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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, 2002

OR

o   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
incorporation or organization) |  | (I.R.S. Employer
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   o

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





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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 24, 2003
|                              |  |                                
|COMMON STOCK, $0.01 PAR VALUE |  |                                 | 47,577,368 | 
|                              |  |                                 |            | 
|TOTAL COMMON STOCK            |  |                                 | 47,577,368 | 
|                              |  |                                 |            | 





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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                           
|ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION                                                                  
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                                 
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                    
|Signature                                                                                    
|CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002                      
|CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002                      
|Exhibit Index                                                                                
|Non-Qualified Stock Option Agreement/Nancy DeParle                                           
|Non-Qualified Stock Option Agreement/Nancy DeParle                                           
|Non-Qualified Stock Option Agreement/Kevin Roberg                                            
|Non-Qualified Stock Option Agreement/Ken Melkus                                              
|Non-Qualified Stock Option Agreement/Ken Masterson                                           
|Non-Qualified Stock Option Agreement/Dick Gourley                                            
|Section 906 Certification of the CEO                                                         
|Section 906 Certification of the CFO                                                         



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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,
2001 and 2002
|                                                                                              | Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2002 (unaudited)                                       
|                                                                                              | Condensed Consolidated Statements of Cash Flows (unaudited)
For the six months ended December 31, 2001 and 2002             
|                                                                                              | 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                            
|Item 4. Controls and Procedures                                                              
|Part II  OTHER INFORMATION                                                                  
|Item 4. Submission of Matters to a Vote of Security Holders                                  
|Item 6. Exhibits and Reports on Form 8-K                                                     

Note: Items 1, 2, 3 and 5 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,
|                                             |         |   |                               |            |                                
|                                             |         |   | 2002                          |            | 2001                            |   | 2002    |            | 2001
|                                             |         |   |                               |            |                                 |   |         |            |     
|Net patient revenue                          |         | $ | 666,304                       |            |                                 | $ | 277,845 |            |      | $ | 353,769 |            |  | $ | 155,550 |           
|Other revenue                                |         |   | 18,923                        |            |                                 |   | 8,116   |            |      |   | 10,038  |            |  |   | 4,209   |           
|Equity in net income of joint ventures       |         |   | 940                           |            |                                 |   | 873     |            |      |   | 595     |            |  |   | 427     |           
|                                             |         |   |                               |            |                                 |   |         |            |      |   |         |            |  |   |         |           
|Total revenues                               |         |   | 686,167                       |            |                                 |   | 286,834 |            |      |   | 364,402 |            |  |   | 160,186 |           
|Cost of sales                                |         |   | 546,671                       |            |                                 |   | 242,771 |            |      |   | 290,846 |            |  |   | 135,759 |           
|                                             |         |   |                               |            |                                 |   |         |            |      |   |         |            |  |   |         |           
|Gross profit                                 |         |   | 139,496                       |            |                                 |   | 44,063  |            |      |   | 73,556  |            |  |   | 24,427  |           
|General & administrative                     |         |   | 63,413                        |            |                                 |   | 19,303  |            |      |   | 32,669  |            |  |   | 10,822  |           
|Bad debts                                    |         |   | 14,242                        |            |                                 |   | 2,056   |            |      |   | 7,634   |            |  |   | 1,001   |           
|Depreciation and amortization                |         |   | 5,573                         |            |                                 |   | 1,462   |            |      |   | 2,862   |            |  |   | 771     |           
|                                             |         |   |                               |            |                                 |   |         |            |      |   |         |            |  |   |         |           
|Income from operations                       |         |   | 56,268                        |            |                                 |   | 21,242  |            |      |   | 30,391  |            |  |   | 11,833  |           
|Interest income (expense), net               |         |   | (4,070                        | )          |                                 |   | 800     |            |      |   | (1,995  | )          |  |   | 286     |           
|Minority interest in consolidated subsidiary |         |   | (1,003                        | )          |                                 |   | (633    | )          |      |   | (519    | )          |  |   | (314    | )         
|                                             |         |   |                               |            |                                 |   |         |            |      |   |         |            |  |   |         |           
|Income before income taxes                   |         |   | 51,195                        |            |                                 |   | 21,409  |            |      |   | 27,877  |            |  |   | 11,805  |           
|Provision for income taxes                   |         |   | 20,176                        |            |                                 |   | 8,315   |            |      |   | 10,828  |            |  |   | 4,588   |           
|                                             |         |   |                               |            |                                 |   |         |            |      |   |         |            |  |   |         |           
|Net income                                   |         | $ | 31,019                        |            |                                 | $ | 13,094  |            |      | $ | 17,049  |            |  | $ | 7,217   |           
|                                             |         |   |                               |            |                                 |   |         |            |      |   |         |            |  |   |         |           
|Cash dividends declared on common stock      |         | $ |                              |            |                                 | $ |        |            |      | $ |        |            |  | $ |        |           
|                                             |         |   |                               |            |                                 |   |         |            |      |   |         |            |  |   |         |           
|Earnings per share:                          |         |   |                               |            |                                 |   |         |            |      |   |         |            |  |   |         |           
|                                             | Basic   |   | $                             | 0.66       |                                 |   | $       | 0.34       |      |   | $       | 0.36       |  |   | $       | 0.18       | 
|                                             | Diluted |   | $                             | 0.64       |                                 |   | $       | 0.32       |      |   | $       | 0.35       |  |   | $       | 0.18       | 
|Weighted average shares outstanding:         |         |   |                               |            |                                 |   |         |            |      |   |         |            |  |   |         |           
|                                             | Basic   |   |                               | 47,279,578 |                                 |   |         | 39,039,020 |      |   |         | 47,452,947 |  |   |         | 39,082,812 | 
|                                             | Diluted |   |                               | 48,462,242 |                                 |   |         | 40,330,074 |      |   |         | 48,614,834 |  |   |         | 40,386,801 | 

