MED DIVERSIFIED INC - 10-K Annual Report

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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

FOR THE FISCAL YEAR ENDED: MARCH 31, 2002

COMMISSION FILE NUMBER: 1-15587

MED DIVERSIFIED, INC.

NEVADA 84-1037630
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

200 BRICKSTONE SQUARE, SUITE 403, ANDOVER, MA 01810
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

(978) 323-2500
(ISSUER'S TELEPHONE NUMBER)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.

COMMON STOCK, $.001 PAR VALUE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 / /

Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /

As of September 30, 2002, 148,661,526 shares of the Registrant's common
stock were outstanding, and the aggregate market value of the shares held by
non-affiliates was approximately $16,043,844.

DOCUMENTS INCORPORATED BY REFERENCE: NONE.

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IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED HEREIN, CERTAIN MATTERS
DISCUSSED IN THIS ANNUAL REPORT MAY CONSTITUTE FORWARD LOOKING STATEMENTS UNDER
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE STATEMENTS MAY INVOLVE RISKS
AND UNCERTAINTIES. THESE FORWARD LOOKING STATEMENTS RELATE TO AMONG OTHER
THINGS, OUR DEVELOPMENT EFFORTS AND BUSINESS PROSPECTS, PERCEIVED OPPORTUNITIES
IN THE MARKETPLACE, DELIVERY OF OUR PRODUCTS AND SERVICES, OUR BUSINESS
STRATEGY, AND OUR BUSINESS PLAN GENERALLY. THE ACTUAL OUTCOMES OF THESE MATTERS
MAY DIFFER SIGNIFICANTLY FROM THE OUTCOMES EXPRESSED OR IMPLIED IN THESE
FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF THE FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE, SEE "RISK FACTORS" ON PAGE 11.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

DEVELOPMENT OF OUR COMPANY

We currently provide home healthcare and alternate site healthcare, skilled
nursing, and pharmacy management and distribution services to more than 175,000
patients in 37 states.

We originally incorporated in Nevada on August 25, 1986 as a business
development company and began operations under the name e-MedSoft.com with the
acquisition of an Internet-based healthcare management system in January 1999.
During the fiscal years ended March 31, 2002, 2001 and 2000, we continued the
development, upgrading, testing and implementation of our healthcare management
system. We acquired e-Net (a UK based hardware and software reseller) in 1999
and entered into a long-term management services agreement with a pharmacy
management company in 2001. In addition, we acquired technologies to service
physician networks and three multimedia companies to provide various
telemedicine technologies. We also entered into several contracts over this
period to implement and roll out various Internet-based healthcare management
systems and to provide other products including "e-financing" distribution
networks.

During fiscal 2001, the underlying business assumptions used to determine
the marketability of our technology products were revised as available capital
for developing Internet technology constricted and the expected results from
various development projects did not occur. As a result, we wrote off
approximately $19.1 million and $201 million in fiscal years ended March 31,
2002 and 2001, respectively. Effective March 31, 2001 we discontinued the
business segment of sales of software and hardware in the UK.

On August 6, 2001, we acquired Chartwell Diversified Services, Inc.
("Chartwell"), a provider of Alternate Site Healthcare Services including
infusion therapy, respiratory therapy, home medical equipment, specialty
pharmaceutical services and home attendant care services. We exchanged
500 thousand shares of our convertible preferred stock and warrants for
20 million shares of our common stock with an exercise price of $4.00 per share
vesting over a five year period from the grant date, for all the outstanding
shares of Chartwell. Following the approval by a majority of stockholders of our
common stock at our annual meeting in December 2001 the convertible preferred
stock was converted to 50 million shares of our common stock. The acquisition
was accounted for under the purchase method of accounting. SEE "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments".

On November 28, 2001, we acquired Tender Loving Care Health Care
Services, Inc. ("TLCS"), a publicly traded company that provides Alternate Site
and Home Health Care Services including skilled nursing, home medical equipment
and temporary staffing. We made a cash tender offer for all the outstanding
shares of TLCS. As of September 30, 2002, approximately 14.5 million shares of
TLCS common stock or 99.3% have been tendered. The acquisition was accounted for
under the purchase method of accounting. SEE "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Recent
Developments".

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Subsequent to the acquisition of TLCS, it was determined that TLCS'
financial condition was significantly worse than originally indicated. Based
upon management's analysis it was determined that goodwill resulting from the
TLCS acquisition was impaired and an impairment charge of $156 million was
recorded as of March 31, 2002. SEE "Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations--Recent Developments".

These acquisitions have expanded our revenue base to include services
provided by an integrated delivery network for home health services. We now
offer a full spectrum of home healthcare services and products within the home
and alternate site settings.

For the three years ended March 31, 2002, our revenue composition and
contribution came from the following business lines (dollars in thousands):

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* Reflected as Discontinued Operations effective March 31, 2001.

** Effective March 31, 2002 we are analyzing alternatives for selling all or a
portion of this Business Segment.

Our objective is to be a leading provider of home healthcare services in the
United States. Our strategy for achieving this objective is:

- to maintain focus on our existing services offerings and increase our
emphasis on providing seamless service offerings to the patient population
we serve; and

- to supplement our internal growth with selective acquisitions.

Our services are offered through two distinct Business Units:

HOME HEALTHCARE/ALTERNATIVE SITE SERVICES provides an option to hospitalization
or admittance to a long-term care facility for persons in need of medical care.
As part of our Home Healthcare/ Alternative Site Services, we provide the
following:

- Skilled Nursing Services

- Home Medical Equipment

- Home Attendant Care Services

- Infusion Therapy

- Respiratory Therapy

PHARMACY MANAGEMENT AND DISTRIBUTION SERVICES provides institutional pharmacy
services to skilled nursing and assisted living facilities, as well as retail
distribution facilities. As part of our Pharmacy Management and Distribution
Services, we provide:

- Specialty Pharmaceutical Services

- Mail Order Pharmacy

- Retail Compounding

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THROUGH FISCAL 2002, WE OPERATED A THIRD BUSINESS UNIT, DISTANCE MEDICINE
SOLUTIONS, which provides desktop or laptop, based solutions, capable of
providing Internet delivered multimedia diagnostic information and patient data
to physicians and other caregivers. At the end of fiscal 2002, our board of
directors and management began to investigate business transactions or
alternatives that would result in us selling all or a portion of this business
unit.

AMERICAN STOCK EXCHANGE DELISTING

On June 4, 2002, our board of directors announced that on May 22, 2002, they
received notice from the American Stock Exchange ("AMEX") that we no longer meet
the continued listing requirements of AMEX. We disputed the factual premises
upon which AMEX's action was taken and requested a formal hearing to continue
listing our common stock on AMEX. Although we were confident in our decision to
challenge the merits of the AMEX notification, we continued to further review
the benefits of appealing the notification and continuing the listing of our
common shares on the AMEX. On June 28, 2002, we announced that we have withdrawn
our appeal of the AMEX delisting determination and that AMEX has consented to
our request to voluntarily delist our common stock on the AMEX effective at the
close of trading on July 15, 2002. We took this action in connection with the
AMEX delisting based upon our management's analysis that we are unable to meet
the AMEX's continued listing requirements given our accumulated deficit at
March 31, 2002.

Beginning on July 16, 2002, our common stock is quoted on the "pink sheets".

INDUSTRY OVERVIEW

HOME HEALTHCARE/ALTERNATE SITE SERVICES

The Center for Medicare and Medicaid Services, Office of the Actuary,
National Health Statistics Group, estimates that expenditures for nursing and
home healthcare were approximately $124.7 billion in 2000 and will reach
approximately $270.4 billion in 2010, representing a compound annual growth rate
of approximately 8%. Of this amount, expenditures for nursing home care were
approximately $92.3 billion in 2000 and will reach $183.4 billion in 2010,
representing a compound annual growth rate of approximately 7.1%. Expenditures
for home healthcare were approximately $32.4 billion in 2000 and will reach
approximately $66.6 billion in 2010.

We believe that the growth in expenditures for nursing and home healthcare
will continue to be driven by increases in demand for services due to (i) the
continued trend towards treatment of patients in the home as a lower cost
alternative to acute care settings (ii) the introduction of new technologies
that enable patients to receive medically appropriate care in the home without
sacrificing quality and (iii) the continued growth of both the number and
percentage of the American population age 65 or older, which is expected to
increase from approximately 33 million people, or 12% of the population in 2000,
to approximately 40 million people or 13% of the population in 2010, according
to the U. S. Census Bureau.

The National Home Infusion Association estimates that approximately $4 to
$5 billion is spent annually in the home infusion therapy sector. We estimate
that annual expenditures in the home respiratory therapy market approximate $3.5
to $4.5 billion and that the home equipment industry has an annual demand of
approximately $1.9 billion.

PHARMACY MANAGEMENT AND DISTRIBUTION SERVICES

Pharmacy Management and Distribution Services originated in an effort to
control the high cost of drugs through the use of formulary, group purchasing
power, lower cost distribution methods and compliance control at the pharmacist
level. Many home infusion companies operate some type of this business as a
logical outgrowth of their expertise in intravenous ("IV") and other non-oral
medications.

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Additionally, organizations such as Caremark, and disease-specific
organizations, such as Baxter's Hemophilia division, have built multi-million
dollar operations through prescription benefit, mail order provision and patient
health management programs.

We believe the pharmaceutical management area, particularly the specialty
pharmacy services business, holds substantial revenue opportunities.

The specialty pharmaceutical services industry has been and is fueled by
significant developments of new drugs and therapies by biotechnology and
pharmaceutical manufacturers. Many of these drugs and therapies require
specialized storage, distribution and handling by specialty pharmaceutical
services companies. In addition, the complexity of these therapies often
requires properly trained nurses and pharmacists to administer and monitor the
therapies for the patients.

Currently, there are more than 350 biotech drug products and vaccines
currently in clinical trials targeting more than 200 diseases, including various
cancers, Alzheimer's disease, heart disease, diabetes, multiple sclerosis, AIDS
and arthritis. The biotechnology industry has almost tripled in size since 1993,
with revenues increasing from $8 billion in 1993 to $22.3 billion in 2000.

The Internet, particularly in the dispensing of so-called "lifestyle"
products, has significantly impacted pharmacy distribution. An informal analysis
of websites offering mail order pharmacy services shows close to 350 vendors
running the spectrum from national retail chains to foreign based distributors
of psychotropic, hair loss and weight control products.

OUR BUSINESS STRATEGY

We have developed strategies for each of our Business Units in line with our
overall strategies of:

- maintaining focus on our existing services offerings and increasing our
emphasis on providing seamless service offerings to the patient population
we serve; and

- supplementing our internal growth with effective acquisitions.

HOME HEALTHCARE/ALTERNATE SITE SERVICES

In our Home Healthcare/Alternative Site Services Business Unit, we are
pursuing a strategy to increase market share and improve our profitability. The
following describes the key elements of our strategy:

MAINTAIN FOCUS ON EXISTING SERVICE OFFERINGS.

We intend to focus on our core businesses of providing comprehensive
healthcare services and expanding our service portfolio through the integration
of new value added services. By offering a comprehensive range of services, we
believe we can gain a competitive advantage with our core managed care customers
while maintaining a diversified revenue base.

In the area of skilled nursing services, our primary strategy for growing
this market is to leverage the brand power of TLCS. The brand provides us with
considerable competitive advantages, including:

- being one of the few national home health providers to have been granted
unconditional providership by the American Nurses Credential Center
("ANCC") qualifying us to provide continuing education ("CE") programs for
nurses through Tender Loving Care-Registered Trademark- Staff Builders'
national training department.

- having a reputation for quality based on TLCS' historical operations.

