content: SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549
  
                                      FORM 10-Q
  
                  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                       OF THE SECURITIES EXCHANGE ACT OF 1934
  
                    For the quarterly period ended March 31, 2002
  
                             Commission File No. 1-15669
  
                            Gentiva Health Services, Inc.
               (Exact name of Registrant as specified in its charter)
  
  
              DELAWARE                                     36-433-5801
              --------                                     -----------
   (State or other jurisdiction of                      (I.R.S. Employer
   incorporation or organization)                      Identification No.)
  
  
                 3 Huntington Quadrangle 2S, Melville, NY 11747-8943
                 ---------------------------------------------------
                 (Address of principal executive offices) (Zip Code)
  
  
         Registrant's telephone number, including area code: (631) 501-7000
  
  
       Indicate by check mark whether the registrant (1) has filed all reports
  required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
  1934 during the preceding 12 months (or for such shorter period that the
  registrant was required to file such reports), and (2) has been subject to such
  filing requirements for the past 90 days.
  
                                 Yes X No
  
                       The number of shares outstanding of the
                      Registrant's Common Stock, as of May 13,
                                2002 was 26,109,168.
  
  
  <PAGE>
  
  
  
  
                                        INDEX
  
                                                                          Page No.
  
  PART I - FINANCIAL INFORMATION
  
           Item 1. Financial Statements
  
                 Consolidated Balance Sheets (Unaudited) - March 31, 2002 and
                 December 30, 2001                                              3
  
                 Consolidated Statements of Operations (Unaudited) -
                 Three Months Ended March 31, 2002 and April 1, 2001            4
  
                 Consolidated Statements of Cash Flows (Unaudited) -
                 Three Months Ended March 31, 2002 and April 1, 2001            5
  
                 Notes to Consolidated Financial Statements (Unaudited)      6-13
  
           Item 2. Management's Discussion and Analysis of Financial
                     Condition and Results of Operations                    14-20
  
           Item 3. Quantitative and Qualitative Disclosures about Market Risk  20
  
  PART II - OTHER INFORMATION
  
           Item 1. Legal Proceedings                                        21-23
  
           Item 2. Changes in Securities and Use of Proceeds                   23
  
           Item 3. Defaults Upon Senior Securities                             23
  
           Item 4. Submission of Matters to a Vote of Security Holders         23
  
           Item 5. Other Information                                           23
  
           Item 6. Exhibits and Reports on Form 8-K                         23-26
  
  SIGNATURES                                                                   27
  
  
                                        -2-
  <PAGE>
  
  
  
  
  
  
  
  
  <PAGE>
  
  
                           PART I - FINANCIAL INFORMATION
  
  
  <TABLE>
  <CAPTION>
  Item 1.  Financial Statements
  
                   Gentiva Health Services, Inc. and Subsidiaries
                            Consolidated Balance Sheets
                        (In thousands, except share amounts)
                                     (Unaudited)
  
                                                                                         March 31, 2002        December 30, 2001
                                                                                    ---------------------   ---------------------
  ASSETS
  Current assets:
  <S>                                                                                         <C>                      <C>
                Cash and cash equivalents                                                     $99,424                  $71,999
                Restricted cash                                                                35,164                   35,164
                Receivables, less allowance for doubtful accounts of $88,920
                  and $88,155, respectively                                                   360,965                  368,196
                Inventories                                                                    56,558                   47,600
                Prepaid expenses and other current assets                                      22,538                   47,396
                                                                                    ---------------------   ---------------------
                            Total current assets                                              574,649                  570,355
  
  Fixed assets, net                                                                            28,155                   30,449
  Goodwill, net                                                                                 3,214                  220,541
  Other assets                                                                                 17,733                   16,989
                                                                                    ---------------------   ---------------------
                            Total assets                                                     $623,751                 $838,334
                                                                                    =====================   =====================
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Current liabilities:
                Accounts payable                                                              $83,306                  $57,726
                Accrued expenses                                                               55,635                   63,874
                Payroll and related taxes                                                      15,462                   16,094
                Insurance costs                                                                35,048                   31,460
                                                                                    ---------------------   ---------------------
                            Total current liabilities                                         189,451                  169,154
  
  Other liabilities                                                                            18,444                   47,473
  
  Shareholders' equity:
                Common stock, $.10 par value; authorized 100,000,000 shares; issued
                  and outstanding 26,022,847 and 25,638,794 shares, respectively                2,602                    2,564
                Additional paid-in capital                                                    726,030                  722,725
                Accumulated deficit                                                          (312,776)                (103,582)
                                                                                    ---------------------   ---------------------
                            Total shareholders' equity                                        415,856                  621,707
                                                                                    ---------------------   ---------------------
                            Total liabilities and shareholders' equity                       $623,751                 $838,334
                                                                                    =====================   =====================
  See notes to consolidated financial statements.
  
  </TABLE>
  
  
  
  
                                        -3-
  <PAGE>
  
  <TABLE>
  <CAPTION>
                   Gentiva Health Services, Inc. and Subsidiaries
                       Consolidated Statements of Operations
                      (In thousands, except per share amounts)
                                    (Unaudited)
  
                                                                         Three Months Ended
                                                               --------------------- --------------------
                                                                  March 31, 2002        April 1, 2001
                                                               --------------------- --------------------
  
  <S>                                                                     <C>                  <C>
  Net revenues                                                            $ 369,584            $ 357,178
  Cost of services sold                                                     252,874              240,748
                                                               --------------------- --------------------
        Gross profit                                                        116,710              116,430
  
  Selling, general and administrative expenses                              107,973              109,385
  Interest expense (income), net                                               (196)                 433
                                                               --------------------- --------------------
        Income before income taxes and cumulative
          effect of accounting change                                         8,933                6,612
  
  Income tax expense                                                            800                  500
                                                               --------------------- --------------------
  Income before cumulative effect of accounting change                      $ 8,133              $ 6,112
  
  Cumultive effect of accounting change                                    (217,327)                   -
                                                               --------------------- --------------------
        Net income (loss)                                                 $(209,194)             $ 6,112
                                                               ===================== ====================
  
  Earnings per Share - Basic:
  
        Income before cumulative effect of accounting change                 $ 0.31               $ 0.28
        Cumulative effect of accounting change                                (8.41)                   -
                                                               --------------------- --------------------
        Net income (loss)                                                    $(8.10)              $ 0.28
                                                               ===================== ====================
  
  Earnings per Share - Diluted:
  
        Income before cumulative effect of accounting change                 $ 0.30               $ 0.26
        Cumulative effect of accounting change                                (8.02)                   -
                                                               --------------------- --------------------
        Net income (loss)                                                    $(7.72)              $ 0.26
                                                               ===================== ====================
  Average shares outstanding:
        Basic                                                                25,842               21,448
                                                               ===================== ====================
        Diluted                                                              27,096               25,701
                                                               ===================== ====================
  
  See notes to consolidated financial statements.
  
  </TABLE>
  
                                        -4-
  <PAGE>
  
  
                   Gentiva Health Services, Inc. and Subsidiaries
                       Consolidated Statements of Cash Flows
                                   (In thousands)
                                    (Unaudited)
  
  
  <TABLE>
  <CAPTION>
                                                                        Three Months Ended
                                                                     -----------------------------------------------------
                                                                          March 31, 2002               April 1, 2001
                                                                     --------------------------   ------------------------
  
  OPERATING ACTIVITIES:
  <S>                                                                               <C>                        <C>
  Net income (loss)                                                                 $ (209,194)                $    6,112
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
      Cumulative effect of accounting change                                           217,327                          -
      Depreciation and amortization                                                      3,578                      6,990
      Provision for doubtful accounts                                                    8,275                      9,200
      Changes in assets and liabilities:
                Accounts receivable                                                     (1,044)                     2,612
                Inventories                                                             (8,958)                      (150)
                Prepaid expenses and other current assets                               (2,001)                     1,416
                Current liabilities                                                     20,297                      8,633
                Other, net                                                              (2,955)                      (737)
                                                                     --------------------------   ------------------------
  Net cash provided by operating activities                                             25,325                     34,076
                                                                     --------------------------   ------------------------
  
  INVESTING ACTIVITIES:
  Purchase of fixed assets                                                              (1,243)                    (1,116)
                                                                     --------------------------   ------------------------
  Net cash used in investing activities                                                 (1,243)                    (1,116)
                                                                     --------------------------   ------------------------
  
  FINANCING ACTIVITIES:
  Proceeds from issuance of common stock                                                 3,343                      5,642
  Decrease in book overdrafts                                                                -                    (10,379)
  Advances from Medicare program                                                             -                     20,878
                                                                     --------------------------   ------------------------
  Net cash provided by financing activities                                              3,343                     16,141
                                                                     --------------------------   ------------------------
  
  Net increase in cash and cash equivalents                                             27,425                     49,101
  
  Cash and cash equivalents at beginning of period                                      71,999                        452
                                                                     --------------------------   ------------------------
  Cash and cash equivalents at end of period                                          $ 99,424                   $ 49,553
                                                                     ==========================   ========================
  
  
  See notes to consolidated financial statements.
  
  </TABLE>
  
  
  
                                        -5-
  <PAGE>
  
  
                   Gentiva Health Services, Inc. and Subsidiaries
                     Notes to Consolidated Financial Statements
                                     (Unaudited)
  
  
       1. Accounting Policies
  
       The accompanying interim consolidated financial statements are unaudited,
  but have been prepared by Gentiva Health Services, Inc. (the "Company") pursuant
  to the rules and regulations of the Securities and Exchange Commission and, in
  the opinion of management, include all adjustments necessary for a fair
  presentation of results of operations, financial position and cash flows for
  each period presented. Results for interim periods are not necessarily
  indicative of results for a full year. The year-end balance sheet data was
  derived from audited financial statements, but does not include all disclosures
  required by accounting principles generally accepted in the United States of
  America.
  
       2. Background and Basis of Presentation
  
       On January 2, 2002, the Company entered into an asset purchase agreement
  with Accredo Health, Incorporated ("Accredo") pursuant to which Accredo agreed
  to acquire substantially all of the assets of the Company's Specialty
  Pharmaceutical Services business for a purchase price of $415 million, subject
  to adjustment in accordance with the asset purchase agreement. The consideration
  is payable to the Company half in cash and half in shares of Accredo common
  stock, provided that the average closing price of Accredo common stock for the
  twenty days ending on the second day prior to the closing of this acquisition is
  between $31 and $41 per share. If the average closing price of the Accredo
  common stock is outside the range, the number of shares to be issued will be
  fixed and the value of the stock consideration will fluctuate. The purchase
  price is also subject to adjustment for changes in the net book value as of the
  closing date. Based on the closing price of Accredo common stock as of May 13,
  2002 ($55.98 per share) and assuming no adjustment for changes in net book
  value, the consideration payable to the Company would approximate $491 million.
  
       The sale of the Specialty Pharmaceutical Services business is conditioned
  upon, among other things, regulatory approval, the approval of the shareholders
  of each company and other customary conditions. Completion of the transaction is
  expected in the second quarter of 2002. It is currently expected that following
  the sale of the Specialty Pharmaceutical Services business, the Company will
  distribute substantially all of the proceeds to its shareholders.
  
       Results for the first quarter of fiscal 2002 included transaction related
  costs of approximately $3 million relating to the pending sale of the Specialty
  Pharmaceutical Services business, consisting primarily of professional services
  fees, which were reflected in selling,
  
  
                                        -6-
  <PAGE>
  
  
  general and administrative expenses in the accompanying consolidated statement
  of operations.
  
       The Specialty Pharmaceutical Services business will be treated as a
  discontinued operation following the date on which shareholders approve the
  transaction. Subsequent to the closing date of the transaction, the Company
  intends to operate in the home health services business.
  
       3. Earnings per Share
  
  
       Basic net income (loss) per share for each period presented has been
  computed by dividing net income (loss) by the weighted average number of shares
  outstanding for each respective period. Diluted net income (loss) per share for
  each period presented has been computed using the weighted average number of
  common and dilutive common equivalent shares outstanding.
  
       During the first quarter of fiscal 2002, the weighted average number of
  shares outstanding was 25,842,000. Dilutive common equivalent shares included an
  incremental 1,254,000 shares for the first quarter that would be issued upon the
  assumed exercise of 1,948,000 stock options under the treasury stock method.
  
       Basic net income per share for the first quarter of fiscal 2001 has been
  computed using the weighted average number of shares outstanding (21,448,000).
  Dilutive common equivalent shares represented (i) 2,107,000 shares that would be
  issued upon the assumed exercise of approximately 3.8 million stock options
  under the treasury stock method and (ii) 2,146,000 shares that would be issued
  upon the assumed conversion of the 10 percent convertible preferred trust
  securities at a conversion price of $9.32 per share.
  
  
       4. Goodwill and Other Intangible Assets
  
       In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
  No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens the
  criteria for recording intangible assets separate from goodwill. SFAS 142
  requires the use of a nonamortization approach to account for purchased goodwill
  and certain intangibles. Under a nonamortization approach, goodwill and certain
  intangibles are not amortized into results of operations, but instead are
  reviewed for impairment and an impairment charge is recorded in the periods in
  which the recorded carrying value of goodwill and certain intangibles is more
  than its estimated fair value. The Company adopted SFAS 142 as of the beginning
  of fiscal 2002. The provisions of SFAS 142 require that a transitional
  impairment test be performed as of the beginning of the year the statement is
  adopted. The provisions of SFAS 142 also require that a goodwill impairment test
  be performed annually or in the case of other events that indicate a potential
  impairment. The new criteria for recording intangible assets separate from
  goodwill did not require any reclassification in the Company's financial
  statements.
  
  
  
                                        -7-
  <PAGE>
  
       At December 30, 2001, the Company had goodwill of $220.5 million, of which
  $217.3 million related to the Home Health Services business and $3.2 million
  related to the Specialty Pharmaceutical Services business. The Company's
  transitional impairment test indicated that there was an impairment of goodwill
  relating to the Home Health Services business upon adoption of SFAS 142 as
  further described below.
  
       The impairment test is a two step process that begins with the estimation
  of the fair value of each reporting unit. The first step screens for potential
  impairment and the second step measures the amount of the impairment. The
  estimate of fair value of the Home Health Services business as of the beginning
  of fiscal 2002 considered publicly available information as well as financial
  projections and estimates prepared by outside advisors, and was determined by
  subtracting the agreed-upon purchase price for the Specialty Pharmaceutical
  Services business from the market capitalization of the Company. As part of the
  first step to assess potential impairment, management compared the estimate of
  fair value for the Home Health Services business to the book value of the
  business unit's net assets. Since the book value of Home Health Services' net
  assets was greater than its estimated fair value, management proceeded to the
  second step to measure the impairment. The second step compares the implied fair
  value of goodwill with its carrying value. The implied fair value of goodwill is
  determined by allocating the fair value of the reporting unit to all of the
  assets and liabilities of that unit as if the reporting unit had been acquired
  in a business combination and the fair value of the reporting unit was the
  purchase price paid to acquire the reporting unit. The excess of the fair value
  of the reporting unit over the amounts assigned to its assets and liabilities is
  the implied fair value of goodwill. If the carrying amount of the reporting
  unit's goodwill is greater than its implied fair value, an impairment loss will
  be recognized in the amount of the excess.
  
       Based on the results of the transitional impairment tests, the Company
  determined that an impairment loss relating to goodwill had occurred and
  recorded a non-cash charge of $217.3 million as cumulative effect of accounting
  change in the accompanying consolidated statement of operations for the three
  months ended March 31, 2002. The Company recorded a deferred tax benefit of
  approximately $66 million resulting from this non-cash charge, however, because
  of the uncertainty of the ultimate realization of the deferred tax asset, the
  Company increased its valuation allowance by the same amount.
  