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,
|                                                |                                                                                                                                                                           |   | 2002         |         | 2002    
|                                                |                                                                                                                                                                           |   |              |         |         
|ASSETS                                          |                                                                                                                                                                           |   |              |         |          |   |         |        
|Current assets:                                 |                                                                                                                                                                           |   |              |         |          |   |         |        
|                                                | Cash and cash equivalents                                                                                                                                                 |   | $            | 36,343  |          |   | $       | 42,913  | 
|                                                | Patient accounts receivable, less allowance for
doubtful accounts of $88,719 at December 31, 2002
and $81,758 at June 30, 2002                                            |   |              | 355,275 |          |   |         | 335,253 | 
|                                                | Due from affiliates                                                                                                                                                       |   |              | 3,143   |          |   |         | 2,255   | 
|                                                | Other accounts receivable                                                                                                                                                 |   |              | 19,784  |          |   |         | 22,555  | 
|                                                | Inventories                                                                                                                                                               |   |              | 114,980 |          |   |         | 120,809 | 
|                                                | Prepaids and other current assets                                                                                                                                         |   |              | 2,889   |          |   |         | 3,470   | 
|                                                | Deferred income taxes                                                                                                                                                     |   |              | 8,243   |          |   |         | 5,954   | 
|                                                |                                                                                                                                                                           |   |              |         |          |   |         |        
|Total current assets                            |                                                                                                                                                                           |   | 540,657      |         |          |   | 533,209 |        
|Property and equipment, net                     |                                                                                                                                                                           |   | 28,928       |         |          |   | 23,796  |        
|Other assets:                                   |                                                                                                                                                                           |   |              |         |          |   |         |        
|                                                | Joint venture investments                                                                                                                                                 |   |              | 5,067   |          |   |         | 4,637   | 
|                                                | Goodwill, net                                                                                                                                                             |   |              | 337,314 |          |   |         | 334,919 | 
|                                                | Other intangible assets, net                                                                                                                                              |   |              | 25,252  |          |   |         | 28,268  | 
|                                                |                                                                                                                                                                           |   |              |         |          |   |         |        
|Total assets                                    |                                                                                                                                                                           | $ | 937,218      |         |          | $ | 924,829 |        
|                                                |                                                                                                                                                                           |   |              |         |          |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY            |                                                                                                                                                                           |   |              |         |          |   |         |        
|Current liabilities:                            |                                                                                                                                                                           |   |              |         |          |   |         |        
|                                                | Accounts payable                                                                                                                                                          |   | $            | 194,600 |          |   | $       | 185,047 | 
|                                                | Accrued expenses                                                                                                                                                          |   |              | 23,357  |          |   |         | 31,369  | 
|                                                | Income taxes payable                                                                                                                                                      |   |              | 1,549   |          |   |         | 1,701   | 
|                                                | Current portion of long-term debt                                                                                                                                         |   |              | 12,500  |          |   |         | 5,312   | 
|                                                |                                                                                                                                                                           |   |              |         |          |   |         |        
|Total current liabilities                       |                                                                                                                                                                           |   | 232,006      |         |          |   | 223,429 |        
|Long-term debt                                  |                                                                                                                                                                           |   | 186,563      |         |          |   | 224,688 |        
|Deferred income taxes                           |                                                                                                                                                                           |   | 6,091        |         |          |   | 4,383   |        
|Minority interest in consolidated joint venture |                                                                                                                                                                           |   | 1,778        |         |          |   | 1,275   |        
|Stockholders equity:                           |                                                                                                                                                                           |   |              |         |          |   |         |        
|                                                | Undesignated Preferred Stock, 5,000,000 shares
authorized, no shares issued                                                                                               |   |              |        |          |   |         |        | 
|                                                | Common Stock, $.01 par value; 100,000,000 shares authorized;
47,577,368 and 46,993,581 shares issued and outstanding at
December 31, 2002 and June 30, 2002, respectively |   |              | 476     |          |   |         | 470     | 
|                                                | Additional paid-in capital                                                                                                                                                |   |              | 422,072 |          |   |         | 413,004 | 
|                                                | Accumulated other comprehensive loss                                                                                                                                      |   |              | (366    | )        |   |         |        | 
|                                                | Retained earnings                                                                                                                                                         |   |              | 88,598  |          |   |         | 57,580  | 
|                                                |                                                                                                                                                                           |   |              |         |          |   |         |        
|Total stockholders equity                      |                                                                                                                                                                           |   | 510,780      |         |          |   | 471,054 |        
|                                                |                                                                                                                                                                           |   |              |         |          |   |         |        
|Total liabilities and stockholders equity      |                                                                                                                                                                           | $ | 937,218      |         |          | $ | 924,829 |        
|                                                |                                                                                                                                                                           |   |              |         |          |   |         |        

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,    
|                                                                                  |                                                           |   |                 
|                                                                                  |                                                           |   | 2002             |         | 2001
|                                                                                  |                                                           |   |                  |         |     
|OPERATING ACTIVITIES:                                                             |                                                           |   |                  |         |      |   |         |        
|Net income                                                                        |                                                           | $ | 31,019           |         |      | $ | 13,094  |        
|Adjustments to reconcile net income to
net cash provided by
operating activities: |                                                           |   |                  |         |      |   |         |        
|                                                                                  | Depreciation and amortization                             |   |                  | 6,374   |      |   |         | 1,462   |  
|                                                                                  | Provision for losses on accounts receivable               |   |                  | 14,242  |      |   |         | 2,056   |  
|                                                                                  | Deferred income tax benefit                               |   |                  | (582    | )    |   |         | (117    | )
|                                                                                  | Compensation resulting from stock transactions            |   |                  |        |      |   |         | 92      |  
|                                                                                  | Tax benefit of disqualifying disposition of stock options |   |                  | 4,425   |      |   |         | 1,946   |  
|                                                                                  | Minority interest in income of consolidated joint venture |   |                  | 1,003   |      |   |         | 632     |  
|Changes in operating assets and liabilities:                                      |                                                           |   |                  |         |      |   |         |        
|                                                                                  | Patient receivables and other                             |   |                  | (35,635 | )    |   |         | (26,780 | )
|                                                                                  | Due from affiliates                                       |   |                  | (888    | )    |   |         | 464     |  
|                                                                                  | Inventories                                               |   |                  | 5,829   |      |   |         | (13,528 | )
|                                                                                  | Prepaids and other current assets                         |   |                  | 582     |      |   |         | (484    | )
|                                                                                  | Accounts payable and accrued expenses                     |   |                  | 6,089   |      |   |         | 28,700  |  
|                                                                                  | Income taxes payable                                      |   |                  | (152    | )    |   |         | 1,416   |  
|                                                                                  |                                                           |   |                  |         |      |   |         |        
|Net cash provided by operating activities                                         |                                                           |   | 32,306           |         |      |   | 8,953   |        
|INVESTING ACTIVITIES:                                                             |                                                           |   |                  |         |      |   |         |        
|Purchases of marketable securities                                                |                                                           |   |                 |         |      |   | (6,000  | )      
|Proceeds from sales and maturities of marketable securities                       |                                                           |   |                 |         |      |   | 4,500   |        
|Purchases of property and equipment                                               |                                                           |   | (8,813           | )       |      |   | (3,603  | )      
|Business acquisitions and joint venture investments                               |                                                           |   | (2,845           | )       |      |   | (37,443 | )      
|Change in joint venture investments, net                                          |                                                           |   | (930             | )       |      |   | (933    | )      
|                                                                                  |                                                           |   |                  |         |      |   |         |        
|Net cash used in investing activities                                             |                                                           |   | (12,588          | )       |      |   | (43,479 | )      
|FINANCING ACTIVITIES:                                                             |                                                           |   |                  |         |      |   |         |        
|Decrease in long-term notes payable                                               |                                                           |   | (30,937          | )       |      |   | (6,111  | )      
|Issuance of common stock                                                          |                                                           |   | 4,649            |         |      |   | 1,482   |        
|                                                                                  |                                                           |   |                  |         |      |   |         |        
|Net cash used in financing activities                                             |                                                           |   | (26,288          | )       |      |   | (4,629  | )      
|                                                                                  |                                                           |   |                  |         |      |   |         |        
|Decrease in cash and cash equivalents                                             |                                                           |   | (6,570           | )       |      |   | (39,155 | )      
|Cash and cash equivalents at beginning of period                                  |                                                           |   | 42,913           |         |      |   | 54,520  |        
|                                                                                  |                                                           |   |                  |         |      |   |         |        
|Cash and cash equivalents at end of period                                        |                                                           | $ | 36,343           |         |      | $ | 15,365  |        
|                                                                                  |                                                           |   |                  |         |      |   |         |        

See accompanying notes to condensed consolidated financial statements.





