10-Q 1 a2116692z10-q.txt 10-Q =============================================================================== U.S. 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: JUNE 30, 2003 COMMISSION FILE NUMBER: 1-15587 MED DIVERSIFIED, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ~~NEVADA 84-1037630 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)~~

100 BRICKSTONE SQUARE, FIFTH FLOOR, ANDOVER, MA 01810 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (978) 323-2500 (ISSUER'S TELEPHONE NUMBER) MED DIVERSIFIED, INC. 100 Brickstone Square, Fifth Floor Andover, MA 01810 Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the issuer is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate by check mark whether the issuer has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] As of July 31, 2003, 148,661,526 shares of the registrant's common stock, $0.001 par value per share, were outstanding. =============================================================================== INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Condensed Consolidated Balance Sheets at June 30, 2003 (unaudited) and March 31, 2003.........................................3 Condensed Consolidated Statements of Operations for the Three Months ended June 30, 2003 and 2002 (unaudited) .......................4 Condensed Consolidated Statements of Cash Flows for the Three Months ended June 30, 2003 and 2002 (unaudited)........................5 Notes to the Condensed Consolidated Financial Statements at June 30, 2003 (unaudited)..............................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................................22 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............27 Item 4. Controls and Procedures................................................27 PART II. OTHER INFORMATION Item 1. Legal Proceedings......................................................27 Item 2. Changes in Securities..................................................30 Item 3. Defaults Upon Senior Securities........................................30 Item 4. Submission of Matters to a Vote of Security Holders....................30 Item 5. Other Information......................................................30 Item 6. Exhibits and Reports on Form 8-K.......................................30 SIGNATURES...............................................................................31

2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MED DIVERSIFIED, INC. (Debtor-In-Possession as of November 27, 2002) Condensed Consolidated Balance Sheets (in thousands)

~~PAGE~~JUNE ~~NO.~~30, ~~PART~~MARCH I.31, ~~FINANCIAL~~2003 ~~INFORMATION~~2003 ASSETS (UNAUDITED) ----------- ---------- Current assets: Cash and cash equivalents ...................................................................... 3$ ~~ITEM~~13,652 1.$ ~~FINANCIAL~~10,072 ~~STATEMENTS~~Accounts ~~Condensed~~receivable, ~~Consolidated~~net ~~Balance~~of ~~Sheets~~allowances atof ~~December~~$23,258 31and $26,209 ~~2002~~at ~~(unaudited)~~June 30, 2003 and March 31, ~~2002~~2003, respectively ................................................................. 335,056 ~~Condensed~~36,594 ~~Consolidated~~Accounts ~~Statements~~receivable offrom ~~Operations~~affiliates, ~~for~~net ~~the~~....................................................... ~~Three~~98 ~~Months~~186 ~~ended~~Prepayments ~~December~~and 31other current assets ........................................................... 8,342 ~~2002~~7,847 ~~and~~Assets ~~2001~~of ~~(unaudited)~~discontinued operations .............................................................. 43,564 ~~Condensed~~891 ~~Consolidated~~--------- ~~Statements~~--------- ofTotal ~~Operations~~current ~~for~~assets ~~the~~....................................................................... ~~Nine~~60,712 ~~Months~~55,590 ~~ended~~--------- ~~December~~--------- ~~31,~~Non-current ~~2002~~assets: Property and ~~2001~~equipment, ~~(unaudited)~~net .................................................................... 512,688 ~~Condensed~~13,856 ~~Consolidated~~Goodwill ~~Statements~~....................................................................................... of20,548 ~~Cash~~20,548 ~~Flows~~Investments ~~for~~.................................................................................... ~~the~~9,903 ~~Nine~~11,231 ~~Months~~Other ~~ended~~intangibles, ~~December~~net ......................................................................... 31,844 ~~2002~~32,042 ~~and~~Assets ~~2001~~of ~~(unaudited)~~discontinued operations, net of current portion ...................................... 6-- ~~Notes~~3,105 toOther ~~the~~assets ~~Condensed~~................................................................................... ~~Consolidated~~2,082 ~~Financial~~1,887 ~~Statements~~--------- at--------- ~~December~~Total ~~31,~~non-current ~~2002~~assets ~~(unaudited)~~................................................................... 777,065 ~~ITEM~~82,669 2--------- --------- TOTAL ASSETS ...................................................................................... ~~MANAGEMENT'S~~$ ~~DISCUSSION~~137,777 ~~AND~~$ ~~ANALYSIS~~138,259 OF========= ~~FINANCIAL~~========= ~~CONDITION~~LIABILITIES AND ~~RESULTS~~STOCKHOLDERS' OFDEFICIT ~~OPERATIONS~~Current liabilities: Accounts payable ............................................................................... 24$ ~~ITEM~~6,905 3.$ ~~QUANTITATIVE~~5,848 ~~AND~~Accrued ~~QUALITATIVE~~salaries ~~DISCLOSURES~~and ~~ABOUT~~benefit ~~MARKET~~costs ~~RISK~~ ............................................................. 3314,417 ~~ITEM~~14,700 4Accrued liabilities ............................................................................ ~~CONTROLS~~8,402 ~~AND~~8,886 ~~PROCEDURES~~Liabilities of discontinued operations ......................................................... 3311,338 ~~PART~~11,716 IICurrent maturities of capital leases ........................................................... ~~OTHER~~10 ~~INFORMATION~~10 --------- --------- Total current liabilities .................................................................. 3341,072 ~~ITEM~~41,160 1--------- --------- Long-Term liabilities: Liabilities subject to compromise (Note 3) ..................................................... ~~LEGAL~~356,379 ~~PROCEEDINGS~~356,873 Capital leases ................................................................................. 3317 ~~ITEM~~20 2Liabilities of discontinued operations, net of current portion ................................. ~~CHANGES~~871 IN1,852 ~~SECURITIES~~--------- --------- Total long-term liabilities ................................................................ 39357,267 ~~ITEM~~358,745 3--------- --------- Minority interest ................................................................................. ~~DEFAULTS~~395 ~~UPON~~377 ~~SENIOR~~Stockholders' ~~SECURITIES~~equity (deficit): Series A convertible preferred stock, 5,000 authorized, none issued or outstanding at June 30, 2003 and March 31, 2003 ................................................ 39-- ~~ITEM~~-- 4Common shares, $0.001 ~~SUBMISSION~~par OFvalue, ~~MATTERS~~400,000 TOshares Aauthorized ~~VOTE~~at OFJune ~~SECURITY~~30, ~~HOLDERS~~2003 and March 31, 2003, 148,661 issued and outstanding at June 30, 2003 and March 31, 2003 ......... 149 149 Paid in capital ................................................................................ 39427,179 ~~ITEM~~427,179 5Stock subscription ............................................................................. ~~OTHER~~(4,400) ~~INFORMATION~~(4,400) Common stock options ........................................................................... 39377 ~~ITEM~~377 6Deferred compensation .......................................................................... ~~EXHIBITS~~(16) ~~AND~~(63) ~~REPORTS~~Accumulated ONdeficit ~~FORM~~............................................................................ ~~8-K~~(682,877) (683,896) Accumulated other comprehensive income ......................................................... 39(3) ~~SIGNATURES~~(3) Less: treasury shares at cost, 460 shares at June 30, 2003 and March 31, 2003 .................. (1,366) (1,366) --------- --------- Total stockholders' deficit ................................................................ 40(260,957) (262,023) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ....................................................... $ 137,777 $ 138,259 ========= =========

The accompanying notes are an integral part of these condensed consolidated financial statements. 3 MED DIVERSIFIED, INC. (Debtor-In-Possession as of November 27, 2002) Condensed Consolidated Statements of Operations For the Three Months Ended June 30, 2003 and 2002 (unaudited, in thousands, except for per share information)

~~December~~2003 ~~31, March 31,~~ 2002 ~~2002~~--------- ~~(unaudited)~~-------- ~~ASSETS~~NET ~~Current Assets~~REVENUES: ~~Cash~~Non &affiliates ~~cash~~.................................................................................... ~~equivalents~~ $ 784,~~199~~039 $ 897,~~093~~532 ~~Accounts~~Affiliates ~~receivable,~~........................................................................................ ~~net~~104 ~~47,224~~278 ~~58,806 Accounts receivable from affiliates, net 545 5,199 Inventory 1,996 2,688 Other current assets 3,530 3,196~~ ---------~~---~~ ---------~~----~~ 60Total net sales .............................................................................. 84,~~494~~143 7797,~~982~~810 ---------~~---~~ ---------~~----~~ ~~Non-Current~~COSTS ~~Assets~~AND EXPENSES: ~~Property~~Cost ~~and~~of ~~equipment,~~sales ~~net~~...................................................................................... 1446,~~999~~726 1854,~~190~~964 ~~Goodwill~~Selling, ~~net~~general ~~89,443~~and ~~89,360~~administrative ~~Investments~~(includes ~~10,453~~non-cash ~~9,865~~compensation ~~Deferred~~of ~~charges~~$45 --thousand ~~8,471~~in ~~Assets~~2003 ofand ~~discontinued~~$3.4 ~~operations~~million 2in 2002) .......................................................................... 34,~~314~~047 244,~~314~~430 ~~Intangibles~~Depreciation and ~~Other~~amortization ~~assets,~~...................................................................... ~~net 6~~1,~~972~~439 61,~~658~~464 ---------~~---~~ ---------~~----~~ ~~124~~Total costs and expenses ........................................................................ 82,~~181~~212 ~~134~~100,858 ---------~~---~~ ---------~~----~~ ~~TOTAL~~OPERATING ~~ASSETS~~INCOME $(LOSS) ~~184~~.............................................................................. 1,~~675~~931 ~~$ 212~~(3,~~840~~048) ~~============~~OTHER ~~=============~~INCOME ~~LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities~~(EXPENSE): ~~Accounts~~Interest ~~payable~~expense $(contractual ~~6,257~~interest $for ~~20,583~~the ~~Accrued~~three ~~salaries~~months ~~and~~ended ~~benefit~~June ~~costs 8~~30,~~311~~ ~~28,557~~2003 ~~Accrued~~was ~~liabilities~~$6.1 ~~3,086~~million) ~~55,981~~........................................................................................... ~~Due to government agencies -- 11~~(1,~~647~~559) ~~Related party debt -- 110~~(12,~~557~~840) ~~Liabilities~~Other ofincome ~~discontinued~~....................................................................................... ~~operations~~48 ~~10,270 10,270 Current maturities of capital leases~~ -- ~~2,012 Current maturities of long~~-~~term debt~~ -- ~~11,014~~ ------~~------~~ ---------~~----~~ ~~27,924~~INCOME ~~250,621~~(LOSS) ~~------------~~BEFORE ~~-------------~~REORGANIZATION ~~Long-Term~~ITEMS, ~~Liabilities:~~MINORITY ~~Liabilities~~INTEREST ~~subject~~AND toEQUITY ~~compromise~~IN ~~375,479~~EARNINGS --OF ~~Capital~~JOINT ~~leases,~~VENTURES ~~net~~............................................................................................. of420 ~~short~~(15,888) ~~term~~REORGANIZATION ~~obligations~~EXPENSES 30.............................................................................. 2(1,~~929~~836) ~~Debt~~ -- ~~95,427~~MINORITY ~~Related party debt -- 4~~INTEREST,~~040~~ ~~Long-term~~NET ~~debt~~OF ~~and~~TAXES ~~lease~~...................................................................... ~~commitments~~(18) of(40) ~~discontinued~~EQUITY ~~operations~~IN ~~952~~EARNINGS ~~952~~OF ~~Due~~JOINT toVENTURES ~~government~~................................................................. ~~agencies -- 42~~1,~~864~~576 ~~Other~~906 ~~liabilities 3,075 9,814~~ ---------~~---~~ ---------~~----~~ ~~379~~INCOME (LOSS) FROM CONTINUING OPERATIONS ............................................................. 142 (15,~~536~~022) ~~156~~INCOME (LOSS) FROM DISCONTINUED OPERATIONS ........................................................... 877 (1,~~026~~178) ---------~~---~~ ---------~~----~~ ~~Minority~~NET ~~interest~~INCOME ~~433~~(LOSS) ~~433~~.................................................................................... ~~Stockholders'~~$ ~~Deficit:~~1,019 ~~Common~~$ ~~shares~~(16,200) ~~149~~========= ~~146~~========= ~~Paid~~BASIC inEARNINGS ~~capital~~PER ~~427,027~~SHARE: ~~423,464~~Continuing ~~Stock~~operations ~~subscription~~........................................................................... ~~(4,400)~~$ -- $ (~~4,400~~0.10) ~~Common~~========= ~~stock~~========= ~~options~~Discontinued ~~528~~operations ~~2,565~~......................................................................... ~~Deferred~~0.01 ~~compensation~~ (~~110~~0.01) ~~(2,004)~~========= ~~Accumulated~~========= ~~deficit~~Net ~~(645,043)~~income (~~612,642~~loss) ~~Accumulated~~............................................................................... ~~other~~$ ~~comprehensive~~0.01 ~~income~~$ (30.11) ~~(3)~~========= ~~Less:~~========= ~~treasury~~WEIGHTED ~~shares,~~AVERAGE atSHARES ~~cost~~- (1BASIC ...................................................................... 148,~~366)~~661 (1146,~~366)~~804 ~~------------~~DILUTED EARNINGS PER SHARE: Continuing operations ........................................................................... $ --~~-----------~~ $ (~~223,218~~0.10) ========= ========= Discontinued operations ......................................................................... 0.01 (~~194,240~~0.01) ~~------------~~========= ~~-------------~~========= ~~TOTAL~~Net ~~LIABILITIES~~income ~~AND~~(loss) ~~STOCKHOLDERS'~~............................................................................... ~~DEFICIT~~ $ ~~184,675~~0.01 $ ~~212,840~~(0.11) ========= ========= WEIGHTED AVERAGE SHARES - DILUTED .................................................................... 149,795 146,804 ========= =========

The accompanying notes are an integral part of these condensed consolidated financial statements. 4 MED DIVERSIFIED, INC. (Debtor-In-Possession as of November 27, 2002) Condensed Consolidated Statements of Cash Flows For the Three Months Ended June 30, 2003 and 2002 (unaudited, in thousands)

