |  | changes in earnings estimates by analysts; and                                                                                        
| |  | changes in operating results from quarter to quarter.                                                                                 

Furthermore, stock prices for many companies fluctuate widely
for reasons that may be unrelated to their operating results. These
fluctuations, coupled with changes in our results of operations and
general economic, political and market conditions, may adversely
affect the market price of our common stock.

Some provisions of our charter documents may have anti-takeover
effects that could discourage a change in control, even if an
acquisition would be beneficial to our stockholders.

Our certificate of incorporation, our bylaws and Delaware law
contain provisions that could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our
stockholders.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to the impact of financial market risk is currently not
significant. Our primary financial market risk exposure consists of
interest rate risk related to interest income from our short term
investments in money market and high quality short term debt
securities with maturities of twelve months or less that we intend to
hold to maturity. We have invested and expect to continue to invest
a substantial portion of our excess cash in such securities.
Generally, if the overall average return on such securities had
decreased 10% from the average return during the quarter ended
December 31, 2001, then our interest income would have decreased, and
pre-tax income would have decreased approximately $29,000 during the
period. This amount was determined by considering the impact of a
hypothetical change in interest rates on our interest income. Actual
changes in rates may differ from the hypothetical assumptions used in
computing this exposure.

In prior periods, we have used derivative financial instruments to
manage our exposure to rising interest rates on our variable-rate
debt, primarily by entering into variable-to-fixed interest rate
swaps. Since we currently do not have an outstanding balance on our
revolving line of credit nor any outstanding interest rate swap
agreements, we do not have an exposure to financial market risk
associated with our revolving line of credit or any derivative
financial instruments.





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PART II  OTHER INFORMATION




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

(a)  The Company held its annual meeting of stockholders on November
16, 2001 at its offices in Memphis, TN. Stockholders holding 85.7%
of the issued and outstanding shares of the Companys Common Stock
were either present in person or were represented by proxy.

(c)  The following matters were voted upon at the meeting:



|1. |  | Proposal to elect Patrick J. Welsh, John R. (Randy) Grow
and Kenneth J. Masterson to serve as Class III directors until
the expiration of their term in 2004 or until their successors
are elected and qualified. The votes cast for each director
were as follows:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|              |  |            |  |  |            |  |  |                |  |  |           |  |  |              |  |  |       | 
|------------- |  | ---------- |  |  | ---------- |  |  | -------------- |  |  | --------- |  |  | ------------ |  |  | ----- | 
|MR. WELSH     |  | VOTED FOR: |  |  | 21,162,629 |  |  | VOTED AGAINST: |  |  | 1,140,397 |  |  | ABSTENTIONS: |  |  | 1,925 | 
|MR. GROW      |  | VOTED FOR: |  |  | 17,000,238 |  |  | VOTED AGAINST: |  |  | 5,302,788 |  |  | ABSTENTIONS: |  |  | 1,925 | 
|MR. MASTERSON |  | VOTED FOR: |  |  | 21,873,062 |  |  | VOTED AGAINST: |  |  | 429,964   |  |  | ABSTENTIONS: |  |  | 1,925 | 



|2. |  | Proposal to ratify the selection of Ernst & Young LLP as
independent public accountants to audit the Companys financial
statements for the fiscal year ended June 30, 2002.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |                        |  |                   
|--------------------- |  | ---------------------- |  | ------------------
|VOTED FOR: 22,053,942 |  | VOTED AGAINST: 249,272 |  | ABSTENTIONS: 1,707



|3. |  | Proposal to approve an amendment to the Accredo Health,
Incorporated 1999 Long-Term Incentive Plan to increase the
number of shares available for awards under the Plan to
1,975,000.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |                           |  |                   
|-------------------- |  | ------------------------- |  | ------------------
|VOTED FOR: 8,650,170 |  | VOTED AGAINST: 13,646,742 |  | ABSTENTIONS: 8,039




ITEM 5. OTHER INFORMATION.