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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2002

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, 2002 are not
necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2003.

The balance sheet at June 30, 2002 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 fiscal year ended June 30, 2002.

2. STOCKHOLDERS EQUITY

During the quarter ended December 31, 2002, employees exercised
stock options to acquire 229,871 shares of Accredo common stock for a
weighted average exercise price of $9.92 per share.

Employees of the Company also acquired 39,866 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
$25.10 per share. Shares acquired under the plan were purchased on
December 31, 2002 from employee funds accumulated via payroll
deductions from July through December, 2002.

3. STOCK SPLIT

On November 4, 2002, the Company announced a three-for-two stock
split in the form of a 50% stock dividend payable on December 2, 2002
for shareholders of record on November 15, 2002. Shareholders
received one additional share of common stock on December 2, 2002 for
every two shares held on the record date. The Company has computed
earnings per share for the six-month and three-month periods
presented in this Form 10-Q on a post-split basis.

4.     BUSINESS ACQUISITIONS  ASSETS TO BE SOLD

As discussed in footnote 3 of the consolidated financial
statements in the Companys Annual Report on Form 10-K for the year
ended June 30, 2002, the purchase price allocation associated with
the Companys acquisition of the Specialty Pharmaceutical Services
Division (SPS business) of Gentiva Health Services, Inc. was
preliminary due to the plans to exit the acute pharmacy business,
which could have an impact on the allocation. The Company has exited
the acute pharmacy business as of December 31, 2002. In exiting the
acute pharmacy business, the Company retained the accounts receivable
of the business and sold or otherwise disposed of the other assets,
which were immaterial. The Company accounted for the acute pharmacy
business in accordance with EITF 87-11, Allocation of Purchase Price
to Assets to be Sold. In accordance with EITF 87-11, the expected
net proceeds from the sale of the acute division, the expected
results of the acute operations during the period from acquisition to
disposal and the expected interest expense during the holding period
on the incremental debt incurred to finance the acute business were
originally recorded as an adjustment to the purchase price.
Differences between the actual and expected results, and additional
estimated costs to collect the retained accounts receivable, have
resulted in increases to goodwill of approximately $2.4 million since
June 30, 2002. The results of operations of the acute division,
amounting to a $390,000 loss, net of tax benefit, during the three
month period ended September 30, 2002 and a $1,537,000 loss, net of
tax benefit, during the three month period ended December 31, 2002,
are excluded from the Companys results of operations in the
accompanying financial statements. The amount of interest expense,
net of tax benefit, allocated to the acute pharmacy business during
the three-month periods ended September 30, 2002 and December 31,
2002 was $241,000 and $204,000, respectively.





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5. COMPREHENSIVE INCOME

Comprehensive income includes changes in the fair value of certain
derivative financial instruments that qualify for hedge accounting.
Comprehensive income for all periods presented is as follows:

|                                                                           |  |                               |        |                                 |  |      |        |      |  |  |        |  |  |  |       | 
|-------------------------------------------------------------------------- |  | ----------------------------- | ------ | ------------------------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ----- | 
|                                                                           |  | Six Months Ended December 31, |        | Three Months Ended December 31,
|                                                                           |  |                               |        |                                
|                                                                           |  | 2002                          |        | 2001                            |  | 2002 |        | 2001
|                                                                           |  |                               |        |                                 |  |      |        |     
|Reported net income                                                        |  |                               | 31,019 |                                 |  |      | 13,094 |      |  |  | 17,049 |  |  |  | 7,217 | 
|Unrealized gain (loss) on
interest rate swap
contracts, net of tax benefit |  |                               | (366   | )                               |  |      |       |      |  |  | 8      |  |  |  |      | 
|                                                                           |  |                               |        |                                 |  |      |        |      |  |  |        |  |  |  |       | 
|Comprehensive income                                                       |  |                               | 30,653 |                                 |  |      | 13,094 |      |  |  | 17,057 |  |  |  | 7,217 | 
|                                                                           |  |                               |        |                                 |  |      |        |      |  |  |        |  |  |  |       | 

The adjustments made in computing comprehensive income are reflected
as a component of stockholders equity under the heading accumulated
other comprehensive loss.





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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.                                   

Specifically, this report contains, among others, forward-looking statements about:



| |  |  | our expectations regarding our product mix for periods following December 31, 2002;                   
| | - |  | ------------------------------------------------------------------------------------------------------
|
| |  |  | our expectations regarding our payor mix for periods following December 31, 2002;                     
|
| |  |  | our expectations regarding the scope and cost of our capital expenditures following December 31, 2002;
|
| |  |  | our sources and availability of funds to satisfy our working capital needs;                           
|
| |  |  | our critical accounting policies; and                                                                 
|
| |  |  | our expectations regarding the percentage of our revenues attributable to federal and state programs. 

The forward-looking statements contained in this report reflect our
current views about future events, are based on assumptions and are
subject to known and unknown risks and uncertainties. Many important
factors could cause our actual results or achievements to differ
materially from any future results or achievements expressed in or
implied by our forward-looking statements. Many of the factors that
will determine future events or achievements are beyond our ability
to control or predict. Important factors that could cause actual
results or achievements to differ materially from the results or
achievements reflected in our forward-looking statements include,
among other things, the factors discussed in Part I, Item 2 of this
report under the sub-heading Risk Factors.

You should read this report, the information incorporated by
reference into this report and the documents filed as exhibits to
this report completely and with the understanding that our actual
future results or achievements may be materially different from what
we currently expect or anticipate. You 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.

The forward-looking statements contained in this report reflect our
views and assumptions only as of the date this report is signed.
Except as required by law, we assume no responsibility for updating
any forward-looking statements.

We qualify all of our forward-looking statements by these cautionary
statements. In addition, with respect to all of our forward-looking
statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.

RESULTS OF OPERATIONS

On June 13, 2002, we acquired the Specialty Pharmaceutical Services
Division (SPS division) of Gentiva Health Services, Inc.
(Gentiva). We acquired substantially all of the assets used in the
SPS division including 100% of the outstanding stock in three of
Gentivas subsidiaries that were exclusively in the business
conducted by the SPS division. The SPS division provides specialty
retail pharmacy services relating to the treatment of patients with
certain costly chronic diseases. In addition to the diseases
previously served by us, the SPS division is also a leading provider
of specialty retail pharmacy services to patients with Pulmonary
Arterial Hypertension (PAH). As a result of the acquisition, we
expect to be a leading specialty retail pharmacy. The aggregate
purchase price paid was $464.7 million (including $14.6 million of
acquisition related costs) and consisted of $218 million of cash and
accrued liabilities and 5,060,976 shares of common stock valued at
$246.7 million. The results of the SPS divisions operations have
been included in the consolidated financial statements since June 14,
2002.