2003 2002 ~~2001~~ ---------~~---~~ --------~~-----~~ ~~NET~~CASH ~~REVENUES~~FLOWS FROM OPERATING ACTIVITIES: ~~Non~~Net ~~affiliates~~income (loss) ................................................................................ $ 891,~~649~~019 $(16,200) 55(Gain) loss from discontinued operations ......................................................... (877) 1,~~084~~178 ~~Affiliates~~Minority ~~195~~interest ~~128~~................................................................................ ~~------------~~18 ~~-------------~~40 ~~Total~~Adjustments ~~Net~~to ~~Revenues~~reconcile ~~89,844~~net ~~55,212~~income ~~------------~~(loss) ~~-------------~~from ~~COSTS~~continuing ~~AND~~operations ~~EXPENSES~~to net cash used in continuing operations: ~~Cost~~Loss on disposal of ~~sales~~fixed ~~51,750~~assets 33................................................................. 144 13 Equity in joint ventures ......................................................................... (1,~~160~~576) ~~Selling~~(906) Non cash compensation ............................................................................ 47 3,384 ~~general~~Impairment charges and ~~administrative~~other ~~(includes~~ non cash ~~Compensation~~expenses of................................................... $3-- 349 Depreciation and amortization .9................................................................... ~~million~~1,439 in1,464 ~~2001)~~Provision 37for doubtful accounts .................................................................. 1,~~400~~647 31791 Deferred financing fees .......................................................................... -- 5,~~920~~896 ~~Depreciation~~Net change in assets and ~~amortization~~liabilities affecting operations, net of acquisitions: Accounts receivable and affiliated receivables ................................................ (21) 1,~~518~~837 Prepayments and other assets .................................................................. (690) (3,~~573~~381) Accounts payable and accrued liabilities ...................................................... 536 (10,255) Other liabilities ............................................................................. 65 1,763 --------~~----~~ --------~~-----~~ ~~Total~~Net ~~Costs~~cash ~~and~~provided ~~Expenses~~by 90(used in) operating activities .............................................. 1,~~668~~751 68(14,~~653~~027) --------~~----~~ --------~~-----~~ ~~OPERATING~~CASH ~~LOSS~~FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ............................................................................. (~~824~~217) (~~13,441~~252) ~~OTHER~~Change ~~INCOME~~in ~~(EXPENSE):~~assets ~~Interest~~and ~~expense~~liabilities -of discontinued operations, net ................................. (~~contractual~~1,301) ~~interest~~-- ~~for~~Restricted ~~the~~cash ~~three~~received ~~(5,228)~~from ~~(14,005)~~sale ~~months~~of ~~ended~~discontinued ~~December~~operations 31.................................... 1,250 ~~2002~~-- ~~was~~Distributions $6received .7.......................................................................... ~~million)~~30 ~~Other~~1,206 ~~139~~Distributions ~~(52)~~from joint ventures subject to restriction.......................................... 2,874 -- -------- -------- Net cash provided by investing activities ........................................................ 2,636 954 -------- -------- ~~LOSS~~CASH ~~BEFORE~~FLOWS ~~REORGANIZATION~~FROM ~~ITEMS,~~FINANCING ~~INCOME~~ACTIVITIES: ~~TAXES,~~Net ~~MINORITY~~payments ~~INTEREST~~on ~~AND~~long-term ~~EQUITY~~debt INand ~~EARNINGS~~related OFparty ~~JOINT~~debt, ~~VENTURES~~net ....................................... (~~5,913~~752) (~~27,498~~848) ~~REORGANIZATION~~Net ~~ITEMS~~repayments ~~(337)~~of --capital ~~MINORITY~~lease ~~INTEREST,~~obligations ~~NET~~...................................................... OF(55) ~~TAXES~~(516) 13Net ~~267~~borrowings ~~EQUITY~~under INfactoring ~~EARNINGS~~facility OF.......................................................... ~~JOINT~~-- ~~VENTURES 1~~16,~~499~~800 ~~1,579~~ --------~~----~~ --------~~-----~~ ~~NET~~Net ~~LOSS~~cash ~~FROM~~provided ~~CONTINUING~~by ~~OPERATIONS~~ (~~4,738~~used in) financing activities .............................................. (~~25,652~~807) 15,436 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS .............................................................. 3,580 2,363 -------- -------- ~~NET~~CASH ~~LOSS~~AND $CASH (4EQUIVALENTS,~~738)~~ $BEGINNING ~~(25,652)~~OF ~~============~~THE ~~=============~~PERIOD ~~BASIC~~................................................. ~~EARNINGS~~10,072 ~~PER~~8,008 ~~SHARE:~~-------- ~~Continued~~-------- ~~Operations~~CASH $AND ~~(0.03)~~CASH $EQUIVALENTS, ~~(0.26)~~END ~~============~~OF ~~=============~~THE ~~Net~~PERIOD ~~Loss~~....................................................... $ ~~(0.03)~~13,652 $ ~~(0.26)~~10,371 ========~~====~~ ========~~=====~~ ~~WEIGHTED AVERAGE SHARES~~ NON-CASH ~~BASIC~~TRANSACTIONS: ~~149,837~~Liabilities ~~99,429~~assumed ~~FULLY~~by ~~DILUTED~~purchaser ~~EARNINGS~~of ~~PER~~discontinued ~~SHARE~~operations ~~FOR: Continuing Operations $ (0~~.~~03) $ (0~~.~~28)~~.................................... ~~============ ============= Net Loss~~ $ ~~(0.03)~~1,421 $ ~~(0.28)~~-- ========~~====~~ ========~~===== WEIGHTED AVERAGE SHARES - FULLY DILUTED 148,662 92,621~~

The accompanying notes are an integral part of these condensed consolidated financial statements. 5 MED DIVERSIFIED, INC. (Debtor-In-Possession as of November 27, 2002) Notes to Condensed Consolidated Financial Statements at June 30, 2003 (unaudited) 1) NATURE OF OPERATIONS, BASIS OF PRESENTATION, GOING CONCERN AND SIGNIFICANT ACCOUNTING POLICIES Med Diversified, Inc. is a diversified healthcare company that provides home healthcare and alternate site healthcare, skilled nursing, and pharmacy management and distribution services to more than 126,000 patients in 29 states. We provide all products and services through a national network of owned and franchised locations. On November 27, 2002 (the "Petition Date"), we and five of our domestic, wholly owned subsidiaries, Chartwell Diversified Services, Inc. ("Chartwell"), Chartwell Community Services, Inc. ("CCS"), Chartwell Care Givers, Inc. ("CCG"), Resource and Trestle Corporation ("Trestle") (collectively, the "Med Debtors"), filed voluntary petitions in the United States Bankruptcy Court for the Eastern District of New York (the "Bankruptcy Court") under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). The reorganization cases are being jointly administered under the caption "In re Med Diversified, Inc., et al., Case No. 8-02 88564." The Med Debtors continue to operate their businesses as debtors-in-possession, subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court while a plan of reorganization is formulated. As a debtor-in-possession, we are authorized to operate our business, but may not engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Court. On November 8, 2002, our wholly owned subsidiary, Tender Loving Care Health Care Services, Inc. ("TLCS"), along with nineteen of TLCS' subsidiaries (the "TLCS Debtors"; collectively, with the Med Debtors, the "Debtors"), filed voluntary petitions in the Bankruptcy Court under the Bankruptcy Code. The TLCS reorganization cases are being jointly administered under the caption "In re Tender Loving Care Health Care Services, Inc., et al., Case No. 8-02-88020." TLCS continues to operate its business as a debtor-in-possession, subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court while a plan of reorganization is formulated. As a debtor-in-possession, TLCS is authorized to operate its business, but may not engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Court. TLCS has not needed to obtain any debtor-in-possession financing. The Med and TLCS Debtors' bankruptcy proceedings are each being separately administered by the Bankruptcy Court. The TLCS Debtors' operations represented approximately 67.4% of our consolidated net sales for the quarter ended June 30, 2003. BASIS OF PRESENTATION AND GOING CONCERN The unaudited condensed consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for our fiscal year ended March 31, 2003. The condensed consolidated financial statements, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly our financial position and the results of operations. These results are not necessarily indicative of the results to be expected for the entire year. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and settlement of liabilities and commitments in the ordinary course of business. However, as a result of the Bankruptcy proceedings and circumstances relating thereto, including our leveraged financial structure and cumulative losses from operations, such realization of assets and settlement of liabilities are subject to significant uncertainty. During the pendency of the Bankruptcy proceedings, we may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Furthermore, a plan or plans of reorganization could materially change the amounts reported in the condensed consolidated financial statements, which do not give effect to any adjustments of the carrying value of assets or liabilities that might be necessary as a consequence of a plan or plans of reorganization. Our ability to continue as a going concern is dependent upon, among other things, confirmation of a plan or plans of reorganization, future profitable operations, the ability to comply with the terms of our financing agreements and the ability to generate sufficient cash from operations and/or financing arrangements to meet its obligations and capital asset expenditure requirements. 6 The accompanying condensed consolidated financial statements have also been presented in conformity with the American Institute of Certified Public Accountants (the "AICPA") Statement of Position ("SOP") 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE ("SOP 90-7"). The statement requires a segregation of liabilities subject to compromise by the Bankruptcy Court as of the Petition Date and identification of all transactions and events that are directly associated with our reorganization. Pursuant to SOP 90-7, pre-petition liabilities are reported on the basis of the expected amounts of such allowed claims, as opposed to the amounts for which claims may be settled. Under a confirmed final plan of reorganization, those claims may be settled at amounts substantially less than their allowed amounts. Our history of recurring operating losses, liquidity issues and the bankruptcy proceedings raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern and the appropriateness of using the going concern basis of accounting depends upon, among other things, the ability to comply with the terms of the debtor-in-possession financing arrangement with Sun Capital Healthcare, Inc. ("Sun Capital") confirmation of a plan of reorganization, success of future operations after such confirmation and the ability to generate sufficient cash from operations and financing sources to meet obligations. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies we followed in preparing our financial statements are set forth in Note 2 to the financial statements included in our Annual Report Form 10-K for the year ended March 31, 2003. We have made no changes to these policies during this quarter, except as noted below. In May 2003, with the approval of the Bankruptcy Court, we sold certain assets and liabilities of Trestle, our wholly owned subsidiary, which made up our Distance Medicine Business Segment. The results of the operations of Trestle have been reported as discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS ("SFAS No. 144") (see Note 7). Unless otherwise indicated, amounts in the following notes exclude the effect of discontinued operations. Certain other reclassifications have also been made to amounts from prior years to conform to the 2003 presentation. BASIC AND DILUTED LOSS PER SHARE In accordance with SFAS No. 128, COMPUTATION OF EARNINGS PER SHARE ("SFAS No. 128"), basic earnings per share is computed by dividing the net earnings available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net earnings for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, consisting of incremental common shares issuable upon the exercise of stock options and warrants, are excluded from the diluted earnings per share calculation if their effect is anti-dilutive. A summary of the shares used to compute the net income (loss) per share is as follows (unaudited, in thousands):

~~2002~~THREE ~~2001~~MONTHS ~~------------~~ENDED ~~-------------~~JUNE ~~NET REVENUES: Non affiliates $ 283~~30,~~122~~ $2003 105,461 Affiliates 725 2,441 ------------ ------------- Total Net Revenues 283,847 107,902 ------------ ------------- COSTS AND EXPENSES: Cost of sales 161,674 71,343 Selling, general and administrative (includes non-cash compensation of $4.9 million in 2002 ~~and $42.4 million in 2001) 128,323 107,698 Asset impairment charge 349 11,635 Depreciation and amortization 4,463 6,075~~ ------------ --~~-----------~~ ~~Total Costs and Expenses 294,809 196,751~~ ------------ --~~-----------~~ ~~OPERATING~~Weighted ~~LOSS~~average ~~(10,962)~~common ~~(88,849)~~shares ~~OTHER~~used ~~INCOME~~to ~~(EXPENSE):~~compute ~~Interest~~basic ~~expense-~~ net ~~(contractual~~income ~~interest for the nine~~ (~~25,341~~loss) ~~(21,013)~~per ~~months~~share ~~ended December 31~~148,661 ~~2002 was $26.8 million) Other 946 (2~~146,~~441)~~804 ~~------------~~Effect ~~-------------~~of ~~LOSS~~dilutive ~~BEFORE~~securities ~~REORGANIZATION ITEMS, INCOME TAXES, MINORITY INTEREST AND EQUITY IN EARNINGS OF JOINT VENTURES (35,357) (112,303) REORGANIZATION ITEMS (337) -- MINORITY INTEREST, NET OF TAXES~~ 1 ~~695 EQUITY IN EARNINGS OF JOINT VENTURES 3~~,~~292~~134 ~~2,165~~ --~~----------~~ --------~~-----~~ ~~NET LOSS FROM CONTINUING OPERATIONS (32,401) (109,443) NET LOSS FROM DISCONTINUED OPERATIONS~~ -- ~~(3,383)~~ -----~~-------~~ ~~-------------~~Weighted ~~NET~~average ~~LOSS~~common $shares ~~(32,401)~~used $to ~~(112,826)~~compute ~~============~~diluted ~~=============~~net ~~BASIC~~income ~~EARNINGS PER SHARE: Continuing Operations $~~ (~~0.22~~loss) $per ~~(1.24)~~share ~~============ ============= Discontinued Operations $ -- $ (0.04) ============ ============= Net Loss $ (0.22) $ (1.28) ============ ============= WEIGHTED AVERAGE SHARES - BASIC~~ 149,~~946~~795 88146,~~143~~804 ~~FULLY DILUTED EARNINGS PER SHARE FOR: Continuing Operations $ (0.22) $ (1.28)~~ =======~~=====~~ =======~~====== Discontinued Operations $ -- $ (0.04) ============ ============= Net Loss $ (0.22) $ (1.32) ============ ============= WEIGHTED AVERAGE SHARES - FULLY DILUTED 147,574 85,702~~

As of June 30, 2003 and 2002, options and warrants to purchase approximately 63.8 million and 56.4 million shares of common stock were outstanding, respectively. The common stock equivalents that were anti-dilutive were excluded from the computation of diluted loss per share for the three months ended June 30, 2002 as such options and warrants were anti-dilutive. In accordance with SFAS No. 128, the Company has included certain options and warrants to acquire shares in fully diluted earnings per share because they are issuable for little or no cash consideration. 7 STOCK-BASED COMPENSATION As allowed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS No. 123"), we elected to account for stock-based compensation at intrinsic value with disclosure of the effects of fair value accounting on net loss and net loss per share on a pro forma basis. At June 30, 2003, we had two stock incentive plans. We account for awards issued to employees under the plan using the recognition and measurement principles of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. No compensation expense has been recognized in connection with its stock option plans, as all options granted under the plan had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and net income (loss) per share had we adopted the fair value recognition provisions of SFAS No. 123 (unaudited, in thousands, except per share information):

