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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


FORM 10-K



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| | þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30,
2004

OR



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| | o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-25769

Accredo Health, Incorporated

(Exact name of company as specified in its
charter)


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

1640 Century Center Pkwy, Suite 101,
Memphis, Tennessee 38134

(Address, including Zip Code, of principal
executive offices)


Registrants telephone number, including
area code:  (901) 385-3688

Securities registered pursuant to
Section 12(b) of the Act:

None

Securities registered pursuant to section
12(g) of the Act:

Common Stock, $.01 par value

Series A Junior Participating Preferred
Stock Purchase Rights


(Title of Class)


Indicate by check mark whether the Company
(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 Company was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.
Yes þ  No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
the Companys knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.  o

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

The aggregate market value of the voting stock
held by non-affiliates of the Company was $1,484,541,239 as of
December 31, 2003, based upon the last sale of such stock
as reported on the Nasdaq National Market System (Nasdaq
Stock Market) on that day (assuming for purposes of this
calculation, without conceding, that all executive officers and
directors are affiliates). There were 48,636,694 shares of
common stock, $.01 par value, outstanding at August 26,
2004.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrants Proxy Statement
for its 2004 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Annual Report.











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PART I

This report contains forward-looking
statements. Forward-looking statements relate to
expectations, beliefs, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that
are not historical facts or that necessarily depend upon future
events. In some cases, you can identify forward-looking
statements by terms such as may, will,
should, could, would,
expect, plan, anticipate,
believe, estimate, project,
predict, potential, and similar
expressions. Specifically, this report contains, among others,
forward-looking statements about:



| |   |                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our expectations regarding financial condition or
    results of operations for periods after June 30, 2004;                                                                                                                                                     
|
| |  | our future sources of and needs for liquidity and
    capital resources;                                                                                                                                                                                         
|
| |  | our critical accounting policies;                                                                                                                                                                                                                                
|
| |  | our expectations regarding the size and growth of
    the market for our products and services;                                                                                                                                                                  
|
| |  | our business strategies and our ability to grow
    our business;                                                                                                                                                                                                
|
| |  | the implementation or interpretation of current
    or future regulations and legislation relating to the industry
    in which we operate; and                                                                                                                  
|
| |  | our ability to maintain contracts and
    relationships on terms that are satisfactory to us with
    biopharmaceutical manufacturers such as Biogen Idec, Inc.
    (Biogen); Genzyme Corporation; MedImmune, Inc.; GlaxoSmithKline,
    Inc.; and Genentech Inc.

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 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 risk factors beginning on
page 18 hereof.

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 expect or anticipate.

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.



|        |         
|------- | --------
|Item 1. | Business

Overview

We are one of the largest providers of specialty
retail pharmacy services in the United States. We sell a limited
number of high cost drugs for the recurring treatment of chronic
and potentially life threatening diseases. We also provide
services to our patients, and we are paid for our products and
services in two ways. We are paid for dispensing medications to
patients similar to a typical retail pharmacy, and we are also
often paid by the manufacturer to provide additional services.
Our services help simplify the difficult and often challenging
medication process for patients with a chronic disease and help
ensure that patients receive and take their medication as
prescribed. Our services benefit biopharmaceutical manufacturers
and payors by accelerating patient acceptance of new drugs,
facilitating patient compliance with prescribed treatments,
addressing difficult reimbursement issues and capturing valuable
clinical information about a new drugs effectiveness.

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Our services include specialty retail pharmacy
services, clinical services, reimbursement services and delivery
services. We primarily provide overnight, temperature-controlled
delivery of all drugs and supplies necessary for patients to
self-administer their drug dosages safely and effectively in the
privacy of their homes. Some of the drugs we sell are
administered at physicians offices or other alternative
sites. We also provide services to patients who require
our IV infused drugs. Our pharmacists and customer service
staff talk frequently with patients over the telephone, help
them comply with prescribed treatment schedules and educate them
about ways to manage their complex diseases more effectively.
Our reimbursement specialists manage the complicated paperwork
that is required to collect payment for the patients
medication from insurance companies, managed care plans and
governmental payors.

We sell a limited number of drugs to our
patients. We mainly focus our services on injectable drugs that:



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | are used on a recurring basis to treat chronic
    and potentially life-threatening diseases;            
|
| |  | are expensive, with annual costs generally
    ranging from approximately $8,000 to $300,000 per patient;
|
| |  | are complex and clinically challenging with the
    potential for side effects or adverse reactions; and 
|
| |  | require temperature control or other specialized
    handling.                                           

We have agreements with fifteen biopharmaceutical
manufacturers to buy drugs and to provide varying degrees of
specialty retail pharmacy services for our twenty-one primary
product lines. Although most of our agreements that involve
specialty retail pharmacy services are not exclusive, we
generally are a recommended provider of the manufacturers
drug to payors, patients and physicians.

Accredo Health, Incorporated, was incorporated in
Delaware in 1996. Our principal executive offices are located at
1640 Century Center Parkway, Suite 101, Memphis, Tennessee
38134. Our telephone number at that address is 901-385-3688.

Products and Services

We offer the following products and services:

Sale and Delivery of
Drugs.We sell and provide timely
delivery of drugs and ancillary supplies directly to the patient
or the patients physician in packaging specially designed
to maintain appropriate temperatures. The package typically
contains all of the supplies required for administration in the
patients home or in other alternate sites. Substantially
all products are shipped from our four primary pharmacy
locations in Memphis, Tennessee; Charlotte, North Carolina;
Nashville, Tennessee; and Pittsburgh, Pennsylvania. We also
maintain 36 satellite pharmacy locations across the United
States. We ship our products primarily via FedEx.

Specialty Retail Pharmacy
Services.We offer customized services
to biopharmaceutical manufacturers designed to meet specific
needs that arise at various stages in the life cycles of their
products.

Prior to product launch, we offer:



| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | consulting services related to strategic pricing
    decisions;                                                                                                                                                      
|
| |  | analyses and information to assist manufacturers
    in evaluating payor mix and pricing strategies for their new
    drugs;                                                                                         
|
| |  | testing of a manufacturers packaging to
    assess maintenance of product temperatures and to determine
    whether the packaging system will meet the products unique
    needs during normal shipping conditions;
|
| |  | advice on injection and infusion supplies related
    to the drug therapy and assistance in procuring supplies and
    customized packaging for infusion supply kits; and                                            
|
| |  | clinical guidelines that assist nurses and
    caregivers in learning how to safely and effectively administer
    a drug, including sterilization techniques, supplies needed and
    infusion time required.       

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Following product launch, we offer:



| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | clinical hotlines that allow the physician or
    patient caregiver to inquire about product usage, adverse drug
    reactions and other clinical questions;              
|
| |  | reimbursement hotlines for patients and health
    care professionals;                                                                                                    
|
| |  | support for manufacturers patient
    assistance programs for patients without the financial ability
    to otherwise acquire needed drugs and services;                 
|
| |  | replacement drug and supply programs that
    replenish patients inventory of products or supplies that
    become damaged;                                              
|
| |  | home care coordination programs that provide
    patient assistance in training, identify home care providers and
    transfer clinical information to all caregivers; and
|
| |  | triage services that refer patients to the
    appropriate provider based on the patients insurance
    provider network.                                                

Results of our interaction with patients, which
is primarily via telephone, are coded to protect privacy and
tracked to compile valuable information, including side effects,
drug interactions, administration problems, supply issues,
physician prescription habits and reasons for therapy
discontinuation and non-compliance.

We will also report on adverse drug reactions,
log the occurrence, and complete an initial preliminary report
of the occurrence to assist manufacturers in completing adverse
event reports in a timely manner. We can also create a wide
variety of additional reports that can be customized to meet
specific manufacturers needs. Examples of reports include
sales by physician, sales by zip code, sales trending, first
time patient orders, Medicaid and Medicare sales, inventory
status and reasons for patient discontinuations. Due to the
nature of the data we collect, we have established procedures
designed to ensure compliance with laws regarding
confidentiality and privacy of patient information.

Clinical Services.We work with the patient and the patients physician to
implement the prescribed plan of care. Each patient is assigned
to a team consisting of a pharmacist, a customer service
representative and a reimbursement specialist, and with certain
therapies, a Registered Nurse. Generally, each patients
team members specialize only in that patients disease and
work only with payors and providers in that patients
geographic region. In helping to implement the prescribed plan
of care, we:



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | help patients understand their medication and
    treatment program;                                                                             
|
| |  | help patients manage potential side effects and
    adverse reactions that may occur so that patients are less
    likely to discontinue therapy;
|
| |  | help coordinate backup care in the event of a
    medical emergency; and                                                                         
|
| |  | help patients establish an inventory management
    and record keeping system.                                                                   

In addition, we assist patients and their
families in coping with a variety of difficult and emotional
social challenges presented by their diseases, participate in
patient advocacy organizations, assist in the formation of
patient support groups, advocate legislation to advance patient
interests and publish newsletters for our patients.

Reimbursement
Services.By focusing on specific
chronic diseases, we have developed significant expertise in
managing reimbursement issues related to the patients
condition and treatment program. Due to the long duration and
high cost of therapy generally required to treat chronic
disorders, the availability of adequate health insurance is a
continual concern for chronically ill patients and their
families. Generally, we contact the payor prior to each shipment
to determine the patients health plan coverage and the
portion of costs that the payor will reimburse. Our
reimbursement specialists review issues such as
pre-authorization or other prior approval requirements, lifetime
limits, pre-existing condition clauses, and the availability of
special state programs. By identifying coverage limitations as
part of an initial consultation, we can assist the patient in
planning for alternate coverage, if necessary. From time to
time, we negotiate with payors to facilitate or

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expand coverage for the chronic diseases we
serve. In addition, we accept assignment of benefits from
numerous payors, which substantially eliminates the claims
submission process for most patients.


Disease Markets and Related Products

Many of the biopharmaceutical drugs that we sell,
including growth hormones, anti-hemophilic factor, intravenous
immunoglobin (IVIG) and other blood-related products, are
available from multiple sources. Currently, we sell and provide
our specialty services primarily with respect to 21 product
lines. The drugs we sell with respect to seven core disease
markets account for approximately 90% of our revenues. These
seven disease markets and the drugs that we sell to service
these markets are described below.

With respect to drugs that we sell for our seven
core disease therapies, Synagis® is the only treatment
available for RSV and Cerezyme® is the only enzyme
replacement therapy available for Gaucher Disease. We have
agreed with Genzyme and Biogen to not sell drugs that compete
with Cerezyme® and AVONEX®. There are other drugs that
we do not sell that are similar to or that compete with some of
the other drugs that we sell.

Hemophilia.Hemophilia is an inherited, genetic, lifelong bleeding disorder
caused by the absence or inactivity of an essential blood
clotting protein or factor. Two major disease
categories exist, hemophilia A, or Factor VIII deficiency, and
hemophilia B, or Factor IX deficiency. It is estimated that
there are approximately 20,000 people with hemophilia in the
United States, and presently there is no known cure. Individuals
with hemophilia may suffer from bleeding episodes that can occur
spontaneously or as a result of physical activity or trauma.
While small surface cuts can usually be treated with a pressure
bandage, the most frequent complication of hemophilia is
internal bleeding into muscles and joints, which can cause
arthritis and debilitating orthopedic problems. More serious
complications include internal bleeding in the head, neck,
spinal cord or internal organs, which can cause death.

Hemophilia is generally treated by infusing blood
clotting factor concentrates intravenously when the symptoms of
a bleed are detected. This therapy is generally administered by
the patient or his or her family members, without the assistance
of a nurse, in response to bleeding episodes. Approximately 60%
of the persons with hemophilia in the United States have a
severe form of the disorder as measured by the level of factor
naturally present in the body. In general, the more severe the
factor deficiency, the more frequently the bleeding episodes may
occur. On average, someone with severe hemophilia will need to
infuse factor weekly. In many individuals with severe
hemophilia, factor therapy is administered prophylactically to
maintain high enough circulating factor levels to minimize the
risk of bleeding.

Many hemophilia patients contracted hepatitis or
human immunodeficiency virus, commonly known as HIV, as a result
of contaminated blood derivative therapies they received prior
to the mid-1980s. It is estimated that approximately
one-half of the hemophilia population who received blood
clotting factor prior to the mid-1980s was exposed to HIV
and is at risk of developing acquired immune deficiency
syndrome, commonly known as AIDS. We offer medications used in
treating AIDS as a convenience to our hemophilia patients that
have contracted HIV. In the early 1990s, recombinant
clotting factor, a biotechnological alternative to
plasma-derived factor, was introduced and has proved to be as
effective as the blood-derived products with virtually no risk
of viral transmission. Current utilization reflects increased
use of recombinant products by physicians because of the
advantages of increased purity. However, issues related to the
development of inhibitors, or antibodies that neutralize the
infused factor products and prevent clotting, may slow the
increase in utilization rates of these products. Recently the
Food and Drug Administration (FDA) has approved a new factor
product Advate that contains no human or animal proteins or
albumin.

There are currently seven major suppliers of
FDA approved products used for treating hemophilia. We
purchase products from all seven suppliers. The majority of our
hemophilia product was purchased from Baxter Healthcare
Corporation in the fiscal years ended June 30, 2002, 2003
and 2004.

We have entered into hemophilia product
distribution agreements with Baxter Healthcare Corporation and
ZLB Behring naming us as a non-exclusive hemophilia specialty
pharmacy provider of hemophilia products to home care patients
in the United States and Puerto Rico. These agreements provide
for minimum

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purchase commitments by us and our acquisition
cost of the drugs is based upon the volume of product purchased
by us.


Pulmonary Arterial
Hypertension.Pulmonary Arterial
Hypertension (PAH) is a chronic pulmonary disease for which
there is no known cure. Patients with this disease experience an
increase in pulmonary arterial pressure that results in symptoms
such as dyspnea, palpitations and syncope. Generally, PAH
impacts patients of all ages, but is commonly diagnosed between
the ages of 20 and 40. It is estimated that 1 to 2 out of every
1 million Americans will develop Primary Pulmonary
Hypertension, a common form of PAH. Once diagnosed, PAH patients
receive therapy for the remainder of their lifetime or until
they receive a lung transplant. This disease is treated with
one, or a combination, of the following three products:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | Flolan®, which is an epoprosternol sodium
    product manufactured by GlaxoSmithKline;                 
|
| |  | Tracleer®, which is a bosentan product
    manufactured by Actelion Pharmaceuticals U.S., Inc.; and    
|
| |  | Remodulin®, which is a treprostinil sodium
    product manufactured by United Therapeutics Corporation.

We have agreements with GlaxoSmithKline for the
sale of Flolan®, with United Therapeutics Corporation for
the sale of Remodulin®, and with Actelion Pharmaceuticals
U.S., Inc. for the sale of Tracleer®. These agreements have
multiple year terms, may be terminated without cause on 90 to
365 days prior notice and obligate us to provide varying
degrees of specialized services.

Autoimmune Disorders and Primary
Immunodeficiency Disease.Autoimmune
disorders describe a group of chronic diseases in which the body
treats its own tissues or cells as if they were foreign
substances and produces antibodies to attack and destroy those
tissues or cells. Most autoimmune disorders currently are
incurable and tend to become progressively more severe. Various
therapies, including IVIG, are administered to minimize the
effects of autoimmune disorders and the severity of their
associated symptoms. Although often administered via infusion in
a hospital or physicians office, patients who require
repeated treatment can have IVIG administered at home.

Primary Immunodeficiency Diseases (PID) are
a group of disorders caused by an absence or malfunction of a
component of the immune system. The component most often missing
or malfunctioning is antibodies or immunoglobulins. Due to the
lack of antibodies these patients have an increased
susceptibility to life threatening infections and chronic lung
disease. Primary immunodeficiencies can occur at any age. IVIG
treatment replaces the antibodies missing or malfunctioning.
Currently there is no other alternative therapy.

Because IVIG is collected and processed from
human donors, the IVIG product market can be somewhat limited by
supply constraints. We purchase product from all six major
suppliers of IVIG in the United States. We have volume
commitment purchase contracts with Baxter Healthcare Corporation
and ZLB Behring. The majority of IVIG sold by us in the fiscal
years ended June 30, 2003 and 2004 was acquired from Baxter.

Multiple Sclerosis.Multiple Sclerosis is a progressive neurological disease in
which the body loses the ability to transmit messages among
nerve cells, leading to a loss of muscle control, paralysis and,
in some cases, death. Patients with active relapsing Multiple
Sclerosis experience an uneven pattern of disease progression
characterized by periods of stability interrupted by flare-ups
of the disease. Industry sources estimate that Multiple
Sclerosis affects between 250,000 and 350,000 people in the
United States, approximately two-thirds of whom are women.
Disease onset typically occurs in young adults between the ages
of 20 and 40. Of the patients diagnosed with Multiple Sclerosis
in the United States, about 90% of patients initially have
relapsing Multiple Sclerosis and about half of those patients go
on to develop a progressive form of the disease. About 10% of
patients exhibit a progressive form of the disease at onset.
Industry sources estimate that, of the persons currently
affected by Multiple Sclerosis in the United States,
approximately 50% have a

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relapsing form of the disease, and approximately
50% have a progressive form. There are currently four
FDA-approved products used for treating relapsing Multiple
Sclerosis:




| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | AVONEX®, which is manufactured by Biogen
    Idec, Inc.;                           
|
| |  | Betaseron®, which is manufactured by Chiron
    Corporation;                       
|
| |  | Copaxone®, which is manufactured by Teva
    Pharmaceutical Industries Limited; and
|
| |  | Rebif®, which is manufactured by Serono, S.A.                                      

Effective September 1, 2002, we entered into
amended and restated agreements with Biogen pursuant to which we
are a preferred distributor of AVONEX® and provide various
services and information to Biogen. The agreements are for a
term ending December 31, 2005. Our agreements with Biogen
are terminable by either party in the event of a breach. Our
agreements provide that as long as we are the only preferred
home delivery service provider approved by Biogen, we may not,
without Biogens approval, sell any products that compete
with AVONEX® for the treatment of Multiple Sclerosis. In
some circumstances we may not sell competing products for a year
following the termination of the agreements. We do not have
exclusive rights to sell AVONEX®, and Biogen has reserved
the right under our agreements to sell AVONEX® directly or
to appoint other providers of AVONEX®, but any such action
would eliminate our exclusivity obligations. AVONEX® is
generally administered via a single intramuscular injection once
per week.

Gaucher Disease.Gaucher Disease is a seriously debilitating, sometimes fatal,
genetic disorder caused by a deficiency of an important enzyme
in the body called glucocerebrosidase. This deficiency results
in the accumulation of the glucocerebroside lipid in the cells
of organs in the body. The disease is characterized by an
enlarged liver or spleen, anemia, bleeding problems, fatigue,
bone and joint pain and other orthopedic complications such as
repeated fractures and bone erosion. Type I Gaucher Disease is
the most common form of Gaucher Disease, affecting about 90% of
all Gaucher patients. Genzymes Ceredase® and
Cerezyme® products are FDA-approved products used for
treating Type I Gaucher Disease. Cerezyme® is the newer
product, and we have very few patients receiving Ceredase®.
The FDA has approved a third product, Zavesca®, for the
treatment of mild to moderate Gaucher Disease where enzyme
replacement is not appropriate. We do not distribute this drug.

We have a longstanding relationship with Genzyme
relating to Cerezyme®. Cerezyme® is administered by
intravenous infusion. Dosing frequencies vary, but a typical
dosing regimen involves administration once every two weeks.
Pursuant to our current agreements with Genzyme, we are a
preferred distributor of Cerezyme® in the United States and
its Territories and provide various information and other
services to Genzyme. The pricing of Cerezyme® under our
agreements with Genyzme, as well as the scope and pricing of
services that we provide, are subject to periodic review. Our
agreements with Genzyme are for a term ending April 1,
2005. The Agreements automatically renew on an annual basis
unless either party provides 90 days prior notice of
non-renewal, and are terminable by either party for any reason
with 90 days prior notice. In addition, the agreements
provide that, during the term of the agreements and for a period
of five years after their termination, we may not sell any
prescription drug for the treatment of Gaucher Disease other
than Cerezyme®. We do not have exclusive rights to sell
Cerezyme®. Genzyme has reserved the right under the
agreements to sell Cerezyme® directly or to appoint other
distributors of this product.

Growth Hormone-Related
Disorders.A major treatable cause of
growth delay in children is growth hormone deficiency. It is
estimated that there are approximately 40,000 pediatric patients
in the United States who are candidates for growth hormone
therapy. The market for growth hormone products is relatively
mature, and currently five manufacturers sell eleven
FDA-approved growth hormone products for a variety of
indications. However, a majority of patients currently being
treated with growth hormone products use one of Genentechs
growth hormone products, Protropin®, Nutropin®, or
Nutropin AQ®, the first long-acting dosage form of
recombinant human growth hormone.

We have purchasing relationships with all five
manufacturers of growth hormone products used in the United
States, including a long-standing relationship with Genentech. A
sixth manufacturer is about to enter the market. Typically,
patients or family members administer growth hormone products at
home without the presence of a nurse. Most growth hormone
products require administration by injection several times per

6



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week, and in some cases daily. We have entered
into an amended and restated national distribution agreement
with Genentech in which we also provide compliance programs,
nursing coordination, various information and other services
relating to Genentechs human growth hormone products,
Protropin®, Nutropin®, and Nutropin AQ® in the
United States. The pricing of Protropin®, Nutropin®,
and Nutropin AQ® under the distribution agreement, as well
as the scope and pricing of the services provided by us, are
subject to adjustment depending on the Company meeting certain
performance criteria. The distribution agreement has a term
expiring December 31, 2006. The agreement may be terminated
by Genentech if we have a change of control and may be
terminated by either party following 90-days notice. We do not
have exclusive rights to distribute Protropin®,
Nutropin®, and Nutropin AQ®. Genentech has reserved
the right under our agreement to sell these drugs directly or to
appoint other distributors of these drugs.


Respiratory Syncytial
Virus.Respiratory Syncytial Virus
(RSV) is a serious lower respiratory tract disease that
primarily attacks pediatric patients. RSV is the most common
cause of pneumonia and bronchiolitis in infants and children.
Approximately two-thirds of infants are infected with RSV during
the first year of life, and almost all have been infected by age
two. It has been estimated that, nationwide, there are
approximately 300,000 children at risk of requiring treatment
for RSV each year and approximately 90,000 hospitalizations due
to RSV infections.

Synagis® (palivizumab), a drug manufactured
by MedImmune, Inc. has been shown to significantly reduce RSV
hospitalizations in pediatric patients at risk of the disease.
Clinical studies have shown that preventive treatment with
Synagis® was associated with a 55% reduction in overall
hospitalizations due to RSV. Physicians prescribe
Synagis®to immunize infants who are at high risk for
serious lung impairment. Synagis® is typically administered
by intramuscular injection once a month over a six month period.

RSV is seasonal, with the disease striking
primarily during the period of October through April. Our
distribution agreement with MedImmune renews on an annual basis
upon the mutual consent of the parties and is terminable by
either party for any reason on 60 days notice. We do not
have the exclusive right to sell Synagis®, although we were
a national preferred assignment of benefits distributor of the
drug for the 2003-2004 respiratory syncytial virus season. We
have recently renewed our agreement with MedImmune to continue
as one of three national preferred assignment of benefits
distributors for the 2004-2005 season.

Suppliers

We primarily dispense growth hormones, blood
clotting factor, IVIG, as well as other drugs obtained from the
following sources:



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | Actelion Pharmaceuticals U.S., Inc., with respect
    to Tracleer®;            
|
| |  | Allergan, Inc., with respect to Botox®;                                        
|
| |  | Amgen, Inc., with respect to Enbrel®;                                          
|
| |  | Baxter Healthcare Corporation, with respect to
    AralastTM;                  
|
| |  | Bertek Pharmaceuticals, Inc. with respect to
    ApokynTM;                     
|
| |  | Biogen Idec, Inc., with respect to AVONEX®;                                    
|
| |  | Enzon, Inc., with respect to Adagen®;                                          
|
| |  | Genentech, Inc. with respect to
    XolairTM and Raptiva®,                     
|
| |  | Genzyme Corporation, with respect to
    Cerezyme®, Aldurazyme® and Fabrazyme®;
|
| |  | GlaxoSmithKline PLC, with respect to Flolan®;                                  
|
| |  | InterMune, Inc., with respect to Actimmune®;                                   
|
| |  | MedImmune, Inc. with respect to Synagis®;                                      
|
| |  | Rare Disease Therapeutics, Inc., with respect to
    Orfadin®;                 

7



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| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | United Therapeutics Corporation, with respect to
    Remodulin®; and
|
| |  | ZLB Behring with respect to ZemairaTM.                              

We have supply relationships with all seven major
suppliers of blood clotting factor and all six major suppliers
of IVIG in the United States. The majority of our hemophilia
product was purchased from Baxter Healthcare Corporation for the
years ended June 30, 2002, 2003 and 2004 and the majority
of IVIG sold by us in fiscal years ended June 30, 2003 and
2004 was also acquired from Baxter.

Although there are five manufacturers of
FDA-approved growth hormone products currently used in the
United States, Genentechs products collectively enjoy a
market share that exceeds the aggregate of all other individual
manufacturers of growth hormone products. In the event that one
or more of our current suppliers of products were to cease
selling products to us, our business, financial condition and
results of operations would be materially and adversely affected.

Our agreements with our key suppliers generally
may be canceled by either party, without cause, with 60 to
365 days prior notice. In addition, our agreements with our
suppliers generally provide that during the term of the
agreements (and, in one instance, for as much as five years
after termination of the agreements), we may not distribute any
competing products. We generally do not have any exclusive
rights to dispense our products, and our suppliers have
generally reserved the right under their agreements with us to
distribute their products directly or to appoint other
distributors of their products. See Risk
Factors  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. and
Business  Disease Markets and Related
Products.

Relationships with Medical Centers

At June 30, 2004, we had joint ventures with
four medical centers (or their affiliates):



| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | Childrens Home Care located in Los Angeles,
    California;     
|
| |  | Alternative Care Systems, Inc. located in Dallas,
    Texas;     
|
| |  | Cook Childrens Home Health located in Ft.
    Worth, Texas; and 
|
| |  | Childrens National Medical Center located
    in Washington D.C.

In our typical joint venture arrangement, we and
the medical center (or its affiliate) form a joint venture
entity to provide specialty retail pharmacy services. We share
in the profits and losses of the joint venture entity with the
medical center (or its affiliate) in proportion to our
respective capital contributions. The agreements generally have
initial terms of one to five years and contain rights of first
refusal.

In addition to joint venture relationships, we
have entered into management agreements with other childrens
hospitals and adult medical centers (or their affiliates) to
provide specialty retail pharmacy services. Under our management
agreements, we provide goods and services used in the
hospitals or joint ventures specialty retail
pharmacy business, including drugs and related supplies, patient
education, clinical consultation, and reimbursement services.
While the payment terms under such management agreements may
vary, we are generally reimbursed for our costs and are paid a
monthly management fee generally calculated as a percentage of
revenues. These agreements usually have terms of one to five
years and are terminable by either party, with or without cause,
with one to twelve months prior notice. See Risk
Factors  If our relationships with some medical
centers are disrupted or canceled, our business could be
harmed.

Acquisition of Specialty Pharmaceuticals
Division of Gentiva Health Services, Inc.

On June 13, 2002, we acquired substantially
all of the assets of the Specialty Pharmaceuticals Services
Division, or SPS business, of Gentiva Health Services, Inc.
(Gentiva). The aggregate purchase price paid was
$463.8 million (including $13.8 million of acquisition
related costs) and consisted of $217.1 million in cash and
7,591,464 shares of our common stock valued at
$246.7 million. As part of the acquisition, we acquired
100% of the outstanding stock of three Gentiva subsidiaries that
were engaged exclusively in the SPS business.

8



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##### 



Payors

The following table sets forth the approximate
percentages of the Companys gross patient revenue
attributable to various payor categories for the fiscal years
ended June 30, 2002, 2003 and 2004. This table reflects the
acquisition of the SPS business only since June 14, 2002.
The percentage of the SPS business reimbursed by Medicare and
Medicaid was higher than the comparable percentage of
Accredos business. Therefore, the payor mix after the
acquisition reflects an increase in the percentage of revenue
attributable to Medicare and Medicaid and a decrease in the
percentage of revenue attributable to private payors.

|                                       |       |               |    |               |   |               |    |     |   |  |    |     |  
|-------------------------------------- | ----- | ------------- | -- | ------------- | - | ------------- | -- | --- | - |  | -- | --- | -
|                                       |       | Year Ended    |    | Year Ended    |   | Year Ended   
|                                       |       | June 30, 2002 |    | June 30, 2003 |   | June 30, 2004
|                                       |       |               |    |               |   |              
|Private payors (including self pay)(1) |       |               | 79 | %             |   |               | 73 | %   |   |  | 72 | %  
|Medicaid and other state programs      |       |               | 19 | %             |   |               | 20 | %   |   |  | 21 | %  
|Medicare and other federal programs    |       |               | 2  | %             |   |               | 7  | %   |   |  | 7  | %  
|                                       |       |               |    |               |   |               |    |     |   |  |    |    
|                                       | Total |               |    | 100           | % |               |    | 100 | % |  |    | 100 | %
|                                       |       |               |    |               |   |               |    |     |   |  |    |    



---



|    |                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes sales to private physician practices,
    whose ultimate payor is typically Medicare, which accounted for
    approximately 3%, 1% and 1% of gross patient revenue,
    respectively, for the fiscal years ended June 30, 2002,
    2003 and 2004.

The primary trend in the United States health
care industry is toward cost containment. The increasing
prevalence of managed care, centralized purchasing decisions,
consolidation among and integration of health care providers,
and competition for patients has affected, and continues to
affect, pricing, purchasing, and usage patterns in health care.
Decisions regarding the use of a particular drug treatment are
increasingly influenced by large private payors, including
managed care organizations, pharmacy benefit managers, group
purchasing organizations, regional integrated delivery systems,
and similar organizations, and are based increasingly on
economic considerations including product cost and whether a
product reduces the cost of treatment. Efforts by payors to
eliminate, contain or reduce costs through coverage exclusions,
lower reimbursement rates, greater claims scrutiny, closed
provider panels, restrictions on required formularies, claim
delays or denials and other similar measures could have a
material adverse effect on our business, financial condition and
results of operations.

Some payors set lifetime limits on the amount
reimbursable to patients for medical costs. Some of our patients
may reach these limits because of the high cost of their medical
treatment and associated pharmaceutical regimens. Some payors
may attempt to further control costs by selecting some firms to
be their exclusive providers of pharmaceutical or other medical
product benefits. If any such arrangements were with our
competitors, we would not be reimbursed for purchases made by
such patients.

We derive a significant portion of our revenue
from governmental programs such as Medicare and Medicaid. 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.

