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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THESECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period
from _______________ to _______________

Commission file number 0-23946

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PEDIATRIC SERVICES OF AMERICA, INC.

(Exact name of Registrant as specified in its
charter)

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| | Delaware(State or other jurisdiction ofincorporation or organization) |  | 58-1873345(I.R.S. EmployerIdentification No.) | 
| | --------------------------------------------------------------------- |  | --------------------------------------------- | 

310 Technology Parkway, Norcross GA 30092-2929(Address of principal executive offices,
including zip code)

(770) 441-1580(Registrants telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes o No x

As of August 7, 2003 the
Registrant had 6,873,337 shares of Common Stock, $0.01 Par Value, outstanding.

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Page 1 of
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FORM 10-QPEDIATRIC SERVICES OF AMERICA, INC.

INDEX



|       |  |                       |  |                                                                                                           | PageNumber
|------ |  | --------------------- |  | --------------------------------------------------------------------------------------------------------- | ----------
|       |  |                       |  |                                                                                                           |           
|PARTI  |  | FINANCIAL INFORMATION | 
|       |  |                       |  |                                                                                                           |           
|       |  | ITEM 1:               |  | Financial Statements                                                                                      |           
|       |  |                       |  |                                                                                                           |           
|       |  |                       |  | Condensed Consolidated Balance Sheetsas of June 30, 2003 and September 30, 2002                           | 3         
|       |  |                       |  |                                                                                                           |           
|       |  |                       |  | Condensed Consolidated Statements of Operationsfor the three and nine months ended June 30, 2003 and 2002 | 5         
|       |  |                       |  |                                                                                                           |           
|       |  |                       |  | Condensed Consolidated Statements of Cash Flowsfor the nine months ended June 30, 2003 and 2002           | 6         
|       |  |                       |  |                                                                                                           |           
|       |  |                       |  | Notes to Condensed Consolidated Financial Statements                                                      | 7         
|       |  |                       |  |                                                                                                           |           
|       |  | ITEM 2:               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     | 13        
|       |  |                       |  |                                                                                                           |           
|       |  | ITEM 3:               |  | Quantitative and Qualitative Disclosures about Market Risk                                                | 23        
|       |  |                       |  |                                                                                                           |           
|       |  | ITEM 4:               |  | Controls and Procedures                                                                                   | 24        
|       |  |                       |  |                                                                                                           |           
|PARTII |  | OTHER INFORMATION     | 
|       |  |                       |  |                                                                                                           |           
|       |  | ITEM 1:               |  | Legal Proceedings                                                                                         | 24        
|       |  |                       |  |                                                                                                           |           
|       |  | ITEM 6:               |  | Exhibits and Reports on Form 8-K                                                                          | 25        

|           |   
|---------- | --
|           |   
|SIGNATURES | 26

2



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##### Table of Contents

PART I - FINANCIAL INFORMATION

| | ITEM 1. | FINANCIAL STATEMENTS
| | ------- | --------------------

PEDIATRIC SERVICES OF AMERICA, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands)



|                                                                                             |  | June 30,2003 |         | September30,2002 |  
|-------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---------------- | -
|                                                                                             |  |              |         |                  |  
|                                                                                             |  | (Unaudited)  |         |                  |  
|Assets                                                                                       |  |              |         |                  |  
|Current Assets:                                                                              |  |              |         |                  |  
|Cash and cash equivalents                                                                    |  | $            | 4,861   |                  | $
|Accounts receivable, less allowance for doubtful accounts of $4,925 and $5,364, respectively |  |              | 37,876  |                  |  
|Prepaid expenses;                                                                            |  |              | 1,701   |                  |  
|Workers compensation loss fund                                                              |  |              | 1,618   |                  |  
|Income taxes receivable                                                                      |  |              |        |                  |  
|Deferred income taxes                                                                        |  |              | 4,626   |                  |  
|Inventory                                                                                    |  |              | 2,418   |                  |  
|Other current assets                                                                         |  |              | 197     |                  |  
|                                                                                             |  |              |         |                  |  
|Total current assets                                                                         |  |              | 53,297  |                  |  
|                                                                                             |  |              |         |                  |  
|Property and equipment:                                                                      |  |              |         |                  |  
|Home care equipment held for rental                                                          |  |              | 31,840  |                  |  
|Furniture and fixtures                                                                       |  |              | 11,343  |                  |  
|Vehicles                                                                                     |  |              | 700     |                  |  
|Leasehold improvements                                                                       |  |              | 1,944   |                  |  
|                                                                                             |  |              |         |                  |  
|                                                                                             |  |              | 45,827  |                  |  
|Accumulated depreciation and amortization                                                    |  |              | (37,545 | )                |  
|                                                                                             |  |              |         |                  |  
|                                                                                             |  |              | 8,282   |                  |  
|                                                                                             |  |              |         |                  |  
|Other assets:                                                                                |  |              |         |                  |  
|Goodwill, less accumulated amortization of $9,613                                            |  |              | 36,539  |                  |  
|Certificates of need, less accumulated amortization of $598 and $581, respectively           |  |              | 75      |                  |  
|Deferred financing fees, less accumulated amortization of $728 and $699, respectively        |  |              | 390     |                  |  
|Non-compete agreements, less accumulated amortization of $1,165 and $1,136, respectively     |  |              | 115     |                  |  
|Deferred income taxes                                                                        |  |              | 4,214   |                  |  
|Workers compensation bond collateral                                                        |  |              | 2,774   |                  |  
|Other                                                                                        |  |              | 307     |                  |  
|                                                                                             |  |              |         |                  |  
|                                                                                             |  |              | 44,414  |                  |  
|                                                                                             |  |              |         |                  |  
|Total assets                                                                                 |  | $            | 105,993 |                  | $
|                                                                                             |  |              |         |                  |  

See Accompanying Notes.

3



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PEDIATRIC SERVICES OF AMERICA, INC.CONDENSED CONSOLIDATED BALANCE
SHEETS(Continued)(In thousands)



|                                                                                                                                                            |  | June 30,2003 |         | September30,2002 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---------------- | -
|                                                                                                                                                            |  |              |         |                  |  
|                                                                                                                                                            |  | (Unaudited)  |         |                  |  
|Liabilities and stockholders equity                                                                                                                        |  |              |         |                  |  
|Current liabilities:                                                                                                                                        |  |              |         |                  |  
|Accounts payable                                                                                                                                            |  | $            | 5,016   |                  | $
|Accrued compensation                                                                                                                                        |  |              | 4,141   |                  |  
|Income taxes payable                                                                                                                                        |  |              | 1,670   |                  |  
|Accrued insurance                                                                                                                                           |  |              | 7,718   |                  |  
|Refunds payable                                                                                                                                             |  |              | 1,197   |                  |  
|Accrued interest                                                                                                                                            |  |              | 484     |                  |  
|Other accrued liabilities                                                                                                                                   |  |              | 2,989   |                  |  
|Deferred revenue                                                                                                                                            |  |              | 722     |                  |  
|Current maturities of long-term obligations to related parties                                                                                              |  |              |        |                  |  
|Current maturities of long-term obligations                                                                                                                 |  |              | 176     |                  |  
|                                                                                                                                                            |  |              |         |                  |  
|Total current liabilities                                                                                                                                   |  |              | 24,113  |                  |  
|                                                                                                                                                            |  |              |         |                  |  
|Long-term obligations, net of current maturities                                                                                                            |  |              | 22,555  |                  |  
|                                                                                                                                                            |  |              |         |                  |  
|Total liabilities                                                                                                                                           |  |              | 46,668  |                  |  
|Redeemable preferred stock, $.01 par value, 2,000 shares authorized, no shares issued and outstanding                                                       |  |              |        |                  |  
|Stockholders equity:                                                                                                                                       |  |              |         |                  |  
|Common stock, $.01 par value, 80,000 shares authorized 6,870 and 6,838 shares issued and outstanding at  June 30, 2003
and September 30, 2002, respectively |  |              | 69      |                  |  
|Additional paid-in capital                                                                                                                                  |  |              | 49,186  |                  |  
|Retained earnings                                                                                                                                           |  |              | 10,070  |                  |  
|                                                                                                                                                            |  |              |         |                  |  
|Total stockholders equity                                                                                                                                  |  |              | 59,325  |                  |  
|                                                                                                                                                            |  |              |         |                  |  
|Total liabilities and stockholders equity                                                                                                                  |  | $            | 105,993 |                  | $
|                                                                                                                                                            |  |              |         |                  |  

See Accompanying
Notes.