~~2002~~THREE ~~2001~~MONTHS ENDED JUNE 30, 2003 2002 ---------~~---~~ ----------~~---~~ ~~CASH FLOWS FROM OPERATING ACTIVITIES:~~ Net ~~loss~~income $ (~~32,401~~loss) ~~$ (112~~,~~826)~~ ~~Loss~~as ~~from~~reported ~~discontinued~~$ ~~operations -- 3,383 Minority interest~~ 1 ~~(696) Equity with loss of deconsolidated subsidiary -- 931 Loss on disposal of fixed assets 438 2~~,~~418~~019 ~~Adjustments~~$ ~~to reconcile loss from continuing operations to net cash used in continuing operations: Equity in joint venture~~ (316,~~292~~200) ~~(2,165)~~Deduct: ~~Non~~total ~~cash compensation 4,876 25,481 Impairment charges and other non cash expenses 1,164 11,635 Depreciation and Amortization 4,463 5,654 Provision for doubtful accounts 4,640 4,373 Interest on preferred~~ stock --based ~~5,836~~employee ~~Amortization~~compensation ofexpense ~~deferred~~determined ~~financing~~under ~~fees~~fair ~~5,896~~market ~~4,616~~value ~~Issuance~~based ofmethod ~~restricted shares and warrants~~ for ~~services~~all ~~provided -- 16~~awards,~~925~~ ~~Net change in assets and liabilities affecting operations,~~ net of ~~acquisitions:~~related ~~Accounts~~tax ~~receivable~~effects ~~and affiliated receivables 12,128~~ (~~6,704~~5) ~~Inventory 692 424 Prepayments and other assets 3,684~~ (7~~,261~~) ~~Accounts payable and accrued liabilities (29,115) 10,859 Other liabilities (4,648)~~ -- ~~Deferred revenue 1,719 61~~ -------~~-----~~ ----------~~---~~ ~~Net~~Pro ~~cash~~forma ~~used~~net inincome ~~operating activities~~ (~~29,755~~loss) ~~(37,056)~~$ ~~------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (860) (~~1,~~176)~~014 ~~Cash~~$ ~~from deconsolidated subsidiary --~~ (216,~~471~~207) ~~Cash~~========= ~~advances~~========== toEarnings ~~discontinued operations --~~ (~~132~~loss) ~~Investment~~per in software -- (1,037) Cash used in acquisitions, net -- (3,171) Distributions received 2,605 2,196 ------------ ------------- Net cash (used in) provided by investing activities 1,745 (5,791) ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIESshare: ~~Payments on long-term debt and related party debt-net (1~~Basic,~~399)~~ --as ~~Proceeds~~reported ~~from~~$ ~~long-term~~0.01 ~~debt~~$ ~~and related party debt -- 46,832 Net repayments of capital lease obligations~~ (~~731~~0.48) ~~(133)~~========= ~~Net~~========== ~~borrowings under factoring facility 29~~Basic,~~246~~ --pro ~~Treasury~~forma ~~stock~~$ ~~purchases~~0.01 --$ (~~324~~0.48) ~~Proceeds~~========= ~~from~~========== ~~exercise of stock options -- 861 ------------ ------------- Net cash provided by financing activities 27~~Diluted,~~116~~ ~~47,236~~as ~~INCREASE~~reported ~~(DECREASE)~~$ IN0.01 ~~CASH~~$ ~~AND CASH EQUIVALENTS~~ (~~894~~0.48) ~~4,389~~========= ~~------------~~========== ~~------------- CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 8~~Diluted,~~093~~ ~~2,061~~pro ~~------------~~forma ~~------------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD~~ $ ~~7,199~~0.01 $ ~~6,450~~(0.48) =========~~===~~ ==========~~===~~

We estimated the fair value on the date of grant using the Black-Scholes Option Pricing Model. The following assumptions were used for each reporting period.

~~Three~~THREE ~~Months~~MONTHS ~~Ended~~ENDED ~~Nine~~JUNE ~~Months Ended December 31~~30, ~~2002~~2003 ~~December 31,~~ 2002 ~~NET REVENUES $ 87,827 $ 276,843 COST AND EXPENSES Cost of Sales 50,298 157,031 Selling, General and Administrative 36,785 125,831 Asset Impairment Charge~~ -- ~~349 Depreciation and Amortization 1,430 4,298~~ -------~~---~~ ---------- ~~Total~~Risk ~~Cost~~free ~~and~~interest ~~Expense~~rate ~~88,513~~3.70% ~~287,509~~4.39% ~~----------~~Expected ~~----------~~option ~~OPERATING~~lives ~~LOSS $~~ (~~686)~~in ~~$ (10,666~~years) ~~OTHER~~7.69 ~~INCOME~~8.04 ~~(EXPENSE)~~Expected ~~Interest~~volatility ~~Expense-net~~123% ~~(5,226)~~76% ~~(25,337)~~Expected ~~Other~~dividend ~~144~~yield ~~947~~ --~~--------~~% --~~-------- NET LOSS BEFORE REORGANIZATION ITEMS $ (5,768) $ (35,056) REORGANIZATION ITEMS (337) (337) ---------- ---------- NET LOSS $ (6,105) $ (35,393) ========== ==========~~%

RECENT ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 149"), which amends SFAS No. 133 for certain decisions made by the FASB Derivatives Implementation Group. In particular, SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an "underlying" (which is a market value guarantee) to conform it to language used in FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS and (4) amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, most provisions of SFAS 149 are to be applied prospectively. We do not expect the adoption of SFAS 149 to have a material impact upon our financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("SFAS No. 150"). This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. This statement does not result in any material change to our existing reporting. 2) PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE EVENTS LEADING TO BANKRUPTCY As has been previously disclosed in our public filings, we had, up until October 2002, been long dependent on National Century Financial Enterprises, Inc. ("NCFE") to provide us financing for current operations under various Sales and Subservicing Agreements. In or around October 2002, NCFE began to suffer financial difficulties after an ongoing audit revealed financial inaccuracies in NCFE's accounting. During the week of October 14, 2002, we submitted receivables for sale to NCFE under the terms of the Sales and Subservicing Agreements, but did not receive funding from NCFE for those sales. NCFE never resumed funding after that point, resulting in a breach of their obligations under the various Sales and Subservicing Agreements. Nevertheless, through the end of October, NCFE continued to assure us that funding would resume and we acted in reliance on those assurances. The resulting cash shortages caused us to fail to meet certain vendor obligations when they became due and caused us eventually to default on certain obligations to Private Investment Bank, Ltd. ("PIBL"). NCFE continued to fail to meet its funding obligations, having a materially adverse effect on our operations. This forced our subsidiary, TLCS, to file for bankruptcy protection on November 8, 2002 in the Bankruptcy Court. During this period, NCFE interpreted the terms of the Sales and Subservicing Agreements to mean that it had a security interest in any accounts receivable of ours, even if we had not submitted such accounts to NCFE for sale. We disagree with this interpretation. We believe that, at most, NCFE had a security interest in future accounts receivable only to the extent that we might have owed NCFE servicing fees. NCFE's continued intransigence regarding this interpretation inhibited our ability to arrange for alternate sources of financing, because few lenders would be willing to finance us if they were unable to take an undisputed first priority security interest in our accounts receivable. NCFE and certain of its affiliates filed for bankruptcy protection on November 18, 2002 in the United States Bankruptcy Court for the Southern District of Ohio, Eastern Division. In NCFE's Chapter 11 proceeding and in other venues prior to the filing of 8 the NCFE bankruptcy, NCFE's counsel sought temporary restraining orders restricting our ability to access cash held by NCFE and cash that we collected on our own account. Because of immediate cash needs and in order to obtain the ability to access necessary cash and move forward with a new financing partner, the Med Debtors filed for bankruptcy on November 27, 2002. REORGANIZATION As noted previously, the Debtors are operating their businesses as debtors-in-possession, subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court while a plan of reorganization is formulated. As such, the Debtors are authorized to operate their business, but may not engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Court. Soon after the Chapter 11 filings, the Debtors notified all known or potential creditors, in an effort to identify and quantify all pre petition claims against them (please note that the bar date for the filing of proofs of claim of our creditors for each of the Med Debtors and TLCS Debtors has passed). As a result of the Debtors' filings, substantially all of their indebtedness and lease obligations went into technical default. The Chapter 11 filings, however, automatically stayed or enjoined the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date, subject to certain exceptions under the Bankruptcy Code. For example, those creditor actions that seek to obtain property, or those that seek to create, perfect or enforce any lien against property of the Debtors, or those that seek to exercise rights or remedies with respect to a pre-petition claim, are enjoined. Such claims may proceed only if the Bankruptcy Court grants relief from the automatic stay. Under the Bankruptcy Code, actions to collect pre petition indebtedness, as well as most other pending litigation, are stayed and other contractual obligations against the Debtors generally may not be enforced, absent an order of the Bankruptcy Court. At hearings held on December 2, 2002, December 9, 2002 and December 20, 2002 the Bankruptcy Court granted the Med Debtors' various motions to stabilize their operations and business relationships with customers, vendors, employees and others. The Court granted the Med Debtors authority to, among other things: (a) pay certain pre-petition and post-petition employee wages, salaries, benefits, and other employee obligations; (b) pay vendors and other providers in the ordinary course of business for goods and services received from and after the Petition Date, and other similar agreements. The Bankruptcy Court also gave interim and final approval for use of cash collateral. On November 12, 2002, the Bankruptcy Court granted TLCS the authority to: (a) maintain and continue to use its existing bank accounts without interruption and in the ordinary course of business; (b) continue to use existing business forms, including checks and other documents; and (c) collect and utilize cash collateral on an interim basis pending further hearings before the Bankruptcy Court. Since November 12, 2002, TLCS has maintained the authority to use cash collateral and continued to operate its business in the ordinary course. TLCS has taken affirmative steps to stabilize its business and preserve assets for the benefit of its creditors. Within its rights under the applicable provisions of the Bankruptcy Code, TLCS has eliminated certain unnecessary or burdensome obligations under various leases and contracts. DEBTOR-IN-POSSESSION FINANCING With regard to the Med Debtors, the Bankruptcy Court, by order dated December 23, 2002, approved a Debtor-In-Possession Master Purchase and Sale Agreement ("DIP Facility") between certain of our subsidiaries in bankruptcy, including Chartwell, CCG, CCS and Resource and Sun Capital. This secured debtor-in-possession financing arrangement was approved for the payment of certain permitted pre-petition claims, working capital needs and other general corporate purposes. It also provided a source of outside financing in order for us to make up potential gaps in our cash flow during the course of our bankruptcy. Under the DIP Facility, certain of our subsidiaries can sell accounts receivable to Sun Capital. After such sale, Sun Capital factors the receivables and submits an advance to the subsidiary selling the receivable. The advance is net of offsets based on a history of collections for the receivable or receivables submitted and a contractually permitted reserve amount. The receivables (in addition to other receivables not sold to Sun Capital but forwarded to Sun Capital in order to provide adequate collateral) then are sent to lockbox accounts controlled by Sun Capital. Sun Capital collects the receivables and provides a reconciliation of them to show which receivables have been collected and which have not. We pay at a daily percentage rate of .075% for each day a factored receivable remains uncollected, which is equivalent to an annual percentage rate of 27%. Any non-factored receivables are maintained in a reserve account at Sun Capital and are available as cash disbursements. During the quarter ended June 30, 2003, CCG sold approximately $6.2 million worth of receivables to Sun Capital and received advances in the amount of $4.9 million. Receivables sold in excess of advances are reported net of fees in prepayments and other assets in our Condensed Consolidated Balance Sheet in our Form 10-Q for the quarter ended June 30, 2003. 9 DEVELOPMENT OF A PLAN OF REORGANIZATION The Debtors are developing a plan of reorganization through negotiations with their respective key creditor constituencies. A substantial portion of all pre-petition liabilities are subject to settlement under such a plan of reorganization to be voted upon by the Debtors' creditors, and subject to confirmation by the Bankruptcy Court. No assurance can be given regarding the timing of such a plan, the likelihood that such a plan will be developed, or the terms on which such a plan may be conditioned. Although the Debtors expect to file a reorganization plan that provides emergence from Chapter 11 during 2003, there can be no assurances that a plan of reorganization will be proposed by the Debtors, or approved by the requisite creditors, or confirmed by the Bankruptcy Court, or that any such plan will be consummated. The Med Debtors had the exclusive right to file a plan of reorganization during the 120 days after the Petition Date until March 27, 2003. We sought and received by order of the Bankruptcy Court, extensions to this exclusivity period. We now have until September 30, 2003 to file the plan. Our creditors have until October 31, 2003 to approve such plan. TLCS filed for two extensions of the exclusivity period and the Bankruptcy Court approved such extension until September 7, 2003. A plan of reorganization is deemed accepted by holders of claims against and equity interests in the Debtors if (i) at least one-half in number and two-thirds in dollar amount of claims actually voting in each impaired class of claims have voted to accept the plan; and (ii) at least two-thirds in amount of equity interests actually voting in each impaired class of equity interests have voted to accept the plan. The Bankruptcy Court may confirm a plan of reorganization notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. For example, if a class of claims or equity interests does not receive or retain any property under the plan, such claims or interests are deemed to have voted to reject the plan. The precise requirements and evidentiary showing for confirming a plan notwithstanding its rejection by one or more impaired classes of claims or equity interests, depends upon a number of factors. Such factors include the status and seniority of the claims or equity interest in the rejecting class (i.e., secured claims or unsecured claims, subordinated or senior claims, preferred or common stock). Generally, with respect to common stock interests, a plan may be "crammed down" if the proponent of the plan demonstrates that (i) the common stock holders are receiving the value of their common stock interests or no class junior to the common stock is receiving or retaining property under the plan and (ii) no class of claims or interests senior to the common stock is being paid more than in full. As required by the Bankruptcy Code, the United States Trustee has appointed official committees of unsecured creditors for TLCS, the Company and CCG (the "Official Committees"). The Official Committees, through their legal representatives, have a right to be heard on all matters that come before the Bankruptcy Court. There can be no assurances that the Official Committees will support the Debtors' positions in the reorganization cases or the plan of reorganization once proposed. Disagreements among the Debtors and the Official Committees could protract the reorganization cases, negatively impacting the Debtors' ability to operate during their Chapter 11 cases, thus, possibly delaying the Debtors' emergence from Chapter 11. On December 22, 2002, the TLCS Debtors filed, and on January 13, 2003, the Med Debtors filed with the Bankruptcy Court schedules and statements of financial affairs setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions contained in certain notes filed in connection therewith. Subsequent to the filing of the schedules and statements of financial affairs, the Med Debtors filed several amendments, setting forth potential creditors who were inadvertently omitted. All of the schedules are subject to further amendment or modification, if necessary. The initial deadline for filing proofs of claim against the Med Debtors with the Bankruptcy Court was April 21, 2003, with limited exceptions for governmental entities. The deadline for the additional creditors to file claims against the Med Debtors, pursuant to the amended schedules, is set for September 2, 2003. The deadline for filing proofs of claim against the TLCS Debtors with the Bankruptcy Court was May 30, 2003, with limited exceptions for governmental entities. Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and resolved in connection with the claims resolution process. That process has commenced, and in light of the number of the Debtors' creditors, may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known and, because the settlement terms of such allowed claims are subject to a confirmed plan of reorganization, the ultimate distribution with respect to allowed claims cannot be presently ascertained. EFFECTS OF CHAPTER 11 ON OUR BUSINESS The potential adverse publicity associated with the Chapter 11 filings and the resulting uncertainty regarding our future may hinder our ongoing business activities and our ability to operate, fund and execute our business plan. Such potential negative publicity may impair relations with existing and potential customers, negatively impact our ability to attract and retain key employees, limit our ability to obtain trade credit and impair present and future relationships with vendors and service providers. As a result of the Chapter 11 filings, the realization of assets and the liquidation of liabilities are subject to uncertainty. While operating as debtors-in-possession under the protection of the Bankruptcy Code, and while subject to Bankruptcy Court approval or 10 otherwise as permitted in the normal course of business, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization. Under the system of priorities of claim established by the Bankruptcy Code, unless creditors agree otherwise, pre- and post-petition liabilities must be satisfied in full before shareholders are entitled to receive any distribution or retain any property under a plan. The ultimate recovery to creditors and/or common shareholders, if any, will not be determined until confirmation of a plan or plans of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 cases to each of these constituencies, or what types or amounts of distributions, if any, they will receive. A plan of reorganization could result in holders of our common stock receiving no distribution on account of their interests and cancellation of their existing stock. The value of the common stock is highly speculative. We urge that appropriate caution be exercised with respect to existing and future investments in our securities and the securities of the other Debtors. REORGANIZATION EXPENSES Reorganization expenses represent the net amounts we incurred as a direct result of the Chapter 11 filing and are presented separately in the Condensed Consolidated Statements of Operations. We incurred and will continue to incur significant costs associated with the reorganization. The amount of these costs, which are being expensed as incurred, are expected to significantly and adversely affect our results of operations. Reorganization expenses included in our Condensed Consolidated Statement of Operations for the three months ended June 30, 2003 consist of the following (unaudited, in thousands):