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##### Table of Contents



OVERVIEW

We provide specialty retail pharmacy services for the treatment of
patients with costly, chronic diseases. We derive revenues primarily
from the retail sale of 15 drugs to patients. We focus almost
exclusively on a limited number of complex and expensive drugs that
serve small patient populations. The following table presents the
percentage of our total revenues generated from sales with respect to
the diseases that we primarily serve:

|                                    |  |                    |    |                  |  |      |    |      |  |  |    |   |  |  |    |  
|----------------------------------- |  | ------------------ | -- | ---------------- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | -
|                                    |  | Three Months Ended |    | Six Months Ended
|                                    |  | December 31,       |    | December 31,    
|                                    |  |                    |    |                 
|                                    |  | 2002               |    | 2001             |  | 2002 |    | 2001
|                                    |  |                    |    |                  |  |      |    |     
|Hemophilia and Autoimmune Disorders |  |                    | 37 | %                |  |      | 24 | %    |  |  | 38 | % |  |  | 25 | %
|Multiple Sclerosis                  |  |                    | 14 | %                |  |      | 32 | %    |  |  | 15 | % |  |  | 35 | %
|Pulmonary Arterial Hypertension     |  |                    | 13 | %                |  |      | 0  | %    |  |  | 13 | % |  |  | 0  | %
|Gaucher Disease                     |  |                    | 9  | %                |  |      | 19 | %    |  |  | 10 | % |  |  | 20 | %
|Growth Hormone-Related Disorders    |  |                    | 7  | %                |  |      | 9  | %    |  |  | 7  | % |  |  | 10 | %
|Respiratory Syncytial Virus         |  |                    | 8  | %                |  |      | 15 | %    |  |  | 5  | % |  |  | 9  | %

We anticipate that our product mix for the remainder of our fiscal
year 2003 will be similar to the product mix achieved in the six
months ended December 31, 2002.

Reimbursement for the products we sell comes from governmental
payors, Medicare and Medicaid, and non-governmental payors. The
following table presents the percentage of our total revenues
reimbursed by these payors:

|                 |          |  |               |    |               |  |                   |    |   |  |    |    |  
|---------------- | -------- |  | ------------- | -- | ------------- |  | ----------------- | -- | - |  | -- | -- | -
|                 |          |  | Year Ended    |    | Year Ended    |  | Six Months Ended 
|                 |          |  | June 30, 2001 |    | June 30, 2002 |  | December 31, 2002
|                 |          |  |               |    |               |  |                  
|Non-governmental |          |  | 81            | %  |               |  | 79                | %  |   |  | 73 | % 
|Governmental:    |          |  |               |    |               |  |                   |    |   |  |    |   
|                 | Medicaid |  |               | 17 | %             |  |                   | 19 | % |  |    | 19 | %
|                 | Medicare |  |               | 2  | %             |  |                   | 2  | % |  |    | 8  | %

The increase in Medicare reimbursement and the related decrease in
non-governmental reimbursement is due to the increase in revenues
from hemophilia factor and Flolan®, for PAH, as a result of the
acquisition of the SPS division. These are the only products we
distribute, for which we are reimbursed directly by Medicare. We
anticipate that our payor mix for the remainder of our fiscal year
2003 will be similar to the payor mix achieved in the six months
ended December 31, 2002.

THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2001

Revenues. Total revenues increased 127% from $160.2 million to $364.4
million from the three months ended December 31, 2001 to the three
months ended December 31, 2002. Net patient revenues increased 127%
from $155.6 million to $353.8 million from the three months ended
December 31, 2001 to the three months ended December 31, 2002. The
increase is primarily due to the acquisitions of BioPartners In Care,
Inc. in December 2001 and the Specialty Pharmaceutical Services
division (SPS) of Gentiva Health Services, Inc. in June 2002. In
addition, we experienced volume growth with the addition of new
patients and additional sales of product to existing patients. We
also experienced an increase in our seasonal drug Synagis® for the
treatment of Respiratory Syncytial Virus (RSV) as a result of
increased patient volume. Sales of Synagis® are seasonal and the
majority of our sales occur during the second and third quarters of
our fiscal year.

As the table above indicates, the acquisition of the SPS business
resulted in a significant increase in the percentage of our revenues
related to hemophilia, autoimmune disorders and PAH from 24% to 50%
from the three months ended December 31, 2001 to the three months
ended December 31, 2002. In addition, the acquisition of the SPS
business resulted in a significant decrease in the percentage of our
revenues related to multiple sclerosis, Gaucher disease and
Respiratory Syncytial Virus from 66% to 31% from the three months
ended December 31, 2001 to the three months ended December 31, 2002.

During the quarter, we began a transition to distributing
Bio-Technology General Corp.s products Oxandrin® and Delatestryl® on
a consignment basis. After this transition, we will no longer record
the revenue for the sale of these products, but we will continue to
receive and record a distribution fee. The transition to this new
arrangement will be fully implemented by April 30, 2003. In addition,
in the third quarter we plan to sell the infertility business that
was acquired as
part of the BioPartners In Care, Inc. acquisition. Revenues from
Oxandrin® , Delatestryl® and the infertility products amounted to
approximately $25 million in the December quarter.





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##### Table of Contents



Cost of sales. Cost of sales increased 114% from $135.8 million to
$290.8 million from the three months ended December 31, 2001 to the
three months ended December 31, 2002, which is commensurate with the
increase in revenues discussed above. As a percentage of revenues,
cost of sales decreased from 84.8% to 79.8% from the three months
ended December 31, 2001 to the three months ended December 31, 2002
resulting in gross margins of 15.2% and 20.2% for the three months
ended December 31, 2001 and 2002, respectively. Gross margins for the
individual products have remained relatively stable. However, the
change in product mix as a result of the SPS acquisition discussed
above, resulted in an increase in the composite gross margin in the
three months ended December 31, 2002. The primary drivers for the
improvement in gross margins were increased revenues from our higher
margin products. In addition, we benefited from lower acquisition
costs on some products that we distribute.

General and Administrative. General and administrative expenses
increased from $10.8 million to $32.7 million, or 203%, from the
three months ended December 31, 2001 to the three months ended
December 31, 2002. The increase is primarily due to the acquisitions
completed during fiscal 2002. In addition, we experienced 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. As a percentage of revenues,
general and administrative expenses increased from 6.7% to 9.0% from
the three months ended December 31, 2001 to the three months ended
December 31, 2002. The increase in general administrative expenses as
a percentage of revenues is due to the product mix changes discussed
above. Our higher margin products, which were a larger percentage of
our total revenues in the three months ended December 31, 2002, have
higher reimbursement, sales and other administrative support expenses
than many of the other products we distribute.

Bad Debts. Bad debts increased from $1.0 million to $7.6 million from
the three months ended December 31, 2001 to the three months ended
December 31, 2002. As a percentage of revenues, bad debt expense
increased from .6% to 2.1% from the three months ended December 31,
2001 to the three months ended December 31, 2002. The increase in bad
debts as a percentage of revenues is primarily due to the acquisition
of the SPS business, which resulted in an increase in the percentage
of our revenues that were reimbursed by major medical benefit plans
versus prescription card benefits. The majority of the reimbursements
provided by major medical benefit plans are subject to much higher
co-payment and deductible amounts resulting in higher bad debt
expense.