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As with all of our product lines, skilled nursing services will adhere to
our strategy of integrating with our other service offerings to, in this case,
provide healthcare organizations with a seamless "one stop shop" of services.

SUPPLEMENT INTERNAL GROWTH WITH SELECTIVE ACQUISITIONS.

We intend to continue to expand through internal growth in our key service
lines and through acquisitions in our target markets. We operate in a highly
fragmented market, which provides an attractive opportunity to drive growth
through select acquisitions.

INTEGRATE HOME HEALTH/ALTERNATE SITE SERVICES WITH OUR OTHER BUSINESS OFFERINGS.

While home healthcare/alternate site care accounts for the majority of our
revenue on a proforma basis as of March 31, 2002, we believe that offering our
contractual and hospital customers an integrated portfolio of alternate
site/home care services, pharmacy management, and skilled nursing options will
strengthen the total portfolio of services and provide additional leverage when
negotiating with managed care providers.

PHARMACY MANAGEMENT AND DISTRIBUTION SERVICES

With the exception of specific patient advocacy groups in areas such as
AIDS-HIV, Hemophilia or IVF, we do not compete in a consumer market. Our
strategy in our Pharmacy Management and Distribution Services Business Unit is
to integrate the product lines into our wider portfolio of home healthcare
product offerings by utilizing our network of hospital and managed care referral
sources, aligning with biopharmaceutical manufacturers in the area of clinical
trials and distribution agreements and making selective acquisitions that
broaden the service portfolio and deepen the product offering. To that end, in
June 2000, we acquired Resource Healthcare ("Resource"), an institutional
pharmacy provider for skilled nursing and assisted living facilities within the
state of Nevada.

OUR PRODUCTS AND SERVICES

We provide a range of products and services specifically for the healthcare
marketplace. In line with our business strategy, we are attempting to build upon
and develop the products and services, which make up our solutions in order to
provide the most comprehensive and relevant services possible for our clients.
The product lines for each of our Business Units are described below.

HOME HEALTHCARE/ALTERNATE SITE SERVICES

We derive approximately 77% and 69% of our revenue on a proforma basis as of
March 31, 2002 and 2001, respectively from our Home Healthcare/Alternative Site
Care Services Business Unit. This Business Unit includes the following products
and services:

- Skilled Nursing, the administration of in-home services from in-home
sitters to highly technical skilled nursing care.

- Infusion therapy, the administration of medications intravenously (into
veins), subcutaneously (under the skin), intramuscularly (into muscle),
intraecally or epidorrally (via spinal routes) or through feeding tubes
into the digestive tract. Infusion therapy often begins during
hospitalization of a patient and continues in the home environment.

- Home respiratory therapy (including home-delivered respiratory
medications), the provision of oxygen systems, home ventilators, sleep
apnea equipment, respiratory equipment, and related services.

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- Home medical equipment, the provision of patient room equipment,
principally hospital beds, wheelchairs, ambulatory and safety aids.

- Home attendant services, paraprofessional services include health aides
and other unlicensed personnel who assist with activities of daily living,
such as bathing, dressing and grooming.

Within these areas, we provide patients with a variety of clinical services,
related to products, and supplies, most of which are prescribed by a physician
as part of a care plan. They include the following:

- Specialized patient care.

- Provision of pharmacy services, high-tech infusion nursing, respiratory
care, and attendant care.

- Education of patients and the caregivers about illness and instructing
them on self-care and the proper use of products in the home.

- Monitoring of patient compliance with individualized treatment plan.

- Provision of progress reports to the physician and/or managed care
organization.

- Maintenance of home medical equipment.

- Assisting patients with activities of daily living and medication
compliance.

- Processing claims to third-party payors.

The decision to proceed with alternate site therapies is generally made
jointly by the patient, the attending physician and a representative of our
office. Our skilled nursing services provide a full line of healthcare services
to patients that require assistance at home. Our infusion and respiratory
services provides respiratory and infusion and other healthcare services to
patients in non-hospital settings and manages a network of locations providing
infusion services. Home infusion services are generally administered to treat
infections, dehydration, cancer, pain and nutritional deficiencies.

Since its formation in 1961, TLCS has become a leading national provider of
home healthcare services with approximately ninety branch locations and over
5,000 fulltime and part-time caregivers. Through our TLCS division we provide a
full range of licensed professional and paraprofessional healthcare personnel
services, which include services rendered by registered nurses, licensed
practical nurses, home health aides, nurses aides and personal care aides. Its
licensed personnel provide skilled nursing services, including:

- cardiac care

- pulmonary management

- wound care

- maternal care

- behavioral healthcare

- infusion therapy

- hospice support

- extensive patient counseling

- family healthcare counseling

- care of the terminally ill

- blood sample collection

- injections and infusion therapy

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- pain management

- physical therapy

- ventilator and tracheotomy care

- chemotherapy

- medication management and reminders

- surgical recovery

Our paraprofessional services include home health aide services and other
unlicensed personnel services to assist with activities of daily living such as:

- bathing

- dressing

- grooming

- live-in companion service

- assistance with daily living activities

For an alternate site patient, our locations also compound, dispense and
administer pharmaceuticals, sell medical supplies, provide nursing services,
train patients and their caregivers, consult with attending physicians, and
process reimbursement claims. Some of our locations also sell and rent durable
medical equipment and provide a full menu of home health nursing and therapy
services as well as complete network management. We manage this Business Unit
through regional centers in Texas and Pennsylvania and through branch offices in
100 national locations and a pool of approximately 11,000 home
healthcare/alternate site caregivers. Day-to-day operations are decentralized
within regional centers, employing nurses and pharmacists for deployment of
care, district managers for sales and marketing initiatives and regional
managers for business management, quality oversight and profit and loss
responsibility. Compliance, reimbursement, finance and executive management
services are provided through our corporate headquarters in Andover,
Massachusetts.

We provide home respiratory therapy services to patients with a variety of
conditions, including:

- Chronic obstructive pulmonary diseases, such as emphysema, chronic
bronchitis and asthma;

- Nervous system related respiratory conditions;

- Congestive heart failure; and

- Lung cancer.

Respiratory therapy involves the provision of:

- oxygen systems, home ventilators and nebulizers (devices to aerosolize
medication.)

- Apnea monitors used to monitor the vital signs of newborns.

- Continuous positive airway pressure devices used to control adult sleep
apnea.

- Noninvasive positive pressure ventilation.

- Other respiratory therapy products including medication.

Home-infusion therapy involves the administration of, and 24 hour access to:

- Nutrients, either intravenously or through a feeding tube;

- Anti-infectives;

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- Chemotherapy; and

- Other intravenous and injectable medications.

Depending on the therapy, a broad range of intravenous access devices and
pump technology may be used to facilitate homecare and patient independence. We
employ licensed pharmacists and registered high-tech infusion nurses who have
specialized skills in the delivery of home infusion therapy.

PHARMACY MANAGEMENT AND DISTRIBUTION SERVICES

We have established our Pharmacy Management and Distribution Business Unit
to address the growing needs for specialized pharmacy expertise and services for
adults and children who have healthcare needs that can be managed at home,
primarily those with chronic conditions, high acuity illnesses and those in need
of particular requirements of long term care, hospice and other skilled nursing
facilities.

We have segmented this Business Unit into three product service lines:

- SPECIALTY PHARMACEUTICAL SERVICES. This segment addresses high revenue
opportunities in the biopharmaceutical, orphan drug and high acuity
disease categories. It is responsible for dispensing pharmaceutical
products, medicines, hydration therapies and specialized parenteral
therapies in areas such as cystic fibrosis, human growth factor, and other
medicines requiring small batching, fragile shelf life or other elements
that render them impractical for large-scale manufacturing. The services
we offer through this segment include pharmaceutical disease management,
pain management, compliance and patient education programs.

- RETAIL PHARMACY COMPOUNDING. This segment provides outsourced medicines to
long-term care, skilled nursing facilities, assisted living and other
alternate site care locations.

- MAIL ORDER PHARMACY SERVICES. This segment provides services primarily to
patients at home and at assisted living facilities for treatment of
chronic diseases.

We manage this Business Unit through regional centers in Nevada, Texas and
Pennsylvania and through our local branch offices.

Day-to-day operations are decentralized within regional centers, employing
pharmaceuticals for deployment of care, district managers for sales and
marketing initiatives and regional managers for business management, quality
oversight and profit and loss responsibility. Compliance, reimbursement, finance
and executive management services are provided through our corporate
headquarters.

Our clinical excellence, cost effective care and technological innovation
are the key themes used in all of our marketing efforts. Through a network of
nationally recognized medical centers the "Chartwell Partnerships", we are able
to leverage some of the premier medical centers in the country. This is a unique
entry point and gives us brand equity across product lines.

TARGET MARKETS

HOSPITALS. As a regional business, the market for many of our products
begins in the hospital. Through the hospital, we can work closely with the
clinicians who provide our referrals, the opinion leader physicians, who are at
the cutting edge of medical technology and therapy developments, and the
administrators who may be interested in forming a limited partnership with us.

PHYSICIAN ORGANIZATIONS. Our target provider customers include aggregators
of individual physicians such as large medical groups, independent practice
associations, physician practice management companies and other large, organized
physician entities associated with integrated delivery networks.

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These providers are sources of referrals for our home healthcare/alternate
site healthcare services. In particular, we seek out provider organizations with
a high degree of involvement in managed care, especially providers that are
involved in activities such as capitation, which requires them to bear some
level of insurance risk for each enrolled patient.

PAYORS. Our target payor customers include managed care organizations,
indemnity insurers, third-party administrators and federal and state
governmental agencies. As managed care penetration increases and risk-based
medicine becomes more prevalent, payors are finding less incremental value in
the historical levels of managed care. In order to stem the unabated growth in
healthcare costs, payors must do more than automate the administrative and
financial processes that govern the provision of services and the payment of
claims.

SUPPLIERS. Our target supplier customers include large national drug
wholesalers and medical equipment supply companies and benefit managers. These
customers have become more efficient in managing their business as managed care
organizations have negotiated significant reductions in price and demanded
measurable improvements in quality.

SALES AND MARKETING

We have a direct sales staff across our Business Units that are
geographically positioned and a general corporate business development group
targeting potential customers in each target market. We obtain clients through
sales presentations, telephone referrals from other clients and direct
solicitation and advertising. We also market our services through the sales and
marketing organizations of our strategic partners, participation in industry
tradeshows, articles in industry publications and by leveraging our existing
client base and strong network of relationships.

Requests for home healthcare services are typically received at a local
office and skilled home healthcare services are provided pursuant to the orders
of the patient's physician. Generally, after a referral is received, local
office intake personnel will schedule an assessment visit in order to identify
the patient's care needs.

During the intake process, we contact third-party payors to confirm the
extent of Medicare or Medicaid eligibility or insurance coverage. The primary
payment sources for home healthcare are Medicare, Medicaid, insurance,
individuals, and other state and local government health programs.

Our nursing care services are performed directly from our locations and
through a form of franchising whereby we license independent companies or
contractors to represent us within a designated territory using our trade names
and service marks. This program allows us to operate certain locations by
employees who are hired and supervised by licensees who are most familiar with
the needs and characteristics of their respective geographic areas. We employ
all direct service employees. Our licensees recruit direct service personnel,
solicit orders, and assign personnel, including registered nurses, therapists
and home health aides, to provide services to our clients. Of our 121 field
offices, 31 are operated by 23 licensees pursuant to the terms of a franchise
agreement.

In addition, our senior management has an active role in the sales process
by cultivating industry contacts. We concentrate our specialty healthcare
services marketing efforts on hospitals, hospital systems, integrated delivery
networks, physicians, managed care and other payors and management companies.