3Professional ~~Months~~services ~~Ended~~$ 91,638 ~~Months~~Other ~~Ended~~reorganization ~~December~~costs ~~31,~~143 ~~2001~~United ~~December~~States ~~31,~~Trustee ~~2001~~filing ~~-----------------~~fees 55 -------~~----------~~ ~~Net sales.........................................~~ $ 891,~~674~~836 $ 309,654 Costs and expenses................................ 136,238 444,682 Depreciation and amortization .................... 6,828 25,693 Net loss from continuing operations............... (75,792) (212,725) Net loss from continuing operations per share .... $ (0.76) $ (1.52)=======

3) LIABILITIES SUBJECT TO COMPROMISE "Liabilities subject to compromise" refers to liabilities incurred prior to the commencement of the Chapter 11 filings. These liabilities, consisting primarily of related-party and long-term debt, certain accounts payable and accrued liabilities, represent management's estimate of known or potential pre-petition claims to be resolved in connection with the Chapter 11 filings. Under the Bankruptcy Code, the Debtors may assume, assume and assign, or reject executory contracts and unexpired leases, including leases of real and personal property, subject to the approval of the Bankruptcy Court and certain other conditions. Rejection constitutes a court-authorized breach of the lease or contract in question and, subject to certain exceptions, relieves the Debtors of their future obligations under such lease or contract, but creates a deemed pre-petition claim for damages caused by such breach or rejection. Parties whose contracts or leases are rejected may file claims against the rejecting Debtor for damages. Generally, the assumption, or assumption and assignment, of an executory contract or unexpired lease requires the Debtors to cure all prior defaults under such executory contract or unexpired lease, including all pre-petition arrearages, and to provide adequate assurance of future performance. In this regard, we expect that liabilities subject to compromise and resolution in the Chapter 11 case will arise in the future as a result of claims for damages created by the Debtors' rejection of various executory contracts and unexpired leases. Conversely, we would expect that the assumption, or assumption and assignment, of certain executory contracts and unexpired leases might convert liabilities shown as subject to compromise, into liabilities not subject to compromise. Under bankruptcy law, actions by creditors to collect indebtedness we owed prior to the Petition Date are stayed and certain other pre-petition contractual obligations may not be enforced against the Debtors. We have received approval from the Court to pay certain pre-petition liabilities including employee salaries and wages, benefits and other employee obligations. Adjustments to the claims may result from negotiations, payments authorized by Court order, additional rejection of executory contracts including leases or other events. Pursuant to an order of the Court, we mailed notices to all known creditors that the deadline for filing proofs of claim with the Court was April 21, 2003 for the Med Debtors and May 30, 2003 for the TLCS Debtors. For the Med Debtors, an estimated 647 claims were filed as of June 20, 2003 out of an estimated 10,276 notices sent to constituents. For the TLCS Debtors, an estimated 11 1,102 claims were filed as of May 30, 2003 out of an estimated 22,088 notices sent to constituents. Amounts that we recorded are in many instances different from amounts filed by our creditors. Differences between amounts scheduled by us and claims by creditors are being investigated and resolved in connection with our claims resolution process. Until the process is complete, the ultimate number and amount of allowable claims cannot be ascertained. In this regard, it should be noted that the claims reconciliation process may result in material adjustments to current estimates of allowable claims. The ultimate resolution of these claims will be based upon the final plan of reorganization. The following table summarizes the components of liabilities subject to compromise in our Condensed Consolidated Balance Sheets as of June 30, 2003 and March 31, 2003 (in thousands):

~~December~~JUNE 3130, ~~2002~~2003 ~~March~~MARCH 31, ~~2002~~2003 -----------~~------~~ -------------- (UNAUDITED) Long Term Debt Borrowings under credit facility............................ $ ~~125~~122,~~377~~237 $ ~~106~~122,~~111~~989 Notes payable related to acquisitions....................... 32,~~059~~892 32,~~325~~892 Term ~~Notes~~notes.................................................. 28,679 28,679 ~~Debenture~~Debentures.................................................. 57,300 57,300 Debentures held by related party............................ 12,500 ~~-- Debentures 57~~12,~~300~~500 ~~70,000~~ Other notes payable......................................... 16,~~275~~893 1216,~~077~~893 ---------~~---~~ ---------~~---~~ Total ~~243~~debt.............................................. 240,~~190~~501 ~~220~~241,~~192~~253 ~~Less:~~Due ~~current~~to ~~portion~~government --agencies.................................. ~~(121~~50,~~571)~~299 ~~------------~~50,230 ~~------------~~Related ~~243~~party liability..................................... 2,~~190~~337 982,~~621~~337 ~~Less:~~Lease ~~debt~~obligations........................................... ~~subject~~10,138 to10,189 ~~compromise~~Accounts ~~(243~~payable and vendor obligations..................... 16,~~190)~~427 --16,671 ~~Market~~Accrued ~~premium~~salaries onand ~~term~~related ~~notes~~benefit --costs.................. ~~846~~16,034 16,308 Accrued interest............................................ 5,658 4,609 Other accrued expenses...................................... 14,985 15,276 --------- --- ------ Total liabilities....................................... 115,878 115,620 --------- ~~Long~~-~~term~~-------- ~~portion~~Total of debt and ~~related~~liabilities ~~party~~subject ~~debt~~to compromise.... $ --356,379 $ 99356,~~467~~873 =========~~===~~ =========~~===~~

Approximately $303.9 million and $296.2 million at June 30, 2003 and March 31, 2003, respectively, would have been classified as current liabilities if the Chapter 11 petitions had not been filed. Filing a petition generally causes the payment of unsecured or undersecured liabilities to be prohibited before the plan is confirmed. The Chapter 11 reorganization ending in confirmation of a plan typically takes more than one year or one operating cycle, if longer. Therefore, we classified all debt and liabilities subject to compromise as long term. In accordance with SOP 90-7, we discontinued accruing interest relating to certain debt currently classified as liabilities subject to compromise effective November 8, 2002 for the TLCS Debtors and November 27, 2002 for the Med Debtors. Thus, contractual interest for the three months ended June 30, 2003 was $6.1 million, which is $4.5 million in excess of interest included in the accompanying financial statements. DIVESTITURE The Bankruptcy Code provides a mechanism by which the Debtors may abandon property if it is no longer beneficial to the estates and its retention serves no purpose in effectuating the goals of the Bankruptcy Code. Abandonment constitutes a court-authorized divestiture of all of the Debtors' interests in the property. Abandonment gives rise to potential claims against the Debtors. Due to the uncertain nature of many of the potential rejection and abandonment related claims, management is unable to project the magnitude of such claims with any degree of certainty at this time. 4) JOINT VENTURES AND MINORITY INTEREST As a result of the Chartwell merger in August 2001, we have investments in eight (8) joint ventures with various healthcare providers that provide home care services, including high-tech infusion therapy, nursing, clinical respiratory services and durable medical equipment to home care patients. We also provide various management services for each of the joint ventures under Administrative Service Agreements, which range for periods from one to five years. Our ownership in the joint ventures includes: one with 80% interest, which is consolidated, one with 45% interest and six with 50% interest, which we account for on an equity basis. 12 Minority interest of $395 thousand and $377 thousand, respectively at June 30, 2003 and March 31, 2003, represents the outside ownership in our joint ventures. A condensed balance sheet at June 30, 2003 and March 31, 2003 and a condensed statement of operations of the joint ventures accounted for on the equity method for the three months ended June 30, 2003 and 2002 are as follows: Condensed Combined Balance Sheet (unaudited, in thousands)

~~THREE~~JUNE ~~MONTHS~~30, ~~ENDED~~2003 ~~DECEMBER~~MARCH 31, ~~NINE~~2003 ~~MONTHS ENDED DECEMBER 31 2002 2001 2002 2001~~ -------------~~-----------------~~ --------------~~----------------~~ ~~Net~~Current ~~sales~~assets..................................... $ --23,027 $ ~~-- $ -- $ 3~~26,~~005~~670 ~~Total~~Non ~~costs~~current ~~and expenses~~assets................................ ~~-- -- --~~ 6,~~357~~104 ~~--------~~5,871 -------- -------- ~~---------~~29,131 ~~Operating~~32,541 ~~loss~~======== ~~from~~======== ~~discontinued~~Current ~~operations~~liabilities... ~~-- -- -- (3,352) Interest and taxes~~............................ --7,219 --8,564 -- 31 -------- -------- Non current liabilities........................... 473 529 -------- --------- ~~Net~~7,692 ~~loss~~9,093 ~~from~~Members ~~discontinued~~equity: ~~Operations~~Company........................................... $10,496 --11,824 $Other $members..................................... 10,943 11,624 -------- ------- $ (329,~~383)~~131 ~~========~~$ ~~========~~32,541 ======== =========

Condensed Combined Statement of Operations (unaudited, in thousands)

~~December~~QUARTER 31ENDED QUARTER ENDED JUNE 30, ~~March~~2003 31JUNE 30, 2002 ~~2002~~ ------------- ------------- ~~Total assets~~ Revenues.......................................... $ 220,~~314~~205 $ 18,232 Expenses.......................................... 16,858 16,205 -------- -------- 3,347 2,~~314~~027 ~~===========~~Net ~~==========~~income ~~Total~~allocated ~~liabilities~~to other members............. 1,771 1,121 -------- -------- Net income........................................ ~~11,222~~$ 111,~~222~~576 $ 906 ======== ========

5) INTANGIBLE ASSETS Our intangible assets at June 30, 2003 and March 31, 2003, other than goodwill, are as follows (in thousands):

~~THREE~~GROSS ~~MONTHS~~CARRYING ~~ENDED~~AMOUNT ~~DECEMBER~~ACCUMULATED 31AMORTIZATION ~~NINE~~--------------------- ~~MONTHS~~------------------------ ~~ENDED~~JUNE ~~DECEMBER~~30, 2003 MARCH 31, ~~2002~~2003 ~~2001~~JUNE ~~2002~~30, ~~2001~~2003 ~~Weighted~~MARCH ~~average~~31, ~~common~~2003 ~~shares~~------------- ~~used~~------------- to------------- ~~compute~~--------------- ~~basic~~(UNAUDITED) ~~net~~(UNAUDITED) ~~loss~~Amortized ~~per~~intangible ~~share...............~~assets: ~~149,837~~Administrative ~~99,429~~service ~~149,946~~agreements 88$ 7,~~143~~950 ~~Effect~~$ of7,950 ~~dilutive~~$ ~~securities..........~~ (14,~~175~~206) $ (64,~~808~~008) -------- -------- --------- -------- Total amortized intangible assets 7,950 7,950 (24,~~372~~206) (24,~~441~~008) -------- -------- -------- ------- ~~Weighted~~Unamortized ~~average~~identifiable ~~common~~intangible ~~shares~~assets ~~used~~28,100 to28,100 ~~compute~~-- ~~diluted~~-- ~~net~~-------- ~~loss~~-------- ~~per~~--------- ~~share.............~~-------- ~~148~~Total identifiable intangible assets $ 36,~~662~~050 92$ 36,~~621~~050 ~~147~~$ (4,~~574~~206) 85$ (4,~~702~~008) ======== ======== ========= ========

Unamoritzed intangible assets consist of contracts that we maintain with regional, national and governmental healthcare providers. Amortization expense related to intangible assets for the three months ended June 30, 2003 and 2002 amounted to $198 thousand and $207 thousand, respectively. The annual amortization that is expected to be recorded is as follows (unaudited, in thousands):

~~DISTANCE~~YEAR ~~MEDICINE~~ENDING ~~PHARMACY~~MARCH ~~HOME HEALTH OTHER TOTAL -------- -------- ----------- --------- --------- Nine Months Ended December~~ 31, ~~2002~~2004 ~~Net Sales ..........................................~~ $ ~~1,649~~792 $2005 ~~40,575~~792 $2006 ~~241,623~~792 $2007 --792 $2008 ~~283,847~~774 ~~Operating~~Thereafter Income (Loss) Before Depreciation and Amortization ...................... (3,417) 2,153 6,024 (11,259) (6,499) Depreciation and Amortization ...................... 30 793 2,936 704 4,463 Operating Income (Loss) ............................ (3,447) 1,360 3,088 (11,963) (10,962) Capital Expenditures ............................... 106 196 476 82 860 Total Assets as of December 31, 2002................ $ 656 $ 77,465 $ 96,918 $ 9,636 $ 184,675 -- ------~~---------------------------------------------------~~ ~~Nine Months Ended December 31, 2001 Net Sales ..........................................~~ $ ~~4,468 $ 56,397 $ 47,037 $ -- $ 107,902 Operating Income (Loss) Before Depreciation and Amortization ...................... (19,416) (~~3,~~339)~~942 (2,583) (57,436) (82,774) Depreciation and Amortization ...................... 1,760 1,656 736 1,923 6,075 Operating Income (Loss) ............................ (21,176) (4,995) (3,319) (59,359) (88,849) Capital Expenditures ............................... 14 956 162 44 1,176 Total Assets as of March 31, 2002 .................. 1,485 32,291 67,130 111,934 212,840 -----------------------------------------------------------======

13 6) FINANCING ARRANGEMENTS Our indebtedness at June 30, 2003 and March 31, 2003 consisted of the following (in thousands):