4



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PEDIATRIC SERVICES OF AMERICA, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)



|                                                |  | Three Months EndedJune 30, |        | Nine Months EndedJune 30, |  
|----------------------------------------------- |  | -------------------------- | ------ | ------------------------- | -
|                                                |  |                            |        |                           |  
|                                                |  | 2003                       |        | 2002                      |  
|                                                |  |                            |        |                           |  
|                                                |  | (Unaudited)                |        | (Unaudited)               |  
|                                                |  |                            |        |                           |  
|Net Revenue                                     |  | $                          | 54,149 |                           | $
|Costs and expenses:                             |  |                            |        |                           |  
|Operating salaries, wages and employee benefits |  |                            | 23,398 |                           |  
|Other operating costs                           |  |                            | 21,631 |                           |  
|Corporate, general and administrative           |  |                            | 4,801  |                           |  
|Provision for doubtful accounts                 |  |                            | 531    |                           |  
|Depreciation and amortization                   |  |                            | 1,008  |                           |  
|                                                |  |                            |        |                           |  
|Total costs and expenses                        |  |                            | 51,369 |                           |  
|                                                |  |                            |        |                           |  
|Operating income                                |  |                            | 2,780  |                           |  
|Other income                                    |  |                            | 10     |                           |  
|Early extinguishment of debt                    |  |                            | 32     |                           |  
|Interest income                                 |  |                            | 16     |                           |  
|Interest expense                                |  |                            | (612   | )                         |  
|                                                |  |                            |        |                           |  
|Income before income tax expense                |  |                            | 2,226  |                           |  
|Income tax expense                              |  |                            | 876    |                           |  
|                                                |  |                            |        |                           |  
|Net income                                      |  | $                          | 1,350  |                           | $
|                                                |  |                            |        |                           |  
|                                                |  |                            |        |                           |  
|Net income per share data:                      |  |                            |        |                           |  
|Basic                                           |  | $                          | 0.20   |                           | $
|                                                |  |                            |        |                           |  
|Diluted                                         |  | $                          | 0.19   |                           | $
|                                                |  |                            |        |                           |  
|                                                |  |                            |        |                           |  
|Weighted average shares outstanding:            |  |                            |        |                           |  
|Basic                                           |  |                            | 6,866  |                           |  
|                                                |  |                            |        |                           |  
|Diluted                                         |  |                            | 7,052  |                           |  
|                                                |  |                            |        |                           |  

See Accompanying Notes.

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PEDIATRIC SERVICES OF AMERICA, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)



|                                                                                  |  | Nine Months EndedJune 30, |       
|--------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                  |  |                           |       
|                                                                                  |  | 2003                      |       
|                                                                                  |  |                           |       
|                                                                                  |  | (Unaudited)               |       
|Operating activities:                                                             |  |                           |       
|Net income                                                                        |  | $                         | 3,449 
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |       
|Depreciation and amortization                                                     |  |                           | 3,082 
|Provision for doubtful accounts                                                   |  |                           | 942   
|Amortization of deferred financing fees                                           |  |                           | 65    
|Early extinguishment of debt                                                      |  |                           | (63   
|Deferred income taxes                                                             |  |                           |      
|Changes in operating assets and liabilities, net of effects from acquisitions:    |  |                           |       
|Accounts receivable                                                               |  |                           | (6,458
|Prepaid expenses                                                                  |  |                           | (758  
|Inventory                                                                         |  |                           | 894   
|Other assets                                                                      |  |                           | (25   
|Workers compensation loss fund                                                   |  |                           | (1,618
|Workers compensation bond collateral                                             |  |                           | (923  
|Accounts payable                                                                  |  |                           | (208  
|Income taxes                                                                      |  |                           | 2,111 
|Accrued liabilities                                                               |  |                           | 1,005 
|                                                                                  |  |                           |       
|Net cash provided by operating activities                                         |  |                           | 1,495 
|Investing activities:                                                             |  |                           |       
|Purchases of property and equipment                                               |  |                           | (1,899
|Acquisition of businesses                                                         |  |                           | (3,781
|                                                                                  |  |                           |       
|Net cash used in investing activities                                             |  |                           | (5,680
|Financing activities:                                                             |  |                           |       
|Principal payments and extinguishment of long-term debt                           |  |                           | (2,047
|Proceeds from exercise of stock options                                           |  |                           | 103   
|                                                                                  |  |                           |       
|Net cash used in financing activities                                             |  |                           | (1,944
|                                                                                  |  |                           |       
|Decrease in cash and cash equivalents                                             |  |                           | (6,129
|Cash and cash equivalents at beginning of period                                  |  |                           | 10,990
|                                                                                  |  |                           |       
|Cash and cash equivalents at end of period                                        |  | $                         | 4,861 
|                                                                                  |  |                           |       
|Supplemental disclosure of cash flow information:                                 |  |                           |       
|Cash paid for interest                                                            |  | $                         | 2,596 
|                                                                                  |  |                           |       
|Cash paid for taxes                                                               |  | $                         | 223   
|                                                                                  |  |                           |       

See Accompanying Notes.

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##### Table of Contents

PEDIATRIC SERVICES OF AMERICA, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited

1.Basis of Presentation

The accompanying unaudited condensed
consolidated financial statements of Pediatric Services of America, Inc. (the Company) and its majority-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and notes required by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Results of operations for the three and nine months ended June 30, 2003 are not necessarily indicative of the
results to be expected for the entire fiscal year ending September 30, 2003. These condensed consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements for the year ended
September 30, 2002 included in the Companys Annual Report on Form 10-K for such year filed with the Securities and Exchange Commission. Principal accounting policies are set forth in the Companys 2002 Annual Report.

2.Summary of Significant Accounting Policies

Description of Business

The Company provides a broad range of pediatric health care services and equipment
including nursing, respiratory therapy, rental and sale of durable medical equipment, pharmaceutical services and infusion therapy services. In addition, the Company provides pediatric rehabilitation services, day treatment centers for medically
fragile children, pediatric well care services and special needs educational services for pediatric patients. The Company also provides case management services in order to assist the family and patient by coordinating the provision of services
between the insurer or other payor, the physician, the hospital and other health care providers. The Companys services are designed to provide a high quality, lower cost alternative to prolonged hospitalization for medically fragile children.
As a complement to its pediatric respiratory and infusion therapy services, the Company also provides respiratory and infusion therapy and related services for adults.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amount of net revenue and expenses during the reporting period. Actual results could differ from those estimates and the differences could be material. Due to the nature of the industry and the reimbursement environment in which the
Company operates, certain estimates are required in recording net revenue and determining the provision for doubtful accounts. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes
available to management.

Accounts Receivable

Accounts receivable
include approximately $7.7 million and $7.2 million for which services have been rendered but the amounts were unbilled as of June 30, 2003 and September 30, 2002, respectively. Such unbilled amounts are primarily a result of the time required to
process bills for services rendered.

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PEDIATRIC SERVICES OF AMERICA, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited -
(Continued)

Summary of Significant Accounting Policies - continued

Identifiable Intangible Assets

Amortization expense on identifiable intangible assets was approximately $0.06 million and $0.02 million for the three
months ended June 30, 2003 and 2002, respectively and approximately $0.2 million and $0.1 million for the nine months ended June 30, 2003 and 2002, respectively. Estimated amortization expense of identifiable intangible assets for each of the fiscal
years ending September 30, is presented below:



|     |  | ForTheYearEndingSeptember30, |        
|---- |  | ---------------------------- | -------
|     |  |                              |        
|2003 |  | $                            | 200,000
|2004 |  | $                            | 140,000
|2005 |  | $                            | 140,000
|2006 |  | $                            | 122,000
|2007 |  | $                            | 80,000 

Concentration of Credit Risk

The Companys principal financial instruments subject to potential concentration of credit risk are cash and cash equivalents and accounts receivable. Cash and cash
equivalents are held primarily in one financial institution. The Company performs periodic evaluations of the relative credit standing of this financial institution.

The concentration of credit risk with respect to accounts receivable, which are primarily health care industry related, represent a risk to the Company given the current health care environment. The risk is somewhat limited due to the large
number of payors including governmental payors, insurance companies, and individuals and the diversity of geographic locations in which the Company operates. However, the Company has substantial geographic density in the eastern United States, which
it believes exposes the Company to payor initiated reimbursement changes.

Reclassifications

Certain amounts for prior periods have been reclassified to conform to the current year presentation.