We employ over 25 persons engaged in specialty healthcare marketing and
sales efforts. We obtain clients through personal and complete sales
presentations, telephone referrals from other clients and direct solicitation
and advertising.

To support our sales forces and our distribution channels, we have an
experienced marketing staff that is focused on designing, creating, and
executing sophisticated marketing plans to attain our objectives. We continue to
focus on building awareness and acceptance of our products through our own
resources and distribution channels, and the Internet.

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KEY RELATIONSHIPS

We have a number of joint venture and strategic relationships with large
academic medical centers through our Chartwell Partnerships, also known as our
National Centers of Excellence ("NCOE") programs in which Chartwell serves as
the General Partner. Chartwell provides equity-partnering models, home care
("MSO") network integration management and administrative services for its
clients. Services include high-tech infusion therapy, nursing, clinical
respiratory services, and durable medical equipment to home care patients. The
NCOE's are recognized for their clinical expertise, especially with complex
patient needs and is accredited by the Joint Commission on Accreditation of
Healthcare Organizations. Currently, Chartwell's NCOE's serve 30 states,
managing over 150,000 patients annually with state of the art patient care
management and service delivery systems to ensure a competitive edge. These
relationships give us regional anchors for the alternate site business.

PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY

We rely upon a combination of trade secrets, copyright and trademark laws,
license agreements, confidentiality procedures, employee nondisclosure
agreements, and technical measures to maintain the secrecy of our intellectual
property. We believe that patent, trade secret, and copyright protection are
less significant to our success than our ability to further develop
applications. We have several trademarks in the United States and
internationally.

COMPETITION

The alternate site healthcare industry is highly competitive and includes
national, regional and local providers. We compete with a number of companies in
all areas in which our operations are located. Our competitors include major
national and regional infusion companies, hospital pharmacies, independent
regional and local pharmacies, hospital-based programs, numerous local providers
and nursing agencies. Some of our current and potential competitors have or may
obtain significantly greater financial and marketing resources than we have.
Accordingly, other companies, including pharmacies, managed care organizations,
hospitals, long-term care providers and healthcare providers that currently are
not serving the specialty healthcare market may become competitors of ours.

In each of our service lines where we conduct our specialty healthcare
services, there are a limited number of national providers and numerous regional
and local providers. On the regional and local level, the facts that are most
important in being able to compete are:

- reputation with referral sources, including local physicians and hospital
based professionals;

- access and responsiveness from patients;

- price of services;

- quality of care provided; and

- breadth of services offered.

On the larger, national markets, the competitive factors, which are also
important, include:

- ability to raise capital;

- scope of services offered on a geographic basis; and

- success in developing and maintaining relationship with managed care
organizations.

We also compete for qualified healthcare personnel to deliver our nursing,
home care and related healthcare services. Competition for such personnel is
intense, and we have, from time to time, experienced difficulties in obtaining
healthcare personnel to meet demands for our services.

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HOME HEALTHCARE/ALTERNATE SITE SERVICES

The home healthcare/alternate site care industry is highly fragmented and
competitors are often localized in particular geographical markets. In general,
there has been consolidation in the healthcare industry that is expected to
continue especially in light of the federal Medicare program's reductions in
costs limits and establishment of per beneficiary limits. Many of our
competitors have ceased doing business, which we believe is one result of
certain healthcare reform measures taken in recent years by federal, state and
other payor sources. We expect that we will continue to compete with national
organizations as well as local providers including home healthcare providers
owned or otherwise controlled by hospitals. In addition, our operations depend,
to a significant degree, on our ability to recruit qualified healthcare
personnel. Some of the entities with which we compete have substantially greater
resources than us and have penetrated markets more effectively than we have.

Among our national competitors in the home care arena are:

- Accredo Health, Inc

- Almost Family

- Amedisys, Inc

- American Home Patient

- Apria Healthcare

- Coram Healthcare

- Gentiva Health Services

- Home Health Corporation of America

- Lincare Holdings, Inc

- Option Care

- Transworld Healthcare

In addition, in the skilled nursing services area, we compete with:

- American Nursing Services

- Aureus Medical

- Core Medical Group

- Fastaff Nursing

- Procare USA

- Pro-Touch Nurses, Inc

PHARMACY MANAGEMENT AND DISTRIBUTION SERVICES

We also compete with a number of local pharmacies; many affiliated with
hospitals that can provide some of these services in their immediate catchment
area. Competition is based on quality of care and service offerings, as well as
upon patient and referral source relationships, price and reputation.

FEDERAL HEALTHCARE PROGRAM COMPLIANCE

TLCS has entered into a Corporate Integrity Agreement ("CIA") with the
Office of Inspector General of the U.S. Department of Health and Human Services
("OIG") to promote our compliance

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with the requirements of Medicare, Medicaid and all other federal healthcare
programs. Under the CIA, TLCS has implemented an internal quality improvement
program designed to improve its system of internal financial controls. TLCS's
failure to comply with the material terms of the agreement could lead to
suspension or exclusion from further participation in federal healthcare
program. The CIA became effective on August 24, 2000 and applies to all TLCS
locations.

The CIA includes compliance requirements, which obligate TLCS to:

1. Appoint a compliance officer and corporate compliance committee to
oversee the implementation and maintenance of the CIA requirements.

2. Adopt and implement written standards on federal healthcare program
requirements with respect to financial and quality of care issues.

3. Conduct initial and annual training for all employees to promote
compliance with federal healthcare requirements.

4. Implement and maintain a compliance hotline to report suspected
violations of law and regulation.

5. Enhance our current system of internal financial controls to promote
compliance with federal healthcare program requirements on billing and
related financial issues, including a variety of internal audit and
compliance reviews. We have retained an independent review organization to
evaluate the integrity and effectiveness of our internal systems. The
independent review organization will report annually its findings to the
OIG.

6. Screen, semi-annually, all employees and contractors for exclusion
from participating in federal health care programs.

7. Notify the OIG within 30 days of our discovery of any ongoing
investigation or legal proceeding conducted or brought by a governmental
entity or its agents involving any allegation that we have committed a crime
or engaged in a fraudulent activity.

8. Identify and return any overpayments within 30 days of discovery and
take remedial steps to avoid recurrence within 60 days of determination.

9. Notify the OIG of any newly acquired business units.

10. Submit annual reports to the OIG demonstrating compliance with the
terms of the CIA, including the findings of our internal audit and review
program. The initial annual report is due in November of 2002.

The CIA contains standard penalty provisions for breach, which include
stipulated cash penalties ranging from $1,000 per day to $2,500 per day for each
day TLCS is in breach of the agreement. If TLCS fails to remedy any breach in
the time specified in the agreement, it can be excluded from participation in
federal healthcare programs.

EMPLOYEES

As of March 31, 2002, we employed approximately 12,920 employees providing
alternate site care services, delivery and support, sales and marketing and
corporate finance and administration. None of our employees are represented by a
labor union, and we have never experienced a work stoppage. We believe we have a
good relationship with our employees. Our ability to achieve our financial and
operational objectives depends, in large part, upon our continuing ability to
attract, integrate, retain, and motivate highly qualified sales, technical, and
managerial personnel, and upon the continued service of our senior management
and key sales and technical personnel, most of whom are not bound by employment
agreements.

13

RISK FACTORS

Stockholders and investors in shares of the our common stock should consider
the following Risk Factors, in addition to other information in this Annual
Report.

OVERALL RISKS

THERE ARE SIGNIFICANT UNCERTAINTIES ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.

We have suffered recurring losses from operations since inception. In
addition, we have consistently had negative working capital from continuing
operations and lower than needed levels of cash. At March 31, 2002, we had
negative working capital of $162.4 million (excluding $10.3 million of negative
working capital from discontinued operations), and accumulated deficit of
$612.6million and $8.1 million in available cash. As of March 31, 2002, the
current portion of our long term and related party debt is $121.6 million. We do
not anticipate generating cash from operations in an amount sufficient to repay
and service this amount of debt within this time frame. In order to avoid a
liquidity crisis, we will have to either negotiate an extension of this debt,
refinance this debt, sell additional equity, sell assets, or accomplish one or
more of these actions. We cannot predict at this time whether any of these can
be accomplished, and if so, the terms or timing of such actions.

We have relied heavily upon funding through loans from private investors,
sales of equity securities, and various credit facilities to finance our
operations and growth. As a result of our reduced stock price, deteriorated
financial condition and negative operating results, among other factors, we no
longer meet the requirements for continued listing of our common stock on the
AMEX. After careful consideration, we decided to voluntarily de-list from the
AMEX. As of July 16, 2002 our common stock is quoted on the "Pink Sheets". In
any event, removal from the AMEX is likely to adversely affect our ability to
raise additional capital in the capital markets.

WE HAVE AN INSUFFICIENT NUMBER OF INDEPENDENT DIRECTORS.

During much of our history, we have not had or have had an insufficient
number of directors who meet the standards for independence as specified by the
SEC and the national stock exchanges. As a result, during much of our history,
we did not have an audit committee comprised of the requisite number of
independent directors as required by the national stock exchanges. While three
individuals meeting the standards of independence were elected to our board of
directors in February 2002, these individuals resigned from our board of
directors as of July 2002 due to the time commitment required of our directors,
agreeing to act as consultants to us as their time permits. In September 2002 we
appointed two new directors, one of whom meets the independency standards.
Neither director has the necessary financial expertise to serve as chairman of
our audit committee. We will endeavor to secure the services of additional
qualified individuals who meets the criteria for independence specified by the
national stock exchanges. We believe this will be a challenge and we may not be
able to do so in the near future. As a result, we will not have an audit
committee comprised of independent directors and will otherwise face challenges
from a corporate governance perspective.

OUR EXTENSIVE RELATIONSHIP WITH NATIONAL CENTURY FINANCIAL ENTERPRISES, INC. IS
OF CRITICAL IMPORTANCE TO OUR BUSINESS.

Our relationship with NCFE has been a long and extensive one touching upon
virtually every aspect of our business.

We finance our operations through an accounts receivable financing program
with NCFE and its subsidiaries, which is the principal source of financing for
our operations. We have contracted with NCFE to provide us financing for current
operations through various Sales and Subservicing Agreements (collectively, the
"Agreements"). These agreements provide for funding from National

14

Premier Financial Services, Inc., and other subsidiaries of NCFE. Under the
terms of the Agreements, we continue to bill customers, collect receipts and
process the related accounts receivable.

Under the Agreements, we are charged financing costs ranging from prime plus
three percent (3%) to 12.9% on outstanding funding balances. The Agreements
provide for funding to specified aggregate limits. Our accounts receivable must
meet certain qualitative and quantitative criteria and we must remain in
compliance with the terms of the Agreements. At March 31, 2002, the unpaid
balance was approximately $106.1 million and is included in related party debt
in the consolidated balance sheet.

At March 31, 2002, we have three unsecured notes payable to entities
affiliated with NCFE totaling $28.7 million. The notes are payable in sixty
monthly installments ranging from $116 thousand to $314 thousand starting on
October 1, 2001. Interest accrues from the note date. Interest ranges from 9% to
12.98% per annum and is included in the monthly payments. The notes mature on
September 2006. We have a right to offset against the payment of principal and
interest all amounts either advanced or paid on behalf of the NCFE affiliates.