Many government payors, including Medicare and
Medicaid, have paid, or continue to pay us directly or
indirectly at the drugs average wholesale price
(AWP) or at a percentage off AWP. The Department of Health
and Human Services, Office of Inspector General (OIG) has
raised concerns since 1992 about how certain manufacturers have
established AWP for certain Medicare covered drugs. Federal and
state agencies continue to examine perceived discrepancies
between reported AWP of drugs and the actual manufacturers
selling price.

Several states have filed lawsuits against
pharmaceutical manufacturers for allegedly inflating reported
AWP for prescription drugs. In addition, class action lawsuits
have been brought by consumers against pharmaceutical
manufacturers alleging overstatement of AWP. We are not
responsible for such calculations, reports or payments, however,
there can be no assurance that our ability to negotiate
discounts from drug manufacturers will not be materially
adversely affected by such investigations or lawsuits, in the
future.

9



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The Federal Government has also entered into
settlement agreements with several drug manufacturers relating
to the calculation and reporting of AWP pursuant to which the
drug manufacturers, among other things, have agreed to report
the average sales price, to government healthcare
programs. The average sales price is calculated differently than
AWP.

To our knowledge, we have not been subject to any
investigation regarding AWP or best-price discounts; however, we
have recently received a subpoena to supply information in the
Pharmaceutical Industry Average Wholesale Price Litigation, a
case involving approximately twenty drug manufacturers pending
in the United States District Court, District of Massachusetts.

The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (MMA) made major changes in the
Medicare payment rates for certain of the drugs that we sell,
including blood clotting factor, Remodulin®, Flolan®
and IVIG. On July 27, 2004, Centers for Medicare and
Medicaid Services (CMS) released a proposed rule setting
reimbursement rates for Part B drugs and drug administration
payments.

Currently, Medicare payment for blood clotting
factor furnished by pharmacies and physician offices continues
to be at 95% of AWP through December 31, 2004. Under
Medicare Part B, the company receives 80% of this amount
directly from Medicare and the remaining 20% is the
patients co-pay obligation. Effective January 1,
2005, the Company will be paid for blood clotting factor based
on a new Medicare Average Sales Price (ASP) methodology.
Congress has directed CMS to make a separate payment to the
entity that provides blood clotting factor to a Medicare
beneficiary for items and services related to the furnishing of
such products. The amount of the separate payment is capped so
that the total of ASP payment rate and the separate payment
amount cannot exceed 95% of AWP. In the recently issued fee
schedule proposed rule, CMS proposed a separate payment amount
of 5 cents per unit of blood clotting factor.

We sell two part B covered drugs that are used to
treat beneficiaries with pulmonary arterial hypertension,
Remodulin® and Flolan®. These products are covered as
necessary for the effective use of durable medical equipment
(DME). These drugs are reimbursed through one of the four
Medicare DME regional carriers (DMERCs). Under the MMA,
Remodulin® and Flolan® are paid at 95% of the AWP in
effect on October 1, 2003 until the DME competitive
acquisition program is phased in from 2007 to 2010. Under
Medicare Part B, we receive 80% of this amount directly from
Medicare and the remaining 20% is the patients co-payment
obligation. Since January 1, 2004, the effective date of
the MMA, the DMERCs have established payment rates for the
10 mg Remodulin® vial size and the 0.5 mg vial
size of Flolan® at rates that are below our acquisition
cost of the drugs. In addition, one regional DMERC is currently
paying all Remodulin® vial sizes at the same rate per mg as
that of the 10 mg vial, thus reducing our reimbursement for
all Medicare recipients of Remodulin® in that region.

IVIG became a Part B covered drug as of
January 1, 2004, being reimbursed through the four Medicare
DMERCs at a percentage of AWP. As of January 1, 2005, IVIG
will be reimbursed based on the new Medicare ASP methodology or
106% of ASP. At this point in time, this ASP amount is unknown.

Effective June 1, 2004, Californias
Medicaid program (MediCal) began implementation of a new
reimbursement methodology for hemophilia blood clotting factor.
Under this methodology, providers will be reimbursed for all
factor products at a rate equal to the lesser of the
providers usual and customary charge, or a
manufacturers reported average of its selling price for
that blood clotting factor, plus 20%. We have not received the
final ASP rates from MediCal. We understand that the final ASP
rates will include certain items, such as prompt pay discounts,
in establishing product reimbursement rates. It will likely be
months before the industry fully understands the MediCal rates
for hemophilia because of the estimated lag on processing claims.

Some states have adopted legislation or
regulations requiring that a pharmacy participating in the state
Medicaid program give the state the best price that the pharmacy
makes available to any third-party payor. Such legislation and
regulations, referred to as most favored nation
pricing, may have a material adverse effect on the
reimbursement we receive from such Medicaid programs. For
example, lower reimbursement by

10



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##### 



Medicare for some of the drugs we sell could
adversely affect the rate of reimbursement paid by the Medicaid
programs in these states.


The calculation of ASP by MediCal or any other
state Medicaid program may or may not result in the same rate of
reimbursement as the ASP methodology adopted by Medicare.

Further, we negotiate purchase discounts from
drug manufacturers. State Medicaid programs also negotiate
purchase discounts with drug manufacturers and generally require
that such Medicaid programs receive the best price
on such purchase discounts. Investigations involving drug
manufacturers have been initiated by certain governmental
entities that question whether best price discounts were
properly calculated, reported and paid to the Medicaid programs.
We are not responsible for such calculations, reports or
payments; however, there can be no assurance that our ability to
negotiate discounts from drug manufacturers will not be
materially adversely effected by such investigations in the
future.

At least thirteen states have implemented
preferred drug list programs, under which drugs
would not appear on an approved and reimbursable Medicaid
formulary unless the Medicaid programs receive significant
discounts or other concessions. The drug industry has instituted
litigation to halt these programs, but the outcome of this
litigation is unknown. If the states prevail in these lawsuits,
then this could result in reductions in the reimbursement we
receive from Medicaid programs for our services and could
materially and adversely affect our business, financial
condition and results of operations.

A number of states are also considering other
types of legislation designed to reduce their Medicaid
expenditures and provide universal coverage and additional care
for some populations, including proposals to impose additional
taxes on providers to help finance or expand such programs. Some
states may require us to maintain a licensed pharmacy in their
state in order to qualify for reimbursement under
state-administered reimbursement plans. Any of these changes
could result in significant reductions in payment levels for
drugs handled and services provided by us, which would have a
material adverse effect on our business, financial condition and
results of operations.

Qualified hemophilia treatment centers may
purchase blood clotting factor from manufacturers at a discount
under a government program established in 1992 which extended
the Medicaid best price rebate program to hemophilia treatment
centers. Manufacturers that sell drugs to hemophilia treatment
centers agree with the Department of Health and Human Services
(DHHS) that they will not charge a price for covered drugs
that is higher than a statutorily set amount. We provide
contract pharmacy services to several hemophilia treatment
centers, but we do not directly own or operate a hemophilia
treatment center that is eligible for this special pricing. This
places us at a competitive disadvantage as a provider of factor,
except where our affiliated medical centers are eligible for the
special pricing. Under DHHS guidelines, a qualified hemophilia
treatment center may obtain blood clotting factor at this
special pricing and use a contract pharmacy to dispense it to
the centers patients. However, if a hemophilia treatment
center does not comply with DHHS guidelines or sells blood
clotting factor bought at this special pricing to patients who
are not patients of the center, it may incur civil penalties or
liability to drug manufacturers for the amount of the discount
that the center received from the manufacturer.

We expect that these developments will reduce
prices and margins on some of the drugs that we distribute.

Competition

The specialty pharmacy industry is highly
competitive and is undergoing consolidation. The industry is
fragmented, with many public and private companies focusing on
different product or customer niches. Some of our current and
potential competitors include:



| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | specialty pharmacy distributors, such as Priority
    Healthcare Corporation;
|
| |  | specialty pharmacy divisions of national
    wholesale drug distributors;    
|
| |  | pharmacy benefit management companies;                                       

11



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##### 





| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | hospital-based pharmacies;                                                                                                         
|
| |  | retail pharmacies;                                                                                                                 
|
| |  | home infusion therapy companies;                                                                                                   
|
| |  | manufacturers that sell their products both to
    distributors and directly to users, including clinics and
    physician offices;
|
| |  | comprehensive hemophilia treatment centers;                                                                                        
|
| |  | patient support groups and payors entering the
    specialty pharmacy distribution business; and                                   
|
| |  | other alternative site health care providers.                                                                                      

Some of our competitors have greater financial,
technical, marketing and managerial resources than we have.

While competition is often based primarily on
price and quality of care and service, it can also be affected
by the ability to develop and maintain relationships with
patients and referral sources, depth of product line, technical
support systems, specific patient requirements and reputation.
There can be no assurance that competitive pressures will not
have a material adverse affect on our business, financial
condition and results of operations.

Government Regulation

Federal and state governments heavily regulate
the drug and medical supply industry. Manufacturers,
distributors, health care providers and patients are all subject
to these regulations. Particular government attention currently
focuses on:



| |   |                                                              
| | - | -------------------------------------------------------------
| |  | manufacturer calculated and reported AWP and ASP
    amounts;
|
| |  | the payment of inducements for patient referrals;            
|
| |  | prohibited financial relationships with
    physicians;      
|
| |  | joint venture and management arrangements;                   
|
| |  | product discounts;                                           
|
| |  | inducements given to patients; and                           
|
| |  | professional licensing.                                      

The laws are very broad, the regulations are
complicated, and in many cases the courts interpret them
differently. This makes compliance difficult. Federal and state
civil and criminal fines and penalties may be imposed on persons
who violate these laws. While we structure our transactions in a
manner we believe complies with all laws, a violation could
result in fines or criminal penalties, which could reduce our
profitability. The following are particular areas of government
regulation that apply to our business.

Licensing and
Registration.A number of state laws
require that we be licensed as an in-state pharmacy. We also
currently ship prescription drugs to many other states that
require us to be licensed as an out-of-state pharmacy. We
believe that we substantially comply with all state licensing
laws applicable to our business.

Some pharmacy associations and state boards of
pharmacy are attempting to protect local pharmacies by
restricting the activities of out-of-state pharmacies. In
addition, some insurance companies and other payors pay lower
reimbursement rates to out-of-state pharmacies. Restrictions on
our operations imposed by these laws could reduce our
profitability.

Laws enforced by the federal Drug Enforcement
Agency, as well as some similar state agencies, require our
pharmacy locations to individually register in order to handle
controlled substances, including prescription drugs. A separate
registration is required at each principal place of business
where the applicant manufactures, distributes, or dispenses
controlled substances. Federal and state laws also require that
we follow specific

12



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##### 



labeling and record-keeping requirements for
controlled substances. We maintain federal and state controlled
substance registrations for each of our facilities that require
it, and follow procedures intended to comply with all such
record-keeping requirements.


Pharmacists and Nursing
Licenses.Our nurses must obtain state
licenses to provide teaching services and the hands on nursing
which we provide to some of our patients, and our pharmacists
must obtain state licenses to dispense drugs. Our pharmacists
and nurses are licensed in those states where their activity
requires it. Pharmacists and nurses must also comply with
professional practice rules. We believe that the activities
undertaken by our nurses or pharmacists comply with all
applicable laws or rules governing the practice of pharmacy,
nursing or medicine.

Pharmacy Counseling.Federal law requires that states offering Medicaid prescription
drug benefits implement a drug use review program. The program
requires before and after drug use reviews, the use
of predetermined standards, and patient education. Its purpose
is to improve the quality of care by ensuring drug prescriptions
are medically necessary, and not likely to cause adverse
effects. Participating states must develop standards for
pharmacy counseling. These standards apply as well to
non-resident pharmacies like us. We believe our pharmacists
monitor these requirements, and provide the necessary counseling.

Federal Mail Order.Federal law imposes standards for:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | the labeling, packaging and repackaging,
    advertising and adulteration of prescription drugs; and
|
| |  | the dispensing of controlled substances and
    prescription drugs.                                 

The Federal Trade Commission and the United
States Postal Service regulate mail order drug sellers. The law
requires truth in advertising, a reasonable supply of drugs to
fill orders, and a right to a refund if an order cannot be
filled within thirty days. We believe that we substantially
comply with all of these requirements.

Prescription Drug Marketing
Act.This federal law exempts many
drug and medical devices from federal labeling and packaging
requirements, as long as they are not adulterated or misbranded
and were prescribed by a physician. The law also prohibits the
sale, purchase or trade of drug samples that are not intended
for sale or intended to promote the sale of the drug. Records
must be kept of drug sample distribution, and proper storage and
maintenance methods used. To the extent that this law applies to
us, we believe that we comply with the documentation,
record-keeping and storage requirements.

Anti-Kickback and
Self-Referral.We are subject to the
federal Medicare Anti-Kickback law that prohibits offering,
paying, soliciting or receiving, directly or indirectly, in cash
or in kind, remuneration to induce or in exchange for:



| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the referral of patients covered by Medicare,
    Medicaid or other government healthcare reimbursement
    programs; or                                               
|
| |  | the leasing, purchasing, ordering or arranging
    for or recommending the lease, purchase or order of any item,
    good, facility or service covered by the programs.

Violations by individuals or entities are
punishable by criminal fines, civil penalties, imprisonment, or
exclusion from participation in the reimbursement programs.
Sanctions imposed under this law on us, our business partners
(such as drug suppliers), or our customers could reduce our
business and our profits.

Many states have similar state laws, which, if
violated, could result in similar penalties. Courts have not
applied the Anti-Kickback law or similar state laws
consistently, and some courts have found a violation if only one
purpose of an otherwise acceptable arrangement was to induce
referrals.

Recently, the OIG issued a Special Advisory
Bulletin focused on complex contractual joint ventures that
could potentially violate the anti-kickback statute. In this
bulletin, the OIG discussed the characteristics that potentially
indicate a prohibited arrangement. Some of these characteristics
are present in our existing joint ventures. As a result, some of
our joint ventures have been restructured and others will be
restructured in the future.

13



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##### 



DHHS published a set of safe harbor
regulations and continues to publish clarifications to the safe
harbors. Arrangements that fully comply with a safe harbor are
deemed not to violate the Anti-Kickback law. We have several
business arrangements (for example, our joint venture and
management arrangements with medical centers, service
arrangements with physicians and product pricing arrangements
with suppliers) that do not satisfy all of the requirements
necessary to fall within the safe harbors. Failure to satisfy a
safe harbor does not mean that a transaction is necessarily
illegal. The law requires the government to evaluate the intent
in each situation. We believe our business arrangements comply
with the Anti-Kickback law, the Health Insurance Portability and
Accountability Act of 1996 (HIPAA) and similar state laws.
However, if we are found to violate any of these laws, we could
suffer penalties, fines, or possible exclusion, which could
reduce our revenues and profits.

OIG Fraud Alerts and Advisory
Opinions.The OIG periodically issues
Fraud Alerts and Advisory Opinions identifying practices it
believes may violate federal fraud and abuse laws. One Fraud
Alert addresses joint venture and contractual arrangements
between health care providers. Another concerns prescription
drug marketing practices. Drug marketing activities may
implicate the federal fraud and abuse laws because the cost of
drugs are often reimbursed by Medicare and Medicaid. According
to the Fraud Alert, questionable practices may include payments
to pharmacists to recommend a particular drug or product. One
Advisory Opinion indicates that management fees calculated as a
percentage of net revenues, where marketing services are
included, could implicate the federal fraud and abuse laws if
the fee is intended to induce patient referrals. We believe our
business arrangements comply with federal fraud and abuse laws.
However, if we are found to have violated any of these laws, we
could suffer penalties, fines or possible exclusion from the
Medicare, Medicaid or other governmental programs, which could
adversely affect our results of operations.

State Consumer Protection
Laws.A number of states are involved
in enforcement actions involving pharmaceutical marketing
programs, including programs offering incentives for pharmacists
to dispense one product rather than another. State consumer
protection laws generally prohibit false advertising, deceptive
trade practices and the like. A number of the states have
requested that the FDA exercise greater regulatory oversight in
the area of pharmaceutical promotional activities by
pharmacists. It is not possible to determine whether the FDA
will act in this regard or what effect, if any, FDA involvement
would have on our operations.

The Ethics in Patient Referrals Law (Stark
Law).Federal law prohibits physicians
from making a referral for certain health items or services if
they, or their family members, have a financial relationship
with the entity receiving the referral. No bill may be submitted
in connection with a prohibited referral. Violations are
punishable by civil monetary penalties upon both the person
making the referral and the provider rendering the service. Such
persons or entities are also subject to exclusion from Medicare
and Medicaid. Many states have adopted laws similar to the Stark
Law which restrict the ability of physicians to refer patients
to entities with which they have a financial relationship. The
Stark Law and similar state statutes apply to our products and
services, and we believe our relationships comply with these
laws. However, if our practices are found to violate the Stark
Law or similar state statues, we may be subject to sanctions or
be required to alter or discontinue some of our practices. This
could reduce our revenues or profits.

Beneficiary
Inducement.HIPAA penalizes the
offering of remuneration or other inducements to beneficiaries
of federal health care programs to influence the
beneficiaries decision to seek specific governmentally
reimbursable items or services, or to choose a particular
provider. HIPAA excludes items provided to promote the delivery
of preventive care. The statutory exception would apply where
such care is provided or directly supervised by the
medical provider that has provided the incentive.

The OIG has issued final regulations concerning
inducements to beneficiaries. Under the new regulations,
permissible incentives are those given in connection with
preventive care, including pre and post natal care, and services
described in the U.S. Preventive Service Task Forces
Guide to Preventive Care. OIG also believes that items of
nominal value given to beneficiaries are permissible even if not
related to preventive care. However, permissible incentives
would not include cash or cash equivalents. We from time to time
provide some items at no charge to our patients in connection
with their drug therapies, not all of which are included on the
list of items specifically stated not to violate the
regulations. However, we believe that those

14



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##### 



items are allowed by the underlying statute. A
determination that we violated the regulations or the statute,
however, could result in sanctions that reduce our revenue or
profits.


The False Claims
Act.We are also subject to federal
and state laws prohibiting individuals or entities from
knowingly and willfully making claims for payment to Medicare,
Medicaid, or other third party payors that contain false or
fraudulent information. These laws provide for both criminal and
civil penalties. Health care providers who submit claims which
they knew or should have known were false, fraudulent, or for
items or services that were not provided as claimed, may be
excluded from Medicare and Medicaid participation, required to
repay previously collected amounts, and subject to substantial
civil monetary penalties.

Government
Investigations.The government
increasingly examines arrangements between health care providers
and potential referral sources to ensure that they are not
designed to exchange remuneration for patient care referrals.
Investigators are increasingly willing to look behind
formalities of business transactions to determine the underlying
purpose of payments. Enforcement actions have increased and are
highly publicized. Any investigation may cause publicity that
would cause potential customers to avoid us, reducing potential
revenues and profits.

In addition to investigations and enforcement
actions initiated by governmental agencies, we could be the
subject of an action brought under the False Claims Act by a
private individual on behalf of the government. Actions under
the False Claims Act, commonly known as
whistleblower lawsuits are generally filed under
seal to allow the government adequate time to investigate and
determine whether it will intervene in the action, and defendant
health care providers are often without knowledge of such
actions until the government has completed its investigation and
the seal is lifted.

Confidentiality, Privacy and
HIPAA.Federal and state laws protect
confidentiality of medical records and privacy of patient health
information. We receive and use patient health information and
maintain medical records for each patient to whom we dispense
drugs. We are thus subject to some of these medical record
confidentiality and patient information privacy laws, including
HIPAA. As part of the Administrative Simplification provision of
HIPAA, DHHS published final regulations governing electronic
transactions involving health information on August 17,
2000. These regulations are commonly referred to as the
Transaction Standards Rule. The Transaction Standards Rule
establishes standards for the most common health care
transactions. Under the new standards, any party transmitting or
receiving health transactions electronically must send and
receive data in a single format, rather than the large number of
different data formats currently used. The Transaction Standards
Rule applies to us in connection with submitting and processing
health claims. The Transaction Standards Rule also applies to
many of our payors and to our relationships with those payors.

On December 28, 2000, DHHS published final
regulations implementing HIPAA that adopted standards for the
privacy of individually identifiable health information (Privacy
Rule). The regulations cover health care providers, health care
clearinghouses and health plans (Covered Entities). The Privacy
Rule imposes significant administrative and financial
obligations on companies that use or disclose individually
identifiable information relating to the health of a patient.

DHHS has published final regulations implementing
that portion of HIPAA governing the security of health
information. Most Covered Entities will be required to comply
with these regulations by April 21, 2005. We are reviewing
these regulations and will adopt policies and change some of our
practices to comply with them.

The HIPAA regulations impose criminal penalties
on wrongful disclosure of protected health information. We
maintain procedures and provide training to our employees in an
effort to comply with all of the medical record confidentiality
and patient information privacy laws to which we are subject. We
believe that we comply with applicable privacy provisions of
HIPPA. While we attempt to comply with all confidentiality
requirements, a violation of any such confidentiality or privacy
law could subject us to sanctions that could reduce revenues or
profits.

In addition to its provisions regarding the
privacy of patient health information described above, HIPAA
also imposes criminal penalties for fraud against any health
care benefit program, for theft or embezzlement

15



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##### 



involving health care and for false statements in
connection with the payment of any health benefits. These HIPAA
fraud and abuse provisions apply not only to federal programs,
but also to private health benefit programs. HIPAA also
broadened the authority of the OIG to exclude participants from
federal health care programs. Although we do not know of any
current violations of the fraud and abuse provisions of HIPAA,
if we were found to be in violation of these provisions, the
government could seek penalties against us including exclusion
from participation in government payor programs. Significant
fines could cause liquidity problems and adversely affect our
results of operations.


Balanced Budget Act.Each state operates a Medicaid program funded in part by the
Federal government. The states may customize their programs
within federal limitations. Each state program has its own
payment formula and recipient eligibility criteria. In recent
years, changes in Medicare and Medicaid programs have resulted
in limitations on, and reduced levels of, payment and
reimbursement for a substantial portion of health care goods and
services. For example, a number of state Medicaid agencies have
taken action to reduce their reimbursement rates in response to
the changes in the reimbursement rates adopted by the Medicare
Program.

Laws governing Medicare, Medicaid, TriCare/
CHAMPUS and other governmental programs may change, and various
administrative rulings, interpretations and determinations make
compliance difficult. Any changes may materially increase or
decrease program payments or the cost of providing services.
Final determinations of government program reimbursement often
require years, because of audits, providers rights of
appeal and numerous technical requirements. We believe we make
adequate provision for adjustments. However, future reductions
in reimbursement could reduce our revenues and profits.

Reform.The
U.S. health care industry continues to undergo significant
change. We anticipate that Congress and state legislatures will
continue to review and assess alternative health care delivery
systems and payment methods and that public debate of these
issues will likely continue in the future. We cannot predict
which, if any, reform proposals will be adopted. Future changes
in the nature of the health care system could reduce revenues
and profits.

Employees

As of June 30, 2004, we had
1,977 full-time and 514 part-time employees. Our
employees include approximately 145 full-time and
53 part-time pharmacists. Our employees are not represented
by a labor union, and we believe we have good relations with our
employees.

Liability Insurance

Providing health care services and products
entails an inherent risk of liability. In recent years,
participants in the health care industry have become subject to
an increasing number of lawsuits, many of which involve large
claims and significant defense costs. We may from time to time
be subject to such suits as a result of the nature of our
business. We maintain general liability insurance, including
professional and product liability, in an amount deemed adequate
by our management. There can be no assurance, however, that
claims in excess of, or beyond the scope of, our insurance
coverage will not arise. In addition, our insurance policies
must be renewed annually. Although we have not experienced
difficulty in obtaining insurance coverage in the past, there
can be no assurance that we will be able to do so in the future
on acceptable terms or at all.

Internet Website

The Companys Internet website can be found
at www.accredohealth.com. Our internet website provides free
access to our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed pursuant to Section 13(a)
or 15(d) of the Exchange Act as soon as reasonably practicable
after such material is filed, or furnished, to the Securities
and Exchange Commission.

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Code of Ethics

We have adopted a code of ethics that applies to
all of our directors, officers and employees. This code is
publicly available in the investor relations area of our website
at www.accredohealth.com. Copies of our code of ethics may also
be requested in print by writing to Investor Relations at 1640
Century Center Parkway, Suite 100, Memphis, Tennessee 38134.

17



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##### 



RISK FACTORS

You should carefully consider the risks and
uncertainties we describe below before investing in Accredo
Health, Incorporated. The risks and uncertainties described
below are notthe 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.

Approximately 36% of our revenue for the year
ended June 30, 2004 was derived from the sale of IVIG and
blood clotting factor product. The majority of our IVIG and
blood clotting factor products were purchased from Baxter
Healthcare Corporation. We also derive a substantial percentage
of our revenue and profitability from our relationships with
Biogen Idec, Inc., Genzyme Corporation, GlaxoSmithKline, Inc.
and MedImmune, Inc. Our revenue derived from these relationships
represented approximately 39% of our revenue during the year
ended June 30, 2004.

Our agreements with these suppliers are
short-term and cancelable by either party without cause on 60 to
365 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 changing market
conditions or required service levels. Any termination or
modification 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 21 product lines. 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
accounted for approximately 90% of our revenues for the year
ended June 30, 2004, with the drugs for hemophilia, autoimmune
disorders and PID constituting approximately 36% of our revenue
for the same period:



| |   |                                          
| | - | -----------------------------------------
| |  | Hemophilia, Autoimmune Disorders and PID;
|
| |  | Pulmonary Arterial Hypertension;         
|
| |  | Multiple Sclerosis;                      
|
| |  | Gaucher Disease;                         
|
| |  | Growth Hormone-Related Disorders; and    
|
| |  | Respiratory Syncytial Virus, or RSV.     

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.

18



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

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



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

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

The specialty pharmacy industry is highly
competitive and is continuing to become more competitive. 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 or PBMs;                                                  
|
| |  | 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;                                                     
|
| |  | patient support groups and payors entering the
    specialty pharmacy distribution business; 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 their own distribution
and services instead of outsourcing 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, PBMs and other payors who can effectively
determine the pharmacy source for their enrollees.

Entry by PBMs into the specialty pharmacy
market, our strategic alliance with Medco Health Solutions, and
consolidation in the industry could affect our ability to serve
patients.

Caremark Rx, Inc. and AdvancePCS recently
combined to form the nations second largest pharmacy
benefit manager, processing drug claims for about 95 million
individuals with about 600 million prescriptions filled per
year. Express Scripts, Inc., which provides PBM services to over
50 million members, acquired

19



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Curascripts on January 30, 2004. All of
these firms are our customers and competitors. On
February 9, 2004, we entered into a 10-year strategic
alliance with Medco Health Solutions, Inc. where we became the
preferred retail and home delivery pharmacy provider to
Medcos members for our specialty pharmacy products. As a
result of our new relationship with Medco, other PBMs may be
reluctant to do business with us. As PBMs acquire specialty
pharmacy capability, it is likely that they will attempt to
cancel their relationships with entities, including us, that
compete with the PBM specialty pharmacy operations, and to cause
the PBM patients to obtain their drugs from the PBMs own
specialty pharmacy. We also expect there will be further
consolidation among specialty pharmacy providers, such as the
recently proposed merger of Chronimed and MIM Corporation. Such
events could materially and adversely affect our financial
condition and results of operations.


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

Changes in Medicare, Medicaid or similar
government health benefit programs or the amounts paid by those
programs for our services may adversely affect our earnings.
Such programs are highly regulated and subject to substantial
changes and cost containment measures. In recent years, changes
in these programs have modified payments to providers both
positively and negatively. The Medicare Prescription Drug,
Improvement and Modernization Act of 2003, or MMA, is having a
significant impact on the U.S. drug delivery system and,
correspondingly, on our business. The MMA expands drug benefits
for Medicare beneficiaries. The MMA changes drug pricing
methodologies resulting in both increases and decreases in drug
payments. The MMA changes Medicares payment methodology
over the next three years from a system based on average
wholesale price, or AWP, to one based on average sales price, or
ASP, and provided for Medicare rate reductions that were
effective January 1, 2004. These changes include new rates
for Remodulin® and Flolan® that for certain vial
concentrations are currently reimbursed at below our acquisition
cost. The amount of Medicare reimbursement that we receive for
blood clotting factor will also be changed effective
January 1, 2005 to an ASP methodology. Although the MMA
impacted the Company in 2004, we expect potentially significant
impact in 2005, 2006 and thereafter, but the effect of which is
not readily ascertainable at this time. We expect that the
effect of the MMA will be to reduce prices and margins on some
of the drugs that we distribute. If we are unsuccessful in
obtaining changes in the Medicare reimbursement for
Remodulin® and Flolan®, we may reevaluate whether we
continue to distribute those products in the future.

At least one Medicaid program has adopted, and we
expect other Medicaid programs, some states and some commercial
payors, to adopt those aspects of the MMA that either result in
or appear to result in price reductions for drugs covered by
such programs. Adoption of ASP as the measure for determining
reimbursement by state Medicaid programs for the drugs we sell
could materially reduce our revenue and gross margins.

In order to deal with budget shortfalls, some
states are attempting to create state administered prescription
drug discount plans, to limit the number of prescriptions per
person that are covered, to raise Medicaid co-pays and
deductibles, and are proposing more restrictive formularies and
reductions in pharmacy reimbursement rates. For example,
Californias Medicaid program, MediCal, recently adopted a
plan that shifted away from use of acquisition cost plus 1% and
instead uses ASP plus 20% for blood clotting factor products.
Although California has not yet disclosed exactly how it is
calculating ASP, it appears that the ASP rates established by
MediCal could be significantly below our original estimates.
Prior to adoption of the ASP methodology, the State of
California adopted a 5% reimbursement rate reduction paid to
providers of the states MediCal program, which was
scheduled to take effect on January 1, 2004. On
December 23, 2003, the United States District Court for the
Eastern District of California issued an injunction enjoining
the State from implementing the 5% rate reduction. The
subsequent change in the law, adopting the new ASP methodology,
caused the 5% rate reduction to expire June 30, 2004. This
reduction and any further reductions in the reimbursement from
MediCal could adversely impact revenues and profitability from
the sale of drugs by us or by our two partnerships in California
to patients covered by MediCal. Any reductions in amounts
reimbursable by other 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.

20



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

Many government payors, including Medicare and
Medicaid, have paid, or continue to pay, us directly or
indirectly at a percentage off a drugs 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. Several states have filed lawsuits against
pharmaceutical manufacturers for allegedly inflating reported
AWP for prescription drugs. In addition, class action lawsuits
have been brought by consumers against pharmaceutical
manufacturers alleging overstatement of AWP. We are not
responsible for such calculations, reports or payments, however,
there can be no assurance that our ability to negotiate
discounts from drug manufacturers will not be materially
adversely affected by such investigations or lawsuits, in the
future.