Workers Compensation
Loss Fund

The Companys insurance carrier requires a twelve month estimated loss reserve to be funded entirely with cash over the first ten months of
fiscal 2003. This cash requirement is estimated to be $2.1 million, which is reduced by the monthly loss fund payments. The insurance carrier has the right to increase this cash requirement at the end of the first twelve months if the claim
experience is greater than anticipated.

Workers Compensation Bond Collateral

The Company has secured surety bonds of $4.0 million to satisfy its prior workers compensation carriers policy requirements. On November 4, 2002, the Company posted $0.9 million cash to its workers
compensation third party escrow account to satisfy the expiring $1.0 million letter of credit. As a result, the surety bonds are collateralized by $2.8 million cash posted to a third party escrow account.

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##### Table of Contents

PEDIATRIC SERVICES OF AMERICA, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Unaudited
 (Continued)

Summary of Significant Accounting Policies  continued

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.

In the three and nine months ended June 30, 2003, the Company had a current income tax expense of $0.9 million and $2.2 million, respectively. In the
three and nine months ended June 30, 2002, the Company had a current income tax benefit of $0.4 million and a current income tax expense of $0.1 million, respectively, which was offset by the reduction of the valuation allowance related to the net
deferred tax asset resulting in zero income tax expense.

Stock Option Plans

The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting provided for under SFAS 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Companys employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is required by SFAS 123, determined as if the Company had accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the periods ending June 30, 2003 and
2002, respectively: risk-free interest rates of 2.35% and 1.95%, a dividend yield of 0.0%; volatility factors of the expected market price of the Companys Common Stock of 126% and 138% and a weighted-average expected life of the option of four
years.

For purposes of the pro forma disclosures, the estimated fair value of the options is amortized over the options vesting period. The Companys
pro forma information follows (in thousands, except for net income per share information):



|                                             |  | ThreeMonthsEndedJune30, |       | NineMonthsEndedJune30, |  
|-------------------------------------------- |  | ----------------------- | ----- | ---------------------- | -
|                                             |  |                         |       |                        |  
|                                             |  | 2003                    |       | 2002                   |  
|                                             |  |                         |       |                        |  
|Net income                                   |  |                         |       |                        |  
|As reported                                  |  | $                       | 1,350 |                        | $
|Fair value based method compensation expense |  |                         | (171  | )                      |  
|                                             |  |                         |       |                        |  
|Proforma net income                          |  | $                       | 1,179 |                        | $
|                                             |  |                         |       |                        |  
|Basic income per share                       |  |                         |       |                        |  
|As reported                                  |  | $                       | 0.20  |                        | $
|                                             |  |                         |       |                        |  
|Proforma                                     |  | $                       | 0.17  |                        | $
|                                             |  |                         |       |                        |  
|Diluted income per share                     |  |                         |       |                        |  
|As reported                                  |  | $                       | 0.19  |                        | $
|                                             |  |                         |       |                        |  
|Proforma                                     |  | $                       | 0.17  |                        | $
|                                             |  |                         |       |                        |  

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PEDIATRIC SERVICES OF AMERICA, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Unaudited
 (Continued)

Summary of Significant Accounting Policies  continued

Impact of Recently Issued Accounting Standards

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (FAS 150). This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. This statement shall be effective for
financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the provisions of this statement to have a
significant impact on the statement of financial position.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46 or the
Interpretation), Consolidation of Variable Interest Entities. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights
(variable interest entities or VIEs) and how to determine when and which business enterprise should consolidate the VIE (the primary beneficiary). This new model for consolidation applies to an entity which
either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entitys activities without receiving additional subordinated financial support from
other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective immediately, for VIEs created after January
31, 2003. FIN 46 is effective no later than the beginning of the first annual financial reporting period beginning after June 15, 2003. The Company is currently evaluating the impact of adopting FIN 46, but does not expect it to have a material
impact on its results of operations or its financial condition.

In December 2002, the FASB issued SFAS 148,Accounting for Stock-Based Compensation -
Transition Disclosure, An Amendment of FASB Statement No. 123 (SFAS 148). This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of Statement No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002 and the interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company will continue to
apply Accounting Principles Board Opinion No. 25 as the method used to account for stock-based employee compensation arrangements, where applicable, but has adopted the disclosure requirements of SFAS 148 beginning with the quarter ended March 31,
2003.

In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The Companys adoption of this new Statement did not have a significant effect on the consolidated financial position, results of operations, or cash flows of the
Company.

10



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##### Table of Contents

PEDIATRIC SERVICES OF AMERICA, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited -
(Continued)

3.Long-Term Borrowing Arrangements

During the second quarter of fiscal 2003, the Company completed a transaction to repurchase $1.0 million of its 10% Senior Subordinated Notes due 2008 (the Notes)
for $0.95 million cash, plus accrued interest. During the third quarter of fiscal 2003, the Company repurchased $1.0 million of its Notes. The Notes were purchased in a private transaction for $0.95 million cash, plus accrued interest. The gain (net
of the write-off of the related deferred financing fees) of approximately $0.03 million and $0.06 million is reflected in the condensed consolidated statements of operations for the three and nine months ended June 30, 2003, respectively. The
aggregate principal amount of the Notes outstanding as of June 30, 2003 is $22.4 million.

During the nine months ended June 30, 2002, the Company completed
several transactions to repurchase a total of $8.0 million of the Notes for $7.4 million cash plus accrued interest. The gain (net of the write-off of the related deferred financing fees) of approximately $0.03 million and $0.4 million is reflected
in the condensed consolidated statements of operations for the three and nine months ended June 30, 2002, respectively.

4.Basic and Diluted Net Income Per Share

Basic net income per share
is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed using the weighted average number of shares of common stock outstanding and the dilutive effect of common
equivalent shares (calculated using the treasury stock method). The dilutive effect of the weighted average options included in the diluted earnings per share is 185,539 and 358,235 for the three months ended June 30, 2003 and 2002, respectively and
208,310 and 405,212 for the nine months ended June 30, 2003 and 2002, respectively.

5.Commitments and Contingencies

As a result of operating in the health
care industry, the Companys business entails an inherent risk of lawsuits alleging malpractice, product liability or related legal theories, which can involve large claims and significant defense costs. The Company is, from time to time,
subject to such suits arising in the ordinary course of business. The Company currently maintains professional and commercial liability insurance intended to cover such claims. As of June 30, 2003, this insurance coverage is provided under a
claims-made policy which, subject to the terms and conditions of the policy, provides coverage for certain types of claims made against the Company during the term of the policy and does not provide coverage for losses occurring during
the terms of the policy for which a claim is made subsequent to the termination of the policy. Should the policy not be renewed or replaced with equivalent insurance, claims based on occurrences during its term but asserted subsequently would be
uninsured.

As a result of a field audit by a Medicare carrier, the Company was notified of an asserted claim for recoupment of approximately $1.7 million of
accounts receivable. The carrier claimed that incomplete clinical documentation was contained in the patients medical record to substantiate the payments for the services provided.The Company
has investigated the assertion and has determined that the alleged insufficiency relates to information that is required to be maintained in the patients medical record.

During January 2003, the Medicare carrier notified the Company that it had begun recoupment of the $1.7 million under audit against weekly disbursements made to the Company. As of April 28, 2003, the Company was
notified by a representative of the Medicare carrier that upon further review a significant number of the patients contained in the original audit sample were deemed to have sufficient medical

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PEDIATRIC SERVICES OF AMERICA, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited -
(Continued)

Commitments and Contingencies  continued

documentation and would be excluded from their reported findings which revised the recoupment to $0.8 million plus accrued interest and has recouped this amount as of June 30, 2003. Among the issues under examination was the Companys
compliance with a local medical review policy (LMRP) requiring a specific type of documentation to be included in the patients medical record. As of April 1, 2003, the Medicare carrier rescinded the LMRP. While this action does not
directly affect the audit sample, which pre-dates the rescission of the LMRP, the Company believes that arguments it intends to cite on appeal regarding the validity of the LMRP may be bolstered by the elimination of this requirement, however, the
ultimate resolution of this issue as it pertains to the Company cannot be predicted at this time. The Company continues to believe that its documentation for substantially all the remaining patients in the audit sample is sufficient.

The Company believes that a repayment of some amount is probable. At this point in time the Companys estimate of the liability is based upon the status of its review to
date, and the settlement of similar claims made against other home health care providers. Based upon this estimate, the Company accrued a $0.36 million liability in the condensed consolidated financial statements for the nine months ended June 30,
2003. The ultimate resolution of this asserted claim may be different from the current estimate and could have a material adverse effect on the Companys consolidated financial or liquidity position.