On January 2, 2002, the Company announced that it had entered
into an agreement with Gentiva Health Services, Inc. to purchase the
SPS business of Gentiva for $415,000,000, subject to adjustment as
set forth in the asset purchase agreement. The purchase price is to
be paid in an equal combination of cash and the Companys common
stock, with the stock portion of the purchase price being subject to
a price collar set forth in the asset purchase agreement. The
acquisition is scheduled to close in the second quarter of 2002 and
is contingent upon approval by the shareholders of each company and
approval by the applicable federal regulatory agencies.

Accredo proposes to acquire substantially all of the assets of
the SPS business of Gentiva. The SPS business to be acquired by
Accredo includes:

     the distribution of drugs and other biological and
pharmaceutical products and professional support services for
individuals with chronic diseases, such as hemophilia, primary
pulmonary hypertension, autoimmune deficiencies and growth disorders,

     the administration of antibiotics, chemotherapy, nutrients and
other medications for patients with acute or episodic disease states,

     marketing and distribution services for pharmaceutical,
biotechnology and medical service firms, and

     clinical support services for pharmaceutical and biotechnology
firms.

Following the closing of the acquisition, Accredo intends to
separate and reorganize the chronic and acute portions of the SPS
business. While Gentiva treated IVIG, Synagis®, Cerezyme® and growth
hormone as part of its acute business, Accredo will consider these
drugs as part of the chronic business which it will continue to
operate. Excluding the drugs mentioned above, Accredo intends to
assess strategic options for the portion of the SPS business which
relates to the administration of medications for acute diseases
because this business is inconsistent with Accredos strategy and
focus.

RISK FACTORS RELATED TO THE PROPOSED ACQUISITION

You should carefully consider the risks and uncertainties
associated with this transaction that we describe below before
investing in Accredo. The risks and uncertainties described below
arenotthe only risks and uncertainties that could develop regarding
the proposed acquisition of the SPS business. Other risks and
uncertainties associated with this





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##### Table of Contents



transaction that we have not
predicted or evaluated could also affect our company. You should also
review the risk factors related to Accredos business generally,
which are included in Item 2 of this Form 10-Q.

If any of the following risks occur, our earnings, financial
condition or business could be materially harmed, and the trading
price of our common stock could decline, resulting in the loss of all
or part of your investment.

If Accredos proposed acquisition of the specialty services
business of Gentiva does not occur, Accredo will not benefit from the
expenses it has incurred in the pursuit of the acquisition.

Accredos planned acquisition of the specialty services
business, or SPS business, of Gentiva may not be completed. The asset
purchase agreement may be terminated for material adverse effects in
either Accredo or the SPS business, failure to obtain regulatory
approvals, identified consents, and other reasons, many of which are
beyond the control of Accredo or Gentiva. In the event of a
termination of the asset purchase agreement because either Gentiva or
Accredo has breached its representations, warranties, covenants or
agreements, or because its stockholders have voted against the
acquisition, the party in breach or whose stockholders voted against
the transaction has agreed to pay the costs and expenses actually
incurred in connection with the acquisition by the other party, up to
an aggregate of $2.5 million. Accredo will have incurred substantial
expenses, and may have to reimburse the costs and expenses of
Gentiva, for which no ultimate benefit will have been received by
Accredo.

Accredo must incur indebtedness to finance the acquisition of
the SPS business and its debt level may limit its financial
flexibility.

Accredo intends to incur an additional $227 million of
indebtedness in order to consummate the acquisition of the SPS
business. After giving effect to the acquisition of the SPS
business, including Accredos intended financing of the cash portion
of the acquisition consideration and the issuance of the stock
consideration, as of December 31, 2001, Accredo would have had
approximately $227 million of total debt and a total debt to total
capitalization ratio of 36%. Accredo may also incur additional debt in the
future, including in connection with other acquisitions. While
Accredo would also have additional assets and cash flow, the level of
Accredos debt could have several important effects on the companys
future operations, including, among others:



| |  |  | A significant portion of Accredos cash flow from
operations will be dedicated to the payment of principal and
interest on the debt and will not be available for other
purposes;                                                                                                                                                                                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Covenants in Accredos existing debt arrangements and
anticipated covenants related to the debt that Accredo intends
to incur to finance the cash portion of the acquisition
consideration will require Accredo to meet financial tests,
and may impose other limitations that may limit Accredos
flexibility in planning for and reacting to changes in its
business, including possible acquisition opportunities;
|
| |  |  | Accredos ability to obtain additional financing for
working capital, capital expenditures, acquisitions, general
corporate and other purposes may be limited;                                                                                                                                                                                                                                                       
|
| |  |  | Accredo may be at a competitive disadvantage to similar companies that have less debt; and                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Accredos vulnerability to adverse economic and industry conditions may increase.                                                                                                                                                                                                                                                                                                                                    

The failure to integrate successfully Accredo and the SPS
business acquired from Gentiva may prevent Accredo from achieving the
anticipated potential benefits of the acquisition and may adversely
affect Accredos business.

Accredo will face significant challenges in consolidating
functions, integrating the procedures, operations and product lines
of the SPS business in a timely and efficient manner, and retaining
key personnel of the SPS business. The integration of Accredo and the
SPS business will be complex and will require substantial attention
from management. The diversion of management attention and any
difficulties encountered in the transition and integration process
could have a material adverse effect on the revenues, level of
expenses and operating results of Accredo.

Accredo may not be able to benefit from the acute portion of the
SPS business.

Accredo has not assigned any financial value to the acute
portion of the SPS business it is acquiring. Accredo intends to
assess strategic options related to the acute portion of the SPS
business following the closing of the acquisition. However, Accredo
may not be able to find an available or acceptable strategic
alternative for the acute business and may have to shut down the
acute business which could cause Accredo to incur additional expense.
Accredos assessment of
strategic alternatives for the acute portion of the SPS business or
the actions required to shut down the acute business, could divert
management time and company resources which could be better served
elsewhere.





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##### Table of Contents



Following the acquisition of the SPS business, Gentiva may be
unable to indemnify Accredo for liabilities.

The asset purchase agreement provides that Gentiva will
indemnify Accredo, after the sale of the SPS business, for losses
suffered or incurred by Accredo and its affiliates arising from the
retained liabilities of Gentiva, breaches of Gentivas
representations, warranties, covenants or agreements under the asset
purchase agreement or agreements delivered pursuant thereto, failure
to deliver good, valid and marketable title to the assets of the SPS
business, and specified tax liabilities of Gentiva, including those
related to Gentivas split-off from Olsten Corporation. However,
Accredo has no assurance that Gentiva will fulfill its
indemnification obligations. Should any significant payment be
required, Gentiva may not have sufficient funds and may not be able
to obtain the funds to satisfy its potential indemnification
obligations to Accredo. Accredo may suffer impairment of assets or
have to bear a liability for which it is entitled to indemnification,
but which it is unable to collect.

Accredos common stock price may be adversely affected by future
sales or issuances of Accredo common stock.

According to the terms of the asset purchase agreement, Accredo
could be obligated to issue up to 6.7 million shares, plus additional shares for adjustments to the purchase price in
accordance with the asset purchase agreement. Assuming the issuance of the 5.1 million
shares based on the recent closing price of Accredo common stock,
upon completion of the acquisition, Accredo will have outstanding
approximately 31.1 million shares of common stock. The shares issued
by Accredo are to be distributed to Gentiva stockholders following
the acquisition, resulting in an increase of approximately 19.4% in
the common stock available for resale on the market. The sale of
these additional shares could result in downward pricing pressure on
the Accredo common stock. Accredo may undertake additional
transactions in the future to simplify and restructure its capital
structure, which may include, as a part of these efforts, additional
issuances of equity securities in exchange for current indebtedness
or indebtedness incurred in order to complete the acquisition. The
issuance of additional shares of common stock may be dilutive to the
existing holders of common stock, including holders who acquire shares of common stock as a result of the acquisition.