The Federal Government has also entered into
settlement agreements with several drug manufacturers relating
to the calculation and reporting of AWP pursuant to which the
drug manufacturers, among other things, have agreed to report
new pricing information, the average sales price, to
government healthcare programs. The average sales price is
calculated differently than AWP.

The recently enacted MMA changes the way the
federal government pays for certain Part B drugs. While the
majority of our revenue is reimbursed by private payors, as CMS
implements the ASP methodology of reimbursement, it may affect
our current AWP based reimbursement structure with our private
payors. If private payors adopt the ASP methodology, it could
have a material effect on reimbursement rates that we are able
to negotiate with these payors.

While we cannot predict the eventual results of
these law changes, government proposals, investigations, or
lawsuits, the effect of the MMA has been and will be to reduce
prices and margins on some of the drugs that we distribute. 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, 2002, 2003 and 2004, we derived approximately 79%,
73% and 72% respectively of our gross patient revenue from
non-governmental payors (including self-pay), which included 3%,
1% 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. We received approximately 10% of our total revenues
from Aetna in the fiscal year ended June 30, 2004. Aetna
has recently indicated that during 2005, it will be transferring
patients and therapies from us to a new joint venture between
Aetna and one of our competitors. 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. Further, significant consolidation
has occurred among non-government payors, and we expect there
will be further consolidation in the future. If payors with whom
we have relationships are part of this consolidation, our
relationships with those payors could be terminated. 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, 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.

Our business could be harmed if payors
decrease or delay their payments to us or seek to recoup
payments already made.

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

21



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##### 



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. Payors also have contractual rights to audit
our books and records to determine if they have overpaid us. We
had a contractual relationship through a joint venture with a
pharmacy currently involved in an ongoing reimbursement audit by
the California agency that administers MediCal. If the audit
finds that the pharmacy received overpayments from MediCal, we
could be required, under the terms of our prior contractual
relationship, to reimburse the pharmacy for a portion of any
amounts recouped by the State of California. Subject to the
outcome of the audit, we could be required to make a significant
payment in order to satisfy our alleged contractual obligations.
If we are unable to collect from payors or if payors fail to pay
us in a timely manner, or if payors seek to recoup payments
already made to us, it could have a material adverse effect on
our business and financial condition.


If any of our relationships with medical
centers are disrupted or canceled, 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 RSV. For the
fiscal years ended June 30, 2002, 2003 and 2004, we derived
approximately 4%, 4% and 2%, respectively, of our income before
income taxes from equity in the net income of unconsolidated
joint ventures.

We own 80% of one of our joint ventures with
Childrens Home Care, Inc. and the financial results of
this joint venture are included in our consolidated financial
results. This consolidated joint venture represented
approximately 10% of our income before income taxes for the
fiscal year ended June 30, 2002, 17% of our income before
income taxes for the fiscal year ended June 30, 2003 and 7%
of our income before income taxes in the current fiscal year
ended June 30, 2004.

Recently, the OIG issued a Special Advisory
Bulletin focused on complex contractual joint ventures that
could potentially violate the anti-kickback statute. In this
bulletin, the OIG discussed the characteristics that potentially
indicate a prohibited arrangement. Some of these characteristics
are present in our existing joint ventures. As a result, our
joint ventures will be restructured.

Further, the Department of Health and Human
Services, or DHHS, published a set of safe harbor
regulations and continues to publish clarifications to the safe
harbors under the federal anti-kickback statute. Arrangements
that fully comply with a safe harbor are deemed not to violate
the anti-kickback statute. We have several business arrangements
(for example, our joint venture and management arrangements with
medical centers, service arrangements with physicians and
product pricing arrangements with suppliers) that do not satisfy
all of the requirements necessary to fall within the safe
harbors. Failure to satisfy a safe harbor does not mean that an
arrangement is necessarily illegal. We believe our business
arrangements comply with the anti-kickback statute, the Health
Insurance Portability and Accountability Act, or HIPPA, the
federal Stark Law and similar state laws. However, if we are
found to violate any of these laws, we could suffer penalties,
fines or possible exclusion, which could adversely affect our
revenues and earnings.

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.                                                  

22



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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 Public Health Service, or 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 qualified hospitals and
hemophilia treatment centers to obtain discounts on blood
clotting factor products. 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 the
right to participate directly in these discount programs 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;                                               
|
| |  | 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, including an obligation
to recoup reimbursement payments previously received by the
companies we acquire. We also face exposure if any seller of an
entity which we acquire, is not able to fulfill its
indemnification obligations under the terms of the purchase
agreement. We may suffer impairment of assets or have to bear a
liability for which we are entitled to indemnification but are
unable to collect.

Our debt incurred from recent acquisitions 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 portion of our cash flow from operations will
    be dedicated to the payment of principal 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 or an increase in the interest
    rate or administrative fees associated with our debt;                                                                    

23



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| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | We may be at a competitive disadvantage to
    similar companies that have less debt; and
|
| |  | Our vulnerability to adverse economic and
    industry conditions may increase.          

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 the
    MMA and other state and federal legislation and revisions in
    pricing methods, or the method of establishing AWP or ASP;
|
| |  | 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 or an oversupply of product;                                                                                                                                                                                                     
|
| |  | inaccuracies in our estimates of the costs of
    ongoing programs;                                                                                                                                                                                
|
| |  | the timing and integration of our acquisitions;                                                                                                                                                                                                    
|
| |  | changes in our estimates used to prepare our
    financial statements;                                                                                                                                                                             
|
| |  | effectiveness of our sales force;                                                                                                                                                                                                                  
|
| |  | 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 RSV;                                                                                                                                                                               
|
| |  | physician prescribing patterns;                                                                                                                                                                                                                    
|
| |  | general political and economic conditions;                                                                                                                                                                                                         
|
| |  | interest rate fluctuations; 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;  

24



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##### 





| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in the 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 some of our hemophilia products, IVIG and some other
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. Our suppliers of IVIG have
announced initiatives that could result in decreases in the
future supply of IVIG, which, in addition to other factors, may
cause the pricing of IVIG to rise. There was also an industry
wide recombinant factor VIII product shortage that existed for
some time, as a result of the manufacturers being unable to
increase production to meet rising global demand. Supply of this
drug 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 and we are unable to
acquire an amount of the drug sufficient to service our
patients, our business could be harmed.

Our industry is subject to extensive
government regulation and noncompliance by us, physicians who
prescribe our products and services 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 others 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 and billing for services rendered pursuant to such
    referrals, 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
    (HIPAA) created new violations for fraudulent
    activity applicable to both public and private health care
    benefit programs and prohibits inducements to Medicare or
    Medicaid eligible patients. The potential sanctions for
    violations of these laws range from significant fines, to
    exclusion from participation in the Medicare and Medicaid
    programs, to criminal sanctions. Although some safe
    harbor regulations attempt to clarify when an arrangement
    will not violate the Anti-Kickback Law, our business
    arrangements and the services we provide may not fit within
    these safe harbors. Failure to satisfy a safe harbor requires
    analysis of whether the parties intended to violate the
    Anti-Kickback Law. Allegations, investigations, or findings of a
    violation of the Anti-Kickback Law or similar state laws could
    have a material adverse effect on our business.
|
| |  | The Department of Health and Human Services
    (DHHS) has issued regulations implementing the
    Administrative Simplification provisions of HIPAA concerning the
    maintenance of privacy and security of individually identifiable
    health information. These new regulations require the
    development and implementation of measures to maintain the
    privacy and security of health information and require that
    certain health claims transactions be conducted in accordance
    with uniform standards. These regulations govern health care
    providers, health plans and health clearinghouses. 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.                                                                                                                                                                                                              

25



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##### 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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. Many states have adopted
    laws similar to the Stark law. A violation of the Stark Law or
    similar state laws 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. Recently, the OIG issued a Special
    Advisory Bulletin focused on complex contractual joint ventures
    that could potentially violate the anti- kickback statute. In
    this bulletin, the OIG discussed the characteristics that
    potentially indicate a prohibited arrangement. Some of these
    characteristics are present in our existing joint ventures.
    Accordingly, some of our existing joint ventures have been
    restructured and others may be restructured in the future.
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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

Our business could be adversely affected by the
expiration or challenge to the orphan drug status that has been
granted by the FDA to some of the drugs that we handle. When the
FDA grants orphan drug status, it will not approve a second drug
for the same treatment for a period of seven years unless the
new drug is chemically different or clinically superior. Not all
of the drugs that we sell which are related to our core disease
states have orphan drug status. The loss of orphan drug status,
the approval of new drugs notwithstanding orphan drug status or
the development of drugs that are superior to the drugs we sell
could result in additional competitive drugs entering the
market, which could harm our business.

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 a single carrier, FedEx,
ships principally all of our products. 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,
    including rate increases resulting from higher fuel prices;                    
|
| |  | 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.    

26



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##### 



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.

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, which has become more difficult due to the
national health care professional shortage. Our ability to
manage our growth is also dependent upon our ability to 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 and other
intangibles 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 tangible 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 as a
charge to our earnings. As of June 30, 2004, we had
goodwill, net of accumulated amortization, of approximately
$383 million, or 38% of total assets and 64% 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 have been named in several shareholder
class action lawsuits and a shareholders derivative
lawsuit asserting claims under the securities laws.

The uncertainty associated with these unresolved
lawsuits could harm our business and financial condition. The
defense of these lawsuits also could result in litigation fees
and costs, as well as the diversion of resources. Negative
developments with respect to the lawsuits could cause our stock
price to decline significantly. The indemnification provisions
contained in our Certificate of Incorporation and Bylaws require

27



---



##### 



us to indemnify our current and former officers
and directors who are named as defendants against the
allegations contained in these suits. Even though we maintain
directors and officers insurance applicable to the lawsuits,
there can be no guarantee that the proceeds of such insurance
will be available for defense fees and costs, or payment of any
settlement or judgment in the lawsuits or, if available, will be
sufficient to cover the fees and costs and any settlement or
judgment imposed against us.


The ultimate cost and effect of these lawsuits on
our financial condition, results of operations, customer
relations and management is unknown at this time.

In addition to the securities litigation
currently pending against us and our officers and directors, we
may also in the future be the target of similar litigation.
Additional securities litigation could result in substantial
costs and divert our attention and resources.

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.

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 System. 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 the financial estimates we provide to
    the market;                                                                              
|
| |  | changes in estimates by analysts;                                                                                                             
|
| |  | changes in operating results from quarter to
    quarter; and                                                                                 
|
| |  | loss of key executives.                                                                                                                       

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 and
the Stockholder Protection Rights Plan 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. In addition, our Board
of Directors has adopted a Stockholder Protection Rights Plan,
sometimes referred to as a poison pill, which would
substantially dilute the interest sought by an acquirer.

28



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##### 



In the event we are unable to satisfy
regulatory requirements relating to internal controls, or if
these internal controls over financial reporting are not
effective, our business and our stock price could
suffer.

Section 404 of Sarbanes-Oxley requires
companies to do a comprehensive and costly evaluation of their
internal controls. As a result, during our fiscal year ending
June 30, 2005, we will be required to perform an evaluation
of our internal controls over financial reporting and have our
auditor publicly attest to such evaluation. We have prepared an
internal plan of action for compliance, which includes a
timeline and scheduled activities with respect to preparation of
such evaluation. Our efforts to comply with Section 404 and
related regulations regarding our managements required
assessment of internal control over financial reporting and our
independent auditors attestation of that assessment has
required, and continues to require, the commitment of
significant financial and managerial resources. If we fail to
timely complete this evaluation, or if our auditors cannot
timely attest to our evaluation, we could be subject to
regulatory scrutiny and a loss of public confidence in our
internal controls, which could have an adverse effect on our
business and our stock price.



|        |           
|------- | ----------
|Item 2. | Properties

Facilities

Our corporate headquarters are located in
Memphis, Tennessee and our other principal facilities are
located in Nashville, Tennessee, Charlotte, North Carolina,
Warrendale, Pennsylvania, Pittsburgh, Pennsylvania and Overland
Park, Kansas. In addition, we have many smaller satellite
pharmacy locations in other states.

Memphis, Tennessee.We currently lease approximately
214,000 square feet of space in an office/warehouse business
park in Memphis. The leases on this space expire
December 31, 2009, but we have an option to extend our
lease terms for one additional five-year period.

Nashville, Tennessee.We currently lease approximately
35,000 square feet of space in Nashville. Our lease expires in
December 2005.

Charlotte, North Carolina.We currently lease approximately
25,000 square feet of space in Charlotte, North Carolina. Our
lease expires in July 2006.

Warrendale, Pennsylvania.We currently lease approximately
29,000 square feet of space in Warrendale, Pennsylvania. Our
lease expires in March 2005.

Pittsburgh, Pennsylvania.We currently lease approximately
38,000 square feet of space in Pittsburgh, Pennsylvania. Our
lease expires in September 2007.

Overland Park, Kansas.We currently lease approximately
122,000 square feet of space in Overland Park, Kansas. We
sublease approximately 40% of this space to Gentiva. Our lease
expires in August 2005.



|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Commencing April 8, 2003, the Company and
certain officers and directors were named as defendants in
several substantially similar putative class action lawsuits
filed in the United States District Court for the Western
District of Tennessee, Memphis Division. The various complaints
have been consolidated into a single action, and the Court
appointed co-Lead Plaintiffs on July 1, 2004. A
Consolidated Complaint is currently due to be filed no later
than September 15, 2004. The lawsuits filed to date name
the Company, David D. Stevens, Joel Kimbrough and in one case
John R. Grow, as Defendants. One of the lawsuits also named
Ernst & Young LLP as a defendant. The lawsuits allege
violations of Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10(b)(5) promulgated thereunder, and
Section 20 of the Securities Exchange Act of 1934. Based on
the lawsuits filed to date, the putative class representatives
seek to represent a class of individuals and entities that
purchased Company stock during the period June 16, 2002
through April 7, 2003 and who supposedly suffered damages
from the alleged violations of the securities laws. The Company
believes that the claims asserted in the putative class action
lawsuits are without merit and intends to defend these lawsuits
vigorously.

29



---



##### 



In addition, two purported derivative lawsuits
were filed in the Circuit Court of Shelby County, Tennessee for
the Thirtieth Judicial District at Memphis. These actions were
consolidated and a Consolidated Derivative Complaint was filed
on July 28, 2003. The derivative action names David D.
Stevens, John R. Grow, Kyle J. Callahan, Kevin L. Roberg,
Kenneth R. Masterson, Kenneth J. Melkus, Dick R. Gourley,
Nancy-Ann Deparle, Joel R. Kimbrough, Thomas W. Bell, Jr., and
Patrick J. Welsh as defendants. The derivative lawsuit alleges
that the defendants breached fiduciary duties owed to the
Company by engaging in the same alleged conduct that is the
basis of the putative class action lawsuits. On behalf of the
Company, the derivative complaint seeks compensatory damages
from the defendants and the disgorgement of profits, benefits
and other compensation received by the defendants. The Company
believes that the claims asserted in the derivative lawsuit are
without merit and intends to defend this lawsuit vigorously. A
motion to dismiss is currently pending.

A joint venture in California which is 80% owned
by us provided contract pharmacy and related billing services to
a local California pharmacy currently under audit by the
California Department of Health Services concerning its MediCal
billings for blood clotting factor supplied by our joint
venture. Although our joint venture is not currently involved
with the audit, the contract pharmacy relationship is
implicated, and the pharmacy is seeking indemnification from our
joint venture. Pending completion of the audit, the state agency
has temporarily withheld MediCal payments from the pharmacy and
has alleged, among other things, overbilling and false claims.
Although we believe these allegations are without merit and
expect the pharmacy and our joint venture to vigorously defend
against these allegations through judicial proceedings if
necessary, we also expect the California state agency to pursue
a refund of some or all of the payments made by MediCal to the
pharmacy. If state or federal false claim statutes are
implicated, the pharmacy could also be assessed fines and
penalties. At this time, we do not believe that we will incur
any such fines and penalties. Due to the uncertainty about the
issues involved in this matter, based on the facts and
circumstances known to date, we believe some amount of monetary
loss to us is reasonably possible in the range of zero to
$20 million, absent any finding of false claims and
incurrence of related fines and penalties.

Also, from time to time, the Company is involved
in lawsuits, claims, audits and investigations arising in the
normal course of its business. In the Companys opinion, in
the aggregate these lawsuits, claims, audits and investigations
should not have a material adverse effect on the Companys
business, financial condition, or results of operations. In
addition, the business that the Company acquired from Gentiva
Health Services, Inc. has several lawsuits and claims related to
its historic operation by Gentiva, which are being controlled by
Gentiva and for which the Company is entitled to indemnification
from liability by Gentiva.



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

None

30



---



##### 



PART II



|        |                                                                        
|------- | -----------------------------------------------------------------------
|Item 5. | Market for Companys Common Equity and
    Related Stockholder Matters.

Price Range
of Common Stock

The Companys common stock is traded on the
Nasdaq National Market System under the symbol ACDO.
The following table sets forth the quarterly high and low sales
prices as reported on the Nasdaq National Market System for the
fiscal years ended June 30, 2003 and 2004.

|                                       |  |      |       |     |  |   |       | 
|-------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal Years 2003 and 2004             |  | High |       | Low
|                                       |  |      |       |    
|Fourth Quarter ended June 30, 2004     |  | $    | 40.70 |     |  | $ | 33.75 | 
|Third Quarter ended March 31, 2004     |  |      | 39.98 |     |  |   | 30.00 | 
|Second Quarter ended December 31, 2003 |  |      | 32.99 |     |  |   | 27.29 | 
|First Quarter ended September 30, 2003 |  |      | 30.28 |     |  |   | 21.35 | 
|Fourth Quarter ended June 30, 2003     |  |      | 26.31 |     |  |   | 11.95 | 
|Third Quarter ended March 31, 2003     |  |      | 39.67 |     |  |   | 21.02 | 
|Second Quarter ended December 31, 2002 |  |      | 38.65 |     |  |   | 25.19 | 
|First Quarter ended September 30, 2002 |  |      | 36.29 |     |  |   | 24.87 | 



| |        
| | -------
| | Holders

As of August 26, 2004, the approximate
number of registered stockholders was 35,049 including 1,116
stockholders of record and approximately 33,933 persons or
entities holding common stock in nominee name.



| |                
| | ---------------
| | Dividend Policy

We have never paid any cash dividends on our
common stock. We currently anticipate that all of our earnings
will be retained to finance the growth and development of our
business, and therefore, do not anticipate that any cash
dividend will be declared or paid on our common stock in the
foreseeable future. Any future declaration of dividends will be
subject to the discretion of our Board of Directors and their
review of our earnings, financial condition, capital
requirements and surplus, contractual restrictions to pay such
dividends and other factors they deem relevant.



| |                                                                       
| | ----------------------------------------------------------------------
| | Securities Authorized for Issuance Under
    Equity Compensation Plans

The following table summarizes our equity
compensation plans as of June 30, 2004:

|                                                           |       |                      |           |                   |  |                      |       |       |  |  |         |         | 
|---------------------------------------------------------- | ----- | -------------------- | --------- | ----------------- |  | -------------------- | ----- | ----- |  |  | ------- | ------- | 
|                                                           |       |                      |           |                   |  | (c)                 
|                                                           |       |                      |           |                   |  | Number of shares    
|                                                           |       |                      |           |                   |  | remaining available 
|                                                           |       | (a)                  |           | (b)               |  | for future issuance 
|                                                           |       | Number of shares to  |           | Weighted-average  |  | under equity        
|                                                           |       | be issued upon       |           | exercise price of |  | compensation plans  
|                                                           |       | exercise of          |           | outstanding       |  | (excluding          
|                                                           |       | outstanding options, |           | options, warrants |  | securities reflected
|Plan Category                                              |       | warrants and rights  |           | and rights        |  | in column (a))      
|                                                           |       |                      |           |                   |  |                     
|Equity compensation plans approved by Stockholders         |       |                      | 4,289,212 |                   |  | $                    | 26.71 |       |  |  | 773,568 |        
|Equity compensation plans not approved by
    Stockholders |       |                      |          |                   |  |                      |      |       |  |  |        |        
|                                                           |       |                      |           |                   |  |                      |       |       |  |  |         |        
|                                                           | Total |                      |           | 4,289,212         |  |                      | $     | 26.71 |  |  |         | 773,568 | 
|                                                           |       |                      |           |                   |  |                      |       |       |  |  |         |        

31



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##### 





| |                                 
| | --------------------------------
| | Sales of Unregistered Securities

None.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Purchases of Equity Securities by the Company
    and Affiliated Purchasers

During the year ended June 30, 2004, we did
not repurchase any shares of our common stock.



|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

SELECTED FINANCIAL DATA

You should read the following selected financial
data in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our Financial Statements and the Notes thereto included
elsewhere in this Annual Report on Form 10-K. The selected
financial data as of and for the fiscal years ended
June 30, 2000, 2001, 2002, 2003 and 2004 have been derived
from our audited financial statements. The information set forth
below is not necessarily indicative of the results of future
operations.

|                                                                                             |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |           |           | 
|-------------------------------------------------------------------------------------------- | -------------------------------------- | ------------------------------------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ---- | ------ | ------- | ------- | - | ------ | --------- | --------- | - | ------- | --------- | --------- | 
|                                                                                             |                                        |                                      
|                                                                                             |                                        | Years Ended June 30,                 
|                                                                                             |                                        |                                      
|                                                                                             |                                        | 2000                                  |        | 2001    |         | 2002(1) |        | 2003    |         | 2004
|                                                                                             |                                        |                                       |        |         |         |         |        |         |         |     
|                                                                                             |                                        |                                      
|                                                                                             |                                        | (in thousands, except per share data)
|Statements of Operations Data:                                                               |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|Revenues:                                                                                    |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|                                                                                             | Net patient revenue                    |                                       | $      | 335,601 |         |         | $      | 446,007 |         |      | $      | 633,249 |         |   | $      | 1,337,414 |           |   | $       | 1,475,036 |          
|                                                                                             | Other revenue                          |                                       |        | 15,432  |         |         |        | 14,985  |         |      |        | 18,257  |         |   |        | 33,982    |           |   |         | 38,761    |          
|                                                                                             | Equity in net income of joint ventures |                                       |        | 2,002   |         |         |        | 1,148   |         |      |        | 2,067   |         |   |        | 1,940     |           |   |         | 3,071     |          
|                                                                                             |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|                                                                                             |                                        | Total revenues                        |        |         | 353,035 |         |        |         | 462,140 |      |        |         | 653,573 |   |        |           | 1,373,336 |   |         |           | 1,516,868 | 
|Operating expenses:                                                                          |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|                                                                                             | Cost of sales                          |                                       |        | 300,973 |         |         |        | 395,365 |         |      |        | 544,902 |         |   |        | 1,086,334 |           |   |         | 1,197,836 |          
|                                                                                             | General and administrative             |                                       |        | 23,831  |         |         |        | 29,871  |         |      |        | 45,571  |         |   |        | 129,803   |           |   |         | 138,521   |          
|                                                                                             | Bad debts(2)                           |                                       |        | 6,117   |         |         |        | 6,131   |         |      |        | 5,833   |         |   |        | 87,418    |           |   |         | 29,745    |          
|                                                                                             | Restructuring charge                   |                                       |        |        |         |         |        |        |         |      |        | 3,893   |         |   |        |          |           |   |         |          |          
|                                                                                             | Depreciation and amortization          |                                       |        | 3,397   |         |         |        | 4,263   |         |      |        | 3,675   |         |   |        | 10,386    |           |   |         | 12,866    |          
|                                                                                             |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|                                                                                             |                                        | Total operating expenses              |        |         | 334,318 |         |        |         | 435,630 |      |        |         | 603,874 |   |        |           | 1,313,941 |   |         |           | 1,378,968 | 
|                                                                                             |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|Operating income                                                                             |                                        |                                       | 18,717 |         |         |         | 26,510 |         |         |      | 49,699 |         |         |   | 59,395 |           |           |   | 137,900 |          
|Interest expense (income), net                                                               |                                        |                                       | 2,136  |         |         |         | (2,770 | )       |         |      | (359   | )       |         |   | 9,564  |           |           |   | 8,125   |          
|                                                                                             |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|Income before minority interest in income of
    consolidated joint venture and income taxes |                                        |                                       | 16,581 |         |         |         | 29,280 |         |         |      | 50,058 |         |         |   | 49,831 |           |           |   | 129,775 |          
|Minority interest in income of consolidated
    joint venture                                |                                        |                                       | (177   | )       |         |         | (692   | )       |         |      | (1,273 | )       |         |   | (2,044 | )         |           |   | (2,338  | )        
|                                                                                             |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|Income before income taxes                                                                   |                                        |                                       | 16,404 |         |         |         | 28,588 |         |         |      | 48,785 |         |         |   | 47,787 |           |           |   | 127,437 |          
|Income tax expense                                                                           |                                        |                                       | 6,508  |         |         |         | 11,333 |         |         |      | 19,025 |         |         |   | 18,252 |           |           |   | 49,124  |          
|                                                                                             |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|Net income                                                                                   |                                        | $                                     | 9,896  |         |         | $       | 17,255 |         |         | $    | 29,760 |         |         | $ | 29,535 |           |           | $ | 78,313  |          
|                                                                                             |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|Diluted earnings per common share:                                                           |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|Net income                                                                                   |                                        | $                                     | 0.30   |         |         | $       | 0.44   |         |         | $    | 0.73   |         |         | $ | 0.61   |           |           | $ | 1.60    |          
|                                                                                             |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          
|Cash dividends declared on common stock                                                      |                                        | $                                     |       |         |         | $       |       |         |         | $    |       |         |         | $ |       |           |           | $ |        |          
|                                                                                             |                                        |                                       |        |         |         |         |        |         |         |      |        |         |         |   |        |           |           |   |         |          

32



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##### 



|                          |  |          |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|------------------------- |  | -------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                          |  |         
|                          |  | June 30,
|                          |  |         
|                          |  | 2000     |         | 2001 |  | 2002 |         | 2003 |  | 2004
|                          |  |          |         |      |  |      |         |      |  |     
|Balance Sheet Data:       |  |          |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents |  | $        | 10,204  |      |  | $    | 54,520  |      |  | $    | 42,913  |  |  | $ | 48,006  |  |  | $ | 42,743  | 
|Working capital           |  |          | 35,639  |      |  |      | 88,288  |      |  |      | 309,780 |  |  |   | 295,874 |  |  |   | 356,574 | 
|Total assets              |  |          | 205,229 |      |  |      | 289,244 |      |  |      | 924,829 |  |  |   | 914,783 |  |  |   | 998,182 | 
|Long-term debt            |  |          | 37,000  |      |  |      |        |      |  |      | 224,688 |  |  |   | 178,438 |  |  |   | 174,866 | 
|Stockholders equity      |  |          | 77,544  |      |  |      | 189,170 |      |  |      | 471,054 |  |  |   | 512,708 |  |  |   | 601,943 | 



---



|    |                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our results for the fiscal year ended 2002
    include the operations of the SPS division from June 14,
    2002 through June 30, 2002.                                                                                                                                                    
|   
|(2) | Bad debts expense for our fiscal year 2003
    includes the effect of a significant change in estimate as
    described below in the heading Change in Accounting
    Estimate in Item 7 Managements Discussion
    and Analysis of Financial Condition and Results of
    Operations.



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis should
be read in conjunction with the Selected Financial
Data and our Financial Statements and the Notes thereto
included elsewhere in this Annual Report on Form 10-K. The
discussion in this Form 10-K contains forward-looking
statements that involve risks and uncertainties, such as
statements regarding our plans, objectives, expectations and
intentions. The cautionary statements made in this
Form 10-K should be read as being applicable to all
forward-looking statements wherever they appear in this Report.
Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences
include those discussed in Item 1 under the heading
Risk Factors, as well as those discussed elsewhere
herein.

Overview

We provide specialty retail pharmacy services for
the treatment of patients with costly, chronic diseases. We
derive revenues primarily from the sale of 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 served in the years ended June 30:

|                                         |  |      |    |      |  |      |    |   |  |  |    |  
|---------------------------------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                         |  | 2002 |    | 2003 |  | 2004
|                                         |  |      |    |      |  |     
|Hemophilia, Autoimmune Disorders and PID |  |      | 27 | %    |  |      | 38 | % |  |  | 36 | %
|Multiple Sclerosis                       |  |      | 31 | %    |  |      | 14 | % |  |  | 14 | %
|Pulmonary Arterial Hypertension          |  |      | 2  | %    |  |      | 14 | % |  |  | 16 | %
|Gaucher Disease                          |  |      | 18 | %    |  |      | 10 | % |  |  | 9  | %
|Growth Hormone-Related Disorders         |  |      | 9  | %    |  |      | 7  | % |  |  | 8  | %
|Respiratory Syncytial Virus              |  |      | 10 | %    |  |      | 6  | % |  |  | 7  | %

The increases in revenues from the diseases
hemophilia and autoimmune disorders, PID and PAH and the related
decreases in revenues from the diseases multiple sclerosis,
Gaucher, growth hormone related disorders and RSV from fiscal
year 2002 to fiscal year 2003 are due to the acquisition of the
SPS division in June 2002. The majority of the revenues of the
SPS division related to hemophilia and autoimmune disorders, PID
and PAH.

Sales and services with respect to Multiple
Sclerosis, Gaucher Disease, RSV, PAH and growth hormone-related
disorders are dependent upon our relationships with Biogen,
Genzyme, MedImmune, GlaxoSmithKline, Actelion Pharmaceuticals
U.S., United Therapeutics and Genentech. Our agreements with
these

33



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##### 



manufacturers describe the services to be
provided by us, including contract pharmacy, information,
clinical, reimbursement and customized delivery services. These
agreements generally:




| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | allow the manufacturer to distribute directly or
    through other parties; and                          
|
| |  | are short-term and may be cancelled by either
    party, without cause, with 60 to 365 days prior notice.

These agreements vary in level of exclusivity and
scope of services provided. We typically purchase products at
prices at or below the manufacturers average wholesale
sales prices, and our resulting contribution margins vary for
each product line. Pricing is customized to reflect specific
services to be provided by us and in some cases is subject to
periodic adjustments to reflect changing market conditions. A
few of these agreements limit our ability to supply competing
drugs during (and in one case up to five years after) the term
of the agreement.

We purchase drugs for hemophilia and immune
disorders from all available sources. We are one of the national
assignment of benefits providers selected by MedImmune, Inc. to
distribute drugs for RSV. During 2002, we began providing
specialty retail pharmacy services for the treatment of patients
with PAH. We distribute all three of the FDA approved drug
therapies for this disease.

We recognize revenue in the period the drugs are
delivered or when we have performed the contractual service.
While we may experience revenue changes from price fluctuations
on our existing product lines, our revenue growth will depend
principally on the introduction of new drugs and on volume
growth in existing drug lines.

