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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


FORM 10-K



| |     |                                                                                         
| | --- | ----------------------------------------------------------------------------------------
| | [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|
| |     | For the fiscal year ended June 30,
    2002                                             

OR



| |      |                                                                                             
| | ---- | --------------------------------------------------------------------------------------------
| | [  ] | 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
    incorporation or organization) |  | (I.R.S. Employer
    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

(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 x  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

The aggregate market value of the voting stock
held by non-affiliates of the Company was $1,174,900,500 as of
September 23, 2002, based upon the closing price 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
31,514,233 shares of common stock, $.01 par value, outstanding
at September 23, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrants Proxy Statement
for its 2002 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Annual Report.









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TABLE OF CONTENTS



|                                           |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                    
|                                           | Item 1. Business                                                                             
|RISK FACTORS                              
|                                           | Item 2. Properties                                                                           
|                                           | Item 3. Legal Proceedings                                                                    
|                                           | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                   
|                                           | Item 5. Market for Companys Common Equity and Related Stockholder Matters.                  
|                                           | Item 6. Selected Consolidated Financial Data                                                 
|                                           | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                           | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          
|                                           | Item 8. Financial Statements and Supplementary Data                                          
|                                           | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                  
|                                           | Item 10. Directors and Executive Officers of the Company                                     
|                                           | Item 11. Executive Compensation                                                              
|                                           | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                           | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                                   
|                                           | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|REPORT OF INDEPENDENT AUDITORS            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|SIGNATURES                                
|EXHIBIT INDEX                             
|AMENDED AND RESTATED CREDIT AGREEMENT     
|AMENDED AND RESTATED PLEDGE AGREEMENT     
|AMENDED AND RESTATED SECURITY AGREEMENT   
|SUBSIDIARIES                              
|CONSENT OF ERNST & YOUNG LLP              
|SECTION 906 CERTIFICATION OF THE CEO      
|SECTION 906 CERTIFICATION OF THE CFO      



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PART I

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



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

We believe it is important to communicate our
expectations to our investors. There may be events in the
future, however, that we are not accurately able to predict or
over which we have no control. The risk factors beginning on
page 14 hereof, as well as any cautionary language in this
report, provide examples of risks, uncertainties and events that
may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements.
Examples of these risks, uncertainties and events include the
availability of new drugs, the demand for our services, our
ability to expand through joint ventures and acquisitions, our
ability to maintain existing pricing arrangements with
suppliers, the impact of government regulation, reliance on key
payor relationships, our need for additional capital, the
seasonality of our operations and our ability to implement our
strategies and objectives.

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






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

Overview

We are one of the largest providers of
specialized pharmacy services in the United States. We provide
these services on behalf of biopharmaceutical manufacturers to
patients with chronic diseases, 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
by accelerating patient acceptance of new drugs, facilitating
patient compliance with the prescribed treatment, addressing
difficult reimbursement issues and capturing valuable clinical
information about a new drugs effectiveness.

Our services include specialized pharmacy
services, clinical services, reimbursement services and delivery
services. We 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. 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 and managed care plans.

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.                                           

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We have agreements with fourteen
biopharmaceutical manufacturers to buy drugs and to provide
varying degrees of specialized pharmacy services for our twenty
primary product lines. Although most of our agreements that
involve specialized pharmacy services are not exclusive, we
generally are a recommended provider of the manufacturers
drug to patients and physicians. These agreements also contain
favorable pricing from the manufacturer and in many cases
compensate us for our specialized services and provide for an
annual review of our acquisition cost of drugs.

We also buy drugs for our acute business which we
intend to exit by December 31, 2002. These arrangements do
not include requirements that we provide specialized pharmacy
services.

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.

Recent Events

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. The
aggregate purchase price paid was $462.3 million (including
$12.2 million of acquisition related costs) and consisted
of $215.6 million in cash and 5,060,976 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. We did not acquire Gentivas home health care
services business.

When operated by Gentiva, the SPS business
incorporated both Gentivas chronic and acute businesses.
Since our acquisition of the SPS business, we have not retained
certain drugs for chronic diseases which are not related to our
primary business. We have also reorganized the chronic and acute
portions of the business. The acute business involves the
administration of antibiotics, chemotherapy, nutrients and other
prescription drugs that require mixing using aseptic techniques
and a laminar hood, and are for patients with acute or episodic
diseases. We view the acute business as inconsistent with our
strategy and focus, and we are pursuing strategic options for
the acute portion of the SPS business and we intend to exit this
acute business by December 31, 2002.

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 three primary pharmacy
locations in Memphis, Nashville, Tennessee and Pittsburgh,
Pennsylvania. We also maintain over 27 satellite pharmacy
locations across the United States. We ship our products
primarily via FedEx.

Specialized 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 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-certification 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, IVIG and other blood-related
products, are available from multiple sources. Currently, we
sell and provide our specialty services primarily with respect
to twenty products. The drugs we sell with respect to seven core
disease markets account for over 85% 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 markets, Synagis®, Ceredase® and
Cerezyme® are only available from single sources. We have
also agreed with Biogen to not sell drugs that compete with
AVONEX® for the treatment of Multiple Sclerosis. 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.

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
artery pressure that results in symptoms such as dyspnea,
angina, palpitations and syncope. Generally, PAH impacts adults
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, and approximately 400
persons per year in the United States will be diagnosed with
some 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, Ltd.; and         
|
| |  | Remodulin®, which is a treprostinil sodium
    product manufactured by United Therapeutics Corporation.

We have agreements with GlaxoSmithKline for the
sale of Flolan®, United Therapeutics Corporation for the
sale of Remodulin®, and Actelion Pharmaceuticals U.S., Inc.
for the sale of TracleerTM. 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. We are the only specialized pharmacy
that offers all three FDA approved treatment options for PAH
patients.

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
anti-hemophilic 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.

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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
anti-hemophilic 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 to date 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 and monoclonal 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.

There are currently six major suppliers of
FDA-approved products used for treating hemophilia. We purchase
products from all six suppliers. Historically, no supplier has
been responsible for a majority of our hemophilia product
purchases. However, due to product shortages, the majority of
our hemophilia product was purchased in the fiscal year ended
June 30, 2002 from Baxter Healthcare Corporation.

We have entered into a Hemophilia Product Volume
Commitment Agreement with Baxter Healthcare Corporation naming
us as a non-exclusive Hemophilia Specialty Pharmacy Provider of
hemophilia products to home care patients in the United States
and Puerto Rico. The agreement provides for minimum purchase
commitments by us and our acquisition cost of the drugs is based
upon the volume of product purchased by us. The agreement
expires December 31, 2004, but will remain in effect for
successive two (2) year terms unless terminated by either
party. The agreement may be terminated upon notice given six
(6) months prior to the expiration of the term and may also
be terminated by either party for cause upon thirty
(30) days prior written notice and opportunity to cure. If
Baxter undertakes to sell or distribute hemophilia products
directly to home care patients, we have the right to terminate
the agreement upon written notice.

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

AVONEX®, which is generally administered via
a single intramuscular injection once per week, is used by a
majority of such patients in the United States currently on drug
therapy.

Effective January 2000, we entered into amended
and restated agreements with Biogen for a three year term
pursuant to which we dispense AVONEX® and provide various
services and information to Biogen. These agreements were
amended and restated effective September 1, 2002. The new
agreements are for a term ending December 31, 2005. Our
agreements with Biogen are terminable by either party for any
reason with 90 days prior notice. In addition, our
agreements provide that as long as we are the only preferred
home delivery service provider approved by Biogen (other than
providers to Medicaid patients in some states), we

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may not, without Biogens approval, sell any
products that compete with AVONEX® for the treatment of
Multiple Sclerosis. We do not have exclusive rights to sell
AVONEX®, and Biogen has reserved the right under our
agreement to sell AVONEX® directly or to appoint other
providers of home delivery pharmacy services for AVONEX®,
but any such action would eliminate our exclusivity obligations.


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 the only FDA-approved products used
for treating Type I Gaucher Disease.

We have a longstanding relationship with Genzyme
relating to Ceredase® and Cerezyme®. Ceredase®
and Cerezyme® are administered by intravenous infusion.
Dosing frequencies vary, but a typical dosing regimen involves
administration once every two weeks. Pursuant to our current
agreement with Genzyme, we dispense Ceredase® and
Cerezyme® in the United States and provide various
information and other services to Genzyme. The pricing of
Ceredase® and Cerezyme® under our agreement with
Genyzme, as well as the scope and pricing of services that we
provide, are subject to periodic adjustment. Our agreement with
Genzyme automatically renews on an annual basis unless either
party provides 90 days prior notice of non-renewal, and is
terminable by either party for any reason with 60 days
prior notice. In addition, the agreement provides that, during
the term of the agreement and for a period of five years after
its termination, we may not sell any prescription drug for the
treatment of Gaucher Disease other than Ceredase® and
Cerezyme®. We do not have exclusive rights to sell
Ceredase® or Cerezyme®. Genzyme has reserved the right
under the agreement to sell these products directly or to
appoint other distributors of these products.

Growth Hormone-Related
Disorders.A major treatable cause of
growth delay in children is growth hormone deficiency. It is
estimated that there are approximately 20,000 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®,
Nutropin AQ® or Nutropin Depot, the first long-acting
dosage form of recombinant human growth hormone. Genentech began
shipping Nutropin Depot to distributors in June 2000.

We have purchasing relationships with all five
manufacturers of growth hormone products used in the United
States, including a longstanding relationship with Genentech.
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 week, and in some cases daily. In contrast, Nutropin
Depot may be administered as infrequently as monthly or
bi-monthly. 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®,
Nutropin AQ® and Nutropin Depot in the United States.
The pricing of Protropin®, Nutropin®, Nutropin
AQ® and Nutropin Depot 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, 2002. The
agreement may be terminated by Genentech upon a change of
control of Nova Factor and may be terminated by either party for
cause following a 60-day right to cure or in the event of
bankruptcy, insolvency or similar events affecting the other
party. We do not have exclusive rights to distribute
Protropin®, Nutropin®, Nutropin AQ® and Nutropin
Depot. Genentech has reserved the right under our
agreement to sell these drugs directly or to appoint other
distributors of these drugs.

Autoimmune Disorder.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

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severe. Various therapies, including intravenous
immunoglobin, (IVIG), are administered to minimize the effects
of autoimmune disorders and the severity of their associated
symptoms. Although typically administered via infusion in a
hospital or physicians office, IVIG can be administered at
home by patients who require repeated treatment.


Prior to October 1999, we did not offer IVIG
products on a retail basis. In an effort to improve the overall
effectiveness of a patients medication, many physicians
prescribe IVIG in combination with existing drug therapies to
treat chronic diseases such as Multiple Sclerosis and rheumatoid
arthritis. This trend contributed to our decision to make two
acquisitions in fiscal year 2000 through which we gained access
to the retail IVIG market. We subsequently acquired two other
IVIG distributors in May 2001 and December 2001. Because IVIG is
collected and processed from human donors, the IVIG product
market can be somewhat limited by supply constraints. We have
supply contracts with all five major suppliers of IVIG in the
United States. Historically, no supplier is responsible for a
majority of our IVIG product purchases.

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 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.

Respiratory syncytial virus is seasonal, with the
disease striking primarily during the period of October through
April. We renewed our relationship with MedImmune for the
2001-2002 respiratory syncytial virus season by executing a new
distribution agreement on October 1, 2001. The 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 30 days notice. We do not have the
exclusive right to sell Synagis®, although we were the
national preferred assignment of benefits distributor of the
drug for the 2001-2002 respiratory syncytial virus season. We
have recently renewed our agreement with MedImmune to continue
as the national preferred assignment of benefits distributor for
the 2002-2003 season.

Suppliers

We primarily dispense, growth hormones, IVIG and
other blood-related products, and the drugs obtained from the
following sources:



| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | Actelion Pharmaceuticals U.S., Inc., with respect
    to Tracleer;          
|
| |  | Allergan, Inc., with respect to Botox®;                                      
|
| |  | Aventis, with respect to Lovenox®,
    Rilutek® and Oncaspar®;               
|
| |  | Bio-Technology General Corp., with respect to
    Delatestryl® and Oxandrin®;
|
| |  | Biogen, Inc., with respect to AVONEX®;                                       
|
| |  | Centocor, Inc., with respect to Remicade®;                                   
|
| |  | Enzon, Inc., with respect to Adagen®;                                        
|
| |  | Genzyme Corporation, with respect to
    Ceredase® and Cerezyme®;            
|
| |  | GlaxoSmithKline, with respect to Flolan®;                                    

7



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| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | Immunex Corporation, with respect to Enbrel®;                     
|
| |  | InterMune, Inc., with respect to ActImmune®;                      
|
| |  | MedImmune, Inc. with respect to Synagis®;                         
|
| |  | Rare Disease Therapeutics, Inc., with respect to
    Orfadin®; and
|
| |  | United Therapeutics Corporation, with respect to
    Remodulin®.  

Although there are four other manufacturers of
FDA-approved growth hormone products, Genentechs products
collectively enjoy a market share that exceeds the aggregate of
all other individual manufacturers of growth hormone products.
Accordingly, in the event that one or more of our current
suppliers of products (other than IVIG and other blood-related
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, upon between 30
and 90 days prior notice. In addition, our agreements with
our suppliers generally provide that during the term of the
agreements (and, in some instances, for as much as five years
after termination of the agreements), we may not distribute any
competing products. We 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 manufacturers. and
Business  Disease Markets and Related
Products.

We have supply relationships with all six major
suppliers of clotting factor and all five major suppliers of
IVIG in the United States, and historically no supplier has been
responsible for a majority of our hemophilia or IVIG product
purchases. However, due to product shortages, the majority of
our hemophilia product was purchased for the year ended
June 30, 2002 from Baxter Healthcare Corporation.

Relationships with Medical Centers

At June 30, 2002, 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;
|
| |  | Childrens Hospital 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 which we provide specialized pharmacy services. Under
the terms of the joint venture agreement, we manage the sales,
marketing, and provision of specialty pharmacy services in
exchange for a monthly management fee and the reimbursement of
some expenses. We share in the profits and losses of the joint
venture entity with the medical center in proportion to our
respective capital contributions and receive a management fee
for our management services. The agreements generally have
initial terms of between one and five years and contain
restrictive covenants and 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 specialized pharmacy services.

Under our management agreements, we provide goods
and services used in the hospitals or joint ventures
specialized 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 between one and five years and are terminable by
either party, with or without cause, with between one and twelve
months prior notice. See Risk Factors  If our
relationships with some medical centers are disrupted, our
business could be harmed.

8



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##### Table of Contents



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, 2000, 2001 and 2002. 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, we anticipate that our
future payor mix will reflect 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, 2000 |    | June 30, 2001 |   | June 30, 2002(2)
|                                       |       |               |    |               |   |                 
|Private payors (including self pay)(1) |       |               | 82 | %             |   |                  | 81 | %   |   |  | 79 | %  
|Medicaid and other state programs      |       |               | 16 | %             |   |                  | 17 | %   |   |  | 19 | %  
|Medicare and other federal programs    |       |               | 2  | %             |   |                  | 2  | %   |   |  | 2  | %  
|                                       |       |               |    |               |   |                  |    |     |   |  |    |    
|                                       | Total |               |    | 100           | % |                  |    | 100 | % |  |    | 100 | %
|                                       |       |               |    |               |   |                  |    |     |   |  |    |    



---



|    |                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes sales to private physician practices,
    whose ultimate payor is typically Medicare, which accounted for
    approximately 5%, 4% and 3% of gross patient revenue,
    respectively, for the fiscal years ended June 30, 2000,
    2001 and 2002.
|   
|(2) | Excludes acute business operated by our SPS
    business.                                                                                                                                                                                                  

In fiscal year 2002, Aetna, Inc. and its
affiliates (Aetna) accounted for approximately 15%
of the Companys revenue. The Company entered into a
Specialty Pharmacy Mail Service Vendor Agreement with Aetna
effective May 1, 2000. Our Agreement has an initial term of
three years ending April 30, 2003 and renews on an annual
basis thereafter. Either party may terminate the Agreement on
90 days notice. Except for Aetna, no private payor
accounted for 10% or more of the Companys revenue and due
to the SPS acquisition, we anticipate that Aetna will account
for less than 10% of our revenues in the future.

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 be unable to 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. According to a Kaiser Family
Foundation report released on September 19, 2002,
45 states reported they took actions to decrease Medicaid
spending on 2002, and 41 reported they would take
additional actions to decrease Medicaid spending in 2003.

9



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Federal and state proposals are pending that
would impose further limitations on governmental payments and
that could increase patient co-payments and deductibles. Many
government payors, including Medicare and Medicaid, 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.

In February 2000, First DataBank, Inc., which
reports AWP to Medicaid programs, announced that it will report
based on market prices rather than prices submitted by
manufacturers. As a result, a number of state Medicaid agencies
have lowered the amount of reimbursement that they pay for
certain drugs, including clotting factor. Medicare also
announced that it would implement lower prices for certain drugs
effective October 1, 2000. The proposal to include clotting
factor and cancer drugs in the lower Medicare pricing was
withdrawn.

In September 2001, the OIG issued a report titled
Medicaids Use of Revised Average Wholesale
Prices, which in part summarized the results of a joint
investigation conducted by the United States Department of
Justice and the National Association of Medicaid Control Fraud
Units of actual wholesale pricing data for 51 drugs. The report
concluded the current method of determining AWP was
fundamentally flawed. In response to this report,
the Centers for Medicare and Medicaid Services
(CMMS) indicated it would continue to look for
administrative and legislative solutions to the problem of
accurately determining AWP. Information from this report
regarding lower calculations of AWP was made available to First
DataBank, and at least thirty states have implemented these new
calculations in whole or in part in their reimbursement
methodologies. On September 16, 2002, the OIG revised its
August, 2001 report entitled Medicaid Pharmacy 
Actual Acquisition Costs of Brand Name Prescription Drug
Products. In its revised report, OIG estimates that
pharmacies receive an average 17% discount on drugs
purchased from wholesalers. We expect that these developments
will reduce prices and margins on some of the drugs that we
distribute.

There has been an increase in the number of suits
instituted by private consumer groups against drug manufacturers
over prescription drug pricing. In December 2001, the
Prescription Access Litigation Project, or PAL, a coalition of
consumer groups, filed suit in Boston, Massachusetts, against 28
drug manufacturers alleging, in part, fraud through manipulating
the AWP. The eventual effect of such suits, if any, on the AWP
is unknown.