In addition, at March 31, 2002, we had $8.5 million in various term notes,
due to affiliates of NCFE. On December 5, 2001, we entered into a Promissory
Note and Stock Pledge Agreement with NCFE in the amount of $4.0 million. The
Promissory Note, as amended, carries an interest rate of fourteen percent (14%)
per annum, with interest payments beginning in August 2002 until maturity.
Principal is due and payable on June 30, 2003. We also had a $2.3 million
promissory note payable to NCFE, which bears interest at the rate of ten percent
(10%) per annum. The entire principal amount of the note together with all
accrued unpaid interest, as amended, is due on December 31, 2002. There is no
prepayment penalty on the note. Additionally, the Company has various term notes
with NCFE totaling $2.2 million at March 31, 2002. These notes have interest
rates of 8% to 14%. SEE Notes 4 and 8 to the Consolidated Financial Statements
for details regarding the NCFE financing arrangements.

Our ability to obtain additional financing from NCFE in the future will
depend upon:

- Our ability to increase revenues and generate additional receivables that
can be sold into securitization vehicles organized and administered by
NCFE.

- NCFE's ability to continue to access the capital markets to permit it to
continue to purchase accounts receivable from us.

NCFE and its affiliates beneficially own approximately thirty-three percent
(33%) of our common stock, and as such, represents the largest related group of
stockholders we have. Accordingly, they could have an ability to influence the
election of directors and other important corporate transactions requiring
stockholder approval. In addition, Donald Ayers, a principal and director of
NCFE is one of our directors.

NCFE and its principals held ownership interests in or had business
relations with companies we recently acquired. Certain principals of NCFE
indirectly owned a majority interest in Chartwell, which we acquired in
August 2001. In addition, NCFE provided financing to Chartwell prior to its
acquisition by us.

In addition, at the time we acquired TLCS in November 2001, TLCS'
outstanding balance due NCFE was approximately $84.7 million. The TLCS financing
agreement was in technical breach during fiscal year ended March 31, 2002. NCFE
provided waivers of these breaches through December 31, 2002. If we were unable
to extend the term of the NCFE accounts receivable financing and if NCFE does
not continue to provide financing to TLCS, it would not have sufficient cash to
support its current level of operations.

All of the accounts receivable purchased by our special purpose entity,
American Reimbursement, LLC, were acquired from healthcare companies with which
NCFE has business and/or financing

15

relationships. NCFE or its affiliates have arranged for or are providing certain
administrative services to American Reimbursement with respect to its accounts
receivable. In addition, while NCFE is not obligated with respect to our
$70 million Debentures purchased by PIBL and subsequently amended, it has agreed
to provide certain facilitation financing and has agreed to make certain
concessions to enable us to partially pay, extend and amend these Debentures.

On February 2, 2000, we entered into a seven year Preferred Provider
Agreement, (extended to cover a total of 21 years in September 2000), with NCFE
to provide it with services and software solutions, and to have exclusive
marketing access to all of its clients for the provision of our products. The
Preferred Provider Agreement provides for a proprietary Master Portal wherein
all of NCFE's and our products and services were to be marketed and sold to
NCFE's and our customers. We were to have received fees for our services based
on an agreed upon fee schedule and negotiated project fees. In connection with
the Preferred Provider Agreement, we issued NCFE 9.5 million shares of our
common stock to NCFE in consideration for:

- entering into the Preferred Provider Agreement;

- canceling approximately $4.8 million of our debt;

- providing $1 million of equity financing, and

- providing an additional $4 million in financing that is to convert into
equity upon the ability of NCFE to sell $4 million of our common stock at
a price per share in excess of $9.50 per share.

The value of the shares issued to NCFE at the time was approximately
$113 million based upon the market price of our common stock on February 2,
2000.

On July 28, 2000, we completed phase one of the Master Portal. We have not
generated any revenues from this Preferred Provider Agreement. Due to the fact
that we no longer believe the anticipated connectivity between NCFE and its
clients can be achieved or has market viability, we recorded an impairment loss
to write off the deferred contract asset and reduce the distribution channel
asset that were created in connection with the Preferred Provider Agreement. In
fiscal 2001, we wrote off $31.1 million and $67.5 million associated with the
distribution channel and deferred contract, respectively. In fiscal 2002, we
reserved the remaining unamortized distribution channel balance of
$2.3 million.

We are continuing to investigate alternatives with NCFE regarding an
amendment and restructuring of the Preferred Provider Agreement, as defined in
the agreement, in order to create an arrangement potentially more lucrative for
us and one better aligned with our current business strategies and core
competencies. As of the date of this report, however, we have not reached final
agreement in this regard, and no assurance can be given that we will be able to
reach such an agreement.

In view of these multiple and extensive relationships, our ability to
continue to finance our operations, effect changes to our business strategy and
management, and implement acquisitions and other material corporate initiatives
are for the immediately foreseeable future dependent upon continuing our
relationships with NCFE and its principals. Notwithstanding this relationship we
have found NCFE to provide funding that is unpredictable in timing and amount,
cumbersome contract administration and inconsistent and at times no
communication on funding and administrative matters.

16

OPERATIONS--RELATED RISKS

THE ACQUISITIONS WE HAVE COMPLETED AND MAY COMPLETE IN THE FUTURE MAY BE
DIFFICULT TO MANAGE.

In fiscal 2002, we acquired Chartwell and TLCS. If we cannot successfully
integrate these and future businesses we may acquire, we will not achieve our
business strategy or generate profits and positive cash flow.

Additional risks associated with our acquisitions are:

- Our profitability could be adversely affected by depletion of cash,
servicing additional debt and recording impairment charges related to
goodwill and intangible assets.

- The issuance of additional equity securities dilutes the interests of our
current stockholders.

- It could be difficult to assimilate the acquired companies' employees,
equipment and operations.

- The acquisitions can divert management's attention from other business
concerns, including implementation of our business strategy.

- The acquired companies may or could operate in markets with which we have
little or no familiarity.

- There could be undisclosed or unforeseen liabilities associated with the
acquired companies.

- We could lose key employees or customers of the acquired companies.

- We have been named defendant in several lawsuits, which, if we are not
successful in defending could negatively impact our financial position.

WE MAY NOT BE ABLE TO ACHIEVE AND MAINTAIN PROFITABILITY FOR ANY LENGTH OF TIME.

We expect to incur significant expenses and to utilize substantial amounts
of cash for:

- funding operating losses;

- developing additional infrastructure;

- bringing products and services to market;

- additional acquisitions; and

- settlement of past due payables, repayment of debt and servicing of debt
and litigation.

We cannot be certain that we can achieve sufficient revenues and cash flow
in relation to our use of cash for expenses and capital to meet our obligations
as they become due, become profitable or generate positive cash flow on an
extended basis. Our ability to sustain profitability is dependent upon the
generation of profits and cash flow from our Business Units.

THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.

Our operations depend on the continued efforts of the executive officers and
management, and in particular, Frank P. Magliochetti, Jr., our President, Chief
Executive Officer and Chairman. The loss of key personnel or the inability to
hire or retain qualified personnel could seriously harm our business by reducing
our revenue, earnings and expected growth and sources of liquidity.

17

WE ARE DEPENDENT ON OUR ABILITY TO RECRUIT AND RETAIN QUALIFIED HEALTHCARE
PERSONNEL, WHO OFTEN ARE IN SHORT SUPPLY.

Our ability to deliver quality healthcare and services depends on our
ability to recruit qualified healthcare personnel. Currently, there is a
shortage of skilled healthcare workers. Consequently, competition for such
personnel is intense. We may experience a shortage of trained and competent
employees or independent contractors that could result in overtime costs or the
need to hire less efficient temporary staff. In some markets, we are concerned
about our ability to attract qualified healthcare personnel at a reasonable
cost. If we cannot successfully attract or retain a sufficient number of
qualified healthcare personnel in the future, we may not be able to perform
efficiently under our contracts, which could have a negative impact on our
reputation, lead to the loss of existing contracts and impair our ability to
secure additional contracts in the future.

THE LOSS OF OUR RELATIONSHIP WITH CERTAIN LARGE THIRD-PARTY PAYORS MAY ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.

The profitability and growth of our business depends on our ability to
establish and maintain close working relationships with government agencies,
managed care organizations, private and governmental third-party payors,
hospitals, physicians, physician groups, home health agencies, long-term care
facilities and other institutional healthcare providers.

One governmental agency, Medicaid, with which we have numerous contracts,
accounted for more than 56% and 19% of home care revenues for the fiscal year
ended March 31, 2002 of Chartwell and TLCS, respectively. The loss of existing
relationships with third-party payors or the failure to continue to develop such
relationships in the future could seriously harm our business by reducing our
revenues, earnings and potential for future growth.

OUR ACCOUNTS RECEIVABLE TAKE AN EXTENDED TIME TO COLLECT, WHICH STRAINS OUR
AVAILABLE CASH FOR OPERATIONS.

The alternate site/home infusion industry generally is characterized by long
collection cycles for accounts receivable. This is because of the complex and
time-consuming requirements for obtaining reimbursement from private and
non-governmental third party payors. A continuation of the lengthening of the
amount of time required to collect accounts receivables from managed care
organizations, the government or other payors would restrict our ability to pay
our liabilities as they become due.

Our home healthcare and pharmacy operations are financed through an accounts
receivable purchase program with NCFE, a related party, which provides
healthcare accounts receivable financing. However, the financing entity is not
obligated to continue to purchase such receivables. The current agreements
expire on varying dates ranging from December 31, 2002 through September 2003.
Our ability to maintain adequate financing for our current level of operations
and to fund growth is dependent upon our ability to renew or replace existing
credit facilities and to generate sufficient cash flow to meet our payment
obligations. Further, because we are required to finance our accounts
receivable, we incur significant interest charges which adversely affects our
profitability.

WE RELY ON REIMBURSEMENTS FROM THIRD-PARTY PAYORS TO PAY FOR OUR SERVICES;
PAYMENT FAILURES OR SIGNIFICANT DELAYS COULD ADVERSELY IMPACT OUR OPERATING
RESULTS.

We receive payment for services rendered to patients from state and local
agencies, private insurers and patients themselves, from the Federal government
under Medicare, and from the states in which we operate under Medicaid. The
Medicare and Medicaid programs are subject to statutory and regulatory changes,
retroactive and prospective rate adjustments, administrative rulings and funding
restrictions, any of which could have the effect of limiting or reducing
reimbursement levels. Any

18

change that limits or reduces the timing on levels of Medicare or Medicaid
reimbursement could have a material adverse effect on our cash flow, earnings
and cost of doing business. Historically, the amounts appropriated by state
legislatures for payment of Medicaid claims have not been always sufficient to
reimburse providers for services rendered to Medicaid patients. Failure of a
state to pay Medicaid claims on a timely basis may impact our ability to pay our
obligations when they come due and payable would seriously harm our business.

We typically receive payment between thirty (30) and one hundred twenty
(120) days after rendering an invoice, although this period can be longer.
Accordingly, our cash flow may at times be insufficient to meet our accounts
payable requirements. Historically, we have been required to borrow funds to
meet our ongoing obligations and may be required to do so in the future. We
would be seriously limited in the use of our operating cash flow if we were
unable either to borrow funds or to borrow funds on terms deemed favorable by
management to meet our payable requirements.

THE EFFECT OF ALTERNATIVE PAYMENT METHODOLOGIES OR OTHER HEALTHCARE REFORM COULD
ADVERSELY IMPACT OUR REVENUES AND PROFIT MARGINS.

In October 2000 a prospective payment system ("PPS") was established for all
home healthcare providers that provide Medicare services. There is an
opportunity to generate profits under PPS if costs are contained under the
per-episode reimbursement amounts. However, unforeseen changes in Federal
healthcare regulations, including changes to PPS, could adversely affect our
ability to generate a profit under PPS. In addition, because PPS may require
periodic changes in billing methodology, our systems may not be able to adapt
immediately or sufficiently to all such changes. Further, changes in Medicare
fiscal intermediaries' new systems may result in slower payments than otherwise
anticipated.