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    |   | Year Ended   
|                 |          | June 30, 2002 |    | June 30, 2003 |   | June 30, 2004
|                 |          |               |    |               |   |              
|Non-governmental |          |               | 79 | %             |   |               | 73 | %  |   |  | 72 | % 
|Governmental:    |          |               |    |               |   |               |    |    |   |  |    |   
|                 | Medicaid |               |    | 19            | % |               |    | 20 | % |  |    | 21 | %
|                 | Medicare |               |    | 2             | % |               |    | 7  | % |  |    | 7  | %

The increase in Medicare reimbursement and the
related decrease in non-governmental reimbursement from fiscal
year 2002 to fiscal year 2003 is due to the revenues from
hemophilia factor and the PAH products, Flolan® and
Remodulin®, as a result of the acquisition of the SPS
division. These are the only products we distribute for which we
were reimbursed directly by Medicare in fiscal year 2002 and
2003. We anticipate that our payor mix for fiscal year 2005 will
be similar to the payor mix achieved in fiscal year 2004.

We have five joint venture agreements with
various medical centers (or their affiliates) in which we own
50% of each venture and one joint venture agreement with a
medical center affiliate in which we own 80% of the joint
venture. Many of our patient populations have diseases that are
discovered before or during adolescence and require ongoing care
from physician specialists, many of whom are based at pediatric,
academic and other acute care medical centers. To date, these
ventures have primarily derived revenues from the treatment of
patients with hemophilia, growth hormone-related disorders and
RSV. We share profits and losses with our joint venture partners
in equal proportion to our respective equity ownership. We
account for our interests in the net income or loss in our 50%
owned joint ventures under the equity method of accounting; we
consolidate our 80% owned joint venture. Our equity interest in
the net income of the 50% owned joint ventures represented
approximately 4% of our income before income taxes in each of
the years ended June 30, 2002 and 2003, and 2% of our
income before income taxes in the year ended June 30, 2004.

Cost of sales include drug acquisition costs,
pharmacy and warehouse personnel costs, freight and other direct
costs associated with the delivery of our products and costs of
clinical services provided. General and administrative expenses
include the personnel costs of the reimbursement, sales,
marketing, administrative and support staffs as well as
corporate overhead and other general expenses. Bad debts include
our provision

34



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##### 



for patient accounts receivable, which we
estimate will prove to be uncollectible after routine collection
efforts have been exhausted. We typically hire personnel and
incur legal, recruiting, marketing and other expenses in
anticipation of the commercial launch of a new biopharmaceutical
drug. In some instances, a portion of these expenses are
reimbursed to us by the biopharmaceutical manufacturer. We have
not historically capitalized any of these start-up expenses.


Due to the increasing sensitivity to drug cost
within governmental and non-governmental payors, we are
continuously susceptible to reimbursement and operating margin
pressures. In recent years, pharmacy benefit managers and other
non-governmental payors have aggressively attempted to discount
their reimbursement rates for our products. This aggressive
discounting has resulted in some reduced margins for some of our
products and services.

Many government payors, including Medicare and
Medicaid, historically paid us directly or indirectly for some
of the drugs that we sell at the drugs AWP or a percentage
discount off AWP. Medicare reduced their reimbursement rates
effective January 1, 2004 from AWP less 5% to AWP less 15%,
however blood clotting factor was excluded from this change.
Effective January 1, 2005, blood clotting factor will be
reimbursed by Medicare using a formula of Average Selling Price
(ASP) plus 6% plus a proposed separate payment of
$0.05 per unit. In addition, MediCal changed its reimbursement
formula to ASP plus 20% effective June 1, 2004.

Both federal and state legislators are continuing
to scrutinize the healthcare industry for the purpose of
reducing healthcare costs. While we are unable to predict what,
if any, future healthcare-reform legislation may be enacted at
the federal or state level, we expect continuing pressure to
limit expenditures by governmental healthcare programs, which
could impact the amount of revenue we receive. Approximately
21%, 27% and 28% of gross patient revenues (excluding the acute
business acquired from Gentiva) for the years ended
June 30, 2002, 2003 and 2004, respectively, was from
Medicare and state-sponsored Medicaid programs. With the
purchase of the SPS division, the percentage of our revenue
reimbursed by Medicare and Medicaid was higher in 2003 when
compared to the percentages experienced by us prior to the
acquisition.

Strategic Alliance

On February 9, 2004, we signed a long-term
agreement with Medco Health Solutions, Inc. (Medco)
to become the preferred retail and home delivery pharmacy
provider to Medco members for our specialty product lines that
we currently dispense to treat patients with long-term, chronic
diseases. The agreement includes drugs to treat hemophilia, PAH,
RSV, multiple sclerosis, growth hormone related disorders and
Gauchers disease. We have historically provided our drugs
to some Medco members, however, we expect an increase in the
number of prescriptions for Medco members resulting from the
agreement.

Acquisition

On June 13, 2002, we acquired the SPS
division of 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
engaged in the business conducted by the SPS division. The SPS
business provides specialty retail pharmacy and related services
relating to the treatment of patients with certain costly
chronic diseases. In addition to the diseases previously served
by us, the SPS business was also a leading provider of specialty
pharmacy and related services to patients with PAH. As a result
of the acquisition, we became a leading provider of specialty
retail pharmacy and related services, as measured by revenue.
The aggregate purchase price was $463.8 million (including
$13.8 million of acquisition related costs) and consisted
of $217.1 million of cash and 7,591,464 shares of common
stock valued at $246.7 million. The results of the SPS
business have been included in the consolidated financial
statements since June 14, 2002.

35



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##### 



Results of Operations

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

|                                                     |                                        |                          |      |      |       |      |      |      |       |  |      |      |       | 
|---------------------------------------------------- | -------------------------------------- | ------------------------ | ---- | ---- | ----- | ---- | ---- | ---- | ----- |  | ---- | ---- | ----- | 
|                                                     |                                        |                         
|                                                     |                                        | Years Ended June 30,    
|                                                     |                                        |                         
|                                                     |                                        | 2002                     |      | 2003 |       | 2004
|                                                     |                                        |                          |      |      |       |     
|Revenues:                                            |                                        |                          |      |      |       |      |      |      |       |  |      |     
|                                                     | Net patient revenue                    |                          |      | 96.9 | %     |      |      | 97.4 | %     |  |      | 97.2 | %    
|                                                     | Other revenue                          |                          |      | 2.8  |       |      |      | 2.5  |       |  |      | 2.6  |      
|                                                     | Equity in net income of joint ventures |                          |      | 0.3  |       |      |      | 0.1  |       |  |      | 0.2  |      
|                                                     |                                        |                          |      |      |       |      |      |      |       |  |      |     
|                                                     |                                        | Total revenues           |      |      | 100.0 |      |      |      | 100.0 |  |      |      | 100.0 | 
|Operating expenses:                                  |                                        |                          |      |      |       |      |      |      |       |  |      |     
|                                                     | Cost of sales                          |                          |      | 83.4 |       |      |      | 79.1 |       |  |      | 79.0 |      
|                                                     | General and administrative             |                          |      | 7.0  |       |      |      | 9.4  |       |  |      | 9.1  |      
|                                                     | Bad debts                              |                          |      | 0.9  |       |      |      | 6.4  |       |  |      | 2.0  |      
|                                                     | Restructuring charge                   |                          |      | 0.6  |       |      |      |     |       |  |      |     |      
|                                                     | Depreciation and amortization          |                          |      | 0.5  |       |      |      | 0.8  |       |  |      | 0.8  |      
|                                                     |                                        |                          |      |      |       |      |      |      |       |  |      |     
|                                                     |                                        | Total operating expenses |      |      | 92.4  |      |      |      | 95.7  |  |      |      | 90.9  | 
|                                                     |                                        |                          |      |      |       |      |      |      |       |  |      |     
|Operating income                                     |                                        |                          | 7.6  |      |       |      | 4.3  |      |       |  | 9.1  |     
|Interest income (expense), net                       |                                        |                          | 0.1  |      |       |      | (0.7 | )    |       |  | (0.5 | )   
|                                                     |                                        |                          |      |      |       |      |      |      |       |  |      |     
|Income before minority interest and
    income taxes |                                        |                          | 7.7  |      |       |      | 3.6  |      |       |  | 8.6  |     
|Minority interest                                    |                                        |                          | (0.2 | )    |       |      | (0.1 | )    |       |  | (0.2 | )   
|                                                     |                                        |                          |      |      |       |      |      |      |       |  |      |     
|Income before income taxes                           |                                        |                          | 7.5  |      |       |      | 3.5  |      |       |  | 8.4  |     
|Income tax expense                                   |                                        |                          | 2.9  |      |       |      | 1.3  |      |       |  | 3.2  |     
|                                                     |                                        |                          |      |      |       |      |      |      |       |  |      |     
|Net income                                           |                                        |                          | 4.6  | %    |       |      | 2.2  | %    |       |  | 5.2  | %   
|                                                     |                                        |                          |      |      |       |      |      |      |       |  |      |     

Critical Accounting Policies and
Estimates

Our consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America. In preparing our
financial statements, we are required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. We
evaluate our estimates and judgments on an ongoing basis. We
base our estimates and judgments on historical experience and on
various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Our actual
results may differ from these estimates, and different
assumptions or conditions may yield different estimates. The
items in our financial statements requiring significant
estimates and judgments are as follows:



| |                    
| | -------------------
| | Revenue Recognition

Net patient revenues are from the sales of
biopharmaceutical drugs to patients and are reported at the net
amount billed to patients, third-party payors and others in the
period the products are delivered. We have agreements with
certain third-party payors that provide for payments to us at
amounts discounted from our established rates.

From time to time we enter into management
contracts with hemophilia treatment centers, medical centers and
joint ventures in which we have an interest. Pursuant to these
contracts, we will provide certain billing, pharmacy dispensing,
inventory management, shipping, reimbursement, collection and
other manage-

36



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##### 



ment services in exchange for fees that range
from a reimbursement of our costs to a percentage of the managed
entities billed charges, less contractual allowances. These
contracts are for terms of up to five years and are usually
cancelable on short notice. Revenue from the management
contracts is recognized when the services are rendered and is
included in other revenue.




| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

The procedure for estimating the allowance for
doubtful accounts requires significant judgment and assumptions.
Our primary collection risks are for patient co-payments and
deductibles. The risk of collection varies based upon the
product, the payor and the patients ability to pay the
amounts not reimbursed by the payor. Some of the drugs we
distribute are primarily reimbursed by prescription card benefit
plans, which reimbursement is subject to lower co-payment and
deductible amounts (typically $15-$30 per prescription). Other
drugs are primarily reimbursed through major medical benefit
plans, which reimbursement is subject to higher deductible
amounts. We estimate the allowance for doubtful accounts based
upon a variety of factors including the age of the outstanding
receivables and our historical experience of collecting the
patient co-payments and deductibles. However, economic and other
factors could result in collections that differ from our
estimates. We continually review the estimation process and make
changes to the estimates as necessary.



| |                                        
| | ---------------------------------------
| | Allowance for Contractual
    Discounts

We are reimbursed for the drugs we sell by many
different payors including insurance companies, Medicare and all
of the state Medicaid programs. The revenues and related
accounts receivable are recorded net of payor contractual
discounts to reflect the estimated net billable amounts for the
products delivered. We estimate the allowance for contractual
discounts on a payor-specific basis, given our interpretation of
the contract terms or applicable regulations. However, the
reimbursement rates are often subject to interpretation that
could result in payments that differ from our estimates.
Additionally, updated regulations and contract negotiations
occur frequently, necessitating our continual review and
assessment of the estimation process.



| |                                     
| | ------------------------------------
| | Patient Credit Balance
    Liability

Patient credit balances arise due to many factors
including overpayments from payors, unapplied payments due to
insufficient information and payments against invoices that have
previously been written off. We estimate the amount of credit
balances that relate to overpayments from payors based upon
historical trends and other available information and classify
those credit balances as accounts payable in the consolidated
financial statements.



| |                        
| | -----------------------
| | Self Insurance Reserves

We maintain self-insured workers
compensation, medical and dental plans for employees. Claims
expense is accrued under these plans as the incidents that give
rise to them occur. We use a third-party administrator to
process all such claims. Unpaid claim accruals are estimated
based on historical costs of settlement and average lag times.
We believe that the estimation methodology used effectively
captures our claims costs, however, payments could differ from
our estimates due to changes in the healthcare cost structure or
changes in the volume of claims filed.



| |                 
| | ----------------
| | Asset Impairment

Management periodically evaluates the carrying
values of long-lived assets, including property and equipment,
to determine whether events and circumstances indicate that
these assets have been impaired. An asset is considered impaired
when undiscounted cash flows to be realized from such asset are
less than its carrying value. In that event, a loss is
determined based on the amount the carrying value exceeds the
fair market value of such asset.

Effective on July 1, 2001, we adopted
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets. This
statement addresses the accounting and reporting of goodwill and

37



---



##### 



other intangible assets subsequent to their
acquisition. Since adoption of SFAS No. 142 in July 2001,
amortization of goodwill was discontinued, and we began
reviewing goodwill at least annually for impairment.


We evaluate goodwill for impairment based on a
two-step process. The first step compares the fair value of a
reporting unit with its carrying amount, including goodwill. If
the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not impaired and the second
step of the impairment test is unnecessary. If the carrying
amount of the reporting unit exceeds its fair value, the second
step of the goodwill impairment test is necessary to measure the
amount of impairment loss, if any. The second step compares the
implied fair value of reporting unit goodwill with the carrying
amount of that goodwill. If the carrying amount of the reporting
unit goodwill exceeds the implied fair value of that goodwill,
an impairment loss would be recognized in an amount equal to
that excess. We have one reporting unit and the fair value of
the reporting unit exceeded its carrying amount resulting in no
impairment charges in fiscal year 2004.



| |             
| | ------------
| | Income Taxes

We are subject to audit by federal and state tax
authorities. These audits could result in proposed assessments
that challenge certain tax positions, which, if upheld through
the administrative and legal process, could have a material
impact on our earnings and cash flow. We believe that our tax
positions comply with applicable tax law, and we do not
anticipate any material impact on earnings or cash flows.



| |                              
| | -----------------------------
| | Change in Accounting Estimate

In preparing our financial statements, we are
required to make certain estimates, including those related to
the allowance for doubtful accounts, refundable credit balances,
self-insurance accruals, income tax liabilities, litigation and
impairment tests on goodwill. We periodically review our
estimates to ensure that the estimates appropriately reflect
changes in our business or as new information becomes available.

During the March 2003 quarter, we analyzed
historical collection rates and other data used in estimating
the allowance for doubtful accounts. Our calculations indicated
that the accounts receivable reserve needed to be increased. As
a result of the new information obtained through the analysis
completed subsequent to the March 2003 quarter, in the third
quarter of fiscal year 2003 we recorded a net $49 million
charge to bad debt expense and increased the allowance for
doubtful accounts related to the accounts receivable of the SPS
division.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Fiscal Year Ended June 30, 2004
    Compared to Fiscal Year Ended June 30, 2003

Revenues.Total
revenues increased 10% from $1.373 billion to
$1.516 billion from fiscal year 2003 to fiscal year 2004.
Net patient revenues increased 10% from $1.337 billion to
$1.475 billion from fiscal year 2003 to fiscal year 2004.
During fiscal 2003, we began distributing certain wholesale
products on a consignment basis for the manufacturer and sold
our infertility business thus eliminating revenues from the sale
of these products from our business. Revenues from these
products amounted to approximately $65.9 million in fiscal
2003. Excluding the $65.9 million from fiscal 2003 results,
our revenues increased 16% from fiscal year 2003 to fiscal year
2004. The increase in revenues is primarily due to volume growth
in our products for the treatment of RSV, PAH, growth hormone
disorders, hemophilia, autoimmune disorders and PID as a result
of the addition of new patients and additional sales of product
to existing patients. In addition, we experienced growth in
revenues from Avonex® due to product pricing increases. We
also benefited from the addition of new and expanded contracts
with managed care organizations.

Cost of Sales.Cost
of sales increased 10% from $1.086 billion to
$1.198 billion from fiscal year 2003 to fiscal year 2004,
which is commensurate with the increase in our revenues
discussed above. As a percentage of revenues, cost of sales
decreased from 79.1% to 79.0% from fiscal year 2003 to fiscal
year 2004 resulting in gross margins of 20.9% in fiscal year
2003 and 21.0% in fiscal year 2004. The composite gross margin
was relatively flat from fiscal 2003 to fiscal 2004, and the
gross margins for the individual products were relatively stable
as well. There were some changes in product mix from fiscal 2003
to fiscal 2004; however, the decrease in revenues from the
higher margin products for the treatment of hemophilia and
immune disorders was offset by an increase in revenues from the
products for the treatment of PAH. Similarly, a decrease in
revenues from

38



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the lower margin products for the treatment of
multiple sclerosis and Gaucher disease was offset by an increase
in revenues from the products for the treatment of RSV and
growth hormone. These changes resulted in a 0.1% increase in
gross margin from fiscal 2003 to fiscal 2004.


General and Administrative.General and administrative expenses
increased from $129.8 million to $138.5 million, or
7%, from fiscal year 2003 to fiscal year 2004. As a percentage
of revenues, general and administrative expenses decreased from
9.4% to 9.1% from fiscal 2003 to fiscal 2004. The increase in
expense is primarily due to the increase in audit fees as a
result of the change to Deloitte & Touche LLP for the
fiscal 2003 audit, increased salaries and benefits associated
with the expansion of our support staffs to support the revenue
growth and increased insurance premiums. Although there has been
a 7% increase in general and administrative expense, the expense
as a percentage of revenue has decreased 0.3% due to the
leveraging of the some of our general and administrative
expenses over increased revenues.

Bad Debts.Bad debts
decreased from $87.4 million to $29.7 million from
fiscal year 2003 to fiscal year 2004. As a percentage of
revenues, bad debt expense decreased from 6.4% to 2.0% from
fiscal year 2003 to fiscal year 2004. The decrease in expense is
primarily due to the change in fiscal 2003 described above in
Change in Accounting Estimate resulting in additional bad debt
expense recorded in fiscal 2003.

Depreciation and Amortization.Depreciation expense increased from
$5.8 million to $8.2 million from fiscal year 2003 to
fiscal year 2004 as a result of purchases of property and
equipment associated with our revenue growth including
additional computer hardware and enhancements to our fully
integrated pharmacy and reimbursement system. Amortization
expense related to other intangible assets increased from
$4.6 million to $4.7 million from fiscal year 2003 to
fiscal year 2004, due to additional amortization related to the
purchase of the assets from Alpha Therapeutic Services, Inc. in
October 2003.

Interest Expense, Net.Interest expense, net decreased from
$9.6 million in fiscal year 2003 to $8.1 million in
fiscal year 2004 due to a decrease in the average amount of debt
outstanding and lower interest rates during fiscal 2004.

Income Tax Expense.Our effective tax rate increased from
38.2% to 38.6% from fiscal year 2003 to fiscal year 2004. The
difference between the recognized effective tax rate and the
statutory tax rate is primarily attributed to state income taxes.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Fiscal Year Ended June 30, 2003
    Compared to Fiscal Year Ended June 30, 2002

Revenues.Total
revenues increased 110% from $0.654 billion to
$1.373 billion from fiscal year 2002 to fiscal year 2003.
Net patient revenues increased 111% from $0.633 billion to
$1.337 billion from fiscal year 2002 to fiscal year 2003.
The increase in revenues is attributable to the SPS acquisition
completed on June 13, 2002 and volume growth in our
products for the treatments of growth hormone disorders,
hemophilia, Gaucher disease and immune disorders as a result of
the addition of new patients and additional sales of product to
existing patients. We also had a significant increase in our
seasonal drug Synagis® for the treatment of RSV as a result
of increased patient volume. We also benefited from the addition
of new and expanded contracts with managed care organizations.

Cost of Sales.Cost
of sales increased 99% from $0.545 billion to
$1.086 billion from fiscal year 2002 to fiscal year 2003,
which is commensurate with the increase in our revenues
discussed above. As a percentage of revenues, cost of sales
decreased from 83.4% to 79.1% from fiscal year 2002 to fiscal
year 2003 resulting in gross margins of 16.6% in fiscal year
2002 and 20.9% in fiscal year 2003. Gross margins for the
individual products remained relatively stable; however, a
change in product mix resulted in an increase in the composite
gross margin in fiscal year 2003. The primary drivers were
increased revenues from hemophilia factor, IVIG for the
treatment of immune disorders and Flolan® for the treatment
of PAH, which have lower acquisition costs as a percentage of
revenue than most of the other products we distribute.

General and Administrative.General and administrative expenses
increased from $45.6 million to $129.8 million, or
185%, from fiscal year 2002 to fiscal year 2003. The increase is
due to the SPS acquisition completed on June 13, 2002 and
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

39



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related furniture and fixtures to support the
revenue growth. General and administrative expenses represented
7.0% and 9.4% of revenues for fiscal years 2002 and 2003,
respectively. The increase to 9.4% in fiscal year 2003 is due to
product mix changes. The higher margin products, which were a
higher percentage of our total revenues in fiscal year 2003,
have higher general and administrative expenses associated with
them than many of the other product lines that we distribute.


Bad Debts.Bad debts
increased from $5.8 million to $87.4 million from
fiscal year 2002 to fiscal year 2003. As a percentage of
revenues, bad debt expense increased from 0.9% to 6.4% from
fiscal year 2002 to fiscal year 2003. The increase in expense is
primarily due to the change described above in Change in
Accounting estimate. During the March 2003 quarter, we analyzed
historical collection rates and other data used in estimating
the allowance for doubtful accounts. Our calculations indicated
that the accounts receivable reserve needed to be increased. As
a result of the new information obtained through the analysis
completed subsequent to the March 2003 quarter, in the third
quarter of fiscal year 2003 we recorded a net $49 million
charge to bad debt expense and increased the allowance for
doubtful accounts related to the accounts receivable of the SPS
division.

Depreciation and Amortization.Depreciation expense increased from
$2.3 million to $5.8 million from fiscal year 2002 to
fiscal year 2003 as a result of the assets acquired in the SPS
acquisition, purchases of property and equipment associated with
our revenue growth and the expansion of our leasehold facility
improvements. Amortization expense related to other intangible
assets increased from $1.3 million to $4.6 million
from fiscal year 2002 to fiscal year 2003 due to the SPS
acquisition.

Interest Income/ Expense, Net.Interest income, net was
$0.4 million in fiscal year 2002 and interest expense, net
was $9.6 million in fiscal year 2003. The change, amounting
to $10.0 million, is primarily due to the debt outstanding
during fiscal year 2003 that was incurred in June 2002 to
finance the cash portion of the SPS acquisition and the related
acquisition costs.

Income Tax Expense.Our effective tax rate decreased from
39.0% to 38.2% from fiscal year 2002 to fiscal year 2003. The
difference between the recognized effective tax rate and the
statutory tax rate is primarily attributed to state income taxes.

Liquidity and Capital Resources

As of June 30, 2004 and June 30, 2003,
we had working capital of $356.6 million and
$295.9 million, respectively. Our net cash provided by
operating activities was approximately $58.3 million for
the year ended June 30, 2004 and $71.1 million for the
year ended June 30, 2003. This decrease is primarily due to
the increase in inventory from $90.0 million as of
June 30, 2003 to $128.3 million as of June 30,
2004. As a percentage of cost of sales, inventory increased from
8.3% in fiscal 2003 to 10.7% in fiscal 2004. This increase is
due to the growth in our business, the purchase of inventory to
fulfill certain purchase commitments and the purchase of certain
inventory at a lower acquisition cost. This increased level of
inventory does not exceed our demand, and we do not expect to
have any obsolescence adjustments related to this additional
inventory. As a percentage of net patient revenue, net patient
accounts receivable decreased from 23% in fiscal 2003 to 22% in
fiscal 2004 resulting in days sales outstanding of approximately
84 in fiscal 2003 and 81 in fiscal 2004.

Net cash used by investing activities was
$55.6 million for the year ended June 30, 2004 and
$38.0 million for the year ended June 30, 2003. Cash
used by investing activities in the year ended June 30,
2004 consisted primarily of $35.9 million for acquisitions
and $19.7 million for purchases of property and equipment.
Cash used by investing activities in the year ended
June 30, 2003 consisted primarily of $22.0 million for
acquisitions, which included a $16.0 million earn out
payment related to a fiscal year 2002 acquisition and
$16.0 million for purchases of property and equipment.

Net cash used in financing activities was
$8.0 million for the year ended June 30, 2004 and
$28.0 million for the year ended June 30, 2003. Cash
used in financing activities for the year ended June 30,
2004 consisted primarily of $15.4 million of repayments on
our credit facility and $1.4 million in distributions to
our minority interest partner less $8.8 million from the
issuance of common stock. Cash used in financing activities for
the year ended June 30, 2003 consisted primarily of
$35.3 million of repayments on our credit facility and

40



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$0.5 million in distributions to our
minority interest partner less $7.8 million from the
issuance of common stock.


Historically, we have funded our operations and
continued internal growth through cash provided by operations.
Capital expenditures amounted to $19.7 million in fiscal
year 2004 and $16.0 million in fiscal year 2003. We
anticipate that our capital expenditures for the fiscal year
ending June 30, 2005 will consist primarily of additional
computer hardware, enhancements to our 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
2005 to be approximately $20.0 million, exclusive of any
acquisitions of businesses. We expect to fund these expenditures
through cash provided by operating activities and/or borrowings
under the revolving credit facility with our bank.

As of June 30, 2004, our $325 million
revolving credit facility with Bank of America, N.A. and other
participating banks (collectively the Lenders)
consisted of a $125 million revolving commitment expiring
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 (Prior Tranche B Term Loan) due
in periodic principal payments through March 2009. On
November 18, 2003, we amended our credit facility to lower
the margin on the Prior Tranche B Term Loan to 2.25% for
London Inter-Bank Offered Rate (LIBOR) based loans and
0.75% for prime rate based loans effectively reducing the margin
by 50 basis points through May 2004 and 25 basis points for the
remaining term of the loan. We paid Bank of America, N.A.
$175,000 in administrative fees to obtain the amendment. Since
June 30, 2004, we have amended our credit facility to
increase the size of the credit facility to $550 million,
consisting of a $175 million revolving commitment expiring
July 2009 and a $375 million term loan (Tranche B Term
Loan) due in periodic principal payments through June 2011. The
terms of the amended agreement are similar to and no less
favorable than those contained in the $325 million credit
facility as in effect on June 30, 2004.

Amounts outstanding under the credit facility
bear interest at varying rates based upon a 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. The combination of a variable rate margin and LIBOR
base rate resulted in an effective rate of 3.67% and 3.39% at
June 30, 2003 and 2004, respectively. Our obligations under
the credit facility 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 domestic subsidiaries. The
Lenders security interest in a portion of our inventory is
subordinate to the liens on that inventory under the terms of a
security agreement between one of our vendors and us. The same
vendor has a security interest in certain accounts receivable,
which is subordinate to the rights of the Lenders.

The credit facility documentation 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 credit
agreement. The credit facility documentation 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 facility documentation also contains customary events of
default, including events relating to changes in control of the
Company.

On June 4, 2003, we entered into an interest
rate swap agreement effectively converting for a period of one
year beginning July 21, 2003, $120 million of
floating-rate borrowings to fixed-rate borrowings with a fixed
rate of 1.14%, plus the applicable margin rate as determined by
the credit agreement.

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 may 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.

41



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Our liquidity needs currently arise primarily
from working capital requirements, capital expenditures,
commitments related to financing obtained through the issuance
of long-term debt and inventory purchase obligations. We believe
that our cash from operations, cash available under the recently
increased 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 and working capital requirements and growth plans for
at least the next 12 months.



| |                                            
| | -------------------------------------------
| | Commitments and Contractual
    Obligations

The following table sets forth a summary of our
contractual cash obligations as of June 30, 2004. Certain
of these contractual obligations are reflected in our balance
sheet, while others are disclosed in the notes to the financial
statements as future obligations under accounting principles
generally accepted in the United States of America. Excluding
long-term debt, this table does not include amounts already
recorded on our balance sheet.

|                            |  |                                                           |         |      |  |      |         |      |  |      |        |            |  |       |       |  |  |   |         |  |  |   |     |  |  |   |         | 
|--------------------------- |  | --------------------------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ | ---------- |  | ----- | ----- |  |  | - | ------- |  |  | - | --- |  |  | - | ------- | 
|                            |  |                                                          
|                            |  | Payments Due Under Contractual Obligations by Fiscal Year
|                            |  |                                                          
|                            |  | 2005                                                      |         | 2006 |  | 2007 |         | 2008 |  | 2009 |        | Thereafter |  | Total
|                            |  |                                                           |         |      |  |      |         |      |  |      |        |            |  |      
|                            |  |                                                          
|                            |  | (in thousands)                                           
|Long-Term Debt              |  | $                                                         | 4,445   |      |  | $    | 3,928   |      |  | $    | 3,750  |            |  | $     | 3,750 |  |  | $ | 163,438 |  |  | $ |    |  |  | $ | 179,311 | 
|Operating Leases            |  |                                                           | 7,464   |      |  |      | 5,077   |      |  |      | 3,662  |            |  |       | 2,359 |  |  |   | 1,741   |  |  |   | 808 |  |  |   | 21,111  | 
|Purchase Obligations        |  |                                                           | 262,192 |      |  |      | 161,584 |      |  |      | 30,126 |            |  |       |      |  |  |   |        |  |  |   |    |  |  |   | 453,902 | 
|Capital Leases              |  |                                                           |        |      |  |      |        |      |  |      |       |            |  |       |      |  |  |   |        |  |  |   |    |  |  |   |        | 
|Other Long-Term Liabilities |  |                                                           |        |      |  |      |        |      |  |      |       |            |  |       |      |  |  |   |        |  |  |   |    |  |  |   |        | 
|                            |  |                                                           |         |      |  |      |         |      |  |      |        |            |  |       |       |  |  |   |         |  |  |   |     |  |  |   |         | 
|                            |  | $                                                         | 274,101 |      |  | $    | 170,589 |      |  | $    | 37,538 |            |  | $     | 6,109 |  |  | $ | 165,179 |  |  | $ | 808 |  |  | $ | 654,324 | 
|                            |  |                                                           |         |      |  |      |         |      |  |      |        |            |  |       |       |  |  |   |         |  |  |   |     |  |  |   |         | 

The long-term debt obligations in the table
reflect the maturities pursuant to credit facility amendments
since June 30, 2004.



| |                               
| | ------------------------------
| | Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect
on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.