Recently, several proposals have been made in
Congress to enlarge prescription drug coverage. The U.S.
Congress has also been studying the accuracy of average
wholesale prices as an appropriate benchmark for setting rates
of reimbursement. In September, 2002, the Bush administration
proposed deep reductions in Medicare payments for a wide range
of drugs provided as outpatient services by Hospitals. Among the
drugs included in this proposal are AVONEX®, Remicade®
and hemophilia products. We are not directly affected by this
proposal as Medicare only reimburses for AVONEX® and
Remicade® dispensed in a hospital or physician clinic.
However, if this proposal is adopted, we cannot predict whether
state Medicaid programs would adopt similar pricing.

A number of states are considering 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 states 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.

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

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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.


Hemophilia treatment centers may purchase 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 outpatient drugs to hemophilia treatment centers agree
with the Department of Health and Human Services that they will
not charge a price for covered outpatient drugs that is higher
than a statutorily set amount. We do 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 the Departments guidelines, an eligible
hemophilia treatment center may obtain 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 the Departments guidelines or
sells 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.

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 Caremark
    Therapeutic Services, and Priority Healthcare Corporation;                   
|
| |  | specialty pharmacy divisions of national
    wholesale drug distributors;                                                          
|
| |  | pharmacy benefit management companies;                                                                                             
|
| |  | hospital-based pharmacies;                                                                                                         
|
| |  | retail pharmacies;                                                                                                                 
|
| |  | home infusion therapy companies;                                                                                                   
|
| |  | manufacturers that sell their products both to
    distributors and directly to users, including clinics and
    physician offices;
|
| |  | comprehensive hemophilia care centers; 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 average
    wholesale pricing
|
| |  | the payment of inducements for patient referrals;                 

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| |   |                                                        
| | - | -------------------------------------------------------
| |  | 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 states impose limits on financial incentives paid
to insurance companies and other payors offering managed drug
programs. 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 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

12



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##### Table of Contents



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.

The Department of Health and Human Services,
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 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.

Health Insurance Portability and
Accountability Act  Administrative
Simplification.Under the Health
Insurance Portability and Accountability Act of 1996, or HIPAA,
Congress required the adoption of rules to establish standards
and requirements for the electronic transmission of certain
health information. The U.S. Department of Health and Human
Services, or HHS, has published two sets of final regulations to
date implementing healthcare transactions and privacy standards
under HIPAA. The first set of final regulations requires
covered entities to use uniform standards, including
data reporting, formatting, and coding, for common healthcare
transactions.

The second set of final regulations imposes new
standards relating to the privacy of individually identifiable
health information. These standards require covered entities to
comply with rules governing the use and disclosure of protected
health information. The standards also require covered entities
to enter into certain contractual provisions with any business
associate to whom individually identifiable information is
disclosed. Under these final regulations, we will be a covered
entity for purposes of HIPAA. A third set of regulations under
HIPAA, which have not yet been finalized, will establish minimum
security requirements for covered entities to protect health
information.

We have submitted a plan to the Secretary of HHS
describing how we will come into compliance with the Electronic
Health Care Transactions and Conduct Standards of HIPAA, and we
will be required to comply with the uniform standards for data
reporting, formatting, and coding by October 16, 2003. We
will also be required to comply with the standards relating to
the privacy of individually identifiable health information by
April 14, 2003.

In some cases, we will also have to comply with
applicable state regulations regarding privacy and medical
information.

13



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##### Table of Contents



In addition to its administrative simplification
provisions, HIPAA also imposes criminal penalties for fraud
against any healthcare benefit program, for theft or
embezzlement involving healthcare 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 Department of Health and Human
Services Office of Inspector General, or OIG, to exclude
participants from federal healthcare 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.

OIG Fraud Alerts and Advisory
Opinions.The Office of Inspector
General of DHHS 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 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. The Stark
Law applies to our products and services, and we believe our
relationships comply with the law. However, if our practices are
found to violate the Stark Law, 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 recently 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 new regulations. However, we believe
that those 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.

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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. To our knowledge, we are not currently the
subject of any investigation. Any future 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.Federal and state laws protect confidentiality of medical
records and information. We maintain medical records for each
patient to whom we dispense drugs. We are thus subject to some
of these medical record and patient confidentiality laws. In
addition, we expect to become subject to DHHS rules recently
proposed to ensure integrity and confidentiality of patient
data. These rules, if adopted, would require mandatory security
standards for entities which maintain or transmit health
information electronically. Compliance with new standards to
safeguard electronic medical records could be expensive, harming
our results of operations. The HIPAA statute imposes 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
and patient confidentiality laws to which we are subject. We
intend to comply with the privacy provisions of HIPPA privacy
regulations. While we attempt to comply with all confidentiality
requirements, a violation of any confidentiality law could
subject us to sanctions that could reduce revenues or profits.

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, the federal Balanced Budget Act of 1997
(even after the restoration of some funding in 1999) will
continue to cause significant reductions in spending levels for
the Medicare and Medicaid programs. A more recent example is the
action of a number of state Medicaid agencies to reduce their
reimbursement rates in response to the new AWP prices published
by First Data Bank. Medicare also adopted new AWP pricing for
some drugs effective October 1, 2000, although this pricing
does not apply to drugs that we currently sell.

Laws governing Medicare, Medicaid, 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

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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, 2002, including those who
work in our acute business which we will exit by
December 31, 2002, we had 2062 full-time and
729 part-time employees. Our employees include
approximately 198 full-time and 32 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.

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RISK FACTORS

You should carefully consider the risks and
uncertainties we describe below before investing in Accredo. 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.

We derive a substantial majority of our revenue
and profitability from our relationships with Biogen, Genzyme,
MedImmune and Genentech. The table below shows the concentration
of our revenue derived from these relationships as a percentage
of revenue for the fiscal year ended June 30, 2002. In
fiscal year ended June 30, 2002, the majority of our
hemophilia product was acquired from Baxter Healthcare
Corporation. As a result of the additional revenue we receive
from the acquisition of the SPS business, we expect the products
we distribute that are manufactured by Biogen and Genzyme to
constitute a smaller percentage of our total revenue, however we
will continue to significantly rely on these relationships.

|          |  |               |    |  
|--------- |  | ------------- | -- | -
|          |  | Percentage of
|          |  | Revenue      
|          |  |              
|Biogen    |  |               | 31 | %
|Genzyme   |  |               | 18 | %
|MedImmune |  |               | 10 | %
|Genentech |  |               | 6  | %

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

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

We focus almost exclusively on a limited number
of complex and expensive drugs that serve small patient
populations. The concentration of our revenue related to these
diseases and the associated drugs is shown in the table below as
a percentage of revenue for the fiscal year ending June 30,
2002. As a result of the acquisition of the SPS business, for
future periods we expect Pulmonary Arterial Hypertension to
significantly increase as a percentage of our revenue, while
Multiple Sclerosis and Gaucher Disease will decrease as a
percentage of revenue due to the larger revenue base.

|                                    |  |               |    |  
|----------------------------------- |  | ------------- | -- | -
|                                    |  | Percentage of
|                                    |  | Revenue      
|                                    |  |              
|Multiple Sclerosis                  |  |               | 31 | %
|Hemophilia and Autoimmune Disorders |  |               | 27 | %
|Gaucher Disease                     |  |               | 18 | %
|Respiratory Syncytial Virus         |  |               | 10 | %
|Growth Hormone-Related Disorders    |  |               | 9  | %
|Pulmonary Arterial Hypertension     |  |               | 2  | %

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

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

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



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

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

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



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | other specialty pharmacy distributors;                                                
|
| |  | specialty pharmacy divisions of wholesale drug
    distributors;                      
|
| |  | pharmacy benefit management companies;                                                
|
| |  | hospital-based pharmacies;                                                            
|
| |  | retail pharmacies;                                                                    
|
| |  | home infusion therapy companies;                                                      
|
| |  | manufacturers that sell their products both to
    distributors and directly to users;
|
| |  | comprehensive hemophilia treatment centers; and                                       
|
| |  | other alternative site health care providers.                                         

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

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

We have joint venture relationships with four
medical centers that provide services primarily related to
hemophilia, growth hormone-related disorders and respiratory
syncytial virus. For the fiscal years ended June 30, 2000,
2001 and 2002, we received approximately 12%, 4% and 4%,
respectively, of our income before income taxes from equity in
the net income of unconsolidated joint ventures.

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Since April 2000, we have owned 80% of one of our
joint ventures with Childrens Home Care, Inc. and the
financial results of this joint venture are included in our
consolidated financial results. This consolidated joint venture
represented approximately 10% of our income before income taxes
for the fiscal years ended June 30, 2001 and 2002.

We also provide pharmacy management services to
several medical centers. During 2002, one of our joint ventures
with a medical center was changed to a management relationship.

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



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

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

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

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

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

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



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

We could also be exposed to unknown or contingent
liabilities resulting from the pre-acquisition operations of the
entities we acquire, such as liability for failure to comply
with health care or reimbursement laws. We also face exposure if
Gentiva is not able to fulfill its indemnification obligations
under the terms of our asset purchase agreement. The purchase
price we paid to Gentiva for the SPS business was distributed
directly to the shareholders of Gentiva, and should any
significant payment be required, Gentiva may not have sufficient
funds and may not be able to obtain the funds to satisfy its
potential indemnification obligation to us. We may suffer
impairment of assets or have to bear a liability for which we
are entitled to indemnification but are unable to collect.

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

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



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | lower prices paid by Medicare or Medicaid for the
    drugs that we sell, including lower prices resulting from recent
    revisions in the method of establishing average wholesale price
    (AWP);
|
| |  | below-expected sales or delayed launch of a new
    drug;                                                                                                                                              
|
| |  | price and term adjustments with our drug
    suppliers;                                                                                                                                                
|
| |  | increases in our operating expenses in
    anticipation of the launch of a new drug;                                                                                                                   
|
| |  | product shortages;                                                                                                                                                                                     
|
| |  | inaccuracies in our estimates of the costs of
    ongoing programs;                                                                                                                                    
|
| |  | the timing and integration of our acquisitions;                                                                                                                                                        
|
| |  | changes in governmental regulations;                                                                                                                                                                   
|
| |  | the annual renewal of deductibles and co-payment
    requirements that affect patient ordering patterns;                                                                                               
|
| |  | our provision of drugs to treat seasonal
    illnesses, such as respiratory syncytial virus;                                                                                                           
|
| |  | physician prescribing patterns;                                                                                                                                                                        
|
| |  | general political and economic conditions;                                                                                                                                                             
|
| |  | interest rate fluxuations; and                                                                                                                                                                         
|
| |  | adverse experience in collection of accounts
    receivable.                                                                                                                                           

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

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



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

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

The biopharmaceutical industry is susceptible to
product shortages. Some of the products that we distribute, such
as IVIG and blood-related products, are collected and processed
from human donors. Accordingly, the supply of these products is
highly dependent on human donors and their availability has been
constrained from time to time. For example, an industry wide
recombinant factor VIII product shortage existed for some
time, as a result of the manufacturers being unable to increase
production to meet rising global demand, and has only recently
returned to normal levels. In addition, the SPS business has
historically reported that its revenue growth was negatively
impacted by some product shortages of recombinant coagulation
therapy, which is used in the treatment of hemophilia, as well
as by Bayer Corporations decision in 1999 to begin
directly distributing Prolastin®, an intravenous therapy
used in the treatment of the hereditary disorder Alpha 1
Antirypsin Deficiency. These drugs affected by product shortages
accounted for approximately 14% of the revenues of the SPS
business (including the acute business) for the year ended
December 31, 2001. If these products, or any of the other
drugs that we distribute, are in short supply for long periods
of time, our business could be harmed.

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

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



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | Nutropin® expires October 2002 (growth
    hormone disorders in children) and December 2003 (Turners
    Syndrome);                        
|
| |  | Flolan® expires September 2002 (PPH) and
    April 2007 (secondary pulmonary hypertension due to intrinsic
    pulmonary vascular disease);
|
| |  | AVONEX® expires May 2003;                                                                                                                  
|
| |  | Nutropin® Depot expires July 2007;                                                                                                         
|
| |  | Tracleer expires November 2008;                                                                                                           
|
| |  | Remodulin® expires May 2009.                                                                                                               

A number of other drugs that we sell have had
orphan drug status which has expired. The loss of orphan drug
status or approval of new drugs notwithstanding orphan drug
status, could result in competitive drugs entering the market,
which could harm our business. For example, despite the orphan
drug status of AVONEX®, the FDA recently approved a
competitive drug called Rebif®, which we do not currently
expect to handle.

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

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

Various federal and state government agencies
have been investigating whether the reported AWP of many drugs,
including some that we sell, is an appropriate or accurate
measure of the market price of the drugs. There are also several
whistleblower lawsuits pending against various drug
manufacturers that have been reported in the business press.
These government investigations and lawsuits involve allegations
that manufacturers reported artificially inflated AWP prices of
various drugs to First DataBank. Bayer

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Corporation, one of the Companys suppliers
of clotting factor, agreed to pay $14 million in a
settlement with the federal government and 45 states
regarding these charges. Bayer also entered into a 5 year
corporate integrity agreement with the government, in which
Bayer agreed to provide average selling prices of its drugs to
the government. In a separate action involving alleged inflated
pricing, TAP Pharmaceutical Products agreed to pay federal and
state governments $875 million to settle charges associated
with the marketing of Lupron. Several other manufacturers have
announced that they are also the subject of investigations. U.S.
attorneys in Boston and Philadelphia have recently issued
subpoenas to more than a dozen corporations requesting
information related to TAP. Those receiving subpoenas include
Express Scripts, Inc., Caremark Rx, Inc. and Wellpoint Health
Networks, Inc.


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

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

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

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

Changes in the Medicare, Medicaid or similar
government programs or the amounts paid by those programs for
our services may adversely affect our earnings. For example,
these programs could revise their pricing based on new methods
of calculating the AWP for drugs we handle or could implement
reimbursement methodology based on some value other than AWP. As
a result of the acquisition of the SPS business, we expect the
percentage of our revenues attributable to federal and state
programs to increase. Any reductions in amounts reimbursable by
government programs for our services or changes in regulations
governing such reimbursements could materially and adversely
affect our business, financial condition and results of
operations.

Our business will suffer if we lose
relationships with payors.

We are highly dependent on reimbursement from
non-governmental payors. For the fiscal years ended
June 30, 2000, 2001 and 2002, we derived approximately 82%,
81% and 79% respectively of our gross patient revenue from
non-governmental payors (including self-pay), which included 5%,
4% and 3%, respectively for those periods, from sales to private
physician practices whose ultimate payor is typically Medicare.
In fiscal year 2002, one private payor, Aetna, Inc. and
affiliates accounted for approximately 15% of the Companys
revenue.

Many payors seek to limit the number of providers
that supply drugs to their enrollees. For example, we were
selected by Aetna, Inc. as one of three providers of injectable
medications. From time to time, payors with whom we have
relationships require that we and our competitors bid to keep
their business, and there can be no assurance that we will be
retained or that our margins will not be adversely affected when
that happens. The loss of a payor relationship, for example, our
relationship with Aetna (which is terminable on 90 days

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notice), or an adverse change in the financial
condition of a payor like Aetna, could result in the loss of a
significant number of patients and have a material adverse
effect on our business, financial condition and results of
operations.


We incurred additional debt to acquire the
specialty pharmaceutical services (SPS) business of
Gentiva Health Services, Inc. which may limit our future
financial flexibility.

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



| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A significant portion of our cash flow from
    operations will be dedicated to the payment of principal and
    interest on the debt and will not be available for other
    purposes;                                                       
|
| |  | Our debt covenants will require us to meet
    financial tests, and may impose other limitations that may limit
    our flexibility in planning for and reacting to changes in our
    business, including possible acquisition opportunities;
|
| |  | Our ability to obtain additional financing for
    working capital, capital expenditures, acquisitions, general
    corporate and other purposes may be limited;                                                                              
|
| |  | Failure to meet our debt covenants could result
    in foreclosure by our lenders;                                                                                                                                                            
|
| |  | We may be at a competitive disadvantage to
    similar companies that have less debt; and                                                                                                                                                     
|
| |  | Our vulnerability to adverse economic and
    industry conditions may increase.                                                                                                                                                               

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

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

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

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



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

Disruptions in commercial activities such as
those following the September 2001 terrorist attacks on the U.S.
may adversely impact our results of operations, our ability to
raise capital or our future growth.

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

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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.


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

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

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

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

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

Our formation and our acquisitions have resulted
in the recording of a significant amount of goodwill on our
financial statements. The goodwill was recorded because the fair
value of the net assets acquired was less than the purchase
price. There can be no assurance that we will realize the full
value of this goodwill. We evaluate on an on-going basis whether
events and circumstances indicate that all or some of the
carrying value of goodwill is no longer recoverable, in which
case we would write off the unrecoverable goodwill in a charge
to our earnings. As of June 30, 2002, we had goodwill, net
of accumulated amortization, of approximately
$334.9 million, or 36% of total assets and 71% of
stockholders equity.

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

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

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

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

In order to implement our growth strategy, we
will need substantial capital resources and will incur, from
time to time, short- and long-term indebtedness, the terms of
which will depend on market and other

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conditions. We cannot be certain that existing or
additional financing will be available to us on acceptable
terms, if at all. As a result, we could be unable to fully
pursue our growth strategy. Further, additional financing may
involve the issuance of equity securities that would reduce the
percentage ownership of our then current stockholders.


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

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

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



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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | states to conduct our business. If we are unable
    to maintain our licenses or if states place burdensome
    restrictions or limitations on non-resident pharmacies or
    nurses, this could limit or affect our ability to operate in
    some states which could adversely impact our business and
    results of operations.                                                                      
|
| |  | Federal and state investigations and enforcement
    actions continue to focus on the health care industry,
    scrutinizing a wide range of items such as joint venture
    arrangements, referral and billing practices, product discount
    arrangements, home health care services, dissemination of
    confidential patient information, clinical drug research trials
    and gifts for patients.
|
| |  | The False Claims Act encourages private
    individuals to file suits on behalf of the government against
    health care providers such as us. Such suits could result in
    significant financial sanctions or exclusion from participation
    in the Medicare and Medicaid programs.                                                                                                                

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

Our common stock is traded on the Nasdaq National
Market. The market price of our common stock could fluctuate
substantially based on a variety of factors, including the
following:



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

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

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

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

We may not benefit from a portion of the SPS
business.

We have not historically distributed many of the
drugs represented by the SPS business of Gentiva. Following the
acquisition, we only retained the twenty products that make up
our primary business. We do not otherwise intend to sell the
other chronic drugs sold by the SPS business or the drugs
represented by the acute portion of the SPS business on a long
term basis. We are assessing strategic options related to the
acute portion of the SPS business. However, we may not be able
to find an available or acceptable strategic alternative for the
acute business, and may have to sell the business for less than
its fair value or shut down the acute business, which could
cause us to incur additional expenses. As we exit the acute
business, our ability to collect the acute accounts receivable
could be adversely affected. For these reasons, we have not
assigned any value to the acute portion of the SPS business we
acquired. In addition, our assessment of the strategic
alternatives for the acute portion of the SPS business or the
actions required to shut down the acute business could divert
management time and company resources which could be better
served elsewhere.