Because we are reimbursed for our services by the Medicare and Medicaid
programs, insurance companies, managed care companies and other third-party
payors, the implementation of alternative healthcare delivery systems and
payment methodologies could have an adverse effect on our revenues and profit
margins. Additionally, uncertainties relating to the nature and outcomes of
healthcare reforms have also generated numerous realignments, combinations and
consolidations in the healthcare industry, which may also seriously harm our
business by adversely affecting our operating results and business strategy.

PPS regulations included provision for a 15% reduction in Medicare payments
to home health care providers effective October 1, 2002. In June 2002, the House
of Representatives passed a bill, H.R. 4954, to eliminate the 15% reduction in
payments. This bill became effective for all PPS patient episodes ending after
October 1, 2002. Recently, a proposed Senate package also would eliminate the
15% reduction. While there are pending provisions to eliminate the 15% reduction
in PPS rates, there can be no assurance that such elimination will occur.

WE HAVE NEGOTIATED DEFERRED PAYMENT TERMS FOR SIGNIFICANT LIABILITIES FOR WHICH
ALTERNATIVE FINANCING MAY NOT BE AVAILABLE.

TLCS has negotiated deferred payment terms for its Medicare and Medicaid
liabilities. TLCS' aggregate Medicare and Medicaid liabilities at March 31, 2002
of approximately $54.5 million. Additionally, TLCS has made arrangements with
many of its other creditors to either reduce its liability to them, defer and/or
extend payment of the liability, or a combination of several of these steps. Our
vendors may not continue to extend credit in this manner. Pursuant to TLCS'
agreement with the Federal Centers for Medicare and Medicaid Services ("CMS") to
repay accumulated Medicare liabilities, TLCS will be required to pay excess
periodic interim payments received in prior years and Medicare audit liabilities
on a monthly basis through May 2005. United Government Services ("UGS"), a
fiscal intermediary for CMS, collects amounts due under the repayment plan by
offsetting against

19

current remittances due to us. We must generate sufficient cash to meet its
payment obligations under the deferred payment arrangements.

WE ARE DEPENDENT ON OUR RELATIONSHIPS WITH REFERRAL SOURCES, AND IF WE ARE
UNABLE TO MAINTAIN THESE RELATIONSHIPS, OUR OPERATING RESULTS WILL BE ADVERSELY
AFFECTED AND OUR BUSINESS WILL BE SERIOUSLY HARMED.

Our growth and profitability depends on our ability to establish and
maintain close working relationships with referral sources, including hospitals,
payors, physicians and other healthcare professionals. Managed care
organizations, which have been exerting an increasing amount of influence over
the healthcare industry, have been consolidating to enhance their ability to
impact the delivery of healthcare services. As managed care organizations
continue to increase their market share in regions in which we operate, these
organizations have become and will likely continue to become increasingly
important as our referral sources. If we are not able to successfully maintain
our existing referral sources or develop and maintain new referral sources, we
could experience a substantial decline in our revenues and earnings.

WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE WITH OTHER HOME HEALTHCARE/ALTERNATE
SITE HEALTHCARE PROVIDERS, RESULTING IN A REDUCTION OF OUR REVENUES AND
EARNINGS.

The home healthcare/alternate site healthcare industry is highly competitive
and includes national, regional and local providers. We compete with a number of
companies in all areas in which our operations are located. Our competitors
include major national and regional infusion companies, hospital pharmacies,
independent regional and local pharmacies, hospital-based programs, numerous
local providers and nursing agencies. Some of our current and potential
competitors have or may obtain significantly greater financial and marketing
resources than we have. Accordingly, other companies, including pharmacies,
managed care organizations, hospitals, long-term care providers and healthcare
providers that currently are not serving the alternate healthcare market may
become competitors of ours and may be able to compete more effectively than us.
Increased competition in markets in which we focus our services may have a
negative effect on our revenues.

WE DEPEND ON A SMALL NUMBER OF VENDORS FOR OUR PHARMACEUTICALS AND OTHER
SUPPLIES, AND THE LOSS OF A SIGNIFICANT VENDOR OR AN INCREASE IN SUPPLY RELATED
COSTS COULD RESULT IN A SUBSTANTIAL INCREASE IN OUR COSTS AND DECLINE IN
EARNINGS.

We purchase pharmaceuticals and supplies from a preferred list of vendors
and a substantial amount of our purchasing is at volume discounts. If we were
unable to maintain our existing relationships with current suppliers or find
alternative suppliers who will offer the same discounted prices, the cost of
purchasing products would increase, which could result in a decline in our
operating income.

ALTHOUGH WE MAINTAIN INSURANCE ON THE PHARMACEUTICAL PRODUCTS WE SELL AND THE
PROFESSIONALS WE EMPLOY, ANY JUDGMENTS, SETTLEMENTS OR COSTS RELATING TO PENDING
OR FUTURE PROCEEDINGS AGAINST US THAT ARE NOT COVERED BY INSURANCE COULD
DIRECTLY INCREASE OUR EXPENSES AND ADVERSELY AFFECT OUR EARNINGS.

We periodically become involved in litigation alleging that our professional
caregivers committed medical malpractice by failing to provide timely or
adequate healthcare services. In addition, we periodically become involved in
product liability litigation. We may be liable, as an employer, for the
negligence of our employees. We also may have liability for the negligence of
persons that we engage as independent contractors. Our contracts generally
require us to indemnify the governmental agency for losses incurred related to
healthcare services provided by our agents and us.

20

Healthcare professionals with whom we contract must provide evidence that
they carry a minimum of $1 million of insurance coverage, although we cannot be
sure that such providers will continue to carry such coverage or that such
insurance is, or will continue to be, adequate or available to protect us, or
that we will not have liability independent of the providers and their coverage.
We maintain medical professional and general liability, including product
liability, insurance providing for coverage in an amount up to $1 million per
claim, subject to a limitation of $5 million for all claims in a single year.

If we were to suffer a loss or claim in excess of our insurance coverage, or
in an amount that was not covered by our insurance with respect to our
employees, contract workers or products, our financial position could be
significantly harmed.

INVESTMENT RISKS

OUR STOCK HAS BEEN DE-LISTED FROM THE AMERICAN STOCK EXCHANGE, WHICH MAY
RESTRICT YOUR ABILITY TO SELL YOUR SHARES IN THE AMOUNTS AND THE TIMES YOU WOULD
OTHERWISE LIKE TO.

As stated previously, we received notification on May 22, 2002 from the AMEX
that they had elected to proceed with filing an application with the SEC to
de-list our common shares from trading on the AMEX. While we initially elected
to appeal this decision as we disagreed with the factual allegations and
conclusions reached by the AMEX, we have since elected to voluntarily de-list
our shares from the AMEX based upon our analysis that we are unable to meet the
AMEX's continued listing requirements in view of several factors, including our
accumulated deficit at March 31, 2002.

Beginning July 16, 2002, our common stock is quoted on the "pink sheets".

From July 31, 2001 through August 1, 2001, our common stock was suspended
from trading on the AMEX because we did not file our annual report on Form 10-K
with the SEC in a timely fashion. Further, on June 4, 2002 and on June 27, 2002,
trading of our common stock on the AMEX was halted for part of each of those
days in order to ensure our compliance with AMEX disclosure policies.

FUTURE ISSUANCES OF A LARGE NUMBER OF SHARES OF OUR COMMON STOCK, INCLUDING
THOSE UNDER EXISTING AGREEMENTS, COULD CAUSE SIGNIFICANT DILUTION TO OUR
STOCKHOLDERS AND DEPRESS OUR STOCK PRICE.

Subject to market conditions, availability, and terms, we plan to sell
additional equity or debt securities with equity features in order to provide us
with additional funds to finance our continued operations, develop our
infrastructure, refinance current debt, introduce new products and services and
acquire additional companies or businesses. We cannot assure that we will be
able to sell such securities or that the price and other terms will meet those
required by potential investors in such securities.

The market price of our common stock could decline as a result of sales of a
large number of shares of common stock in the market, or the perception that
such sales could occur.

We have a large number of shares of common stock outstanding and available
for resale at various points in time in the future. These sales also might make
it more difficult for us to sell equity securities in the future at a time and
at a price that we deem appropriate. As of September 30, 2002, we have
outstanding 148,661,526 shares of common stock. Of these shares, approximately
72 million shares are restricted securities and will become eligible for sale
without registration pursuant to Rule 144 under the Securities Act of 1933, as
amended ("Rule 144"), subject to certain conditions of Rule 144. If holders sell
a large number of shares in the public market, our stock price could fall
materially.

The risk of dilution may cause the selling stockholders as well as other
stockholders of ours to sell their shares, which would contribute to a downward
movement in the stock price of our common stock. Moreover, the risk of dilution
and the resulting downward pressure on our stock price could encourage investors
to engage in short sales of our common stock. By increasing the number of shares
offered for

21

sale, material amounts of short selling could further contribute to progressive
price declines in our common stock.

THE SALE OF SHARES OF NEWLY AUTHORIZED COMMON STOCK, AS WELL AS THOSE COVERED
UNDER EXISTING AGREEMENTS COULD INFLUENCE THE CONTROL OF OUR COMPANY.

The acquisition by third party investors of a significant percentage of our
common stock could enable such investors to influence or direct the policies,
decisions and composition of our board of directors and management. A potential
change of control could involve a number of risks, including the diversion of
management attention and resources, the loss of key employees, and changes in
our business plan and operations. Any such event could directly increase our
expenses, decrease revenues, earnings and expected growth.

HOLDERS OF OPTIONS AND WARRANTS AND OTHER PARTIES HAVE THE RIGHT TO ACQUIRE A
LARGE NUMBER OF SHARES OF OUR COMMON STOCK, WHICH COULD DILUTE THE OWNERSHIP OF
OUR EXISTING STOCKHOLDERS.

We have reserved a total of 31.0 million shares of our common stock for
issuance upon exercise of options granted or which may be granted under our
existing stock option plans. As of March 31, 2002, stock options to acquire
5.3 million shares at a weighted average exercise price of $3.24 per share were
outstanding. In addition, as of March 31, 2002, warrants to acquire
50.3 million shares of our common stock at a weighted average exercise price of
$2.74 per share were outstanding. It is likely that we will be required to issue
warrants and options to lenders and other providers as an additional inducement
to continue to do business with us. The holders of these options and warrants
will have the opportunity to profit from an increase in the market price of our
common stock. These options and warrants may make it more difficult for us to
obtain additional equity financing in the future. The holders of these options
and warrants can be expected to exercise the options and warrants at a time when
we, in all likelihood, would be able to sell equity securities on terms more
favorable to us than those provided in the options and warrants.

THE PRICE OF OUR COMMON STOCK MAY CONTINUE TO BE VOLATILE.

The market price of our common stock has been, and in the future could be,
significantly affected by factors such as:

- actual or anticipated fluctuations in operating results;

- new products or new contracts;

- competitors or their customers;

- governmental regulatory action;

- developments with respect to patents or proprietary rights;

- changes in financial estimates by securities analysts; and

- general market conditions.

The stock markets in general have experienced substantial volatility that
has often been unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the trading price of our
common stock.

22

INDUSTRY RISKS

GOVERNMENT REGULATION OF THE HEALTHCARE INDUSTRY COULD ADVERSELY AFFECT OUR
REVENUES.