The Company is subject to claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of such current pending legal proceedings at this time should
not have a material adverse effect on the Companys consolidated financial or liquidity position.

The Company has entered into employment agreements with
certain employees of the Company which provide, amongst other things, salary, benefits and perquisites, as well as additional compensation for certain changes in control of the Company or a failure of the Company to comply with any material terms of
the agreements.

6.Acquisition of a Business

On January 10, 2003 the Company acquired the Pennsylvania assets of Health Med One, Inc., a Pennsylvania corporation doing business as Advanced Health Care, for a purchase
price of $3.75 million in cash. The acquisition included Advanced Health Cares pediatric private duty nursing facilities in York, Harrisburg, Allentown and Philadelphia, Pennsylvania. Pro-forma revenues from these locations are estimated to be
in excess of $7.0 million annually.

7.Subsequent Event

During July 2003, the Company completed a transaction to repurchase a total of $1.0 million of its Notes for $0.95 million cash plus accrued interest. The
gain (net of the write-off of the related deferred financing fees) of approximately $0.03 million will be reflected in the consolidated statements of operations during the fourth quarter of fiscal year 2003.

During August 2003, the Company completed a transaction to repurchase a total of $1.0 million of its Notes for $0.98 million cash plus accrued interest. The gain (net of the write-off of the related
deferred financing fees) of approximately $0.008 million will be reflected in the consolidated statements of operations during the fourth quarter of fiscal year 2003.

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| | Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| | ------- | -------------------------------------------------------------------------------------

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to future financial
performance of Pediatric Services of America, Inc. (the Company). When used in this Form 10-Q, the words may, targets, goal, could, should, would,
believe, feel, expects, anticipate, estimate, intend, plan, potential and similar expressions may be indicative of forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Companys control. The Company cautions that various factors, including the factors described hereunder and those discussed in the
Companys other filings with the Securities and Exchange Commission, as well as general economic conditions, industry trends, the Companys ability to collect for equipment sold or rented, assimilate and manage previously acquired field
operations, collect accounts receivable, including receivables related to acquired businesses and receivables under appeal, hire and retain qualified personnel and comply with and respond to billing requirements issues, including those related to
the Companys billing and collection system, nurse shortages, competitive bidding, HIPAA regulations, Average Wholesale Price (AWP) reductions, adverse litigation, workers compensation losses, availability and cost of medical
malpractice insurance and reduced state funding levels and nursing hours authorized by Medicaid programs, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on
behalf of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of an unanticipated event. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact
of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements of the Company included in this quarterly report.

Recent Developments

Home Healthcare Industry Events & Updates

During the third quarter of fiscal 2003 a number of state legislatures remained in session dealing with record budget deficits and contemplating cuts to Medicaid funding, some of which, if enacted, would
reduce reimbursement levels for services provided by the Company. As is typically the case, many of the original proposals highlighted in the media were substantially modified either in committee or in the general sessions of the various
legislatures. As of the date of this filing, the Company is not aware of any enacted state changes that would have a material adverse effect on the Companys consolidated financial or liquidity position; however, some states are still
considering rate or volume reductions which, if enacted could have a significant impact on the Companys consolidated financial or liquidity position. In an effort to impact these legislative issues, the Company engaged consultants in selective
markets to directly present the Companys cost saving strategies and related rate requests to the Medicaid program. As of the date of this filing, the Company has received positive indications from one state Medicaid commissioner to consider
our reimbursement rate request within the current budget year. In addition, the Company has begun negotiations with another state Medicaid commissioner to pilot a program to more rapidly discharge hospitalized medically complex and medically fragile
children into the Companys care. These accelerated discharges should provide the state with significant cost savings and potentially motivate the state to increase the reimbursement rate for services provided by the Company. In addition, the
Companys local market staff routinely collaborates with the appropriate community and regulatory authorities on behalf of the Company and its patients.

A
few states are experiencing internal problems with the administration of their Medicaid programs, which are temporarily disrupting payments of claims for services rendered by the Company. Specifically, one state

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has chosen to make progress payments to providers without assigning those payments to specific claims for services rendered. This decision has the potential
to create reconciliation problems for the Company and the state. As of the date of this filing, the Company has not received notification of payment application instructions from the state.

Company Events & Updates

As a result of a field audit by a Medicare carrier, the Company was notified of an asserted
claim for recoupment of approximately $1.7 million of accounts receivable. The carrier claimed that incomplete clinical documentation was contained in the patients medical record to substantiate the payments for the services provided. The
Company has investigated the assertion and has determined that the alleged insufficiency relates to information that is required to be maintained in the patients medical record.

During January 2003, the Medicare carrier notified the Company that it had begun recoupment of the $1.7 million under audit against weekly disbursements made to the Company. As of April 28, 2003, the Company was
notified by a representative of the Medicare carrier that upon further review a significant number of the patients contained in the original audit sample were deemed to have sufficient medical documentation and would be excluded from their reported
findings which revised the recoupment to $0.8 million plus accrued interest and has recouped this amount as of June 30, 2003. Among the issues under examination was the Companys compliance with a local medical review policy (LMRP)
requiring a specific type of documentation to be included in the patients medical record. As of April 1, 2003, the Medicare carrier rescinded the LMRP. While this action does not directly affect the audit sample, which pre-dates the rescission
of the LMRP, the Company believes that arguments it intends to cite on appeal regarding the validity of the LMRP may be bolstered by the elimination of this requirement, however, the ultimate resolution of this issue as it pertains to the Company
cannot be predicted at this time. The Company continues to believe that its documentation for substantially all the remaining patients in the audit sample is sufficient.

The Company believes that a repayment of some amount is probable. At this point in time the Companys estimate of the liability is based upon the status of its review to date, and the settlement of similar claims
made against other home health care providers. Based upon this estimate, the Company accrued a $0.36 million liability in the condensed consolidated financial statements for the nine months ended June 30, 2003. The ultimate resolution of this
asserted claim may be different from the current estimate and could have a material adverse effect on the Companys consolidated financial or liquidity position.

During the three months ended June 30, 2003, the Company repurchased $1.0 million of its Notes. The Notes were purchased in a private transaction for $0.95 million cash, plus accrued interest. The gain (net of the write-off of the related
deferred financing fees) of approximately $0.03 million is reflected in the condensed consolidated statements of operations for the three months ended June 30, 2003. During July 2003, the Company repurchased $1.0 million of its Notes. The Notes were
purchased in a private transaction for $0.95 million cash, plus accrued interest. The gain (net of the write-off of the related deferred financing fees) of approximately $0.03 million will be reflected in the consolidated statements of operations in
the fourth quarter of fiscal 2003. In addition, during August 2003, the Company completed a transaction to repurchase a total of $1.0 million of its Notes for $0.98 million cash plus accrued interest. The gain (net of the write-off of the related
deferred financing fees) of approximately $0.008 million will be reflected in the consolidated statements of operations during the fourth quarter of fiscal year 2003. The aggregate principal amount of the Notes outstanding as of the date of this
filing is $20.4 million.

During the third quarter of fiscal year 2003, the Company opened a new pilot Prescribed Pediatric Extended Care center (PPEC)
in North Carolina. The Company believes this PPEC will be an important step in establishing the PPEC concept in the state of North Carolina where the Company owns and operates seven private duty nursing locations as well as pharmacy and respiratory
businesses. The Company believes that the potential exists to create a statewide network of centers in North Carolina and may use this relationship model in other states as well. On July 18, 2003, the Company announced the opening of two branch
offices in San Antonio, TX and Chesapeake, VA to provide home medical equipment primarily for infants and children.

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During July, 2003, the Company appointed Dr. Susan J. Kelley to serve as a member of the Board of Directors in the Class III membership
group.

The Companys management will continue to assess its various growth opportunities, ranging from evaluation of acquisition alternatives in key markets,
geographical expansion through the use of start-up branch offices, marketing initiatives impact on existing branch office growth, and technology improvements in order to ration capital available from operations.

Risk Management

On October 1, 2002, the Company completed its annual renewal of its risk management
program and implemented several changes.Due to the exiting of St. Paul Fire and Marine Insurance Company from the medical malpractice insurance marketplace, the Company entered
into a new insurance program for medical malpractice, commercial and general liability coverage with Arch Specialty Insurance Company, rated A- by AM Best Company. Material changes included an increase in per claim deductible limits from $0.25
million to $1.0 million. The annual aggregate also changed from $0.75 million to no annual aggregate. The policy amount remains at $10.0 million with a slight increase in annual premiums. However, the Company chose to decline renewal of a $10.0
million umbrella policy due to significant price increases.