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##### Table of Contents






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 148,000 square feet of space in
an office/warehouse business park in Memphis. The lease on this
space will expire in March 2007, but we have an option to extend
our lease terms for one additional five-year period.

Nashville,
Tennessee.We currently lease
approximately 31,000 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. Our lease expires in August 2005.




Item 3.     Legal
Proceedings

From time to time, we are involved in lawsuits,
claims, audits and investigations arising in the normal course
of our business. In our opinion, in the aggregate these
lawsuits, claims, audits and investigations should not have a
material adverse effect on our business, financial condition, or
results of operations. In addition, the SPS business has several
lawsuits and claims related to its historic operation by
Gentiva, which are being controlled by Gentiva and for which we
are entitled to indemnification from liability by Gentiva.

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##### Table of Contents








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

a) The Company held a special meeting of
stockholders on June 12, 2002 at its offices in Memphis,
TN. Stockholders holding 87.1% of the issued and outstanding
shares of the Companys Common Stock were either present in
person or were represented by proxy.

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



| |                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Proposal to approve the issuance of
    Accredo Health common stock in the acquisition of the specialty
    pharmaceutical services division of Gentiva Health Services,
    Inc. contemplated by the asset purchase agreement, dated as of
    January 2, 2002, by and among Accredo Health, Incorporated,
    Gentiva Health Services, Inc and those identified subsidiaries
    of Gentiva.

|          |            |               |  |           |         |           |  |  |         |  |  |  |           | 
|--------- | ---------- | ------------- |  | --------- | ------- | --------- |  |  | ------- |  |  |  | --------- | 
|Voted For |            | Voted Against |  | Abstained |         | Non-Votes
|          |            |               |  |           |         |          
|          | 20,317,541 |               |  |           | 103,066 |           |  |  | 308,306 |  |  |  | 2,128,248 | 



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | 2. Proposal to approve the Accredo Health,
    Incorporated 2002 Long-Term Incentive Plan.

|          |            |               |  |           |           |           |  |  |         |  |  |  |           | 
|--------- | ---------- | ------------- |  | --------- | --------- | --------- |  |  | ------- |  |  |  | --------- | 
|Voted For |            | Voted Against |  | Abstained |           | Non-Votes
|          |            |               |  |           |           |          
|          | 18,083,753 |               |  |           | 2,518,083 |           |  |  | 127,077 |  |  |  | 2,128,248 | 



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. Proposal to approve an amendment to the
    Companys Amended and Restated Certificate of Incorporation
    to increase the number of authorized shares of common stock from
    50,000,000 to 100,000,000.

|          |            |               |  |           |           |           |  |  |         |  |  |  |         | 
|--------- | ---------- | ------------- |  | --------- | --------- | --------- |  |  | ------- |  |  |  | ------- | 
|Voted For |            | Voted Against |  | Abstained |           | Non-Votes
|          |            |               |  |           |           |          
|          | 19,333,328 |               |  |           | 2,722,745 |           |  |  | 130,827 |  |  |  | 670,261 | 



| |                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4. Proposal to approve the authority of the
    proxies to vote in their discretion upon any motion submitted to
    a vote of the stockholders to adjourn or postpone the special
    meeting to another time and place for the purpose of soliciting
    additional proxies.

|          |            |               |  |           |            |           |  |  |         |  |  |  |         | 
|--------- | ---------- | ------------- |  | --------- | ---------- | --------- |  |  | ------- |  |  |  | ------- | 
|Voted For |            | Voted Against |  | Abstained |            | Non-Votes
|          |            |               |  |           |            |          
|          | 11,557,155 |               |  |           | 10,242,383 |           |  |  | 387,362 |  |  |  | 670,261 | 

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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, 2001 and 2002.

|                                       |  |      |       |     |  |   |       | 
|-------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal Years 2001 and 2002             |  | High |       | Low
|                                       |  |      |       |    
|Fourth Quarter ended June 30, 2002     |  | $    | 64.82 |     |  | $ | 42.00 | 
|Third Quarter ended March 31, 2002     |  |      | 57.89 |     |  |   | 38.02 | 
|Second Quarter ended December 31, 2001 |  |      | 41.80 |     |  |   | 29.76 | 
|First Quarter ended September 30 2001  |  |      | 39.25 |     |  |   | 27.60 | 
|Fourth Quarter ended June 30, 2001     |  |      | 39.95 |     |  |   | 26.06 | 
|Third Quarter ended March 31, 2001     |  |      | 35.54 |     |  |   | 23.50 | 
|Second Quarter ended December 31, 2000 |  |      | 37.21 |     |  |   | 23.25 | 
|First Quarter ended September 30 2000  |  |      | 34.67 |     |  |   | 19.83 | 

Holders

As of September 23, 2002, the approximate
number of registered stockholders was 24,479 including 1,779
stockholders of record and approximately 22,700 persons or
entities holding common stock in nominee name.

Dividend
Policy

We have never paid any cash dividends on our
capital 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, 2002:

|                                                           |       |                      |           |                   |  |                      |       |  |  |  |           |           | 
|---------------------------------------------------------- | ----- | -------------------- | --------- | ----------------- |  | -------------------- | ----- |  |  |  | --------- | --------- | 
|                                                           |       |                      |           |                   |  | (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         |       |                      | 2,990,594 |                   |  | $                    | 30.26 |  |  |  | 1,359,287 |          
|Equity compensation plans not approved by
    stockholders |       |                      | 0         |                   |  |                      | 0     |  |  |  | 0         |          
|                                                           |       |                      |           |                   |  |                      |       |  |  |  |           |          
|                                                           | Total |                      |           | 2,990,594         |  |                      |       |  |  |  |           | 1,359,287 | 
|                                                           |       |                      |           |                   |  |                      |       |  |  |  |           |          

Sales
of Unregistered Securities

None.

29



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##### Table of Contents






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, 1998, 1999, 2000, 2001 and 2002 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,                 
|                                                                                                                 |                                        |                                      
|                                                                                                                 |                                        | 1998                                  |        | 1999    |         | 2000 |        | 2001    |         | 2002(2)
|                                                                                                                 |                                        |                                       |        |         |         |      |        |         |         |        
|                                                                                                                 |                                        |                                      
|                                                                                                                 |                                        | (in thousands, except per share data)
|Statements of Operations Data:                                                                                   |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        
|Revenues:                                                                                                        |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        
|                                                                                                                 | Net patient revenue                    |                                       | $      | 170,002 |         |      | $      | 244,158 |         |         | $      | 335,601 |         |   | $      | 446,007 |         |   | $      | 633,249 |        
|                                                                                                                 | Other revenue                          |                                       |        | 9,806   |         |      |        | 12,277  |         |         |        | 15,432  |         |   |        | 14,985  |         |   |        | 18,257  |        
|                                                                                                                 | Equity in net income of joint ventures |                                       |        | 1,150   |         |      |        | 1,919   |         |         |        | 2,002   |         |   |        | 1,148   |         |   |        | 2,067   |        
|                                                                                                                 |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        
|                                                                                                                 |                                        | Total revenues                        |        |         | 180,958 |      |        |         | 258,354 |         |        |         | 353,035 |   |        |         | 462,140 |   |        |         | 653,573 | 
|Operating expenses:                                                                                              |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        
|                                                                                                                 | Cost of sales                          |                                       |        | 154,046 |         |      |        | 220,517 |         |         |        | 300,973 |         |   |        | 395,365 |         |   |        | 544,902 |        
|                                                                                                                 | General and administrative             |                                       |        | 12,489  |         |      |        | 17,637  |         |         |        | 23,831  |         |   |        | 29,871  |         |   |        | 45,571  |        
|                                                                                                                 | Bad debts                              |                                       |        | 3,165   |         |      |        | 4,739   |         |         |        | 6,117   |         |   |        | 6,131   |         |   |        | 5,833   |        
|                                                                                                                 | Restructuring charge                   |                                       |        |        |         |      |        |        |         |         |        |        |         |   |        |        |         |   |        | 3,893   |        
|                                                                                                                 | Depreciation and amortization          |                                       |        | 3,861   |         |      |        | 3,911   |         |         |        | 3,397   |         |   |        | 4,263   |         |   |        | 3,675   |        
|                                                                                                                 |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        
|                                                                                                                 |                                        | Total operating expenses              |        |         | 173,561 |      |        |         | 246,804 |         |        |         | 334,318 |   |        |         | 435,630 |   |        |         | 603,874 | 
|                                                                                                                 |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        
|Operating income                                                                                                 |                                        |                                       | 7,397  |         |         |      | 11,550 |         |         |         | 18,717 |         |         |   | 26,510 |         |         |   | 49,699 |        
|Interest expense (income), net                                                                                   |                                        |                                       | 3,552  |         |         |      | 3,165  |         |         |         | 2,136  |         |         |   | (2,770 | )       |         |   | (359   | )      
|                                                                                                                 |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        
|Income before minority interest in income of
    consolidated joint venture, income taxes and extraordinary item |                                        |                                       | 3,845  |         |         |      | 8,385  |         |         |         | 16,581 |         |         |   | 29,280 |         |         |   | 50,058 |        
|Minority interest in income of cons. joint venture                                                               |                                        |                                       |       |         |         |      |       |         |         |         | (177   | )       |         |   | (692   | )       |         |   | (1,273 | )      
|                                                                                                                 |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        
|Income before income taxes and extraord. Item                                                                    |                                        |                                       | 3,845  |         |         |      | 8,385  |         |         |         | 16,404 |         |         |   | 28,588 |         |         |   | 48,785 |        
|Income tax expense                                                                                               |                                        |                                       | 2,420  |         |         |      | 4,003  |         |         |         | 6,508  |         |         |   | 11,333 |         |         |   | 19,025 |        
|                                                                                                                 |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        
|Income before extraordinary item                                                                                 |                                        |                                       | 1,425  |         |         |      | 4,382  |         |         |         | 9,896  |         |         |   | 17,255 |         |         |   | 29,760 |        
|Extraordinary item for early extinguishment of
    debt, net of income tax benefit                               |                                        |                                       |       |         |         |      | (1,254 | )       |         |         |       |         |         |   |       |         |         |   |       |        
|                                                                                                                 |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        
|Net income                                                                                                       |                                        |                                       | 1,425  |         |         |      | 3,128  |         |         |         | 9,896  |         |         |   | 17,255 |         |         |   | 29,760 |        
|Mandatorily redeemable cumulative preferred stock
    dividends                                                  |                                        |                                       | (2,043 | )       |         |      | (1,617 | )       |         |         |       |         |         |   |       |         |         |   |       |        
|                                                                                                                 |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        
|Net income (loss) to common stockholders                                                                         |                                        | $                                     | (618   | )       |         | $    | 1,511  |         |         | $       | 9,896  |         |         | $ | 17,255 |         |         | $ | 29,760 |        
|                                                                                                                 |                                        |                                       |        |         |         |      |        |         |         |         |        |         |         |   |        |         |         |   |        |        

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|                                            |  |                                       |       |      |  |      |       |      |  |         |      |  |  |   |      |  |  |   |      | 
|------------------------------------------- |  | ------------------------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ------- | ---- |  |  | - | ---- |  |  | - | ---- | 
|                                            |  |                                      
|                                            |  | Years Ended June 30,                 
|                                            |  |                                      
|                                            |  | 1998                                  |       | 1999 |  | 2000 |       | 2001 |  | 2002(2)
|                                            |  |                                       |       |      |  |      |       |      |  |        
|                                            |  |                                      
|                                            |  | (in thousands, except per share data)
|Diluted earnings per common share:          |  |                                       |       |      |  |      |       |      |  |         |      |  |  |   |      |  |  |   |      | 
|Income before extraordinary item            |  | $                                     | 0.11  |      |  | $    | 0.28  |      |  | $       | 0.45 |  |  | $ | 0.66 |  |  | $ | 1.09 | 
|Extraordinary item                          |  |                                       |      |      |  |      | (0.08 | )    |  |         |     |  |  |   |     |  |  |   |     | 
|Preferred stock dividends                   |  |                                       | (0.16 | )    |  |      | (0.10 | )    |  |         |     |  |  |   |     |  |  |   |     | 
|                                            |  |                                       |       |      |  |      |       |      |  |         |      |  |  |   |      |  |  |   |      | 
|Net income (loss) to common stockholders(1) |  | $                                     | (0.05 | )    |  | $    | 0.10  |      |  | $       | 0.45 |  |  | $ | 0.66 |  |  | $ | 1.09 | 
|                                            |  |                                       |       |      |  |      |       |      |  |         |      |  |  |   |      |  |  |   |      | 
|Cash dividends declared on common stock     |  | $                                     |      |      |  | $    |      |      |  | $       |     |  |  | $ |     |  |  | $ |     | 
|                                            |  |                                       |       |      |  |      |       |      |  |         |      |  |  |   |      |  |  |   |      | 

|                                                  |  |          |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|------------------------------------------------- |  | -------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                  |  |         
|                                                  |  | June 30,
|                                                  |  |         
|                                                  |  | 1998     |         | 1999 |  | 2000 |         | 2001 |  | 2002
|                                                  |  |          |         |      |  |      |         |      |  |     
|Balance Sheet Data:                               |  |          |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents                         |  | $        | 5,087   |      |  | $    | 5,542   |      |  | $    | 10,204  |  |  | $ | 54,520  |  |  | $ | 42,913  | 
|Working capital                                   |  |          | 23,377  |      |  |      | 28,906  |      |  |      | 35,639  |  |  |   | 88,288  |  |  |   | 309,780 | 
|Total assets                                      |  |          | 114,049 |      |  |      | 146,746 |      |  |      | 205,229 |  |  |   | 289,244 |  |  |   | 924,829 | 
|Long-term debt                                    |  |          | 36,418  |      |  |      | 20,500  |      |  |      | 37,000  |  |  |   |        |  |  |   | 224,688 | 
|Mandatorily redeemable cumulative preferred stock |  |          | 29,792  |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Stockholders equity                              |  |          | 12,801  |      |  |      | 64,127  |      |  |      | 77,544  |  |  |   | 189,170 |  |  |   | 471,054 | 



---



|    |                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Historical diluted loss per share for the period
    ended June 30, 1998 has been calculated using the same
    denominator as used for basic loss per share because the
    inclusion of dilutive securities in the denominator would have
    an anti-dilutive effect.
|   
|(2) | Our results for the fiscal year ended 2002
    include the operations of the SPS business from June 14,
    2002 through June 30, 2002.                                                                                                                                 




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 specialized contract pharmacy services
for the treatment of patients with costly, chronic diseases. We
derive revenues primarily from the sale of drugs to patients.

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The following table presents the percentage of
our total revenue generated from sales and services provided
with respect to the diseases that we primarily serviced in the
years ended June 30:

|                                    |  |      |    |      |  |      |    |   |  |  |    |  
|----------------------------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                                    |  | 2000 |    | 2001 |  | 2002
|                                    |  |      |    |      |  |     
|Multiple Sclerosis                  |  |      | 37 | %    |  |      | 38 | % |  |  | 31 | %
|Hemophilia and Autoimmune Disorders |  |      | 21 | %    |  |      | 21 | % |  |  | 27 | %
|Gaucher Disease                     |  |      | 30 | %    |  |      | 23 | % |  |  | 18 | %
|Respiratory Syncytial Virus         |  |      | 1  | %    |  |      | 6  | % |  |  | 10 | %
|Growth Hormone-Related Disorders    |  |      | 7  | %    |  |      | 9  | % |  |  | 9  | %
|Pulmonary Arterial Hypertension     |  |      |   |      |  |      |   |   |  |  | 2  | %

As a result of the additional revenue that we
receive from the acquisition of the SPS business, these
percentages will change. We expect the products we sell that are
manufactured by Biogen and Genzyme to constitute a smaller
percentage of our total revenue and the products that we sell
for Pulmonary Arterial Hypertension to constitute a higher
percentage of our total revenue.

Sales and services with respect to Multiple
Sclerosis, Gaucher Disease, Respiratory Syncytial Virus,
Pulmonary Arterial Hypertension and growth hormone-related
disorders are dependent upon our preferred relationships with
Biogen, Genzyme, MedImmune, GlaxoSmithKline, Actelion
Pharmaceuticals U.S., United Therapeutics and Genentech. Our
agreements with these 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, upon between 30 and 90 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 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 some cases up to five years after) the term of
the agreement.

We purchase drugs for hemophilia and autoimmune
disorders from all available sources on a volume discount basis.
We are one of the national assignment of benefits providers
selected by MedImmune, Inc. to distribute drugs for respiratory
syncytial virus. During 2002, we began providing specialized
contract pharmacy services for the treatment of patients with
pulmonary arterial hypertension. We distribute all three of the
drug therapies for this disease.

We recognize revenue at the time we ship drugs 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.

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
respiratory syncytial virus. 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, and in our 80% owned joint venture under the
consolidated method of accounting. Our equity interest in the
net income of the 50% owned joint ventures represented
approximately

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12%, 4% and 4% of our income before income taxes
for the years ended June 30, 2000, 2001 and 2002,
respectively.


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 for patient accounts receivable which 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, pay us directly or indirectly for some of the drugs
that we sell at the drugs average wholesale price
(AWP) or a percentage discount off AWP. Recent
government investigations into the reporting of AWP by drug
manufacturers have lead First DataBank, Inc. to publish a Market
Price Survey of 437 drugs that significantly reduces
reimbursement for a number of the clotting factor and IVIG
products we sell.

A number of state Medicaid agencies now pay us
for clotting factor at the prices shown on the Market Price
Survey or at a percentage discount off those prices. Other
states have not changed their pricing structure or have changed
back to their pre-Market Price Survey reimbursement rates. In
addition, the Health Care Financing Administration
(HCFA) had previously announced that Medicare
intermediaries should calculate the amount that they pay for
clotting factor and 49 other drugs by using the lower prices on
the First DataBank Market Price Survey. However, the Medicare
intermediaries have not adopted the lower pricing policy to
date. It is possible that all of the Medicare intermediaries
could adopt the lower pricing at anytime.

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
18%, 19% and 21% of gross patient revenues (excluding the acute
business acquired from Gentiva) for the years ended
June 30, 2000, 2001 and 2002, 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 will be higher than the
comparable percentages experienced by Accredo prior to the
acquisition.