Generally, the healthcare industry, including our business, is subject to
extensive federal, state and local regulation requiring compliance with
extensive and complex billing, substantiation and record-keeping requirements,
governing licensure and conduct of operations at existing facilities,
construction of new facilities, acquisition of existing facilities, additions of
new services, certain capital expenditures, the quality of services provided and
the manner in which such services are provided and reimbursement for services
rendered. Changes in applicable laws and regulations or new interpretations of
existing laws and regulations could have a material adverse effect on licensure,
eligibility for participation, permissible activities, operating costs and our
levels of reimbursement from governmental and other sources. There can be no
assurance that regulatory authorities will not adopt changes or new
interpretations of existing regulations that could harm our business. In
addition, our operations are subject to review by federal and state regulatory
agencies to assure continued compliance with various standards, their continued
licensing under state law and their certification under the Medicare and
Medicaid programs. Failure to comply with applicable laws and regulations could
result in significant costs and criminal penalties. In addition, violation of
applicable laws and regulations could result in prohibition of our payment for
services we have provided and loss of the licenses we need to conduct our
business, this adversely affecting our revenues.

CHANGES IN THE HEALTHCARE INDUSTRY COULD ADVERSELY AFFECT OUR FINANCIAL POSITION
AND RESULTS OF OPERATIONS.

The healthcare industry is subject to changing political, economic and
regulatory influences. These factors affect the purchasing practices and
operations of healthcare organizations. Changes in current healthcare financing
and reimbursement systems could cause us to make unplanned enhancements of
applications or services, or result in delays or cancellations of orders, or in
the revocation of endorsement of our applications and services by healthcare
participants. Federal and state legislatures have periodically considered
programs to reform or amend the U.S. healthcare system at both the federal and
state level. Such programs may increase governmental involvement in healthcare,
lower reimbursement rates, or otherwise change the environment in which
healthcare industry participants operate. Healthcare industry participants may
respond by reducing their investments or postponing investment decisions,
including investments in our applications and services.

Many healthcare industry participants are consolidating to create integrated
healthcare delivery systems with greater market power. As the healthcare
industry consolidates, competition to provide products and services to industry
participants will become even more intense, as will the importance of
establishing a relationship with each industry participant. These industry
participants may try to use their market power to negotiate price reductions for
our products and services. If we are forced to reduce our prices, our operating
results could suffer if we cannot achieve corresponding reductions in expenses.

COST CONTAINMENT MEASURES BY GOVERNMENT AND OTHER THIRD-PARTY PAYORS COULD
REDUCE OUR REVENUES AND EARNINGS.

The healthcare industry is experiencing a trend toward cost containment, as
government and other third-party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced payment schedules with service
providers. These cost containment measures, combined with the increasing
influence of managed care payors and competition for patients, has resulted in
reduced rates of reimbursement for services provided by us, which has adversely
affected, and may continue to adversely affect, our margins. Aspects of certain
healthcare reform proposals, such as cutbacks in the Medicare and Medicaid
programs, reductions in Medicare reimbursement rates and/or limitations on

23

reimbursement rate increases, containment of healthcare costs on an interim
basis by means that could include a short-term freeze on reimbursements paid by
healthcare providers, and permitting greater state flexibility in the
administration of Medicaid, could seriously harm us. Additional changes to the
Medicare or Medicaid programs involving significant limits on the scope of
services reimbursed and on reimbursement rates and fees could reduce our
revenues, earnings and expected growth.

OUR INABILITY TO RENEW OUR LICENSE TO PROVIDE HOME HEALTHCARE SERVICES IN A
JURISDICTION MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

The profitability and growth of our business depends on our ability to
establish and maintain operating licenses throughout the country. While we
maintain close working relationships with government agencies, that oversee the
licensing process, actions such as those by New York's Department of Health and
Rhode Island's Department of Health, which may initiate revocation proceedings
against certain of our locations for failure to obtain certain approvals related
to the proposed sale of the New York state licensed businesses to us may
adversely impact revenues and results of operations.

CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD GIVE INCREASED PRICING POWER TO
PURCHASERS OF OUR SERVICES AND REDUCE OUR REVENUES.

Managed care organizations have grown substantially in terms of the
percentage of the population that is covered by such organizations and in terms
of their control over an increasing portion of the healthcare economy. Managed
care plans have continued to consolidate to enhance their ability to influence
the delivery of healthcare services and to exert pressure to control healthcare
costs. This increased pressure may require us to reduce our prices or forfeit
existing or new business, which would adversely impact our revenues.

COMPETITION IN THE HEALTHCARE INDUSTRY IS INTENSE AND COULD ADVERSELY AFFECT OUR
FINANCIAL POSITION AND RESULTS OF OPERATIONS.

The healthcare industry is highly competitive and is subject to continuing
changes in the provision of services and the selection and compensation of
providers. We compete on a local and regional basis with other providers on the
basis of the breadth and quality of our services, the quality of our products
and, to a more limited extent, price. Our current and potential competitors
include national, regional and local operators of geriatric care facilities,
acute care hospitals and rehabilitation hospitals, extended care centers,
retirement centers and other home respiratory care, infusion and durable medical
equipment companies and similar institutions, many of which have significantly
greater financial and other resources than we do. In addition, we compete with a
number of tax-exempt nonprofit organizations that can finance acquisitions and
capital expenditures on a tax-exempt basis or receive charitable contributions,
which are unavailable to us. New service introductions and enhancements,
acquisitions, continued industry consolidation and the development of strategic
relationships by our competitors could cause a significant decline in sales or
loss of market acceptance of our services or intense price competition or make
our services noncompetitive. Further, technological advances in drug delivery
systems and the development of new medical treatments that cure certain complex
diseases or reduce the need for healthcare services could adversely impact our
business. In addition, relatively few barriers to entry exist in local home
healthcare markets. There can be no assurance that we will be able to compete
successfully against current or future competitors or that competitive pressures
will not increase our expenses or reduce our revenues, which adversely effect
earnings.

ITEM 2. DESCRIPTION OF PROPERTY.

Our principal offices are in Andover, Massachusetts. We also have additional
administrative offices in Lake Success, New York, Pittsburgh, Pennsylvania and
Addison, Texas. These offices are leased. We

24

believe that our headquarters office space is sufficient for our immediate needs
and that we will be able to obtain additional space as needed in the future.

We lease all our branch office locations from unaffiliated landlords. Most
of these are for a specified term although several of them are month-to-month
leases. Currently we have 125 locations including 104 operated by us and 31
operated by 23 different licensees. These licensee offices are owned by
licensees or are leased by the licensee from third-party landlords. We believe
that we will be able to renew or find adequate replacement offices for leases
that are scheduled to expire in the next twelve months at comparable costs.

In addition, we own or lease computer and communication equipment necessary
to operate our business.

ITEM 3. LEGAL PROCEEDINGS.

We are party to routine litigation involving various aspects of our
business. In addition, we have been and continue to be involved in litigation
regarding several of our acquisitions and strategic relationships. Except as
described below, none of such pending litigation, in our opinion, could have a
material adverse impact on our consolidated financial condition, results of
operations, or businesses.

PRIMERX.COM/NETWORK PHARMACEUTICALS, INC.

Our relationship with PrimeRx.com ("PrimeRx"), Network
Pharmaceuticals, Inc. ("Network") and the principal stockholders of PrimeRx has
been a troubled one characterized by numerous disputes and litigation. On
March 26, 2001, we entered into a Settlement Agreement and Mutual Releases (the
"March 2001 Settlement Agreement") with PrimeRx, Network, PrimeMed Pharmacy
Services, Inc. ("PrimeMed"), another subsidiary of PrimeRx and the shareholders
of PrimeRx. On or about July 16, 2001, Network filed a complaint against us and
our strategic partner, NCFE (NETWORK PHARMACEUTICALS, INC., A NEVADA
CORPORATION; NCFE; AND DOES 1 THROUGH 25, INCLUSIVE, SUPERIOR COURT OF THE STATE
OF CALIFORNIA FOR THE COUNTY OF LOS ANGELES (CENTRAL DISTRICT) (CASE NO. BC
254258)). This suit alleged breach of the March 2001 Settlement Agreement. On or
about September 26, 2001, this matter was ordered to arbitration through the
American Arbitration Association (the "AAA").

On or about September 28, 2001, Network formally filed its claim with the
AAA claiming damages of over $10 million. In addition, on or about October 19,
2001, Network filed documents seeking a court order allowing Network to attach
up to $14 million of our assets pending resolution of this action. Network's
request for attachment was denied.

On or about November 6, 2001, we filed documents with the AAA denying the
allegations raised by Network and counterclaiming against Network and its
alleged co-conspirators, Prem Reddy, Richard Hayes, Prime A Investments, LLC,
PrimeMed, PrimeRx and Doe Defendants for over $120 million.

As of July 1, 2002, we entered into a settlement agreement with Network,
PrimeRx and its principal shareholders (the "Network Settlement"). Under the
terms of the Network Settlement, provided we meet the obligations set forth
therein, each of us, NCFE, and one of NCFE's subsidiaries on the one hand, and
the cross-defendants (which include Network and certain alleged co-conspirators)
release one another from all claims related to the subject matter of this
litigation. This release does not cover certain employment compensation disputes
that one of the principal shareholders of PrimeRx has against us and does not
release any parties other than NCFE, the NCFE subsidiary and us.

Our obligations under the Network Settlement include (i) a payment of
$2.5 million we made on July 1, 2002; (ii) a payment of $2.5 million by wire
transfer by August 1, 2003; (iii) a transfer of shares of PrimeRx that we had
held, which transfer was made prior to July 1, 2002; (iv) returning all of
PrimeRx's, Network's and their affiliates' equipment by July 15, 2002 along with
an inventory of such equipment that indicates whether any equipment has been
previously sold by us; (v) monthly payments

25

commencing July 15 in connection with certain guaranties of leased equipment
made by a principal shareholder of PrimeRx; and, (vi) a dismissal of our
cross-complaint with prejudice in the arbitration proceedings. Amounts
pertaining to this settlement were expensed and recorded as of March 31, 2002.

VIDIMEDIX CORPORATION

On or about September 15, 2000, certain former securities holders of
VidiMedix Corporation ("VidiMedix") filed a petition against us arising from our
acquisition of VidiMedix (MONCRIEF, ET AL. V. e-MEDSOFT.COM AND VIDIMEDIX
ACQUISITION CORPORATION, HARRIS COUNTY (TEXAS) COURT, NO. 200047334 (the "Texas
Action")). The petition was amended on or about May 24, 2001 and amended again,
on or about August 15, 2001. Plaintiffs Jana Davis Wells and Tom Davis, III
("Remaining Plaintiffs") filed a Third Amended Original Petition on or about
December 26, 2001.

Plaintiffs claimed that we owe them either 6.0 million shares of common
stock or liquidated damages of $8.9 million and exemplary damages of at least
$24 million. We settled those disputes with all but two former VidiMedix
shareholders, the Remaining Plaintiffs.

On May 3, 2001, we filed a lawsuit against the plaintiffs and others in
California Superior Court for the County of Los Angeles (e-MEDSOFT.COM V.
MONCRIEF, ET AL., CASE NO. BC249782 (the "California Action")). On or about
October 19, 2001, defendants caused the case to be transferred to the United
States District Court for the Central District of California based on diversity
of citizenship between the defendants and us, the case is now known as CASE NO.
EDCV 01-00803-VAP (SGLX). We settled those disputes with all but two former
VidiMedix shareholders. The terms of the settlement required us to pay
approximately $4.1 million in a combination of cash and common stock. The
Remaining Plaintiffs are the only remaining plaintiffs in the Texas Action and
the only remaining defendants in the California Action.

As of July 31, 2002, we reached a settlement with the Remaining Plaintiffs.
Settlement terms included a mutual release from the Texas Action and for us to
dismiss the California action with prejudice and monetary payments to the
remaining plaintiffs over a seven month period.