           The table below presents a reconciliation of reported net income to
  adjusted net income as if the SFAS 142 was adopted as of the beginning of fiscal
  2001 (in 000's, except per share amounts).
  
  <TABLE>
  <CAPTION>
                                                           Three Months Ended
                                           --------------------------------------------------
                                                               April 2, 2001
                                           --------------------------------------------------
                                                                   Earnings per Share
                                                             --------------------------------
                                            Net Income           Basic            Diluted
                                           --------------    ---------------   --------------
  <S>                                            <C>                 <C>              <C>
  Reported net income                            $ 6,112             $ 0.28           $ 0.26
  Add back:  Goodwill amortization                 2,653               0.13             0.10
                                           --------------    ---------------   --------------
  
  Adjusted net income                            $ 8,765             $ 0.41           $ 0.36
                                           ==============    ===============   ==============
  </TABLE>
  
  
       5. Current Liabilities
  
  
  
                                        -8-
  <PAGE>
  
       In early 2001, the Center for Medicare and Medicaid Services, formerly
  known as the Health Care Financing Administration, issued cash advances to
  certain Medicare providers in connection with the transition from the Interim
  Payment System to the Prospective Payment System (PPS) for Medicare
  reimbursement. Such advances are expected to be repaid during the second quarter
  of fiscal 2002. In the first quarter of fiscal 2001, the Company received such
  an advance, net of payments for estimated settlements relating to cost report
  filings, of approximately $20.9 million, which is reflected in accrued expenses
  in the accompanying consolidated balance sheets as of March 31, 2002 and
  December 30, 2001.
  
       6. Restricted Cash and Revolving Credit Facility
  
       As of March 31, 2002, there were no outstanding borrowings, and total
  outstanding letters of credit approximated $25.7 million under the Company's
  $150 million amended revolving credit facility. The credit facility, which
  expires in 2004, includes certain covenants requiring the Company to maintain a
  minimum tangible net worth and minimum earnings before interest, taxes,
  depreciation and amortization. Other covenants in the credit facility include
  limitation on mergers, consolidation, acquisitions, indebtedness, liens, capital
  expenditures and dispositions of assets and other limitation with respect to the
  Company's operations. Certain of these covenants would be violated if the
  Company does not negotiate a new credit facility or receive a consent from its
  lenders in connection with the sale of the Specialty Pharmaceutical Services
  business. The Company's obligations under the credit facility are collateralized
  by all of the Company's tangible and intangible personal property, and other
  equipment. The Company was in compliance with the financial covenants under the
  credit facility at March 31, 2002.
  
       In June 2001, the Company's credit facility was amended to increase the
  portion of the facility available for letters of credit from $30 million to
  either (i) $40 million or (ii) $70 million in the event that the Company elects
  to post a letter of credit in lieu of an appellate bond for all or a part of the
  total amount of the judgment (including interest) in the Fredrickson v. Olsten
  Health Services Corp. and Olsten Corporation case while the Company pursues its
  appeal of the judgment as further discussed in Note 8. A supersedeas bond in the
  amount of $35.2 million was posted to satisfy the judgment plus interest. Under
  the terms of the bond, cash equal to the amount of the bond is held in a
  segregated account and is reported as restricted cash in the accompanying
  consolidated balance sheets as of March 31, 2002 and December 30, 2001.
  
       7. Shareholders' Equity
  
       Changes in shareholders' equity during the three months ended March 31,
  2002 were as follows (in thousands):
  
  
  
                                        -9-
  <PAGE>
  
  
  
  
  <TABLE>
  <CAPTION>
                                                      Common        Additional Paid-       Accumulated
                                                      Stock             in Capital           Deficit               Total
                                                ---------------     ----------------   -----------------    -----------------
  
  <S>                                                 <C>             <C>                <C>                   <C>
  Balance at December 30, 2001                        $ 2,564         $    722,725       $     (103,582)       $     621,707
  
       Comprehensive loss:
                   Net loss                                                                    (209,194)            (209,194)
  
       Issuance of stock upon exercise of
       stock options and under stock plans
       for employees and directors                         38                3,305                    -                3,343
                                                 ------------         ------------      ---------------        -------------
  Balance at March 31, 2002                           $ 2,602         $    726,030      $      (312,776)       $    $415,856
                                                 ============         ============      ===============        =============
  
  </TABLE>
  
  
  Comprehensive loss amounted to $209.2 million during the first quarter of fiscal
  2002 and comprehensive income was $5.5 million for the first quarter of fiscal
  2001.
  
       8. Legal Matters
  
       Litigation
  
       In addition to the matters referenced below, the Company is party to
  certain legal actions arising in the ordinary course of business including legal
  actions arising out of services rendered by its various operations, personal
  injury and employment disputes.
  
       Fredrickson v. Olsten Health Services Corp. and Olsten Corporation, Case
  No. 01C.A.116, Court of Appeals, Seventh Appellate District, Mahoning County,
  Ohio. In November, 2000, the jury in this age-discrimination lawsuit returned a
  verdict in favor of the plaintiff against Olsten consisting of $675,000 in
  compensatory damages, $30 million in punitive damages and an undetermined amount
  of attorneys' fees. The jury found that, although Olsten had lawfully terminated
  the plaintiff's employment, its failure to transfer or rehire the plaintiff
  rendered Olsten liable to the plaintiff. Following post-trial motion practice by
  both parties, the trial court, in May 2001, denied all post-trial motions, and
  entered judgment for the plaintiff for the full amount of compensatory and
  punitive damages, and awarded the plaintiff reduced attorney's fees of $247,938.
  In June 2001, defendants timely filed a Notice of Appeal with the Court of
  Appeals, and the Company posted a supersedeas bond for the full amount of the
  judgment, plus interest. The parties to the appeal have filed all briefs and the
  briefing period is completed. Oral arguments have not been scheduled. The
  Company continues to defend itself in this matter vigorously. At this stage of
  the proceedings, the Company is unable to assess the probable outcome of the
  appeal.
  
       Cooper v. Gentiva CareCentrix, Inc., t/a/d/b/a Gentiva Health Services,
  U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
  this Amended Complaint was served on the Company alleging that the defendant
  submitted false claims to the government for payment in violation of the Federal
  False Claims Act, 31 U.S.C. 3729 et seq, and that the defendant had wrongfully
  terminated Plaintiff. Plaintiff claims that infusion pumps delivered to patients
  did not supply the full amount of medication, allegedly resulting in substandard
  care. Based on a review of the court's docket sheet, plaintiff filed a complaint
  under seal in March 2001. In October 2001, the United States Government filed a
  Notice with the
  
  
  
                                        -10-
  <PAGE>
  
  court declining to intervene in this matter, and on October 24, 2001, the court
  ordered that the seal be lifted. The Company filed its responsive pleading on
  February 25, 2002 and discovery has now commenced. The Company has denied the
  allegations of wrongdoing in the complaint and intends to defend itself
  vigorously in this matter. Given the preliminary stage of the proceedings, the
  Company is unable to assess the probable outcome or potential liability, if any,
  arising from this matter; therefore, a range of damages, if any, cannot be
  determined.
  
       United States of America ex rel. Lee Einer v. Olsten Corporation, No.
  CIV-S-99-0860 DFL/DAD, U.S. District Court for the Eastern District of
  California. On November 1, 2001, the Company received notice of the entry of an
  Order dated October 25, 2001, unsealing the referenced complaint. As recited in
  the Order unsealing the complaint, the United States gave notice to the District
  Court that the United States was declining to intervene in the action. The
  Company believes that it was this complaint that gave rise to a document
  subpoena served on the Company in December 1999 from the Department of Health
  and Human Services, Office of Inspector General, and Office of Investigations.
  The Company acknowledged service of the complaint on November 29, 2001 and
  timely filed responsive pleadings to the Complaint. The Company is engaged in
  discovery and intends to defend itself vigorously in this matter. Given the
  preliminary stage of the proceedings, the Company is unable to assess the
  probable outcome or potential liability, if any, arising from this matter;
  therefore, a range of damages, if any, cannot be determined.
  
       In 1999, Kimberly Home Health Care, Inc. ("Kimberly"), one of the Company's
  subsidiaries, initiated three arbitration proceedings against hospitals owned by
  Columbia/HCA Healthcare Corp. ("Columbia/HCA") with which Kimberly had
  management services agreements to provide services to the hospitals' home health
  agencies. The basis for each of the arbitrations is that Columbia/ HCA sold the
  home health agencies without assigning the management services agreements and,
  as a result, Columbia/HCA has breached the management services agreements. In
  response to the arbitrations, Columbia/HCA has asserted that the arbitrations be
  consolidated and stayed, in part based upon its alleged claims against Kimberly
  for breach of contract, and requested indemnity and possibly return of
  management fees. Columbia/HCA has not yet formally presented these claims in the
  arbitrations or other legal proceedings and has not yet quantified the claims.
  Still pending before the arbitrators is Columbia/HCA's request to consolidate
  the proceedings, which Kimberly has opposed. The proceedings are currently in
  abeyance pending ruling on Columbia/HCA's motion to consolidate. The Company is
  the claimant in this matter and the defendant has not formally asserted any
  counterclaims against the Company in the arbitration, nor has the defendant made
  any formal demand on the Company. The Company is unable to assess the liability
  or losses, if any, attributable to the threatened counterclaims.
  
       Furthermore, in connection with the Company's split off from Olsten
  Corporation on March 15, 2000 (the "Split-Off"), the Company agreed to assume,
  to the extent permitted by law, the liabilities, if any, arising out of (and to
  indemnify Olsten for) the above proceedings and other liabilities arising out of
  the health services business, including any such liabilities arising after the
  Split-Off in connection with the government investigations described below. In
  addition, in connection with the sale of the Specialty Pharmaceutical Services
  business, the
  
  
  
                                        -11-
  <PAGE>
  
  Company has agreed to retain and indemnify Accredo for the specified liabilities
  including the litigation described above and the government investigation
  described below.
  
       Government Investigations
  
       In early February 2000, the Company received a document subpoena from the
  Department of Health and Human Services, Office of Inspector General, and Office
  of Investigations. The Company believes the subpoena relates to its agencies'
  cost reporting procedures concerning contracted nursing and home health aide
  costs. To the Company's knowledge, the government has not filed a complaint
  against the Company, nor has the government quantified the amount of alleged
  damages relating to this matter. Recently, the government has asserted that this
  matter could fall under the Federal False Claims Act (the "Act"), and if
  liability is found under the Act, the government would be able to assess double
  or treble damages against the Company. The Company disputes the government's
  assertions, but continues to cooperate with the government in its investigation
  of this matter and to provide the government with the requested documents. At
  this time, the Company is unable to assess the probable outcome or potential
  liability, if any, arising from this subpoena.
  
  
       9. Business Segment Information
  
       The Company operates in the United States servicing patients and customers
  through the following business segments: Specialty Pharmaceutical Services and
  Home Health Services. These segments are briefly described below.
  
       Specialty Pharmaceutical Services includes (i) the distribution of drugs
  and other biological and pharmaceutical products and professional support
  services for individuals with chronic diseases, such as hemophilia, primary
  pulmonary hypertension, autoimmune deficiencies and growth disorders, (ii) the
  administration of antibiotics, chemotherapy, nutrients and other medications for
  patients with acute or episodic disease states, (iii) distribution services for
  pharmaceutical, biotechnology and medical service firms and (iv) clinical
  support services for pharmaceutical and biotechnology firms.
  
       Home Health Services includes (i) professional and paraprofessional
  services, including skilled nursing, rehabilitation and other therapies, home
  health aide and personal care services to individuals with acute illnesses,
  long-term chronic health conditions, permanent disabilities, terminal illnesses
  or post-procedural needs and (ii) care management and coordination for managed
  care organizations and self-insured employees.
  
       The Company and its chief decision makers evaluate performance and allocate
  resources based on operating contributions of the reportable segments, which
  exclude corporate expenses, depreciation, amortization and interest expense, but
  include revenues and all other costs directly attributable to the specific
  segment. Intersegment revenues represent Specialty Pharmaceutical Services
  segment revenues generated from services provided to the Home Health Services
  segment. Identifiable assets of the segments reflect net accounts receivable and
  inventories associated with segment activities. All other assets are assigned to
  the Company for the benefit of all segments.
  
  
  
                                        -12-
  <PAGE>
  
       Information about the Company's operations is as follows (in thousands):
  
  <TABLE>
  <CAPTION>
                                                     Specialty
                                                 Pharmaceutical          Home Health
                                                    Services              Services           Total
                                                ------------------------------------------------------
  Three months ended March 31, 2002
  <S>                                                      <C>             <C>              <C>
  Net revenues - segments                                  $ 200,468       $ 192,799        $ 393,267
                                                ===================== ===============
  Intersegment revenues                                                                       (23,683)
                                                                                       ---------------
  Net revenues                                                                              $ 369,584
                                                                                       ===============
  
  Operating contribution                                    $ 17,467        $ 15,481         $ 32,948
                                                ===================== ===============
  Corporate expenses                                                                          (20,633)
                                                                                       ---------------
  Earnings before interest expense, taxes,
    depreciation and amortization                                                              12,315
  Depreciation and amortization                                                                (3,578)
  Interest income, net                                                                            196
                                                                                       ---------------
  
  Income before income taxes and
    cumulative effect of accounting change                                                     $ 8,933
                                                                                       ===============
  
  Segment assets                                           $ 294,712       $ 133,642        $ 428,354
                                                ===================== ===============
  Intersegment assets                                                                         (10,831)
                                                                                       ---------------
  Segment assets, net                                                                         417,523
  Corporate assets                                                                            206,228
                                                                                       ---------------
  Total assets                                                                              $ 623,751
                                                                                       ===============
  
  
  
  
  Three months ended April 1, 2001
  Net revenues - segments                                  $ 195,887       $ 185,617        $ 381,504
                                                ===================== ===============
  Intersegment revenues                                                                       (24,326)
                                                                                       ---------------
  Net revenues                                                                              $ 357,178
                                                                                       ===============
  
  Operating contribution                                    $ 16,847        $ 14,780         $ 31,627
                                                ===================== ===============
  Corporate expenses                                                                          (17,592)
                                                                                       ---------------
  Earnings before interest expense, taxes,
    depreciation and amortization                                                              14,035
  
  Depreciation and amortization                                                                (6,990)
  Interest expense, net                                                                          (433)
                                                                                       ---------------
  Income before income taxes                                                                  $ 6,612
                                                                                       ===============
  
  Segment assets                                           $ 302,364       $ 173,877        $ 476,241
                                                ===================== ===============
  Intersegment assets                                                                         (17,614)
                                                                                       ---------------
  Segment assets, net                                                                         458,627
  Corporate assets                                                                            376,215
                                                                                       ---------------
  Total assets                                                                              $ 834,842
                                                                                       ===============
  </TABLE>
  
                                        -13-
  <PAGE>
  
  
  Item 2. Management's Discussion and Analysis of Financial Condition and Results
          of Operations
  
  General
  
       The Company's results of operations are impacted by various regulations and
  other matters that are implemented from time to time in its industry, some of
  which are described in the Company's Annual Report on Form 10-K, as amended, for
  the fiscal year ended December 30, 2001.
  
  Significant Developments
  
       On January 2, 2002, the Company entered into an asset purchase agreement
  with Accredo Health, Incorporated ("Accredo") pursuant to which Accredo agreed
  to acquire substantially all of the assets of the Company's Specialty
  Pharmaceutical Services business for a purchase price of $415 million, subject
  to adjustment in accordance with the asset purchase agreement. The consideration
  is payable to the Company half in cash and half in shares of Accredo common
  stock, provided that the average closing price of Accredo common stock for the
  twenty days ending on the second day prior to the closing of this acquisition is
  between $31 and $41 per share. If the average closing price of the Accredo
  common stock is outside the range, the number of shares to be issued will be
  fixed and the value of the stock consideration will fluctuate. The purchase
  price is also subject to adjustment for changes in the net book value as of the
  closing date. Based on the closing price of Accredo common stock as of May 13,
  2002 ($55.98 per share) and assuming no adjustment for changes in net book
  value, the consideration payable to the Company would approximate $491 million.
  