Depreciation and Amortization. Depreciation expense increased from
$.5 million to $1.4 million from the three months ended December 31,
2001 to the three months ended December 31, 2002, as a result of the
acquisitions completed in fiscal 2002, purchases of property and
equipment associated with our revenue growth and expansion of our
leasehold facility improvements. Amortization expense increased from
$.3 million to $1.5 million from the three months ended December 31,
2001 to the three months ended December 31, 2002, due to the
acquisitions completed in fiscal 2002.

Interest Income/Expense, Net. Interest income was $.3 million for the
three months ended December 31, 2001 and interest expense was $2.0
million for the three months ended December 31, 2002. The change,
amounting to $2.3 million, is due to the $230 million of debt
incurred in June 2002 to finance the cash portion of the SPS
acquisition and the related acquisition costs.

Income Tax Expense. The effective tax rate was 38.9% and 38.8% for
the three months ended December 31, 2001 and 2002, respectively. The
difference between the recognized effective tax rate and the
statutory rate of 35% is primarily attributable to state income
taxes.

SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2001

Revenues. Total revenues increased 139% from $286.8 million to $686.2
million from the six months ended December 31, 2001 to the six months
ended December 31, 2002. Net patient revenues increased 140% from
$277.8 million to $666.3 million from the six months ended December
31, 2001 to the six months ended December 31, 2002. The increase is
primarily due to the acquisitions of BioPartners In Care, Inc. in
December 2001 and SPS in June 2002. In addition, we experienced
volume growth with the addition of new patients and additional sales
of product to existing patients. We also experienced an increase in
our seasonal drug Synagis® for the treatment of RSV as a result of
increased patient volume. Sales of Synagis® are seasonal and the
majority of our sales occur during the second and third quarters of
our fiscal year.

As the table above indicates, the acquisition of the SPS business
resulted in a significant increase in the percentage of our revenues
related to hemophilia, autoimmune disorders and PAH from 25% to 51%
from the six months ended December 31, 2001 to the six months ended
December 31, 2002. In addition, the acquisition of the SPS business
resulted in a significant decrease in the percentage of our revenues
related to multiple sclerosis, Gaucher disease and Respiratory
Syncytial Virus from 64% to 30% from the six months ended December
31, 2001 to the six months ended December 31, 2002.

Cost of sales. Cost of sales increased 125% from $242.8 million to
$546.7 million from the six months ended December 31, 2001 to the six
months ended December 31, 2002, which is commensurate with the
increase in revenues discussed above. As a percentage of revenues,
cost of sales decreased from 84.6% to 79.7% from the six months ended
December 31, 2001 to the six months ended December 31, 2002 resulting
in gross margins of 15.4% and 20.3% for the six months ended December
31, 2001 and 2002, respectively. Gross margins for the individual
products have remained relatively stable. However, the change





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in
product mix as a result of the SPS acquisition discussed above,
resulted in an increase in the composite gross margin in the six
months ended December 31, 2002. The primary drivers for the
improvement in gross margins were increased revenues from our higher
margin products. In addition, we benefited from lower acquisition
costs on some products that we distribute.

General and Administrative. General and administrative expenses
increased from $19.3 million to $63.4 million, or 228%, from the six
months ended December 31, 2001 to the six months ended December 31,
2002. This increase is primarily due to the acquisitions completed
during fiscal 2002. In addition, we experienced 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. As a percentage of revenues, general and
administrative expenses increased from 6.7% to 9.2% from the six
months ended December 31, 2001 to the six months ended December 31,
2002. The increase in general and administrative expenses as a
percentage of revenues is due to the product mix changes discussed
above. Our higher margin products, which were a larger percentage of
our total revenues in the six months ended December 31, 2002, have
higher reimbursement, sales and other administrative support expenses
than many of the other product lines we distribute.

Bad Debts. Bad debts increased from $2.1 million to $14.2 million
from the six months ended December 31, 2001 to the six months ended
December 31, 2002. As a percentage of revenues, bad debt expense
increased from .7% to 2.1% from the six months ended December 31,
2001 to the six months ended December 31, 2002. The increase in bad
debts as a percentage of revenues is primarily due to the acquisition
of the SPS business, which resulted in an increase in the percentage
of our revenues that were reimbursed by major medical benefit plans
versus prescription card benefits. The majority of the reimbursements
provided by major medical benefit plans are subject to much higher
co-payment and deductible amounts resulting in higher bad debt
expense.

Depreciation and Amortization. Depreciation expense increased from
$1.0 million to $2.6 million from the six months ended December 31,
2001 to the six months ended December 31, 2002, as a result of the
acquisitions completed in fiscal 2002, purchases of property and
equipment associated with our revenue growth and expansion of our
leasehold facility improvements. Amortization expense increased from
$.5 million to $3.0 million from the six months ended December 31,
2001 to the six months ended December 31, 2002, due to the
acquisitions completed in 2002.

Interest Income/Expense, Net. Interest income was $.8 million for the
six months ended December 31, 2001 and interest expense was $4.1
million for the six months ended December 31, 2002. The change,
amounting to $4.9 million, is due to the $230 million of debt
incurred in June 2002 to finance the cash portion of the SPS
acquisition and the related acquisition costs.

Income Tax Expense. The effective tax rate was 38.8% and 39.4% for
the six months ended December 31, 2001 and 2002, respectively. The
difference between the recognized effective tax rate and the
statutory rate of 35% is primarily attributable to state income
taxes.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2002, working capital was $308.7 million, cash and
cash equivalents were $36.3 million and the current ratio was 2.3 to
1.0.

Net cash provided by operating activities was $32.3 million for the
six months ended December 31, 2002. During the six months ended
December 31, 2002, accounts receivable increased $21.4 million,
inventories decreased $5.8 million and accounts payable, accrued
expenses and income taxes increased $5.9 million. These changes 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 $12.6 million for the six
months ended December 31, 2002. Cash used in investing activities
consisted of $8.8 million for purchases of property and equipment,
$2.9 million for business acquisition costs and $.9 million of
undistributed earnings from our joint ventures.

Net cash used in financing activities was $26.3 million for the six
months ended December 31, 2002, which consisted of $30.9 million in
debt repayments less $4.6 million from the net proceeds of stock
option exercises and employee stock purchase plan transactions.

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, 2003 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 2003 to be
approximately $17.0 million, exclusive of any acquisitions of
businesses. In addition, on February 11, 2003 our obligation became
fixed to make a $16 million earn-out payment in connection with our acquisition of
BioPartners In Care, Inc. This obligation will be paid during the
quarter ended March 31, 2003 and will be recorded as an increase in
the goodwill related to the acquisition. We expect to fund these
expenditures and obligations through cash provided by operating
activities and/or borrowings under the revolving credit agreement
with our bank.