SUTRO NASD ARBITRATION NO. 1

As disclosed in the our Annual Report on Form 10-K at and for the year
period ended March 31, 2001, a dispute between Sutro & Co., and us has been
arbitrated before the National Association of Securities Dealers. On
October 22, 2001, we agreed to settle the matter and Sutro NASD Arbitration
No. 2 described below for 1.6 million shares of our common stock. We delivered a
stock certificate for 1.3 million shares of our common stock representing shares
due Sutro from an exercise of our warrants in June and August 2000. These shares
met all requirements of Rule 144 (k) and were delivered to Sutro without
restriction. We also delivered a stock certificate for 300 thousand shares of
our common stock with a value of $720 thousand at the time of issuance. We
agreed to register these shares in our next registration statement filing with
the SEC. If based on the closing price of our common stock two days prior to the
effective date of the registration statement, the market value of the
300 thousand shares is less then $720 thousand, then we are obligated to issue
an additional number of shares such that the market value of the sum of the
shares is as nearly as possible equal to $720 thousand. Based on the closing
price of our common stock at June 30, 2002, we would be obligated to issue an
additional 3.3 million shares. As a result of this settlement we expensed
$3.7 million as of March 31, 2002.

SUTRO NASD ARBITRATION NO. 2

An investor in the Company sued Sutro for failing to honor commitments and
failures to act in accordance with its fiduciary duties. This matter was being
arbitrated before the National Association

26

of Securities Dealers. As part of the Sutro No. 1 NASD arbitration settlement
described above, on October 22, 2001, we agreed to settle the matter.

CAPPELLO CAPITAL CORP.

On November 16, 2001, we filed a complaint against Cappello Capital Corp.
("Cappello") (MED DIVERSIFIED V. CAPPELLO CAPITAL CORP., LOS ANGELES SUPERIOR
COURT CASE NO. SC 069391 (the "Cappello Action")), alleging that Cappello is
liable for fraud for inducing us to enter into an exclusive financial advisor
"Engagement Agreement" by misrepresenting to us that Cappello had significant
sources of capital ready and willing to invest in us when such was not true. In
the complaint, we sought compensatory and punitive damages, as well as
rescission of the Engagement Agreement. We dismissed the case without prejudice
on March 1, 2002, and settled the case and all claims relating thereto as of
March 25, 2002. We have fulfilled all of our obligations under this settlement.

HOSKIN INTERNATIONAL, LTD. AND CAPPELLO CAPITAL CORP.

On October 30, 2001, we filed a demand for arbitration with the American
Arbitration Association ("AAA") against Hoskin International, Ltd. ("Hoskin")
and Cappello (collectively, "Respondents") (AAA CASE NO. 50T 168 00515 1),
alleging that Respondents fraudulently induced us to enter into a "Common Stock
Purchase Agreement" and to issue warrants through various misstatements of
material facts and failed to disclose facts that the Respondents had a duty to
disclose. This matter is before an administrator assigned to the case through
the San Francisco branch of the AAA.

On December 28, 2001, Hoskin filed a response to our demand in which it
denied our allegations and asserted a counterclaim alleging that we are liable
for breach of the Common Stock Purchase Agreement and warrants based on our
alleged failure to use best efforts to cause the registration statement for the
warrants to become effective at a time when the warrants could have been
exercised at a profit.

On January 2, 2002, Cappello filed a motion to stay arbitration before the
AAA as to Cappello on the grounds that Cappello was not a party to the
arbitration clause contained in the Common Stock Purchase Agreement, and that
our claims against Cappello should be resolved in the Cappello Action in Los
Angeles (as described above under "Legal Proceedings: Cappello Capital Corp.").
The Court granted Cappello's motion on January 28, 2002. We dismissed, without
prejudice, the claims asserted against Cappello in the AAA arbitration.
Arbitration of the Hoskin matter is scheduled for late October, 2002. Settlement
discussions are ongoing.

ILLUMEA (ASIA)

On December 13, 2000, Illumea (Asia), Ltd. ("IAL"), Nathalie j.v.d.
Doornmalen, David Chung Shing Wu, George K.K. Tong, Edna Liu, Yee Mau Chen,
Norman Yuen Tsing Tao, Jeffrey Sun, Boris Luchterhand, Carol Andretta, Kin Yu,
Kathryn Ma, Alan Munro, Yonanda j.v.d. Doornmalen, Hunter Vest, Ltd., Eltrinic
Enterprises, Ltd. and True Will Investments filed a First Amended Complaint
against Illumea Corporation ("Illumea") and Andrew Borsanyi (collectively
"Defendants") arising out of our acquisition of Illumea (ILLUMEA (ASIA), LTD.,
ET AL. V. ILLUMEA CORPORATION AND ANDREW BORSANYI). All of the plaintiffs IAL
and Nathalie Doornmalen thereafter dismissed their claims without prejudice. As
a result, only IAL and Doornmalen remained as plaintiffs.

Doornmalen, a former Illumea shareholder, alleges that she consented to our
acquisition of Illumea based on the allegedly false representation that we would
hire her. She also alleges that Defendants made defamatory statements about her.
Doornmalen asserts claims for securities fraud under 15 U.S.C. Section 78j(b)
and Rule 10b-5, "conspiracy," breach of contract, fraud, false promise,
defamation, and violation of California Business & Professions Code
Section 17200 ("Section 17200"). IAL alleges that Illumea breached an agency
agreement between IAL and Illumea and engaged in

27

fraud in connection with the agency relationship. IAL asserts claims for breach
of contract and fraud. Collectively, plaintiffs seek compensatory damages,
disgorgement under Section 17200 and attorneys' fees.

We filed a counterclaim against IAL and Doornmalen on March 26, 2001,
alleging breach of contract, breach of fiduciary duty and fraud. We allege that
IAL and Doornmalen refused to repay Illumea for providing funding and equipment
to IAL and that Doornmalen failed to disclose certain material issues in
connection with the merger between Illumea and us.

As of April 2, 2002, we settled these matters. Under the terms of the
settlement, we were required to (i) pay $300 thousand, (ii) issue 700 thousand
shares of our common stock and (iii) file a registration statement, on
Form S-1, registering the 700 thousand shares. As of October 31, 2002, we have
not filed the registration statement as set forth in the Settlement Agreement.
We have been notified that Nathalie Doornmalen has filed a motion to enforce the
Settlement Agreement in the Illumea (Asia), Ltd. matter. The opposition to this
motion is due on Monday, November 4, and the hearing is on November 18.

TREBOR O. CORPORATION

On June 29, 2001, Trebor O. Corporation, a California corporation, doing
business as Western Pharmacy Services ("Trebor O."), and its principal Robert
Okum, filed an action in Los Angeles County Superior Court against us, PrimeRx,
Chartwell Diversified Services and various individuals (TREBOR O. CORPORATION
D.B.A. WESTERN PHARMACY SERVICES AND ROBERT OKUM V. e-MEDSOFT.COM, PRIMERX,
CHARTWELL DIVERSIFIED SERVICES AND VARIOUS INDIVIDUALS, LOS ANGELES SUPERIOR
COURT CASE NO. BC 253387). The plaintiffs assert claims for breach of contract,
promissory estoppel, misrepresentation, breach of confidentiality, and tortious
interference, and seek more than $5 million in compensatory damages, on the
theory that we entered into a letter of intent to purchase Trebor O, but then
refused to complete the transaction. We have settled this lawsuit as of
July 2002. Settlement terms include dismissal of Trebor O's suit against us and
a payment by us to Trebor O.

SAN DIEGO ASSET MANAGEMENT, INC.

On October 24, 2001, we filed a complaint against San Diego Asset
Management, Inc. ("SDAM") (MED DIVERSIFIED V. SAN DIEGO ASSET MANAGEMENT, INC.,
LOS ANGELES SUPERIOR COURT CASE NO. BC 260285 (the "2001 SDAM Action")) arising
out of an agreement whereby we were to sell shares of our common stock that
could be purchased for $83 million for 90% of the market price of our common
stock to SDAM. We agreed to prepare a certificate for 15 million restricted
shares of our common stock as a commission (the "Certificate"), as well as pay
$3 million in cash as commission to SDAM. We delivered the Certificate but SDAM
did not deliver the $83 million. In the lawsuit, we sought a temporary
restraining order, preliminary injunction and permanent injunction ordering SDAM
to return the Certificate to us. Pursuant to the Court's order dated
November 6, 2001, the Certificate was returned to us and cancelled. We dismissed
the 2001 SDAM Action without prejudice on November 13, 2001.

On February 1, 2002, we filed for Arbitration with the National Association
of Securities Dealers (the "NASD Arbitration") against SDAM and its principals,
Wendy Feldman Purner and Daniel Feldman (collectively, "Respondents) (NASD CASE
NO. 02-00650), alleging that Respondents fraudulently induced us to enter into a
"Securities Purchase Agreement" through various misstatements of material fact
and, alternatively, that Respondents breached the Security Purchase Agreement.
On March 13, 2002, following objections to jurisdiction, we dismissed without
prejudice the claims asserted against Daniel Feldman in the arbitration. The
remaining Respondents have not yet responded to our claims and no arbitrator has
yet been selected.

28

On February 5, 2002, we filed a complaint against SDAM and its principals,
Wendy Feldman Purner and Daniel Feldman, (MED DIVERSIFIED, INC. V. SAN DIEGO
ASSET MANAGEMENT, INC., WENDY FELDMAN PURNER AND DANIEL FELDMAN, LOS ANGELES,
SUPERIOR COURT CASE NO. BC 267635 (the "2002 SDAM Action")), alleging that they,
in the second half of 2001, fraudulently induced us to enter into a "Debenture
Agreement" through various misstatements of material fact and, alternatively,
that they breached the Debenture Agreement.

On February 28, 2002, we amended our complaint in the 2002 SDAM Action to
add as defendants E*Trade Securities, Inc. and E*Trade Group, Inc. and to add,
as against SDAM, Wendy Feldman Purner and Daniel Feldman, the claims asserted in
the NASD Arbitration. No discovery has been propounded as of October 24, 2002.
On May 3, 2002, we dismissed E*Trade from the 2002 SDAM Action without
prejudice. On May 6, 2002, we dismissed Daniel Feldman from the 2002 SDAM Action
without prejudice.

On May 9, 2002, SDAM filed a cross-complaint against us. They allege that on
or about August of 2001, we entered into an agreement with SDAM to sell them
5 million shares of our common stock and that they paid us $2 million, but have
not received any stock. After we demurred to SDAM's cross-complaint, SDAM filed
an amended cross-complaint July 3, 2002. These matters are currently in
discovery.

CRAVEY

Warren Willard Cravey ("Cravey"), now deceased, was a client of Chartwell
Community Services, Inc. ("Chartwell").

Chartwell provided care to Cravey via its community-based alternatives
program. On October 1, 2001, Lorene Emma Barros, Individually and as Executive
to the Estate of Warren Willard Cravey, Deceased, Cheryl Lynn Sloniger, Londa
Sylvia Cravey, Lorna Christine Tillman, and Warren Willard Cravey, II
("Plaintiffs') filed a lawsuit against Concepts of Care Ii, Inc., Chartwell
Community Services, Inc. f/k/a Concepts of Care, Infusion Management
Systems, Inc. d/b/a Concepts of Care, HomeCare Concepts of America, Inc. d/b/a
Concepts of Care, Mollie Primrose, and Mollie Gay Jordy ("Defendants"). (Cause
No. 23096, pending in the District Court of Jasper County, Texas.) Plaintiffs in
the above-referenced cause are the children of Cravey.

Plaintiffs claim that Defendants were negligent in their care of Cravey.
Plaintiffs allege against Chartwell claims for negligence, negligence per se,
gross negligence, and breach of fiduciary duty. Pursuant to the theory of
respondeat superior, Plaintiffs also assert that Chartwell is liable for the
alleged negligence of its former employee, Defendant Mollie Primrose, in her
care of Cravey. Plaintiffs also assert against Chartwell a claim for punitive
damages, alleging Chartwell's conduct was grossly negligent and/or malicious.
Chartwell denies and is vigorously defending all claims.