       The sale of the Specialty Pharmaceutical Services business is conditioned
  upon, among other things, regulatory approval, the approval of the shareholders
  of each company and other customary conditions. Completion of the transaction is
  expected in the second quarter of 2002. It is currently expected that following
  the sale of the Specialty Pharmaceutical Services business, the Company will
  distribute substantially all of the proceeds to its shareholders.
  
       Results for the first quarter of fiscal 2002 included transaction related
  costs of approximately $3 million relating to the pending sale of the Specialty
  Pharmaceutical Services business, consisting primarily of professional services
  fees, which were reflected in selling, general and administrative expenses in
  the accompanying consolidated statement of operations.
  
       The Specialty Pharmaceutical Services business will be treated as a
  discontinued operation following the date on which shareholders approve the
  transaction. Subsequent to the closing date of the transaction, the Company
  intends to operate in the home health services business.
  
  
  
                                        -14-
  <PAGE>
  
  
  Critical Accounting Policies
  
       The preparation of financial statements in conformity with accounting
  principles generally accepted in the United States requires management to make
  estimates and assumptions and select accounting policies that affect the
  reported amounts of assets and liabilities and disclosure of contingent assets
  and liabilities at the date of the financial statements and the reported amounts
  of revenues and expenses during the reporting period. Actual results could
  differ from those estimates.
  
       These accounting policies have been described in our 2001 Annual Report on
  Form 10-K, as amended, with the following accounting policy adopted effective
  December 31, 2001.
  
       In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
  No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens the
  criteria for recording intangible assets separate from goodwill. SFAS 142
  requires the use of a nonamortization approach to account for purchased goodwill
  and certain intangibles. Under a nonamortization approach, goodwill and certain
  intangibles are not amortized into results of operations, but instead are
  reviewed for impairment and an impairment charge is recorded in the periods in
  which the recorded carrying value of goodwill and certain intangibles is more
  than its estimated fair value. The Company adopted SFAS 142 as of the beginning
  of fiscal 2002. The provisions of SFAS 142 require that a transitional
  impairment test be performed as of the beginning of the year the statement is
  adopted. The provisions of SFAS 142 also require that a goodwill impairment test
  be performed annually or in the case of other events that indicate a potential
  impairment. The new criteria for recording intangible assets separate from
  goodwill did not require any reclassification in the Company's financial
  statements.
  
       At December 30, 2001, the Company had goodwill, of $220.5 million, of which
  $217.3 million related to the Home Health Services business and $3.2 million
  related to the Specialty Pharmaceutical Services business. The Company's
  transitional impairment test indicated that there was an impairment of goodwill
  relating to the Home Health Services business upon adoption of SFAS 142 as
  further described below.
  
       The impairment test is a two step process that begins with the estimation
  of the fair value of each reporting unit. The first step screens for potential
  impairment and the second step measures the amount of the impairment. The
  estimate of fair value of the Home Health Services business as of the beginning
  of fiscal 2002 considered publicly available information as well as financial
  projections and estimates prepared by outside advisors, and was determined by
  subtracting the agreed-upon purchase price for the Specialty Pharmaceutical
  Services business from the market capitalization of the Company. As part of the
  first step to assess potential impairment, management compared the estimate of
  fair value for the Home Health Services business to the book value of the
  business unit's net assets. Since the book value of Home Health Services' net
  assets was greater than its estimated fair value, management proceeded to the
  second step to measure the impairment. The second step compares the implied fair
  value of goodwill with its carrying value. The implied fair value of goodwill is
  
  
                                        -15-
  <PAGE>
  
  determined by allocating the fair value of the reporting unit to all of the
  assets and liabilities of that unit as if the reporting unit had been acquired
  in a business combination and the fair value of the reporting unit was the
  purchase price paid to acquire the reporting unit. The excess of the fair value
  of the reporting unit over the amounts assigned to its assets and liabilities is
  the implied fair value of goodwill. If the carrying amount of the reporting
  unit's goodwill is greater than its implied fair value, an impairment loss will
  be recognized in the amount of the excess.
  
       Based on the results of the transitional impairment tests, the Company
  determined that an impairment loss relating to goodwill had occurred and
  recorded a non-cash charge of $217.3 million as cumulative effect of accounting
  change in the accompanying consolidated statement of operations for the three
  months ended March 31, 2002. The Company recorded a deferred tax benefit of
  approximately $66 million resulting from this non-cash charge, however, because
  of the uncertainty of the ultimate realization of the deferred tax asset, the
  Company increased its tax valuation allowance by the same amount.
  
       The table below presents a reconciliation of reported net income to
  adjusted net income as if the SFAS 142 was adopted as of the beginning of fiscal
  2001 (in 000's, except per share amounts).
  
  <TABLE>
  <CAPTION>
                                                           Three Months Ended
                                           --------------------------------------------------
                                                               April 2, 2001
                                           --------------------------------------------------
                                                                   Earnings per Share
                                                             --------------------------------
                                            Net Income           Basic            Diluted
                                           --------------    ---------------   --------------
  <S>                                            <C>                 <C>              <C>
  Reported net income                            $ 6,112             $ 0.28           $ 0.26
  Add back:  Goodwill amortization                 2,653               0.13             0.10
                                           --------------    ---------------   --------------
  
  Adjusted net income                            $ 8,765             $ 0.41           $ 0.36
                                           ==============    ===============   ==============
  </TABLE>
  
  
  Results of Operations
  
  Quarter Ended March 31, 2002 Compared to Quarter Ended April 1, 2001
  
       Revenues
  
       Net revenues increased by $12 million or 3.5 percent to $370 million during
  the first quarter of fiscal 2002 as compared to the first quarter of fiscal
  2001, primarily due to a $7 million or 3.9 percent increase in Home Health
  Services revenue and a $5 million or 2.3 percent increase in the Specialty
  Pharmaceutical Services revenue.
  
       The increase in Home Health Services revenue during the first quarter of
  fiscal 2002 was attributable to a combination of increased rates to commercial
  and government payors and an increase in the number of Preferred Provider
  Organization enrollees served by the Company's CareCentrix unit offset by a
  decrease in revenue of approximately $1 million relating to estimated third
  party settlements.
  
       During the first quarter of fiscal 2002, the Company experienced unit
  volume increases in several core chronic therapies in the Specialty
  Pharmaceutical Services segment.
  
  
  
                                        -16-
  <PAGE>
  
  These therapies included (i) coagulation therapy, used in the treatment of
  hemophilia, which increased by 3.5 percent, (ii) Flolan, an intravenous therapy,
  and Tracleer, an oral medication, both used in the treatment of pulmonary
  arterial hypertension, which increased by a combined 10.0 percent, (iii)
  intravenous immune globulin (IVIG), used in the treatment of primary immune
  deficiency and other diagnoses which increased by 36.7 percent and, (iv) growth
  hormone, used in the treatment of growth hormone disorder, which increased by
  17.0 percent. Revenue relating to acute infusion products decreased by 6.8
  percent due to management's decision to terminate certain contracts in an effort
  to improve revenue quality and cash flow. Due to significant purchases by
  wholesale customers early in 2001 revenue relating to Oxandrin, an oral
  pharmaceutical for involuntary weight loss, decreased by 30.2 percent during the
  first quarter of fiscal 2002 as compared to the corresponding period of fiscal
  2001.
  
       Gross Profit
  
       Gross Profit was approximately $117 million in the first quarter of fiscal
  2002 and $116 million in the first quarter of fiscal 2001. As a percentage of
  net revenue, gross profit margins decreased from 32.6 percent in the fiscal 2001
  first quarter to 31.6 percent in the first quarter of fiscal 2002. The decrease
  in margin was primarily related to the home health services business and was
  attributable to revenue adjustments relating to estimated third party
  settlements (0.3 percent of net revenues) as well as various other factors,
  including increased insurance and labor costs, training costs associated with
  the orientation of additional full-time caregivers and changes in business mix
  resulting from revenue growth in lower margin product lines.
  
       Selling, General and Administrative Expenses
  
       Selling, general and administrative expenses decreased to $108 million
  during the first quarter of fiscal 2002 as compared to $109 million during the
  first quarter of fiscal 2001 due to decreases resulting from the elimination of
  goodwill amortization expense of $3 million and a reduction in field
  administration costs relating to the Home Health Services business of $1
  million, offset by an increase of $3 million, representing transaction related
  costs, primarily consisting of professional fees, relating to the pending sale
  of the Specialty Pharmaceutical Services business to Accredo.
  
       Interest Income (Expense), Net
  
       Net interest income was approximately $0.2 million in the first quarter of
  fiscal 2002 and net interest expense was approximately $0.4 million in the first
  quarter of fiscal 2001. Net interest income for the first quarter of fiscal 2002
  represented interest income of approximately $0.6 million, offset by fees
  relating to the revolving credit facility and outstanding letters of credit.
  
       Income Taxes
  
       Income tax expense for the first quarter of fiscal 2002 consisted primarily
  of taxes relating to certain state jurisdictions. The Company had estimated net
  operating loss carryforwards (NOLs) of approximately $90 million as of December
  30, 2001. Because of the uncer-
  
  
  
                                        -17-
  <PAGE>
  
  tainty of ultimate realization of the net deferred tax asset, the Company has
  established a valuation allowance for the deferred tax asset that is not
  otherwise used to offset deferred tax liabilities. The Company expects to fully
  utilize its NOLs to offset a portion of the gain expected to be recorded in
  connection with the sale of the Specialty Pharmaceutical Services business.
  
       Liquidity and Capital Resources
  
       Working capital at March 31, 2002, was $385 million, a decrease of $16
  million as compared to $401 million at December 30, 2001, primarily due to the
  $25 million decrease in prepaid expenses and other assets relating to an
  increase in valuation allowance for deferred tax assets as further described in
  Note 4, offset by a $9 million increase in inventory related to increased
  purchases to take advantage of favorable pricing. Net receivables decreased by
  $7 million in the first quarter of fiscal 2002 as a result of improved cash
  collections in both the Specialty Pharmaceutical Services and Home Health
  Services business. Days Sales Outstanding ("DSO") was 94 days at December 30,
  2001. DSO was reduced by 5 days to 89 days at March 31, 2002, as a result of
  continued improved cash collections.
  
       Cash and cash equivalents increased by approximately $27 million as of
  March 31, 2002, as compared to December 30, 2001, as a result of (i) cash flow
  from operations of approximately $25 million, (ii) proceeds from the exercise of
  stock options of approximately $3 million, offset somewhat by capital
  expenditures of approximately $1 million. In early 2001, the Center for Medicare
  and Medicaid Services, formerly known as the Health Care Financing
  Administration, issued cash advances to certain Medicare providers in connection
  with the transition from the IPS to the PPS for Medicare reimbursement. Such
  advances are expected to be repaid during the second quarter of fiscal 2002. In
  the first quarter of fiscal 2001, the Company received a cash advance relating
  to the transition to PPS, net of payments for estimated settlements relating to
  cost report filings, of approximately $21 million, which was reflected in
  accrued expenses in the accompanying consolidated balance sheet as of March 31,
  2002.
  
       The Company maintains a credit facility, which provides for up to $150
  million in borrowings. The Company may borrow up to a maximum of 80 percent of
  eligible accounts receivable, as defined. At the Company's option, the interest
  rate on borrowings under the credit facility is based on the London Interbank
  Offered Rate (LIBOR) plus 2.5 percent or the lender's prime rate plus 0.25
  percent. As of March 31, 2002, there were no borrowings outstanding under the
  credit facility and total outstanding letters of credit approximated $25.7
  million. The Company is subject to an unused line fee equal to 0.375 percent per
  annum of the average daily difference between $150 million and the total
  outstanding borrowings and letters of credit. In addition, the Company must pay
  a fee equal to 2.25 percent per annum of the aggregate face amount of
  outstanding standby letters of credit.
  
       The credit facility, which expires in 2004, includes certain covenants
  requiring the Company to maintain a minimum tangible net worth and minimum
  earnings before interest, taxes, depreciation and amortization. Other covenants
  in the credit facility include limitation on mergers, consolidations,
  acquisitions, indebtedness, liens, capital expenditures and dispositions of
  assets and other limitations with respect to the Company's operations. Certain
  of
  
  
  
                                        -18-
  <PAGE>
  
  these covenants would be violated if the Company does not negotiate a new credit
  facility or receive a consent from its lenders in connection with the sale of
  the Specialty Pharmaceutical Services business. The Company's obligations under
  the credit facility are collateralized by all of the Company's tangible and
  intangible personal property, and other equipment. As of March 31, 2002, the
  Company was in compliance with its financial covenants and had borrowing
  capacity under the credit facility, after adjusting for outstanding letters of
  credit, of approximately $124 million.
  
       In June 2001, the Company's credit facility was amended to increase the
  portion of the facility available for letters of credit from $30 million to
  either (i) $40 million or (ii) $70 million in the event that the Company elects
  to post a letter of credit in lieu of an appellate bond for all or a part of the
  total amount of the judgment plus interest in the Fredrickson v. Olsten Health
  Services Corp. and Olsten Corporation case while the Company pursues its appeal
  of the judgment as further discussed in Note 8. A supersedeas bond in the amount
  of $35 million was posted to satisfy the judgment (including interest). Under
  the terms of the bond, cash equal to the amount of the bond is held in a
  segregated account and is reported as restricted cash in the accompanying
  consolidated balance sheets.
  
       As described in Note 8 to the Company's Consolidated Financial Statements,
  the Company has pending litigation and a government investigation. At this time,
  the Company is unable to assess the probable outcome of some of these matters
  and an unfavorable resolution of any of these matters could have a material
  adverse affect on the Company. In particular, in connection with the Fredrickson
  case, if a final non-appealable offer is rendered against the Company consistent
  with the lower court's ruling, the Company could be required to pay a full $35
  million judgment plus additional accrued interest. Any resolution of this matter
  (by settlement or final non-appealable court order) could have a material
  adverse effect on the Company's results of operations, cash flows and financial
  condition.
  
       As a result of the pending sale of the Specialty Pharmaceutical Services
  business, the Company commenced discussions with its existing administrative
  agent for an underwriting of a new credit facility which would provide for
  borrowing capacity of a minimum of $55 million and a new four year term with,
  conditions and covenants substantially similar to its existing facility. In
  April 2002, the Company received a commitment letter from the administration
  agent to underwrite the new revolving credit agreement. The Company expects the
  new credit facility to be established at or prior to the consummation date of
  the sale of the Specialty Pharmaceutical Services business.
  
       Although the Company had cash and cash equivalents, including restricted
  cash, of $134.6 million at March 31, 2002, $20.9 million represented cash
  advances from the Medicare program which are expected to be repaid by the
  Company during second quarter of 2002, approximately $14 million is expected to
  be paid upon closing of the sale of the Specialty Pharmaceutical Services
  business as transaction costs (including advisor fees and payments under change
  in control agreements and severance arrangements), approximately $9 million may
  be required to cover a portion of the corporate taxes resulting from the receipt
  of consideration from the sale of the Specialty Pharmaceutical Services business
  and up to $25 million is intended to be used in connection with a cash tender
  offer to purchase and cancel all of the Company's vested stock options which
  will commence prior to the closing of the sale of the
  
  
  
                                        -19-
  <PAGE>
  
  Specialty Pharmaceutical Services business. These cash outflows could be offset
  somewhat by cash flow generated from operations during the year. The Company
  expects to have a balance of cash and cash equivalents, including restricted
  cash, in excess of $70 million following the distribution to stockholders of the
  consideration to be received from Accredo Health, Incorporated upon the sale of
  the Specialty Pharmaceutical Services business.
  