Acquisition

On June 13, 2002, we acquired the Specialty
Pharmaceutical Services Division (SPS business) of
Gentiva Health Services, Inc. We acquired substantially all of
the assets used in the SPS business including 100% of the
outstanding stock in three of Gentivas subsidiaries that
were exclusively in the business conducted by the SPS business.
The SPS business provides specialized contract 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 is also a leading
provider of contract pharmacy and related services to patients
with pulmonary arterial hypertension. As a result of the
acquisition, we have become the leading provider of specialized
contract pharmacy and related services, measured by revenue. The
aggregate purchase price was $462.3 million (including
$12.2 million of acquisition related costs) and consisted
of $215.6 million of cash and 5,060,976 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.

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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,    
|                                                 |                                        |                         
|                                                 |                                        | 2000                     |      | 2001 |       | 2002
|                                                 |                                        |                          |      |      |       |     
|Revenues:                                        |                                        |                          |      |      |       |      |     |      |       |  |     |     
|                                                 | Net patient revenue                    |                          |      | 95.0 | %     |      |     | 96.5 | %     |  |     | 96.9 | %    
|                                                 | Other revenue                          |                          |      | 4.4  |       |      |     | 3.2  |       |  |     | 2.8  |      
|                                                 | Equity in net income of joint ventures |                          |      | 0.6  |       |      |     | 0.3  |       |  |     | 0.3  |      
|                                                 |                                        |                          |      |      |       |      |     |      |       |  |     |     
|                                                 |                                        | Total revenues           |      |      | 100.0 |      |     |      | 100.0 |  |     |      | 100.0 | 
|Operating expenses:                              |                                        |                          |      |      |       |      |     |      |       |  |     |     
|                                                 | Cost of sales                          |                          |      | 85.2 |       |      |     | 85.6 |       |  |     | 83.4 |      
|                                                 | General and administrative             |                          |      | 6.8  |       |      |     | 6.5  |       |  |     | 7.0  |      
|                                                 | Bad debts                              |                          |      | 1.7  |       |      |     | 1.3  |       |  |     | 0.9  |      
|                                                 | Restructuring charge                   |                          |      |     |       |      |     |     |       |  |     | 0.6  |      
|                                                 | Depreciation and amortization          |                          |      | 1.0  |       |      |     | .9   |       |  |     | .5   |      
|                                                 |                                        |                          |      |      |       |      |     |      |       |  |     |     
|                                                 |                                        | Total operating expenses |      |      | 94.7  |      |     |      | 94.3  |  |     |      | 92.4  | 
|                                                 |                                        |                          |      |      |       |      |     |      |       |  |     |     
|Operating income                                 |                                        |                          | 5.3  |      |       |      | 5.7 |      |       |  | 7.6 |     
|Interest income (expense), net                   |                                        |                          | (0.6 | )    |       |      | .6  |      |       |  | .1  |     
|                                                 |                                        |                          |      |      |       |      |     |      |       |  |     |     
|Income before minority interest and income taxes |                                        |                          | 4.7  |      |       |      | 6.3 |      |       |  | 7.7 |     
|Minority interest                                |                                        |                          | .1   |      |       |      | .1  |      |       |  | .2  |     
|                                                 |                                        |                          |      |      |       |      |     |      |       |  |     |     
|Income before income taxes                       |                                        |                          | 4.6  |      |       |      | 6.2 |      |       |  | 7.5 |     
|Income tax expense                               |                                        |                          | 1.8  |      |       |      | 2.5 |      |       |  | 2.9 |     
|                                                 |                                        |                          |      |      |       |      |     |      |       |  |     |     
|Net income                                       |                                        |                          | 2.8  | %    |       |      | 3.7 | %    |       |  | 4.6 | %   
|                                                 |                                        |                          |      |      |       |      |     |      |       |  |     |     

Fiscal Year Ended June 30, 2002
Compared to Fiscal Year Ended June 30, 2001

Revenues.Total
revenues increased 41% from $462.1 million to $653.6
million from fiscal year 2001 to fiscal year 2002. Acquisitions
completed during 2002 accounted for $57.6 million of the
increase in total revenues. Net patient revenues increased 42%
from $446.0 million to $633.2 million from fiscal year
2001 to fiscal year 2002. Acquisitions completed during 2002
accounted for $55.8 million of the increase in net patient
revenues. In fiscal year 2002, we experienced growth in our
products for the treatments of multiple sclerosis, growth
hormone disorders, hemophilia and Gaucher disease and autoimmune
disorders as a result of volume growth with the addition of new
patients, additional sales of product to existing patients and
acquisitions. We also had a significant increase in our seasonal
drug Synagis® for the treatment of Respiratory Synctial
Virus 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 38% from $395.4 million to
$544.9 million from fiscal year 2001 to fiscal year 2002,
which is commensurate with the increase in our revenues
discussed above. As a percentage of revenues, cost of sales
decreased from 85.6% to 83.4% from fiscal year 2001 to fiscal
year 2002 resulting in gross margins of 14.4% in fiscal year
2001 and 16.6% in fiscal year 2002. Gross margins for the
individual products have remained relatively stable; however, a
change in product mix resulted in an increase in the composite
gross margin in fiscal year 2002. The primary drivers were
increased revenues from hemophilia factor, intravenous
immunoglobulin (IVIG) for the treatment of
autoimmune disorders and Flolan® for the treatment of
pulmonary hypertension, 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 $29.9 million to $45.6 million, or 53%,
from fiscal year 2001 to fiscal year 2002. Acquisitions
completed during 2002 accounted for $5.5 million of the
increase in general and administrative expenses. The balance of
the increase was

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primarily the result of increased salaries and
benefits associated with the expansion of our reimbursement,
sales and marketing, administrative and support staffs and the
addition of office space and related furniture and fixtures to
support the revenue growth. General and administrative expenses
represented 6.5% and 7.0% of revenues for fiscal years 2001 and
2002, respectively.


Bad Debts.Bad debts
decreased from $6.1 million to $5.8 million from
fiscal year 2001 to fiscal year 2002. As a percentage of
revenues, bad debt expense decreased from 1.3% to 0.9% from
fiscal year 2001 to fiscal year 2002. The decrease in bad debts
as a percentage of revenues is primarily due to the increased
percentage of our revenues that was reimbursed by prescription
card benefits versus major medical benefit plans. The majority
of the reimbursement for both AVONEX® and Synagis® is
being provided by prescription card benefit plans, and therefore
is subject to much lower co-payment and deductible amounts
(typically $15-$30 per prescription) resulting in lower bad debt.

Restructuring Charge.In connection with the acquisition of
the SPS business, we recorded a restructuring charge of
$3.9 million. The charge includes a $3.6 million
write-off (of which $3.2 million is non-cash) of a software
application we were developing that will not be implemented as a
result of the decision to enhance and implement company wide the
software application acquired with the SPS business. The
restructuring charge also includes $.3 million for future
lease commitments that will be abandoned once the facility
integration plan related to the acquisition has been completed.

Depreciation and Amortization.Depreciation expense increased from
$1,509,000 to $2,338,000 from fiscal year 2001 to fiscal year
2002 as a result of purchases of property and equipment
associated with our revenue growth and the expansion of our
leasehold facility improvements. Amortization expense associated
with goodwill and other intangible assets decreased from
$2,754,000 to $1,337,000 from fiscal year 2001 to fiscal year
2002 due to the adoption of Statement of Financial Accounting
Standards (SFAS) 142, Goodwill and Other
Intangible Assets, during the first quarter of fiscal year
2002. The application of the non-amortization of goodwill
provisions resulted in a reduction in amortization expense (net
of income taxes) of approximately $1.5 million or $0.06 per
diluted share.

Interest Income/Expense, Net.Interest income, net decreased from
$2,770,000 to $359,000 from fiscal year 2001 to fiscal year
2002. The decrease is due to a decrease in the average amount of
cash invested during the year primarily as a result of cash used
for acquisitions and earn-out payments related to prior year
acquisitions and a decrease in the interest rate earned on the
amounts invested. In addition, we incurred $230 million in
debt on June 13, 2002 to acquire the SPS business of
Gentiva Health Services.

Income Tax Expense.Our effective tax rate decreased from
39.6% to 39.0% from fiscal year 2001 to fiscal year 2002. The
decrease in the effective tax rate is primarily due to the
adoption of the non-amortization provisions of SFAS 142
discussed above. The difference between the recognized effective
tax rate and the statutory tax rate is primarily attributed to
state income taxes.

Fiscal Year Ended June 30, 2001
Compared to Fiscal Year Ended June 30, 2000

Revenues.Total
revenues increased 31% from $353.0 million to
$462.1 million from fiscal year 2000 to fiscal year 2001.
Net patient revenues increased 33% from $335.6 million to
$446.0 million from fiscal year 2000 to fiscal year 2001.
In fiscal year 2001, we experienced growth in our products for
the treatments of multiple sclerosis, growth hormone disorders,
hemophilia autoimmune disorders and Gaucher disease as a result
of volume growth with 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 Respiratory Synctial Virus as a result of increased
patient volume. Our sales of intravenous immunoglobulin
(IVIG) increased due to the acquisition of
Pharmacare Resources, Inc., which added approximately
$3.1 million in revenues during the year ended
June 30, 2001. We also benefited from the addition of new
and expanded contracts with managed care organizations. In June
2000, we were selected by Aetna U.S. Healthcare to be a
preferred distributor of injectable medications to Aetna
U.S. Healthcare members and participating physicians.

Equity in net income of joint ventures decreased
$854,000 from fiscal year 2000 to fiscal year 2001 primarily due
to the acquisition of an additional 30% interest in the joint
venture Childrens Hemophilia

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##### Table of Contents



Services effective April 1, 2000. The
results of operations of the joint venture have been
consolidated with our results of operations since the date of
acquisition and, therefore, are no longer recorded using the
equity method of accounting.


Cost of Sales.Cost
of sales increased 31% from $301.0 million to
$395.4 million from fiscal year 2000 to fiscal year 2001,
which is commensurate with the increase in our revenues
discussed above. As a percentage of revenues, cost of sales
increased from 85.2% to 85.6% from fiscal year 2000 to fiscal
year 2001 resulting in gross margins of 14.8% in fiscal year
2000 and 14.4% in fiscal year 2001. Gross margins for the
individual products have remained relatively stable; however, a
change in product mix resulted in a decrease in the composite
gross margin in fiscal year 2001. The primary drivers were
increased revenues from Synagis® for the treatment of
Respiratory Synctial Virus and AVONEX® for the treatment of
multiple sclerosis, which have higher acquisition costs as a
percentage of revenue than most of the other products we
distribute.

General and Administrative.General and administrative expenses
increased from $23.8 million to $29.9 million, or 26%,
from fiscal year 2000 to fiscal year 2001. This increase was
primarily the result of increased salaries and benefits
associated with the expansion of our reimbursement, sales and
marketing, administrative and support staffs and the addition of
office space and related furniture and fixtures to support the
revenue growth. General and administrative expenses represented
6.8% and 6.5% of revenues for fiscal years 2000 and 2001,
respectively.

Bad Debts.Bad debts
were $6.1 million in both fiscal years 2000 and 2001. As a
percentage of revenues, bad debt expense decreased from 1.7% to
1.3% from fiscal year 2000 to fiscal year 2001. The decrease in
bad debts as a percentage of revenues is primarily due to the
increased percentage of our revenues that was reimbursed by
prescription card benefits versus major medical benefit plans.
The majority of the reimbursement for both AVONEX® and
Synagis® is being provided by prescription card benefit
plans, and therefore is subject to much lower co-payment and
deductible amounts (typically $15-$30 per prescription)
resulting in lower bad debt. AVONEX® and Synagis®
represented 44% of our revenues in fiscal year 2001 compared to
38% in fiscal year 2000.

Depreciation and Amortization.Depreciation expense increased from
$1,094,000 to $1,509,000 from fiscal year 2000 to fiscal year
2001 as a result of purchases of property and equipment
associated with our revenue growth and the expansion of our
leasehold facility improvements. Amortization expense associated
with goodwill and other intangible assets increased from
$2,303,000 to $2,754,000 from fiscal year 2000 to fiscal year
2001 due to acquisitions made during fiscal years 2000 and 2001.

Interest Income/Expense, Net.Interest expense, net amounted to
$2,136,000 in fiscal year 2000 compared to interest income, net
of $2,770,000 in fiscal year 2001. This change amounting to
$4,906,000 is due to the repayment of our debt with the proceeds
of the stock offering completed during the first quarter of
fiscal year 2001, the investment of the excess proceeds from the
offering and the sale of an interest rate swap for $350,000.

Income Tax Expense.Our effective tax rate decreased from
39.7% to 39.6% from fiscal year 2000 to fiscal year 2001. The
difference between the recognized effective tax rate and the
statutory tax rate is primarily attributed to approximately
$816,000 and $788,000 of nondeductible amortization expense in
fiscal years 2000 and 2001, respectively, and state income taxes.

Liquidity and Capital Resources

As of June 30, 2002 and June 30, 2001,
we had working capital of $309.8 million and
$88.3 million, respectively. Our net cash provided by
operating activities was approximately $34.1 million for
the year ended June 30, 2002 and $23.2 million for the
year ended June 30, 2001. These increases are due primarily
to our net income growth and the timing of the collection of
receivables, inventory purchases and payments of accounts
payable and accrued expenses.

Net cash used by investing activities was
$266.0 million for the year ended June 30, 2002 and
$33.1 million for the year ended June 30, 2001. Cash
used by investing activities in the year ended June 30,
2002 consisted primarily of $256.2 million for acquisitions
most of which related to the acquisition of the SPS

36



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business, $8.9 million for purchases of
property and equipment, $2.0 million for net sales of
marketable securities and $2.9 million of undistributed
earnings from our joint ventures. Cash used by investing
activities in fiscal 2001 consisted primarily of
$27.1 million for acquisitions, $2.6 million for
purchases of property and equipment, $2.0 million for net
purchases of marketable securities and $1.3 million of
undistributed earnings from our joint ventures.


Net cash provided by financing activities was
$220.2 million for the year ended June 30, 2002 and
$54.2 million for the year ended June 30, 2001. Cash
provided by financing activities for the year ended
June 30, 2002 consisted primarily of $223.9 million of
net borrowings on our credit facility, which was used to acquire
the SPS business in June 2002. Cash provided by financing
activities for the year ended June 30, 2001 consisted
primarily of $88.3 million of net proceeds from the common
stock offering plus $3.1 million from the proceeds of stock
option exercises less $37.2 million of net repayments on
the revolving line of credit.

Historically, we have funded our operations and
continued internal growth through cash provided by operations.
Capital expenditures amounted to $8.9 million in fiscal
year 2002 and $2.6 million in fiscal year 2001. We
anticipate that our capital expenditures for the fiscal year
ending June 30, 2003 will consist primarily of additional
computer hardware, a fully integrated pharmacy and reimbursement
software system and costs to build out and furnish additional
space needed to meet the needs of our growth. We expect the cost
of our capital expenditures in fiscal year 2003 to be
approximately $17.0 million, exclusive of any acquisitions
of businesses. We expect to fund these expenditures through cash
provided by operating activities and/or borrowings under the
revolving credit agreement with our bank. In addition, in
connection with our acquisition of BioPartners in Care, Inc.
made during fiscal year 2002, we may be obligated to make up to
$16 million in earn-out payments during the next twelve
months.

During 2002, we amended and restated our
$60 million revolving credit facility with Bank of America,
N.A. and other participating banks to increase the size of the
credit facility to $325 million. The credit facility
consists of a $125 million revolving commitment 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. As of
June 30, 2002, the total amount outstanding under the
credit facility was $230 million, which included $30
million under the revolving credit facility, the
$75 million Tranche A Term Loan and the
$125 million Tranche B Term Loan.

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

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

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

The credit agreement also requires us to enter
into an interest rate swap agreement within 60 days of
June 13, 2002 to protect against fluctuations in interest
rates. The credit agreement requires 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, we 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.

Previously, we had effectively converted, for the
period through October 31, 2001, $25.0 million of
floating-rate borrowings to fixed-rate borrowings. We had
secured a 5.5% fixed interest rate (exclusive of the

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margin rate) using an interest rate swap
agreement. On August 21, 2000, in conjunction with the
repayment of the outstanding principal balance of our revolving
line of credit, we surrendered our swap agreement and received
$350,000 in consideration for the early termination of the
agreement.


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

The following table sets forth a summary of our
contractual cash obligations as of June 30, 2002. The
long-term debt is reflected on our balance sheet, while the
lease commitments are disclosed as future obligations in the
notes to the financial statements.

Payments due for the year ending June 30 (in
thousands):

|                 |                           |       |       |       |        |      |       |        |        |      |       |            |        |  |       |        |        |  |     |        |        |  |   |         |         | 
|---------------- | ------------------------- | ----- | ----- | ----- | ------ | ---- | ----- | ------ | ------ | ---- | ----- | ---------- | ------ |  | ----- | ------ | ------ |  | --- | ------ | ------ |  | - | ------- | ------- | 
|                 |                           | 2003  |       | 2004  |        | 2005 |       | 2006   |        | 2007 |       | Thereafter
|                 |                           |       |       |       |        |      |       |        |        |      |       |           
|Long-term debt:  |                           |       |       |       |        |      |       |        |        |      |       |            |        |  |       |        |        |  |     |        |        |  |   |        
|                 | Revolving credit facility |       | $     |      |        |      | $     |       |        |      | $     |           |        |  | $     |       |        |  | $   | 30,000 |        |  | $ |        |        
|                 | Tranche A term loan       |       |       | 3,750 |        |      |       | 15,000 |        |      |       | 16,875     |        |  |       | 22,500 |        |  |     | 16,875 |        |  |   |        |        
|                 | Tranche B term loan       |       |       | 1,562 |        |      |       | 1,250  |        |      |       | 1,250      |        |  |       | 1,250  |        |  |     | 15,781 |        |  |   | 103,907 |        
|Operating leases |                           |       | 7,165 |       |        |      | 5,914 |        |        |      | 4,692 |            |        |  | 2,166 |        |        |  | 587 |        |        |  |  |        
|                 |                           |       |       |       |        |      |       |        |        |      |       |            |        |  |       |        |        |  |     |        |        |  |   |        
|                 |                           | Total |       | $     | 12,477 |      |       | $      | 22,164 |      |       | $          | 22,817 |  |       | $      | 25,916 |  |     | $      | 63,243 |  |   | $       | 103,907 | 
|                 |                           |       |       |       |        |      |       |        |        |      |       |            |        |  |       |        |        |  |     |        |        |  |   |        

Critical Accounting Policies and
Estimates

Our consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States. 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.

Management has discussed the development and
selection of the following accounting policies and estimates
with the Audit Committee of our Board of Directors and with our
independent auditors.



| |                                
| | -------------------------------
| | 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 $10-$15 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 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.