Impact of Recently Issued Accounting
Standards

In December 2003, the FASB issued FIN
No. 46(R), Consolidation of Variable Interest Entities,which clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements.
FIN No. 46(R) requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
provide sufficient equity at risk for the entity to support its
activities. FIN No. 46(R) is effective for the first
interim or annual period ending after March 15, 2004. We
have determined that we do not have any variable interest
entities and therefore, the adoption of the provisions of FIN
No. 46(R) in fiscal year 2004 did not have a material
effect on our financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities.This Statement amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities,by requiring that contracts with comparable characteristics
be accounted for similarly and clarifies when a derivative
contains a financing component that warrants special reporting
in the statement of cash flows. SFAS No. 149 is effective
for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30,
2003 and must be applied prospectively. The adoption of the
provisions of SFAS No. 149 in fiscal year 2004 did not have
a material effect on our financial position or results of
operations.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.This
statement established standards for how an issuer classifies

42



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##### 



and measures in its statement of financial
position certain financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 is effective for
financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 13, 2003
and must be applied prospectively by reporting the cumulative
effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement
and still existing at the beginning of the interim period of
adoption. The adoption of the provisions of SFAS No. 150 in
fiscal year 2004 did not have a material effect on our financial
position or results of operations.


Impact of Inflation

Changes in prices charged by the
biopharmaceutical manufacturers for the drugs we dispense, along
with increasing labor costs, freight and supply costs and other
overhead expenses, affect our cost of sales and general and
administrative expenses. Changes due to inflation have not had
significant adverse effects on our operations.

Forward Looking Information

Certain matters discussed in the preceding pages
of this Form 10-K, particularly regarding implementation of
the our strategy, development of new drugs by the pharmaceutical
and biotechnology industries, anticipated growth and revenues,
anticipated working capital and sources of funding for growth
opportunities, expenditures, interest, costs and income
constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended (See Item 1  Risk Factors).



|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | 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 sometimes use derivative financial instruments
to manage our exposure to rising interest rates on our
variable-rate debt, primarily by entering into variable-to-fixed
interest rate swaps. We had fixed the interest rate through
July 21, 2004 on $120 million of our variable-rate
debt through the use of a variable-to-fixed interest rate swap.
As a result, we did not benefit from any decrease in interest
rates nor were we subjected to any detriment from rising
interest rates on this portion of our debt during the period of
the swap agreement.

We have not yet hedged against our interest rate
risk exposure after July 21, 2004. As a result, we will
benefit from decreasing interest rates, but rising interest
rates on our debt will also harm us. Accordingly, if we maintain
our current level of total debt, including additional debt
incurred in July 2004, a 100 basis point decrease in interest
rates along the entire yield curve would result in an increase
in pre-tax income of approximately $3.75 million for the
year. However, a 100 basis point increase in interest rates
would result in a decrease in pre-tax income of
$3.75 million 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 8. | Financial Statements and Supplementary
    Data

The Consolidated Financial Statements and
financial statement schedule in Part IV, Item 14(a)(1)
and (2) of the report are incorporated by reference into
this Item 8.

Item 9.                      Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

On May 5, 2003, the Company dismissed
Ernst & Young LLP as its independent public accountant.
The decision to terminate the engagement of Ernst &
Young LLP was recommended and approved by the Audit Committee of
the Companys Board of Directors, which determined that
such termination was in the best interests of the Company, and
approved by the Companys Board of Directors.

43



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Ernst & Young LLP was retained as the
Companys independent auditor at the time of the
Companys formation on May 29, 1996. Ernst &
Young LLPs report on the financial statements of the
Company for the year ended June 30, 2002 did not contain an
adverse opinion or disclaimer of opinion, nor was it qualified
or modified as to uncertainty, audit scope, or accounting
principles.

During the year ended June 30, 2002 and the
interim period between June 30, 2002 and May 5, 2003,
there were no disagreements between the Company and
Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Ernst & Young LLP,
would have caused it to make reference to the subject matter of
the disagreements in connection with its report for such period.
During the year ended June 30, 2002 and the interim period
between June 30, 2002 and the date of Ernst &
Young LLPs dismissal on May 5, 2003, there were no
reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K promulgated by the Securities and Exchange
Commission).

The Company requested that Ernst & Young
LLP furnish it with a letter addressed to the Securities and
Exchange Commission stating whether or not it agreed with the
above statements. A copy of the letter from Ernst &
Young LLP dated May 19, 2003 was filed as Exhibit 16.1
to the Form 8-K/A filed May 19, 2003.

On June 10, 2003, the Audit Committee of the
Board of Directors of the Company approved the engagement of
Deloitte & Touche LLP to serve as the Companys
new independent auditors, effective June 10, 2003.

During the fiscal year ended June 30, 2002,
and the interim period between June 30, 2002 and the date
of the Companys engagement of Deloitte & Touche
LLP, the Company did not consult with Deloitte & Touche
LLP with respect to any matters described in
paragraphs (a)(2)(i) or (ii) of Item 304 of
Regulation S-K.



|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

The Companys Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the
design and operation of the Companys disclosure controls
and procedures as of the end of the period covered by this
report. The Companys Chief Executive Officer and Chief
Financial Officer concluded that as of the end of the period
covered by this report, the Company maintains disclosure
controls and procedures that provide reasonable assurance that
information required to be disclosed in the Companys
reports under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to the
Companys management, including its Chief Executive Officer
and its Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.

There have been no changes in the Companys
internal control over financial reporting during the quarter
ended June 30, 2004 that have materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.

44



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PART III



|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Company

The information required by this item will appear
in, and is incorporated by reference from, the sections entitled
Proposals for Stockholder Action  Election of
Directors, Section 16(a) Beneficial Ownership
Reporting Compliance, Management and
Compensation Committee Interlocks and Insider
Participation included in the Companys definitive
Proxy Statement relating to the 2004 Annual Meeting of
Stockholders.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item will appear
in the section entitled Executive Compensation
included in the Companys definitive Proxy Statement
relating to the 2004 Annual Meeting of Stockholders, which
information, other than the Compensation Committee Report and
Performance Graph required by Items 402(k) and (l) of
Regulation S-K, is incorporated herein by reference.



|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Securities Authorized for Issuance Under Equity
Compensation Plans in Part II, Item 5, of the report
are incorporated by reference into this Item 12.

The information required by this item will appear
in, and is incorporated by reference from, the section entitled
Security Ownership of Directors, Officers and Principal
Stockholders included in the Companys definitive
Proxy Statement relating to the 2004 Annual Meeting of
Stockholders.



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item will appear
in, and is incorporated by reference from, the sections entitled
Compensation Committee Interlocks and Insider
Participation and Certain Relationships and Related
Transactions included in the Companys definitive
Proxy Statement relating to the 2004 Annual Meeting of
Stockholders.



|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The information required by this item will appear
in, and is incorporated by reference from, the sections entitled
Principal Accounting Fees and Services included in
the Companys definitive Proxy Statement relating to the
2004 Annual Meeting of Stockholders.

45



---



##### 



PART IV



|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) Document filed as part of this Report:

|    |  |                                                                                                                                                                                                                                                    |  |      |      | 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|    |  |                                                                                                                                                                                                                                                    |  | Page
|    |  |                                                                                                                                                                                                                                                    |  |     
|(1) |  | Financial Statements:                                                                                                                                                                                                                              |  |      |      | 
|    |  | Reports of Independent Registered Public
    Accounting Firms                                                                                                                                                                                      |  |      | F-1  | 
|    |  | Consolidated Balance Sheets at June 30, 2003
    and 2004                                                                                                                                                                                          |  |      | F-3  | 
|    |  | Consolidated Statements of Income for the years
    ended June 30, 2002, 2003 and 2004                                                                                                                                                             |  |      | F-4  | 
|    |  | Consolidated Statements of Stockholders
    Equity for the years ended June 30, 2002, 2003 and 2004                                                                                                                                               |  |      | F-5  | 
|    |  | Consolidated Statements of Cash Flows for the
    years ended June 30, 2002, 2003 and 2004                                                                                                                                                         |  |      | F-6  | 
|    |  | Notes to Consolidated Financial Statements                                                                                                                                                                                                         |  |      | F-7  | 
|(2) |  | Financial Statement Schedule:                                                                                                                                                                                                                      |  |      |      | 
|    |  | Schedule II  Consolidated
    Schedule  Valuation and Qualifying Accounts                                                                                                                                                                        |  |      | F-26 | 
|    |  | All other schedules for which provision is made
    in the applicable accounting Regulations of the Securities and
    Exchange Commission are not required under the related
    instructions or are inapplicable and therefore have been omitted |  |      |      | 
|(3) |  | The Index of Exhibits Required by Item 601
    of Regulation S-K included herewith, which is incorporated
    herein by reference                                                                                                                  |  |      |      | 



| |     |                                          
| | --- | -----------------------------------------
| | (b) | Reports filed by the Company on Form 8-K:

We filed a report on Form 8-K on May 3,
2004, to furnish as an exhibit, the press release reporting our
financial results for the quarter ended March 31, 2004.

46



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Accredo Health, Incorporated


Memphis, TN


We have audited the accompanying consolidated
balance sheets of Accredo Health, Incorporated and subsidiaries
(Company) as of June 30, 2004 and 2003, and the
related consolidated statements of income, stockholders
equity and cash flows for the years then ended. Our audits also
included the financial statement schedule as of June 30,
2004 and 2003, and for the years then ended, listed in the Index
at Item 15(a)(2). These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. The Companys consolidated financial statements
for the year ended June 30, 2002, were audited by other
auditors whose report, dated August 16, 2002, expressed an
unqualified opinion on those statements.

We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of Accredo Health, Incorporated and
subsidiaries as of June 30, 2004 and 2003, and the results
of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion,
such financial statement schedule, when considered in relation
to the 2004 and 2003 basic consolidated financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.



| |                          
| | -------------------------
| | /s/ Deloitte & Touche LLP

Memphis, Tennessee

September 10, 2004


F-1



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

Board of Directors

Accredo Health, Incorporated


We have audited the accompanying consolidated
statements of income, stockholders equity and cash flows
of Accredo Health, Incorporated for the year ended June 30,
2002. Our audit also included the financial statement schedule
listed in the Index at Item 15(a) for the year ended
June 30, 2002. These financial statements and schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audit.

We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the results of Accredo Health, Incorporateds
operations and its cash flows for the year ended June 30,
2002, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Memphis, Tennessee

August 16, 2002


F-2



---



##### 



ACCREDO HEALTH, INCORPORATED

CONSOLIDATED BALANCE SHEETS

(000s omitted, except share
data)


|                                                    |                                                                                                                                                     |                                 |                                                |         |          |         |         |         |         |         | 
|--------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---------------------------------------------- | ------- | -------- | ------- | ------- | ------- | ------- | ------- | 
|                                                    |                                                                                                                                                     |                                
|                                                    |                                                                                                                                                     | June 30                        
|                                                    |                                                                                                                                                     |                                
|                                                    |                                                                                                                                                     | 2003                            |                                                | 2004   
|                                                    |                                                                                                                                                     |                                 |                                                |        
|ASSETS                                             
|Current assets:                                     |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|                                                    | Cash and cash equivalents                                                                                                                           |                                 | $                                              | 48,006  |          |         | $       | 42,743  |        
|                                                    | Receivables:                                                                                                                                        |                                 |                                                |         |          |         |         |         |        
|                                                    |                                                                                                                                                     | Patient accounts                |                                                |         | 434,523  |         |         |         | 406,693 |        
|                                                    |                                                                                                                                                     | Allowance for doubtful accounts |                                                |         | (126,541 | )       |         |         | (81,051 | )      
|                                                    |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|                                                    |                                                                                                                                                     |                                 | 307,982                                        |         |          |         | 325,642 |        
|                                                    |                                                                                                                                                     | Due from affiliates             |                                                |         | 3,933    |         |         |         | 4,191   |        
|                                                    |                                                                                                                                                     | Other                           |                                                |         | 21,226   |         |         |         | 28,584  |        
|                                                    |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|                                                    |                                                                                                                                                     |                                 | 333,141                                        |         |          |         | 358,417 |        
|                                                    | Inventories                                                                                                                                         |                                 |                                                | 89,985  |          |         |         | 128,323 |        
|                                                    | Prepaid expenses and other current assets                                                                                                           |                                 |                                                | 4,625   |          |         |         | 5,084   |        
|                                                    | Income taxes receivable                                                                                                                             |                                 |                                                | 1,546   |          |         |         | 382     |        
|                                                    | Deferred income taxes                                                                                                                               |                                 |                                                | 24,579  |          |         |         | 14,129  |        
|                                                    |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|                                                    |                                                                                                                                                     |                                 | Total current assets                           |         |          | 501,882 |         |         |         | 549,078 | 
|Property and equipment, net                         |                                                                                                                                                     |                                 | 31,681                                         |         |          |         | 41,283  |        
|Other assets:                                       |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|                                                    | Joint venture investments                                                                                                                           |                                 |                                                | 5,908   |          |         |         | 7,713   |        
|                                                    | Goodwill, net                                                                                                                                       |                                 |                                                | 352,509 |          |         |         | 382,628 |        
|                                                    | Other intangible assets, net                                                                                                                        |                                 |                                                | 22,803  |          |         |         | 17,480  |        
|                                                    |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|                                                    |                                                                                                                                                     |                                 | Total assets                                   |         | $        | 914,783 |         |         | $       | 998,182 | 
|                                                    |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY           
|Current liabilities:                                |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|                                                    | Accounts payable                                                                                                                                    |                                 | $                                              | 169,664 |          |         | $       | 164,780 |        
|                                                    | Accrued expenses                                                                                                                                    |                                 |                                                | 19,518  |          |         |         | 22,625  |        
|                                                    | Due to affiliates                                                                                                                                   |                                 |                                                | 576     |          |         |         | 654     |        
|                                                    | Current portion of long-term debt                                                                                                                   |                                 |                                                | 16,250  |          |         |         | 4,445   |        
|                                                    |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|                                                    |                                                                                                                                                     |                                 | Total current liabilities                      |         |          | 206,008 |         |         |         | 192,504 | 
|Long-term debt                                      |                                                                                                                                                     |                                 | 178,438                                        |         |          |         | 174,866 |        
|Deferred income taxes                               |                                                                                                                                                     |                                 | 14,810                                         |         |          |         | 25,112  |        
|Minority interest in consolidated
    joint venture |                                                                                                                                                     |                                 | 2,819                                          |         |          |         | 3,757   |        
|Commitments                                         |                                                                                                                                                     |                                 |                                               |         |          |         |        |        
|Stockholders equity:                               |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|                                                    | Undesignated preferred stock, 5,000,000 shares
    authorized, no shares issued                                                                     |                                 |                                                |        |          |         |         |        |        
|                                                    | Common stock, $.01 par value; 100,000,000 shares
    authorized; 47,838,257 shares in 2003 and 48,603,341 shares in
    2004 issued and outstanding |                                 |                                                | 478     |          |         |         | 486     |        
|                                                    | Additional paid-in capital                                                                                                                          |                                 |                                                | 425,183 |          |         |         | 436,021 |        
|                                                    | Accumulated other comprehensive income (loss)                                                                                                       |                                 |                                                | (68     | )        |         |         | 8       |        
|                                                    | Retained earnings                                                                                                                                   |                                 |                                                | 87,115  |          |         |         | 165,428 |        
|                                                    |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|                                                    |                                                                                                                                                     |                                 | Total stockholders equity                     |         |          | 512,708 |         |         |         | 601,943 | 
|                                                    |                                                                                                                                                     |                                 |                                                |         |          |         |         |        
|                                                    |                                                                                                                                                     |                                 | Total liabilities and
    stockholders equity |         | $        | 914,783 |         |         | $       | 998,182 | 
|                                                    |                                                                                                                                                     |                                 |                                                |         |          |         |         |        

See accompanying notes to consolidated financial
statements.

F-3



---



##### 



ACCREDO HEALTH, INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME

(000s omitted, except share
data)


|                                                                                             |                                        |                          |        |            |         |      |        |            |           |  |         |            |           | 
|-------------------------------------------------------------------------------------------- | -------------------------------------- | ------------------------ | ------ | ---------- | ------- | ---- | ------ | ---------- | --------- |  | ------- | ---------- | --------- | 
|                                                                                             |                                        |                         
|                                                                                             |                                        | Years Ended June 30     
|                                                                                             |                                        |                         
|                                                                                             |                                        | 2002                     |        | 2003       |         | 2004
|                                                                                             |                                        |                          |        |            |         |     
|Revenues:                                                                                    |                                        |                          |        |            |         |      |        |            |           |  |         |           
|                                                                                             | Net patient revenue                    |                          | $      | 633,249    |         |      | $      | 1,337,414  |           |  | $       | 1,475,036  |          
|                                                                                             | Other revenue                          |                          |        | 18,257     |         |      |        | 33,982     |           |  |         | 38,761     |          
|                                                                                             | Equity in net income of joint ventures |                          |        | 2,067      |         |      |        | 1,940      |           |  |         | 3,071      |          
|                                                                                             |                                        |                          |        |            |         |      |        |            |           |  |         |           
|                                                                                             |                                        | Total revenues           |        |            | 653,573 |      |        |            | 1,373,336 |  |         |            | 1,516,868 | 
|Operating expenses:                                                                          |                                        |                          |        |            |         |      |        |            |           |  |         |           
|                                                                                             | Cost of sales                          |                          |        | 544,902    |         |      |        | 1,086,334  |           |  |         | 1,197,836  |          
|                                                                                             | General and administrative             |                          |        | 45,571     |         |      |        | 129,803    |           |  |         | 138,521    |          
|                                                                                             | Bad debts                              |                          |        | 5,833      |         |      |        | 87,418     |           |  |         | 29,745     |          
|                                                                                             | Restructuring charge                   |                          |        | 3,893      |         |      |        |           |           |  |         |           |          
|                                                                                             | Depreciation                           |                          |        | 2,338      |         |      |        | 5,834      |           |  |         | 8,210      |          
|                                                                                             | Amortization                           |                          |        | 1,337      |         |      |        | 4,552      |           |  |         | 4,656      |          
|                                                                                             |                                        |                          |        |            |         |      |        |            |           |  |         |           
|                                                                                             |                                        | Total operating expenses |        |            | 603,874 |      |        |            | 1,313,941 |  |         |            | 1,378,968 | 
|                                                                                             |                                        |                          |        |            |         |      |        |            |           |  |         |           
|Operating income                                                                             |                                        |                          | 49,699 |            |         |      | 59,395 |            |           |  | 137,900 |           
|Interest income (expense):                                                                   |                                        |                          |        |            |         |      |        |            |           |  |         |           
|                                                                                             | Interest expense                       |                          |        | (662       | )       |      |        | (10,281    | )         |  |         | (8,986     | )        
|                                                                                             | Interest income                        |                          |        | 1,021      |         |      |        | 717        |           |  |         | 861        |          
|                                                                                             |                                        |                          |        |            |         |      |        |            |           |  |         |           
|                                                                                             |                                        |                          | 359    |            |         |      | (9,564 | )          |           |  | (8,125  | )         
|                                                                                             |                                        |                          |        |            |         |      |        |            |           |  |         |           
|Income before minority interest in income of
    consolidated joint venture and income taxes |                                        |                          | 50,058 |            |         |      | 49,831 |            |           |  | 129,775 |           
|Minority interest in income of consolidated
    joint venture                                |                                        |                          | (1,273 | )          |         |      | (2,044 | )          |           |  | (2,338  | )         
|                                                                                             |                                        |                          |        |            |         |      |        |            |           |  |         |           
|Income before income taxes                                                                   |                                        |                          | 48,785 |            |         |      | 47,787 |            |           |  | 127,437 |           
|Income tax expense                                                                           |                                        |                          | 19,025 |            |         |      | 18,252 |            |           |  | 49,124  |           
|                                                                                             |                                        |                          |        |            |         |      |        |            |           |  |         |           
|                                                                                             |                                        | Net income               |        | $          | 29,760  |      |        | $          | 29,535    |  |         | $          | 78,313    | 
|                                                                                             |                                        |                          |        |            |         |      |        |            |           |  |         |           
|Net income per common share:                                                                 |                                        |                          |        |            |         |      |        |            |           |  |         |           
|                                                                                             | Basic                                  |                          | $      | 0.75       |         |      | $      | 0.62       |           |  | $       | 1.63       |          
|                                                                                             |                                        |                          |        |            |         |      |        |            |           |  |         |           
|                                                                                             | Diluted                                |                          | $      | 0.73       |         |      | $      | 0.61       |           |  | $       | 1.60       |          
|                                                                                             |                                        |                          |        |            |         |      |        |            |           |  |         |           
|Weighted average shares outstanding:                                                         |                                        |                          |        |            |         |      |        |            |           |  |         |           
|                                                                                             | Basic                                  |                          |        | 39,547,712 |         |      |        | 47,509,682 |           |  |         | 48,165,855 |          
|                                                                                             | Diluted                                |                          |        | 40,919,625 |         |      |        | 48,442,723 |           |  |         | 49,042,676 |          

See accompanying notes to consolidated financial
statements.

F-4



---



##### 



ACCREDO HEALTH, INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(000s omitted, except share
data)


|                                                                              |                                   |        |            |           |  |            |     |               |  |             |         |               |  |   |     |   |  |   |         |   |  |   |         |         | 
|----------------------------------------------------------------------------- | --------------------------------- | ------ | ---------- | --------- |  | ---------- | --- | ------------- |  | ----------- | ------- | ------------- |  | - | --- | - |  | - | ------- | - |  | - | ------- | ------- | 
|                                                                              |                                   |        |            |           |  |            |     | Accumulated   |  |             |         |              
|                                                                              |                                   |        |            |           |  |            |     | Other         |  |             |         |              
|                                                                              |                                   | Common |            |           |  | Additional |     | Comprehensive |  | Accumulated |         | Total        
|                                                                              |                                   | Stock  |            | Common    |  | Paid-In    |     | Income        |  | Retained    |         | Stockholders
|                                                                              |                                   | Shares |            | Stock     |  | Capital    |     | (Loss)        |  | Earnings    |         | Equity       
|                                                                              |                                   |        |            |           |  |            |     |               |  |             |         |              
|Balance at June 30, 2001                                                      |                                   |        | 38,931,027 |           |  | $          | 389 |               |  | $           | 160,961 |               |  | $ |    |   |  | $ | 27,820  |   |  | $ | 189,170 |        
|Issuance of common stock:                                                     |                                   |        |            |           |  |            |     |               |  |             |         |               |  |   |     |   |  |   |         |   |  |   |         |        
|                                                                              | In connection with an acquisition |        |            | 7,591,464 |  |            |     | 76            |  |             |         | 246,647       |  |   |     |  |  |   |         |  |  |   |         | 246,723 | 
|                                                                              | Exercise of stock options         |        |            | 427,442   |  |            |     | 4             |  |             |         | 2,193         |  |   |     |  |  |   |         |  |  |   |         | 2,197   | 
|                                                                              | Employee stock purchase plan      |        |            | 43,328    |  |            |     | 1             |  |             |         | 895           |  |   |     |  |  |   |         |  |  |   |         | 896     | 
|Tax benefit of exercise of stock options                                      |                                   |        |           |           |  |            |    |               |  |             | 2,204   |               |  |   |    |   |  |   |        |   |  |   | 2,204   |        
|Compensation resulting from stock transactions,
    net of income tax benefit |                                   |        |           |           |  |            |    |               |  |             | 104     |               |  |   |    |   |  |   |        |   |  |   | 104     |        
|Net income                                                                    |                                   |        |           |           |  |            |    |               |  |             |        |               |  |   |    |   |  |   | 29,760  |   |  |   | 29,760  |        
|                                                                              |                                   |        |            |           |  |            |     |               |  |             |         |               |  |   |     |   |  |   |         |   |  |   |         |        
|Balance at June 30, 2002                                                      |                                   |        | 46,993,261 |           |  |            | 470 |               |  |             | 413,004 |               |  |   |    |   |  |   | 57,580  |   |  |   | 471,054 |        
|Issuance of common stock:                                                     |                                   |        |            |           |  |            |     |               |  |             |         |               |  |   |     |   |  |   |         |   |  |   |         |        
|                                                                              | Exercise of stock options         |        |            | 762,250   |  |            |     | 7             |  |             |         | 6,008         |  |   |     |  |  |   |         |  |  |   |         | 6,015   | 
|                                                                              | Employee stock purchase plan      |        |            | 82,746    |  |            |     | 1             |  |             |         | 1,794         |  |   |     |  |  |   |         |  |  |   |         | 1,795   | 
|Tax benefit of exercise of stock options                                      |                                   |        |           |           |  |            |    |               |  |             | 4,377   |               |  |   |    |   |  |   |        |   |  |   | 4,377   |        
|Mark to market interest rate swap, net of taxes
    of $43                    |                                   |        |           |           |  |            |    |               |  |             |        |               |  |   | (68 | ) |  |   |        |   |  |   | (68     | )      
|Net income                                                                    |                                   |        |           |           |  |            |    |               |  |             |        |               |  |   |    |   |  |   | 29,535  |   |  |   | 29,535  |        
|                                                                              |                                   |        |            |           |  |            |     |               |  |             |         |               |  |   |     |   |  |   |         |   |  |   |         |        
|Balance at June 30, 2003                                                      |                                   |        | 47,838,257 |           |  |            | 478 |               |  |             | 425,183 |               |  |   | (68 | ) |  |   | 87,115  |   |  |   | 512,708 |        
|Issuance of common stock:                                                     |                                   |        |            |           |  |            |     |               |  |             |         |               |  |   |     |   |  |   |         |   |  |   |         |        
|                                                                              | Exercise of stock options         |        |            | 699,410   |  |            |     | 7             |  |             |         | 7,306         |  |   |     |  |  |   |         |  |  |   |         | 7,313   | 
|                                                                              | Employee stock purchase plan      |        |            | 65,674    |  |            |     | 1             |  |             |         | 1,458         |  |   |     |  |  |   |         |  |  |   |         | 1,459   | 
|Tax benefit of exercise of stock options                                      |                                   |        |           |           |  |            |    |               |  |             | 2,074   |               |  |   |    |   |  |   |        |   |  |   | 2,074   |        
|Mark to market interest rate swap, net of taxes
    of $48                    |                                   |        |           |           |  |            |    |               |  |             |        |               |  |   | 76  |   |  |   |        |   |  |   | 76      |        
|Net income                                                                    |                                   |        |           |           |  |            |    |               |  |             |        |               |  |   |    |   |  |   | 78,313  |   |  |   | 78,313  |        
|                                                                              |                                   |        |            |           |  |            |     |               |  |             |         |               |  |   |     |   |  |   |         |   |  |   |         |        
|Balance at June 30, 2004                                                      |                                   |        | 48,603,341 |           |  | $          | 486 |               |  | $           | 436,021 |               |  | $ | 8   |   |  | $ | 165,428 |   |  | $ | 601,943 |        
|                                                                              |                                   |        |            |           |  |            |     |               |  |             |         |               |  |   |     |   |  |   |         |   |  |   |         |        

See accompanying notes to consolidated financial
statements.

F-5



---



##### 



ACCREDO HEALTH, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(000s omitted)


|                                                                                           |                                                               |                     |          |         |   |      |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------- | ------------------- | -------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                           |                                                               |                    
|                                                                                           |                                                               | Years Ended June 30
|                                                                                           |                                                               |                    
|                                                                                           |                                                               | 2002                |          | 2003    |   | 2004
|                                                                                           |                                                               |                     |          |         |   |     
|Operating activities                                                                       |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|Net income                                                                                 |                                                               | $                   | 29,760   |         |   | $    | 29,535  |         |   | $ | 78,313  |        
|Adjustments to reconcile net income to net cash
    provided by operating activities:      |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|                                                                                           | Depreciation and amortization                                 |                     |          | 3,675   |   |      |         | 13,761  |   |   |         | 16,454  |  
|                                                                                           | Restructuring charge                                          |                     |          | 3,893   |   |      |         |        |   |   |         |        |  
|                                                                                           | Provision for losses on accounts receivable                   |                     |          | 5,833   |   |      |         | 87,418  |   |   |         | 29,745  |  
|                                                                                           | Deferred income taxes                                         |                     |          | 949     |   |      |         | (8,198  | ) |   |         | 20,752  |  
|                                                                                           | Compensation resulting from stock transactions                |                     |          | 164     |   |      |         |        |   |   |         |        |  
|                                                                                           | Tax benefit of exercise of stock options                      |                     |          | 2,204   |   |      |         | 4,377   |   |   |         | 2,074   |  
|                                                                                           | Undistributed earnings of joint ventures                      |                     |          | (1,827  | ) |      |         | (1,270  | ) |   |         | (1,805  | )
|                                                                                           | Minority interest in income of consolidated joint
    venture |                     |          | 1,273   |   |      |         | 2,044   |   |   |         | 2,338   |  
|Changes in operating assets and liabilities, net
    of effect from business acquisitions: |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|                                                                                           | Patient and other receivables                                 |                     |          | (34,703 | ) |      |         | (62,960 | ) |   |         | (52,042 | )
|                                                                                           | Due from affiliates                                           |                     |          | 185     |   |      |         | (1,102  | ) |   |         | (180    | )
|                                                                                           | Inventories                                                   |                     |          | (34,577 | ) |      |         | 30,825  |   |   |         | (37,078 | )
|                                                                                           | Prepaid expenses and other current assets                     |                     |          | (1,945  | ) |      |         | (1,155  | ) |   |         | (458    | )
|                                                                                           | Income taxes receivable                                       |                     |          | 589     |   |      |         | (2,507  | ) |   |         | 1,870   |  
|                                                                                           | Accounts payable and accrued expenses                         |                     |          | 56,804  |   |      |         | (19,698 | ) |   |         | (1,668  | )
|                                                                                           |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|Net cash provided by operating activities                                                  |                                                               |                     | 32,277   |         |   |      | 71,070  |         |   |   | 58,315  |        
|                                                                                          
|Investing activities                                                                       |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|Purchases of marketable securities                                                         |                                                               |                     | (6,000   | )       |   |      |        |         |   |   |        |        
|Proceeds from sales and maturities of marketable
    securities                            |                                                               |                     | 8,000    |         |   |      |        |         |   |   |        |        
|Purchases of property and equipment                                                        |                                                               |                     | (8,858   | )       |   |      | (16,005 | )       |   |   | (19,671 | )      
|Business acquisitions and joint venture
    investments                                    |                                                               |                     | (256,172 | )       |   |      | (21,970 | )       |   |   | (35,902 | )      
|                                                                                           |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|Net cash used in investing activities                                                      |                                                               |                     | (263,030 | )       |   |      | (37,975 | )       |   |   | (55,573 | )      
|                                                                                          
|Financing activities                                                                       |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|(Payment of) proceeds from notes payable and line
    of credit                            |                                                               |                     | 223,889  |         |   |      | (35,313 | )       |   |   | (15,377 | )      
|Payment of deferred financing costs                                                        |                                                               |                     | (6,737   | )       |   |      |        |         |   |   |        |        
|Issuance of common stock                                                                   |                                                               |                     | 3,094    |         |   |      | 7,811   |         |   |   | 8,772   |        
|Distributions to minority interest partner                                                 |                                                               |                     | (1,100   | )       |   |      | (500    | )       |   |   | (1,400  | )      
|                                                                                           |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|Net cash provided by (used in) financing
    activities                                    |                                                               |                     | 219,146  |         |   |      | (28,002 | )       |   |   | (8,005  | )      
|                                                                                           |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|Increase (decrease) in cash and cash equivalents                                           |                                                               |                     | (11,607  | )       |   |      | 5,093   |         |   |   | (5,263  | )      
|Cash and cash equivalents at beginning of year                                             |                                                               |                     | 54,520   |         |   |      | 42,913  |         |   |   | 48,006  |        
|                                                                                           |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|Cash and cash equivalents at end of year                                                   |                                                               | $                   | 42,913   |         |   | $    | 48,006  |         |   | $ | 42,743  |        
|                                                                                           |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|                                                                                          
|Supplementary cash flow disclosures                                                        |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|Income taxes paid                                                                          |                                                               | $                   | 15,279   |         |   | $    | 20,578  |         |   | $ | 24,570  |        
|                                                                                           |                                                               |                     |          |         |   |      |         |         |   |   |         |        
|Interest paid                                                                              |                                                               | $                   | 395      |         |   | $    | 8,936   |         |   | $ | 7,455   |        
|                                                                                           |                                                               |                     |          |         |   |      |         |         |   |   |         |        

See accompanying notes to consolidated financial
statements.