All parties to the suit are currently actively engaged in discovery. To
date, there have been no motions for summary judgment or any other dispositive
motions filed by any party. Though a jury trial has been demanded, this case is
not presently set for trial.

H.L.N. CORPORATION

H.L.N. Corporation, Frontlines Homecare, Inc., E.T.H.L., Inc., Phoenix
Homelife Nursing, Inc., and Pacific Rim Health Care Services, Inc., former
licensees (franchisees) of TLCS for the territory comprising certain counties in
and around Los Angeles, California, and their holding company, instituted an
action against TLCS subsidiaries, Staff Builders, Inc., Staff Builders
International, Inc. and Staff Builders Services, Inc., and certain executive
officers of TLCS. Plaintiffs filed a First and Second Amended Complaint in the
Central District on January 8, 1999 and September 1, 1999, respectively, to
challenge the termination of the four franchise agreements between TLCS and
certain of the named

29

plaintiffs (H.L.N. CORPORATION, ET AL. V. TLCS SUBSIDIARIES, ET AL.). The
plaintiffs are seeking damages for violations of California franchise laws,
breach of contract, fraud and deceit, unfair trade practices, claims under the
RICO, negligence, intentional interference with contractual rights, declaratory
and injunctive relief and a request for an accounting. The plaintiffs have not
specified the amount of damages they are seeking. Pursuant to a Motion of
Summary Judgment, the court granted all of the individual defendants' Motion for
Summary Judgment dismissing all causes of action against these individuals. In
addition, the court dismissed the RICO, fraud, negligence, California franchise
investment law and implied covenant of good faith and fair dealing claims. The
only remaining triable issues in the case are those relating to breach of
contract, unfair business practices and wrongful termination under the
California Franchise Law. Trial is scheduled for August 2003.

NURSING SERVICES OF IOWA

On April 30, 1999, Nursing Services of Iowa, Inc., Helen Kelly, Geri-Care
Home Health Inc. and Jacquelyn Klooster, two former home healthcare licensees of
TLCS and the principals in Des Moines and Sioux City, Iowa, respectively,
commenced an action in the United States District Court for the Southern
District of Iowa, Central Division against TLCS' subsidiaries Staff Builders
International, Inc., Staff Builders Services, Inc., Staff Builders, Inc. and
certain executive officers of TLCS. The action alleges claims under the RICO,
claiming a series of deliberate and illegal actions designed to defraud Staff
Builders' franchisees, as well as claims for negligence, breach of fiduciary
duty, breach of contract, fraudulent misrepresentation and violation of the Iowa
franchise law. The complaint seeks unspecified money damages, a claim for treble
damages on the RICO claims and punitive and exemplary damages. Pursuant to TLCS'
Motion to Dismiss all counts except for one count were dismissed by the Court.
TLCS' Motion for Summary Judgment was granted on May 25, 2001, which reduced the
lawsuit to one for breach of contract only. The case was tried before a jury in
July 2002. The jury awarded nominal damages to Geri-Care and no damages to
Nursing Services of Iowa. The judgment was paid and a Satisfaction of Judgment
was entered in the court.

ADDUS HEALTHCARE

On or about April 24, 2002, we filed a complaint against Addus
Healthcare, Inc. ("Addus"), and its major shareholders, W. Andrew Wright, Mark
S. Heaney, Courtney E. Panzer, and James A. Wright (MED DIVERSIFIED, INC. V.
ADDUS HEALTHCARE, INC., ET AL., U.S. DISTRICT COURT, CENTRAL DISTRICT OF
CALIFORNIA, CASE NO. CV 02-3911 AHM (JTLX)). We contend that Addus has been
unable to perform its obligations under a certain stock purchase agreement
relating to our acquisition of Addus. We allege that Addus breached the
warranties and representations it gave regarding its financial condition, and
Addus has been unable to obtain the consent of necessary third parties to assign
some relevant contracts. We believe that Addus has breached the agreement in
other ways, as well. Additionally, we allege that the defendants have
misappropriated our deposit.

The complaint demands the imposition of a constructive trust for the
converted funds; and an injunction against the defendants' disposing of or
liquidating the $7.5 million deposit. Our complaint further alleges fraud on
behalf of the defendants, stating that they never intended to complete the
transaction but planned to use the pendency of the transaction to obtain
concessions from us. Additionally, there is a claim for breach of contract. We
seek compensatory damages of approximately $10 million per claim, plus punitive
damages, along with the equitable relief previously described and attorney's
fees.

Addus has filed a counterclaim against us. They allege that we
(1) fraudulently induced them to enter into the agreement (2) negligently
misrepresented certain aspects of our business, (3) breached the terms of the
agreement by not closing the transaction and not having available funds to close
the transaction, and (4) breached certain other confidentiality agreements. They
have sought compensatory damages in excess of $4 million, a declaratory judgment
that they are entitled to retain the $7.5 million

30

deposit, for general and special damages. We dispute these claims vigorously and
believe they are without merit. On July 9, we filed a reply to the counterclaim.
This matter has been transferred to the Northern District of Illinois. On
October 11, 2002, we filed an Amended Complaint. Addus' answer to that complaint
is due on November 1, 2002.

UNIVERSITY AFFILIATES

In January 2002, we filed a Complaint against University Affiliates IPA
("UAIPA") and its president, Sam Romeo, who at the time was also a member of our
board of directors, for breach of contract, fraud, and, as to Mr. Romeo, breach
of fiduciary duty arising out of a May 2, 2000 agreement between UAIPA and us.
Under the agreement, during the quarter ended June 2000, we advanced $2 million
to UAIPA for the purpose of creating a joint venture intended to combine UAIPA's
supposed healthcare management expertise with Internet healthcare management
systems in an effort to develop new business opportunities. As of the filing of
the suit, the companies had not proceeded with the joint venture. According to
the original agreement, if a formal joint venture agreement were not entered
into between UAIPA and us by July 1, 2000, UAIPA would guarantee payment of
$2.5 million on or before July 1, 2001. The $2.5 million has not been paid. We
seek payment of this amount, plus any profits from the business opportunities
that were to be transferred to the joint venture, and punitive damages.

On March 4, 2002, UAIPA served a cross-complaint against us, Sanga E-Health,
LLC, TSI Technologies, LLC, Mitchell Stein, and John F. Andrews alleging breach
of various contracts, breach of the implied covenant of good faith and fair
dealing, declaratory relief, promissory estoppel, fraud, negligent
misrepresentation, unjust enrichment, quantum meruit, conversion, money had and
received, breach of fiduciary duty, interference with prospective business
advantage and unfair business practices, seeking damages in the aggregate of
approximately $11 million plus punitive damages. The court denied our motion to
compel arbitration on May 8, 2002. We subsequently filed a cross-complaint
against UAIPA and Sam Romeo regarding their failure to adhere to the May 2, 2000
agreement. No trial date has been set and UAIPA is currently in bankruptcy
proceedings.

MEDICAL SPECIALTIES DISTRIBUTORS INC.

In July of 2001, Medical Specialties Inc. ("Medical Specialties") sued our
subsidiary, Chartwell, in state court in Massachusetts (MEDICAL SPECIALTIES
DISTRIBUTORS INC. V. CHARTWELL DIVERSIFIED SERVICES, INC., ET AL., BRISTOL
COUNTY SUPERIOR COURT (MASSACHUSETTS) CIVIL ACTION NO. BRCV2001-00845. This
claim alleges failure to pay for the purchase of healthcare products and
equipment rentals totaling approximately $2 million. The case is currently in
discovery. We had been informed previously by Home Medical of America, Inc.
("HMA") that they would assume the defense of this matter. As of the date
hereof, we have not been informed that HMA has actually assumed such defense. We
continue to request of HMA that they assume this defense, and have retained
counsel to handle this defense in the meantime.

TRI-COUNTY HOME HEALTH, INC.

In March of 2002, Tri-County Home Health ("Tri-County") and other plaintiffs
filed suit against Chartwell Community Services, Inc., Chartwell Diversified
Services, Inc. (each is a subsidiary of ours) and Shay Fields (TRI COUNTY HOME
HEALTH, INC. ET AL. V. CHARTWELL COMMUNITY SERVICES, INC., CHARTWELL DIVERSIFIED
SERVICES, INC. AND SHAY FIELD, 365TH JDC, HARDIN COUNTY TX, CASE NO. 42108).
Tri-County claims that the defendants breached a contract for the sale of the
long term care portion of Tri-County's operations. They have also alleged fraud,
tortious interference, material misrepresentation and unfair dealings. They seek
damages in excess of $1 million. Chartwell answered their complaint and believes
that their claims are without merit. Chartwell intends to vigorously defend this
action.

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

None.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

(a) MARKET INFORMATION. Our common stock was listed on the AMEX under the
symbol "MED" from January 11, 2000 until July 15, 2002. Effective July 16, 2002
our common stock is quoted on the "pink sheets" under the symbol "MDDV.PK".
Prior to January 11, 2000, our common stock traded on the OTC:BB, under the
symbol "MDTK". The following table sets forth the high and low sales prices of
our common stock as reported on the AMEX for the period beginning on
January 11, 2000. The following table also sets forth the high and low bid
prices for our common stock for the periods (prior to January 11, 2000)
indicated, as reported by the OTC:BB. These prices are believed to be inter-
dealer quotations and do not include retail mark-ups, markdowns, or other fees
or commissions, and may not necessarily represent actual transactions. On
May 28, 1999, we changed our year-end from May 31 to March 31. As a result, the
quarter ending March 31, 1999 represents only one month of trading.

(b) HOLDERS. As of September 30, 2002, there were a total of 726
shareholders of record. This does not include shareholders who hold stock in
their accounts at broker/dealers.

(c) DIVIDENDS. We have never paid a cash dividend on our common stock and
do not expect to pay a cash dividend in the foreseeable future.

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(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

EQUITY COMPENSATION PLAN INFORMATION
(AS OF MARCH 31, 2002)

(e) RECENT SALES OF UNREGISTERED SECURITIES. In addition to security sales
previously reported in our quarterly reports on Form 10-Q for the quarters ended
June 30, 2001, September 30, 2001 and December 31, 2001, we have sold the
following securities that were not registered under the Securities Act of 1933,
as amended (the "Securities Act").

On May 15, 2001, we issued a warrant to TSI (now known as Swab Financial,
LLC) to purchase 4.8 million shares of our common stock exercisable until
May 15, 2008 at an exercise price of $2.30 per share. The warrant was issued in
consideration for TSI's contribution of 1 million shares of our common stock on
our behalf to Startnest LLC, in November 2000 and for consulting services during
the fiscal year ended March 31, 2001. TSI was an "accredited investor". We
relied on Section 4(2) of the Securities Act.

On July 31, 2001, we issued a warrant to purchase 1 million shares of our
common stock exercisable until July 31, 2006 at an exercise price of $.80 per
share to MPP Holdings, LLC, an affiliate of Manatt, Phelps and Phillips, LLP
("MPP"), which currently acts as our corporate counsel. We issued this warrant
in consideration for the credit risk MPP has taken on amounts owed to it for
services provided to us up through the first two quarters of 2001. We relied on
Section 4(2) of the Securities Act.

On August 6, 2001, we entered into an Employment Agreement with Frank P.
Magliochetti, Jr. in connection with Mr. Magliochetti's employment as one of our
senior executive officers. In accordance with the agreement, we issued options
to purchase 5 million shares of our common stock at an exercise price of $.001