       Management believes cash flows from operations, existing cash and cash
  equivalent balances, borrowings available under the credit facility and other
  financing options will be adequate to support the Company's operating
  requirements both before and after the disposition of the Specialty
  Pharmaceutical Services business. In this connection, income before the
  cumulative effect of accounting change would have been significantly less in the
  first quarter of 2002 if the results of operations for the Specialty
  Pharmaceutical Services business were excluded and prior to any change in
  corporate and other administrative expenses. The Company is currently evaluating
  alternative realignment and consolidation initiatives in an effort to achieve
  cost savings and increased profitability following the sale of the Specialty
  Pharmaceutical Services business. However, there can be no assurance that such
  cost savings and increased profitability will be achieved.
  
       The Company intends to make investments and other expenditures to, among
  other things, upgrade its computer technology and system infrastructure and
  comply with regulatory changes in the industry. If cash flows from operations or
  availability under the credit facility fall below expectations, the Company may
  be forced to delay planned capital expenditures, reduce operating expenses, seek
  additional financing or consider alternatives designed to enhance liquidity.
  
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
       Generally, the fair market value of fixed rate debt will increase as
  interest rates fall and decrease as interest rates rise. The Company had no
  interest rate exposure on fixed rate debt at March 31, 2002.
  
  OTHER:
  
       INFORMATION CONTAINED HEREIN, OTHER THAN HISTORICAL INFORMATION, SHOULD BE
  CONSIDERED FORWARD-LOOKING AND IS SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES.
  FOR INSTANCE, THE COMPANY'S STRATEGIES AND OPERATIONS INVOLVE RISKS OF
  COMPETITION, CHANGING MARKET CONDITIONS, CHANGES IN LAWS AND REGULATIONS
  AFFECTING THE COMPANY'S INDUSTRIES AND NUMEROUS OTHER FACTORS DISCUSSED IN THIS
  DOCUMENT AND IN OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE
  COMMISSION. ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
  EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
  
  
                                        -20-
  <PAGE>
  
  
  
  
  
                            PART II - OTHER INFORMATION
  
  Item 1.  Legal Proceedings
  
           Litigation
  
       In addition to the matters referenced below, the Company is party to
  certain legal actions arising in the ordinary course of business including legal
  actions arising out of services rendered by its various operations, personal
  injury and employment disputes.
  
       Fredrickson v. Olsten Health Services Corp. and Olsten Corporation, Case
  No. 01C.A.116, Court of Appeals, Seventh Appellate District, Mahoning County,
  Ohio. In November, 2000, the jury in this age-discrimination lawsuit returned a
  verdict in favor of the plaintiff against Olsten consisting of $675,000 in
  compensatory damages, $30 million in punitive damages and an undetermined amount
  of attorneys' fees. The jury found that, although Olsten had lawfully terminated
  the plaintiff's employment, its failure to transfer or rehire the plaintiff
  rendered Olsten liable to the plaintiff. Following post-trial motion practice by
  both parties, the trial court, in May 2001, denied all post-trial motions, and
  entered judgment for the plaintiff for the full amount of compensatory and
  punitive damages, and awarded the plaintiff reduced attorney's fees of $247,938.
  In June 2001, defendants timely filed a Notice of Appeal with the Court of
  Appeals, and the Company posted a supersedeas bond for the full amount of the
  judgment, plus interest. The parties to the appeal have filed all briefs and the
  briefing period is completed. Oral arguments have not been scheduled. The
  Company continues to defend itself in this matter vigorously. At this stage of
  the proceedings, the Company is unable to assess the probable outcome of the
  appeal.
  
       Cooper v. Gentiva CareCentrix, Inc., t/a/d/b/a Gentiva Health Services,
  U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
  this Amended Complaint was served on the Company alleging that the defendant
  submitted false claims to the government for payment in violation of the Federal
  False Claims Act, 31 U.S.C. 3729 et seq, and that the defendant had wrongfully
  terminated Plaintiff. Plaintiff claims that infusion pumps delivered to patients
  did not supply the full amount of medication, allegedly resulting in substandard
  care. Based on a review of the court's docket sheet, plaintiff filed a complaint
  under seal in March 2001. In October 2001, the United States Government filed a
  Notice with the court declining to intervene in this matter, and on October 24,
  2001, the court ordered that the seal be lifted. The Company filed its
  responsive pleading on February 25, 2002 and discovery has now commenced. The
  Company has denied the allegations of wrongdoing in the complaint and intends to
  defend itself vigorously in this matter. Given the preliminary stage of the
  proceedings, the Company is unable to assess the probable outcome or potential
  liability, if any, arising from this matter; therefore, a range of damages, if
  any, cannot be determined.
  
       United States of America ex rel. Lee Einer v. Olsten Corporation, No.
  CIV-S-99-0860 DFL/DAD, U.S. District Court for the Eastern District of
  California. On November 1, 2001, the Company received notice of the entry of an
  Order dated October 25, 2001, unsealing the referenced complaint. As recited in
  the Order unsealing the complaint, the United States
  
  
  
                                        -21-
  <PAGE>
  
  gave notice to the District Court that the United States was declining to
  intervene in the action. The Company believes that it was this complaint that
  gave rise to a document subpoena served on the Company in December 1999 from the
  Department of Health and Human Services, Office of Inspector General, and Office
  of Investigations. The Company acknowledged service of the complaint on November
  29, 2001 and timely filed responsive pleadings to the Complaint. The Company is
  engaged in discovery and intends to defend itself vigorously in this matter.
  Given the preliminary stage of the proceedings, the Company is unable to assess
  the probable outcome or potential liability, if any, arising from this matter;
  therefore, a range of damages, if any, cannot be determined.
  
       In 1999, Kimberly Home Health Care, Inc. ("Kimberly"), one of the Company's
  subsidiaries, initiated three arbitration proceedings against hospitals owned by
  Columbia/HCA Healthcare Corp. ("Columbia/HCA") with which Kimberly had
  management services agreements to provide services to the hospitals' home health
  agencies. The basis for each of the arbitrations is that Columbia/ HCA sold the
  home health agencies without assigning the management services agreements and,
  as a result, Columbia/HCA has breached the management services agreements. In
  response to the arbitrations, Columbia/HCA has asserted that the arbitrations be
  consolidated and stayed, in part based upon its alleged claims against Kimberly
  for breach of contract, and requested indemnity and possibly return of
  management fees. Columbia/HCA has not yet formally presented these claims in the
  arbitrations or other legal proceedings and has not yet quantified the claims.
  Still pending before the arbitrators is Columbia/HCA's request to consolidate
  the proceedings, which Kimberly has opposed. The proceedings are currently in
  abeyance pending ruling on Columbia/HCA's motion to consolidate. The Company is
  the claimant in this matter and the defendant has not formally asserted any
  counterclaims against the Company in the arbitration, nor has the defendant made
  any formal demand on the Company. The Company is unable to assess the liability
  or losses, if any, attributable to the threatened counterclaim.
  
       Furthermore, in connection with the Split-Off, the Company agreed to
  assume, to the extent permitted by law, the liabilities, if any, arising out of
  (and to indemnify Olsten for) the above proceedings and other liabilities
  arising out of the health services business, including any such liabilities
  arising after the Split-Off in connection with the government investigations
  described below. In addition, in connection with the sale of the specialty
  pharmaceutical services business, the Company has agreed to retain and indemnify
  Accredo Health, Incorporated for the specified liabilities including the
  litigation described above and the government investigation described below.
  
       Government Investigations
  
       In early February 2000, the Company received a document subpoena from the
  Department of Health and Human Services, Office of Inspector General, and Office
  of Investigations. The Company believes the subpoena relates to its agencies'
  cost reporting procedures concerning contracted nursing and home health aide
  costs. To the Company's knowledge, the government has not filed a complaint
  against the Company, nor has the government quantified the amount of alleged
  damages relating to this matter. Recently, the government has asserted that this
  matter could fall under the Federal False Claims Act (the "Act"), and if
  liability is found under the Act, the government would be able to assess double
  or treble damages against
  
  
  
                                        -22-
  <PAGE>
  
  the Company. The Company disputes the government's assertions, but continues to
  cooperate with the government in its investigation of this matter and to provide
  the government with the requested documents. At this time, the Company is unable
  to assess the probable outcome or potential liability, if any, arising from this
  subpoena.
  
  
  Item 2.  Changes in Securities and Use of Proceeds
  
           None.
  
  Item 3.  Defaults Upon Senior Securities
  
           None.
  
  Item 4.  Submission of Matters to a Vote of Security Holders
  
       (a) None.
  
  Item 5.  Other Information
  
  
       In connection with a July 19, 1999 settlement with various government
  agencies, Olsten executed a corporate integrity agreement with the Office of
  Inspector General of the Department of Health and Human Services which will
  remain in effect until August 18, 2004. The July 1999 corporate integrity
  agreement applies to the Company's businesses that bill the federal government
  health programs directly for services, such as its Home Health Services business
  (but excluding the Specialty Pharmaceutical Services business). This corporate
  integrity agreement focuses on issues and training related to cost report
  preparation, contracting, medical necessity and billing of claims.
  
       Under the corporate integrity agreement, the Company is required, for
  example, to maintain a corporate compliance officer to develop and implement
  compliance programs, to retain an independent review organization to perform
  annual reviews and to maintain a compliance program and reporting systems, as
  well as provide certain training to employees.
  
       The Company's compliance program will be implemented for all newly
  established or acquired business units if their type of business is covered by
  the corporate integrity agreement. Reports under the integrity agreement are to
  be filed annually with the Department of Health and Human Services, Office of
  Inspector General. After the corporate integrity agreement expires, the Company
  is to file a final annual report with the government. The Company is in
  compliance with the corporate integrity agreement and has timely filed all
  required reports. If the Company fails to comply with the terms of its corporate
  integrity agreement, the Company will be subject to penalties.
  
  Item 6.  Exhibits and Reports on Form 8-K
  
  (a) Exhibit Number Description
  
  
  
                                        -23-
  <PAGE>
  
            3.1  Restated Certificate of Incorporation of Company. (1)
  
            3.2  Restated By-Laws of Company. (1)
  
            4.1  Specimen of common stock. (3)
  
            4.2  Form of Certificate of Designation of Series A Junior
                 Participating Preferred Stock. (1)
  
            4.3  Form of Certificate of Designation of Series A Cumulative
                 Non-Voting Redeemable Preferred Stock. (2)
  
            10.1 Separation Agreement dated August 17, 1999, among Olsten
                 Corporation, Aaronco Corp. and Adecco SA. (1)*
  
  
            10.2 Omnibus Amendment No. 1 dated October 7, 1999, by and among
                 Olsten Corporation, Aaronco Corp., Adecco SA and Olsten Health
                 Services Holding Corp. (1)
  
            10.3 Form of Rights Agreement dated March 2, 2000 between the
                 Registrant and Equiserve Limited Partnership, as rights agent.
                 (1)
  
            10.4 Company's Executive Officers Bonus Plan. (1)*
  
            10.5 Company's 1999 Stock Incentive Plan. (4)*
  
            10.6 Company's Stock & Deferred Compensation Plan for Non-Employee
                 Directors. (4)*
  
            10.7 Company's Employee Stock Purchase Plan. (1)*
  
            10.8 Omnibus Amendment No. 2 dated January 18, 2000, by and among
                 Olsten Corporation, Adecco SA, Olsten Health Services Holding
                 Corp., the Company and Staffing Acquisition Corporation. (1)
  
            10.9 Loan and Security Agreement by and between Fleet Capital Corp.,
                 on behalf of the lenders named therein, the Company, Olsten
                 Health Services Holding Corp. and the subsidiaries named therein,
                 dated March 13, 2000. (4)
  
            10.10 Form of Employment Agreement with Edward A. Blechschmidt. (2)*
  
            10.11 Form of Change of Control Agreement with Executive Officers of
                 Company. (4)*
  
  
  
                                        -24-
  <PAGE>
  
            10.12 Form of Change in Control Agreement with Edward A. Blechschmidt.
                 (4)*
  
            10.13 Form of Severance Agreement with Executive Officers of Company.
                 (2)*
  
            10.14 First Amendment and Consent Agreement dated September 15, 2000
                 to the Loan Agreement by and among the lending institutions named
                 therein, Fleet Capital Corporation, the Company, Olsten Health
                 Services Holding Corp. and the subsidiaries named therein. (6)
  
            10.15 Purchase and Sale Agreement dated August 25, 2000 by and between
                 the Company and Intelistaf Group, Inc. (formerly known as GS
                 Acquisition Co.) (6)
  
            10.16 Second Amendment and Consent Agreement dated as of November 20,
                 2000 to the Loan Agreement by and among the lending institutions
                 named therein, Fleet Capital Corporation, the Company, Olsten
                 Health Services Holding Corp. and the subsidiaries named therein.
                 (7)
  
            10.17 Third Amendment to Loan and Security Agreement dated as of June
                 1, 2001 to the Loan Agreement by and among the lending
                 institutions named therein, Fleet Capital Corporation, the
                 Company, Olsten Health Services Holding Corp. and the
                 subsidiaries named therein. (8)
  
            10.18 Fourth Amendment and Consent Agreement dated as of August 22,
                 2001 to the Loan Amendment by and among the lending institutions
                 named therein, Fleet Capital Corporation, the Company, Olsten
                 Health Services Holding Corp. and the subsidiaries named therein.
                 (10)
  
            10.19 Asset Purchase Agreement dated as of January 2, 2002, by and
                 between Accredo Health Incorporated, the Company and the Sellers
                 named therein. (9)
  
            21.1 List of Subsidiaries of Company. (10)
                 -----------------------------------------------------------------
  
            (1)  Incorporated herein by reference to Amendment No. 2 to the
                 Registration Statement on Form S-4, dated January 20, 2000 (File
                 No. 333-88663).
  
            (2)  Incorporated herein by reference to Amendment No. 3 to the
                 Registration Statement on Form S-4, dated February 4, 2000 (File
                 No. 333-88663).
  
  
  
                                        -25-
  <PAGE>
  
            (3)  Incorporated herein by reference to Amendment No. 4 to the
                 Registration Statement on Form S-4, dated February 9, 2000 (File
                 No. 333-88663).
  
            (4)  Incorporated herein by reference to Form 10-K for the Registrant
                 for the fiscal year ended January 2, 2000.
  
            (5)  Incorporated herein by reference to Form 10-Q for the Registrant
                 for the period ended July 2, 2000.
  
            (6)  Incorporated herein by reference to Form 10-Q for the Registrant
                 for the period ended October 1, 2000.
  
            (7)  Incorporated herein by reference to Form 10-K for the Registrant
                 for the fiscal year ended December 31, 2000.
  
            (8)  Incorporated herein by reference to Form 10-Q for the Registrant
                 for the period ended September 30, 2001.
  
            (9)  Incorporated herein by reference to Registration Statement on
                 Form S-4, dated February 8, 2002 (File No. 333-82396), of Accredo
                 Health, Incorporated.
  
            (10) Incorporated by reference to Form 10-K for the Registrant for the
                 fiscal year ended December 30, 2001.
  
            *    Management contract or compensatory plan or arrangement.
  
  (b)      Reports on Form 8-K
  
           On January 7, 2002, the Company filed a report on Form 8-K (Item 5) in
  connection with the execution of the Asset Purchase Agreement with Accredo
  Health, Incorporated.
  