The Companys third party actuary has completed an analysis of the Companys medical
malpractice loss history and has quantified liability recognition for fiscal 2003 under the new policy terms. Under the new medical malpractice policy, if the Companys loss experience worsens it could have a material adverse effect on the
Companys financial results and liquidity position. In recognition of the increased exposure, the Company has further re-engineered its risk management processes. The Companys Risk Committee continues to monitor incident reporting and
claim adjustment activity, and also reviews existing patient census and discharges high-risk cases where legally permissible. The Company continues to educate location staff on risk management procedures including appropriate nurse staffing
decisions.

During the third quarter of fiscal year 2003, the Company renewed its Directors, Officers and Corporate Liability Insurance Policy (D &
O). Due to the turbulent conditions in the D & O market, the Company chose to reduce the amount of coverage from a $10.0 million limit to a $5.0 million limit.

Operations

The Company continues to experience downward pressure on its operating margins for many of its products and services. The most notable
factors include: (1) nurse shortages, (2) increased insurance costs, (3) selected reductions in pharmacy reimbursements and increased product acquisition costs, (4) negative risk loss experience, (5) select state Medicaid program funding reductions
and a decrease in Medicaid nursing hours authorized and (6) increased revenue from existing start-up locations with continued losses in the third quarter of fiscal 2003. During the third quarter of fiscal 2003, the Company experienced a significant
increase in pharmacy revenue primarily attributable to increased deliveries of hemophilia factor products. The product level gross margin dollars generated by these increased deliveries contributed significantly to the improved operating margins of
the Company in the third quarter of fiscal year 2003. The Company has implemented a number of programs to try to improve operating margins which include: staffing reductions at selected locations including the corporate office, primarily through
position eliminations, reductions in workforce and attrition; certain supplier relationships have been adjusted to yield cost savings while still satisfying business requirements; and full implementation of the nurse scheduling system (SHINE). In
addition, the Company has engaged consultants and is currently in negotiations with a number of state Medicaid programs to identify additional opportunities for the Companys private duty nursing and PPEC services which could provide the states
with lower cost alternatives to existing care plans.

The Company continues to pursue a managed care marketing strategy which focuses on select key markets with
unfulfilled market share potential. The Companys regional managed care sales personnel work directly with branch office directors to increase local market share. Initiatives include: (1) identification of the dominant local market managed care
companies and their provider networks, (2) coordinated marketing and contracting efforts,

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(3) relationship development and expansion with key referral sources, (4) appropriate patient intakes, (5) development of clinical outcome reporting to
satisfy contractual obligations and demonstrate cost savings to the payor, and (6) effective coordination with local market Medicaid programs. The Company recently hired a new Vice President for Sales & Marketing to consolidate the
Companys various marketing resources and programs.

The Company is aware of ongoing changes in the infusion drug delivery market and the alternatives
available to various payors. If some of these alternatives are selected by various payors, there could be significant reductions to the Companys future pharmacy revenues. In addition, the Company remains exposed to significant revenue
fluctuations as a result of change in service or usage levels by a limited number of hemophilia factor patients. The Company is expanding its capability to distribute injectable medication nationally and continues to assess opportunities for these
injectables in selected payor patient populations. The Companys marketing strategy is to capitalize on core product opportunities within these patient populations, as well as to expand product offerings.

Source & Availability of Clinical Personnel

During the 13 weeks ending June 28, 2003, the Company
experienced a decrease in total hours ordered and case hours staffed. The un-staffed hours decreased to approximately 9% of total hours ordered as compared to the prior rolling 13 week period ending March 29, 2003 which was 12%. The Company
continues to aggressively compete for nurses to staff hours ordered, retain nurses with select wage and benefit improvements and implement employee satisfaction initiatives. To date, management has seen inconsistent results in a number of markets
and will continue to assess and respond accordingly.Management anticipates that with the full implementation of the nurse scheduling system (SHINE) and subsequent learning curve of the
application, improvements in both un-staffed hours and gross margin levels should occur over time; however, there can be no assurance that this will occur.

The
following table represents the approximate total hours for the time periods indicated:



|                                      |  | Totalhoursordered |  | Totalhoursdeclined |  | Totalcasehoursstaffed |  | Totalcasehoursun-staffed | 
|------------------------------------- |  | ----------------- |  | ------------------ |  | --------------------- |  | ------------------------ | 
|                                      |  |                   |  |                    |  |                       |  |                          | 
|Rolling 13 weeks ended March 29, 2003 |  | 895,630           |  | 87,554             |  | 699,806               |  | 108,270                  | 
|Rolling 13 weeks ended June 28, 2003  |  | 874,240           |  | 98,645             |  | 693,053               |  | 82,542                   | 

Critical Accounting Policies

Net Revenue

Due to the nature of the health care industry and the reimbursement environment in which the Company operates,
certain estimates are required to record net revenues and accounts receivable at their realizable values. Inherent in these estimates is the risk that they will need to be revised or updated, with the changes recorded in subsequent periods as
additional information becomes available to management. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for services from certain payors may result in adjustments to amounts
originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review. As of June 30, 2003, the Company had no material claims, disputes or unsettled matters with third-party
payors, nor were there any material pending settlements with third-party payors except as disclosed under the Recent Developments section above.

Net
revenue represents the estimated net realizable amounts from patients, third-party payors and others for patient services rendered and products provided. Such revenue is recognized as the treatment plan is administered to the patient and recorded at
amounts estimated to be received under reimbursement arrangements with payors. Net revenues to be reimbursed by contracts with third-party payors are recorded at an amount to be realized under these contractual arrangements. Revenues from Medicaid
and Medicare are generally based on

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reimbursement of the reasonable direct and indirect costs of providing services to program participants. In certain situations, the services and products
are recorded separately. In other situations, the services and products are billed and reimbursed on a per diem or contract basis whereby the insurance carrier pays the Company one combined amount for treatment. Because the reimbursement
arrangements in these situations are based on a per diem or contract amount, the Company does not maintain records that provide a breakdown between the service and product components.

The Company has developed a methodology to record the estimated revenue as a result of the inherent time lag between certain patient treatments and input of the related information into its billing and collection
system. This methodology measures relative changes in the time and overall activity level at each branch office location and aggregates these measurements to estimate the impact to consolidated net revenue. As of September 30, 2002 the estimated
revenue was approximately 0.5% of revenue for fiscal year ended 2002. Any unforeseen volatility to either the time or activity level at specific branch offices has the potential to significantly impact the estimate.

In other cases, patient treatments may cease for a number of reasons including re-hospitalizations, changes in treatment needs, or death, and a time lag may exist before this
information is reflected in the Companys billing and collection system. The Company has developed a methodology that measures the relative magnitude of these events over recent time periods and applies this methodology to reduce net revenues
recognized in the current period.

Allowance for Doubtful Accounts

In determining
the adequacy of the allowance and related provision for doubtful accounts, the Company has developed a process that combines statistical analysis of historical collection and write-off activity with a detailed review of existing account balances
meeting certain criteria and their likelihood of being collected at the amounts recorded. This detailed review involves both the assigned corporate reimbursement department personnel and the respective branch office location personnel assessing each
patient claim that falls within prescribed age and amount criteria. These assessments are aggregated and compared to the results of the statistical analysis to provide additional support to management in making the estimate of the allowance for
doubtful accounts. Inherent in this estimate is the risk that it will need to be revised or updated, with the changes recorded in subsequent periods, as additional information becomes available to management.

Goodwill and Other Acquired Intangible Assets

The Statement of Financial Accounting Standards (SFAS) No. 142
eliminates goodwill amortization from the consolidated statements of operations and requires an evaluation of goodwill for impairment on an annual basis, and more frequently if circumstances indicate a possible impairment. The Company performs its
annual impairment test in the fourth quarter of each fiscal year. For these evaluations, the Company is using an implied fair value approach, which uses a discounted cash flow analysis and other valuation methodologies. These evaluations use many
assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related to future earnings. The Company completed the impairment test and, at September 30, 2002, there was no resulting impairment. Subsequent
impairments, if any, would be classified as operating expense.

Intangible assets that meet certain criteria will qualify for recording on the consolidated balance
sheet and will continue to be amortized in the consolidated statements of operations. Such intangible assets will be subject to a periodic impairment test based on estimated fair value.