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During 2002, we amended and restated our $60 million revolving credit
facility with Bank of America, N.A. and other participating banks to
increase the size of the credit facility to $325 million. The credit
facility consists of a $125 million revolving commitment due June
2007, a $75 million term loan (Tranche A Term Loan) due in periodic
principal payments through March 2007, and a $125 million term loan
(Tranche B Term Loan) due in periodic principal payments through
March 2009. The amount available to borrow under this credit facility
is based upon our leverage ratio calculated as of the end of each
quarter. Based upon the leverage ratio as of December 31, 2002, the
total amount available to borrow is $285.7 million. As of December
31, 2002, the total amount outstanding under the credit facility was
$199.1 million, which included $75 million under the Tranche A Term
Loan and $124.1 million under the Tranche B Term Loan.

Amounts outstanding under the credit agreement bear interest at
varying rates based upon a London Inter-Bank Offered Rate (LIBOR) or
prime rate of interest (as selected by us), plus a variable margin
rate based upon our leverage ratio as defined by the credit
agreement.

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 financial covenants, including
requirements to maintain certain ratios with respect to leverage,
fixed charge coverage, net worth and asset coverage each as defined
in the agreement. The credit agreement also includes customary
affirmative and negative covenants, including covenants relating to
transactions with affiliates, uses of proceeds, restrictions on
subsidiaries, limitations on indebtedness, limitations on mergers,
acquisitions and asset dispositions, limitations on investments,
limitations on payment of dividends and stock repurchases, and other
distributions. The credit agreement also contains customary events of
default, including events relating to changes in control of our
company.

On July 17, 2002, we entered into an interest rate swap to protect
against fluctuations in interest rates. The agreement effectively
converts for a period of one year, $120 million of floating-rate
borrowings to fixed-rate borrowings with a fixed rate of 2.175%, plus
the applicable margin rate as determined by the credit agreement.

On December 2, 2002, we completed a three-for-two stock split, in the
form of a 50% stock dividend to shareholders of record on November
15, 2002. All historical references to common shares and earnings per
share amounts included in this report on Form 10-Q and in our
condensed consolidated financial statements and notes thereto have
been restated to reflect the three-for-two split.

On February 6, 2003, the Securities and Exchange Commission (SEC)
declared effective our shelf registration statement on Form S-3
providing for the offer, from time to time, of various securities, up
to an aggregate of $500 million. The shelf registration statement
will enable us to more efficiently raise funds from the offering of
securities covered by the shelf registration statement , subject to
market conditions and our capital needs.

We believe that our cash from operations, cash available under the
revolving credit facility and the proceeds from any offering of debt
or equity securities allowed by the shelf registration statement will
be sufficient to meet our internal operating requirements and growth
plans for at least the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Information regarding our Critical Accounting Policies and
Estimates can be found in our Annual Report on Form 10-K for our
most recent fiscal year ended June 30, 2002, filed with the SEC on
September 30, 2002. The three critical accounting policies that we
believe are either the most judgmental, or involve the selection or
application of alternative accounting policies, and are material to
our financial statements are those relating to allowance for doubtful
accounts, allowance for contractual discounts and medical claims
reserve. In addition, Note 1 to our audited financial statements
contained within our most recent Annual Report on Form 10-K, contains
a summary of our significant accounting policies.

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires
management to adopt policies and make significant judgements and
estimates to develop amounts reflected and disclosed in the financial
statements. In many cases, there are alternative policies or
estimation techniques that could be used. We maintain a thorough
process to review the application of our accounting policies and to
evaluate the appropriateness of the many estimates that are required
to prepare the financial statements. However, estimates routinely
require adjustment based on changing circumstances and the receipt of
new or better information.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure.
SFAS 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition to SFAS
123s fair value of accounting for stock-based compensation. SFAS 148
also amends the disclosure provisions of SFAS 123 and APB Opinion No.
28, Interim Financial Reporting, to require disclosure in the summary
of significant accounting policies of the effects of an entitys
accounting policy with respect to stock-based compensation on
reported net income and earnings per share in annual and interim
financial statements. SFAS 148 does not require companies to account
for stock options using the





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fair value method. We have not adopted
the fair value of accounting provisions of SFAS 123, therefore, the
transition provisions of SFAS 148 will not apply. However, SFAS 148
will require additional disclosures in our interim and annual reports
beginning with our March 2003 report on Form 10-Q.

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.

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 percentage of our revenue and
profitability from the sale of hemophilia product and intravenous
immunoglobin (IVIG) that we primarily purchase from Baxter Healthcare
Corporation, Bayer Corporation and Wyeth Pharmaceuticals.
Approximately 38% of our revenue in the six-month period ended
December 31, 2002 was derived from the sale of IVIG and hemophilia
product. During the six months ended December 31, 2002 and the
fiscal year ended June 30, 2002, the majority of our hemophilia
product was purchased from Baxter Healthcare Corporation. We also
derive a substantial percentage of our revenue and profitability from
our relationships with Biogen, Genzyme, MedImmune and
GlaxoSmithKline. Our revenue derived from these relationships
represented approximately 39% of our revenue for the six months ended
December 31, 2002.

Our agreements with these suppliers are short-term and
cancelable by either party without cause on 30 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 primarily sell 15 products. We focus almost exclusively on a
limited number of complex and expensive drugs that serve small
patient populations. The drugs that we sell with respect to the
following core disease markets account for approximately 88% of our
revenues, with the drugs for hemophilia and autoimmune disorders
constituting approximately 38% of our revenue for the six months
ended December 31, 2002:



| |  |  | Hemophilia and Autoimmune Disorders
| | - |  | -----------------------------------
|
| |  |  | Multiple Sclerosis                 
|
| |  |  | Pulmonary Arterial Hypertension    
|
| |  |  | Gaucher Disease                    
|
| |  |  | Growth Hormone-Related Disorders   
|
| |  |  | 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 operations. | 

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 or orphan drug status;                     
|
| |  |  | 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.                                                                            





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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. Most 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;                                                                
|
| |  |  | home infusion therapy companies;                                                  
|
| |  |  | manufacturers that sell their products both to distributors and directly to users;
|
| |  |  | 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 our 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.

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. Such programs are highly regulated and subject
to frequent and substantial changes and cost containment measures.
In recent years, changes in these programs have limited and reduced
reimbursement to providers. According to a Kaiser Family Foundation
report released on September 19, 2002, 45 states reported they took
actions to decrease Medicaid spending in 2002, and 41 reported they
would take additional actions to decrease Medicaid spending in 2003.
For example, the National Conference of State Legislatures estimates
that California faces a 35 billion dollar deficit over fiscal year
2003 and fiscal year 2004. We are a general partner in two
California partnerships and a significant number of our patients are
insured by Californias MediCal program. In order to deal with these
budget shortfalls, some states are attempting to create state
administered prescription drug discount plans, limit the number of
prescriptions per person that are covered, raising Medicaid co-pays
and deductibles, proposing more restrictive formularies and proposing
reductions in pharmacy reimbursement rates. As a result of the
acquisition of the SPS business, we expect the percentage of our
revenues attributable to federal and state programs to increase. 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.

Changes in average wholesale prices could reduce our pricing and
margins.

