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FORM 10-K

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

     For the fiscal year ended June 30, 2004

OR

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

Commission File Number 000-25769

Accredo Health, Incorporated

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

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

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

None

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

Common Stock, $.01 par value

     Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

PART I

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

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

      The forward-looking statements contained in this report reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties. Many important factors could cause actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the risk factors beginning on page 18 hereof.

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

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

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

Overview

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

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

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

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

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

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

Products and Services

      We offer the following products and services:

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

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

      Prior to product launch, we offer:

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

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      Following product launch, we offer:

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

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

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

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

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

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

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

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Disease Markets and Related Products

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Suppliers

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

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

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	•	United Therapeutics Corporation, with respect to Remodulin®; and
	•	ZLB Behring with respect to ZemairaTM.

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

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

      Our agreements with our key suppliers generally may be canceled by either party, without cause, with 60 to 365 days prior notice. In addition, our agreements with our suppliers generally provide that during the term of the agreements (and, in one instance, for as much as five years after termination of the agreements), we may not distribute any competing products. We generally do not have any exclusive rights to dispense our products, and our suppliers have generally reserved the right under their agreements with us to distribute their products directly or to appoint other distributors of their products. See “Risk Factors — We are highly dependent on our relationships with a limited number of biopharmaceutical suppliers and the loss of any of these relationships could significantly impact our ability to sustain or grow our revenues.” and “Business — Disease Markets and Related Products.”

Relationships with Medical Centers

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

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

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

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

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

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

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Payors

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

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

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

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

      We derive a significant portion of our revenue from governmental programs such as Medicare and Medicaid. Such programs are highly regulated and subject to frequent and substantial changes and cost containment measures. In recent years, changes in these programs have limited and reduced reimbursement to providers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Competition

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

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

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

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

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

Government Regulation

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

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

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

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

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

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

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

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

      Federal Mail Order. Federal law imposes standards for:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Employees

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

Liability Insurance

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

Internet Website

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

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Code of Ethics

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

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RISK FACTORS

      You should carefully consider the risks and uncertainties we describe below before investing in Accredo Health, Incorporated. The risks and uncertainties described below are not the only risks and uncertainties that could develop. Other risks and uncertainties that we have not predicted or evaluated could also affect our company.

      If any of the following risks occur, our earnings, financial condition or business could be materially harmed, and the trading price of our common stock could decline, resulting in the loss of all or part of your investment

We are highly dependent on our relationships with a limited number of biopharmaceutical suppliers and the loss of any of these relationships could significantly impact our ability to sustain or grow our revenues.

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

      Our agreements with these suppliers are short-term and cancelable by either party without cause on 60 to 365 days prior notice. These agreements also generally limit our ability to handle competing drugs during and, in some cases, after the term of the agreement, but allow the supplier to distribute through channels other than us. Further, these agreements provide that pricing and other terms of these relationships be periodically adjusted for changing market conditions or required service levels. Any termination or modification to any of these relationships could have a material adverse effect on a significant portion of our business, financial condition and results of operations.

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

      We primarily sell 21 product lines. We focus almost exclusively on a limited number of complex and expensive drugs that serve small patient populations. The drugs that we sell with respect to the following core disease markets accounted for approximately 90% of our revenues for the year ended June 30, 2004, with the drugs for hemophilia, autoimmune disorders and PID constituting approximately 36% of our revenue for the same period:

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

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

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

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

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

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

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

	•	other specialty pharmacy distributors;
	•	specialty pharmacy divisions of wholesale drug distributors;
	•	pharmacy benefit management companies or PBMs;
	•	hospital-based pharmacies;
	•	retail pharmacies;
	•	home infusion therapy companies;
	•	manufacturers that sell their products both to distributors and directly to users;
	•	comprehensive hemophilia treatment centers;
	•	patient support groups and payors entering the specialty pharmacy distribution business; and
	•	other alternative site health care providers.

      Many of our competitors have substantially greater resources and more established operations and infrastructure than we have. We are particularly at risk from any of our suppliers deciding to pursue their own distribution and services instead of outsourcing these needs to companies like us. A significant factor in effective competition will be our ability to maintain and expand relationships with managed care companies, PBMs and other payors who can effectively determine the pharmacy source for their enrollees.

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

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

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

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

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

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