F-6



---



##### 



ACCREDO HEALTH, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1. Description of Business

The consolidated financial statements and related
notes to the consolidated financial statements include the
accounts of Accredo Health, Incorporated (the
Company), its wholly-owned subsidiaries and its 80%
owned joint venture. Significant inter-company accounts have
been eliminated in consolidation.

The Company provides specialty retail pharmacy
and related services pursuant to agreements with biotechnology
drug manufacturers relating to the treatment of patients with
certain costly chronic diseases. Because of the unique needs of
patients suffering from chronic diseases, biotechnology drug
manufacturers have recognized the benefits of customized
programs to facilitate alternate site drug administration,
ensure compliance with treatment regimens, provide reimbursement
assistance and capture valuable clinical and patient demographic
information. The Company addresses the needs of the
manufacturers, payors and patients by providing specialized
services that facilitate product launch and patient acceptance
including the collection of timely drug utilization and patient
compliance information, patient education and monitoring through
the use of written materials and telephonic consultation,
reimbursement expertise and overnight drug delivery.

The Company has designed its specialty retail
pharmacy services to focus primarily on biotechnology injectable
drugs that: (i) are used on a recurring basis to treat
chronic, and potentially life threatening diseases;
(ii) are expensive; and (iii) require temperature
control or other specialized handling as part of their
distribution process. Currently, the Company provides specialty
retail pharmacy and related services that primarily address the
needs of patients with chronic diseases including Multiple
Sclerosis, Gaucher Disease, hemophilia, pulmonary arterial
hypertension, growth hormone-related disorders, primary immune
deficiencies, autoimmune disorders and respiratory syncytial
virus.



|   |                                
|-- | -------------------------------
|2. | Significant Accounting Policies

Cash Equivalents

The Company considers all highly liquid
investments with an initial maturity of three months or less to
be cash equivalents.

Concentrations of Risks

The Companys primary concentration of
credit risk is patient accounts receivable, which consists of
amounts owed by various governmental agencies, insurance
companies and private patients. The Company manages the
receivables by regularly reviewing its accounts and contracts
and by providing appropriate allowances for uncollectible
amounts. Significant concentrations of gross patient accounts
receivable consist of the following at June 30:

|         |  |      |    |      |  |  |    |  
|-------- |  | ---- | -- | ---- |  |  | -- | -
|         |  | 2003 |    | 2004
|         |  |      |    |     
|Medicare |  |      | 7  | %    |  |  | 9  | %
|Medicaid |  |      | 18 | %    |  |  | 16 | %

Concentration of credit risk relating to accounts
receivable is limited to some extent by the diversity and number
of patients and payors and the geographic dispersion of the
Companys operations. The Company grants credit without
collateral to its patients and payors.

F-7



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company derives a substantial portion of its
revenue from the sale of drugs provided by a limited number of
single-source suppliers. The table below shows the concentration
of the Companys revenue derived from the sale of drugs
provided by these suppliers for the years ended June 30:

|          |  |      |    |      |  |      |    |   |  |  |    |  
|--------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|          |  | 2002 |    | 2003 |  | 2004
|          |  |      |    |      |  |     
|Biogen    |  |      | 31 | %    |  |      | 14 | % |  |  | 14 | %
|Genzyme   |  |      | 18 | %    |  |      | 10 | % |  |  | 9  | %
|MedImmune |  |      | 10 | %    |  |      | 6  | % |  |  | 7  | %

The Company derived approximately 15% of its
revenue from a single non-governmental payor in the year ended
June 30, 2002. No payor represented more than 10% of the
Companys revenue in the year ended June 30, 2003. The
Company derived approximately 10% of its revenue from a single
non-governmental payor in the year ended June 30, 2004.

Cash, cash equivalents and marketable securities
are placed with major high credit quality financial institutions
and issuers. Management believes that there is minimal credit
risk associated with these financial institutions and issuers.

Receivables

Receivables are presented net of allowance for
doubtful accounts and contractual allowances. Receivables
include trade and patient accounts receivable. The Company
regularly reviews and analyzes the adequacy of the allowances
based on a variety of factors including the age of the
outstanding receivable and the collection history. If
circumstances related to specific customers change, estimates of
the recoverability of receivables could be further adjusted.

Inventories

Inventories are stated at the lower of cost,
determined by the first-in, first-out method, or market value.

Fair Value of Financial Instruments

The carrying value of accounts receivable,
accounts payable and long-term debt approximates fair value of
these financial instruments at June 30, 2003 and 2004.

Property and Equipment

Property and equipment is stated at cost.
Provisions for depreciation are computed primarily by the
straight-line method based on the estimated useful lives of the
related assets of two to seven years.

Valuation of Long-Lived Assets

Management periodically evaluates carrying values
of long-lived assets, including property and equipment, to
determine whether events and circumstances indicate that these
assets have been impaired. An asset is considered impaired when
undiscounted cash flows to be realized from such asset are less
than its carrying value. In that event, a loss is determined
based on the amount the carrying value exceeds the fair market
value of such asset, which is based on discounted cash flows.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the cost of
businesses acquired over fair value of net tangible and
identifiable intangible assets at the date of acquisition. Prior
to the adoption of Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets, goodwill was amortized

F-8



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

using the straight-line method over their
estimated useful lives of 40 years. Since adoption of
SFAS No. 142 in July 2001, amortization of goodwill
was discontinued and goodwill is reviewed at least annually for
impairment. Accumulated amortization of goodwill was
$7.0 million at June 30, 2003 and 2004. Other
intangible assets consist primarily of non-compete agreements
and acquired patient relationships in connection with business
acquisitions. Other intangibles are being amortized using the
straight-line method over their estimated useful lives of two to
ten years for the non-compete agreements, four to eight years
for acquired patient relationships and five to seven years for
the deferred financing costs. Absent any impairment indicators,
the Company performs the annual impairment tests during the
fourth quarter each year.

Income Taxes

Deferred income taxes are provided for the tax
effect of temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial
statements. The liability method is used to account for income
taxes, which requires deferred taxes to be recorded at the
statutory rate to be in effect when the taxes are paid.

Stock-Based Compensation

The Company recognizes stock-based compensation
using the intrinsic value method as permitted by
SFAS No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation expense is
recorded for employee stock-based awards issued at market value
at the date such awards are granted.

For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over
the options vesting period. The Companys pro forma
information for the years ended June 30 is as follows (in
thousands, except share data):

|                                                                                                                               |                       |      |        |      |  |      |         |      |  |   |         |      | 
|------------------------------------------------------------------------------------------------------------------------------ | --------------------- | ---- | ------ | ---- |  | ---- | ------- | ---- |  | - | ------- | ---- | 
|                                                                                                                               |                       | 2002 |        | 2003 |  | 2004
|                                                                                                                               |                       |      |        |      |  |     
|Net income, as reported                                                                                                        |                       | $    | 29,760 |      |  | $    | 29,535  |      |  | $ | 78,313  |     
|Less stock-based employee compensation cost, net
    of related tax effects, applying the fair value method to all
    rewards |                       |      | (3,860 | )    |  |      | (10,949 | )    |  |   | (11,855 | )   
|                                                                                                                               |                       |      |        |      |  |      |         |      |  |   |         |     
|Pro forma net income                                                                                                           |                       | $    | 25,900 |      |  | $    | 18,586  |      |  | $ | 66,458  |     
|                                                                                                                               |                       |      |        |      |  |      |         |      |  |   |         |     
|Earnings per share:                                                                                                            |                       |      |        |      |  |      |         |      |  |   |         |     
|                                                                                                                               | Basic  as reported   |      | $      | 0.75 |  |      | $       | 0.62 |  |   | $       | 1.63 | 
|                                                                                                                               | Basic  pro forma     |      | $      | 0.65 |  |      | $       | 0.39 |  |   | $       | 1.38 | 
|                                                                                                                               | Diluted  as reported |      | $      | 0.73 |  |      | $       | 0.61 |  |   | $       | 1.60 | 
|                                                                                                                               | Diluted  pro forma   |      | $      | 0.64 |  |      | $       | 0.39 |  |   | $       | 1.37 | 

Revenue Recognition

Net patient revenues are from the sales of
biopharmaceutical drugs to patients and are reported at the net
amount billed to patients, third-party payors and others in the
period the products are delivered. The Company has agreements
with certain third-party payors that provide for payments to the
Company at amounts discounted from its established rates.

The revenues and related accounts receivable are
recorded net of payor contractual discounts to reflect the
estimated net billable amounts for the products delivered. We
estimate the allowance for contractual discounts on a
payor-specific basis, given our interpretation of the contract
terms or applicable regulations. However, the reimbursement
rates are often subject to interpretation that could result in
payments that differ from our estimates. Additionally, updated
regulations and contract negotiations occur frequently,
necessitating our continual review and assessment of the
estimation process.

F-9



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Approximately 21%, 27% and 28% of gross patient
revenues for the years ended June 30, 2002, 2003 and 2004,
respectively, is from participation in the Medicare and
state-sponsored Medicaid programs.

The Company from time to time enters into
management contracts with hemophilia treatment centers, medical
centers and joint ventures in which the Company has an interest.
Pursuant to these contracts, the Company will provide certain
billing, pharmacy dispensing, inventory management, shipping,
reimbursement, collection and other management services in
exchange for fees that range from a reimbursement of the
Companys costs to a percentage of the managed entities
billed charges, less contractual allowances. These contracts are
for terms of up to five years and are usually cancelable on
short notice. Revenue from the management contracts is
recognized when the services are rendered and is included in
other revenue.

Shipping and Handling Costs

Shipping and handling costs are included in cost
of sales.

Interest Rate Swap Agreements

The Company enters into interest rate swap
agreements as a means of managing its interest rate exposure.
The differential to be paid or received is recognized over the
life of the agreement as an adjustment to interest expense. The
interest rate swap is designated as an effective cash-flow
hedge. The fair value of the swap is recorded on the balance
sheet, with changes in the fair value included in accumulated
other comprehensive income (loss).

Segment Disclosures

SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information,establishes standards for the way that public business
enterprises that are required to file financial statements with
the Securities and Exchange Commission report information about
operating segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in interim financial reports.
SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and
major customers. The Company manages its business in one
operating segment.

Earnings Per Share

The Company presents earnings per share in
accordance with SFAS No. 128, Earnings Per
Share. All per share amounts have been calculated using the
weighted average number of shares outstanding during each
period. Diluted earnings per share are adjusted for the impact
of common stock equivalents using the treasury stock method when
the effect is dilutive. A reconciliation of the basic and
diluted weighted average shares outstanding is as follows at
June 30:

|                                                                                                                                      |  |      |            |      |  |      |            |  |  |  |            | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- | 
|                                                                                                                                      |  | 2002 |            | 2003 |  | 2004
|                                                                                                                                      |  |      |            |      |  |     
|Weighted average number of common shares
    outstanding used as the denominator in the basic earnings per
    share calculation      |  |      | 39,547,712 |      |  |      | 47,509,682 |  |  |  | 48,165,855 | 
|Additional shares assuming exercise of dilutive
    stock options                                                                     |  |      | 1,371,913  |      |  |      | 933,041    |  |  |  | 876,821    | 
|                                                                                                                                      |  |      |            |      |  |      |            |  |  |  |            | 
|Weighted average number of common and equivalent
    shares used as the denominator in the diluted earnings per share
    calculation |  |      | 40,919,625 |      |  |      | 48,442,723 |  |  |  | 49,042,676 | 
|                                                                                                                                      |  |      |            |      |  |      |            |  |  |  |            | 

F-10



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Use of Estimates

The preparation of the consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and the accompanying
notes to the consolidated financial statements. Management makes
its best estimate of the ultimate outcome for these items based
on historical trends and other information available when the
financial statements are prepared. Actual results could differ
from those estimates. Changes in estimates are recognized in
accordance with accounting principles for the estimate, which is
typically in the period when the new information becomes
available to management. Estimates are used primarily in
recording the allowance for doubtful accounts, refundable credit
balances, self-insurance accruals, income tax liabilities and
impairment tests on goodwill.

During the March 2003 quarter, we analyzed
historical collection rates and other data used in estimating
the allowance for doubtful accounts. Our calculations indicated
that the accounts receivable reserve needed to be increased. As
a result of the new information obtained through the analysis
completed subsequent to the March 2003 quarter, we recorded a
net $49 million charge to bad debt expense and increased
the allowance for doubtful accounts related to the accounts
receivable of the SPS division in the third quarter of fiscal
year 2003.

Risk Management

The Company maintains self-insured workers
compensation, medical and dental plans for employees. Claims are
accrued under these plans as the incidents that give rise to
them occur. Unpaid claim accruals are based on the estimated
ultimate cost of settlement, including claim settlement
expenses. The Company has entered into reinsurance agreements
with independent insurance companies to limit its losses on
claims. Under the terms of the agreements, the insurance
companies will reimburse the Company for individual claims
generally in excess of $200,000 in respect to medical or dental
claims, $250,000 in respect to workers compensation claims
and when total claims exceed an aggregate amount based on the
number of covered lives. These reimbursements are included in
general and administrative expense in the accompanying
consolidated statements of income.

Recent Accounting Pronouncements

In December 2003, the FASB issued FIN
No. 46(R), Consolidation of Variable Interest Entities,which clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements.
FIN No. 46(R) requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
provide sufficient equity at risk for the entity to support its
activities. FIN No. 46(R) is effective for the first
interim or annual period ending after March 15, 2004. We
have determined that we do not have any variable interest
entities and therefore, the adoption of the provisions of FIN
No. 46(R) in fiscal year 2004 did not have a material
effect on the financial position or results of operations.

In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This
statement amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities,by requiring
that contracts with comparable characteristics be accounted for
similarly and clarifies when a derivative contains a financing
component that warrants special reporting in the statement of
cash flows. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003, and
must be applied prospectively. The adoption of the provisions of
SFAS No. 149 in fiscal year 2004 did not have a
material effect on the financial position or results of
operations.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. This Statement established standards for how an
issuer

F-11



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

classifies and measures in its statement of
financial position certain financial instruments with
characteristics of both liabilities and equity.
SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period
beginning after June 13, 2003 and must be applied
prospectively by reporting the cumulative effect of a change in
an accounting principle for financial instruments created before
the issuance date of the Statement and still existing at the
beginning of the interim period of adoption. The adoption of the
provisions of SFAS No. 150 in fiscal year 2004 did not
have a material effect on the financial position or results of
operations.

Reclassifications

Certain prior year amounts in the consolidated
financial statements have been reclassified to conform to the
current year classification.



|   |                      
|-- | ---------------------
|3. | Business Acquisitions

The Company acquired all of the outstanding stock
of Pharmacare Resources, Inc. (Pharmacare) and its
sister company, NCL Management, Inc. effective May 1, 2001.
Pharmacare is headquartered in Elmsford, New York, and is a
provider of pharmaceutical care for certain chronic, long-term
patient populations, including those requiring intravenous
immunoglobulin (IVIG). This transaction was
accounted for using the purchase method of accounting. The price
paid by the Company for this acquisition was $25,074,000. The
Company also paid an additional $6,325,000 for a related
earn-out payment based upon the achievement of certain financial
results for the twelve-month period ended December 31,
2001, resulting in a total purchase price of $31,399,000. Total
assets acquired and liabilities assumed were $3,659,000 and
$1,030,000, respectively. The excess of the total purchase
price, including acquisition costs of $63,000, over the fair
value of the net assets acquired of $2,629,000 was allocated as
follows: $28,153,000 to goodwill and $617,000 to acquired
patient relationships. The acquired patient relationship
intangible is being amortized over five years. The Company also
paid $500,000 as consideration for an agreement with the selling
shareholders not to compete with the Company in certain product
lines for a period of six years.

The Company acquired all of the outstanding stock
of BioPartners in Care, Inc. (BioPartners) from its
shareholders effective December 1, 2001. BioPartners is
headquartered in Dayton, Ohio, and is a provider of
pharmaceutical care for certain chronic, long-term patient
populations, including those requiring hemophilia clotting
factor and IVIG. As a result of the acquisition, the Company was
able to increase its market share for the distribution of these
products. The purchase price paid by the Company for this
acquisition was $36,600,000. In addition, the Company also paid
an additional $16,000,000 during fiscal 2003 for a related
earn-out payment based upon the achievement of certain financial
results for the twelve-month period ended December 31,
2002, resulting in a total purchase price of $52,600,000. Total
assets acquired and liabilities assumed were $15,160,000 and
$11,750,000, respectively. The excess of the total purchase
price, including acquisition costs of $275,000, over the fair
value of the net assets acquired of $3,410,000 was allocated as
follows: $48,487,000 to goodwill and $703,000 to acquired
patient relationships. The acquired patient relationship
intangible is being amortized over five years. The entire amount
allocated to goodwill is expected to be deductible for tax
purposes. The Company also paid $1,000,000 as consideration for
an agreement with the selling shareholders not to compete with
the Company in certain product lines for periods of five to
seven years.

On June 13, 2002, the Company acquired the
Specialty Pharmaceutical Services Division (SPS
division) of Gentiva Health Services, Inc.
(Gentiva). The Company 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 engaged exclusively in the business conducted by the SPS
division. The SPS division provides specialty retail pharmacy
and related services relating to the treatment of patients with
certain costly chronic diseases. In addition to the diseases
served by the Company, the SPS division is also a leading
provider of contract

F-12



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

pharmacy and related services to patients with
pulmonary hypertension. As a result of the acquisition,
management expected the Company to become the leading provider
of specialty retail pharmacy and related services.

The aggregate purchase price paid for the SPS
division was $463.8 million (including $13.8 million
of acquisition related costs) and consisted of
$217.1 million of cash and 7,591,464 shares of common
stock valued at $246.7 million. The value of the common
stock issued was determined in accordance with EITF issue 99-12,
Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business
Combination. Accordingly, January 31, 2002, became the
measurement date, as this was the first date on which the number
of shares became fixed without subsequent revision. The value
per share was based upon the average market price over the
period including two days before and after the measurement date.
The following table summarizes the estimated fair values of the
assets acquired and the liabilities assumed at the date of
acquisition of the SPS division (in thousands).

|                                          |                                                                         |                                                                                        |                                                                            |         |         |         | 
|----------------------------------------- | ----------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------- | ------- | ------- | 
|Cash                                      |                                                                         | $                                                                                      | 19                                                                         |        
|Receivables:                              |                                                                         |                                                                                        |                                                                            |        
|                                          | Patient accounts, net of allowance for doubtful
    accounts of $68,949 |                                                                                        |                                                                            | 223,173 |        
|                                          | Other                                                                   |                                                                                        |                                                                            | 1,991   |        
|Inventories                               |                                                                         |                                                                                        | 50,087                                                                     |        
|Prepaid expenses and other current assets |                                                                         |                                                                                        | 836                                                                        |        
|                                          |                                                                         |                                                                                        |                                                                            |        
|                                          |                                                                         |                                                                                        | Total current assets                                                       |         |         | 276,106 | 
|Property and equipment                    |                                                                         |                                                                                        | 12,086                                                                     |        
|Other assets:                             |                                                                         |                                                                                        |                                                                            |        
|                                          |                                                                         | Intangible assets subject to amortization
    (5.1 year weighted-average useful life): |                                                                            |         |         |        
|                                          |                                                                         |                                                                                        | Acquired patient relationships (5.0 year
    weighted-average useful life) |         |         | 15,163  | 
|                                          |                                                                         |                                                                                        | Non-compete agreements (6.4 year
    weighted-average useful life)         |         |         | 2,000   | 
|                                          |                                                                         | Goodwill                                                                               |                                                                            |         | 207,780 |        
|                                          |                                                                         | Other                                                                                  |                                                                            |         | 129     |        
|                                          |                                                                         |                                                                                        |                                                                            |        
|                                          |                                                                         |                                                                                        | Total assets acquired                                                      |         |         | 513,264 | 
|Accounts payable                          |                                                                         |                                                                                        | 39,577                                                                     |        
|Accrued expenses                          |                                                                         |                                                                                        | 9,842                                                                      |        
|                                          |                                                                         |                                                                                        |                                                                            |        
|                                          |                                                                         |                                                                                        | Total liabilities assumed                                                  |         |         | 49,419  | 
|                                          |                                                                         |                                                                                        |                                                                            |        
|Net assets acquired                       |                                                                         | $                                                                                      | 463,845                                                                    |        
|                                          |                                                                         |                                                                                        |                                                                            |        

The entire amount allocated to goodwill is
expected to be deductible for tax purposes.

As planned, the Company exited the acute pharmacy
business acquired as part of the SPS division in December 2002.
The Company retained the accounts receivable of the acute
pharmacy business and disposed of certain of the other assets of
the business, which were immaterial. The Company has accounted
for the acute division in accordance with EITF 87-11,
Allocation of Purchase Price to Assets to be Sold. In
accordance with EITF 87-11, the net proceeds from the sale of
the acute division, the results of the acute operations during
the period from acquisition to disposal and the interest expense
during the holding period on the incremental debt incurred to
finance the acute business have been recorded as an adjustment
to the purchase price. The results of operations of the acute
division, amounting to a $4,000 and $3,919,000 loss (net of tax
benefit) during the periods ended June 30, 2002 and 2003,
respectively, are excluded from the Companys results of
operations in the accompanying financial statements. The amount
of interest expense

F-13



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

allocated to the acute pharmacy business was
$53,000 and $616,000, net of tax benefit, during the periods
ended June 30, 2002 and 2003, respectively.

On October 17, 2003, the Company acquired
certain assets of Alpha Therapeutic Services, Inc.
(ATS) from Baxter Healthcare Corporation. ATS is a
provider of pharmaceutical care for certain chronic, long-term
patient populations, including those requiring hemophilia
clotting factor and IVIG. As a result of the acquisition, the
Company was able to increase its market share for the
distribution of these products. The aggregate purchase price
paid by the Company for this acquisition was $35,700,000. Total
assets acquired were $4,157,000, which included accounts
receivable of $2,721,000, inventory of $1,261,000 and fixed
assets of $175,000. The excess of the total purchase price,
including acquisition costs of $14,000, over the fair value of
the net assets acquired was allocated as follows: $30,825,000 to
goodwill and $652,000 to acquired patient relationships. The
acquired patient relationship intangible is being amortized over
five years. The entire amount allocated to goodwill is expected
to be deductible for tax purposes. The Company also paid
$100,000 as consideration for an agreement with the selling
shareholders not to compete with the Company in certain product
lines for five years. The results of the ATS operations have
been included in the consolidated financial statements since
October 18, 2003.

The following pro forma financial information
presents results as if the 2002 acquisitions (including the
results of the acute pharmacy business of the SPS division) had
occurred on July 1, 2001 (in thousands, except share data):

|                             |         |      |           |      | 
|---------------------------- | ------- | ---- | --------- | ---- | 
|                             |         | 2002
|                             |         |     
|Total revenues               |         | $    | 1,401,192 |     
|Net income                   |         |      | 40,279    |     
|Net income per common share: |         |      |           |     
|                             | Basic   |      | $         | 0.86 | 
|                             | Diluted |      | $         | 0.84 | 

The results of these acquisitions have been
included in the Companys results from their respective
dates of acquisition.



|   |                     
|-- | --------------------
|4. | Restructuring Charge

In connection with the acquisition of the SPS
division, the Company recorded a restructuring charge of
$3,893,000 ($2,355,000, or $0.06 per diluted share, after
tax) for the year ended June 30, 2002. The charge includes
a $3,553,000 write-off (of which $3,193,000 is non-cash) of a
software application that was being developed by the Company
that was not implemented as a result of the decision to enhance
and implement company-wide the software application acquired
with the SPS division. The restructuring charge also includes
$340,000 for future lease commitments related to facilities that
were abandoned upon completion of the integration plan related
to the acquisition.

F-14



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                       
|-- | ----------------------
|5. | Property and Equipment

Property and equipment consists of the following
at June 30 (in thousands):

|                         |  |      |         |      |  |   |         |  
|------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                         |  | 2003 |         | 2004
|                         |  |      |         |     
|Equipment                |  | $    | 29,798  |      |  | $ | 50,795  |  
|Furniture and fixtures   |  |      | 16,037  |      |  |   | 14,727  |  
|                         |  |      |         |      |  |   |         |  
|                         |  |      | 45,835  |      |  |   | 65,522  |  
|Accumulated depreciation |  |      | (14,154 | )    |  |   | (24,239 | )
|                         |  |      |         |      |  |   |         |  
|                         |  | $    | 31,681  |      |  | $ | 41,283  |  
|                         |  |      |         |      |  |   |         |  



|   |                                     
|-- | ------------------------------------
|6. | Goodwill and Other Intangible Assets

Amortizable intangible assets consist of the
following at June 30 (in thousands):

|                         |  |                |        |              |  |                |       |              |  |   |        |  |  |   |        | 
|------------------------ |  | -------------- | ------ | ------------ |  | -------------- | ----- | ------------ |  | - | ------ |  |  | - | ------ | 
|                         |  |                |        |             
|                         |  | 2003           |        | 2004        
|                         |  |                |        |             
|                         |  | Gross Carrying |        | Accumulated  |  | Gross Carrying |       | Accumulated 
|                         |  | Amount         |        | Amortization |  | Amount         |       | Amortization
|                         |  |                |        |              |  |                |       |             
|Patient relationships    |  | $              | 19,072 |              |  | $              | 5,872 |              |  | $ | 19,724 |  |  | $ | 9,507  | 
|Non-compete agreements   |  |                | 5,900  |              |  |                | 2,139 |              |  |   | 6,000  |  |  |   | 3,159  | 
|Deferred financing costs |  |                | 7,818  |              |  |                | 1,976 |              |  |   | 7,993  |  |  |   | 3,571  | 
|                         |  |                |        |              |  |                |       |              |  |   |        |  |  |   |        | 
|                         |  | $              | 32,790 |              |  | $              | 9,987 |              |  | $ | 33,717 |  |  | $ | 16,237 | 
|                         |  |                |        |              |  |                |       |              |  |   |        |  |  |   |        | 

Estimated amortization expense consists of the
following for the years ending June 30 (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2005 |  | $ | 4,298 | 
|2006 |  |   | 4,173 | 
|2007 |  |   | 3,738 | 
|2008 |  |   | 500   | 
|2009 |  |   | 328   | 

The change in the carrying amount of goodwill
consists of the following (in thousands):

|                                                                   |  |   |         | 
|------------------------------------------------------------------ |  | - | ------- | 
|Balance as of June 30, 2002                                        |  | $ | 334,919 | 
|Goodwill acquired during the year, net of tax
    basis adjustment |  |   | 17,590  | 
|                                                                   |  |   |         | 
|Balance as of June 30, 2003                                        |  |   | 352,509 | 
|Goodwill acquired during the year, net of tax
    basis adjustment |  |   | 30,119  | 
|                                                                   |  |   |         | 
|Balance as of June 30, 2004                                        |  | $ | 382,628 | 
|                                                                   |  |   |         | 

F-15



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |               
|-- | --------------
|7. | Long-Term Debt

Long-term debt consists of the following at
June 30 (in thousands):

|                                 |                      |      |         |         |  |   |         |         | 
|-------------------------------- | -------------------- | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                 |                      | 2003 |         | 2004   
|                                 |                      |      |         |        
|Credit facility:                 |                      |      |         |         |  |   |         |        
|                                 | Revolving commitment |      | $       |        |  |   | $       |        | 
|                                 | Tranche A Term Loan  |      |         | 71,250  |  |   |         | 56,250  | 
|                                 | Tranche B Term Loan  |      |         | 123,438 |  |   |         | 122,187 | 
|                                 |                      |      |         |         |  |   |         |        
|                                 |                      |      | 194,688 |         |  |   | 178,437 |        
|Other                            |                      |      |        |         |  |   | 874     |        
|                                 |                      |      |         |         |  |   |         |        
|                                 |                      |      | 194,688 |         |  |   | 179,311 |        
|Less amounts due within one year |                      |      | 16,250  |         |  |   | 4,445   |        
|                                 |                      |      |         |         |  |   |         |        
|                                 |                      | $    | 178,438 |         |  | $ | 174,866 |        
|                                 |                      |      |         |         |  |   |         |        

On June 13, 2002, the Company amended and
restated its credit agreement with Bank of America, N.A. and
other participating banks (collectively the Lenders)
to increase the size of the credit facility to
$325 million. The credit facility consists of a
$125 million revolving commitment expiring 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. Amounts outstanding under the credit agreement bear
interest at varying rates based upon a LIBOR or prime rate of
interest at the periodic election of the Company, plus a
variable margin rate based on the Companys leverage ratio
as defined by the credit agreement. The combination of a
variable rate margin and LIBOR base rate resulted in an
effective rate of 3.67% and 3.39% at June 30, 2003 and
2004, respectively. The credit facility is secured by
substantially all assets of the Company, 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
Lenders security interest in a portion of the
Companys inventory is subordinate to the liens on that
inventory under the terms of a security agreement between the
Company and one of its vendors. The same vendor has a security
interest in certain accounts receivable of the Company, which is
subordinate to the rights of the Lenders. At June 30, 2003
and 2004, the balances outstanding under the credit facility
were $194,687,500 and $178,437,500, respectively.

The credit agreement contains financial
covenants, which require the Company to maintain certain ratios
with respect to leverage, fixed charge coverage, net worth, and
asset coverage, 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 relating to changes in
control of the Company.