Accrued Insurance

The Companys insurance broker retains the services of an independent actuary to prepare an actuarial
analysis of the Companys development of reported and incurred but not reported claims. These estimates are updated quarterly and are used in the valuation of the accrued insurance liability. Inherent in these estimates is the risk that they
will need to be revised or updated, with the changes recorded in subsequent periods, as additional information becomes available to management.

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Results of Operations

The following table is derived from the
Companys unaudited condensed consolidated statements of operations for the periods indicated and presents results of operations as a percentage of net revenue and the percentage change in the dollar of each item from the comparative prior
period:

|                                                |  | Percentage of Net Revenue |   | Period-to-PeriodPercentageIncrease(Decrease) |  
|----------------------------------------------- |  | ------------------------- | - | -------------------------------------------- | -
|                                                |  |                           |   |                                              |  
|                                                |  | Three MonthsendedJune 30, |   | Nine MonthsendedJune 30,                     |  
|                                                |  |                           |   |                                              |  
|                                                |  | 2003                      |   | 2002                                         |  
|                                                |  |                           |   |                                              |  
|Net revenue                                     |  | 100.0                     | % | 100.0                                        | %
|Operating salaries, wages and employee benefits |  | 43.2                      |   | 46.4                                         |  
|Other operating costs                           |  | 39.9                      |   | 38.0                                         |  
|Corporate, general and administrative           |  | 8.9                       |   | 9.2                                          |  
|Provision for doubtful accounts                 |  | 1.0                       |   | 0.7                                          |  
|Depreciation and amortization                   |  | 1.9                       |   | 1.9                                          |  
|                                                |  |                           |   |                                              |  
|Operating income                                |  | 5.1                       |   | 3.8                                          |  
|Other income                                    |  | 0.0                       |   |                                             |  
|Early extinguishment of debt                    |  | 0.1                       |   | 0.1                                          |  
|Interest income                                 |  | 0.0                       |   | 0.1                                          |  
|Interest expense                                |  | (1.1                      | ) | (1.4                                         | )
|                                                |  |                           |   |                                              |  
|Income before income tax expense                |  | 4.1                       | % | 2.6                                          | %
|                                                |  |                           |   |                                              |  

The Company provides a broad range of health care services and products principally
for children and, to a lesser extent, young adults and geriatric patients. The following table summarizes both services and products based upon estimated percentages of net revenue to total net revenue of each major category from continuing
operations offered by the Company for the periods indicated.

The prior period includes reclassifications.(in thousands):

|                                                         |  | Three MonthsEndedJune 30, |        | Nine MonthsEndedJune 30, |  
|-------------------------------------------------------- |  | ------------------------- | ------ | ------------------------ | -
|                                                         |  |                           |        |                          |  
|                                                         |  | 2003                      |        | 2002                     |  
|                                                         |  |                           |        |                          |  
|Pediatric Home Health Care                               |  |                           |        |                          |  
|Nursing                                                  |  | $                         | 21,238 |                          | $
|Respiratory Therapy Equipment and Home Medical Equipment |  |                           | 4,320  |                          |  
|PPEC                                                     |  |                           | 1,862  |                          |  
|Pharmacy and Other                                       |  |                           | 14,418 |                          |  
|                                                         |  |                           |        |                          |  
|Total Pediatric Home Health Care                         |  |                           | 41,838 |                          |  
|                                                         |  |                           |        |                          |  
|Adult Home Health Care:                                  |  |                           |        |                          |  
|Nursing                                                  |  |                           | 2,681  |                          |  
|Respiratory Therapy Equipment and Home Medical Equipment |  |                           | 4,923  |                          |  
|Pharmacy and Other                                       |  |                           | 4,707  |                          |  
|                                                         |  |                           |        |                          |  
|Total Adult Home Health Care                             |  |                           | 12,311 |                          |  
|                                                         |  |                           |        |                          |  
|Total Net Revenue                                        |  | $                         | 54,149 |                          | $
|                                                         |  |                           |        |                          |  

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Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

Net revenue increased $4.9 million, or 10%, to $54.1 million in the three months ended June 30, 2003 from $49.2 million in the three months ended June 30, 2002. Pediatric home health care net revenue increased by $3.4
million for the three months ended June 30, 2003, due to a number of factors, including, the acquisition of pediatric private duty nursing facilities in Pennsylvania, increased pharmacy deliveries to new and existing hemophilia factor patients and
other core products and increased PPEC locations and census as compared to the three months ended June 30, 2002. Adult health care net revenue increased $1.5 million for the three months ended June 30, 2003, primarily as a result of increased
pharmacy deliveries and an increase in the provision of core products and services to respiratory therapy patients. In the three months ended June 30, 2003, the Company derived approximately 51% of its net revenue from commercial insurers and other
private payors, 42% from Medicaid and 7% from Medicare.

Operating salaries, wages and employee benefits consist primarily of branch office employee costs.
Operating salaries, wages and employee benefits increased $0.6 million, or 2%, to $23.4 million in the three months ended June 30, 2003 from $22.8 million in the three months ended June 30, 2002. The Company experienced increases in its labor costs
for nursing services as well as an increase in branch office staff costs for both existing and new start-up locations in the three months ended June 30, 2003 as compared to the three months ended June 30, 2002. As a percentage of net revenue,
operating salaries, wages and employee benefits for the three months ended June 30, 2003 decreased to 43% from 46% for the three months ended June 30, 2002.

Other
operating costs include medical supplies, branch office rent, utilities, vehicle expenses, allocated insurance costs and cost of sales. Cost of sales consists primarily of the costs of pharmaceuticals and related services. Other operating costs
increased $2.9 million, or 16%, to $21.6 million in the three months ended June 30, 2003 from $18.7 million in the three months ended June 30, 2002. The increase in other operating costs relates primarily to increased pharmacy deliveries and
business insurance costs. As a percentage of net revenue, other operating costs for the three months ended June 30, 2003 increased to 40% from 38% for the three months ended June 30, 2002.

Corporate, general and administrative costs increased $0.2 million, or 5% to $4.8 million in the three months ended June 30, 2003 from $4.6 million in the three months ended June 30, 2002. The increase relates primarily
to increased managed care marketing personnel, severance payouts as a result of staffing reductions and increased professional service costs. As a percentage of net revenue, corporate, general and administrative costs remained relatively constant at
9%.

Provision for doubtful accounts increased $0.2 million, or 65% to $0.5 million in the three months ended June 30, 2003 from $0.3 million in the three months
ended June 30, 2002. Cash collections as a percentage of net revenue were 99% and 98% for the three months ended June 30, 2003 and 2002, respectively. In connection with the acquisition of Advanced Health Cares Pennsylvania facilities, the
Company encountered delays in obtaining new provider numbers from the State, which resulted in services performed remaining as unbilled accounts receivable. The provider numbers were obtained in late June 2003 and all billings were subsequently
released and are expected to be collected. In addition, the aging of accounts receivable for pharmacy, respiratory therapy and home medical equipment deteriorated slightly during the quarter.

Depreciation and amortization remained relatively unchanged at $1.0 million in the three months ended June 30, 2003 as compared to the three months ended June 30, 2002. As a percentage of net revenue, depreciation and
amortization remained relatively constant at 2%.

Interest expense decreased $0.1 million, or 12%, to $0.6 million in the three months ended June 30, 2003 from
$0.7 million in the three months ended June 30, 2002. The Companys average debt outstanding decreased $3.2 million as the Company completed several transactions to repurchase a portion of the Notes.

Interest income decreased $0.03 million to $0.02 million in the three months ended June 30, 2003 from $0.05 million in the three months ended June 30, 2002. The Company invested its excess cash balances
in highly liquid guaranteed principal investments.

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Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002

Net revenue increased $13.9 million, or 10%, to $160.3 million in the nine months ended June 30, 2003 from $146.4 million in the nine months ended June 30, 2002. Pediatric home health care net revenue increased by $9.8
million for the nine months ended June 30, 2003, due to a number of factors, including, the acquisition of pediatric private duty nursing facilities in Pennsylvania, increased pharmacy deliveries to new and existing hemophilia factor patients, the
seasonal drug Synagis and other core products, increased provision of core respiratory products and services and increased PPEC locations and census as compared to the nine months ended June 30, 2002. Adult health care net revenue increased $4.1
million for the nine months ended June 30, 2003, primarily as a result of increased pharmacy deliveries and an increase in the provision of core products and services to respiratory therapy patients. In the nine months ended June 30, 2003, the
Company derived approximately 51% of its net revenue from commercial insurers and other private payors, 42% from Medicaid and 7% from Medicare.