~~DISTANCE~~JUNE ~~MEDICINE~~30, ~~PHARMACY~~2003 ~~HOME~~MARCH ~~HEALTH~~31, ~~OTHER~~2003 ~~TOTAL~~ -------- -----~~---~~ ----------- ---~~------~~ ~~---------~~(UNAUDITED) ~~Three~~Borrowings ~~Months~~under ~~Ended~~credit ~~December~~facility.................... 31$ 122,237 ~~2002~~$ ~~Net~~122,989 ~~Sales~~Notes payable related to acquisitions............... 2,892 2,892 Term notes.......................................... ~~$ 677 $ 13~~28,~~065~~679 ~~$ 76~~28,~~102~~679 $Debenture --held $by ~~89,844~~related ~~Operating (Loss) Income Before Depreciation and Amortization~~ party...................... ~~(979) 909 3~~12,~~137~~500 (212,~~373)~~500 ~~694 Depreciation and Amortization~~ Debentures.......................................... 957,300 ~~303 970 236 1~~57,~~518~~300 ~~Operating~~Other ~~(Loss)~~notes ~~Income~~ payable................................. ~~(988) 606 2~~16,~~167~~893 (216,~~609)~~893 ~~(824)~~DIP ~~Capital Expenditures~~ facility........................................ 8-- 45-- 1--------- 5---------- 59 Total............................................... ~~Assets~~240,501 as241,253 ofLess: ~~December~~debt ~~31,~~subject ~~2002~~to compromise.................... ~~$ 656 $ 77~~(240,~~465~~501) ~~$ 96~~(241,~~918~~253) ~~$ 9,636 $ 184,675~~ --------- ---------- Long term portion of debt and related party debt.... $ -- $ --~~------------------------------------~~ ========= ==========

Due to the failure to make scheduled payments and the commencement of the Chapter 11 proceedings, we are in default of substantially all of our pre-petition debt and other long-term obligations. Under Chapter 11 of the Bankruptcy Code, actions against the Debtors to collect pre-petition indebtedness are subject to an automatic stay provision. These debt obligations at June 30, 2003 and March 31, 2003 are classified as liabilities subject to compromise in the accompanying Condensed Consolidated Balance Sheets in accordance with SOP 90-7. 7) DISCONTINUED OPERATIONS In June 2001, e-Net Technology, Ltd. ("e-Net") filed for receivership. In accordance with the Emerging Issues Task Force ("EITF") Abstract No. 95-18, ACCOUNTING AND REPORTING FOR A DISCONTINUED BUSINESS SEGMENT WHEN THE MEASUREMENT DATE OCCURS AFTER THE BALANCE SHEET DATE BUT BEFORE THE ISSUANCE OF FINANCIAL STATEMENTS ("EITF 95-18"), we reflected the discontinued operations in the fiscal year ended March 31, 2001. We estimated the net realizable value of the assets of the discontinued operations and recorded a write down of $6.4 million in fiscal 2001. In May 2003, with the approval of the Bankruptcy Court, we sold certain assets and liabilities of Trestle, our wholly owned subsidiary, which made up our Distance Medicine Solutions Business Segment, to Trestle Acquisition Corporation, a wholly owned subsidiary of Sunland Entertainment Co., Inc. The transaction included the sale of all of Trestle's intellectual property rights, certain operating assets plus the assumption of certain liabilities totaling approximately $1.4 million. Cash proceeds from the sale of $1.25 million will remain in escrow pending completion of our plan of reorganization under the bankruptcy proceedings and is included as restricted cash in assets of discontinued operations of the Condensed Consolidated Balance Sheet at June 30, 2003. In accordance with SFAS No. 144, the results of operations have been reported as discontinued operations. The net sales, expenses, assets and liabilities of our wholly owned subsidiaries, Trestle and e-Net, have been combined in our condensed consolidated financial statements under discontinued operations. The following is a condensed statement of operations for Trestle and e-Net for the three months ended June 30, 2003 and 2002, which comprises the results from discontinued operations (unaudited, in thousands):

~~Gross~~THREE ~~Carrying~~MONTHS ~~Amount~~ENDED ~~Accumulated~~JUNE ~~Amortization (thousands of dollars) December 31~~30, ~~March~~2003 ~~31,~~TRESTLE ~~December~~e-NET ~~31,~~TOTAL ~~March 31, 2002 2002 2002 2002~~ -------~~-----~~ -----~~--------~~ --------~~----~~ ~~------------~~Net ~~Amortized~~sales............................................ ~~intangible~~$ ~~assets:~~112 ~~Administrative~~$ ~~service~~-- ~~agreements~~ $ ~~7,950~~112 ~~8,299~~Total $cost ~~(3,810)~~and $expenses.............................. ~~(3,206)~~608 --~~------~~ 608 -------- ------~~---~~ ------~~---~~ ~~Total~~Operating ~~amortized~~loss ~~intangible~~from ~~assets~~discontinued ~~7,950~~operations.......... ~~8,299~~(496) $-- (~~3,810~~496) Interest and taxes................................... (~~3,206~~34) --~~------~~ ~~--------~~(34) ~~---------~~Reorganization items................................. 3 --~~--------~~ ~~Unamortized~~3 ~~identifiable~~Other................................................ ~~intangible~~(6) ~~assets:~~ -- --(6) --Gain --on sale......................................... 1,410 --~~------~~ 1,410 -------- ------~~---~~ ------~~----~~ ~~Total~~Income ~~identifiable~~from ~~intangible~~discontinued assets*operations.................. $ ~~7,950~~877 $ ~~8,299~~-- $ ~~(3,810)~~877 ~~$ (3,206)~~ ======== ======== ======~~=== =========~~

~~Year~~THREE ~~ending~~MONTHS ~~March~~ENDED 31JUNE 30, 2002 TRESTLE e-NET TOTAL --------- --------- -------- (Net sales..................................................... $ in583 ~~thousands)~~$ ~~2003~~-- $ ~~802~~583 ~~2004~~Total $cost ~~792~~and ~~2005~~expenses....................................... $1,761 ~~792~~-- ~~2006~~1,761 $--------- ~~792~~--------- ~~2007~~-------- $Operating ~~792~~loss ~~2008~~from $discontinued ~~792~~operations................... ~~thereafter~~(1,178) $-- ~~331~~(1,178) --------- ~~TOTAL~~--------- -------- Loss from discontinued operations............................. $ 5(1,~~093~~178) $ -- $ (1,178) ========= ========= ========

The following is a condensed balance sheet for Trestle and e-Net at June 30, 2003 and March 31, 2003 (in thousands):

~~THREE~~JUNE ~~MONTHS~~30, ~~NINE~~2003 ~~MONTHS~~(UNAUDITED) ~~ENDED~~TRESTLE ~~ENDED~~e-NET ~~DECEMBER~~TOTAL ~~31,~~------- ~~DECEMBER~~------------- ~~31,~~-------- ~~2001~~ASSETS ~~2001~~Current ~~Reported~~assets: ~~net~~Cash ~~loss~~............................................... ~~from~~$ ~~continuing~~-- ~~operations~~ $ ~~(25~~2,~~652)~~172 $ ~~(109~~2,~~443)~~172 Restricted cash .................................... 1,250 -- 1,250 Other receivables .................................. -- 142 142 ------ -------- -------- ~~Add~~Total ~~back:~~current ~~goodwill~~assets ~~amortization~~............................... ~~422~~ 1,~~248~~250 ~~Adjusted~~2,314 ~~net~~3,564 ~~loss~~------ ~~from~~-------- ~~continuing~~-------- ~~operations~~Total assets .......................................... $1,250 ~~(25~~$ 2,~~230)~~314 $ ~~(108~~3,~~195)~~564 ====== === ===== ======== ~~Basic~~LIABILITIES ~~Earnings~~AND ~~per~~STOCKHOLDERS' ~~share~~EQUITY (DEFICIT) Current liabilities: ~~Reported~~Accounts ~~net~~payable ~~loss~~and ~~from~~other ~~continuing~~liabilities ~~operations~~............. $ ~~(0.26)~~116 $ ~~(1.24)~~11,222 ~~Goodwill~~$ ~~amortization~~11,338 ------ 0-------- -------- Total current liabilities .01......................... ~~Adjusted~~116 ~~net~~11,222 ~~loss~~11,338 ~~from~~------ ~~continuing~~-------- ~~operations~~-------- $Long ~~(0.26)~~term $liabilities: (1Liabilities subject to compromise .~~23)~~................. ~~=========~~871 ~~==========~~-- ~~Earnings~~871 ~~per~~------ ~~share~~-------- -------- ~~basic~~Total ~~and~~long ~~diluted:~~term ~~Reported~~liabilities ~~net~~........................ ~~loss~~871 ~~from~~-- ~~continuing~~871 ~~operations~~------ $-------- -------- Stockholders' equity (~~0.28~~deficit) $........................ 263 (~~1.28~~8,908) ~~Goodwill~~(8,645) ~~amortization~~ -- ~~0.02~~ ---- ----- --- -------- ~~Adjusted~~TOTAL ~~net~~LIABILITIES ~~loss~~AND ~~from~~STOCKHOLDERS' ~~continuing~~EQUITY ~~operations~~(DEFICIT) .. $1,250 ~~(0.28)~~$ 2,314 $ ~~(1.26)~~3,564 ====== === ===== ========

~~THREE~~MARCH ~~MONTHS ENDED DECEMBER~~ 31, ~~PROFORMA~~2003 ~~2002~~TRESTLE ~~2001~~e-NET ~~2001~~TOTAL ------- --------------- --------- ~~Net~~ASSETS ~~sales~~Current assets: Cash .............................................. $ ~~89,844~~511 $ ~~55,212~~-- $ ~~89,674~~511 ~~Costs~~Accounts receivable and ~~expenses:~~other ~~Cost~~receivables ~~of sales~~......... 148 -- 148 Prepaid and other current assets .................... ~~51,750~~232 ~~33,160~~-- ~~56,089~~232 ~~Research~~------- ~~and~~-------- ~~development~~-------- Total current assets .............................. 891 -- ~~496~~891 ~~496~~------- ~~Sales~~-------- -------- Non-Current assets: Property and ~~marketing~~equipment ............................ ~~367~~83 ~~695~~-- ~~695~~83 ~~General~~Other ~~and administrative~~................ ~~37,033 30,729 78,958 Asset impairment charges~~.................. ~~-- Depreciation and amortization~~............. 1708 2,~~518~~314 3,~~573~~022 ~~6,828~~ --------- --------- --------- Total ~~costs~~non-current ~~and~~assets ~~expenses~~.......................... ~~90,668~~791 682,~~653~~314 ~~143~~3,~~066~~105 --------- --------- --------- ~~Operating~~Total ~~loss~~assets ~~from continuing operations~~......................................... $ ~~(824)~~1,682 $ ~~(13~~2,~~441)~~314 $ ~~(53~~3,~~392)~~996 ========= ========= ========= ~~Net~~LIABILITIES ~~Loss~~AND ~~from~~STOCKHOLDERS' ~~continuing~~EQUITY ~~operations~~(DEFICIT) Current liabilities: Accounts payable and other liabilities ............ $ (4494 $ 11,~~738)~~222 $ 11,716 ------- -------- -------- Total current liabilities ......................... 494 11,222 11,716 ------- -------- -------- Long term liabilities: Liabilities subject to compromise ................. 871 -- 871 Deferred revenue .................................. 981 -- 981 ------- -------- -------- Total long term liabilities ....................... 1,852 -- 1,852 ------- -------- -------- Stockholders' deficit ................................ (25664) (8,~~652~~908) $ (759,~~792~~572) ------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) . $ 1,682 $ 2,314 $ 3,996 ========= ========= =========

15 8) SEGMENT INFORMATION We derive our net sales from two operating segments: (1) Home health services comprised of skilled nursing care and attendant care services in the home and (2) Pharmacy services comprised of pharmaceutical management and distribution services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies, which are contained in our Annual Report on Form 10-K for the year ended March 31, 2003, except as noted below. In May 2003, with the approval of the Bankruptcy Court, we sold certain assets and liabilities of Trestle, our wholly owned subsidiary, which made up our Distance Medicine Business Segment. The results of operations of Trestle have been reported as discontinued operations in accordance with SFAS No. 144 (see Note 7). We evaluate performance based on operating earnings of our respective business segments; as such, there is no separately identifiable statement of operations data below operating loss. Our financial information by business segment is summarized as follows (unaudited, in thousands). The "Other" column includes corporate related items and other expenses not allocated to reportable segments. No amounts from our Distance Medicine Business Segment are included in this column (unaudited, in thousands):

~~NINE~~HOME ~~MONTHS~~HEALTH ~~ENDED~~PHARMACY ~~DECEMBER~~OTHER ~~31,~~TOTAL ~~2002 2001 PROFORMA 2001~~ ----------- -------- --------- --------- Three Months Ended June 30, 2003: Net sales ....................................................... $ ~~283~~71,~~847~~502 $ ~~107~~12,~~902~~641 $ ~~309~~-- $ 84,~~654~~143 ~~Costs~~Operating ~~and~~income ~~expenses:~~(loss) ~~Cost~~before ofdepreciation ~~sales~~and amortization .................................................... ~~161~~5,~~674~~378 71337 (2,~~343~~345) ~~187~~3,~~835~~370 ~~Research~~Depreciation and ~~development~~amortization ................................... --953 ~~2,965~~237 2249 1,~~965~~439 ~~Sales~~Operating ~~and~~income ~~Marketing~~(loss) income .................................. ~~947~~4,425 5100 (2,~~714~~594) 51,~~714~~931 ~~General~~Capital ~~and~~expenditures ~~administrative~~............................................ ~~127,376~~77 ~~97,590~~129 ~~235,104~~11 ~~Asset~~217 ~~impairment~~Total ~~charges~~assets as of June 30, 2003 ................................ ~~349~~$ 1180,~~635~~259 11$44,~~635~~828 ~~Restructuring~~$ ~~charges~~12,690 1$ 137,~~429~~777 1Three Months Ended June 30,~~429~~ ~~Depreciation~~2002: ~~and~~Net ~~Amortization~~sales ....................................................... ~~4,463~~$ 683,~~075~~656 25$14,~~693~~154 ~~----------~~$ --~~--------~~ ~~-----------~~$ ~~Total~~97,810 ~~costs~~Operating income (loss) before depreciation and ~~expenses~~amortization .................................................... ~~294~~591 1,~~809~~238 ~~196~~(3,~~751~~413) ~~470~~(1,~~375~~584) ~~----------~~Depreciation ~~----------~~and ~~-----------~~amortization ~~Operating~~................................... ~~loss~~993 ~~from~~231 ~~continuing~~240 ~~operations~~1,464 Operating income (loss) ......................................... $ (~~10,962~~402) $1,007 (883,~~849~~653) $ (~~160~~3,~~721~~048) ~~==========~~Capital ~~==========~~expenditures ~~===========~~............................................ ~~Net~~246 ~~Loss~~4 ~~from~~2 ~~continuing~~252 ~~operations~~Total assets at March 31, 2003 .................................. $ ~~(32~~81,~~401)~~149 $ ~~(109~~49,~~443)~~801 $ ~~(212~~7,~~725)~~309 ~~==========~~$ ~~========== ===========~~138,259