  
  
  
                                        -26-
  <PAGE>
  
  
  
                                     SIGNATURES
  
  
       Pursuant to the requirements of the Securities Exchange Act of 1934, the
  registrant has duly caused this report to be signed on its behalf by the
  undersigned thereunto duly authorized.
  
  Date:  May 15, 2002              /S/ Edward A. Blechschmidt
                                   ------------------------------------
                                   Edward A. Blechschmidt
                                   President and Chief Executive
                                   Officer
  
  
  Date:  May 15, 2002              /S/ John J. Collura
                                   ------------------------------------
                                   John J. Collura
                                   Executive Vice President,
                                   Chief Financial Officer and
                                   Treasurer
  
  
  
  
  
                                        -27-
metadata_documents: [{"type": "10-Q", "sequence": "1", "filename": "gentiva1stqtr2002.txt", "description": "FIRST QUARTER 2002", "secsgml_size_bytes": 85876}]
metadata_filer: {"company-data": {"conformed-name": "GENTIVA HEALTH SERVICES INC", "cik": "0001096142", "assigned-sic": "8000", "irs-number": "364335801", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "001-15669", "film-number": "02653605"}, "business-address": {"street1": "3 HUNTINGTON QUADRANGLE 2S", "city": "MELVILLE", "state": "NY", "zip": "11747-8943", "phone": "6315017000"}, "mail-address": {"street1": "3 HUNTINGTON QUADRANGLE 2S", "city": "MELVILLE", "state": "NY", "zip": "11747-8943"}, "former-company": {"former-conformed-name": "OLSTEN HEALTH SERVICES HOLDING CORP", "date-changed": "19991001"}}
text: SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549
  
                                      FORM 10-Q
  
                  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                       OF THE SECURITIES EXCHANGE ACT OF 1934
  
                    For the quarterly period ended March 31, 2002
  
                             Commission File No. 1-15669
  
                            Gentiva Health Services, Inc.
               (Exact name of Registrant as specified in its charter)
  
              DELAWARE                                     36-433-5801
              --------                                     -----------
   (State or other jurisdiction of                      (I.R.S. Employer
   incorporation or organization)                      Identification No.)
  
                 3 Huntington Quadrangle 2S, Melville, NY 11747-8943
                 ---------------------------------------------------
                 (Address of principal executive offices) (Zip Code)
  
         Registrant's telephone number, including area code: (631) 501-7000
  
       Indicate by check mark whether the registrant (1) has filed all reports
  required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
  1934 during the preceding 12 months (or for such shorter period that the
  registrant was required to file such reports), and (2) has been subject to such
  filing requirements for the past 90 days.
  
                                 Yes X No
  
                       The number of shares outstanding of the
                      Registrant's Common Stock, as of May 13,
                                2002 was 26,109,168.
  INDEX
  
                                                                          Page No.
  
  PART I - FINANCIAL INFORMATION
  
           Item 1. Financial Statements
  
                 Consolidated Balance Sheets (Unaudited) - March 31, 2002 and
                 December 30, 2001                                              3
  
                 Consolidated Statements of Operations (Unaudited) -
                 Three Months Ended March 31, 2002 and April 1, 2001            4
  
                 Consolidated Statements of Cash Flows (Unaudited) -
                 Three Months Ended March 31, 2002 and April 1, 2001            5
  
                 Notes to Consolidated Financial Statements (Unaudited)      6-13
  
           Item 2. Management's Discussion and Analysis of Financial
                     Condition and Results of Operations                    14-20
  
           Item 3. Quantitative and Qualitative Disclosures about Market Risk  20
  
  PART II - OTHER INFORMATION
  
           Item 1. Legal Proceedings                                        21-23
  
           Item 2. Changes in Securities and Use of Proceeds                   23
  
           Item 3. Defaults Upon Senior Securities                             23
  
           Item 4. Submission of Matters to a Vote of Security Holders         23
  
           Item 5. Other Information                                           23
  
           Item 6. Exhibits and Reports on Form 8-K                         23-26
  
  SIGNATURES                                                                   27
  
                                        -2-
  PART I - FINANCIAL INFORMATION
  Item 1.  Financial Statements
  
                   Gentiva Health Services, Inc. and Subsidiaries
                            Consolidated Balance Sheets
                        (In thousands, except share amounts)
                                     (Unaudited)
  
                                                                                         March 31, 2002        December 30, 2001
                                                                                    ---------------------   ---------------------
  ASSETS
  Current assets:
  Cash and cash equivalents                                                     $99,424                  $71,999
                Restricted cash                                                                35,164                   35,164
                Receivables, less allowance for doubtful accounts of $88,920
                  and $88,155, respectively                                                   360,965                  368,196
                Inventories                                                                    56,558                   47,600
                Prepaid expenses and other current assets                                      22,538                   47,396
                                                                                    ---------------------   ---------------------
                            Total current assets                                              574,649                  570,355
  
  Fixed assets, net                                                                            28,155                   30,449
  Goodwill, net                                                                                 3,214                  220,541
  Other assets                                                                                 17,733                   16,989
                                                                                    ---------------------   ---------------------
                            Total assets                                                     $623,751                 $838,334
                                                                                    =====================   =====================
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Current liabilities:
                Accounts payable                                                              $83,306                  $57,726
                Accrued expenses                                                               55,635                   63,874
                Payroll and related taxes                                                      15,462                   16,094
                Insurance costs                                                                35,048                   31,460
                                                                                    ---------------------   ---------------------
                            Total current liabilities                                         189,451                  169,154
  
  Other liabilities                                                                            18,444                   47,473
  
  Shareholders' equity:
                Common stock, $.10 par value; authorized 100,000,000 shares; issued
                  and outstanding 26,022,847 and 25,638,794 shares, respectively                2,602                    2,564
                Additional paid-in capital                                                    726,030                  722,725
                Accumulated deficit                                                          (312,776)                (103,582)
                                                                                    ---------------------   ---------------------
                            Total shareholders' equity                                        415,856                  621,707
                                                                                    ---------------------   ---------------------
                            Total liabilities and shareholders' equity                       $623,751                 $838,334
                                                                                    =====================   =====================
  See notes to consolidated financial statements.
  -3-
  Gentiva Health Services, Inc. and Subsidiaries
                       Consolidated Statements of Operations
                      (In thousands, except per share amounts)
                                    (Unaudited)
  
                                                                         Three Months Ended
                                                               --------------------- --------------------
                                                                  March 31, 2002        April 1, 2001
                                                               --------------------- --------------------
  Net revenues                                                            $ 369,584            $ 357,178
  Cost of services sold                                                     252,874              240,748
                                                               --------------------- --------------------
        Gross profit                                                        116,710              116,430
  
  Selling, general and administrative expenses                              107,973              109,385
  Interest expense (income), net                                               (196)                 433
                                                               --------------------- --------------------
        Income before income taxes and cumulative
          effect of accounting change                                         8,933                6,612
  
  Income tax expense                                                            800                  500
                                                               --------------------- --------------------
  Income before cumulative effect of accounting change                      $ 8,133              $ 6,112
  
  Cumultive effect of accounting change                                    (217,327)                   -
                                                               --------------------- --------------------
        Net income (loss)                                                 $(209,194)             $ 6,112
                                                               ===================== ====================
  
  Earnings per Share - Basic:
  
        Income before cumulative effect of accounting change                 $ 0.31               $ 0.28
        Cumulative effect of accounting change                                (8.41)                   -
                                                               --------------------- --------------------
        Net income (loss)                                                    $(8.10)              $ 0.28
                                                               ===================== ====================
  
  Earnings per Share - Diluted:
  
        Income before cumulative effect of accounting change                 $ 0.30               $ 0.26
        Cumulative effect of accounting change                                (8.02)                   -
                                                               --------------------- --------------------
        Net income (loss)                                                    $(7.72)              $ 0.26
                                                               ===================== ====================
  Average shares outstanding:
        Basic                                                                25,842               21,448
                                                               ===================== ====================
        Diluted                                                              27,096               25,701
                                                               ===================== ====================
  
  See notes to consolidated financial statements.
  -4-
  Gentiva Health Services, Inc. and Subsidiaries
                       Consolidated Statements of Cash Flows
                                   (In thousands)
                                    (Unaudited)
  Three Months Ended
                                                                     -----------------------------------------------------
                                                                          March 31, 2002               April 1, 2001
                                                                     --------------------------   ------------------------
  
  OPERATING ACTIVITIES:
  Net income (loss)                                                                 $ (209,194)                $    6,112
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
      Cumulative effect of accounting change                                           217,327                          -
      Depreciation and amortization                                                      3,578                      6,990
      Provision for doubtful accounts                                                    8,275                      9,200
      Changes in assets and liabilities:
                Accounts receivable                                                     (1,044)                     2,612
                Inventories                                                             (8,958)                      (150)
                Prepaid expenses and other current assets                               (2,001)                     1,416
                Current liabilities                                                     20,297                      8,633
                Other, net                                                              (2,955)                      (737)
                                                                     --------------------------   ------------------------
  Net cash provided by operating activities                                             25,325                     34,076
                                                                     --------------------------   ------------------------
  
  INVESTING ACTIVITIES:
  Purchase of fixed assets                                                              (1,243)                    (1,116)
                                                                     --------------------------   ------------------------
  Net cash used in investing activities                                                 (1,243)                    (1,116)
                                                                     --------------------------   ------------------------
  
  FINANCING ACTIVITIES:
  Proceeds from issuance of common stock                                                 3,343                      5,642
  Decrease in book overdrafts                                                                -                    (10,379)
  Advances from Medicare program                                                             -                     20,878
                                                                     --------------------------   ------------------------
  Net cash provided by financing activities                                              3,343                     16,141
                                                                     --------------------------   ------------------------
  
  Net increase in cash and cash equivalents                                             27,425                     49,101
  
  Cash and cash equivalents at beginning of period                                      71,999                        452
                                                                     --------------------------   ------------------------
  Cash and cash equivalents at end of period                                          $ 99,424                   $ 49,553
                                                                     ==========================   ========================
  
  See notes to consolidated financial statements.
  -5-
  Gentiva Health Services, Inc. and Subsidiaries
                     Notes to Consolidated Financial Statements
                                     (Unaudited)
  
       1. Accounting Policies
  
       The accompanying interim consolidated financial statements are unaudited,
  but have been prepared by Gentiva Health Services, Inc. (the "Company") pursuant
  to the rules and regulations of the Securities and Exchange Commission and, in
  the opinion of management, include all adjustments necessary for a fair
  presentation of results of operations, financial position and cash flows for
  each period presented. Results for interim periods are not necessarily
  indicative of results for a full year. The year-end balance sheet data was
  derived from audited financial statements, but does not include all disclosures
  required by accounting principles generally accepted in the United States of
  America.
  
       2. Background and Basis of Presentation
  
       On January 2, 2002, the Company entered into an asset purchase agreement
  with Accredo Health, Incorporated ("Accredo") pursuant to which Accredo agreed
  to acquire substantially all of the assets of the Company's Specialty
  Pharmaceutical Services business for a purchase price of $415 million, subject
  to adjustment in accordance with the asset purchase agreement. The consideration
  is payable to the Company half in cash and half in shares of Accredo common
  stock, provided that the average closing price of Accredo common stock for the
  twenty days ending on the second day prior to the closing of this acquisition is
  between $31 and $41 per share. If the average closing price of the Accredo
  common stock is outside the range, the number of shares to be issued will be
  fixed and the value of the stock consideration will fluctuate. The purchase
  price is also subject to adjustment for changes in the net book value as of the
  closing date. Based on the closing price of Accredo common stock as of May 13,
  2002 ($55.98 per share) and assuming no adjustment for changes in net book
  value, the consideration payable to the Company would approximate $491 million.
  
       The sale of the Specialty Pharmaceutical Services business is conditioned
  upon, among other things, regulatory approval, the approval of the shareholders
  of each company and other customary conditions. Completion of the transaction is
  expected in the second quarter of 2002. It is currently expected that following
  the sale of the Specialty Pharmaceutical Services business, the Company will
  distribute substantially all of the proceeds to its shareholders.
  
       Results for the first quarter of fiscal 2002 included transaction related
  costs of approximately $3 million relating to the pending sale of the Specialty
  Pharmaceutical Services business, consisting primarily of professional services
  fees, which were reflected in selling,
  
                                        -6-
  general and administrative expenses in the accompanying consolidated statement
  of operations.
  
       The Specialty Pharmaceutical Services business will be treated as a
  discontinued operation following the date on which shareholders approve the
  transaction. Subsequent to the closing date of the transaction, the Company
  intends to operate in the home health services business.
  
       3. Earnings per Share
  
       Basic net income (loss) per share for each period presented has been
  computed by dividing net income (loss) by the weighted average number of shares
  outstanding for each respective period. Diluted net income (loss) per share for
  each period presented has been computed using the weighted average number of
  common and dilutive common equivalent shares outstanding.
  
       During the first quarter of fiscal 2002, the weighted average number of
  shares outstanding was 25,842,000. Dilutive common equivalent shares included an
  incremental 1,254,000 shares for the first quarter that would be issued upon the
  assumed exercise of 1,948,000 stock options under the treasury stock method.
  
       Basic net income per share for the first quarter of fiscal 2001 has been
  computed using the weighted average number of shares outstanding (21,448,000).
  Dilutive common equivalent shares represented (i) 2,107,000 shares that would be
  issued upon the assumed exercise of approximately 3.8 million stock options
  under the treasury stock method and (ii) 2,146,000 shares that would be issued
  upon the assumed conversion of the 10 percent convertible preferred trust
  securities at a conversion price of $9.32 per share.
  
       4. Goodwill and Other Intangible Assets
  
       In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
  No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens the
  criteria for recording intangible assets separate from goodwill. SFAS 142
  requires the use of a nonamortization approach to account for purchased goodwill
  and certain intangibles. Under a nonamortization approach, goodwill and certain
  intangibles are not amortized into results of operations, but instead are
  reviewed for impairment and an impairment charge is recorded in the periods in
  which the recorded carrying value of goodwill and certain intangibles is more
  than its estimated fair value. The Company adopted SFAS 142 as of the beginning
  of fiscal 2002. The provisions of SFAS 142 require that a transitional
  impairment test be performed as of the beginning of the year the statement is
  adopted. The provisions of SFAS 142 also require that a goodwill impairment test
  be performed annually or in the case of other events that indicate a potential
  impairment. The new criteria for recording intangible assets separate from
  goodwill did not require any reclassification in the Company's financial
  statements.
  
                                        -7-
  At December 30, 2001, the Company had goodwill of $220.5 million, of which
  $217.3 million related to the Home Health Services business and $3.2 million
  related to the Specialty Pharmaceutical Services business. The Company's
  transitional impairment test indicated that there was an impairment of goodwill
  relating to the Home Health Services business upon adoption of SFAS 142 as
  further described below.
  
       The impairment test is a two step process that begins with the estimation
  of the fair value of each reporting unit. The first step screens for potential
  impairment and the second step measures the amount of the impairment. The
  estimate of fair value of the Home Health Services business as of the beginning
  of fiscal 2002 considered publicly available information as well as financial
  projections and estimates prepared by outside advisors, and was determined by
  subtracting the agreed-upon purchase price for the Specialty Pharmaceutical
  Services business from the market capitalization of the Company. As part of the
  first step to assess potential impairment, management compared the estimate of
  fair value for the Home Health Services business to the book value of the
  business unit's net assets. Since the book value of Home Health Services' net
  assets was greater than its estimated fair value, management proceeded to the
  second step to measure the impairment. The second step compares the implied fair
  value of goodwill with its carrying value. The implied fair value of goodwill is
  determined by allocating the fair value of the reporting unit to all of the
  assets and liabilities of that unit as if the reporting unit had been acquired
  in a business combination and the fair value of the reporting unit was the
  purchase price paid to acquire the reporting unit. The excess of the fair value
  of the reporting unit over the amounts assigned to its assets and liabilities is
  the implied fair value of goodwill. If the carrying amount of the reporting
  unit's goodwill is greater than its implied fair value, an impairment loss will
  be recognized in the amount of the excess.
  