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| |                                    
| | -----------------------------------
| | 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.



| |                        
| | -----------------------
| | Medical Claims Reserves

We maintain self-insured 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 medical 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.

Impact of Recently Issued Accounting
Standards

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141,
Business Combinations, which requires all business
combinations initiated after June 30, 2001 to be accounted
for under the purchase method. SFAS No. 141 also sets forth
guidelines for applying the purchase method of accounting in the
determination of intangible assets, including goodwill acquired
in a business combination, and expands financial disclosures
concerning business combinations completed after June 30,
2001. The application of SFAS No. 141 did not effect any of
our previously reported amounts included in goodwill or other
intangible assets.

Effective July 1, 2001, we early adopted
SFAS No. 142, Goodwill and Other Intangible Assets,
which establishes new accounting and reporting requirements for
goodwill and other intangible assets. Under SFAS 142, all
goodwill amortization ceased effective July 1, 2001 and
goodwill was tested for impairment. Impairment tests are
required to be performed at the date of adoption of
SFAS 142 and at least annually thereafter. Absent any
impairment indicators, we perform our annual impairment tests
during the fourth quarter. The impairment tests performed at
adoption and in the fourth quarter of 2002 resulted in no
adjustment to the carrying value of goodwill.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.SFAS
No. 144 removes goodwill from its scope and clarifies other
implementation issues related to SFAS No. 121. SFAS
No. 144 also provides a single framework for evaluating
long-lived assets to be disposed of by sale. The provisions of
this statement will be effective in our fiscal year 2003. We do
not expect the application of this new accounting standard to
have a material effect on our financial position or results of
operations.

In April 2002, the FASB issued SFAS No. 145,
Recission of FASB Statements No. 4, 44 and 62, Amendment
of FASB Statement No. 13, and Technical Corrections.SFAS No. 145 requires gains and losses on
extinguishment of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as
previously required under SFAS No. 4. SFAS No. 145
also amends SFAS No. 13 to require certain modifications to
capital leases treated as a sale-leaseback and modifies the
accounting for sub-leases when the original lessee remains a
secondary obligor or guarantor. The provisions of this Statement
are generally effective for years beginning after May 15,
2002.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition
for Certain Employer Termination Benefits

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and Other Costs to Exit an
Activity . SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under
EITF 94-3, a liability for an exit cost was recognized at
the date of an entitys commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002.


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. Historically, we have been able to pass
all, or a portion, of the effect of such increases to the
biopharmaceutical manufacturers pursuant to negotiated
adjustments made under our preferred distribution agreements. As
a result, 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 use derivative financial instruments to manage
some of our exposure to rising interest rates on our
variable-rate debt, primarily by entering into variable-to-fixed
interest rate swaps. We have fixed the interest rate through
July 21, 2003 on $120.0 million of our variable-rate
debt through the use of a variable-to-fixed interest rate swap.
As a result, we will not benefit from any decrease in interest
rates nor will we be subjected to any detriment from rising
interest rates on this portion of our debt during the period of
the swap agreement. Accordingly, a 100 basis point decrease in
interest rates along the entire yield curve would not increase
pre-tax income by $1.2 million for the year as would be
expected without this financial instrument. However, a 100 basis
point increase in interest rates along the entire yield curve
would also not decrease pre-tax income by $1.2 million for
the same period as a result of using this derivative financial
instrument.

For the remaining portion of our variable-rate
debt, we have not hedged against our interest rate risk
exposure. As a result, we will benefit from decreasing interest
rates, but we will also be harmed by rising interest rates on
this portion of our debt. Accordingly, if we maintain our
current level of total debt, a 100 basis point decrease in
interest rates along the entire yield curve would result in an
increase in pre-tax income of approximately $1.1 million
for the year. However, a 100 basis point increase in interest
rates would result in a decrease in pre-tax income of
$1.1 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

None.

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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 2002 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 2002 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 2002 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 2002 Annual Meeting of
Stockholders.

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##### Table of Contents






PART IV




Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K



| |     |                                       
| | --- | --------------------------------------
| | (a) | Document filed as part of this Report:

|    |  |                                                                                                                                                                                                                                                    |  |      |      | 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|    |  |                                                                                                                                                                                                                                                    |  | Page
|    |  |                                                                                                                                                                                                                                                    |  |     
|(1) |  | Financial Statements:                                                                                                                                                                                                                              |  |      |      | 
|    |  | Report of Independent Auditors                                                                                                                                                                                                                     |  |      | F-1  | 
|    |  | Consolidated Balance Sheets at June 30, 2001
    and 2002                                                                                                                                                                                          |  |      | F-2  | 
|    |  | Consolidated Statements of Income for the years
    ended June 30, 2000, 2001 and 2002                                                                                                                                                             |  |      | F-3  | 
|    |  | Consolidated Statements of Stockholders
    Equity for the years ended June 30, 2000, 2001 and 2002                                                                                                                                               |  |      | F-4  | 
|    |  | Consolidated Statements of Cash Flows for the
    years ended June 30, 2000, 2001 and 2002                                                                                                                                                         |  |      | F-5  | 
|    |  | Notes to Consolidated Financial Statements                                                                                                                                                                                                         |  |      | F-6  | 
|(2) |  | Financial Statement Schedules:                                                                                                                                                                                                                     |  |      |      | 
|    |  | Schedule II  Consolidated
    Schedule  Valuation and Qualifying Accounts                                                                                                                                                                        |  |      | F-22 | 
|    |  | 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) | We filed a report on Form 8-K dated
    June 5, 2002 to report an amendment reflecting an increase
    in available credit in our bank financing commitment letter that
    was associated with our Registration Statement on Form S-4
    that was filed on May 10, 2002.                                                                                  
|
| |     | We filed a report on Form 8-K dated
    June 13, 2002 to report that Accredo Health, Incorporated
    acquired substantially all of the assets of the specialty
    pharmaceutical services business (SPS Business) of
    Gentiva Health Services, Inc., pursuant to the Asset
    Purchase Agreement entered into by the parties on
    January 2, 2002.

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REPORT OF INDEPENDENT AUDITORS

Board of Directors

Accredo Health, Incorporated


We have audited the accompanying consolidated
balance sheets of Accredo Health, Incorporated (the
Company) as of June 30, 2001 and 2002, and the
related consolidated statements of income, stockholders
equity and cash flows for each of the three years in the period
ended June 30, 2002. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). 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
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the 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, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Accredo Health, Incorporated
at June 30, 2001 and 2002, and the results of its
operations and its cash flows for each of the three years in the
period ended June 30, 2002, in conformity with accounting
principles generally accepted in the United States. 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.

As discussed in Notes 2 and 7 to the
consolidated financial statements, the Company adopted Statement
of Financial Accounting Standards No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible
Assets, in 2002.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Memphis, Tennessee

August 16, 2002


F-1



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED

CONSOLIDATED BALANCE SHEETS

(000s omitted, except share
data)


|                            |                                           |                                 |                      |        |         |         |         |         |         |         | 
|--------------------------- | ----------------------------------------- | ------------------------------- | -------------------- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | 
|                            |                                           |                                
|                            |                                           | June 30,                       
|                            |                                           |                                
|                            |                                           | 2001                            |                      | 2002  
|                            |                                           |                                 |                      |       
|ASSETS                     
|Current assets:             |                                           |                                 |                      |        |         |         |         |        
|                            | Cash and cash equivalents                 |                                 | $                    | 54,520 |         |         | $       | 42,913  |        
|                            | Marketable securities                     |                                 |                      | 2,000  |         |         |         |        |        
|                            | Receivables:                              |                                 |                      |        |         |         |         |         |        
|                            |                                           | Patient accounts                |                      |        | 87,760  |         |         |         | 417,011 |        
|                            |                                           | Allowance for doubtful accounts |                      |        | (10,808 | )       |         |         | (81,758 | )      
|                            |                                           |                                 |                      |        |         |         |         |        
|                            |                                           |                                 | 76,952               |        |         |         | 335,253 |        
|                            |                                           | Due from affiliates             |                      |        | 2,440   |         |         |         | 2,255   |        
|                            |                                           | Other                           |                      |        | 13,275  |         |         |         | 22,555  |        
|                            |                                           |                                 |                      |        |         |         |         |        
|                            |                                           |                                 | 92,667               |        |         |         | 360,063 |        
|                            | Inventories                               |                                 |                      | 30,711 |         |         |         | 120,809 |        
|                            | Prepaid expenses and other current assets |                                 |                      | 537    |         |         |         | 3,470   |        
|                            | Deferred income taxes                     |                                 |                      | 4,703  |         |         |         | 5,954   |        
|                            |                                           |                                 |                      |        |         |         |         |        
|                            |                                           |                                 | Total current assets |        |         | 185,138 |         |         |         | 533,209 | 
|Property and equipment, net |                                           |                                 | 8,195                |        |         |         | 23,796  |        
|Other assets:               |                                           |                                 |                      |        |         |         |         |        
|                            | Joint venture investments                 |                                 |                      | 2,809  |         |         |         | 4,637   |        
|                            | Goodwill, net                             |                                 |                      | 89,499 |         |         |         | 334,919 |        
|                            | Other intangible assets, net              |                                 |                      | 3,603  |         |         |         | 28,268  |        
|                            |                                           |                                 |                      |        |         |         |         |        
|                            |                                           |                                 | Total assets         |        | $       | 289,244 |         |         | $       | 924,829 | 
|                            |                                           |                                 |                      |        |         |         |         |        

|                                                |                                                                                                                                                     |                                            |       |         |         |  |         |         |         | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------- | ------- |  | ------- | ------- | ------- | 
|LIABILITIES AND STOCKHOLDERS
    EQUITY       
|Current liabilities:                            |                                                                                                                                                     |                                            |       |         |         |  |         |        
|                                                | Accounts payable                                                                                                                                    |                                            | $     | 88,611  |         |  | $       | 185,047 |        
|                                                | Accrued expenses                                                                                                                                    |                                            |       | 7,168   |         |  |         | 31,369  |        
|                                                | Income taxes payable                                                                                                                                |                                            |       | 1,071   |         |  |         | 1,701   |        
|                                                | Current portion of long-term debt                                                                                                                   |                                            |       |        |         |  |         | 5,312   |        
|                                                |                                                                                                                                                     |                                            |       |         |         |  |         |        
|                                                |                                                                                                                                                     | Total current liabilities                  |       |         | 96,850  |  |         |         | 223,429 | 
|Long-term debt                                  |                                                                                                                                                     |                                            |      |         |         |  | 224,688 |        
|Deferred income taxes                           |                                                                                                                                                     |                                            | 2,122 |         |         |  | 4,383   |        
|Minority interest in consolidated joint venture |                                                                                                                                                     |                                            | 1,102 |         |         |  | 1,275   |        
|Stockholders equity:                           |                                                                                                                                                     |                                            |       |         |         |  |         |        
|                                                | Undesignated preferred stock, 5,000,000 shares
    authorized, no shares issued                                                                     |                                            |       |        |         |  |         |        |        
|                                                | Common stock, $.01 par value;
    100,000,000 shares authorized; 25,954,232 shares in
    2001 and 31,329,054 shares in 2002 issued and outstanding |                                            |       | 259     |         |  |         | 313     |        
|                                                | Additional paid-in capital                                                                                                                          |                                            |       | 161,091 |         |  |         | 413,161 |        
|                                                | Retained earnings                                                                                                                                   |                                            |       | 27,820  |         |  |         | 57,580  |        
|                                                |                                                                                                                                                     |                                            |       |         |         |  |         |        
|                                                |                                                                                                                                                     | Total stockholders equity                 |       |         | 189,170 |  |         |         | 471,054 | 
|                                                |                                                                                                                                                     |                                            |       |         |         |  |         |        
|                                                |                                                                                                                                                     | Total liabilities and stockholders equity |       | $       | 289,244 |  |         | $       | 924,829 | 
|                                                |                                                                                                                                                     |                                            |       |         |         |  |         |        

See accompanying notes.

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##### Table of Contents



ACCREDO HEALTH, INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME

(000s omitted, except share
data)


|                                                                                             |                                        |                          |        |            |         |      |        |            |         |  |        |            |         | 
|-------------------------------------------------------------------------------------------- | -------------------------------------- | ------------------------ | ------ | ---------- | ------- | ---- | ------ | ---------- | ------- |  | ------ | ---------- | ------- | 
|                                                                                             |                                        |                         
|                                                                                             |                                        | Years Ended June 30,    
|                                                                                             |                                        |                         
|                                                                                             |                                        | 2000                     |        | 2001       |         | 2002
|                                                                                             |                                        |                          |        |            |         |     
|Revenues:                                                                                    |                                        |                          |        |            |         |      |        |            |         |  |        |           
|                                                                                             | Net patient revenue                    |                          | $      | 335,601    |         |      | $      | 446,007    |         |  | $      | 633,249    |        
|                                                                                             | Other revenue                          |                          |        | 15,432     |         |      |        | 14,985     |         |  |        | 18,257     |        
|                                                                                             | Equity in net income of joint ventures |                          |        | 2,002      |         |      |        | 1,148      |         |  |        | 2,067      |        
|                                                                                             |                                        |                          |        |            |         |      |        |            |         |  |        |           
|                                                                                             |                                        | Total revenues           |        |            | 353,035 |      |        |            | 462,140 |  |        |            | 653,573 | 
|Operating expenses:                                                                          |                                        |                          |        |            |         |      |        |            |         |  |        |           
|                                                                                             | Cost of sales                          |                          |        | 300,973    |         |      |        | 395,365    |         |  |        | 544,902    |        
|                                                                                             | General and administrative             |                          |        | 23,831     |         |      |        | 29,871     |         |  |        | 45,571     |        
|                                                                                             | Bad debts                              |                          |        | 6,117      |         |      |        | 6,131      |         |  |        | 5,833      |        
|                                                                                             | Restructuring charge                   |                          |        |           |         |      |        |           |         |  |        | 3,893      |        
|                                                                                             | Depreciation                           |                          |        | 1,094      |         |      |        | 1,509      |         |  |        | 2,338      |        
|                                                                                             | Amortization                           |                          |        | 2,303      |         |      |        | 2,754      |         |  |        | 1,337      |        
|                                                                                             |                                        |                          |        |            |         |      |        |            |         |  |        |           
|                                                                                             |                                        | Total operating expenses |        |            | 334,318 |      |        |            | 435,630 |  |        |            | 603,874 | 
|                                                                                             |                                        |                          |        |            |         |      |        |            |         |  |        |           
|Operating income                                                                             |                                        |                          | 18,717 |            |         |      | 26,510 |            |         |  | 49,699 |           
|Other income (expense):                                                                      |                                        |                          |        |            |         |      |        |            |         |  |        |           
|                                                                                             | Interest expense                       |                          |        | (2,459     | )       |      |        | (467       | )       |  |        | (662       | )      
|                                                                                             | Interest income                        |                          |        | 323        |         |      |        | 3,237      |         |  |        | 1,021      |        
|                                                                                             |                                        |                          |        |            |         |      |        |            |         |  |        |           
|                                                                                             |                                        |                          | (2,136 | )          |         |      | 2,770  |            |         |  | 359    |           
|                                                                                             |                                        |                          |        |            |         |      |        |            |         |  |        |           
|Income before minority interest in income of
    consolidated joint venture and income taxes |                                        |                          | 16,581 |            |         |      | 29,280 |            |         |  | 50,058 |           
|Minority interest in income of consolidated joint
    venture                                |                                        |                          | (177   | )          |         |      | (692   | )          |         |  | (1,273 | )         
|                                                                                             |                                        |                          |        |            |         |      |        |            |         |  |        |           
|Income before income taxes                                                                   |                                        |                          | 16,404 |            |         |      | 28,588 |            |         |  | 48,785 |           
|Income tax expense                                                                           |                                        |                          | 6,508  |            |         |      | 11,333 |            |         |  | 19,025 |           
|                                                                                             |                                        |                          |        |            |         |      |        |            |         |  |        |           
|                                                                                             |                                        | Net income               |        | $          | 9,896   |      |        | $          | 17,255  |  |        | $          | 29,760  | 
|                                                                                             |                                        |                          |        |            |         |      |        |            |         |  |        |           
|Net income per common share:                                                                 |                                        |                          |        |            |         |      |        |            |         |  |        |           
|                                                                                             | Basic                                  |                          | $      | 0.48       |         |      | $      | 0.69       |         |  | $      | 1.13       |        
|                                                                                             |                                        |                          |        |            |         |      |        |            |         |  |        |           
|                                                                                             | Diluted                                |                          | $      | 0.45       |         |      | $      | 0.66       |         |  | $      | 1.09       |        
|                                                                                             |                                        |                          |        |            |         |      |        |            |         |  |        |           
|Weighted average shares outstanding:                                                         |                                        |                          |        |            |         |      |        |            |         |  |        |           
|                                                                                             | Basic                                  |                          |        | 20,764,780 |         |      |        | 24,994,496 |         |  |        | 26,365,141 |        
|                                                                                             | Diluted                                |                          |        | 22,174,828 |         |      |        | 26,125,529 |         |  |        | 27,279,750 |        

See accompanying notes.