Our U.S. sales from our pharmacy services and home health services segments are paid through third-party payors, including Medicare, Medicaid and commercial insurance companies, as well as directly from institutions and patients. During the three months ended June 30, 2003, approximately 83.3% of the sales from these segments were reimbursable by Medicare and Medicaid. 9) CONTINGENCIES AND LEGAL MATTERS As discussed in greater detail in Part I, Note 2 above, on the Petition Date, we and five of our domestic, wholly owned subsidiaries, Chartwell, CCS, CCG, Resource and Trestle, filed voluntary petitions in the Bankruptcy Court under Chapter 11 of the Bankruptcy Code. The reorganization cases are being jointly administered under the caption "In re Med Diversified, Inc., et al., Case No. 8-02-88564." On November 8, 2002, TLCS along with nineteen of TLCS' subsidiaries filed voluntary petitions in the Bankruptcy Court under the Bankruptcy Code. The reorganization cases are being jointly administered under the caption "In re Tender Loving Care Health Care Services, Inc., et al., Case No. 8-02-88020." All of the entities continue to operate their businesses as debtors-in-possession, subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court, while a plan of reorganization is formulated. At this time, it is not possible to predict the outcome of the Chapter 11 cases or their effect on our business. In connection with our filing for bankruptcy protection, all of the litigation noted below, if it was not settled prior to the filing for bankruptcy, has been automatically stayed under bankruptcy law, meaning, where we are a defendant, that no adverse party may take any action in the context of such litigation unless such party obtains relief from the automatic stay. Where we are the plaintiff, we may pursue such litigation at our option. Except as described below, none of such pending litigation, in our opinion, could have a material adverse impact on our consolidated financial condition, results of operations or businesses. 16 We are subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably to us. We have established accruals for matters that are probable and reasonably estimable. Management believes that any liability that may ultimately result from the resolution of these matters in excess of amounts provided will not have a material adverse effect on our financial position, results of operations or cash flows. We, and certain related parties, have been and continue to be involved in litigation regarding certain of our acquisitions and strategic relationships, material and non-material. Where we are a party to such material litigation, a description of such litigation is set forth below. In our Annual Report on Form 10-K for the fiscal year ended March 31, 2003, we reported on our pending legal proceedings. The following section updates that disclosure to the extent that developments in those proceedings have occurred since our Annual Report. ASHE WAHBA On April 17, 2002, Ashe Wahba ("Wahba") filed a demand for arbitration with the American Arbitration Association ("AAA") against the Company (AAA No. 11 160 01346 2). Prior to his termination in April 2002, Wahba served as Chartwell's President of International Business. Wahba alleges that we breached the severance and signing compensation provisions of his Executive Employment Agreement (the "Employment Agreement"), dated August 18, 2001. The Employment Agreement called for arbitration for disagreements arising out of or relating to the Employment Agreement. Wahba seeks an award of salary compensation, compensation for stock options, attorneys' fees and administrative costs. Though we have taken part in settlement discussions with Wahba, no settlement has been reached. We continue to disagree with Wahba's interpretation of the Employment Agreement. Due to our filing for bankruptcy protection, this matter was subject to the automatic stay under the Bankruptcy Code. However, on February 4, 2003, Wahba filed a motion with the Bankruptcy Court to modify the stay and allow the arbitration to proceed. The Bankruptcy Court granted such motion. Therefore, this matter will proceed in arbitration. Any award, however, will merely liquidate the amount of Wahba's claim, which will remain subject to the automatic stay and whatever treatment ultimately will be afforded the unsecured creditors under our plan of reorganization. A conference regarding potential settlement of this matter was held on August 15, 2003. The parties agreed to have another conference in the near future. ADDUS HEALTHCARE On or about April 24, 2002, we filed a complaint against Addus Healthcare, Inc. ("Addus"), and its major shareholders, W. Andrew Wright, Mark S. Heaney, Courtney E. Panzer, and James A. Wright (Med Diversified, Inc. v. Addus Healthcare, Inc., et al., U.S. District Court, Central District of California, Case No. CV 02-3911 AHM (JTLX)). We contend that Addus has been unable to perform its obligations under a certain stock purchase agreement relating to our acquisition of Addus. We allege that Addus breached the warranties and representations it gave regarding its financial condition, and Addus has been unable to obtain the consent of necessary third parties to assign some relevant contracts. We believe that Addus has breached the agreement in other ways, as well. Additionally, we allege that the Defendants have misappropriated our deposit. The complaint demands the imposition of a constructive trust for the converted funds and an injunction against the Defendants' disposing of or liquidating the $7.5 million deposit. Our complaint further alleges fraud on behalf of the Defendants, stating that they never intended to complete the transaction but planned to use the pendency of the transaction to obtain concessions from us. Additionally, there is a claim for breach of contract. We seek compensatory damages of approximately $10 million per claim, plus punitive damages, along with the equitable relief previously described and attorneys' fees. Addus has filed a counterclaim against us, alleging that we (1) fraudulently induced them to enter into the agreement, (2) negligently misrepresented certain aspects of our business, (3) breached the terms of the agreement by not closing the transaction and not having available funds to close the transaction, and (4) breached certain other confidentiality agreements. Addus has sought compensatory damages in excess of $4 million, a declaratory judgment that it is entitled to retain the $7.5 million deposit, for general and special damages. We dispute these claims vigorously and believe they are without merit. On July 9, 2002, we filed a reply to the counterclaim. This matter has been transferred to the Northern District of Illinois. On October 11, 2002, we filed an Amended Complaint. We received Addus' answer to that complaint. A status conference was held on July 25, 2003. We intend to continue pursuing this litigation. UNIVERSITY AFFILIATES In January 2002, we filed a Complaint against University Affiliates IPA ("UAIPA") and its president, Sam Romeo, who at the time was also a member of our board of directors, for breach of contract, fraud and, as to Mr. Romeo, breach of fiduciary duty arising 17 out of a May 2, 2000 agreement between UAIPA and us (Med Diversified, Inc. v. University Affiliates IPA a/k/a Univ. Affiliates Med Grp.; Sam J.W. Romeo, M.D. a/k/a Sam Romeo; Doe Defendants, Superior Court of the State of California, County of Los Angeles, Case No. BC 266500). Under the agreement, during the quarter ended June 2000, we advanced $2 million to UAIPA for the purpose of creating a joint venture intended to combine UAIPA's supposed healthcare management expertise with Internet healthcare management systems in an effort to develop new business opportunities. As of the filing of the suit, the companies had not proceeded with the joint venture. According to the original agreement, if a formal joint venture agreement were not entered into between UAIPA and us by July 1, 2000, UAIPA would guarantee payment of $2.5 million to us on or before July 1, 2001. The $2.5 million has not been paid. We seek payment of this amount, plus any profits from the business opportunities that were to be transferred to the joint venture, and punitive damages. On March 4, 2002, UAIPA served a cross-complaint against us, Sanga E-Health, LLC, TSI Technologies, LLC, Mitchell Stein and John F. Andrews ("Andrews"), alleging breach of various contracts, breach of the implied covenant of good faith and fair dealing, declaratory relief, promissory estoppel, fraud, negligent misrepresentation, unjust enrichment, quantum meruit, conversion, money had and received, breach of fiduciary duty, interference with prospective business advantage and unfair business practices, seeking damages in the aggregate of approximately $11 million plus punitive damages. The court denied our motion to compel arbitration on May 8, 2002. We subsequently filed a cross-complaint against UAIPA and Sam Romeo regarding their failure to adhere to the May 2, 2000 agreement. No trial date has been set and UAIPA is currently in bankruptcy proceedings. Due to our filing for bankruptcy protection and UAIPA's bankruptcy proceedings, this matter was subject to the automatic stay in both cases. On June 16, 2003, the Bankruptcy Court has entered an order settling this litigation without payment by any party. NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., NATIONAL PREMIER FINANCIAL SERVICES, INC., NPF VI, INC., NPF X, INC., NPF XII, INC., NPF CAPITAL, INC. On May 30, 2003, we, along with Chartwell, CCG, CCS, and Resource, filed a lawsuit against NCFE and five legal designees of NCFE in the Bankruptcy Court (Med Diversified, Inc.; Chartwell Diversified Services, Inc.; Chartwell Care Givers, Inc.; Chartwell Community Services, Inc.; and Resource Pharmacy, Inc. v. National Century Financial Enterprises Inc.; National Premier Financial Services, Inc.; NPF, VI, Inc.; NPF X, Inc.; NPF XII, Inc.; NPF Capital, Inc., United States Bankruptcy Court for the Eastern District of New York, Adversary Proceeding No. 1-03-01320). We contend that the defendants engaged in a course of conduct, whereby they fraudulently promised attractive returns to investors. We believe that the defendants diverted investments and concealed the scheme by fraudulently manipulating the use of new investments. We believe that the defendants used us as an instrumentality to further this fraudulent conduct, harming our estates. We also bring causes of action under theories of unjust enrichment and fraud. There are certain claims against us arising from transfers of funds from the Defendants to us, including the Defendants' purported secured and unsecured loans, purchases of receivables and other advances. We seek to recharacterize these claims as equity interests, and to the extent that such claims are recharacterized as equity interests, we seek to subordinate those interests to those of the other equity holders. Further, we seek the turnover of overfunded reserves and accrued subservicing fees by certain of the Defendants and recovery for breach of certain sales and subservicing agreements between the Defendants and us. We also seek recovery for the Defendants' breach of commitments in connection with a bond initiative sponsored by PIBL, as well as breach of the preferred provider agreement, entered into between NCFE and us in February 2000. We also seek recovery of fraudulent transfers. The defendants' answer on responsive pleadings was due on August 8, 2003 and was filed on such date. This adversary proceeding is in its initial stages, with a pretrial conference set before the Bankruptcy Court on August 15, 2003. STEPHEN SAVITSKY, DAVID SAVITSKY, DALE R. CLIFT On May 16, 2003 we, along with TLCS, filed a lawsuit against Stephen Savitsky ("S. Savitsky"), David Savitsky ("D. Savitsky"), and Dale R. Clift ("Clift") in the Bankruptcy Court (Med Diversified, Inc.; Tender Loving Care Health Care Services, Inc. v. Stephen Savitsky; David Savitsky; Dale R. Clift, United States Bankruptcy Court for the Eastern District of New York, Adversary Proceeding No. 03-8244). Up until October 28, 2002, S. Savitsky served as Chief Executive Officer of TLCS. From October 28, 2002 until his resignation on November 6, 2002, S. Savitsky served as Executive Vice President of TLCS. Up until or shortly after October 28, 2002, D. Savitsky served as Vice Chairman of Governmental Affairs for TLCS. Up until February 27, 2002, Clift served as President and Chief Operating Officer of TLCS. We and TLCS made certain transfers and conveyances to S. Savitsky, D. Savitsky and Clift during the course of their employment with TLCS. We and TLCS seek to avoid and recover those transfers as preferential payments under the Bankruptcy Code. We and TLCS also seek to avoid and recover those funds under the theories of fraudulent transfers, fraudulent conveyances, and unjust enrichment. 18 The defendants' answers were due on June 30, 2003 and were filed on such date. Discovery is proceeding in this matter. 10) DEBTOR FINANCIALS The following condensed consolidating balance sheet as of June 30, 2003 and March 31, 2003 and the related condensed consolidating statements of income and statements of cash flows for the three months ended June 30, 2003 are presented in accordance with SOP 90-7. Condensed Consolidating Balance Sheet As of June 30, 2003 (unaudited, in thousands)

~~THREE~~DEBTORS ~~MONTHS~~NON-DEBTORS ~~ENDED~~ELIMINATIONS ~~DECEMBER~~CONSOLIDATED 31--------- ~~NINE~~----------- ~~MONTHS~~------------ ~~ENDED~~------------ ~~DECEMBER~~ASSETS 31Current ~~Chartwell~~assets: ~~Joint~~Cash Ventures*and ~~Chartwell~~cash ~~Joint~~equivalents ~~Ventures* Net sales~~............................................ $ 2413,~~548~~367 $ ~~17,645~~285 $ ~~74,539~~-- $ 5413,~~680~~652 ~~Cost~~Accounts ofreceivable, ~~sales~~net ............................................. $33,199 171,~~570~~857 9-- 35,~~603~~056 54Accounts receivable from affiliates .................................. 62 1,~~082~~394 31(1,~~397~~358) 98 Prepayments and other current assets ................................. 5,188 3,154 -- 8,342 Assets of discontinued operations .................................... 1,250 2,314 -- 3,564 --------- ------- -------- --------- Total current assets ................................................. 53,066 9,004 (1,358) 60,712 --------- ~~Gross~~------- ~~profit~~-------- --------- Non-current assets: Property and equipment, net .......................................... 612,~~978~~496 8192 -- 12,~~042~~688 Goodwill, net ........................................................ 13,408 7,140 -- 20,~~457~~548 23Investments .......................................................... 9,~~283~~903 ~~Operating~~9,766 ~~expenses~~(9,766) 9,903 Other intangibles, net ............................................... 531,~~095~~844 4-- -- 31,~~701~~844 15Other assets ......................................................... 2,~~465~~064 1518 -- 2,~~258~~082 --------- ------- -------- --------- Total non-current assets ............................................. 69,715 17,116 (9,766) 77,065 --------- ~~Income~~------- ~~from~~-------- ~~operations~~--------- Total assets ......................................................... 1$ 122,~~883~~781 3$26,~~341~~120 4$(11,~~992~~124) 8$ 137,~~025~~777 ~~Depreciation~~========= ======= ======== ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable ..................................................... $ 6,460 $ 445 $ -- $ 6,905 Accrued salaries and ~~amortization~~benefit costs ................................... ~~(314)~~14,231 36186 ~~(791)~~-- ~~(673)~~14,417 ~~Other~~Accrued ~~income/(expense)~~liabilities .................................................. 8,140 262 -- ~~184~~8,402 (2Liabilities of discontinued operations ............................... 116 11,~~189)~~222 ~~184~~-- ~~Corporate~~11,338 ~~overhead~~Current maturities of capital leases ................................. ~~219~~-- 10 -- 10 --------- ------- ~~Equity~~-------- in--------- ~~earnings~~Total ofcurrent ~~joint~~liabilities ~~venture~~............................................ 128,~~499~~947 12,125 -- 341,~~292~~072 --------- ~~Joint~~------- ~~venture~~-------- ~~earnings~~--------- ~~allocated~~Long-Term liabilities: Liabilities subject to ~~other~~compromise ~~members~~.................................... 356,379 -- (2-- 356,~~062)~~379 Capital leases ....................................................... -- ~~(4,244)~~17 -- 17 Long-term debt and lease commitments of discontinued operations ...... 871 -- -- 871 --------- ------- -------- --------- Total long-term liabilities .......................................... 357,250 17 -- 357,267 --------- ~~Net~~------- ~~income~~-------- --------- Minority interest ...................................................... $122 2273 -- 395 Total stockholders' deficit .......................................... (263,~~849~~538) 13,705 (11,124) (260,957) --------- ------- -------- --------- Total liabilities and stockholders' deficit .......................... $ 1122,~~499~~781 $26,120 5$(11,~~304~~124) $ 3137,~~292~~777 ========= ========= ========= =========