Many government payors, including Medicare and Medicaid, pay us
directly or indirectly at a percentage off the drugs average
wholesale price (or 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 several private
companies, including 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. A number of state
Medicaid agencies have revised their payment methodology as a result
of the Market Price Survey.

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. There are also several whistleblower lawsuits
pending against various drug manufacturers that have been reported in
the business press. These government investigations and lawsuits
involve allegations that manufacturers reported artificially inflated
AWP prices of various drugs to First DataBank.

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 February 3, 2003,
President Bush again included, in his 2004 budget, a proposal for
reforms in AWP payments for Medicare outpatient drugs.

On December 3, 2002, the Centers for Medicare and Medicaid
Services (CMS) issued a Program Memorandum that outlined a uniform
single national payment schedule for Medicare part-B drugs.
Previously each Medicare carrier would come up with its own estimates
of AWP. CMS will base payments on 95% of AWP as established by
First DataBank and Redbook.

On February 12, 2003, the U.S. General Accounting
Office released a report to the Ranking Minority Member, Subcommittee
on Health, Committee on Ways and Means, House of Representatives
titled Payment for Blood Clotting Factor Exceeds Providers
Acquisition Cost. The Report dated January 10, 2003 recommends
that CMS establish Medicare payment levels for clotting factor that
are more closely related to providers acquisition cost and
establish a separate payment for the cost of delivering clotting
factor to Medicare beneficiaries.

We cannot predict the eventual results of government
proposals, investigations, lawsuits or the changes made by First DataBank. If
government payors or private payors revise their pricing based on new
methods of calculating the AWP for drugs we handle or implement
reimbursement methodology based on some value other than AWP, 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 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, 2001 and 2002 and the six
months ended December 31, 2002, we derived approximately 81%, 79% and
73% respectively of our gross patient revenue from non-governmental
payors (including self-pay), which included 4%, 3% and 1%,
respectively for those periods, from sales to private physician
practices whose ultimate payor is typically Medicare.

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 injectable 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, Inc. and
affiliates (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.

We incurred additional debt to acquire the SPS business of Gentiva
Health Services, Inc. which may limit our future financial
flexibility.

The current level of our debt will have several important
effects on our future operations, including, among others:



| |  |  | A significant portion of our 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;                                                       
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our debt covenants will require us to meet financial
tests, and may impose other limitations that may limit our
flexibility in planning for and reacting to changes in our
business, including possible acquisition opportunities;
|
| |  |  | Our ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate
and other purposes may be limited;                                                                          
|
| |  |  | Failure to meet our debt covenants could result in foreclosure by our lenders;                                                                                                                                                    
|
| |  |  | We may be at a competitive disadvantage to similar companies that have less debt; and                                                                                                                                             





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##### Table of Contents





| |  |  | Our vulnerability to adverse economic and industry conditions may increase.
| | - |  | ---------------------------------------------------------------------------

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.

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

We 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 the SPS business is
complex and requires 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 our revenues, level of expenses and operating results.

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

We have joint venture 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, 2001 and 2002 and the six months ended
December 31, 2002, we derived approximately 4%, 4% and 2%,
respectively, of our income before income taxes from equity in the
net income of unconsolidated joint ventures.

Since April 2000, we have owned 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 10% of our
income before income taxes for the fiscal years ended June 30, 2001
and 2002 and 8% of our income before income taxes for the six months
ended December 31, 2002.

In addition to joint venture relationships, we also provide
pharmacy management services to several medical centers.

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 favorable PHS pricing for
drugs we handle, our business could be harmed.

The federal pricing program of the Public Health Service,
commonly known as PHS, allows hospitals and hemophilia treatment
centers to obtain discounts on clotting factor. While we are able to
access PHS pricing through our contracts to provide contract
pharmacy services to hemophilia treatment centers, we are not
eligible to participate directly in these programs. Increased
competition from hospitals and hemophilia treatment centers that have
such favorable pricing 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
acquisition and joint venture 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;                                               





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| |  |  | 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. We also face exposure if Gentiva is not able to
fulfill its indemnification obligations under the terms of our asset
purchase agreement. The purchase price we paid to Gentiva for the SPS
business was distributed directly to the shareholders of Gentiva, and
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 obligation to us. We may suffer
impairment of assets or have to bear a liability for which we are
entitled to indemnification but are unable to collect.

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;                                                                                                                                        
|
| |  |  | 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;                                                                                                                                                            
|
| |  |  | general political and economic conditions;                                                                                                                                                 
|
| |  |  | interest rate fluxuations; and                                                                                                                                                             
|
| |  |  | adverse experience in collection of accounts receivable.                                                                                                                                   

Our business would be harmed if the biopharmaceutical industry
reduces 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
some 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. For example, an industry wide recombinant factor VIII
product shortage existed for some time, as a result of the
manufacturers being unable to increase production to meet rising
global demand, and has only recently returned to normal levels. 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





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##### Table of Contents



second drug for the same
treatment for a period of seven years unless the new drug is
chemically different or clinically superior. Not all of the drugs
that we sell which are related to our core disease states have
orphan drug status. The orphan drug status applicable to drugs
related to the seven core disease states that we handle expires (or
expired) as follows:



| |  |  | Flolan® expired September 2002 (primary pulmonary
hypertension) and expires April 2007 (secondary pulmonary
hypertension due to intrinsic pulmonary vascular disease);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | AVONEX® expires May 2003;                                                                                                                                             
|
| |  |  | Nutropin® Depot expires July 2007;                                                                                                                                    
|
| |  |  | Tracleer expires November 2008;                                                                                                                                      
|
| |  |  | Remodulin® expires May 2009.                                                                                                                                          

However, despite orphan drug status, there are competing
products on the market for Avonex and Nutropin® Depot. Tracleer,
Remodulin® and Flolan® also compete in the treatments of pulmonary
arterial hypertension. The loss of orphan drug status, or approval
of new drugs notwithstanding orphan drug status, could result in
additional competitive drugs entering the market, which could harm
our business. For example, despite the orphan drug status of AVONEX®,
the FDA recently approved a competitive drug called Rebif®, which we
do not currently expect to handle.

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.    

Disruptions in commercial activities such as those 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.





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##### Table of Contents



Our operations have been and could again be harmed by terrorist
attacks on the U.S. For example, transportation systems and couriers
that we rely upon to deliver our drugs have been and could again 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 payments from payors, which would harm our cash
flow. The U.S. economy in general may be adversely affected by
terrorist attacks or by any related outbreak of hostilities. Any such
economic downturn could adversely impact our results of operations,
impair our cost of or ability to raise debt or equity capital or
impede our ability to continue growing our business.

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 have 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. As of December 31, 2002, we had goodwill, net of
accumulated amortization, of approximately $337 million, or 36% of
total assets and 66% 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
and nurses. 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.

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 or debt 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
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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##### Table of Contents





| |   |  | 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. Our entities that
provide nursing for our patients and our nurses must obtain
licenses in certain states to conduct our business. If we are
unable to maintain our licenses or if states place burdensome
restrictions or limitations on non-resident pharmacies or
nurses, 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. The
market price of our common stock could fluctuate substantially based
on a variety of factors, including the following:



| |  |  | 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 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.