F-3



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(000s omitted, except share
data)


|                         |                                                                               |                                   |            |        |           |            |     |          |    |               |         |       |         |   |        |        |   |   |         |        |         | 
|------------------------ | ----------------------------------------------------------------------------- | --------------------------------- | ---------- | ------ | --------- | ---------- | --- | -------- | -- | ------------- | ------- | ----- | ------- | - | ------ | ------ | - | - | ------- | ------ | ------- | 
|                         |                                                                               | Common                            |            |        |           | Additional |     |          |    | Total        
|                         |                                                                               | Stock                             |            | Common |           | Paid-In    |     | Retained |    | Stockholders
|                         |                                                                               | Shares                            |            | Stock  |           | Capital    |     | Earnings |    | Equity       
|                         |                                                                               |                                   |            |        |           |            |     |          |    |              
|Balance at June 30, 1999 |                                                                               |                                   | 20,423,447 |        |           | $          | 204 |          |    | $             | 63,254  |       |         | $ | 669    |        |   | $ | 64,127  |       
|                         | Issuance of common stock:                                                     |                                   |            |        |           |            |     |          |    |               |         |       |         |   |        |        |   |   |         |        |        
|                         |                                                                               | Exercise of stock options         |            |        | 630,721   |            |     |          | 6  |               |         |       | 1,093   |   |        |        |  |   |         |        | 1,099   | 
|                         |                                                                               | Employee stock purchase plan      |            |        | 106,284   |            |     |          | 1  |               |         |       | 769     |   |        |        |  |   |         |        | 770     | 
|                         | Tax benefit of exercise of stock options                                      |                                   |            |       |           |            |     |         |    |               |         | 1,536 |         |   |        |       |   |   |         | 1,536  |        
|                         | Compensation resulting from stock transactions,
    net of income tax benefit |                                   |            |       |           |            |     |         |    |               |         | 116   |         |   |        |       |   |   |         | 116    |        
|                         | Net income                                                                    |                                   |            |       |           |            |     |         |    |               |         |      |         |   |        | 9,896  |   |   |         | 9,896  |        
|                         |                                                                               |                                   |            |        |           |            |     |          |    |               |         |       |         |   |        |        |   |   |         |       
|Balance at June 30, 2000 |                                                                               |                                   | 21,160,452 |        |           |            | 211 |          |    |               | 66,768  |       |         |   | 10,565 |        |   |   | 77,544  |       
|                         | Issuance of common stock:                                                     |                                   |            |        |           |            |     |          |    |               |         |       |         |   |        |        |   |   |         |        |        
|                         |                                                                               | Public offering                   |            |        | 4,140,000 |            |     |          | 41 |               |         |       | 88,886  |   |        |        |  |   |         |        | 88,927  | 
|                         |                                                                               | Exercise of stock options         |            |        | 625,059   |            |     |          | 6  |               |         |       | 2,436   |   |        |        |  |   |         |        | 2,442   | 
|                         |                                                                               | Employee stock purchase plan      |            |        | 28,721    |            |     |          | 1  |               |         |       | 651     |   |        |        |  |   |         |        | 652     | 
|                         | Costs related to public offering                                              |                                   |            |       |           |            |     |         |    |               |         | (605  | )       |   |        |       |   |   |         | (605   | )      
|                         | Tax benefit of exercise of stock options                                      |                                   |            |       |           |            |     |         |    |               |         | 2,840 |         |   |        |       |   |   |         | 2,840  |        
|                         | Compensation resulting from stock transactions,
    net of income tax benefit |                                   |            |       |           |            |     |         |    |               |         | 115   |         |   |        |       |   |   |         | 115    |        
|                         | Net income                                                                    |                                   |            |       |           |            |     |         |    |               |         |      |         |   |        | 17,255 |   |   |         | 17,255 |        
|                         |                                                                               |                                   |            |        |           |            |     |          |    |               |         |       |         |   |        |        |   |   |         |       
|Balance at June 30, 2001 |                                                                               |                                   | 25,954,232 |        |           |            | 259 |          |    |               | 161,091 |       |         |   | 27,820 |        |   |   | 189,170 |       
|                         | Issuance of common stock:                                                     |                                   |            |        |           |            |     |          |    |               |         |       |         |   |        |        |   |   |         |        |        
|                         |                                                                               | In connection with an acquisition |            |        | 5,060,976 |            |     |          | 51 |               |         |       | 246,672 |   |        |        |  |   |         |        | 246,723 | 
|                         |                                                                               | Exercise of stock options         |            |        | 284,961   |            |     |          | 2  |               |         |       | 2,195   |   |        |        |  |   |         |        | 2,197   | 
|                         |                                                                               | Employee stock purchase plan      |            |        | 28,885    |            |     |          | 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 |                                                                               |                                   | 31,329,054 |        |           | $          | 313 |          |    | $             | 413,161 |       |         | $ | 57,580 |        |   | $ | 471,054 |       
|                         |                                                                               |                                   |            |        |           |            |     |          |    |               |         |       |         |   |        |        |   |   |         |       

See accompanying notes.

F-4



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(000s omitted)


|                                                                                           |                                                               |                      |         |         |   |      |         |         |   |   |          |         |  
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------- | -------------------- | ------- | ------- | - | ---- | ------- | ------- | - | - | -------- | ------- | -
|                                                                                           |                                                               |                     
|                                                                                           |                                                               | Years Ended June 30,
|                                                                                           |                                                               |                     
|                                                                                           |                                                               | 2000                 |         | 2001    |   | 2002
|                                                                                           |                                                               |                      |         |         |   |     
|Operating activities                                                                       |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|Net income                                                                                 |                                                               | $                    | 9,896   |         |   | $    | 17,255  |         |   | $ | 29,760   |        
|Adjustments to reconcile net income to net cash
    provided by operating activities:      |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|                                                                                           | Depreciation and amortization                                 |                      |         | 3,397   |   |      |         | 4,263   |   |   |          | 3,675   |  
|                                                                                           | Restructuring charge                                          |                      |         |        |   |      |         |        |   |   |          | 3,893   |  
|                                                                                           | Provision for losses on accounts receivable                   |                      |         | 6,117   |   |      |         | 6,131   |   |   |          | 5,833   |  
|                                                                                           | Deferred income taxes                                         |                      |         | (1,158  | ) |      |         | (872    | ) |   |          | 949     |  
|                                                                                           | Compensation resulting from stock transactions                |                      |         | 185     |   |      |         | 185     |   |   |          | 164     |  
|                                                                                           | Tax benefit of exercise of stock options                      |                      |         | 1,536   |   |      |         | 2,840   |   |   |          | 2,204   |  
|                                                                                           | Minority interest in income of consolidated joint
    venture |                      |         | 177     |   |      |         | 692     |   |   |          | 1,273   |  
|Changes in operating assets and liabilities, net
    of effect from business acquisitions: |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|                                                                                           | Patient receivables and other                                 |                      |         | (13,419 | ) |      |         | (18,050 | ) |   |          | (34,703 | )
|                                                                                           | Due from affiliates                                           |                      |         | (990    | ) |      |         | (806    | ) |   |          | 185     |  
|                                                                                           | Inventories                                                   |                      |         | (11,950 | ) |      |         | 2,192   |   |   |          | (34,577 | )
|                                                                                           | Prepaid expenses and other current assets                     |                      |         | (406    | ) |      |         | 115     |   |   |          | (1,945  | )
|                                                                                           | Accounts payable and accrued expenses                         |                      |         | 23,618  |   |      |         | 9,439   |   |   |          | 56,804  |  
|                                                                                           | Income taxes payable                                          |                      |         | 896     |   |      |         | (218    | ) |   |          | 589     |  
|                                                                                           |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|Net cash provided by operating activities                                                  |                                                               |                      | 17,899  |         |   |      | 23,166  |         |   |   | 34,104   |        
|Investing activities                                                                       |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|Purchases of marketable securities                                                         |                                                               |                      |        |         |   |      | (13,500 | )       |   |   | (6,000   | )      
|Proceeds from sales and maturities of marketable
    securities                            |                                                               |                      |        |         |   |      | 11,500  |         |   |   | 8,000    |        
|Purchases of property and equipment                                                        |                                                               |                      | (4,452  | )       |   |      | (2,635  | )       |   |   | (8,858   | )      
|Business acquisitions and joint venture
    investments                                    |                                                               |                      | (24,480 | )       |   |      | (27,088 | )       |   |   | (256,172 | )      
|Change in joint venture investments, net                                                   |                                                               |                      | (1,707  | )       |   |      | (1,343  | )       |   |   | (2,927   | )      
|                                                                                           |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|Net cash used in investing activities                                                      |                                                               |                      | (30,639 | )       |   |      | (33,066 | )       |   |   | (265,957 | )      
|Financing activities                                                                       |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|Proceeds from (payment of) notes payable and line
    of credit                            |                                                               |                      | 16,000  |         |   |      | (37,200 | )       |   |   | 223,889  |        
|Payment of deferred financing costs                                                        |                                                               |                      |        |         |   |      |        |         |   |   | (6,737   | )      
|Issuance of common stock                                                                   |                                                               |                      | 1,869   |         |   |      | 92,021  |         |   |   | 3,094    |        
|Payment of costs related to public offering                                                |                                                               |                      | (467    | )       |   |      | (605    | )       |   |   |         |        
|                                                                                           |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|Net cash provided by financing activities                                                  |                                                               |                      | 17,402  |         |   |      | 54,216  |         |   |   | 220,246  |        
|                                                                                           |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|Increase (decrease) in cash and cash equivalents                                           |                                                               |                      | 4,662   |         |   |      | 44,316  |         |   |   | (11,607  | )      
|Cash and cash equivalents at beginning of year                                             |                                                               |                      | 5,542   |         |   |      | 10,204  |         |   |   | 54,520   |        
|                                                                                           |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|Cash and cash equivalents at end of year                                                   |                                                               | $                    | 10,204  |         |   | $    | 54,520  |         |   | $ | 42,913   |        
|                                                                                           |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|Supplementary cash flow disclosures                                                        |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|Income taxes paid                                                                          |                                                               | $                    | 5,235   |         |   | $    | 9,593   |         |   | $ | 15,279   |        
|                                                                                           |                                                               |                      |         |         |   |      |         |         |   |   |          |        
|Interest paid                                                                              |                                                               | $                    | 2,529   |         |   | $    | 555     |         |   | $ | 395      |        
|                                                                                           |                                                               |                      |         |         |   |      |         |         |   |   |          |        

See accompanying notes.

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##### Table of Contents



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 intercompany accounts have been eliminated in
consolidation.

The Company provides specialized 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 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 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 specialized contract pharmacy and related
services that address the needs of patients with chronic
diseases including: Multiple Sclerosis, Gaucher Disease,
hemophilia, pulmonary arterial hypertension, growth
hormone-related disorders, primary immune deficiencies,
auto-immune 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.

Marketable Securities

The Company has classified all of its investments
in marketable securities as held-to-maturity. Debt securities
are classified as held-to-maturity when there is the positive
intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost,
adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization and accretion and the interest
earned on the securities are included in interest income.
Investments with an original maturity of less than three months
are included in 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:

|         |  |      |    |      |  |  |    |  
|-------- |  | ---- | -- | ---- |  |  | -- | -
|         |  | 2001 |    | 2002
|         |  |      |    |     
|Medicare |  |      | 2  | %    |  |  | 7  | %
|Medicaid |  |      | 21 | %    |  |  | 13 | %

F-6



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

The Company derives a substantial portion of its
revenue from the sale of drugs provided by a limited number of
biopharmaceutical 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:

|          |  |      |    |      |  |      |    |   |  |  |    |  
|--------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|          |  | 2000 |    | 2001 |  | 2002
|          |  |      |    |      |  |     
|Biogen    |  |      | 37 | %    |  |      | 38 | % |  |  | 31 | %
|Genzyme   |  |      | 30 | %    |  |      | 23 | % |  |  | 18 | %
|MedImmune |  |      | 1  | %    |  |      | 6  | % |  |  | 10 | %
|Genentech |  |      | 4  | %    |  |      | 5  | % |  |  | 6  | %

The Company derived approximately 15% of its
revenue from a single non-governmental payor in the years ended
June 30, 2001 and 2002.

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.

Inventories

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

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, 2001 and 2002.

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 2 to 7 years.

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
No. 142, Goodwill and Other Intangible Assets(SFAS No. 142), goodwill was amortized
using the straight-line method over their estimated useful lives
of 40 years. Since adoption of SFAS 142 in July 2001,
amortization of goodwill was discontinued and is reviewed at
least annually for impairment. Accumulated amortization of
goodwill was $7.0 million at June 30, 2001. 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 2 to
10 years for the non-compete agreements and 4 to
8 years for acquired patient relationships.

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.

F-7



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

Stock-Based Compensation

The Company recognizes stock-based compensation
using the intrinsic value method as permitted by Financial
Accounting Standards Board Statement (FASB) No. 123,
Accounting for Stock-Based Compensation(Statement 123). Accordingly, no compensation expense
is recorded for employee stock-based awards issued at market
value at the date such awards are granted. For employee
stock-based awards issued below market value at the date such
awards are granted, the intrinsic value of the options is
amortized over the vesting period.

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.

Approximately 18%, 19% and 21% of gross patient
revenues for the years ended June 30, 2000, 2001 and 2002,
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 agreements
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.

Earnings Per Share

The Company presents earnings per share in
accordance with FASB Statement 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.

F-8



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##### Table of Contents



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 requires management to make
estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates. Estimates are
used primarily in recording the allowance for doubtful accounts,
self-insurance accruals and impairment tests on goodwill.

Risk Management

The Company maintains a self-insured medical and
dental plan 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 a reinsurance agreement with an independent insurance
company to limit its losses on claims. Under the terms of this
agreement, the insurance company will reimburse the Company for
individual claims generally in excess of $100,000 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 June 2001, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 141,
Business Combinations, which requires all business
combinations initiated after June 30, 2001 to be accounted
for under the purchase method. SFAS No. 141 also sets forth
guidelines for applying the purchase method of accounting in the
determination of intangible assets, including goodwill acquired
in a business combination, and expands financial disclosures
concerning business combinations completed after June 30,
2001. The application of SFAS No. 141 did not affect any of
our previously reported amounts included in goodwill or other
intangible assets.

Effective July 1, 2001, we early adopted
SFAS No. 142, Goodwill and Other Intangible Assets,
which establishes new accounting and reporting requirements for
goodwill and other intangible assets. Under SFAS No. 142,
all goodwill amortization ceased effective July 1, 2001 and
goodwill was tested for impairment. Impairment tests are
required to be performed at the date of adoption of SFAS
No. 142 and at least annually thereafter. Absent any
impairment indicators, we perform our annual impairment tests
during the fourth quarter. The impairment tests performed at
adoption and in the fourth quarter of 2002 resulted in no
adjustment to the carrying value of goodwill.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. SFAS
No. 144 removes goodwill from its scope and clarifies other
implementation issues related to SFAS No. 121. SFAS
No. 144 also provides a single framework for evaluating
long-lived assets to be disposed of by sale. The provisions of
this statement will be effective in our fiscal year 2003. We do
not expect the application of this new accounting standard to
have a material effect on our financial position or results of
operations.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 62, Amendment of
FASB Statement No. 13, and Technical Corrections. SFAS
No. 145 requires gains and losses on extinguishment of debt
to be classified as income or loss from continuing operations
rather than as extraordinary items as previously required under
SFAS No. 4. SFAS No. 145 also amends SFAS No. 13
to require certain modifications to capital leases treated as a
sale-leaseback and modifies the accounting for sub-leases when
the original lessee remains a secondary obligor or guarantor.
The provisions of this Statement are generally effective for
years beginning after May 15, 2002.

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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under
EITF 94-3, a liability for an exit cost was recognized at
the date of an entitys commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002.

3. Business Acquisitions

On October 20, 1999, the Company acquired
the majority of the operating assets of the specialty pharmacy
businesses operated by certain affiliates of Home Medical of
America, Inc. (HMA), a company engaged in the sale
and distribution of blood clotting factors and growth hormone
products. This transaction was accounted for using the purchase
method of accounting. The price paid by the Company for this
acquisition was $7,765,000. The Company also paid an additional
$482,000 for a related earn-out payment based upon the
achievement of certain revenue goals in the six-month period
ended April 30, 2000, resulting in a total purchase price
of $8,247,000. The total value of tangible assets acquired was
$234,000 and no indebtedness was assumed. The excess of the
total purchase price, including acquisition costs of $91,000,
over the fair value of the tangible assets acquired was
allocated as follows: $7,713,000 to goodwill and $300,000 to
acquired patient relationships. The Company also paid $500,000
as consideration for an agreement from HMA and certain of its
other affiliates not to compete for a period of five years.

The Company acquired all of the outstanding stock
of Sunrise Health Management, Inc. (Sunrise) from
its shareholders effective December 1, 1999. Sunrise is
headquartered in Norcross, Georgia, and is a provider of
pharmaceutical care for certain chronic, long-term patient
populations, including those requiring intravenous
immunoglobulin (IVIG), clotting factor and growth
hormone. This transaction was accounted for using the purchase
method of accounting. The price paid by the Company for this
acquisition was $13,724,000. The Company also paid an additional
$1,000,000 for a related earn-out payment based upon the
achievement of certain financial results for the six-month
period ended May 31, 2000, resulting in a total purchase
price of $14,724,000. Total assets acquired and liabilities
assumed were $1,903,000 and $882,000, respectively. The excess
of the total purchase price, including acquisition costs of
$45,000, over the fair value of the net assets acquired of
$1,021,000 was allocated as follows: $13,057,000 to goodwill and
$646,000 to acquired patient relationships. The Company also
paid $500,000 as consideration for an agreement with the selling
shareholders and a prior officer of Sunrise not to compete with
the Company in certain product lines for a period of ten years.

Effective April 1, 2000, the Company
acquired an additional 30% interest in one of its joint
ventures, Childrens Hemophilia Services, increasing its
ownership in the joint venture to 80%. Childrens Hemophilia
Services is located in Los Angeles, California, and is a
provider of blood clotting factors and ancillary supplies to
hemophilia patients. This transaction was accounted for using
the purchase method of accounting. The price paid by the Company
for this acquisition was $2,086,000. Total assets acquired and
liabilities assumed were $1,788,000 and $479,000, respectively.
The excess of the purchase price over the fair value of the net
assets acquired of $1,309,000, which amounted to $777,000, was
allocated to goodwill. The Company also paid an additional
$417,000 in 2001 and $417,000 in 2002 for earn-out payments
based upon the achievement of targeted earnings during the
twelve-month periods ended November 2000 and 2001, respectively,
as specified in the purchase agreement for the acquisition of
the original 50% interest.

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

F-10



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 intravenous immunoglobulin. 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 $36,588,000. In
addition, the Company will make an earn-out payment of up to
$16,000,000 if BioPartners achieves certain financial results in
the twelve-month period ending December 31, 2002. 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 $263,000, over the fair
value of the net assets acquired of $3,410,000 was allocated as
follows: $32,475,000 to goodwill and $703,000 to acquired
patient relationships. The acquired patient relationship
intangible is being amortized over 5 years. The entire
amount allocated to goodwill is expected to be deductible for
tax purposes. Any additional earn-out payments made under this
purchase agreement will be treated as additional purchase cost
and added to goodwill. 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.

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

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 results of the SPS divisions operations have
been included in the consolidated financial statements since
June 14, 2002. The SPS division provides specialized
contract 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 pharmacy and related services to
patients with pulmonary hypertension. As a result of the
acquisition, the Company is expected to be the leading provider
of specialized contract pharmacy and related services.

The aggregate purchase price paid was
$462.3 million (including $12.2 million of acquisition
related costs) and consisted of $215.6 million of cash and
5,060,976 shares of common stock valued at $246.7 million.
The value of the common stock issued was determined in
accordance with Emerging Issues Task Force (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.