       Based on the results of the transitional impairment tests, the Company
  determined that an impairment loss relating to goodwill had occurred and
  recorded a non-cash charge of $217.3 million as cumulative effect of accounting
  change in the accompanying consolidated statement of operations for the three
  months ended March 31, 2002. The Company recorded a deferred tax benefit of
  approximately $66 million resulting from this non-cash charge, however, because
  of the uncertainty of the ultimate realization of the deferred tax asset, the
  Company increased its valuation allowance by the same amount.
  
           The table below presents a reconciliation of reported net income to
  adjusted net income as if the SFAS 142 was adopted as of the beginning of fiscal
  2001 (in 000's, except per share amounts).
  Three Months Ended
                                           --------------------------------------------------
                                                               April 2, 2001
                                           --------------------------------------------------
                                                                   Earnings per Share
                                                             --------------------------------
                                            Net Income           Basic            Diluted
                                           --------------    ---------------   --------------
  Reported net income                            $ 6,112             $ 0.28           $ 0.26
  Add back:  Goodwill amortization                 2,653               0.13             0.10
                                           --------------    ---------------   --------------
  
  Adjusted net income                            $ 8,765             $ 0.41           $ 0.36
                                           ==============    ===============   ==============
  5. Current Liabilities
  
                                        -8-
  In early 2001, the Center for Medicare and Medicaid Services, formerly
  known as the Health Care Financing Administration, issued cash advances to
  certain Medicare providers in connection with the transition from the Interim
  Payment System to the Prospective Payment System (PPS) for Medicare
  reimbursement. Such advances are expected to be repaid during the second quarter
  of fiscal 2002. In the first quarter of fiscal 2001, the Company received such
  an advance, net of payments for estimated settlements relating to cost report
  filings, of approximately $20.9 million, which is reflected in accrued expenses
  in the accompanying consolidated balance sheets as of March 31, 2002 and
  December 30, 2001.
  
       6. Restricted Cash and Revolving Credit Facility
  
       As of March 31, 2002, there were no outstanding borrowings, and total
  outstanding letters of credit approximated $25.7 million under the Company's
  $150 million amended revolving credit facility. The credit facility, which
  expires in 2004, includes certain covenants requiring the Company to maintain a
  minimum tangible net worth and minimum earnings before interest, taxes,
  depreciation and amortization. Other covenants in the credit facility include
  limitation on mergers, consolidation, acquisitions, indebtedness, liens, capital
  expenditures and dispositions of assets and other limitation with respect to the
  Company's operations. Certain of these covenants would be violated if the
  Company does not negotiate a new credit facility or receive a consent from its
  lenders in connection with the sale of the Specialty Pharmaceutical Services
  business. The Company's obligations under the credit facility are collateralized
  by all of the Company's tangible and intangible personal property, and other
  equipment. The Company was in compliance with the financial covenants under the
  credit facility at March 31, 2002.
  
       In June 2001, the Company's credit facility was amended to increase the
  portion of the facility available for letters of credit from $30 million to
  either (i) $40 million or (ii) $70 million in the event that the Company elects
  to post a letter of credit in lieu of an appellate bond for all or a part of the
  total amount of the judgment (including interest) in the Fredrickson v. Olsten
  Health Services Corp. and Olsten Corporation case while the Company pursues its
  appeal of the judgment as further discussed in Note 8. A supersedeas bond in the
  amount of $35.2 million was posted to satisfy the judgment plus interest. Under
  the terms of the bond, cash equal to the amount of the bond is held in a
  segregated account and is reported as restricted cash in the accompanying
  consolidated balance sheets as of March 31, 2002 and December 30, 2001.
  
       7. Shareholders' Equity
  
       Changes in shareholders' equity during the three months ended March 31,
  2002 were as follows (in thousands):
  
                                        -9-
  Common        Additional Paid-       Accumulated
                                                      Stock             in Capital           Deficit               Total
                                                ---------------     ----------------   -----------------    -----------------
  Balance at December 30, 2001                        $ 2,564         $    722,725       $     (103,582)       $     621,707
  
       Comprehensive loss:
                   Net loss                                                                    (209,194)            (209,194)
  
       Issuance of stock upon exercise of
       stock options and under stock plans
       for employees and directors                         38                3,305                    -                3,343
                                                 ------------         ------------      ---------------        -------------
  Balance at March 31, 2002                           $ 2,602         $    726,030      $      (312,776)       $    $415,856
                                                 ============         ============      ===============        =============
  Comprehensive loss amounted to $209.2 million during the first quarter of fiscal
  2002 and comprehensive income was $5.5 million for the first quarter of fiscal
  2001.
  
       8. Legal Matters
  
       Litigation
  
       In addition to the matters referenced below, the Company is party to
  certain legal actions arising in the ordinary course of business including legal
  actions arising out of services rendered by its various operations, personal
  injury and employment disputes.
  
       Fredrickson v. Olsten Health Services Corp. and Olsten Corporation, Case
  No. 01C.A.116, Court of Appeals, Seventh Appellate District, Mahoning County,
  Ohio. In November, 2000, the jury in this age-discrimination lawsuit returned a
  verdict in favor of the plaintiff against Olsten consisting of $675,000 in
  compensatory damages, $30 million in punitive damages and an undetermined amount
  of attorneys' fees. The jury found that, although Olsten had lawfully terminated
  the plaintiff's employment, its failure to transfer or rehire the plaintiff
  rendered Olsten liable to the plaintiff. Following post-trial motion practice by
  both parties, the trial court, in May 2001, denied all post-trial motions, and
  entered judgment for the plaintiff for the full amount of compensatory and
  punitive damages, and awarded the plaintiff reduced attorney's fees of $247,938.
  In June 2001, defendants timely filed a Notice of Appeal with the Court of
  Appeals, and the Company posted a supersedeas bond for the full amount of the
  judgment, plus interest. The parties to the appeal have filed all briefs and the
  briefing period is completed. Oral arguments have not been scheduled. The
  Company continues to defend itself in this matter vigorously. At this stage of
  the proceedings, the Company is unable to assess the probable outcome of the
  appeal.
  
       Cooper v. Gentiva CareCentrix, Inc., t/a/d/b/a Gentiva Health Services,
  U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
  this Amended Complaint was served on the Company alleging that the defendant
  submitted false claims to the government for payment in violation of the Federal
  False Claims Act, 31 U.S.C. 3729 et seq, and that the defendant had wrongfully
  terminated Plaintiff. Plaintiff claims that infusion pumps delivered to patients
  did not supply the full amount of medication, allegedly resulting in substandard
  care. Based on a review of the court's docket sheet, plaintiff filed a complaint
  under seal in March 2001. In October 2001, the United States Government filed a
  Notice with the
  
                                        -10-
  court declining to intervene in this matter, and on October 24, 2001, the court
  ordered that the seal be lifted. The Company filed its responsive pleading on
  February 25, 2002 and discovery has now commenced. The Company has denied the
  allegations of wrongdoing in the complaint and intends to defend itself
  vigorously in this matter. Given the preliminary stage of the proceedings, the
  Company is unable to assess the probable outcome or potential liability, if any,
  arising from this matter; therefore, a range of damages, if any, cannot be
  determined.
  
       United States of America ex rel. Lee Einer v. Olsten Corporation, No.
  CIV-S-99-0860 DFL/DAD, U.S. District Court for the Eastern District of
  California. On November 1, 2001, the Company received notice of the entry of an
  Order dated October 25, 2001, unsealing the referenced complaint. As recited in
  the Order unsealing the complaint, the United States gave notice to the District
  Court that the United States was declining to intervene in the action. The
  Company believes that it was this complaint that gave rise to a document
  subpoena served on the Company in December 1999 from the Department of Health
  and Human Services, Office of Inspector General, and Office of Investigations.
  The Company acknowledged service of the complaint on November 29, 2001 and
  timely filed responsive pleadings to the Complaint. The Company is engaged in
  discovery and intends to defend itself vigorously in this matter. Given the
  preliminary stage of the proceedings, the Company is unable to assess the
  probable outcome or potential liability, if any, arising from this matter;
  therefore, a range of damages, if any, cannot be determined.
  
       In 1999, Kimberly Home Health Care, Inc. ("Kimberly"), one of the Company's
  subsidiaries, initiated three arbitration proceedings against hospitals owned by
  Columbia/HCA Healthcare Corp. ("Columbia/HCA") with which Kimberly had
  management services agreements to provide services to the hospitals' home health
  agencies. The basis for each of the arbitrations is that Columbia/ HCA sold the
  home health agencies without assigning the management services agreements and,
  as a result, Columbia/HCA has breached the management services agreements. In
  response to the arbitrations, Columbia/HCA has asserted that the arbitrations be
  consolidated and stayed, in part based upon its alleged claims against Kimberly
  for breach of contract, and requested indemnity and possibly return of
  management fees. Columbia/HCA has not yet formally presented these claims in the
  arbitrations or other legal proceedings and has not yet quantified the claims.
  Still pending before the arbitrators is Columbia/HCA's request to consolidate
  the proceedings, which Kimberly has opposed. The proceedings are currently in
  abeyance pending ruling on Columbia/HCA's motion to consolidate. The Company is
  the claimant in this matter and the defendant has not formally asserted any
  counterclaims against the Company in the arbitration, nor has the defendant made
  any formal demand on the Company. The Company is unable to assess the liability
  or losses, if any, attributable to the threatened counterclaims.
  
       Furthermore, in connection with the Company's split off from Olsten
  Corporation on March 15, 2000 (the "Split-Off"), the Company agreed to assume,
  to the extent permitted by law, the liabilities, if any, arising out of (and to
  indemnify Olsten for) the above proceedings and other liabilities arising out of
  the health services business, including any such liabilities arising after the
  Split-Off in connection with the government investigations described below. In
  addition, in connection with the sale of the Specialty Pharmaceutical Services
  business, the
  
                                        -11-
  Company has agreed to retain and indemnify Accredo for the specified liabilities
  including the litigation described above and the government investigation
  described below.
  
       Government Investigations
  
       In early February 2000, the Company received a document subpoena from the
  Department of Health and Human Services, Office of Inspector General, and Office
  of Investigations. The Company believes the subpoena relates to its agencies'
  cost reporting procedures concerning contracted nursing and home health aide
  costs. To the Company's knowledge, the government has not filed a complaint
  against the Company, nor has the government quantified the amount of alleged
  damages relating to this matter. Recently, the government has asserted that this
  matter could fall under the Federal False Claims Act (the "Act"), and if
  liability is found under the Act, the government would be able to assess double
  or treble damages against the Company. The Company disputes the government's
  assertions, but continues to cooperate with the government in its investigation
  of this matter and to provide the government with the requested documents. At
  this time, the Company is unable to assess the probable outcome or potential
  liability, if any, arising from this subpoena.
  
       9. Business Segment Information
  
       The Company operates in the United States servicing patients and customers
  through the following business segments: Specialty Pharmaceutical Services and
  Home Health Services. These segments are briefly described below.
  
       Specialty Pharmaceutical Services includes (i) the distribution of drugs
  and other biological and pharmaceutical products and professional support
  services for individuals with chronic diseases, such as hemophilia, primary
  pulmonary hypertension, autoimmune deficiencies and growth disorders, (ii) the
  administration of antibiotics, chemotherapy, nutrients and other medications for
  patients with acute or episodic disease states, (iii) distribution services for
  pharmaceutical, biotechnology and medical service firms and (iv) clinical
  support services for pharmaceutical and biotechnology firms.
  
       Home Health Services includes (i) professional and paraprofessional
  services, including skilled nursing, rehabilitation and other therapies, home
  health aide and personal care services to individuals with acute illnesses,
  long-term chronic health conditions, permanent disabilities, terminal illnesses
  or post-procedural needs and (ii) care management and coordination for managed
  care organizations and self-insured employees.
  
       The Company and its chief decision makers evaluate performance and allocate
  resources based on operating contributions of the reportable segments, which
  exclude corporate expenses, depreciation, amortization and interest expense, but
  include revenues and all other costs directly attributable to the specific
  segment. Intersegment revenues represent Specialty Pharmaceutical Services
  segment revenues generated from services provided to the Home Health Services
  segment. Identifiable assets of the segments reflect net accounts receivable and
  inventories associated with segment activities. All other assets are assigned to
  the Company for the benefit of all segments.
  
                                        -12-
  Information about the Company's operations is as follows (in thousands):
  Specialty
                                                 Pharmaceutical          Home Health
                                                    Services              Services           Total
                                                ------------------------------------------------------
  Three months ended March 31, 2002
  Net revenues - segments                                  $ 200,468       $ 192,799        $ 393,267
                                                ===================== ===============
  Intersegment revenues                                                                       (23,683)
                                                                                       ---------------
  Net revenues                                                                              $ 369,584
                                                                                       ===============
  
  Operating contribution                                    $ 17,467        $ 15,481         $ 32,948
                                                ===================== ===============
  Corporate expenses                                                                          (20,633)
                                                                                       ---------------
  Earnings before interest expense, taxes,
    depreciation and amortization                                                              12,315
  Depreciation and amortization                                                                (3,578)
  Interest income, net                                                                            196
                                                                                       ---------------
  
  Income before income taxes and
    cumulative effect of accounting change                                                     $ 8,933
                                                                                       ===============
  
  Segment assets                                           $ 294,712       $ 133,642        $ 428,354
                                                ===================== ===============
  Intersegment assets                                                                         (10,831)
                                                                                       ---------------
  Segment assets, net                                                                         417,523
  Corporate assets                                                                            206,228
                                                                                       ---------------
  Total assets                                                                              $ 623,751
                                                                                       ===============
  
  Three months ended April 1, 2001
  Net revenues - segments                                  $ 195,887       $ 185,617        $ 381,504
                                                ===================== ===============
  Intersegment revenues                                                                       (24,326)
                                                                                       ---------------
  Net revenues                                                                              $ 357,178
                                                                                       ===============
  
  Operating contribution                                    $ 16,847        $ 14,780         $ 31,627
                                                ===================== ===============
  Corporate expenses                                                                          (17,592)
                                                                                       ---------------
  Earnings before interest expense, taxes,
    depreciation and amortization                                                              14,035
  
  Depreciation and amortization                                                                (6,990)
  Interest expense, net                                                                          (433)
                                                                                       ---------------
  Income before income taxes                                                                  $ 6,612
                                                                                       ===============
  
  Segment assets                                           $ 302,364       $ 173,877        $ 476,241
                                                ===================== ===============
  Intersegment assets                                                                         (17,614)
                                                                                       ---------------
  Segment assets, net                                                                         458,627
  Corporate assets                                                                            376,215
                                                                                       ---------------
  Total assets                                                                              $ 834,842
                                                                                       ===============
  -13-
  Item 2. Management's Discussion and Analysis of Financial Condition and Results
          of Operations
  
  General
  
       The Company's results of operations are impacted by various regulations and
  other matters that are implemented from time to time in its industry, some of
  which are described in the Company's Annual Report on Form 10-K, as amended, for
  the fiscal year ended December 30, 2001.
  