Operating
salaries, wages and employee benefits consist primarily of branch office employee costs. Operating salaries, wages and employee benefits increased $2.1 million, or 3%, to $70.1 million in the nine months ended June 30, 2003 from $68.0 million in the
nine months ended June 30, 2002. The Company experienced increases in its labor costs for nursing services as well as an increase in branch office staff costs for both existing and new start-up locations in the nine months ended June 30, 2003 as
compared to the nine months ended June 30, 2002. As a percentage of net revenue, operating salaries, wages and employee benefits for the nine months ended June 30, 2003 decreased to 44% from 46% for the nine months ended June 30, 2002.

Other operating costs include medical supplies, branch office rent, utilities, vehicle expenses, allocated insurance costs and cost of sales. Cost of sales consists primarily
of the costs of pharmaceuticals and related services. Other operating costs increased $10.8 million, or 20%, to $64.7 million in the nine months ended June 30, 2003 from $53.9 million in the nine months ended June 30, 2002. The increase in other
operating costs relates primarily to increased pharmacy deliveries, business insurance costs and medical supply usage. As a percentage of net revenue, other operating costs for the nine months ended June 30, 2003 increased to 40% from 37% for the
nine months ended June 30, 2002.

Corporate, general and administrative costs increased $0.5 million, or 4% to $14.2 million in the nine months ended June 30, 2003
from $13.7 million in the nine months ended June 30, 2002. The increase relates primarily to increased managed care marketing personnel, severance payouts as a result of staffing reductions and increased professional service costs. As a percentage
of net revenue, corporate, general and administrative costs remained relatively constant at 9%.

Provision for doubtful accounts remained relatively constant at
$1.0 million in the nine months ended June 30, 2003 as compared to the nine months ended June 30, 2002. Cash collections as a percentage of net revenue were 97% and 99% for the nine months ended June 30, 2003 and 2002, respectively. In connection
with the acquisition of Advanced Health Cares Pennsylvania facilities, the Company encountered delays in obtaining new provider numbers from the State, which resulted in services performed remaining as unbilled accounts receivable. The
provider numbers were obtained in late June 2003 and all billings were subsequently released and are expected to be collected. In addition, the aging of accounts receivable for pharmacy, respiratory therapy and home medical equipment deteriorated
slightly during the quarter.

Depreciation and amortization remained relatively unchanged at $3.1 million in the nine months ended June 30, 2003 as compared to
the nine months ended June 30, 2002. As a percentage of net revenue, depreciation and amortization remained relatively constant at 2%.

Interest expense decreased
$0.2 million, or 11%, to $1.9 million in the nine months ended June 30, 2003 from $2.1 million in the nine months ended June 30, 2002. The Companys average debt outstanding decreased $3.5 million as the Company completed several transactions
to repurchase a portion of the Notes.

Interest income decreased $0.05 million to $0.08 million in the nine months ended June 30, 2003 from $0.1 million in the
nine months ended June 30, 2002. The Company invested its excess cash balances in highly

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liquid guaranteed principal investments.

Liquidity and Capital
Resources

Company Events & Updates

As of April 28, 2003, the Company was
notified by a representative of the Medicare carrier that upon further review a significant number of the patients contained in the original audit sample were deemed to have sufficient medical documentation and would be excluded from their reported
findings which revised the recoupment to $0.8 million plus accrued interest and has recouped this amount as of June 30, 2003. (See Recent Developments above for further details).

During the three months ended June 30, 2003, the Company repurchased $1.0 million of its Notes. The Notes were purchased in a private transaction for $0.95 million cash, plus accrued interest. The gain (net of the
write-off of the related deferred financing fees) of approximately $0.03 million is reflected in the condensed consolidated statements of operations for three months ended June 30, 2003. During the fourth quarter of fiscal year 2003, the Company
repurchased $2.0 million of its Notes. The Notes were purchased in private transactions for $1.9 million cash, plus accrued interest. The gain (net of the write-off of the related deferred financing fees) of approximately $0.04 million will be
reflected in the consolidated statements of operations in the fourth quarter of fiscal year 2003. The aggregate principal amount of the Notes outstanding as of the date of this filing is $20.4 million.

The Indenture under which the Notes were issued allows the Company to repurchase the Notes at its discretion. All bids to repurchase have been based upon a number of factors including cash availability,
interest rates on invested cash, other capital investment alternatives, and relative ask prices quoted by the market maker. Each decision by the Company to repurchase has been arrived at independently using the above criteria and the Company does
not have a formal plan in place to repurchase the Notes.

Operations

Cash
collections as a percentage of net revenue for the three months ended June 30, 2003 and 2002 were 99% and 98%, respectively. In connection with the acquisition of Advanced Health Cares Pennsylvania facilities, the Company encountered delays in
obtaining new provider numbers from the State, which resulted in services performed remaining as unbilled accounts receivable. The provider numbers were obtained in late June 2003 and all billings were subsequently released and are expected to be
collected. While management anticipates the Company will continue to achieve its cash collection targets, there can be no assurance that disruptions to cash flow will not occur.

Among a number of states, one has encountered three missed deadlines by its contractor for implementation of a new computer system designed to standardize its technology platform and facilitate faster claims payment. As
a result, the state has chosen to make progress payments to providers without assigning those payments to specific claims for services rendered. This decision has the potential to create reconciliation problems for the Company and the state. As of
the date of this filing, the Company has not received notifications of payment application instructions from the state.

For the nine months ended June 30, 2003,
the Company purchased medical equipment with technology upgrades to service existing patients, and made routine purchases of computer equipment to maintain and upgrade its technology infrastructure. The Company anticipates future capital
expenditures for maintenance, support and enhancements of existing technology, continued investments in new start up locations and continued durable medical equipment purchases. The Company anticipates funding these capital expenditures with cash
flow from operations.

For the three and nine months ended June 30, 2003, the Company had a current income tax expense of $0.9 million and $2.2 million,
respectively.

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Risk Management

The Companys insurance carrier requires a
twelve month estimated loss reserve to be funded entirely with cash over the first ten months of fiscal 2003. This cash requirement is estimated to be $2.1 million, which is reduced by the monthly loss fund payments. The insurance carrier has the
right to increase this cash requirement at the end of the first twelve months if the claim experience is greater than anticipated.

As a result of operating in the
health care industry, the Companys business entails an inherent risk of lawsuits alleging malpractice, product liability or related legal theories, which can involve large claims and significant defense costs. The Company is, from time to
time, subject to such suits arising in the ordinary course of business. The Company currently maintains professional and commercial liability insurance intended to cover such claims. As of June 30, 2003, this insurance coverage is provided under a
claims-made policy which provides, subject to the terms and conditions of the policy, coverage for certain types of claims made against the Company during the term of the policy and does not provide coverage for losses occurring during
the terms of the policy for which a claim is made subsequent to the termination of the policy. Should the policy not be renewed or replaced with equivalent insurance, claims based on occurrences during its term but asserted subsequently would be
uninsured. There can be no assurance that the coverage limits of the Companys insurance policy will be adequate.

In addition, the Company is subject to
accident claims arising out of the normal operation of its fleet of vans and small trucks, and maintains insurance intended to cover such claims. A successful claim against the Company in excess of the Companys insurance coverage could have an
adverse effect upon the Companys business. Claims against the Company, regardless of their merits or eventual outcome also may have an adverse effect upon the Companys reputation and business.

Capital Resources

Management currently believes that its liquidity position will be adequate to satisfy the Companys
working capital requirements, professional and commercial liability insurance loss funding, funding of start-up locations, selected acquisitions, workers compensation collateral requirements, and income tax payments. The Companys current
source of liquidity is cash on hand and cash flow from operations and as a result, the Company is exposed to fluctuations in cash collection results. The Company has engaged a financial advisor to review capital structure alternatives necessary to
support the Companys growth plans. These alternatives include recapitalization of its debt obligations to take advantage of potential interest rate arbitrage opportunities and financing of potential acquisitions. However, there is no assurance
that external financing to satisfy a preferred alternative will be obtained.

Variation in Quarterly Operating Results

The Companys quarterly results may vary significantly depending primarily on factors such as re-hospitalizations of patients, seasonality and usage levels of pharmaceutical products and respiratory
services, the timing of new branch office openings and pricing pressures due to legislative and regulatory initiatives to contain health care costs. Because of these factors, the Companys operating results for any particular quarter may not be
indicative of the results for the full fiscal year.