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##### Table of Contents






ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to the impact of financial market risk is significant.
Our primary financial market risk exposure consists of interest rate
risk related to interest that we are obligated to pay on our
variable-rate debt.

We use derivative financial instruments to manage some of our
exposure to rising interest rates on our variable-rate debt,
primarily by entering into variable-to-fixed interest rate swaps. We
have fixed the interest rate through July 21, 2003 on $120.0 million
of our variable-rate debt through the use of a variable-to-fixed
interest rate swap. As a result, we will not benefit from any
decrease in interest rates nor will we be subjected to any detriment
from rising interest rates on this portion of our debt during the
period of the swap agreement. Accordingly, a 100 basis point decrease
in interest rates along the entire yield curve would not increase
pre-tax income by $300,000 for a quarter as would be expected without
this financial instrument. However, a 100 basis point increase in
interest rates along the entire yield curve would also not decrease
pre-tax income by $300,000 for the same period as a result of using
this derivative financial instrument.

For the remaining portion of our variable-rate debt, we have not
hedged against our interest rate risk exposure. As a result, we will
benefit from decreasing interest rates, but we will also be harmed by
rising interest rates on this portion of our debt. Accordingly, if we
maintain our current level of total debt, a 100 basis point decrease
in interest rates along the entire yield curve would result in an
increase in pre-tax income of approximately $200,000 during a
quarter. However, a 100 basis point increase in interest rates would
result in a decrease in pre-tax income of approximately $200,000 for
the same period.

Actual changes in rates may differ from the hypothetical assumptions
used in computing the exposures in the examples cited above.




ITEM 4. CONTROLS AND PROCEDURES



|(a) |  | Evaluation of Disclosure Controls and Procedures
|--- |  | ------------------------------------------------

Our Chief Executive Officer and Chief Financial Officer have
evaluated our disclosure controls and procedures (as such term is
defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended) within 90 days prior to the filing
of this report and concluded, as of the date that evaluation was
completed, that our disclosure controls and procedures are designed
to provide reasonable assurance that information required to be
disclosed in our reports under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in the SECs rules and forms.



|(b) |  | Changes in Internal Controls
|--- |  | ----------------------------

There have been no significant changes in our internal controls
or in other factors that could significantly affect these controls
since the date last evaluated.





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##### Table of Contents






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
19, 2002 at its offices in Memphis, TN. Stockholders holding 88.2%
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 David D. Stevens, Kevin L. Roberg and
Kenneth Melkus to serve as Class I directors to serve until the
2005 annual meeting of stockholders and until their successors
are elected and qualified; and to elect Nancy-Ann DeParle to
serve as a Class III director to serve until the 2004 annual
meeting of stockholders and until her successor is elected and
qualified. The votes cast for each director were as follows:
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|            |  |                       |  |                        |  |               
|----------- |  | --------------------- |  | ---------------------- |  | --------------
|Mr. Stevens |  | Voted For: 27,694,986 |  | Voted Against: 129,966 |  | Abstentions: 0
|Mr. Roberg  |  | Voted For: 27,178,590 |  | Voted Against: 646,362 |  | Abstentions: 0
|Mr. Melkus  |  | Voted For: 27,178,494 |  | Voted Against: 646,458 |  | Abstentions: 0
|Ms. DeParle |  | Voted For: 27,598,161 |  | Voted Against: 226,791 |  | Abstentions: 0



|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, 2003.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |                          |  |                   
|--------------------- |  | ------------------------ |  | ------------------
|Voted For: 25,952,656 |  | Voted Against: 1,868,435 |  | Abstentions: 3,861



| |  | The number of shares voted (votes cast) in the proposals above does
not reflect the effect of the three-for two stock split in December
2002 that was effective after the date of the annual shareholders
meeting.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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



|(a) |  | Exhibits
|--- |  | --------

|             |  |                                                                                                                       
|------------ |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit 10.1 |  | Non-Qualified Stock Option Agreement of Nancy-Ann DeParle dated November 1, 2002                                      
|Exhibit 10.2 |  | Non-Qualified Stock Option Agreement of Nancy-Ann DeParle dated November 19, 2002                                     
|Exhibit 10.3 |  | Non-Qualified Stock Option Agreement of Kevin L. Roberg dated November 1, 2002                                        
|Exhibit 10.4 |  | Non-Qualified Stock Option Agreement of Kenneth J. Melkus dated November 1, 2002                                      
|Exhibit 10.5 |  | Non-Qualified Stock Option Agreement of Kenneth R. Masterson dated November 1, 2002                                   
|Exhibit 10.6 |  | Non-Qualified Stock Option Agreement of Dick R. Gourley dated November 1, 2002                                        
|Exhibit 99.1 |  | Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|Exhibit 99.2 |  | Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002



|(b) |  | Reports on Form 8-K
|--- |  | -------------------
|   
|    |  | None.              





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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, 2003 |  | 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






CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David D. Stevens, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Accredo
Health, Incorporated (the registrant);

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:

| |  |                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
| |  |                                                                                                                                                                                                                                                                                                   
| |  | b) evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date);
and                                                                                                  
| |  |                                                                                                                                                                                                                                                                                                   
| |  | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors:



| |  |                                                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| |  |                                                                                                                                                                                                                                                                                                  
| |  | b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

|                        |  |                                         
|----------------------- |  | ----------------------------------------
|Date: February 14, 2003 |  |                                         
|                        |  |                                         
|                        |  | /s/ David D. Stevens                    
|                        |  |                                         
|                        |  | David D. Stevens
Chief Executive Officer





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##### Table of Contents






CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joel R. Kimbrough, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Accredo
Health, Incorporated (the registrant);

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:

| |  |                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | d) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
| |  |                                                                                                                                                                                                                                                                                                   
| |  | e) evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date);
and                                                                                                  
| |  |                                                                                                                                                                                                                                                                                                   
| |  | f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors:

| |  |                                                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | c) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| |  |                                                                                                                                                                                                                                                                                                  
| |  | d) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

|                        |  |                                          
|----------------------- |  | -----------------------------------------
|Date: February 14, 2003 |  |                                          
|                        |  |                                          
|                        |  | /s/ Joel R. Kimbrough                    
|                        |  |                                          
|                        |  | Joel R. Kimbrough
Chief Financial Officer





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##### Table of Contents






Exhibit Index

|              |  |                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibits                                                                                               
|              |  |                                                                                                                       
|10.1          |  | Non-Qualified Stock Option Agreement of Nancy-Ann DeParle dated November 1, 2002                                      
|10.2          |  | Non-Qualified Stock Option Agreement of Nancy-Ann DeParle dated November 19, 2002                                     
|10.3          |  | Non-Qualified Stock Option Agreement of Kevin L. Roberg dated November 1, 2002                                        
|10.4          |  | Non-Qualified Stock Option Agreement of Kenneth J. Melkus dated November 1, 2002                                      
|10.5          |  | Non-Qualified Stock Option Agreement of Kenneth R. Masterson dated November 1, 2002                                   
|10.6          |  | Non-Qualified Stock Option Agreement of Dick R. Gourley dated November 1, 2002                                        
|99.1          |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|99.2          |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002