  Significant Developments
  
       On January 2, 2002, the Company entered into an asset purchase agreement
  with Accredo Health, Incorporated ("Accredo") pursuant to which Accredo agreed
  to acquire substantially all of the assets of the Company's Specialty
  Pharmaceutical Services business for a purchase price of $415 million, subject
  to adjustment in accordance with the asset purchase agreement. The consideration
  is payable to the Company half in cash and half in shares of Accredo common
  stock, provided that the average closing price of Accredo common stock for the
  twenty days ending on the second day prior to the closing of this acquisition is
  between $31 and $41 per share. If the average closing price of the Accredo
  common stock is outside the range, the number of shares to be issued will be
  fixed and the value of the stock consideration will fluctuate. The purchase
  price is also subject to adjustment for changes in the net book value as of the
  closing date. Based on the closing price of Accredo common stock as of May 13,
  2002 ($55.98 per share) and assuming no adjustment for changes in net book
  value, the consideration payable to the Company would approximate $491 million.
  
       The sale of the Specialty Pharmaceutical Services business is conditioned
  upon, among other things, regulatory approval, the approval of the shareholders
  of each company and other customary conditions. Completion of the transaction is
  expected in the second quarter of 2002. It is currently expected that following
  the sale of the Specialty Pharmaceutical Services business, the Company will
  distribute substantially all of the proceeds to its shareholders.
  
       Results for the first quarter of fiscal 2002 included transaction related
  costs of approximately $3 million relating to the pending sale of the Specialty
  Pharmaceutical Services business, consisting primarily of professional services
  fees, which were reflected in selling, general and administrative expenses in
  the accompanying consolidated statement of operations.
  
       The Specialty Pharmaceutical Services business will be treated as a
  discontinued operation following the date on which shareholders approve the
  transaction. Subsequent to the closing date of the transaction, the Company
  intends to operate in the home health services business.
  
                                        -14-
  Critical Accounting Policies
  
       The preparation of financial statements in conformity with accounting
  principles generally accepted in the United States requires management to make
  estimates and assumptions and select accounting policies that affect the
  reported amounts of assets and liabilities and disclosure of contingent assets
  and liabilities at the date of the financial statements and the reported amounts
  of revenues and expenses during the reporting period. Actual results could
  differ from those estimates.
  
       These accounting policies have been described in our 2001 Annual Report on
  Form 10-K, as amended, with the following accounting policy adopted effective
  December 31, 2001.
  
       In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
  No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens the
  criteria for recording intangible assets separate from goodwill. SFAS 142
  requires the use of a nonamortization approach to account for purchased goodwill
  and certain intangibles. Under a nonamortization approach, goodwill and certain
  intangibles are not amortized into results of operations, but instead are
  reviewed for impairment and an impairment charge is recorded in the periods in
  which the recorded carrying value of goodwill and certain intangibles is more
  than its estimated fair value. The Company adopted SFAS 142 as of the beginning
  of fiscal 2002. The provisions of SFAS 142 require that a transitional
  impairment test be performed as of the beginning of the year the statement is
  adopted. The provisions of SFAS 142 also require that a goodwill impairment test
  be performed annually or in the case of other events that indicate a potential
  impairment. The new criteria for recording intangible assets separate from
  goodwill did not require any reclassification in the Company's financial
  statements.
  
       At December 30, 2001, the Company had goodwill, of $220.5 million, of which
  $217.3 million related to the Home Health Services business and $3.2 million
  related to the Specialty Pharmaceutical Services business. The Company's
  transitional impairment test indicated that there was an impairment of goodwill
  relating to the Home Health Services business upon adoption of SFAS 142 as
  further described below.
  
       The impairment test is a two step process that begins with the estimation
  of the fair value of each reporting unit. The first step screens for potential
  impairment and the second step measures the amount of the impairment. The
  estimate of fair value of the Home Health Services business as of the beginning
  of fiscal 2002 considered publicly available information as well as financial
  projections and estimates prepared by outside advisors, and was determined by
  subtracting the agreed-upon purchase price for the Specialty Pharmaceutical
  Services business from the market capitalization of the Company. As part of the
  first step to assess potential impairment, management compared the estimate of
  fair value for the Home Health Services business to the book value of the
  business unit's net assets. Since the book value of Home Health Services' net
  assets was greater than its estimated fair value, management proceeded to the
  second step to measure the impairment. The second step compares the implied fair
  value of goodwill with its carrying value. The implied fair value of goodwill is
  
                                        -15-
  determined by allocating the fair value of the reporting unit to all of the
  assets and liabilities of that unit as if the reporting unit had been acquired
  in a business combination and the fair value of the reporting unit was the
  purchase price paid to acquire the reporting unit. The excess of the fair value
  of the reporting unit over the amounts assigned to its assets and liabilities is
  the implied fair value of goodwill. If the carrying amount of the reporting
  unit's goodwill is greater than its implied fair value, an impairment loss will
  be recognized in the amount of the excess.
  
       Based on the results of the transitional impairment tests, the Company
  determined that an impairment loss relating to goodwill had occurred and
  recorded a non-cash charge of $217.3 million as cumulative effect of accounting
  change in the accompanying consolidated statement of operations for the three
  months ended March 31, 2002. The Company recorded a deferred tax benefit of
  approximately $66 million resulting from this non-cash charge, however, because
  of the uncertainty of the ultimate realization of the deferred tax asset, the
  Company increased its tax valuation allowance by the same amount.
  
       The table below presents a reconciliation of reported net income to
  adjusted net income as if the SFAS 142 was adopted as of the beginning of fiscal
  2001 (in 000's, except per share amounts).
  Three Months Ended
                                           --------------------------------------------------
                                                               April 2, 2001
                                           --------------------------------------------------
                                                                   Earnings per Share
                                                             --------------------------------
                                            Net Income           Basic            Diluted
                                           --------------    ---------------   --------------
  Reported net income                            $ 6,112             $ 0.28           $ 0.26
  Add back:  Goodwill amortization                 2,653               0.13             0.10
                                           --------------    ---------------   --------------
  
  Adjusted net income                            $ 8,765             $ 0.41           $ 0.36
                                           ==============    ===============   ==============
  Results of Operations
  
  Quarter Ended March 31, 2002 Compared to Quarter Ended April 1, 2001
  
       Revenues
  
       Net revenues increased by $12 million or 3.5 percent to $370 million during
  the first quarter of fiscal 2002 as compared to the first quarter of fiscal
  2001, primarily due to a $7 million or 3.9 percent increase in Home Health
  Services revenue and a $5 million or 2.3 percent increase in the Specialty
  Pharmaceutical Services revenue.
  
       The increase in Home Health Services revenue during the first quarter of
  fiscal 2002 was attributable to a combination of increased rates to commercial
  and government payors and an increase in the number of Preferred Provider
  Organization enrollees served by the Company's CareCentrix unit offset by a
  decrease in revenue of approximately $1 million relating to estimated third
  party settlements.
  
       During the first quarter of fiscal 2002, the Company experienced unit
  volume increases in several core chronic therapies in the Specialty
  Pharmaceutical Services segment.
  
                                        -16-
  These therapies included (i) coagulation therapy, used in the treatment of
  hemophilia, which increased by 3.5 percent, (ii) Flolan, an intravenous therapy,
  and Tracleer, an oral medication, both used in the treatment of pulmonary
  arterial hypertension, which increased by a combined 10.0 percent, (iii)
  intravenous immune globulin (IVIG), used in the treatment of primary immune
  deficiency and other diagnoses which increased by 36.7 percent and, (iv) growth
  hormone, used in the treatment of growth hormone disorder, which increased by
  17.0 percent. Revenue relating to acute infusion products decreased by 6.8
  percent due to management's decision to terminate certain contracts in an effort
  to improve revenue quality and cash flow. Due to significant purchases by
  wholesale customers early in 2001 revenue relating to Oxandrin, an oral
  pharmaceutical for involuntary weight loss, decreased by 30.2 percent during the
  first quarter of fiscal 2002 as compared to the corresponding period of fiscal
  2001.
  
       Gross Profit
  
       Gross Profit was approximately $117 million in the first quarter of fiscal
  2002 and $116 million in the first quarter of fiscal 2001. As a percentage of
  net revenue, gross profit margins decreased from 32.6 percent in the fiscal 2001
  first quarter to 31.6 percent in the first quarter of fiscal 2002. The decrease
  in margin was primarily related to the home health services business and was
  attributable to revenue adjustments relating to estimated third party
  settlements (0.3 percent of net revenues) as well as various other factors,
  including increased insurance and labor costs, training costs associated with
  the orientation of additional full-time caregivers and changes in business mix
  resulting from revenue growth in lower margin product lines.
  
       Selling, General and Administrative Expenses
  
       Selling, general and administrative expenses decreased to $108 million
  during the first quarter of fiscal 2002 as compared to $109 million during the
  first quarter of fiscal 2001 due to decreases resulting from the elimination of
  goodwill amortization expense of $3 million and a reduction in field
  administration costs relating to the Home Health Services business of $1
  million, offset by an increase of $3 million, representing transaction related
  costs, primarily consisting of professional fees, relating to the pending sale
  of the Specialty Pharmaceutical Services business to Accredo.
  
       Interest Income (Expense), Net
  
       Net interest income was approximately $0.2 million in the first quarter of
  fiscal 2002 and net interest expense was approximately $0.4 million in the first
  quarter of fiscal 2001. Net interest income for the first quarter of fiscal 2002
  represented interest income of approximately $0.6 million, offset by fees
  relating to the revolving credit facility and outstanding letters of credit.
  
       Income Taxes
  
       Income tax expense for the first quarter of fiscal 2002 consisted primarily
  of taxes relating to certain state jurisdictions. The Company had estimated net
  operating loss carryforwards (NOLs) of approximately $90 million as of December
  30, 2001. Because of the uncer-
  
                                        -17-
  tainty of ultimate realization of the net deferred tax asset, the Company has
  established a valuation allowance for the deferred tax asset that is not
  otherwise used to offset deferred tax liabilities. The Company expects to fully
  utilize its NOLs to offset a portion of the gain expected to be recorded in
  connection with the sale of the Specialty Pharmaceutical Services business.
  
       Liquidity and Capital Resources
  
       Working capital at March 31, 2002, was $385 million, a decrease of $16
  million as compared to $401 million at December 30, 2001, primarily due to the
  $25 million decrease in prepaid expenses and other assets relating to an
  increase in valuation allowance for deferred tax assets as further described in
  Note 4, offset by a $9 million increase in inventory related to increased
  purchases to take advantage of favorable pricing. Net receivables decreased by
  $7 million in the first quarter of fiscal 2002 as a result of improved cash
  collections in both the Specialty Pharmaceutical Services and Home Health
  Services business. Days Sales Outstanding ("DSO") was 94 days at December 30,
  2001. DSO was reduced by 5 days to 89 days at March 31, 2002, as a result of
  continued improved cash collections.
  
       Cash and cash equivalents increased by approximately $27 million as of
  March 31, 2002, as compared to December 30, 2001, as a result of (i) cash flow
  from operations of approximately $25 million, (ii) proceeds from the exercise of
  stock options of approximately $3 million, offset somewhat by capital
  expenditures of approximately $1 million. In early 2001, the Center for Medicare
  and Medicaid Services, formerly known as the Health Care Financing
  Administration, issued cash advances to certain Medicare providers in connection
  with the transition from the IPS to the PPS for Medicare reimbursement. Such
  advances are expected to be repaid during the second quarter of fiscal 2002. In
  the first quarter of fiscal 2001, the Company received a cash advance relating
  to the transition to PPS, net of payments for estimated settlements relating to
  cost report filings, of approximately $21 million, which was reflected in
  accrued expenses in the accompanying consolidated balance sheet as of March 31,
  2002.
  
       The Company maintains a credit facility, which provides for up to $150
  million in borrowings. The Company may borrow up to a maximum of 80 percent of
  eligible accounts receivable, as defined. At the Company's option, the interest
  rate on borrowings under the credit facility is based on the London Interbank
  Offered Rate (LIBOR) plus 2.5 percent or the lender's prime rate plus 0.25
  percent. As of March 31, 2002, there were no borrowings outstanding under the
  credit facility and total outstanding letters of credit approximated $25.7
  million. The Company is subject to an unused line fee equal to 0.375 percent per
  annum of the average daily difference between $150 million and the total
  outstanding borrowings and letters of credit. In addition, the Company must pay
  a fee equal to 2.25 percent per annum of the aggregate face amount of
  outstanding standby letters of credit.
  
       The credit facility, which expires in 2004, includes certain covenants
  requiring the Company to maintain a minimum tangible net worth and minimum
  earnings before interest, taxes, depreciation and amortization. Other covenants
  in the credit facility include limitation on mergers, consolidations,
  acquisitions, indebtedness, liens, capital expenditures and dispositions of
  assets and other limitations with respect to the Company's operations. Certain
  of
  
                                        -18-
  these covenants would be violated if the Company does not negotiate a new credit
  facility or receive a consent from its lenders in connection with the sale of
  the Specialty Pharmaceutical Services business. The Company's obligations under
  the credit facility are collateralized by all of the Company's tangible and
  intangible personal property, and other equipment. As of March 31, 2002, the
  Company was in compliance with its financial covenants and had borrowing
  capacity under the credit facility, after adjusting for outstanding letters of
  credit, of approximately $124 million.
  
       In June 2001, the Company's credit facility was amended to increase the
  portion of the facility available for letters of credit from $30 million to
  either (i) $40 million or (ii) $70 million in the event that the Company elects
  to post a letter of credit in lieu of an appellate bond for all or a part of the
  total amount of the judgment plus interest in the Fredrickson v. Olsten Health
  Services Corp. and Olsten Corporation case while the Company pursues its appeal
  of the judgment as further discussed in Note 8. A supersedeas bond in the amount
  of $35 million was posted to satisfy the judgment (including interest). Under
  the terms of the bond, cash equal to the amount of the bond is held in a
  segregated account and is reported as restricted cash in the accompanying
  consolidated balance sheets.
  
       As described in Note 8 to the Company's Consolidated Financial Statements,
  the Company has pending litigation and a government investigation. At this time,
  the Company is unable to assess the probable outcome of some of these matters
  and an unfavorable resolution of any of these matters could have a material
  adverse affect on the Company. In particular, in connection with the Fredrickson
  case, if a final non-appealable offer is rendered against the Company consistent
  with the lower court's ruling, the Company could be required to pay a full $35
  million judgment plus additional accrued interest. Any resolution of this matter
  (by settlement or final non-appealable court order) could have a material
  adverse effect on the Company's results of operations, cash flows and financial
  condition.
  
       As a result of the pending sale of the Specialty Pharmaceutical Services
  business, the Company commenced discussions with its existing administrative
  agent for an underwriting of a new credit facility which would provide for
  borrowing capacity of a minimum of $55 million and a new four year term with,
  conditions and covenants substantially similar to its existing facility. In
  April 2002, the Company received a commitment letter from the administration
  agent to underwrite the new revolving credit agreement. The Company expects the
  new credit facility to be established at or prior to the consummation date of
  the sale of the Specialty Pharmaceutical Services business.
  
       Although the Company had cash and cash equivalents, including restricted
  cash, of $134.6 million at March 31, 2002, $20.9 million represented cash
  advances from the Medicare program which are expected to be repaid by the
  Company during second quarter of 2002, approximately $14 million is expected to
  be paid upon closing of the sale of the Specialty Pharmaceutical Services
  business as transaction costs (including advisor fees and payments under change
  in control agreements and severance arrangements), approximately $9 million may
  be required to cover a portion of the corporate taxes resulting from the receipt
  of consideration from the sale of the Specialty Pharmaceutical Services business
  and up to $25 million is intended to be used in connection with a cash tender
  offer to purchase and cancel all of the Company's vested stock options which
  will commence prior to the closing of the sale of the
  
                                        -19-
  Specialty Pharmaceutical Services business. These cash outflows could be offset
  somewhat by cash flow generated from operations during the year. The Company
  expects to have a balance of cash and cash equivalents, including restricted
  cash, in excess of $70 million following the distribution to stockholders of the
  consideration to be received from Accredo Health, Incorporated upon the sale of
  the Specialty Pharmaceutical Services business.
  