The credit agreement required the Company to
enter into a one-year interest rate swap agreement within
60 days of June 13, 2002, to protect against
fluctuations in interest rates. The credit agreement required
the interest rate swap to provide coverage in an amount equal to
at least 50% of the outstanding principal amount of the loans.
On July 17, 2002, the Company entered into an interest rate
swap agreement effectively converting 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
June 4, 2003, the Company entered into an interest rate
swap agreement effectively converting for a period of one year
beginning July 21, 2003, $120 million of floating-rate
borrowings to fixed-rate borrowings with a fixed rate of 1.14%,
plus the applicable margin rate as determined by the credit
agreement.

F-16



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On May 5, 2003, the Company amended the
credit agreement to exclude the charges, as defined in the
amendment to the credit agreement, taken in the March 2003
quarter in connection with the additional accounts receivable
reserves of the SPS division from the calculation of
Consolidated EBITDA, as defined in the credit agreement, and to
reduce the Consolidated Net Worth requirement, as defined in the
credit agreement, to allow for a reduction in the minimum net
worth requirement equal to the net loss incurred in the March
2003 quarter. The amendment also included a 25 basis point
increase in interest rates per the credit agreement for a period
of twelve months beginning May 15, 2003. The Company paid
fees of $607,000 in connection with this amendment which have
been capitalized in deferred financing costs.

Principal maturities of long-term debt consist of
the following for the years ending June 30 (in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|2005       |  | $ | 4,445   | 
|2006       |  |   | 3,928   | 
|2007       |  |   | 3,750   | 
|2008       |  |   | 3,750   | 
|2009       |  |   | 163,438 | 
|After 2009 |  |   |        | 
|           |  |   |         | 
|           |  | $ | 179,311 | 
|           |  |   |         | 

Since June 30, 2004, the Company amended its
credit facility. See footnote 17  Subsequent
Events. The maturities in the preceding table reflect the effect
of the aforementioned credit facility amendment.



|   |             
|-- | ------------
|8. | Income Taxes

The liability method is used in accounting for
income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

Income tax expense (benefit) consists of the
following for the years ended June 30 (in thousands):

|          |         |      |        |        |  |      |        |        |   |   |        |        | 
|--------- | ------- | ---- | ------ | ------ |  | ---- | ------ | ------ | - | - | ------ | ------ | 
|          |         | 2002 |        | 2003   |  | 2004
|          |         |      |        |        |  |     
|Current:  |         |      |        |        |  |      |        |        |   |   |        |       
|          | Federal |      | $      | 15,434 |  |      | $      | 22,115 |   |   | $      | 25,523 | 
|          | State   |      |        | 2,642  |  |      |        | 4,335  |   |   |        | 2,849  | 
|          |         |      |        |        |  |      |        |        |   |   |        |       
|          |         |      | 18,076 |        |  |      | 26,450 |        |   |   | 28,372 |       
|Deferred: |         |      |        |        |  |      |        |        |   |   |        |       
|          | Federal |      |        | 764    |  |      |        | (6,705 | ) |   |        | 16,892 | 
|          | State   |      |        | 185    |  |      |        | (1,493 | ) |   |        | 3,860  | 
|          |         |      |        |        |  |      |        |        |   |   |        |       
|          |         |      | 949    |        |  |      | (8,198 | )      |   |   | 20,752 |       
|          |         |      |        |        |  |      |        |        |   |   |        |       
|          |         | $    | 19,025 |        |  | $    | 18,252 |        |   | $ | 49,124 |       
|          |         |      |        |        |  |      |        |        |   |   |        |       

F-17



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The provision for income taxes differed from the
amount computed by applying the statutory federal income tax
rates for the years ended June 30 due to the following (in
thousands):

|                                                                |  |      |        |      |  |      |        |   |  |   |        | 
|--------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                                                |  | 2002 |        | 2003 |  | 2004
|                                                                |  |      |        |      |  |     
|Income tax expense at statutory rate                            |  | $    | 17,075 |      |  | $    | 16,725 |   |  | $ | 44,590 | 
|State income tax expense, net of federal income
    tax benefit |  |      | 1,838  |      |  |      | 1,847  |   |  |   | 4,361  | 
|Goodwill amortization                                           |  |      | 19     |      |  |      | 18     |   |  |   | 16     | 
|Other                                                           |  |      | 93     |      |  |      | (338   | ) |  |   | 157    | 
|                                                                |  |      |        |      |  |      |        |   |  |   |        | 
|Income tax expense                                              |  | $    | 19,025 |      |  | $    | 18,252 |   |  | $ | 49,124 | 
|                                                                |  |      |        |      |  |      |        |   |  |   |        | 

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets and liabilities at
June 30 are as follows (in thousands):

|                                   |                                |      |         |         |   |   |         |         |  
|---------------------------------- | ------------------------------ | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                   |                                | 2003 |         | 2004   
|                                   |                                |      |         |        
|Deferred tax assets:               |                                |      |         |         |   |   |         |        
|                                   | Accounts receivable allowances |      | $       | 22,829  |   |   | $       | 11,191  |  
|                                   | Accrued expenses               |      |         | 1,375   |   |   |         | 1,901   |  
|                                   | Intangible assets              |      |         |        |   |   |         | 360     |  
|                                   | Joint venture investments      |      |         | 125     |   |   |         | 150     |  
|                                   | Other                          |      |         | 250     |   |   |         | 527     |  
|                                   |                                |      |         |         |   |   |         |        
|                                   |                                |      | 24,579  |         |   |   | 14,129  |        
|Deferred tax liabilities:          |                                |      |         |         |   |   |         |        
|                                   | Property and equipment         |      |         | (3,543  | ) |   |         | (5,477  | )
|                                   | Intangible assets              |      |         | (11,027 | ) |   |         | (19,217 | )
|                                   | Joint venture investments      |      |         | (240    | ) |   |         | (418    | )
|                                   |                                |      |         |         |   |   |         |        
|                                   |                                |      | (14,810 | )       |   |   | (25,112 | )      
|                                   |                                |      |         |         |   |   |         |        
|Net deferred tax asset (liability) |                                | $    | 9,769   |         |   | $ | (10,983 | )      
|                                   |                                |      |         |         |   |   |         |        

Management has evaluated the need for a valuation
allowance for the deferred tax assets and believes that no
valuation allowance is necessary because it is more likely than
not that the assets will ultimately be realized through future
taxable income from operations.



|   |            
|-- | -----------
|9. | Commitments

The Company leases office space and equipment
under various operating leases. Rent expense for all operating
leases was approximately $2,838,000, $7,774,000 and $8,150,000
for the years ended June 30, 2002, 2003 and 2004,
respectively.

F-18



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Future minimum payments, by year and in the
aggregate, under non-cancelable operating leases with initial
terms of one year or more consist of the following at
June 30, 2004 (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2005       |  | $ | 7,464  | 
|2006       |  |   | 5,077  | 
|2007       |  |   | 3,662  | 
|2008       |  |   | 2,359  | 
|2009       |  |   | 1,741  | 
|Thereafter |  |   | 808    | 
|           |  |   |        | 
|           |  | $ | 21,111 | 
|           |  |   |        | 



|    |                             
|--- | ----------------------------
|10. | Investment in Joint Ventures

Texas Health Pharmaceutical Resources, Teddy Bear
Home Care/ Drug Therapies, Childrens Home Services, Childrens
Biotech Pharmacy Services and Childrens National Hemophilia Care
are partnerships in which the Company has a 50% ownership
interest. The Company uses the equity method of accounting for
these joint ventures. Amounts due to and from these joint
ventures to the Company are classified as due to and from
affiliates in the accompanying consolidated balance sheets. The
portion of the Companys retained earnings at June 30,
2003 and 2004 attributable to undistributed earnings of these
joint ventures is $5,187,000 and $6,993,000, respectively.

The Company received fees for management services
from the joint ventures of $1,184,000, $1,289,000 and $1,435,000
for the years ended June 30, 2002, 2003 and 2004,
respectively, which are recorded as other revenues in the
accompanying consolidated statements of income.

Summary financial information for 50% owned joint
ventures accounted for by the equity method is as follows as of
and for the years ended June 30 (in thousands):

|                                             |  |      |        |      |  |      |        |  |  |   |        | 
|-------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                             |  | 2002 |        | 2003 |  | 2004
|                                             |  |      |        |      |  |     
|Current assets                               |  | $    | 12,394 |      |  | $    | 14,625 |  |  | $ | 16,915 | 
|Property and equipment, net and other assets |  |      | 55     |      |  |      | 26     |  |  |   | 22     | 
|Current liabilities                          |  |      | 4,090  |      |  |      | 3,568  |  |  |   | 2,223  | 
|Total revenues                               |  |      | 26,963 |      |  |      | 33,173 |  |  |   | 43,013 | 
|Net income                                   |  |      | 4,131  |      |  |      | 3,893  |  |  |   | 6,142  | 



|    |                                     
|--- | ------------------------------------
|11. | Defined Contribution Retirement Plan

The Company sponsors a qualified, defined
contribution retirement plan under Section 401(k) of the
Internal Revenue Code in which substantially all employees
qualify for participation. The Company matches employee
contributions, as defined in the plan. The Company made annual
matching contributions of approximately $234,000, $708,000 and
$775,000 for the years ended June 30, 2002, 2003 and 2004,
respectively.



|    |                     
|--- | --------------------
|12. | Stockholders Equity

Common Stock

In 2003, the Company effected a stock split in
the form of a stock dividend. All share and per share data in
the consolidated financial statements and the notes hereto have
been retroactively adjusted for the splits.

F-19



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On June 13, 2002, the Company issued
7,591,464 shares of its common stock to the shareholders of
Gentiva in connection with the acquisition of the SPS division.

Preferred Stock

In April 1999, the Companys Board of
Directors and Stockholders authorized the establishment of a new
class of undesignated preferred stock.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive income (loss)
includes the change in fair value of the interest rate swap that
qualifies for hedge accounting. Comprehensive income is as
follows for the years ended June 30 (in thousands):

|                                     |  |      |        |      |  |      |        |   |  |   |        | 
|------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | 
|                                     |  | 2002 |        | 2003 |  | 2004
|                                     |  |      |        |      |  |     
|Reported net income                  |  | $    | 29,760 |      |  | $    | 29,535 |   |  | $ | 78,313 | 
|Unrealized income (loss) on interest |  |      |        |      |  |      |        |   |  |   |        | 
|rate swap, net of tax benefit        |  |      |       |      |  |      | (68    | ) |  |   | 76     | 
|                                     |  |      |        |      |  |      |        |   |  |   |        | 
|Comprehensive income                 |  | $    | 29,760 |      |  | $    | 29,467 |   |  | $ | 78,389 | 
|                                     |  |      |        |      |  |      |        |   |  |   |        | 

Stockholder Protection Rights
Agreement

On April 21, 2003, the Company adopted a
stockholder protection rights agreement (Rights
Plan) and issued Rights in connection with the Rights Plan
in the event of a proposed takeover of the Company. The Rights
Plan is not intended to prevent transactions that provide full
and fair value to stockholders. It is intended to discourage
abusive takeover tactics and to provide time for the
Companys Board of Directors to review and evaluate what is
in the best interests of the stockholders.

The Rights Plan provided that a dividend of one
share purchase Right be issued for each outstanding share of
common stock to stockholders of record as of the close of
business on April 28, 2003. Generally, the Rights are
exercisable only if a group (other than certain existing
shareholders) acquires 15% or more of the Companys common
stock or announces a tender offer upon consummation of which,
such person or group would beneficially own 15% or more of the
Companys common stock. Each Right entitles stockholders to
buy one ten-thousandth of a share of a new share of junior
participating preferred stock at an exercise price of $100.

If the Rights become exercisable, a Rights holder
(other than the person or group acquiring 15% or more) will be
entitled to purchase, at the Rights then-current price, a
number of shares of the Companys common stock having a
market value of twice such price. If after a person has acquired
15% or more of the Companys common stock, such person
acquires the Company, each Right will entitle its holder to
purchase, at the Rights then-current exercise price, a
number of shares of the acquiring companys common stock
having a market value of twice such price. Following the
acquisition of 15% or more of the Companys common stock,
but less than 50% by any person or group, the Board of Directors
may exchange the Rights (other than Rights owned by such person
or group) at an exchange ratio of one share of the
Companys common stock for each Right.



|    |                             
|--- | ----------------------------
|13. | Employee Stock Purchase Plan

In April 1999, the Companys Board of
Directors adopted and the stockholders approved the Accredo
Health, Incorporated 1999 Employee Stock Purchase Plan
(ESPP). Under the ESPP, employees may purchase
shares of common stock at 85% of market price on the first day
of an offering period (usually

F-20



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

consisting of a six-month period beginning
January 1 or July 1) or the last day of an offering period,
whichever is lower. The shares are purchased at the end of each
period with funds withheld from employees pay during the
period. A total of 455,625 shares of the Companys
common stock have been reserved for issuance under the ESPP.
Participation in the ESPP commenced on the effective date of the
Companys initial public offering in April 1999. There were
43,328, 82,746 and 65,674 shares of common stock issued
during the years ended June 30, 2002, 2003 and 2004,
respectively, pursuant to the ESPP.



|    |                   
|--- | ------------------
|14. | Stock Option Plans

The Companys Amended and Restated Stock
Option and Restricted Stock Purchase Plan authorizes the grant
of options to selected employees, officers and directors for up
to 3,256,875 shares of the Companys common stock. As
of June 30, 2004, options to
purchase 3,251,691 shares of stock have been granted
under this plan. All options granted have ten-year terms and
generally vest and become fully exercisable over a period of
four years.

The Companys 1999 Long-Term Incentive Plan
authorizes the grant of options to selected employees, officers
and directors for up to 1,687,500 shares of the
Companys common stock. As of June 30, 2004, options
to purchase 1,549,424 shares of common stock have been
granted under this plan under terms similar to those discussed
above. All options granted have ten-year terms and generally
vest and become fully exercisable over a period of four years of
continued employment.

The Companys 2002 Long-Term Incentive Plan
authorizes the grant of options to selected employees, officers
and directors for up to 3,900,000 shares of the
Companys common stock. As of June 30, 2004, options
to purchase 3,269,692 shares of stock have been
granted under this plan. All options granted have ten-year terms
and generally vest and become fully exercisable over a period of
four years of continued employment.

Pro forma information regarding net income is
required by SFAS 123 and has been determined as if the
Company had accounted for its employee stock options under the
fair value method of SFAS 123. Significant assumptions used
by the Company in the Black-Scholes option pricing model
computations are as follows for the years ended June 30:

|                               |  |      |                |      |  |      |                |  |  |  |                | 
|------------------------------ |  | ---- | -------------- | ---- |  | ---- | -------------- |  |  |  | -------------- | 
|                               |  | 2002 |                | 2003 |  | 2004
|                               |  |      |                |      |  |     
|Risk-free interest rate        |  |      | 3.56% to 4.41% |      |  |      | 1.89% to 3.15% |  |  |  | 2.68% to 2.87% | 
|Dividend yield                 |  |      | 0%             |      |  |      | 0%             |  |  |  | 0%             | 
|Volatility factor              |  |      | .65            |      |  |      | .66            |  |  |  | .64            | 
|Weighted-average expected life |  |      | 4.0 years      |      |  |      | 4.0 years      |  |  |  | 4.0 years      | 
|Estimated turnover             |  |      | 8%             |      |  |      | 8%             |  |  |  | 8%             | 

The Black-Scholes option model was developed for
use in estimating the fair value of traded options, which have
no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Companys employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options.

F-21



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over
the options vesting period. The Companys pro forma
information for the years ended June 30 is as follows (in
thousands, except share data):

|                                                                                                                               |                       |      |        |      |  |      |         |      |  |   |         |      | 
|------------------------------------------------------------------------------------------------------------------------------ | --------------------- | ---- | ------ | ---- |  | ---- | ------- | ---- |  | - | ------- | ---- | 
|                                                                                                                               |                       | 2002 |        | 2003 |  | 2004
|                                                                                                                               |                       |      |        |      |  |     
|Net income, as reported                                                                                                        |                       | $    | 29,760 |      |  | $    | 29,535  |      |  | $ | 78,313  |     
|Less stock-based employee compensation cost, net
    of related tax effects, applying the fair value method to all
    rewards |                       |      | (3,860 | )    |  |      | (10,949 | )    |  |   | (11,855 | )   
|                                                                                                                               |                       |      |        |      |  |      |         |      |  |   |         |     
|Pro forma net income                                                                                                           |                       | $    | 25,900 |      |  | $    | 18,586  |      |  | $ | 66,458  |     
|                                                                                                                               |                       |      |        |      |  |      |         |      |  |   |         |     
|Earnings per share:                                                                                                            |                       |      |        |      |  |      |         |      |  |   |         |     
|                                                                                                                               | Basic  as reported   |      | $      | 0.75 |  |      | $       | 0.62 |  |   | $       | 1.63 | 
|                                                                                                                               | Basic  pro forma     |      | $      | 0.65 |  |      | $       | 0.39 |  |   | $       | 1.38 | 
|                                                                                                                               | Diluted  as reported |      | $      | 0.73 |  |      | $       | 0.61 |  |   | $       | 1.60 | 
|                                                                                                                               | Diluted  pro forma   |      | $      | 0.64 |  |      | $       | 0.39 |  |   | $       | 1.37 | 

A summary of the Companys stock option
activity and related information for the years ended
June 30 is as follows:

|                                                                   |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |   |           |   |  |   |       | 
|------------------------------------------------------------------ |  | ------- | --------- | --------- |  | ------- | ----- | --------- |  | ------- | --------- | --------- |  | - | ----- |  |  | - | --------- | - |  | - | ----- | 
|                                                                   |  |         |           |           |  |        
|                                                                   |  | 2002    |           | 2003      |  | 2004   
|                                                                   |  |         |           |           |  |        
|                                                                   |  |         |           | Weighted- |  |         |       | Weighted- |  |         |           | Weighted-
|                                                                   |  |         |           | Average   |  |         |       | Average   |  |         |           | Average  
|                                                                   |  |         |           | Exercise  |  |         |       | Exercise  |  |         |           | Exercise 
|                                                                   |  | Options |           | Price     |  | Options |       | Price     |  | Options |           | Price    
|                                                                   |  |         |           |           |  |         |       |           |  |         |           |          
|Outstanding at beginning of year                                   |  |         | 2,695,772 |           |  | $       | 9.02  |           |  |         | 4,486,022 |           |  | $ | 20.18 |  |  |   | 4,023,732 |   |  | $ | 23.38 | 
|Granted                                                            |  |         | 2,281,614 |           |  |         | 30.54 |           |  |         | 677,150   |           |  |   | 30.81 |  |  |   | 1,361,453 |   |  |   | 28.95 | 
|Exercised                                                          |  |         | (427,423  | )         |  |         | 5.15  |           |  |         | (762,616  | )         |  |   | 7.90  |  |  |   | (699,410  | ) |  |   | 10.45 | 
|Forfeited                                                          |  |         | (63,941   | )         |  |         | 19.97 |           |  |         | (376,824  | )         |  |   | 29.90 |  |  |   | (396,563  | ) |  |   | 28.94 | 
|                                                                   |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |   |           |   |  |   |       | 
|Outstanding at end of year                                         |  |         | 4,486,022 |           |  | $       | 20.18 |           |  |         | 4,023,732 |           |  | $ | 23.38 |  |  |   | 4,289,212 |   |  | $ | 26.71 | 
|                                                                   |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |   |           |   |  |   |       | 
|Exercisable at end of year                                         |  |         | 1,585,907 |           |  | $       | 6.95  |           |  |         | 1,707,472 |           |  | $ | 16.60 |  |  |   | 1,752,195 |   |  | $ | 23.42 | 
|                                                                   |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |   |           |   |  |   |       | 
|Weighted-average fair value of options granted
    during the year |  | $       | 15.96     |           |  |         |       |           |  | $       | 15.54     |           |  |   |       |  |  | $ | 15.07     |   |  |   |       | 
|                                                                   |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |   |           |   |  |   |       | 

F-22



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                 |               |                     |  |                     |           |           |  |               |           |           |  |   |       |  |  |  |           |  |  |   |       | 
|---------------- | ------------- | ------------------- |  | ------------------- | --------- | --------- |  | ------------- | --------- | --------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                 |               |                     |  |                    
|                 |               | Options Outstanding |  | Options Exercisable
|                 |               |                     |  |                    
|                 |               |                     |  | Weighted-           |           |           |  |              
|                 |               |                     |  | Average             |           | Weighted- |  |               |           | Weighted-
|Range of         |               | Number              |  | Remaining           |           | Average   |  | Number        |           | Average  
|Exercise prices  |               | Outstanding         |  | Contractual         |           | Exercise  |  | Exercisable   |           | Exercise 
|(150% increment) |               | June 30, 2004       |  | Life                |           | Price     |  | June 30, 2004 |           | Price    
|                 |               |                     |  |                     |           |           |  |               |           |          
|$                | 0.89   0.89  |                     |  |                     | 128,589   |           |  |               | 2.1 years |           |  | $ | 0.89  |  |  |  | 128,589   |  |  | $ | 0.89  | 
|                 | 1.78   1.78  |                     |  |                     | 94,250    |           |  |               | 3.8 years |           |  |   | 1.78  |  |  |  | 94,250    |  |  |   | 1.78  | 
|                 | 8.59   8.70  |                     |  |                     | 49,881    |           |  |               | 5.4 years |           |  |   | 8.61  |  |  |  | 49,881    |  |  |   | 8.61  | 
|                 | 12.99  18.81 |                     |  |                     | 641,417   |           |  |               | 6.4 years |           |  |   | 18.36 |  |  |  | 432,578   |  |  |   | 18.44 | 
|                 | 20.03  29.25 |                     |  |                     | 1,322,933 |           |  |               | 8.9 years |           |  |   | 27.01 |  |  |  | 119,305   |  |  |   | 23.12 | 
|                 | 30.33  38.46 |                     |  |                     | 2,052,142 |           |  |               | 8.2 years |           |  |   | 32.33 |  |  |  | 927,592   |  |  |   | 31.91 | 
|                 |               |                     |  |                     |           |           |  |               |           |           |  |   |       |  |  |  |           |  |  |   |       | 
|$                | 0.89  38.46  |                     |  |                     | 4,289,212 |           |  |               | 7.8 years |           |  | $ | 26.71 |  |  |  | 1,752,195 |  |  | $ | 23.42 | 
|                 |               |                     |  |                     |           |           |  |               |           |           |  |   |       |  |  |  |           |  |  |   |       | 



|    |              
|--- | -------------
|15. | Contingencies

Commencing April 8, 2003, the Company and
certain officers and directors were named as defendants in
several substantially similar putative class action lawsuits
filed in the United States District Court for the Western
District of Tennessee, Memphis Division. The various complaints
have been consolidated into a single action. The lawsuits filed
to date name the Company, David D. Stevens, Joel R. Kimbrough
and in one case John R. Grow, as defendants. One of the lawsuits
also named the Companys former independent auditor,
Ernst & Young LLP, as a defendant. The lawsuits allege
violations of Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10(b)(5) promulgated thereunder, and
Section 20 of the Securities Exchange Act of 1934. The
putative class representatives seek to represent a class of
individuals and entities that purchased Company stock during the
period June 16, 2002 through April 7, 2003 and who
supposedly suffered damages from the alleged violations of the
securities laws. The Company believes that the claims asserted
in the putative class action lawsuits are without merit.

In addition, two purported derivative lawsuits
were filed in the Circuit Court of Shelby County, Tennessee for
the Thirtieth Judicial District at Memphis. These actions were
consolidated and a Consolidated Derivative Complaint was filed
on July 28, 2003. The derivative action names Company
officers, directors and a former director; David D. Stevens,
John R. Grow, Kyle J. Callahan, Kevin L. Roberg, Kenneth R.
Masterson, Kenneth J. Melkus, Dick R. Gourley, Nancy-Ann
Deparle, Joel R. Kimbrough, Thomas W. Bell, Jr., and
Patrick J. Welsh; as defendants. The derivative lawsuit alleges
that the defendants breached fiduciary duties owed to the
Company by engaging in the same alleged conduct that is the
basis of the putative class action lawsuits. On behalf of the
Company, the derivative complaint seeks compensatory damages
from the defendants and the disgorgement of profits, benefits
and other compensation received by the defendants. The Company
has filed a motion to dismiss the Consolidated Derivative
Complaint and the parties are awaiting the Courts ruling
on this motion. The Company believes that the claims asserted in
the derivative lawsuit are without merit.

The Companys 80% owned joint venture in
California provided contract pharmacy and related billing
services to a local California pharmacy currently under audit by
the California Department of Health Services concerning its
MediCal billing for clotting factor supplied by the joint
venture. Although the joint venture is not currently involved
with the audit, the contract pharmacy relationship is implicated
and the pharmacy is seeking indemnification from the joint
venture. Pending completion of the audit, the state agency has
temporarily withheld MediCal payments from the pharmacy and has
alleged, among other things, overbilling and false claims.
Although the Company believes these allegations are without
merit and expects the pharmacy and the joint venture to
vigorously defend against these allegations through judicial
proceedings if necessary, the Company also expects the
California state agency to pursue a refund of some or all of the
payments made by MediCal to the pharmacy. If state or federal
false claim statues are implicated, the

F-23



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

pharmacy could also be assessed fines and
penalties. At this time, the Company does not believe that it
will incur any such fines or penalties. Due to the uncertainty
about the issues involved in this matter, based on the facts and
circumstances known to date, the Company believes some amount of
monetary loss is reasonably possible in the range of zero to
$20 million, absent any finding of false claims and
incurrence of related fines and penalties.

Also, from time to time, the Company is involved
in lawsuits, claims, audits, and investigations arising in the
normal course of business. In the Companys opinion, in the
aggregate these lawsuits, claims, audits and investigations
should not have a material adverse effect on the Companys
business, financial condition, or results of operations. In
addition, the business that the Company acquired from Gentiva
Health Services, Inc. has several lawsuits and claims related to
its historical operations by Gentiva, which are being controlled
by Gentiva and for which the Company is entitled to
indemnification from liability by Gentiva.



|    |                                                
|--- | -----------------------------------------------
|16. | Quarterly Financial Information
    (Unaudited)

Quarterly financial information for the years
ended June 30, 2003 and 2004, is summarized below (in
thousands, except share data):

|                             |         |         |         |         |  |         |         |         |  |   |         |      |  |   |         |      | 
|---------------------------- | ------- | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | ---- |  | - | ------- | ---- | 
|                             |         |        
|                             |         | 2004   
|                             |         |        
|                             |         | First   |         | Second  |  | Third   |         | Fourth 
|                             |         | Quarter |         | Quarter |  | Quarter |         | Quarter
|                             |         |         |         |         |  |         |         |        
|Total revenues               |         | $       | 334,984 |         |  | $       | 389,781 |         |  | $ | 409,308 |      |  | $ | 382,795 |     
|Operating income             |         |         | 31,406  |         |  |         | 35,066  |         |  |   | 37,033  |      |  |   | 34,395  |     
|Income before income taxes   |         |         | 28,648  |         |  |         | 32,370  |         |  |   | 34,381  |      |  |   | 32,038  |     
|Net income                   |         |         | 17,508  |         |  |         | 19,909  |         |  |   | 21,127  |      |  |   | 19,769  |     
|Net income per common share: |         |         |         |         |  |         |         |         |  |   |         |      |  |   |         |     
|                             | Basic   |         |         | 0.37    |  |         |         | 0.41    |  |   |         | 0.44 |  |   |         | 0.41 | 
|                             | Diluted |         |         | 0.36    |  |         |         | 0.41    |  |   |         | 0.43 |  |   |         | 0.40 | 

|                                    |         |         |         |         |  |         |         |         |  |   |         |       |   |   |         |      | 
|----------------------------------- | ------- | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | ----- | - | - | ------- | ---- | 
|                                    |         |        
|                                    |         | 2003   
|                                    |         |        
|                                    |         | First   |         | Second  |  | Third   |         | Fourth 
|                                    |         | Quarter |         | Quarter |  | Quarter |         | Quarter
|                                    |         |         |         |         |  |         |         |        
|Total revenues                      |         | $       | 316,661 |         |  | $       | 369,506 |         |  | $ | 358,113 |       |   | $ | 329,056 |     
|Operating income (loss)             |         |         | 25,427  |         |  |         | 31,582  |         |  |   | (27,997 | )     |   |   | 30,383  |     
|Income (loss) before income taxes   |         |         | 22,497  |         |  |         | 28,698  |         |  |   | (30,851 | )     |   |   | 27,443  |     
|Net income (loss)                   |         |         | 13,463  |         |  |         | 17,556  |         |  |   | (18,723 | )     |   |   | 17,239  |     
|Net income (loss) per common share: |         |         |         |         |  |         |         |         |  |   |         |       |   |   |         |     
|                                    | Basic   |         |         | 0.29    |  |         |         | 0.37    |  |   |         | (0.39 | ) |   |         | 0.36 | 
|                                    | Diluted |         |         | 0.28    |  |         |         | 0.36    |  |   |         | (0.39 | ) |   |         | 0.36 | 



|    |                  
|--- | -----------------
|17. | Subsequent Events

Since June 30, 2004, the Company amended its
$325 million credit facility to increase the size of the
facility to $550 million. The amended facility consists of
a $175 million revolving commitment expiring July 2009 and
a $375 million term loan due in periodic principal payments
through June 2011. Principal maturities for the
$375 million term loan are $3,750,000 in fiscal years 2005
through 2009 and $178,125,000 in fiscal years 2010 and 2011. The
terms of the amended agreement are similar to and no less
favorable than those in the $325 million credit facility in
place on June 30, 2004. As a result of this amendment, the
Company will expense in the September 2004 quarter
$4.4 million of unamortized debt issuance costs associated
with the 2002 amended credit facility.

F-24



---



##### 



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On July 21, 2004, the Company acquired all
of the outstanding stock of HRA Holding Corporation and its
wholly owned subsidiary, Hemophilia Resources of America, Inc..
The purchase price paid for this acquisition was
$159 million and was funded by the increased credit
facility.