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##### Table of Contents






ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

|             |  |                                                                                                                                                                                                                                                                                                                 
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.1 |  | Amendment to Amended and Restated Distribution and Services Agreement and Additional Services Agreement dated as of May 1, 2001
between Biogen, Inc. and Nova Factor, Inc. (The Company has requested confidential treatment with respect to certain portions of
this Exhibit.)                                 
|Exhibit 10.2 |  | Non-Qualified Stock Option Agreement of Patrick J. Welsh dated November 1, 2001                                                                                                                                                                                                                                 
|Exhibit 10.3 |  | Non-Qualified Stock Option Agreement of Kevin L. Roberg dated November 1, 2001                                                                                                                                                                                                                                  
|Exhibit 10.4 |  | Non-Qualified Stock Option Agreement of Kenneth J. Melkus dated November 1, 2001                                                                                                                                                                                                                                
|Exhibit 10.5 |  | Non-Qualified Stock Option Agreement of Kenneth R. Masterson dated November 1, 2001                                                                                                                                                                                                                             
|Exhibit 10.6 |  | Non-Qualified Stock Option Agreement of Dick R. Gourley dated November 1, 2001                                                                                                                                                                                                                                  
|Exhibit 10.7 |  | Asset Purchase Agreement, dated as of January 2, 2002, by and between Accredo
Health, Incorporated, Gentiva Health
Services, Inc. and the Sellers named therein
(incorporated by reference from Accredo
Health, Incorporateds Registration
Statement on Form S-4 filed with the
Commission on February 8, 2002)

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K on December 20,
2001, in connection with the acquisition of all of the outstanding
stock of BioPartners in Care, Inc. effective as of December 1, 2001.





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##### Table of Contents






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.

|                  |  |                                 | 
|----------------- |  | ------------------------------- | 
|February 14, 2002 |  | Accredo Health, Incorporated   
|                  |  | /s/ David D. Stevens           
|                  |  |                                
|                  |  | David D. Stevens               
|                  |  | Chairman of the Board and      
|                  |  | Chief Executive Officer        
|                  |  |                                
|                  |  | /s/ Joel R. Kimbrough          
|                  |  |                                
|                  |  | Joel R. Kimbrough              
|                  |  | Senior Vice President, Chief   
|                  |  | Financial Officer and Treasurer





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##### Table of Contents



Exhibit Index

|             |  |                                                                                                                                                                                                                                                                                                                 
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit      |  |                                                                                                                                                                                                                                                                                                                 
|Number       |  | Description of Exhibits                                                                                                                                                                                                                                                                                         
|             |  |                                                                                                                                                                                                                                                                                                                 
|Exhibit 10.1 |  | Amendment to Amended and Restated Distribution and Services Agreement and Additional Services Agreement dated as of May 1, 2001
between Biogen, Inc. and Nova Factor, Inc. (The Company has requested confidential treatment with respect to certain portions of
this Exhibit.)                                 
|Exhibit 10.2 |  | Non-Qualified Stock Option Agreement of Patrick J. Welsh dated November 1, 2001                                                                                                                                                                                                                                 
|Exhibit 10.3 |  | Non-Qualified Stock Option Agreement of Kevin L. Roberg dated November 1, 2001                                                                                                                                                                                                                                  
|Exhibit 10.4 |  | Non-Qualified Stock Option Agreement of Kenneth J. Melkus dated November 1, 2001                                                                                                                                                                                                                                
|Exhibit 10.5 |  | Non-Qualified Stock Option Agreement of Kenneth R. Masterson dated November 1, 2001                                                                                                                                                                                                                             
|Exhibit 10.6 |  | Non-Qualified Stock Option Agreement of Dick R. Gourley dated November 1, 2001                                                                                                                                                                                                                                  
|Exhibit 10.7 |  | Asset Purchase Agreement, dated as of January 2, 2002, by and between Accredo
Health, Incorporated, Gentiva Health
Services, Inc. and the Sellers named therein
(incorporated by reference from Accredo
Health, Incorporateds Registration
Statement on Form S-4 filed with the
Commission on February 8, 2002)