Contingent Liabilities and Commitments

The Companys former workers compensation carrier requires the estimated loss reserve to be secured by surety bonds. As of June 30, 2003, the Company had posted $2.8 million cash as collateral for $4.0 million surety bonds. The
carrier has the right to require the Company to post cash up to the loss reserve liability. In addition, all loss fund payments are made monthly from cash flow from operations.

The Companys workers compensation insurance carrier requires a twelve month estimated loss reserve to be funded entirely with cash over the first ten months of fiscal 2003. This cash requirement is estimated
to be $2.1

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million, which is reduced by the monthly loss fund payments. The insurance carrier has the right to increase this cash requirement at the end of the first
twelve months if the claim experience is greater than anticipated.

The Company believes that a repayment of some amount is probable for the open Medicare audit
issue discussed inRecent Developments above. At this point in time the Companys estimate of the liability is based upon the status of its review to date, and the settlement of similar claims made against other home health care
providers. Based upon this estimate, the Company accrued a $0.36 million liability in the condensed consolidated financial statements for the nine months ended June 30, 2003. The ultimate resolution of this asserted claim may be different than the
current estimate and could have a material adverse effect on the Companys consolidated financial or liquidity position.

The Company has entered into
employment agreements with certain employees of the Company which provide, amongst other things, salary, benefits and perquisites, as well as additional compensation for certain changes in control of the Company or a failure of the Company to comply
with any material terms of the agreements.

The following table represents a schedule of the Companys contractual obligations and commitments as of June 30,
2003:



|                         |  | Payments Due by Period(In thousands) |       
|------------------------ |  | ------------------------------------ | ------
|                         |  |                                      |       
|                         |  | Total                                |       
|                         |  |                                      |       
|Contractual Obligations: |  |                                      |       
|Long-term debt           |  |                                      |       
|Subordinated Notes       |  | $                                    | 22,350
|Other notes payable      |  |                                      | 381   
|Operating leases         |  |                                      | 14,009
|                         |  |                                      |       
|                         |  | $                                    | 36,740
|                         |  |                                      |       

| | ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
| | ------- | ----------------------------------------------------------

The Company faces a number of market risk exposures including risks related to
cash and cash equivalents, accounts receivable and interest rates. Cash and cash equivalents are held primarily in one financial institution. The Company performs periodic evaluations of the relative credit standing of this financial institution.
The concentration of credit risk with respect to accounts receivable, which are primarily health care industry related, represent a risk to the Company given the current environment in the health care industry. The risk is somewhat limited due to
the large number of payors including governmental payors, insurance companies, individuals and the diversity of geographic locations in which the Company operates. However, the Company has substantial geographic density in the eastern United States
which it believes exposes the Company to payor initiated reimbursement changes.

The Companys Notes, issued in 1998, have a fixed coupon rate of 10%. The
fair value of the Companys Notes is subject to change as a result of changes in market prices or interest rates. The Company estimates potential changes in the fair value of interest rate sensitive financial instruments based on the
hypothetical increase (or decrease) in interest rates. The Companys use of this methodology to quantify the market risk of such instruments should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions.
The quantitative information about market risk is necessarily limited because it does not take into account other factors such as the Companys financial performance and credit ratings.

Based on a hypothetical immediate 150 basis point increase in interest rates at June 30, 2003 and 2002, the market value of the Companys Notes would be reduced by approximately $1.1 million and $1.5 million,
respectively. Conversely, a 150 basis point decrease in interest rates would result in a net increase in the market

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value of the Companys Notes outstanding at June 30, 2003 and 2002 of approximately $1.2 million and $1.6 million, respectively.



| | ITEM 4. | CONTROLS AND PROCEDURES
| | ------- | -----------------------

(a)Evaluation of disclosure controls and procedures. The Companys chief executive officer and chief financial officer, after evaluating the effectiveness of the Companys disclosure controls and procedures as
of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Companys disclosure controls and procedures are adequate and effective in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the Companys periodic SEC filings.

(b)Changes in internal controls.There were no changes in the Companys internal controls over financial reporting that
occurred during the Companys most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.

PART II - OTHER INFORMATION

| | ITEM 1. | LEGAL PROCEEDINGS
| | ------- | -----------------

On March 11, 1999, a putative class action complaint was filed against the Company in the United States District Court
for the Northern District of Georgia. The Company and certain of its then current officers and directors were among the named defendants. To the Companys knowledge, no other putative class action complaints were filed within the 60-day time
period provided for in the Private Securities Litigation Reform Act. The plaintiffs and their counsel were appointed lead plaintiffs and lead counsel, and an amended complaint was filed on or about July 22, 1999. The amended complaint did not
specify an amount or range of damages that the plaintiffs were seeking. In general, the plaintiffs alleged that prior to the decline in the price of the Companys Common Stock on July 28, 1998, there were violations of the Federal Securities
Laws arising from misstatements of material information in and/or omissions of material information from certain of the Companys securities filings and other public disclosures principally related to its reporting of accounts receivable and
the allowance for doubtful accounts. The amended complaint purported to expand the class to include all persons who purchased the Companys Common Stock during the period from July 29, 1997 through and including July 29, 1998. On October 8,
1999, the Company and the individuals named as defendants moved to dismiss the amended complaint on both substantive and procedural grounds. On March 30, 2000, the Court denied the motions to dismiss. On May 15, 2000, the Company and the individuals
named as defendants filed their answer, denying liability.

On February 27, 2001, Plaintiffs Motion for Class Certification was granted by the Court. Fact
discovery in the case closed on July 31, 2001. On September 5, 2001, Plaintiffs moved for leave to file a Second Amended Complaint and to expand the class period. The proposed Second Amended Complaint purported to expand the class to include all
persons who purchased the Companys stock between November 11, 1996 and July 28, 1998. The Court denied Plaintiffs Motion on October 12, 2001.

In January,
2002, the parties entered into a Stipulation of Settlement settling all claims asserted in the lawsuit against all parties for a total of $3.2 million, subject to court approval. On March 14, 2002, following a hearing on the fairness, reasonableness
and adequacy of the proposed settlement, the Court entered an Order approving the settlement. The time for appeal of the Settlement Order has expired and no appeal has been taken. Under the terms of the settlement, the $3.0 million contribution of
the Company to the settlement was fully funded by its insurance carrier under its Directors and Officers insurance policy.

On July 28, 1999, a civil action was
filed against the Company and certain of its current and former officers and directors in the United States District Court for the Middle District of Tennessee. The action was filed by Phyllis T. Craighead and Healthmark Partners, LLC, as well as a
liquidating trust apparently established to wind up the business affairs of their corporation, Kids & Nurses, Inc. In the original complaint, in general, the plaintiffs alleged that the defendants violated Federal and Tennessee Securities Laws
and committed common law fraud in connection with the Companys purchase of Kids & Nurses, Inc. in November, 1997. The plaintiffs

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sought actual damages in an amount between $2.5 million and $3.5 million, plus punitive damages and the costs of litigation, including reasonable
attorneys fees. On September 24, 1999, the defendants filed a motion to dismiss the complaint on both substantive and procedural grounds. On December 20, 1999, the plaintiffs filed an amended complaint in which they withdrew their claims under
the Federal Securities Laws, and added claims under Georgias securities laws. The plaintiffs also filed a brief in response to the Companys motion to dismiss. On February 1, 2000, the defendants filed an amended motion to dismiss
addressing the allegations of the amended complaint. On March 29, 2001, the motion to dismiss was denied without prejudice pending a ruling by the Tennessee Supreme Court on an unrelated case. On May 2, 2001, the Company and the individuals named as
defendants, filed their answer, denying liability.On May 8, 2002, the case was dismissed with prejudice, subject only to the Plaintiffs reservation of
their rights to participate in the Class Settlement.



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

(a)Exhibits

31.1Rule 13a-14(a)/15d-14(a) Certification

31.2Rule 13a-14(a)/15d-14(a) Certification

32.1Section 1350 Certification

32.2Section 1350 Certification

(b)Reports on Form 8-K

On May 12, 2003, the Company filed a Current Report on Form
8-K announcing its financial results for the quarter ended March 31, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.



|                       |  | PEDIATRICSERVICESOFAMERICA,INC.(Registrant)
|---------------------- |  | -------------------------------------------
|Date:  August 12, 2003 |  | By:                                        
|                       |  |                                            
|                       |  |                                            



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