F-25



---



##### 



ACCREDO HEALTH, INCORPORATED

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

(IN THOUSANDS)

|                          |                                 |                     |   |            |  |            |   |            |  |            |   |        |     |  |   |        |     |  |   |         | 
|------------------------- | ------------------------------- | ------------------- | - | ---------- |  | ---------- | - | ---------- |  | ---------- | - | ------ | --- |  | - | ------ | --- |  | - | ------- | 
|                          |                                 |                     |   |            |  |            |   |           
|Col. A                    |                                 | Col. B              |   | Col. C     |  | Col. D     |   | Col. E    
|                          |                                 |                     |   |            |  |            |   |           
|                          |                                 |                     |   |            |  |            |   |           
|                          |                                 |                     |   | Additions  |  |            |   |           
|                          |                                 |                     |   |            |  |            |   |           
|                          |                                 |                     |   | Charged to |  |            |   |            |  |           
|                          |                                 |                     |   | Costs      |  | Charged to |   |            |  | Balance at
|                          |                                 | Balance at          |   | and        |  | Other      |   |            |  | End of    
|Description               |                                 | Beginning of Period |   | Expenses   |  | Accounts   |   | Deductions |  | Period    
|                          |                                 |                     |   |            |  |            |   |            |  |           
|Year ended June 30, 2002: |                                 |                     |   |            |  |            |   |            |  |            |   |        |     |  |   |        |     |  |   |        
|                          | Allowance for doubtful accounts |                     | $ | 10,808     |  |            | $ | 5,833      |  |            | $ | 69,412 | (1) |  | $ | 4,295  | (2) |  | $ | 81,758  | 
|Year ended June 30, 2003: |                                 |                     |   |            |  |            |   |            |  |            |   |        |     |  |   |        |     |  |   |        
|                          | Allowance for doubtful accounts |                     |   | 81,758     |  |            |   | 87,418     |  |            |   |        |     |  |   | 42,635 | (2) |  |   | 126,541 | 
|Year ended June 30, 2004: |                                 |                     |   |            |  |            |   |            |  |            |   |        |     |  |   |        |     |  |   |        
|                          | Allowance for doubtful accounts |                     |   | 126,541    |  |            |   | 29,745     |  |            |   |        |     |  |   | 75,235 | (2) |  |   | 81,051  | 



---



|    |                                                          
|--- | ---------------------------------------------------------
|(1) | Allowance as a result of acquisitions                    
|   
|(2) | Uncollectible accounts written off, net of
    recoveries

F-26



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized in the
City of Memphis, State of Tennessee, on the 13th day of
September, 2004.



| |                             
| | ----------------------------
| | ACCREDO HEALTH, INCORPORATED



| |     |                     
| | --- | --------------------
| | By: | /s/ DAVID D. STEVENS

| |                          
| | -------------------------
| |                          
| | David D. Stevens         
| | Chairman of the Board and
| | Chief Executive Officer  



---



##### 



KNOW ALL MEN BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints David D.
Stevens and Joel R. Kimbrough and either of them (with full
power in each to act alone) as true and lawful attorneys-in-fact
with full power of substitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file
the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Annual Report on Form 10-K has
been signed by the following persons in the capacities and on
the dates indicated.

|                                             |  |                                                                   |  |                               |  | 
|-------------------------------------------- |  | ----------------------------------------------------------------- |  | ----------------------------- |  | 
|                                            
|/s/ DAVID D. STEVENSDavid D. Stevens         |  | Chairman of the Board, Chief
    Executive Officer and Director   |  | September 13, 2004           
|                                             |  |                                                                   |  | (Principal Executive Officer) |  | 
|                                            
|/s/ JOEL R. KIMBROUGHJoel R. Kimbrough       |  | Senior Vice President, Chief Financial Officer,
    and Treasurer |  | September 13, 2004           
|                                             |  |                                                                   |  | (Principal Financial and      |  | 
|                                             |  |                                                                   |  | Accounting Officer)           |  | 
|                                            
|/s/ KENNETH R. MASTERSONKenneth R. Masterson |  | Director                                                          |  | September 13, 2004           
|                                            
|/s/ KENNETH J. MELKUSKenneth J. Melkus       |  | Director                                                          |  | September 13, 2004           
|                                            
|/s/ KEVIN L. ROBERGKevin L. Roberg           |  | Director                                                          |  | September 13, 2004           
|                                            
|/s/ DICK R. GOURLEYDick R. Gourley           |  | Director                                                          |  | September 13, 2004           
|                                            
|/s/ NANCY-ANN DEPARLENancy-Ann DeParle       |  | Director                                                          |  | September 13, 2004           
|                                            
|/s/ THOMAS G. ROTHERHAMThomas G. Rotherham   |  | Director                                                          |  | September 13, 2004           
|                                            
|/s/ WILLIAM E. EVANSWilliam E. Evans         |  | Director                                                          |  | September 13, 2004           
|                                            
|/s/ J. MARTIN CARROLLJ. Martin Carroll       |  | Director                                                          |  | September 13, 2004           



---



##### 



EXHIBIT INDEX

|        |      |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                               
|------- | ---- |  |  | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |  |                        
|Number  |      |  |  | Description of Exhibits
|        |      |  |  |                        
|        | 2.1  |  |  |                        |  | Asset Purchase Agreement, dated as of
    January 2, 2002, by and between Accredo Health,
    Incorporated, Gentiva Health Services, Inc. and the Sellers
    named therein (incorporated by reference to Annex A of the
    joint proxy statement-prospectus included in our Registration
    Statement on Form S-4 (File Number 333-82396)).
|        | 3.1  |  |  |                        |  | Amended and Restated Certificate of Incorporation
    of Accredo Health, Incorporated (incorporated by reference to
    Exhibit 3.1 to our Registration Statement on Form S-1
    (File Number 333-62679)).                                                                                                                                   
|        | 3.2  |  |  |                        |  | Certificate of Amendment of the Certificate of
    Incorporation of Accredo Health, Incorporated (incorporated by
    reference to Exhibit 3.1 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2000).                                                                                                  
|        | 3.3  |  |  |                        |  | Certificate of Amendment of the Certificate of
    Incorporation of Accredo Health, Incorporated (incorporated by
    reference to Exhibit 3.1 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended September 30,
    2002).                                                                                                 
|        | 3.4  |  |  |                        |  | Amended and Restated Bylaws of Accredo Health,
    Incorporated (incorporated by reference to Exhibit 3.2 to
    our Registration Statement on Form S-1 (File
    Number 333-62679)).                                                                                                                                                         
|        | 3.5  |  |  |                        |  | Certificate of Designation, Preferences and
    Rights of Series A Junior Participating Preferred Stock of
    the Company (incorporated by reference to Exhibit 3.1 to
    our Quarterly Report on Form 10-Q for the fiscal quarter
    ended March 31, 2003).                                                                               
|        | 4.1  |  |  |                        |  | Form of Common Stock Certificate (incorporated by
    reference to Exhibit 4.1 to our Registration Statement on
    Form S-1 (File Number 333-62679)).                                                                                                                                                                                        
|        | 4.2  |  |  |                        |  | Stockholder Protection Rights Agreement, dated
    April 17, 2003, between the Company and American Stock
    Transfer & Trust Company, As Rights Agent (incorporated
    by reference to Exhibit 4.1 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended March 31, 2003).                                                  
|        | 10.1 |  |  |                        |  | Accredo Health 1999 Long-Term Incentive Plan
    (incorporated by reference to Exhibit 10.6 to our
    Registration Statement on Form S-1 (File
    Number 333-62679)).                                                                                                                                                                       
|        | 10.2 |  |  |                        |  | Accredo Health, Incorporated 2002 Long-Term
    Incentive Plan (incorporated by reference to Annex E of the
    joint proxy statement-prospectus included in our Registration
    Statement on Form S-4 (File Number 333-82396)).                                                                                                             
|        | 10.3 |  |  |                        |  | Accredo Health 1999 Employee Stock Purchase
    Plan(incorporated by reference to Exhibit 10.7 to our
    Registration Statement on Form S-1 (File
    Number 333-62679)).                                                                                                                                                                    
|        | 10.4 |  |  |                        |  | Nova Holdings, Inc. and its Subsidiaries Stock
    Option and Restricted Purchase Plan, as amended and restated
    (incorporated by reference to Exhibit 10.8 to our
    Registration Statement on Form S-1 (File
    Number 333-62679)).                                                                                                    
|        | 10.5 |  |  |                        |  | Registration Rights Agreement dated May 31,
    1996 among the Company, Welsh, Carson, Anderson &
    Stowe VII, L.P. and certain other investors (incorporated
    by reference to Exhibit 10.10 to our Registration Statement
    on Form S-1 (File Number 333-62679)).                                                                     
|        | 10.6 |  |  |                        |  | Amendment Number One to the Registration Rights
    Agreement dated October 27, 1997 among the Company, Welsh,
    Carson, Anderson & Stowe VII, L.P. and certain
    other investors (incorporated by reference to Exhibit 10.11
    to our Registration Statement on Form S-1 (File
    Number 333-62679)).                                 
|        | 10.7 |  |  |                        |  | Amendment Number Two to the Registration Rights
    Agreement dated July 24, 1998 among the Company, Welsh,
    Carson, Anderson & Stowe VII, L.P. and certain
    other investors (incorporated by reference to Exhibit 10.12
    to our Registration Statement on Form S-1 (File
    Number 333-62679)).                                    
|        | 10.8 |  |  |                        |  | Stock Purchase Agreement dated as of June 5,
    1997 among Dianne R. Martz, A.B. Charlton, III,
    the Company and Horizon Health Systems, Inc. (incorporated by
    reference to Exhibit 10.17 to our Registration Statement on
    Form S-1 (File Number 333-62679)).                                                                     



---



##### 



|        |       |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | ----- |  |  | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 10.9  |  |  |                        |  | Non-Disclosure and Non-Compete Agreement dated as
    of June 5, 1997 by and among Horizon Health Systems, Inc.,
    the Company and Dianne R. Martz (incorporated by reference
    to Exhibit 10.18 to our Registration Statement on
    Form S-1 (File Number 333-62679)).                                                                                                                                                                                                     
|        | 10.10 |  |  |                        |  | Grant Agreement dated as of June 5, 1997 by
    and between Kyle Callahan and the Company (incorporated by
    reference to Exhibit 10.19 to our Registration Statement on
    Form S-1 (File Number 333-62679)).                                                                                                                                                                                                                                                                
|        | 10.11 |  |  |                        |  | Subscription and Restriction Agreement dated as
    of June 5, 1997 by and between the Company and Kyle
    Callahan (incorporated by reference to Exhibit 10.20 to our
    Registration Statement on Form S-1 (File
    Number 333-62679)).                                                                                                                                                                                                                                     
|        | 10.12 |  |  |                        |  | Refunds Payable Escrow Agreement dated
    June 5, 1997 among First American National Bank, Nova
    Holdings, Inc. and Dianne Martz and A.B. Charlton, III
    (incorporated by reference to Exhibit 10.26 to our
    Registration Statement on Form S-1 (File
    Number 333-62679)).                                                                                                                                                                                          
|        | 10.13 |  |  |                        |  | Amended and Restated Credit Agreement dated as of
    June 13, 2002 among Accredo Health, Incorporated as
    Borrower, Certain Subsidiaries of the Borrower as Guarantors and
    The Lenders Named Therein and Bank of America, N.A. as Agent
    (incorporated by reference to Exhibit 10.13 to our Annual
    Report on Form 10-K for the fiscal year ended June 30,
    2002).                                                                                              
|        | 10.14 |  |  |                        |  | Amended and Restated Pledge Agreement dated as of
    June 13, 2002 by and among the parties identified as
    Pledgors and Bank of America, N.A. as collateral
    agent (incorporated by reference to Exhibit 10.13 to our
    Annual Report on Form 10-K for the fiscal year ended
    June 30, 2002).                                                                                                                                                                      
|        | 10.15 |  |  |                        |  | Amended and Restated Security Agreement dated as
    of June 13, 2002 by and among the parties identified as
    Grantors and Bank of America, N.A. as collateral
    agent (incorporated by reference to Exhibit 10.13 to our
    Annual Report on Form 10-K for the fiscal year ended
    June 30, 2002).                                                                                                                                                                    
|        | 10.16 |  |  |                        |  | ISDA Master Agreement dated August 7, 1997
    between NationsBank of Tennessee, N.A. and Nova Holdings, Inc.
    (incorporated by reference to Exhibit 10.40 to our
    Registration Statement on Form S-1 (File
    Number 333-62679)).                                                                                                                                                                                                                                        
|        | 10.17 |  |  |                        |  | Amended and Restated General Partnership
    Agreement of Childrens Hemophilia Services (incorporated
    by reference to Exhibit 10.61 to our Registration Statement
    on Form S-1 (File Number 333-62679)).                                                                                                                                                                                                                                                                 
|        | 10.18 |  |  |                        |  | Amendment Number One to Amended and Restated
    General Partnership Agreement of Childrens Hemophilia
    Services and Restrictive Agreement dated January 5, 2000
    (incorporated by reference to Exhibit 10.28 to our Annual
    Report on Form 10-K for the fiscal year ended June 30,
    2000).                                                                                                                                                                         
|        | 10.19 |  |  |                        |  | First Amendment to Amended and Restated General
    Partnership Agreement of Childrens Hemophilia Services
    dated June 30, 2000 (incorporated by reference to
    Exhibit 10.29 to our Annual Report on Form 10-K for
    the fiscal year ended June 30, 2000).                                                                                                                                                                                                              
|        | 10.20 |  |  |                        |  | Hemophilia Therapy Business Management, Services
    and Sales Agreement, dated November 10, 1998 between
    Horizon Health Systems, Inc., a Tennessee corporation, and
    Childrens Hemophilia Services, a California general
    partnership (The Company has obtained confidential treatment
    with respect to certain portions of this Exhibit.) (incorporated
    by reference to Exhibit 10.63 to our Registration Statement
    on Form S-1 (File Number 333-62679)).
|        | 10.21 |  |  |                        |  | Amended and Restated Distribution and Services
    Agreement effective as of January 1, 2000 by and between
    Biogen, Inc. and Nova Factor, Inc. (The Company has obtained
    confidential treatment with respect to certain portions of this
    Exhibit.) (incorporated by reference to Exhibit 10.1 to our
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    March 31, 2000).                                                                             
|        | 10.22 |  |  |                        |  | Additional Services Agreement dated
    January 1, 2000 by and between Biogen, Inc. and Nova
    Factor, Inc. (The Company has obtained confidential treatment
    with respect to certain portions of this Exhibit.) (incorporated
    by reference to Exhibit 10.2 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended March 31, 2000).                                                                                                                      



---



##### 



|        |       |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | ----- |  |  | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 10.23 |  |  |                        |  | Amendment to Amended and Restated Distribution
    and Services Agreement and Additional Services Agreement dated
    as of May 1, 2001 between Biogen, Inc. and Nova Factor,
    Inc. (The Company has obtained confidential treatment with
    respect to certain portions of this Exhibit.) (incorporated by
    reference to Exhibit 10.1 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2001).
|        | 10.24 |  |  |                        |  | Amended and Restated Distribution Agreement,
    dated January 1, 1998, by and between Nova Factor, Inc. and
    Genzyme Corporation (The Company has obtained confidential
    treatment with respect to certain portions of this Exhibit.)
    (incorporated by reference to Exhibit 10.65 to our Annual
    Report on Form 10-K for the fiscal year ended June 30,
    1999).                                                           
|        | 10.25 |  |  |                        |  | Incentive Stock Option Agreement of David Stevens
    dated May 31, 1996 (incorporated by reference to
    Exhibit 10.46 to our Registration Statement on
    Form S-1 (File Number 333-62679)).                                                                                                                                                                                                                                           
|        | 10.26 |  |  |                        |  | Incentive Stock Option Agreement of Joel R.
    Kimbrough dated May 31, 1996 (incorporated by reference to
    Exhibit 10.47 to our Registration Statement on
    Form S-1 (File Number 333-62679)).                                                                                                                                                                                                                                       
|        | 10.27 |  |  |                        |  | Incentive Stock Option Agreement of John R.
    Grow dated May 31, 1996 (incorporated by reference to
    Exhibit 10.48 to our Registration Statement on
    Form S-1 (File Number 333-62679)).                                                                                                                                                                                                                                            
|        | 10.28 |  |  |                        |  | Incentive Stock Option Agreement of Kyle Callahan
    dated September 3, 1997 (incorporated by reference to
    Exhibit 10.49 to our Registration Statement on
    Form S-1 (File Number 333-62679)).                                                                                                                                                                                                                                      
|        | 10.29 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Patrick J. Welsh dated February 9, 1998 (incorporated by
    reference to Exhibit 10.50 to our Registration Statement on
    Form S-1 (File Number 333-62679)).                                                                                                                                                                                                                                
|        | 10.30 |  |  |                        |  | Non-Qualified Stock Option Agreement of Ken
    Melkus dated February 9, 1998 (incorporated by reference to
    Exhibit 10.51 to our Registration Statement on
    Form S-1 (File Number 333-62679)).                                                                                                                                                                                                                                      
|        | 10.31 |  |  |                        |  | Incentive Stock Option Agreement of Kyle Callahan
    dated February 9, 1998 (incorporated by reference to
    Exhibit 10.52 to our Registration Statement on
    Form S-1 (File Number 333-62679)).                                                                                                                                                                                                                                       
|        | 10.32 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kenneth R. Masterson dated April 30, 1998
    (incorporated by reference to Exhibit 10.54 to our
    Registration Statement on Form S-1 (File
    Number 333-62679)).                                                                                                                                                                                                                          
|        | 10.33 |  |  |                        |  | Incentive Stock Option Agreement of
    Thomas W. Bell, Jr. dated July 10, 1998 (incorporated
    by reference to Exhibit 10.55 to our Registration Statement
    on Form S-1 (File Number 333-62679)).                                                                                                                                                                                                                                    
|        | 10.34 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Patrick J. Welsh dated November 10, 1999 (incorporated
    by reference to Exhibit 10.2 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    1999).                                                                                                                                                                                                          
|        | 10.35 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kenneth J. Melkus dated November 10, 1999 (incorporated by
    reference to Exhibit 10.4 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    1999).                                                                                                                                                                                                         
|        | 10.36 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kenneth R. Masterson dated November 10, 1999
    (incorporated by reference to Exhibit 10.5 to our Quarterly
    Report on Form 10-Q for the fiscal quarter ended
    December 31, 1999).                                                                                                                                                                                                      
|        | 10.37 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kevin L. Roberg dated November 10, 1999 (incorporated
    by reference to Exhibit 10.6 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    1999).                                                                                                                                                                                                           
|        | 10.38 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kevin L. Roberg dated November 18, 1999 (incorporated
    by reference to Exhibit 10.7 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    1999).                                                                                                                                                                                                           



---



##### 



|        |       |  |  |                         |  |                                                                                                                                                                                                                                     
|------- | ----- |  |  | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 10.39 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Patrick J. Welsh dated November 1, 2000 (incorporated
    by reference to Exhibit 10.2 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2000).    
|        | 10.40 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kevin L. Roberg Dated November 1, 2000 (incorporated
    by reference to Exhibit 10.3 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2000).     
|        | 10.41 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kenneth J. Melkus dated November 1, 2000 (incorporated
    by reference to Exhibit 10.4 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2000).   
|        | 10.42 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kenneth R. Masterson dated November 1, 2000
    (incorporated by reference to Exhibit 10.5 to our Quarterly
    Report on Form 10-Q for the fiscal quarter ended
    December 31, 2000).
|        | 10.43 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Dick R. Gourley dated November 1, 2000 (incorporated
    by reference to Exhibit 10.6 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2000).     
|        | 10.44 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Dick R. Gourley dated November 16, 2000 (incorporated
    by reference to Exhibit 10.7 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2000).    
|        | 10.45 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Patrick J. Welsh dated November 1, 2001 (incorporated
    by reference to Exhibit 10.2 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2001).    
|        | 10.46 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kevin L. Roberg dated November 1, 2001 (incorporated
    by reference to Exhibit 10.3 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2001).     
|        | 10.47 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kenneth J. Melkus Dated November 1, 2001 (incorporated
    by reference to Exhibit 10.4 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2001).   
|        | 10.48 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kenneth R. Masterson dated November 1, 2001
    (incorporated by reference to Exhibit 10.5 to our Quarterly
    Report on Form 10-Q for the fiscal quarter ended
    December 31, 2001).
|        | 10.49 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Dick R. Gourley dated November 1, 2001 (incorporated
    by reference to Exhibit 10.6 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2001).     
|        | 10.50 |  |  |                        |  | Incentive Stock Option Agreement of David Stevens
    dated November 1, 2000 (incorporated by reference to
    Exhibit 10.8 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended December 31, 2000).               
|        | 10.51 |  |  |                        |  | Incentive Stock Option Agreement of John R.
    Grow dated November 1, 2000 (incorporated by reference to
    Exhibit 10.9 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended December 31, 2000).                
|        | 10.52 |  |  |                        |  | Incentive Stock Option Agreement of Joel R.
    Kimbrough dated November 1, 2000 (incorporated by reference
    to Exhibit 10.10 to our Quarterly Report on Form 10-Q
    for the fiscal quarter ended December 31, 2000).          
|        | 10.53 |  |  |                        |  | Incentive Stock Option Agreement of
    Thomas W. Bell, Jr. dated November 1, 2000
    (incorporated by reference to Exhibit 10.11 to our
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    December 31, 2000).    
|        | 10.54 |  |  |                        |  | Incentive Stock Option Agreement of Kyle J.
    Callahan dated November 1, 2000 (incorporated by reference
    to Exhibit 10.12 to our Quarterly Report on Form 10-Q
    for the fiscal quarter ended December 31, 2000).           
|        | 10.55 |  |  |                        |  | Stock Option Agreement of David Stevens dated
    September 3, 2002 (incorporated by reference to
    Exhibit 10.1 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2002).                       



---



##### 



|        |       |  |  |                         |  |                                                                                                                                                                                                                                                                    
|------- | ----- |  |  | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 10.56 |  |  |                        |  | Stock Option Agreement of John R. Grow dated
    September 3, 2002 (incorporated by reference to
    Exhibit 10.2 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2002).                                                       
|        | 10.57 |  |  |                        |  | Stock Option Agreement of Joel R. Kimbrough
    dated September 3, 2002 (incorporated by reference to
    Exhibit 10.3 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2002).                                                  
|        | 10.58 |  |  |                        |  | Stock Option Agreement of Kyle J. Callahan
    dated September 3, 2002 (incorporated by reference to
    Exhibit 10.4 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2002).                                                   
|        | 10.59 |  |  |                        |  | Stock Option Agreement of Barbara H. Biehner
    dated June 24, 2002 (incorporated by reference to
    Exhibit 10.5 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2002).                                                     
|        | 10.60 |  |  |                        |  | Stock Option Agreement of Barbara H. Biehner
    dated September 3, 2002 (incorporated by reference to
    Exhibit 10.6 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2002).                                                 
|        | 10.61 |  |  |                        |  | Employment Agreement effective as of
    September 1, 2001 between Accredo Health, Incorporated and
    David D. Stevens (incorporated by reference to
    Exhibit 10.7 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2002). 
|        | 10.62 |  |  |                        |  | Employment Agreement effective as of
    September 1, 2002 between Accredo Health, Incorporated and
    John R. Grow (incorporated by reference to
    Exhibit 10.8 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2002).     
|        | 10.63 |  |  |                        |  | Employment Agreement effective as of
    September 1, 2001 between Accredo Health, Incorporated and
    Joel R. Kimbrough (incorporated by reference to
    Exhibit 10.9 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2002).
|        | 10.64 |  |  |                        |  | Employment Agreement effective as of
    September 1, 2002 between Accredo Health, Incorporated and
    Kyle J. Callahan (incorporated by reference to
    Exhibit 10.10 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2002).
|        | 10.65 |  |  |                        |  | Non-Qualified Stock Option Agreement of Nancy-Ann
    DeParle dated November 1, 2002 (incorporated by reference
    to Exhibit 10.1 to our Quarterly Report on Form 10-Q
    for the fiscal quarter ended December 31, 2002).                                      
|        | 10.66 |  |  |                        |  | Non-Qualified Stock Option Agreement of Nancy-Ann
    DeParle dated November 19, 2002 (incorporated by reference
    to Exhibit 10.2 to our Quarterly Report on Form 10-Q
    for the fiscal quarter ended December 31, 2002).                                     
|        | 10.67 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kevin L. Roberg dated November 1, 2002 (incorporated
    by reference to Exhibit 10.3 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2002).                                    
|        | 10.68 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kenneth J. Melkus dated November 1, 2002 (incorporated
    by reference to Exhibit 10.4 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2002).                                  
|        | 10.69 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kenneth R. Masterson dated November 1, 2002
    (incorporated by reference to Exhibit 10.5 to our Quarterly
    Report on Form 10-Q for the fiscal quarter ended
    December 31, 2002).                               
|        | 10.70 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Dick R. Gourley dated November 1, 2002 (incorporated
    by reference to Exhibit 10.6 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2002).                                    
|        | 10.71 |  |  |                        |  | Employment Agreement dated as of January 7,
    2002 between Accredo Health, Incorporated and Steve Fitzpatrick
    (incorporated by reference to Exhibit 10.1 to our Quarterly
    Report on Form 10-Q for the fiscal quarter ended
    March 31, 2002).          
|        | 10.72 |  |  |                        |  | Employment Agreement dated as of January 21,
    2002 between Accredo Health, Incorporated and Barbara H.
    Biehner (incorporated by reference to Exhibit 10.2 to our
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    March 31, 2002).        



---



##### 



|        |       |  |  |                         |  |                                                                                                                                                                                                                                                            
|------- | ----- |  |  | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 10.73 |  |  |                        |  | Stock Option Agreement of Thomas W. Bell,
    Jr. dated September 3, 2002 (incorporated by reference to
    Exhibit 10.73 to our Annual Report on Form 10-K for
    the fiscal year ended June 30, 2003).                                                  
|        | 10.74 |  |  |                        |  | Employment Agreement effective as of
    September 1, 2001 between Accredo Health, Incorporated and
    Thomas W. Bell, Jr. (incorporated by reference to
    Exhibit 10.74 to our Annual Report on Form 10-K for
    the fiscal year ended June 30, 2003).
|        | 10.75 |  |  |                        |  | Stock Option Agreement of Steve Fitzpatrick dated
    August 1, 2001 (incorporated by reference to
    Exhibit 10.75 to our Annual Report on Form 10-K for
    the fiscal year ended June 30, 2003).                                                       
|        | 10.76 |  |  |                        |  | Stock Option Agreement of Steve Fitzpatrick dated
    January 7, 2002 (incorporated by reference to
    Exhibit 10.76 to our Annual Report on Form 10-K for
    the fiscal year ended June 30, 2003).                                                      
|        | 10.77 |  |  |                        |  | Stock Option Agreement of Steve Fitzpatrick dated
    September 3, 2002 (incorporated by reference to
    Exhibit 10.77 to our Annual Report on Form 10-K for
    the fiscal year ended June 30, 2003).                                                    
|        | 10.78 |  |  |                        |  | Stock Option Agreement of David D. Stevens
    dated September 5, 2003 (incorporated by reference to
    Exhibit 10.1 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2003).                                           
|        | 10.79 |  |  |                        |  | Stock Option Agreement of John R. Grow dated
    September 5, 2003 (incorporated by reference to
    Exhibit 10.2 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2003).                                               
|        | 10.80 |  |  |                        |  | Stock Option Agreement of Joel R. Kimbrough
    dated September 5, 2003 (incorporated by reference to
    Exhibit 10.3 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2003).                                          
|        | 10.81 |  |  |                        |  | Stock Option Agreement of Kyle J. Callahan
    dated September 5, 2003 (incorporated by reference to
    Exhibit 10.4 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2003).                                           
|        | 10.82 |  |  |                        |  | Stock Option Agreement of Thomas W. Bell,
    Jr. dated September 5, 2003 (incorporated by reference to
    Exhibit 10.5 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2003).                                        
|        | 10.83 |  |  |                        |  | Stock Option Agreement of Barbara H. Biehner
    dated September 5, 2003 (incorporated by reference to
    Exhibit 10.6 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2003).                                         
|        | 10.84 |  |  |                        |  | Stock Option Agreement of Steve Fitzpatrick dated
    September 5, 2003 (incorporated by reference to
    Exhibit 10.7 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended September 30, 2003).                                          
|        | 10.85 |  |  |                        |  | Non-Qualified Stock Option Agreement of Nancy-Ann
    DeParle dated November 25, 2003 (incorporated by reference
    to Exhibit 10.1 to our Quarterly Report on Form 10-Q
    for the fiscal quarter ended December 31, 2003).                             
|        | 10.86 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kevin L. Roberg dated November 25, 2003 (incorporated
    by reference to Exhibit 10.2 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2003).                           
|        | 10.87 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kenneth J. Melkus dated November 25, 2003
    (incorporated by reference to Exhibit 10.3 to our Quarterly
    Report on Form 10-Q for the fiscal quarter ended
    December 31, 2003).                         
|        | 10.88 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Kenneth R. Masterson dated November 25, 2003
    (incorporated by reference to Exhibit 10.4 to our Quarterly
    Report on Form 10-Q for the fiscal quarter ended
    December 31, 2003).                      
|        | 10.89 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Dick R. Gourley dated November 25, 2003 (incorporated
    by reference to Exhibit 10.5 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2003).                           



---



##### 



|        |       |  |  |                         |  |                                                                                                                                                                                                                                     
|------- | ----- |  |  | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 10.90 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Thomas G. Rotherham dated November 25, 2003
    (incorporated by reference to Exhibit 10.6 to our Quarterly
    Report on Form 10-Q for the fiscal quarter ended
    December 31, 2003).
|        | 10.91 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    Thomas G. Rotherham dated November 25, 2003
    (incorporated by reference to Exhibit 10.7 to our Quarterly
    Report on Form 10-Q for the fiscal quarter ended
    December 31, 2003).
|        | 10.92 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    William E. Evans dated November 25, 2003 (incorporated
    by reference to Exhibit 10.8 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2003).   
|        | 10.93 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    William E. Evans dated November 25, 2003 (incorporated
    by reference to Exhibit 10.9 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2003).   
|        | 10.94 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    J. Martin Carroll dated January 27, 2004.                                                                                                                                               
|        | 10.95 |  |  |                        |  | Non-Qualified Stock Option Agreement of
    J. Martin Carroll dated January 27, 2004.                                                                                                                                               
|        | 10.96 |  |  |                        |  | Stock Option Agreement of Jon Peters dated
    January 2, 2004.                                                                                                                                                                     
|        | 16.1  |  |  |                        |  | Letter from Ernst & Young LLP regarding
    change in certifying accountant (incorporated by reference to
    Exhibit 16.1 to our Current Report on Form 8-K/A dated
    May 19, 2003).                                             
|        | 21.1  |  |  |                        |  | Subsidiaries                                                                                                                                                                                                                        
|        | 23.1  |  |  |                        |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                    
|        | 23.2  |  |  |                        |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                    
|        | 23.3  |  |  |                        |  | Consent of Ernst & Young LLP                                                                                                                                                                                                        
|        | 24.1  |  |  |                        |  | Power of Attorney (contained on the signature
    pages of this report)                                                                                                                                                             
|        | 31.1  |  |  |                        |  | Certification pursuant to
    Rule 13a-14(a)/15d-14(a), as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                    
|        | 31.2  |  |  |                        |  | Certification pursuant to
    Rule 13a-14(a)/15d-14(a), as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                    
|        | 32.1  |  |  |                        |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to section 906 of
    the Sarbanes-Oxley Act of 2002                                                                                                      
|        | 32.2  |  |  |                        |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to section 906 of
    the Sarbanes-Oxley Act of 2002