19 Condensed Consolidating Balance Sheet As of March 31, 2003 (in thousands)

~~THREE~~DEBTORS ~~MONTHS~~NON-DEBTORS ~~ENDED~~ELIMINATIONS ~~DECEMBER~~CONSOLIDATED 31--------- ----------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents ........................................... $ 9,831 ~~PROFORMA~~$ ~~SEGMENT~~241 ~~2002~~$ ~~2001~~-- ~~2001~~$ 10,072 Accounts receivable, net ............................................ 34,791 1,803 -- 36,594 Accounts receivable from affiliates ................................. 59 1,417 (1,290) 186 Prepayments and other current assets ................................ 7,575 272 -- 7,847 Assets of discontinued operations ................................... 891 -- -- 891 --------- ------- -------- --------- Total current assets ................................................ 53,147 3,733 (1,290) 55,590 --------- ~~Distance~~------- ~~Medicine~~-------- ~~Solutions~~--------- Non-current assets: Property and equipment, net ......................................... 13,624 232 -- 13,856 Goodwill, net ....................................................... 13,408 7,140 -- 20,548 Investments ......................................................... 11,231 11,094 (11,094) 11,231 Other intangibles, net .............................................. 32,042 -- -- 32,042 Assets of discontinued operations ................................... 791 2,314 -- 3,105 Other assets ........................................................ 1,869 18 -- 1,887 --------- ------- -------- --------- Total non-current assets ............................................ 72,965 20,798 (11,094) 82,669 --------- ------- -------- --------- Total assets ........................................................ $ ~~677~~126,112 $24,531 ~~912~~$(12,384) $ ~~912~~138,259 ~~Pharmacy~~========= ~~Management~~======= ======== ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable .................................................... $ 5,572 $ 276 $ -- $ 5,848 Accrued salaries and ~~Distribution~~benefit costs .................................. 1314,~~065~~540 16160 -- 14,~~357~~700 16Accrued liabilities ................................................. 8,~~357~~445 ~~Home~~441 ~~Health/Alternative~~-- ~~Site~~8,886 ~~Services~~Liabilities of discontinued operations .............................. 76494 11,~~102~~222 37-- 11,~~943~~716 72Current maturities of capital leases ................................ -- 10 -- 10 --------- ------- -------- --------- Total current liabilities ........................................... 29,~~405~~051 12,109 -- 41,160 --------- ------- -------- --------- Long-Term liabilities: Liabilities subject to compromise ................................... 356,873 -- -- 356,873 Capital leases ...................................................... -- 20 -- 20 Long-term debt and lease commitments of discontinued operations ..... -- -- -- -- Other liabilities ................................................... 1,852 -- -- 1,852 --------- ------- -------- --------- Total long-term liabilities ......................................... 358,725 20 -- 358,745 --------- ------- -------- --------- Minority interest ..................................................... 115 262 -- 377 Total stockholders' deficit ......................................... (261,779) 12,140 (12,384) (262,023) --------- ------- -------- --------- Total liabilities and stockholders' deficit ......................... $ 89126,~~844~~112 $24,531 55$(12,~~212~~384) $ 89138,~~674~~259 ========== ======= === ===== =========

20 Condensed Consolidating Statement of Operations For the Three Months Ended June 30, 2003 (unaudited, in thousands)

~~NINE~~DEBTOR ~~MONTHS~~NON-DEBTOR ~~ENDED~~ELIMINATIONS ~~DECEMBER~~CONSOLIDATED 31-------- ---------- ----------- ------------ NET SALES: Non affiliates ........................................................ $ 82,217 ~~PROFORMA~~$ ~~2002~~1,822 ~~2001~~$ ~~2001~~-- $ 84,039 Affiliates ............................................................ -- 104 -- 104 -------- ------- -------- -------- Total net sales .................................................. 82,217 1,926 -- ~~Distance~~84,143 ~~Medicine~~-------- ~~Solutions~~------- -------- -------- COSTS AND EXPENSES: Cost of sales .......................................................... $45,556 1,~~649~~170 $-- 446,~~468~~726 $Selling, 4general and administrative .................................... 33,~~468~~317 ~~Pharmacy~~730 ~~Management~~-- 34,047 Depreciation and ~~Distribution~~amortization .......................................... 401,~~575~~400 5639 -- 1,~~397~~439 74-------- ------- -------- -------- Total costs and expenses ............................................ 80,~~327~~273 ~~Home~~1,939 ~~Health/Alternative~~-- ~~Site~~82,212 ~~Services~~-------- ------- -------- -------- OPERATING INCOME (LOSS) .................................................. ~~241~~1,~~623~~944 47(13) -- 1,~~037~~931 ~~230~~OTHER INCOME (EXPENSE): Interest expense ....................................................... (1,~~859~~557) (2) -- (1,559) Other income ........................................................... 37 11 -- 48 -------- ------- -------- -------- LOSS BEFORE REORGANIZATION ITEMS, MINORITY INTEREST AND EQUITY IN EARNINGS OF JOINT VENTURES AND INCOME TAXES ........................... 424 (4) -- $420 ~~283~~-------- ------- -------- -------- REORGANIZATION ITEMS ..................................................... (1,~~847~~836) -- -- (1,836) MINORITY INTEREST, NET OF TAXES .......................................... (7) (11) -- (18) EQUITY IN EARNINGS ON JOINT VENTURES ..................................... -- 1,576 -- 1,576 INCOME TAXES ............................................................. -- -- -- -- -------- ------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS ................................. (1,419) 1,561 -- 142 INCOME FROM DISCONTINUED OPERATIONS ...................................... 877 -- -- 877 -------- ------- -------- -------- NET INCOME (LOSS) ........................................................ $ ~~107~~(542) $ 1,~~902~~561 $ ~~309~~-- $ 1,~~654~~019 ======== == ===== ===== === ========

21 Condensed Consolidated Statement of Cash Flows For the Three Months Ended June 30, 2003 (unaudited, in thousands)

~~THREE~~DEBTOR ~~MONTHS~~NON-DEBTOR ~~ENDED~~CONSOLIDATED ~~DECEMBER~~--------- 31----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .............................................................. $ (542) $ 1,561 ~~PROFORMA~~$ ~~SEGMENT~~1,019 ~~2002~~(Gain) ~~2001~~loss ~~2001~~from discontinued operations ....................................... (877) -- (877) Minority interest .............................................................. 7 11 18 Adjustments to reconcile loss from continuing operations to net cash used in continuing operations: Loss on disposal of fixed assets................................................ 144 -- 144 Equity in joint ventures ....................................................... -- (1,576) (1,576) Non cash compensation .......................................................... 47 -- 47 Depreciation and amortization .................................................. 1,400 39 1,439 Provision for doubtful accounts ................................................ 1,646 1 1,647 Net change in assets and liabilities affecting operations, net of acquisitions: Accounts receivable and affiliated receivables .............................. (16) (5) (21) Prepayments and other assets ................................................ 2,214 (2,904) (690) Accounts payable and accrued liabilities .................................... 520 16 536 Other liabilities ........................................................... 65 -- 65 -------- ------- -------- Net cash provided by (used in) operating activities ............................ 4,608 (2,857) 1,751 -------- ~~PrimeRx~~------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ........................................................... $(217) -- $(217) Change in assets and liabilities of discontinued operations, net ............... (1,301) -- $(1,301) Restricted cash received from sale of discontinued operations .................. 1,250 -- ~~Chartwell~~1,250 Distributions received ......................................................... 9-- 30 30 Distributions from joint ventures subject to restriction........................ -- 2,~~748~~874 132,~~336~~874 13-------- ------- -------- Net cash provided by (used in) investing activities ............................ (268) 2,~~336~~904 ~~Resource~~2,636 -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net payments on long-term debt and related party debt, net ..................... (752) -- (752) Net repayments of capital lease obligations .................................... (52) (3~~,317~~) (55) -------- ------- -------- Net cash provided by financing activities ...................................... (804) (3) (807) -------- ------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................. 3,~~021~~536 44 3,~~021~~580 -------- ------- -------- CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD ......................... 9,831 241 10,072 -------- ------- -------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD ............................... $ 13,~~065~~367 $ ~~16,357~~285 $ 1613,~~357~~652 ======== ======= ======== NON-CASH TRANSACTIONS: Liabilities assumed by purchaser of discontinued operations .................... $ 1,421 $ -- $ 1,421 ======== ======= ========

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of our Annual Report on Form 10-K for the year ended March 31, 2003. Statements in this quarterly report that relate to management's expectations, intentions or beliefs concerning future plans, expectations, events and performance are "forward-looking" within the meaning of the federal securities laws. Forward looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plan", "believe", "expect", "will", "anticipate", "estimate" and other words of similar meaning. These forward-looking statements include assumptions, beliefs and opinions relating to our business and growth strategy based upon management's interpretation and analysis of its own contractual and legal rights, of management's ability to satisfy industry and consumer needs with its strategies, and of healthcare industry trends. Management's forward-looking statements further assume that we will be able to successfully develop and execute on our strategic relationships and obtain approval for a plan of reorganization under the terms of the Bankruptcy Code. Actual results or events could differ materially from those anticipated in the forward-looking statements due to a variety of factors, in addition to those set out above, including, without limitation, acceptance by customers of our products, changing technology, competition in the health-care market, government regulation of health care, general economic conditions, availability of capital, the outcome of pending litigation, our ability to successfully reorganize under the Bankruptcy Code and other factors. Investors should not rely on forward 22 looking statements because they are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Some important factors that could cause our actual results to differ materially from those projected in such forward-looking statements are discussed in our Annual Report on Form 10-K for the year ended March 31, 2003. RESULTS OF CONTINUING OPERATIONS The results of continuing operations presented herein reflect the consolidated net sales and expenses from continuing operations for the three months ended June 30, 2003 and 2002 (unaudited, in thousands):

~~NINE~~THREE MONTHS ENDED ~~DECEMBER~~JUNE 3130, ~~PROFORMA~~2003 2002 ~~2001 2001~~ ---------- ---------- ~~----------~~Net ~~PrimeRx......................................~~Sales $ --84,143 $ 2597,~~352~~810 $Costs ~~25,352~~and ~~Chartwell....................................~~expenses: ~~30,443~~Cost 22of sales 46,~~243~~726 4054,~~173~~964 ~~Resource.....................................~~Sales ~~10,132~~and 8marketing 249 315 General and administrative 33,~~802~~798 843,~~802~~766 Asset impairment charge -- 349 Depreciation and amortization 1,439 1,464 -------- ------- Total costs and expenses 82,212 100,858 --- ----- -------- $Operating ~~40,575~~income (loss) from continuing operations $ 561,~~397~~931 $ 74(3,~~327~~048) ======== == ====== Net income (loss) from continuing operations $ 142 $(15,022) ==== ==== ========

The following table summarizes the operations for Chartwell and subsidiaries and the statements of operations of non-majority joint ventures, which are managed by Chartwell for the three months ended June 30, 2003 and 2002 (unaudited, in thousands):

THREE MONTHS ENDED ~~DECEMBER~~JUNE 3130, ~~PROFORMA~~2003 ~~SEGMENT~~THREE MONTHS ENDED JUNE 30, 2002 ~~2001~~CHARTWELL ~~2001~~JOINT VENTURES* CHARTWELL JOINT VENTURES* ---------- ------------------- -------------------------------- ~~Distance~~Net ~~Medicine~~Sales ~~Solutions..................~~$ 23,571 $ ~~647~~20,205 $ ~~362~~25,133 $ ~~362~~18,231 ~~Pharmacy~~Cost ~~Management~~of ~~and~~Sales ~~Distribution.........~~16,939 712,~~883~~247 18,220 10,~~108~~720 9------------ ---------- ---------- ---------- Gross Profit 6,~~838~~632 ~~Home~~7,958 ~~Health/Alternative~~6,913 ~~Site~~7,511 ~~Services........~~Operating 43expenses 4,~~220~~366 224,~~690~~863 454,~~889~~886 5,191 ------------ ---------- ---------- -------- Income from operations 2,266 3,095 2,027 2,320 Depreciation and amortization (251) (214) (234) (284) Other income (expense) (1,519) 466 (890) (9) Equity in earnings of joint venture 1,576 -- 906 -- Joint venture earnings allocated to other members -- (1,771) -- (1,121) ------------ ---------- ---------- --------- Net income $ 512,~~750~~072 $ 331,~~160~~576 $ 561,~~089~~809 $ 906 ============ ========== ========== =========

As noted above, Chartwell's income from operations under management for the three months ended June 30, 2003 and 2002 totaled $1.6 million and $906 thousand, respectively. * Chartwell's ownership in the joint ventures ranges from 45% to 50%. As a result of the Chartwell merger, we have investments in eight joint ventures with various health care providers that provide home care services, including high-tech infusion therapy, nursing, clinical respiratory services and durable medical equipment to home care patients. Our ownership in the joint ventures includes: one with 80 percent interest which is consolidated, one with 45 percent interest and six with 50 percent interest accounted for on the equity basis of accounting. Total Chartwell revenue under management for the three months ended June 30, 2003 and 2002, which includes unconsolidated joint ventures as well as Chartwell subsidiary revenue, was $43.8 million and $43.4 million, respectively. NET SALES Net sales for the three months ended June 30, 2003 and 2002 are summarized as follows (unaudited, in thousands):

~~NINE~~THREE MONTHS ENDED ~~DECEMBER~~JUNE 3130, ~~PROFORMA~~SEGMENT 2003 2002 ~~2001 2001~~ ------- --- ---------- -------------- ~~Distance~~Home ~~Medicine~~Health/Alternate ~~Solutions..................~~Site $Services ~~1,155~~ $ 371,~~069~~502 $ 383,~~069~~656 Pharmacy Management and Distribution~~.........~~ 2512,~~347~~641 3814,~~485~~154 ~~49,248 Home Health/Alternative Site Services........ 135,172 29,789 135,518~~ ---------- ---------- ~~----------~~Total $ ~~161~~84,~~674~~143 $ 7197,~~343~~810 ~~$ 187,835~~ ========== ========== ~~==========~~