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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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                                                                               |                                                                            |                           | 206,203 |       
|                                          | Other                                                                                  |                                                                            |                           | 129     |       
|                                          |                                                                                        |                                                                            |                           |        
|                                          |                                                                                        |                                                                            | Total assets acquired     |         |        | 511,687 | 
|Accounts payable                          |                                                                                        |                                                                            | 39,577                    |        
|Accrued expenses                          |                                                                                        |                                                                            | 9,842                     |        
|                                          |                                                                                        |                                                                            |                           |        
|                                          |                                                                                        |                                                                            | Total liabilities assumed |         |        | 49,419  | 
|                                          |                                                                                        |                                                                            |                           |        
|Net assets acquired                       |                                                                                        | $                                                                          | 462,268                   |        
|                                          |                                                                                        |                                                                            |                           |        

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

The purchase price allocation is preliminary due
to the plans to exit the acute pharmacy business, which could
have an impact on the allocation. The Company plans to exit the
acute pharmacy business acquired as part of the SPS division by
December 2002. The Companys intentions are to retain the
accounts receivable of the acute pharmacy business and dispose
of the other assets of the business, which are 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 expected
net proceeds from the sale of the acute division, the expected
results of the acute operations during the period from
acquisition to disposal and the expected interest expense during
the holding period on the incremental debt incurred to finance
the acute business have been recorded as an adjustment to the
purchase price. Any difference between the actual and expected
results will result in an adjustment to goodwill, unless the
adjustment results from a post-acquisition event. The results of
operations of the acute division, amounting to a $4,000 loss
during the period ended June 30, 2002, are excluded from
the Companys results of operations in the accompanying
financial statements. The amount of interest expense allocated
to the acute pharmacy business was $53,000, net of tax benefit,
during the period ended June 30, 2002.

The pro forma results of operations for the years
ended June 30, 2000, 2001 and 2002, as if the 2000 and 2001
acquisitions had occurred on July 1, 1999, and the 2002
acquisitions (including the results of the acute

F-12



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

pharmacy business of the SPS division) had
occurred on July 1, 2000, are as follows (in thousands,
except per share data):

|                             |         |      |         |      |  |      |           |     |  |   |           |      | 
|---------------------------- | ------- | ---- | ------- | ---- |  | ---- | --------- | --- |  | - | --------- | ---- | 
|                             |         | 2000 |         | 2001 |  | 2002
|                             |         |      |         |      |  |     
|Total revenues               |         | $    | 372,191 |      |  | $    | 1,229,841 |     |  | $ | 1,401,192 |     
|Net income                   |         |      | 11,450  |      |  |      | 28,998    |     |  |   | 40,279    |     
|Net income per common share: |         |      |         |      |  |      |           |     |  |   |           |     
|                             | Basic   |      | $       | .55  |  |      | $         | .96 |  |   | $         | 1.29 | 
|                             | Diluted |      | $       | .52  |  |      | $         | .93 |  |   | $         | 1.25 | 



|   |                     
|-- | --------------------
|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 $0.09 per diluted share, after tax).
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 will not be 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 that
will be abandoned once the facility integration plan related to
the acquisition has been completed.



|   |                      
|-- | ---------------------
|5. | Marketable Securities

At June 30, 2001, all of the Companys
investments in marketable securities were investment-grade
corporate debt instruments. The estimated fair value of the
marketable securities approximated the amortized cost, which
amounted to $16.5 million as of June 30, 2001, of
which $14.5 million were classified as cash equivalents.
All of the investments matured within one year from
June 30, 2001. There were no marketable securities at
June 30, 2002.

6. Property and Equipment

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

|                         |  |      |        |      |  |   |        |  
|------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                         |  | 2001 |        | 2002
|                         |  |      |        |     
|Equipment                |  | $    | 7,032  |      |  | $ | 17,762 |  
|Furniture and fixtures   |  |      | 5,027  |      |  |   | 12,255 |  
|                         |  |      |        |      |  |   |        |  
|                         |  |      | 12,059 |      |  |   | 30,017 |  
|Accumulated depreciation |  |      | (3,864 | )    |  |   | (6,221 | )
|                         |  |      |        |      |  |   |        |  
|                         |  | $    | 8,195  |      |  | $ | 23,796 |  
|                         |  |      |        |      |  |   |        |  

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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7. Goodwill and Other Intangible
Assets

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

|                         |  |                |       |              |  |                |       |              |  |   |        |  |  |   |       | 
|------------------------ |  | -------------- | ----- | ------------ |  | -------------- | ----- | ------------ |  | - | ------ |  |  | - | ----- | 
|                         |  |                |       |             
|                         |  | 2001           |       | 2002        
|                         |  |                |       |             
|                         |  | Gross Carrying |       | Accumulated  |  | Gross Carrying |       | Accumulated 
|                         |  | Amount         |       | Amortization |  | Amount         |       | Amortization
|                         |  |                |       |              |  |                |       |             
|Patient relationships    |  | $              | 3,206 |              |  | $              | 1,558 |              |  | $ | 19,072 |  |  | $ | 2,333 | 
|Non-compete agreements   |  |                | 2,500 |              |  |                | 672   |              |  |   | 5,900  |  |  |   | 1,126 | 
|Deferred financing costs |  |                | 475   |              |  |                | 348   |              |  |   | 7,211  |  |  |   | 456   | 
|                         |  |                |       |              |  |                |       |              |  |   |        |  |  |   |       | 
|                         |  | $              | 6,181 |              |  | $              | 2,578 |              |  | $ | 32,183 |  |  | $ | 3,915 | 
|                         |  |                |       |              |  |                |       |              |  |   |        |  |  |   |       | 

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

|     |  |   |       | 
|---- |  | - | ----- | 
|2003 |  | $ | 6,032 | 
|2004 |  |   | 5,955 | 
|2005 |  |   | 5,453 | 
|2006 |  |   | 5,191 | 
|2007 |  |   | 4,599 | 

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

|                                  |  |   |         | 
|--------------------------------- |  | - | ------- | 
|Balance as of June 30, 2001       |  | $ | 89,499  | 
|Goodwill acquired during the year |  |   | 245,420 | 
|                                  |  |   |         | 
|Balance as of June 30, 2002       |  | $ | 334,919 | 
|                                  |  |   |         | 

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

|                                                          |                                                           |      |        |      |  |      |        |     |  |   |        |      | 
|--------------------------------------------------------- | --------------------------------------------------------- | ---- | ------ | ---- |  | ---- | ------ | --- |  | - | ------ | ---- | 
|                                                          |                                                           | 2000 |        | 2001 |  | 2002
|                                                          |                                                           |      |        |      |  |     
|Reported net income                                       |                                                           | $    | 9,896  |      |  | $    | 17,255 |     |  | $ | 29,760 |     
|Add goodwill amortization expense, net of tax
    benefit |                                                           |      | 1,283  |      |  |      | 1,500  |     |  |   |       |     
|                                                          |                                                           |      |        |      |  |      |        |     |  |   |        |     
|Adjusted net income                                       |                                                           | $    | 11,179 |      |  | $    | 18,755 |     |  | $ | 29,760 |     
|                                                          |                                                           |      |        |      |  |      |        |     |  |   |        |     
|Basic earnings per share:                                 |                                                           |      |        |      |  |      |        |     |  |   |        |     
|                                                          | Reported net income                                       |      | $      | .48  |  |      | $      | .69 |  |   | $      | 1.13 | 
|                                                          | Add goodwill amortization expense, net of tax
    benefit |      |        | .06  |  |      |        | .06 |  |   |        |     | 
|                                                          |                                                           |      |        |      |  |      |        |     |  |   |        |     
|                                                          | Adjusted net income                                       |      | $      | .54  |  |      | $      | .75 |  |   | $      | 1.13 | 
|                                                          |                                                           |      |        |      |  |      |        |     |  |   |        |     
|Diluted earnings per share:                               |                                                           |      |        |      |  |      |        |     |  |   |        |     
|                                                          | Reported net income                                       |      | $      | .45  |  |      | $      | .66 |  |   | $      | 1.09 | 
|                                                          | Add goodwill amortization expense, net of tax
    benefit |      |        | .06  |  |      |        | .06 |  |   |        |     | 
|                                                          |                                                           |      |        |      |  |      |        |     |  |   |        |     
|                                                          | Adjusted net income                                       |      | $      | .51  |  |      | $      | .72 |  |   | $      | 1.09 | 
|                                                          |                                                           |      |        |      |  |      |        |     |  |   |        |     

F-14



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8. Long-Term Debt

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

|                                 |  |      |   |      |  |   |         | 
|-------------------------------- |  | ---- | - | ---- |  | - | ------- | 
|                                 |  | 2001 |   | 2002
|                                 |  |      |   |     
|Revolving credit facility        |  | $    |  |      |  | $ | 30,000  | 
|Tranche A term loan              |  |      |  |      |  |   | 75,000  | 
|Tranche B term loan              |  |      |  |      |  |   | 125,000 | 
|                                 |  |      |   |      |  |   |         | 
|                                 |  |      |  |      |  |   | 230,000 | 
|Less amounts due within one year |  |      |  |      |  |   | 5,312   | 
|                                 |  |      |   |      |  |   |         | 
|                                 |  | $    |  |      |  | $ | 224,688 | 
|                                 |  |      |   |      |  |   |         | 

On June 13, 2002, the Company amended and
restated its credit agreement with Bank of America, N.A. and
other participating banks to increase the size of the credit
facility to $325 million. The credit facility consists of a
$125 million revolving commitment 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 4.36% at June 30, 2002. The credit
facility is secured by substantially all assets of the Company.
The banks 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 banks. At June 30, 2002,
the balance outstanding under this credit facility was
$230,000,000. There were no borrowings at June 30, 2001.

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. The credit agreement also requires the Company to
enter into an interest rate swap agreement within 60 days
of June 13, 2002, to protect against fluctuations in
interest rates. The agreement requires 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.

The Company entered into an interest rate swap
agreement with a bank in October 1997 in order to fix a portion
of its interest rate exposure on a line of credit. The terms of
the agreement were revised and extended on January 21,
1999, and required the Company to pay a fixed interest rate of
5.5% on a $25 million notional amount and receive the
30-day LIBOR rate in exchange. On August 21, 2000, the
Company surrendered the swap agreement and received $350,000 in
consideration for the early termination of the agreement.

F-15



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 5,312   | 
|2004       |  |   | 16,250  | 
|2005       |  |   | 18,125  | 
|2006       |  |   | 23,750  | 
|2007       |  |   | 62,656  | 
|After 2007 |  |   | 103,907 | 
|           |  |   |         | 
|           |  | $ | 230,000 | 
|           |  |   |         | 

9. 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):

|          |         |      |        |        |   |      |        |        |   |   |        |        | 
|--------- | ------- | ---- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | 
|          |         | 2000 |        | 2001   |   | 2002
|          |         |      |        |        |   |     
|Current:  |         |      |        |        |   |      |        |        |   |   |        |       
|          | Federal |      | $      | 6,634  |   |      | $      | 10,574 |   |   | $      | 15,434 | 
|          | State   |      |        | 1,032  |   |      |        | 1,631  |   |   |        | 2,642  | 
|          |         |      |        |        |   |      |        |        |   |   |        |       
|          |         |      | 7,666  |        |   |      | 12,205 |        |   |   | 18,076 |       
|Deferred: |         |      |        |        |   |      |        |        |   |   |        |       
|          | Federal |      |        | (1,004 | ) |      |        | (769   | ) |   |        | 764    | 
|          | State   |      |        | (154   | ) |      |        | (103   | ) |   |        | 185    | 
|          |         |      |        |        |   |      |        |        |   |   |        |       
|          |         |      | (1,158 | )      |   |      | (872   | )      |   |   | 949    |       
|          |         |      |        |        |   |      |        |        |   |   |        |       
|          |         | $    | 6,508  |        |   | $    | 11,333 |        |   | $ | 19,025 |       
|          |         |      |        |        |   |      |        |        |   |   |        |       

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):

|                                                                |  |      |       |      |  |      |        |  |  |   |        | 
|--------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                                |  | 2000 |       | 2001 |  | 2002
|                                                                |  |      |       |      |  |     
|Income tax expense at statutory rate                            |  | $    | 5,619 |      |  | $    | 10,006 |  |  | $ | 17,075 | 
|State income tax expense, net of federal income
    tax benefit |  |      | 577   |      |  |      | 992    |  |  |   | 1,838  | 
|Goodwill amortization                                           |  |      | 279   |      |  |      | 276    |  |  |   | 19     | 
|Other                                                           |  |      | 33    |      |  |      | 59     |  |  |   | 93     | 
|                                                                |  |      |       |      |  |      |        |  |  |   |        | 
|Income tax expense                                              |  | $    | 6,508 |      |  | $    | 11,333 |  |  | $ | 19,025 | 
|                                                                |  |      |       |      |  |      |        |  |  |   |        | 

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.

F-16



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant components of the Companys
deferred tax assets and liabilities at June 30 are as
follows (in thousands):

|                          |                              |      |        |        |   |   |        |        |  
|------------------------- | ---------------------------- | ---- | ------ | ------ | - | - | ------ | ------ | -
|                          |                              | 2001 |        | 2002  
|                          |                              |      |        |       
|Deferred tax assets:      |                              |      |        |        |   |   |        |       
|                          | Accounts receivable reserves |      | $      | 4,010  |   |   | $      | 4,878  |  
|                          | Accrued expenses             |      |        | 545    |   |   |        | 752    |  
|                          | Joint venture investments    |      |        | 49     |   |   |        | 122    |  
|                          | Other                        |      |        | 99     |   |   |        | 202    |  
|                          |                              |      |        |        |   |   |        |       
|                          |                              |      | 4,703  |        |   |   | 5,954  |       
|Deferred tax liabilities: |                              |      |        |        |   |   |        |       
|                          | Property and equipment       |      |        | (330   | ) |   |        | (318   | )
|                          | Intangible assets            |      |        | (1,628 | ) |   |        | (3,736 | )
|                          | Joint venture investments    |      |        | (164   | ) |   |        | (329   | )
|                          |                              |      |        |        |   |   |        |       
|                          |                              |      | (2,122 | )      |   |   | (4,383 | )     
|                          |                              |      |        |        |   |   |        |       
|Net deferred tax assets   |                              | $    | 2,581  |        |   | $ | 1,571  |       
|                          |                              |      |        |        |   |   |        |       

Management has evaluated the need for a valuation
allowance for the deferred tax assets and believes it is more
likely than not that the assets will ultimately be realized
through future taxable income from operations.

10. Commitments

The Company leases office space and equipment
under various operating leases. Rent expense for all operating
leases was approximately $1,227,000, $1,575,000 and $2,838,000
for the years ended June 30, 2000, 2001 and 2002,
respectively.

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, 2002 (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 7,165  | 
|2004       |  |   | 5,914  | 
|2005       |  |   | 4,692  | 
|2006       |  |   | 2,166  | 
|2007       |  |   | 587    | 
|Thereafter |  |   |       | 
|           |  |   |        | 
|           |  | $ | 20,524 | 
|           |  |   |        | 

In connection with the acquisition of BioPartners
made during fiscal year 2002, the Company may be obligated to
make up to $16,000,000 in earn-out payments during the next
twelve months.

11. Investment in Joint
Ventures

Texas Health Pharmaceutical Resources, Teddy Bear
Home Care/ Drug Therapies, Childrens Memorial Home
Hemophilia Services, 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 from these joint ventures to the Company
are classified as due from affiliates in the accompanying
consolidated balance sheets.

F-17



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The portion of the Companys retained
earnings at June 30, 2001 and 2002 attributable to
undistributed earnings of these joint ventures is $2,088,000 and
$3,916,000, respectively.

On October 1, 1999, the Company entered into
a joint venture agreement with Childrens Hospital in
Washington, DC, to market, sell, provide and distribute
Synagis® and growth hormone and related services and
supplies. The term of the joint venture is for a period of five
years unless terminated at an earlier date pursuant to the terms
of the agreement. Both companies contributed $40,000 in capital
to the joint venture and will share equally in the assets,
liabilities, profits and losses. In conjunction with the
formation of this joint venture, the Company also entered into a
management, service and sales agreement with the joint venture,
whereby the Company will provide specialty pharmacy and
management services to the joint venture in exchange for a
management fee and the reimbursement of certain expenses.

On August 15, 2000, the Company entered into
a joint venture agreement with Childrens Hospital in
Washington, DC, to market, sell, provide and distribute
hemophilia clotting factor and related services and supplies.
The term of the joint venture is for a period of five years
unless terminated at an earlier date pursuant to the terms of
the agreement. Both companies contributed $50,000 in capital to
the joint venture and will share equally in the assets,
liabilities, profits and losses. In conjunction with the
formation of this joint venture, the Company also entered into a
management, service and sales agreement with the joint venture,
whereby the Company will provide specialty pharmacy and
management services to the joint venture in exchange for a
management fee and the reimbursement of certain expenses.

The Company received fees for management services
from the joint ventures of $819,000, $1,193,000 and $1,184,000
for the years ended June 30, 2000, 2001 and 2002,
respectively, which are recorded as other revenues in the
accompanying consolidated statements of income.

Summary financial information for affiliated
joint ventures (20 percent to 50 percent owned) accounted
for by the equity method is as follows as of and for the years
ended June 30 (in thousands):

|                                        |  |      |        |      |  |      |        |  |  |   |        | 
|--------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                        |  | 2000 |        | 2001 |  | 2002
|                                        |  |      |        |      |  |     
|Current assets                          |  | $    | 6,229  |      |  | $    | 8,753  |  |  | $ | 12,394 | 
|Property and equipment and other assets |  |      | 84     |      |  |      | 69     |  |  |   | 55     | 
|Current liabilities                     |  |      | 3,130  |      |  |      | 4,114  |  |  |   | 4,090  | 
|Total revenues                          |  |      | 20,637 |      |  |      | 23,359 |  |  |   | 26,963 | 
|Net income                              |  |      | 4,057  |      |  |      | 2,315  |  |  |   | 4,131  | 

12. 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 $152,000, $189,000 and
$234,000 for the years ended June 30, 2000, 2001 and 2002,
respectively.

13. Stockholders Equity

Common Stock

On August 17, 2000, the Company completed a
stock offering of 3,600,000 shares of its common stock. An
additional 540,000 shares of common stock were sold on
September 12, 2000 pursuant to the exercise of the
underwriters over-allotment option. All shares were issued
at a price of $22.67 per share. Net proceeds to the Company,
after deducting underwriting discounts and commissions and other
expenses of the offering, were $88.3 million.

F-18



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In fiscal 2000 and 2001, the Company effected
stock splits 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.

On June 13, 2002, the Company issued
5,060,976 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.

14. 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 (the
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 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 303,750 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 106,284, 28,721 and 28,885 shares of
common stock issued during the years ended June 30, 2000,
2001 and 2002, respectively, pursuant to this employee stock
purchase plan.

15. 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 2,171,250 shares of the Companys common stock. As of
June 30, 2002, options to purchase 2,167,786 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.