       Management believes cash flows from operations, existing cash and cash
  equivalent balances, borrowings available under the credit facility and other
  financing options will be adequate to support the Company's operating
  requirements both before and after the disposition of the Specialty
  Pharmaceutical Services business. In this connection, income before the
  cumulative effect of accounting change would have been significantly less in the
  first quarter of 2002 if the results of operations for the Specialty
  Pharmaceutical Services business were excluded and prior to any change in
  corporate and other administrative expenses. The Company is currently evaluating
  alternative realignment and consolidation initiatives in an effort to achieve
  cost savings and increased profitability following the sale of the Specialty
  Pharmaceutical Services business. However, there can be no assurance that such
  cost savings and increased profitability will be achieved.
  
       The Company intends to make investments and other expenditures to, among
  other things, upgrade its computer technology and system infrastructure and
  comply with regulatory changes in the industry. If cash flows from operations or
  availability under the credit facility fall below expectations, the Company may
  be forced to delay planned capital expenditures, reduce operating expenses, seek
  additional financing or consider alternatives designed to enhance liquidity.
  
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
       Generally, the fair market value of fixed rate debt will increase as
  interest rates fall and decrease as interest rates rise. The Company had no
  interest rate exposure on fixed rate debt at March 31, 2002.
  
  OTHER:
  
       INFORMATION CONTAINED HEREIN, OTHER THAN HISTORICAL INFORMATION, SHOULD BE
  CONSIDERED FORWARD-LOOKING AND IS SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES.
  FOR INSTANCE, THE COMPANY'S STRATEGIES AND OPERATIONS INVOLVE RISKS OF
  COMPETITION, CHANGING MARKET CONDITIONS, CHANGES IN LAWS AND REGULATIONS
  AFFECTING THE COMPANY'S INDUSTRIES AND NUMEROUS OTHER FACTORS DISCUSSED IN THIS
  DOCUMENT AND IN OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE
  COMMISSION. ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
  EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
  
                                        -20-
  PART II - OTHER INFORMATION
  
  Item 1.  Legal Proceedings
  
           Litigation
  
       In addition to the matters referenced below, the Company is party to
  certain legal actions arising in the ordinary course of business including legal
  actions arising out of services rendered by its various operations, personal
  injury and employment disputes.
  
       Fredrickson v. Olsten Health Services Corp. and Olsten Corporation, Case
  No. 01C.A.116, Court of Appeals, Seventh Appellate District, Mahoning County,
  Ohio. In November, 2000, the jury in this age-discrimination lawsuit returned a
  verdict in favor of the plaintiff against Olsten consisting of $675,000 in
  compensatory damages, $30 million in punitive damages and an undetermined amount
  of attorneys' fees. The jury found that, although Olsten had lawfully terminated
  the plaintiff's employment, its failure to transfer or rehire the plaintiff
  rendered Olsten liable to the plaintiff. Following post-trial motion practice by
  both parties, the trial court, in May 2001, denied all post-trial motions, and
  entered judgment for the plaintiff for the full amount of compensatory and
  punitive damages, and awarded the plaintiff reduced attorney's fees of $247,938.
  In June 2001, defendants timely filed a Notice of Appeal with the Court of
  Appeals, and the Company posted a supersedeas bond for the full amount of the
  judgment, plus interest. The parties to the appeal have filed all briefs and the
  briefing period is completed. Oral arguments have not been scheduled. The
  Company continues to defend itself in this matter vigorously. At this stage of
  the proceedings, the Company is unable to assess the probable outcome of the
  appeal.
  
       Cooper v. Gentiva CareCentrix, Inc., t/a/d/b/a Gentiva Health Services,
  U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
  this Amended Complaint was served on the Company alleging that the defendant
  submitted false claims to the government for payment in violation of the Federal
  False Claims Act, 31 U.S.C. 3729 et seq, and that the defendant had wrongfully
  terminated Plaintiff. Plaintiff claims that infusion pumps delivered to patients
  did not supply the full amount of medication, allegedly resulting in substandard
  care. Based on a review of the court's docket sheet, plaintiff filed a complaint
  under seal in March 2001. In October 2001, the United States Government filed a
  Notice with the court declining to intervene in this matter, and on October 24,
  2001, the court ordered that the seal be lifted. The Company filed its
  responsive pleading on February 25, 2002 and discovery has now commenced. The
  Company has denied the allegations of wrongdoing in the complaint and intends to
  defend itself vigorously in this matter. Given the preliminary stage of the
  proceedings, the Company is unable to assess the probable outcome or potential
  liability, if any, arising from this matter; therefore, a range of damages, if
  any, cannot be determined.
  
       United States of America ex rel. Lee Einer v. Olsten Corporation, No.
  CIV-S-99-0860 DFL/DAD, U.S. District Court for the Eastern District of
  California. On November 1, 2001, the Company received notice of the entry of an
  Order dated October 25, 2001, unsealing the referenced complaint. As recited in
  the Order unsealing the complaint, the United States
  
                                        -21-
  gave notice to the District Court that the United States was declining to
  intervene in the action. The Company believes that it was this complaint that
  gave rise to a document subpoena served on the Company in December 1999 from the
  Department of Health and Human Services, Office of Inspector General, and Office
  of Investigations. The Company acknowledged service of the complaint on November
  29, 2001 and timely filed responsive pleadings to the Complaint. The Company is
  engaged in discovery and intends to defend itself vigorously in this matter.
  Given the preliminary stage of the proceedings, the Company is unable to assess
  the probable outcome or potential liability, if any, arising from this matter;
  therefore, a range of damages, if any, cannot be determined.
  
       In 1999, Kimberly Home Health Care, Inc. ("Kimberly"), one of the Company's
  subsidiaries, initiated three arbitration proceedings against hospitals owned by
  Columbia/HCA Healthcare Corp. ("Columbia/HCA") with which Kimberly had
  management services agreements to provide services to the hospitals' home health
  agencies. The basis for each of the arbitrations is that Columbia/ HCA sold the
  home health agencies without assigning the management services agreements and,
  as a result, Columbia/HCA has breached the management services agreements. In
  response to the arbitrations, Columbia/HCA has asserted that the arbitrations be
  consolidated and stayed, in part based upon its alleged claims against Kimberly
  for breach of contract, and requested indemnity and possibly return of
  management fees. Columbia/HCA has not yet formally presented these claims in the
  arbitrations or other legal proceedings and has not yet quantified the claims.
  Still pending before the arbitrators is Columbia/HCA's request to consolidate
  the proceedings, which Kimberly has opposed. The proceedings are currently in
  abeyance pending ruling on Columbia/HCA's motion to consolidate. The Company is
  the claimant in this matter and the defendant has not formally asserted any
  counterclaims against the Company in the arbitration, nor has the defendant made
  any formal demand on the Company. The Company is unable to assess the liability
  or losses, if any, attributable to the threatened counterclaim.
  
       Furthermore, in connection with the Split-Off, the Company agreed to
  assume, to the extent permitted by law, the liabilities, if any, arising out of
  (and to indemnify Olsten for) the above proceedings and other liabilities
  arising out of the health services business, including any such liabilities
  arising after the Split-Off in connection with the government investigations
  described below. In addition, in connection with the sale of the specialty
  pharmaceutical services business, the Company has agreed to retain and indemnify
  Accredo Health, Incorporated for the specified liabilities including the
  litigation described above and the government investigation described below.
  
       Government Investigations
  
       In early February 2000, the Company received a document subpoena from the
  Department of Health and Human Services, Office of Inspector General, and Office
  of Investigations. The Company believes the subpoena relates to its agencies'
  cost reporting procedures concerning contracted nursing and home health aide
  costs. To the Company's knowledge, the government has not filed a complaint
  against the Company, nor has the government quantified the amount of alleged
  damages relating to this matter. Recently, the government has asserted that this
  matter could fall under the Federal False Claims Act (the "Act"), and if
  liability is found under the Act, the government would be able to assess double
  or treble damages against
  
                                        -22-
  the Company. The Company disputes the government's assertions, but continues to
  cooperate with the government in its investigation of this matter and to provide
  the government with the requested documents. At this time, the Company is unable
  to assess the probable outcome or potential liability, if any, arising from this
  subpoena.
  
  Item 2.  Changes in Securities and Use of Proceeds
  
           None.
  
  Item 3.  Defaults Upon Senior Securities
  
           None.
  
  Item 4.  Submission of Matters to a Vote of Security Holders
  
       (a) None.
  
  Item 5.  Other Information
  
       In connection with a July 19, 1999 settlement with various government
  agencies, Olsten executed a corporate integrity agreement with the Office of
  Inspector General of the Department of Health and Human Services which will
  remain in effect until August 18, 2004. The July 1999 corporate integrity
  agreement applies to the Company's businesses that bill the federal government
  health programs directly for services, such as its Home Health Services business
  (but excluding the Specialty Pharmaceutical Services business). This corporate
  integrity agreement focuses on issues and training related to cost report
  preparation, contracting, medical necessity and billing of claims.
  
       Under the corporate integrity agreement, the Company is required, for
  example, to maintain a corporate compliance officer to develop and implement
  compliance programs, to retain an independent review organization to perform
  annual reviews and to maintain a compliance program and reporting systems, as
  well as provide certain training to employees.
  
       The Company's compliance program will be implemented for all newly
  established or acquired business units if their type of business is covered by
  the corporate integrity agreement. Reports under the integrity agreement are to
  be filed annually with the Department of Health and Human Services, Office of
  Inspector General. After the corporate integrity agreement expires, the Company
  is to file a final annual report with the government. The Company is in
  compliance with the corporate integrity agreement and has timely filed all
  required reports. If the Company fails to comply with the terms of its corporate
  integrity agreement, the Company will be subject to penalties.
  
  Item 6.  Exhibits and Reports on Form 8-K
  
  (a) Exhibit Number Description
  
                                        -23-
  3.1  Restated Certificate of Incorporation of Company. (1)
  
            3.2  Restated By-Laws of Company. (1)
  
            4.1  Specimen of common stock. (3)
  
            4.2  Form of Certificate of Designation of Series A Junior
                 Participating Preferred Stock. (1)
  
            4.3  Form of Certificate of Designation of Series A Cumulative
                 Non-Voting Redeemable Preferred Stock. (2)
  
            10.1 Separation Agreement dated August 17, 1999, among Olsten
                 Corporation, Aaronco Corp. and Adecco SA. (1)*
  
            10.2 Omnibus Amendment No. 1 dated October 7, 1999, by and among
                 Olsten Corporation, Aaronco Corp., Adecco SA and Olsten Health
                 Services Holding Corp. (1)
  
            10.3 Form of Rights Agreement dated March 2, 2000 between the
                 Registrant and Equiserve Limited Partnership, as rights agent.
                 (1)
  
            10.4 Company's Executive Officers Bonus Plan. (1)*
  
            10.5 Company's 1999 Stock Incentive Plan. (4)*
  
            10.6 Company's Stock & Deferred Compensation Plan for Non-Employee
                 Directors. (4)*
  
            10.7 Company's Employee Stock Purchase Plan. (1)*
  
            10.8 Omnibus Amendment No. 2 dated January 18, 2000, by and among
                 Olsten Corporation, Adecco SA, Olsten Health Services Holding
                 Corp., the Company and Staffing Acquisition Corporation. (1)
  
            10.9 Loan and Security Agreement by and between Fleet Capital Corp.,
                 on behalf of the lenders named therein, the Company, Olsten
                 Health Services Holding Corp. and the subsidiaries named therein,
                 dated March 13, 2000. (4)
  
            10.10 Form of Employment Agreement with Edward A. Blechschmidt. (2)*
  
            10.11 Form of Change of Control Agreement with Executive Officers of
                 Company. (4)*
  
                                        -24-
  10.12 Form of Change in Control Agreement with Edward A. Blechschmidt.
                 (4)*
  
            10.13 Form of Severance Agreement with Executive Officers of Company.
                 (2)*
  
            10.14 First Amendment and Consent Agreement dated September 15, 2000
                 to the Loan Agreement by and among the lending institutions named
                 therein, Fleet Capital Corporation, the Company, Olsten Health
                 Services Holding Corp. and the subsidiaries named therein. (6)
  
            10.15 Purchase and Sale Agreement dated August 25, 2000 by and between
                 the Company and Intelistaf Group, Inc. (formerly known as GS
                 Acquisition Co.) (6)
  
            10.16 Second Amendment and Consent Agreement dated as of November 20,
                 2000 to the Loan Agreement by and among the lending institutions
                 named therein, Fleet Capital Corporation, the Company, Olsten
                 Health Services Holding Corp. and the subsidiaries named therein.
                 (7)
  
            10.17 Third Amendment to Loan and Security Agreement dated as of June
                 1, 2001 to the Loan Agreement by and among the lending
                 institutions named therein, Fleet Capital Corporation, the
                 Company, Olsten Health Services Holding Corp. and the
                 subsidiaries named therein. (8)
  
            10.18 Fourth Amendment and Consent Agreement dated as of August 22,
                 2001 to the Loan Amendment by and among the lending institutions
                 named therein, Fleet Capital Corporation, the Company, Olsten
                 Health Services Holding Corp. and the subsidiaries named therein.
                 (10)
  
            10.19 Asset Purchase Agreement dated as of January 2, 2002, by and
                 between Accredo Health Incorporated, the Company and the Sellers
                 named therein. (9)
  
            21.1 List of Subsidiaries of Company. (10)
                 -----------------------------------------------------------------
  
            (1)  Incorporated herein by reference to Amendment No. 2 to the
                 Registration Statement on Form S-4, dated January 20, 2000 (File
                 No. 333-88663).
  
            (2)  Incorporated herein by reference to Amendment No. 3 to the
                 Registration Statement on Form S-4, dated February 4, 2000 (File
                 No. 333-88663).
  
                                        -25-
  (3)  Incorporated herein by reference to Amendment No. 4 to the
                 Registration Statement on Form S-4, dated February 9, 2000 (File
                 No. 333-88663).
  
            (4)  Incorporated herein by reference to Form 10-K for the Registrant
                 for the fiscal year ended January 2, 2000.
  
            (5)  Incorporated herein by reference to Form 10-Q for the Registrant
                 for the period ended July 2, 2000.
  
            (6)  Incorporated herein by reference to Form 10-Q for the Registrant
                 for the period ended October 1, 2000.
  
            (7)  Incorporated herein by reference to Form 10-K for the Registrant
                 for the fiscal year ended December 31, 2000.
  
            (8)  Incorporated herein by reference to Form 10-Q for the Registrant
                 for the period ended September 30, 2001.
  
            (9)  Incorporated herein by reference to Registration Statement on
                 Form S-4, dated February 8, 2002 (File No. 333-82396), of Accredo
                 Health, Incorporated.
  
            (10) Incorporated by reference to Form 10-K for the Registrant for the
                 fiscal year ended December 30, 2001.
  
            *    Management contract or compensatory plan or arrangement.
  
  (b)      Reports on Form 8-K
  
           On January 7, 2002, the Company filed a report on Form 8-K (Item 5) in
  connection with the execution of the Asset Purchase Agreement with Accredo
  Health, Incorporated.
  
                                        -26-
  SIGNATURES
  
       Pursuant to the requirements of the Securities Exchange Act of 1934, the
  registrant has duly caused this report to be signed on its behalf by the
  undersigned thereunto duly authorized.
  
  Date:  May 15, 2002              /S/ Edward A. Blechschmidt
                                   ------------------------------------
                                   Edward A. Blechschmidt
                                   President and Chief Executive
                                   Officer
  
  Date:  May 15, 2002              /S/ John J. Collura
                                   ------------------------------------
                                   John J. Collura
                                   Executive Vice President,
                                   Chief Financial Officer and
                                   Treasurer
  
                                        -27-