The Companys 1999 Long-Term Incentive Plan
authorizes the grant of options to selected employees, officers
and directors for up to 1,125,000 shares of the Companys
common stock. As of June 30, 2002, options to purchase
1,088,860 shares of stock have been granted under this plan
under terms similar to those discussed above.

The Companys 2002 Long-Term Incentive Plan
authorizes the grant of options to selected employees, officers
and directors for up to 2,600,000 shares of the Companys
common stock. As of June 30, 2002, options to purchase
1,280,317 shares of stock have been granted under this plan. All
options granted have ten-year terns 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 Statement 123 and has been determined as if the
Company had accounted for its employee stock options under the
fair value method of Statement 123. Significant assumptions used
by the Company in the Black-Scholes option pricing model
computations are as follows for the years ended June 30:

|                               |  |      |                |      |  |      |                |  |  |  |                | 
|------------------------------ |  | ---- | -------------- | ---- |  | ---- | -------------- |  |  |  | -------------- | 
|                               |  | 2000 |                | 2001 |  | 2002
|                               |  |      |                |      |  |     
|Risk-free interest rate        |  |      | 5.81% to 6.59% |      |  |      | 4.57% to 6.14% |  |  |  | 3.56% to 4.41% | 
|Dividend yield                 |  |      | 0%             |      |  |      | 0%             |  |  |  | 0%             | 
|Volatility factor              |  |      | .72            |      |  |      | .70            |  |  |  | .65            | 
|Weighted-average expected life |  |      | 3.19 years     |      |  |      | 4.0 years      |  |  |  | 4.0 years      | 
|Estimated turnover             |  |      | 0%             |      |  |      | 0%             |  |  |  | 8%             | 

F-19



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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):

|                                     |  |      |       |      |  |      |        |  |  |   |        | 
|------------------------------------ |  | ---- | ----- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                     |  | 2000 |       | 2001 |  | 2002
|                                     |  |      |       |      |  |     
|Net income as reported             |  | $    | 9,896 |      |  | $    | 17,255 |  |  | $ | 29,760 | 
|Pro forma net income                 |  | $    | 8,784 |      |  | $    | 14,874 |  |  | $ | 25,900 | 
|Pro forma basic earnings per share   |  | $    | 0.42  |      |  | $    | 0.60   |  |  | $ | 0.98   | 
|Pro forma diluted earnings per share |  | $    | 0.40  |      |  | $    | 0.57   |  |  | $ | 0.96   | 

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

|                                                                   |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |   |           |   |  |   |       | 
|------------------------------------------------------------------ |  | ------- | --------- | --------- |  | ------- | ----- | --------- |  | ------- | --------- | --------- |  | - | ----- |  |  | - | --------- | - |  | - | ----- | 
|                                                                   |  |         |           |           |  |        
|                                                                   |  | 2000    |           | 2001      |  | 2002   
|                                                                   |  |         |           |           |  |        
|                                                                   |  |         |           | Weighted- |  |         |       | Weighted- |  |         |           | Weighted-
|                                                                   |  |         |           | Average   |  |         |       | Average   |  |         |           | Average  
|                                                                   |  |         |           | Exercise  |  |         |       | Exercise  |  |         |           | Exercise 
|                                                                   |  | Options |           | Price     |  | Options |       | Price     |  | Options |           | Price    
|                                                                   |  |         |           |           |  |         |       |           |  |         |           |          
|Outstanding at beginning of period                                 |  |         | 2,101,678 |           |  | $       | 1.90  |           |  |         | 1,780,947 |           |  | $ | 3.97  |  |  |   | 1,796,775 |   |  | $ | 13.52 | 
|Granted                                                            |  |         | 334,294   |           |  |         | 12.92 |           |  |         | 746,393   |           |  |   | 28.10 |  |  |   | 1,521,031 |   |  |   | 45.81 | 
|Exercised                                                          |  |         | (630,716  | )         |  |         | 1.75  |           |  |         | (625,067  | )         |  |   | 3.91  |  |  |   | (284,961  | ) |  |   | 7.72  | 
|Forfeited                                                          |  |         | (24,309   | )         |  |         | 5.92  |           |  |         | (105,498  | )         |  |   | 12.30 |  |  |   | (42,251   | ) |  |   | 29.98 | 
|                                                                   |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |   |           |   |  |   |       | 
|Outstanding at end of period                                       |  |         | 1,780,947 |           |  | $       | 3.97  |           |  |         | 1,796,775 |           |  | $ | 13.52 |  |  |   | 2,990,594 |   |  | $ | 30.26 | 
|                                                                   |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |   |           |   |  |   |       | 
|Exercisable at end of year                                         |  |         | 1,092,495 |           |  | $       | 3.13  |           |  |         | 973,029   |           |  | $ | 4.56  |  |  |   | 1,057,271 |   |  | $ | 10.42 | 
|                                                                   |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |   |           |   |  |   |       | 
|Weighted-average fair value of options granted
    during the year |  | $       | 6.68      |           |  |         |       |           |  | $       | 16.03     |           |  |   |       |  |  | $ | 23.94     |   |  |   |       | 
|                                                                   |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |   |           |   |  |   |       | 

|                         |  |                     |           |                     |  |           |           |             |  |           |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | --------- | --------- | ----------- |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                     |  |          
|                         |  | Options Outstanding |           |                    
|                         |  |                     |           | Options Exercisable
|                         |  |                     |           | Weighted-           |  |           |           |            
|                         |  |                     |           | Average             |  | Weighted- |           |             |  | Weighted-
|                         |  | Number              |           | Remaining           |  | Average   |           | Number      |  | Average  
|Range of Exercise prices |  | Outstanding         |           | Contractual         |  | Exercise  |           | Exercisable |  | Exercise 
|(150% increment)         |  | at 6/30/02          |           | Life                |  | Price     |           | at 6/30/02  |  | Price    
|                         |  |                     |           |                     |  |           |           |             |  |          
|$ 1.33   1.33           |  |                     | 502,128   |                     |  |           | 4.0 years |             |  | $         | 1.33  |  |  |  | 502,128   |  |  | $ | 1.33  | 
|2.67   2.67             |  |                     | 172,731   |                     |  |           | 5.7 years |             |  |           | 2.67  |  |  |  | 172,731   |  |  |   | 2.67  | 
|7.11   7.11             |  |                     | 18,835    |                     |  |           | 6.5 years |             |  |           | 7.11  |  |  |  | 10,678    |  |  |   | 7.11  | 
|12.89  13.06            |  |                     | 137,905   |                     |  |           | 7.4 years |             |  |           | 12.92 |  |  |  | 85,911    |  |  |   | 12.91 | 
|23.25  33.73            |  |                     | 695,821   |                     |  |           | 8.4 years |             |  |           | 28.06 |  |  |  | 185,823   |  |  |   | 27.81 | 
|35.36  47.62            |  |                     | 1,463,174 |                     |  |           | 9.9 years |             |  |           | 46.43 |  |  |  | 100,000   |  |  |   | 35.36 | 
|                         |  |                     |           |                     |  |           |           |             |  |           |       |  |  |  |           |  |  |   |       | 
|$ 1.33  47.62           |  |                     | 2,990,594 |                     |  |           | 8.2 years |             |  | $         | 30.26 |  |  |  | 1,057,271 |  |  | $ | 10.42 | 
|                         |  |                     |           |                     |  |           |           |             |  |           |       |  |  |  |           |  |  |   |       | 

F-20



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

16. Quarterly Financial Information
(Unaudited)

Quarterly financial information for the years
ended June 30, 2001 and 2002, is summarized below (in
thousands, except share data):

|                             |         |         |         |         |  |         |         |         |  |   |         |      |  |   |         |      | 
|---------------------------- | ------- | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | ---- |  | - | ------- | ---- | 
|                             |         |        
|                             |         | 2002   
|                             |         |        
|                             |         | First   |         | Second  |  | Third   |         | Fourth 
|                             |         | Quarter |         | Quarter |  | Quarter |         | Quarter
|                             |         |         |         |         |  |         |         |        
|Total revenues               |         | $       | 126,648 |         |  | $       | 160,186 |         |  | $ | 178,497 |      |  | $ | 188,242 |     
|Operating income             |         |         | 9,409   |         |  |         | 11,833  |         |  |   | 14,974  |      |  |   | 13,483  |     
|Income before income taxes   |         |         | 9,604   |         |  |         | 11,805  |         |  |   | 14,679  |      |  |   | 12,697  |     
|Net income                   |         |         | 5,877   |         |  |         | 7,217   |         |  |   | 8,988   |      |  |   | 7,678   |     
|Net income per common share: |         |         |         |         |  |         |         |         |  |   |         |      |  |   |         |     
|                             | Basic   |         |         | 0.23    |  |         |         | 0.28    |  |   |         | 0.34 |  |   |         | 0.28 | 
|                             | Diluted |         |         | 0.22    |  |         |         | 0.27    |  |   |         | 0.33 |  |   |         | 0.27 | 

|                             |         |         |        |         |  |         |         |         |  |   |         |      |  |   |         |      | 
|---------------------------- | ------- | ------- | ------ | ------- |  | ------- | ------- | ------- |  | - | ------- | ---- |  | - | ------- | ---- | 
|                             |         |        
|                             |         | 2001   
|                             |         |        
|                             |         | First   |        | Second  |  | Third   |         | Fourth 
|                             |         | Quarter |        | Quarter |  | Quarter |         | Quarter
|                             |         |         |        |         |  |         |         |        
|Total revenues               |         | $       | 99,577 |         |  | $       | 113,870 |         |  | $ | 124,280 |      |  | $ | 124,413 |     
|Operating income             |         |         | 5,368  |         |  |         | 6,175   |         |  |   | 7,213   |      |  |   | 7,754   |     
|Income before income taxes   |         |         | 5,593  |         |  |         | 6,900   |         |  |   | 7,913   |      |  |   | 8,182   |     
|Net income                   |         |         | 3,364  |         |  |         | 4,167   |         |  |   | 4,789   |      |  |   | 4,935   |     
|Net income per common share: |         |         |        |         |  |         |         |         |  |   |         |      |  |   |         |     
|                             | Basic   |         |        | 0.15    |  |         |         | 0.16    |  |   |         | 0.19 |  |   |         | 0.19 | 
|                             | Diluted |         |        | 0.14    |  |         |         | 0.16    |  |   |         | 0.18 |  |   |         | 0.18 | 

F-21



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##### Table of Contents



ACCREDO HEALTH, INCORPORATED

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

(In Thousands)


|                          |                                 |                     |   |            |  |            |   |            |  |               |   |        |     |  |   |       |     |  |   |        | 
|------------------------- | ------------------------------- | ------------------- | - | ---------- |  | ---------- | - | ---------- |  | ------------- | - | ------ | --- |  | - | ----- | --- |  | - | ------ | 
|                          |                                 |                     |   |            |  |            |   |           
|Col. A                    |                                 | Col. B              |   | Col. C     |  | Col. D     |   | Col. E    
|                          |                                 |                     |   |            |  |            |   |           
|                          |                                 |                     |   |            |  |            |   |           
|                          |                                 |                     |   | Additions  |  |            |   |           
|                          |                                 |                     |   |            |  |            |   |           
|                          |                                 |                     |   | Charged to |  | Charged to |   |            |  |              
|                          |                                 | Balance at          |   | Costs and  |  | Other      |   |            |  | Balance at   
|Description               |                                 | Beginning of Period |   | Expenses   |  | Accounts   |   | Deductions |  | End of Period
|                          |                                 |                     |   |            |  |            |   |            |  |              
|Year ended June 30, 2000: |                                 |                     |   |            |  |            |   |            |  |               |   |        |     |  |   |       |     |  |   |       
|                          | Allowance for doubtful accounts |                     | $ | 5,300      |  |            | $ | 6,117      |  |               | $ | 76     | (1) |  | $ | 3,098 | (2) |  | $ | 8,395  | 
|Year ended June 30, 2001: |                                 |                     |   |            |  |            |   |            |  |               |   |        |     |  |   |       |     |  |   |       
|                          | Allowance for doubtful accounts |                     |   | 8,395      |  |            |   | 6,131      |  |               |   |       |     |  |   | 3,718 | (2) |  |   | 10,808 | 
|Year ended June 30, 2002: |                                 |                     |   |            |  |            |   |            |  |               |   |        |     |  |   |       |     |  |   |       
|                          | Allowance for doubtful accounts |                     |   | 10,808     |  |            |   | 5,833      |  |               |   | 69,412 | (1) |  |   | 4,295 | (2) |  |   | 81,758 | 



---



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

F-22



---



##### Table of Contents






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 30th day of
September, 2002.



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



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

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



---



##### Table of Contents



KNOW ALL MEN BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints
David D. Stevens, John R. Grow 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 (Principal Executive Officer)             |  | September 30, 2002
|                                            
|/s/ JOEL R. KIMBROUGHJoel R. Kimbrough       |  | Senior Vice President, Chief Financial Officer
    Treasurer (Principal Financial and Accounting Officer) |  | September 30, 2002
|                                            
|/s/ JOHN R. GROWJohn R. Grow                 |  | President and Director                                                                                    |  | September 30, 2002
|                                            
|/s/ KENNETH R. MASTERSONKenneth R. Masterson |  | Director                                                                                                  |  | September 30, 2002
|                                            
|/s/ KENNETH J. MELKUSKenneth J. Melkus       |  | Director                                                                                                  |  | September 30, 2002
|                                            
|/s/ KEVIN L. ROBERGKevin L. Roberg           |  | Director                                                                                                  |  | September 30, 2002
|                                            
|/s/ DICK R. GOURLEYDick R. Gourley           |  | Director                                                                                                  |  | September 30, 2002



---



##### Table of Contents



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

I, David D. Stevens, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Accredo Health, Incorporated;                                                                                                                                                                                                                                                        
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report.                       



| |                        
| | -----------------------
| | /s/ DAVID D. STEVENS   
| |                        
| | David D. Stevens       
| | Chief Executive Officer

Date: September 30, 2002



---



##### Table of Contents



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

I, Joel R. Kimbrough, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Accredo Health, Incorporated;                                                                                                                                                                                                                                                        
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report.                       



| |                        
| | -----------------------
| | /s/ JOEL R. KIMBROUGH  
| |                        
| | Joel R. Kimbrough      
| | Chief Financial Officer

Date: September 30, 2002



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##### Table of Contents






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).                                                                                                  
|        | 3.4   |  |  |                        |  | 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)).                                                                                                                                                         
|        | 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)).                                                                                                                                                                                        
|        | 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 Exhibit 10.6
    to our Registration Statement on Form S-1 (File Number
    333-62679)).                                                                                                                                                         
|        | 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)).                                                                     
|        | 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)).                                                                                                                             



---



##### Table of Contents



|        |       |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | ----- |  |  | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 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.                                                                                                                                                                                                                             
|        | 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.                                                                                                                                                                                                                                                                                                     
|        | 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.                                                                                                                                                                                                                                                                                                   
|        | 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).                                                                                                                  
|        | 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).                                                                                                 



---



##### Table of Contents



|        |       |  |  |                         |  |                                                                                                                                                                                                                                      
|------- | ----- |  |  | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 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).     
|        | 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).      



---



##### Table of Contents



|        |       |  |  |                         |  |                                                                                                                                                                                                                                                     
|------- | ----- |  |  | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 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 |  |  |                        |  | Employment Agreement dated as of
    September 1, 1999 between Accredo Health, Incorporated and
    David D. Stevens (incorporated by reference to
    Exhibit 10.55 to our Annual Report on Form 10-K for
    the fiscal year ended June 30, 2000).
|        | 10.56 |  |  |                        |  | Employment Agreement dated as of
    September 1, 1999 between Accredo Health, Incorporated and
    John R. Grow (incorporated by reference to
    Exhibit 10.56 to our Annual Report on Form 10-K for
    the fiscal year ended June 30, 2000).    



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##### Table of Contents



|        |       |  |  |                         |  |                                                                                                                                                                                                                                                                                                  
|------- | ----- |  |  | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 10.57 |  |  |                        |  | Employment Agreement dated as of
    September 1, 1999 between Accredo Health, Incorporated and
    Joel R. Kimbrough (incorporated by reference to
    Exhibit 10.57 to our Annual Report on Form 10-K for
    the fiscal year ended June 30, 2000).                                            
|        | 10.58 |  |  |                        |  | Employment Agreement dated as of
    September 1, 1999 between Accredo Health, Incorporated and
    Kyle J. Callahan (incorporated by reference to
    Exhibit 10.58 to our Annual Report on Form 10-K for
    the fiscal year ended June 30, 2000).                                             
|        | 10.59 |  |  |                        |  | Employment Agreement dated as of
    September 1, 1999 between Accredo Health, Incorporated and
    Thomas W. Bell, Jr. (incorporated by reference to
    Exhibit 10.59 to our Annual Report on Form 10-K for
    the fiscal year ended June 30, 2000).                                          
|        | 10.60 |  |  |                        |  | Amendment Number One to Employment Agreement
    effective as of September 1, 2000 between Accredo Health,
    Incorporated and David D. Stevens (incorporated by
    reference to Exhibit 10.13 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2000).   
|        | 10.61 |  |  |                        |  | Amendment Number One to Employment Agreement
    effective as of September 1, 2000 between Accredo Health,
    Incorporated and John R. Grow (incorporated by reference to
    Exhibit 10.14 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended December 31, 2000).           
|        | 10.62 |  |  |                        |  | Amendment Number One to Employment Agreement
    effective as of September 1, 2000 between Accredo Health,
    Incorporated and Joel R. Kimbrough (incorporated by
    reference to Exhibit 10.15 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2000).  
|        | 10.63 |  |  |                        |  | Amendment Number One to Employment Agreement
    effective as of September 1, 2000 between Accredo Health,
    Incorporated and Kyle J. Callahan (incorporated by
    reference to Exhibit 10.16 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2000).   
|        | 10.64 |  |  |                        |  | Amendment Number One to Employment Agreement
    effective as of September 1, 2000 between Accredo Health,
    Incorporated and Thomas W. Bell, Jr. (incorporated by
    reference to Exhibit 10.17 to our Quarterly Report on
    Form 10-Q for the fiscal quarter ended December 31,
    2000).
|        | 21.1  |  |  |                        |  | Subsidiaries                                                                                                                                                                                                                                                                                     
|        | 23.1  |  |  |                        |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                     
|        | 24.1  |  |  |                        |  | Power of Attorney (contained on the signature
    pages of this report)                                                                                                                                                                                                                          
|        | 99.1  |  |  |                        |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to section 906 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                   
|        | 99.2  |  |  |                        |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to section 906 of
    the Sarbanes-Oxley Act of 2002