Home Health/Alternate Site Services revenues decreased from $83.7 million to $71.5 million for the three months ended June 30, 2003 over the comparable prior year a decrease of $12.2 million, or 14.5%. This decrease consists of a reduction in revenue of $6.0 million resulting from the sale or closure of 14 locations from our TLCS subsidiary and approximately $6.1 million primarily from changes in payor mix, particularly at TLCS. All operations in the Home Health/Alternative Site Services segment have taken steps to reduce business with low margin payor sources and concurrently expand services to Medicare eligible patients, for whom we have clinical platforms that are cost effective and generate improved gross margins. Pharmacy Management and Distribution revenues decreased $1.5 million or 10.7% for the three months ended June 30, 2003 and 2002. This decrease is due primarily to the Company's reductions in referrals and focus on higher-margin therapies. The Company has and continues to take steps to reduce business from low-margin referral sources and expand its services to referral sources with higher-margin therapies. 23 COSTS AND EXPENSES Cost of sales for the three months ended June 30, 2003 and 2002 are summarized as follows (unaudited, in thousands):

THREE MONTHS ENDED ~~DECEMBER~~JUNE 3130, ~~PROFORMA~~ SEGMENT 2003 2002 ~~2001 2001~~ ------- --- ---------- ---------------- ~~Distance~~Home ~~Medicine~~Health/Alternate ~~Solutions~~Site Services.... $ 39,069 $ 46,266 Pharmacy Management and Distribution... 7,657 8,698 -------- -------- Total........... 95.~~6% 39~~.~~7% 39~~.~~7% Pharmacy Management and Distribution~~......... 60.~~3% 61~~.~~8% 60~~.~~1% Home Health/Alternative Site Services~~........ ~~56.8%~~$ ~~59.8%~~46,726 ~~63.4%~~$ 54,964 ======== ========

Cost of sales as a percentage of sales for the three months ended June 30, 2003 and 2002 are summarized as follows:

~~NINE~~SEGMENT ~~MONTHS~~2003 ~~ENDED DECEMBER 31, PROFORMA~~ 2002 ~~2001 2001~~ ------- --- ---------- --------------- ~~Distance~~Home ~~Medicine~~Health/Alternate ~~Solutions~~Site Services...........~~.......~~ 7054.06% 6855.73% ~~68.7%~~ Pharmacy Management and Distribution......... 62.5% 6860.26% 6661.35% ~~Home Health/Alternative Site Services........ 55.9% 63.3% 58.7%~~

Both Home Health/Alternate Site Services and Pharmacy Management and Distribution cost of sales decreased in the three months ended June 30, 2003 as compared to the same periods in 2002 because of reduced sales. The reduction in cost of sales as a percentage of sales reflects the previously mentioned focus on payor and therapy mix. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses decreased $10.4 million or 23.3% for the three months ended June 30, 2003 as compared to the comparable period in 2002. The decrease is attributed to the full impact of certain cost reduction programs implemented in 2002, especially at our TLCS subsidiary, which included the sale or closure of fourteen locations, reduction in personnel and related costs in its operating locations, regional support and corporate office. Additionally, a decrease in expense of $3.4 million related to executive non-cash compensation and a reduction in professional fees (classified as SG&A expenses) favorably impacted SG&A expenses for the three months ended June 30, 2003. OTHER INCOME (EXPENSE) Interest expense decreased $11.2 million, from $12.8 million to $1.6 million, for the three months ended June 30, 2003. As compared to the comparable period in 2002, it was an 87.9% reduction. The decrease is attributed primarily to the reduction of $5.9 million in deferred financing fees from 2002 and the discontinued accruing of $4.5 million of interest related to certain unsecured debt, as prescribed by SOP 90-7. RESULTS OF DISCONTINUED OPERATIONS In May 2003, with the approval of the Bankruptcy Court, we sold certain assets and liabilities of Trestle Corporation ("Trestle"), our wholly owned subsidiary, which made up our Distance Medicine Solutions Business Segment, to Trestle Acquisition Corporation, a wholly owned subsidiary of Sunland Entertainment Co., Inc. The transaction included the sale of all of Trestle's intellectual property rights, certain operating assets plus the assumption of certain liabilities totaling approximately $368 thousand. Proceeds from the sale of $1.25 million will remain in escrow pending completion of our plan of reorganization under the bankruptcy proceedings and is included as restricted cash in assets of discontinued operations of the Condensed Consolidated Balance Sheet at June 30, 2003. In accordance with SFAS No. 144, the results of operations have been reported as discontinued operations. In June 2001, e-Net Technology, Ltd. ("e-Net") filed for receivership. In accordance with the Emerging Issues Task Force ("EITF") Abstract No. 95-18, ACCOUNTING AND REPORTING FOR A DISCONTINUED BUSINESS SEGMENT WHEN THE MEASUREMENT DATE OCCURS AFTER THE BALANCE SHEET DATE BUT BEFORE THE ISSUANCE OF FINANCIAL STATEMENTS ("EITF 95-18"), we reflected the discontinued operations in the fiscal year ended March 31, 2001. We estimated the net realizable value of the assets of the discontinued operations and recorded a write down of $6.4 million in fiscal 2001. For further information regarding our discontinued operations, please see Part I, Note 7 of this quarterly report. 24 LIQUIDITY There are significant uncertainties about our ability to continue as a going concern. We have incurred accumulated losses of $682.9 million since our inception, including $417.3 million of goodwill and asset impairment charges. While we have reported net income for the three months ended June 30, 2003, there are no guarantees that we will be profitable in the future. In addition, we have consistently had negative working capital and cash flow from continuing operations, and lower than anticipated levels of cash ($13.7 million and $10.1 million of cash and cash equivalents at June 30, 2003 and March 31, 2003, respectively). We have consistently used cash in operations, including cash used in operating activities of $21.3 million in the fiscal year ended March 31, 2003. However, during the three months ended June 30, 2003, cash provided by operating activities approximated $1.8 million, primarily due to the net income for the period and non cash charges, such as bad debt expenses of $1.6 million, non cash compensation and expenses of $47 thousand and by depreciation and amortization expense of $1.4 million. During the three months ended June 30, 2002, cash used in operating activities of $14 million was primarily due to the net loss from the period of $16.2 million and the cash used by the net change in operating assets and liabilities of $10 million. We are authorized under the Bankruptcy Code to act as a debtor-in-possession during the course of the bankruptcy case. Being a debtor-in-possession means that current management, the board of directors and the shareholders remain in place during the pendency of the case or until such time as an examiner or trustee is appointed. No trustee or examiner has been appointed in our case, although it is possible that one might be appointed at a future time. In connection with being a debtor-in-possession, we obtained financing from Sun Capital. By order of the bankruptcy court dated December 23, 2002, Sun Capital has been approved to act as our source for outside financing in order for us to make up potential gaps in our cash flow during the course of our bankruptcy. For the quarter ended June 30, 2003, CCG has sold approximately $6.2 million worth of receivables to Sun Capital and has received advances in the amount of $4.9 million. Receivables sold in excess of advances are reported net of fees in prepayments and other assets in our Condensed Consolidated Balance Sheet in our Form 10-Q for the quarter ended June 30, 2003. During the three months ended June 30, 2003 and 2002, cash provided in investing activities of $2.6 million and $1 million, respectively, was primarily from distributions from our joint ventures. During the three months ended June 30, 2003, we repaid cash from financing activities of approximately $807 thousand, primarily due to net payments from credit facilities. During the three months ended June 30, 2002, we used cash of $15.4 million in financing activities primarily due to borrowings from credit facilities. The following represents a summary of our estimated contractual obligations and commercial commitments:

~~THREE~~PAYMENTS ~~MONTHS~~DUE ~~ENDED~~BY ~~DECEMBER~~PERIOD 31(IN ~~NINE~~THOUSANDS) ~~MONTHS~~TOTAL ~~ENDED~~LESS ~~DECEMBER~~THAN 311 ~~2002~~YEAR ~~2001~~1-3 ~~2002~~YEARS ~~2001~~4-5 YEARS AFTER 5 YEARS ----- ---------------- --------- --------- -------------~~-------~~ ~~Net sales~~Indebtedness.........................~~.............~~ $ 240,501 $ 240,501 $ -- $ -- $ -- $Capital 3lease obligations............ 4,~~005~~001 ~~Total~~1,923 ~~costs~~2,057 ~~and~~21 ~~expenses~~-- Operating lease....................... --15,169 ~~-- --~~ 6,~~357~~246 ~~-----------~~7,659 ~~-----------~~1,243 ~~-----------~~21 ~~-----------~~Unconditional ~~Operating~~purchase ~~loss from discontinued operations~~obligations.... -- -- -- ~~(3,352)~~-- ~~Interest~~-- ~~and~~Other ~~taxes~~long-term obligations..........~~...................~~ 50,299 50,299 -- -- -- 31 ----------- ----------- -------~~----~~ ------- ---- ~~Net~~Total ~~loss~~contractual ~~from~~cash ~~discontinued Operations~~obligations...~~.......~~ $ --309,970 $ 298,969 $ --9,716 $ (31,~~383)~~264 $ 21 =========== =========== =======~~====~~ ======= ====

Due to the failure to make scheduled payments and the commencement of Chapter 11 proceedings, we are in default of substantially all of our pre-petition debt and other long-term obligations. Under Chapter 11 of the Bankruptcy Code, actions against the Debtors to collect pre-petition indebtedness are subject to an automatic stay provision. These debt obligations at March 31, 2003 and June 30, 2003 are classified as liabilities subject to compromise in the accompanying Condensed Consolidated Balance Sheets in accordance with SOP 90-7. Letters of Credit are purchased guarantees that ensure our performance or payment to third parties in accordance with specified terms and conditions. The following table presents our letters of credit for amounts committed but not drawn-down. These instruments may exist or expire without being drawn-down. Therefore, the amounts committed but not drawn-down, do not necessarily represent future cash flows. 25

~~DECEMBER~~PAYMENTS ~~31,~~DUE ~~MARCH~~BY ~~31,~~PERIOD ~~2002~~(IN ~~2002~~THOUSANDS) OTHER COMMERCIAL OBLIGATIONS TOTAL AMOUNTS COMMITTED LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS ---------------------------- ----------------------- ~~Total~~---------------- ~~assets $ 2,314 $ 2,314 ============ ============ Total liabilities 11,222 11,222 Stockholder's deficit (8,908) (8,908)~~ --------- --------- ------------- ~~Total~~Letters ~~liabilities~~of ~~and~~credit ~~stockholder's~~$ ~~deficit~~640 $ ~~2,314~~-- $ ~~2,314~~640 ~~============~~$ ~~============~~-- $ --

On August 12, 2000, our board of directors approved the repurchase in the open market of up to 2 million shares of our common stock over an eighteen-month period. During the fiscal year ended March 31, 2002, 273 thousand shares were acquired for approximately $429 thousand and during the fiscal year ended March 31, 2001, 187 thousand shares were acquired for approximately $937 thousand. No subsequent repurchases have been made and none are currently contemplated. On August 18, 2001, we entered into two offshore financing agreements with Societe Financiere du Seujet, Limited ("SFSL"), a Securities/Purchase Agreement and a Debenture and Equity Agreement, providing for up to $83 million financing and $54 million in debenture financing, respectively. No funding was provided under either of those agreements. In August 2002, in conjunction with the Company's $70 million debenture refinancing, these agreements were terminated. DEBENTURES In addition to the above-mentioned agreements with SFSL, we entered into a series of ten short form convertible debentures, dated September 5, 2001 (some of which were amended as of September 10, 2001), with SFSL and its affiliate, Sangate. On October 1, 2001, a total of $40 million, less a commission of $3.7 million, was funded and 13.2 million shares of our common stock were pledged and were issuable as collateral of these debentures. The funds were raised principally to fund the planned acquisition of TLCS. In December 2001, these debentures were paid off with the proceeds of new debentures and the pledged shares were released and repledged to holders of the new debentures. On December 28, 2001, debentures 1 and 2 were funded for a total of $40 million and the aggregate amount of 13.2 million shares were pledged to PIBL as collateral for the repayment of debentures 1 and 2. The proceeds of debentures 1 and 2 were used to retire certain of our outstanding debentures with SFSL with a maturity date of December 20, 2001. On December 28, 2001, debentures 3, 4 and 5 were funded for a total of $30 million. In connection with funding of debentures 3, 4 and 5, we entered into a Commission Agreement pursuant to which, as consideration for arranging for the financing, we provided SFSL with a commission of $2.7 million, 3 million shares of our common stock and a warrant to purchase an additional 2 million shares of our common stock at a purchase price of $4.20 per share. Additionally, 10 million shares of our common stock were pledged to SFSL as collateral for the January 4, 2002 funding and SFSL has the right to purchase bondholder position rights of the 10 million shares at $3.00 per share. In August 2002, we reached an agreement to refinance the $70 million of original debentures issued by Private Investment Bank, Limited ("PIBL") held by the holders of our outstanding debentures (the "Debenture Holders"). Pursuant to the agreement entered into with PIBL, as agent for the Debenture Holders, we issued five new amended debentures with a total principal balance of $57.5 million. The new debentures mature on June 28, 2004 unless there is an event of default that would cause acceleration of the amount due. The original debentures, which totaled $70 million and were due on June 28, 2002, have been cancelled. The reduced total of the new debentures reflects the $12.5 million of principal represented by a contractually subordinated debenture that was purchased by TEGCO Investments, LLC ("TegCo"). The new agreement is subject to standard terms and conditions including a schedule of payment obligations and the grant security interests in our assets. Also refer to our Form 8-K, dated August 19, 2002, reported under Item 5 the refinance of $70 million debentures held by PIBL. Due to our filing for bankruptcy protection, we are technically in default under these agreements. On June 9, 2003, Chartwell Home Therapies, L.P. ("CHT") and Chartwell Management Company, Inc. ("CMC") entered into a Proceeds Distribution Agreement with PIBL. Under the terms of this agreement, CHT has agreed to split proceeds with PIBL from cash distributions from joint ventures owned by CHT. CHT and CMC have also granted to PIBL a security interest in all such proceeds and on substantially all of the assets of CHT and CMC. PIBL has agreed to remove permanently certain liens it placed on the joint ventures. The obligations to split proceeds from distributions terminate at the time when a reorganization plan is confirmed in our Bankruptcy Case. Going forward, our principal focus will be to generate positive cash flow from our continuing operations primarily from our business units. We plan to continue to eliminate redundancies at all staff levels and locations consistent with this objective. In order for us to continue our operations, we must be successful in obtaining additional funding by 1) maintaining our arrangement with Sun Capital as our source for debtor-in-possession financing; 2) successfully managing the reorganization of the TLCS and Med Debtors; and 3) preparing, filing and obtaining approval of plans of reorganization for the Med Debtors. Other factors, including those risk factors identified in our Form 10-K for the fiscal year ended March 31, 2003, adversely affect our ability to obtain additional funding. Our independent auditors stated in their "Report of Independent Accountants" on our consolidated financial statements as of and for the years ended March 31, 2003, 2002 and 2001 that there is substantial doubt about our ability to continue as a going concern. We may be unable to raise any additional amounts on reasonable terms, or at all, when needed. If we are unable to raise such additional funding, we would have to curtail operations, which in turn would have an adverse effect on our financial position and results of operations and our ability to operate. CAPITAL EXPENDITURES There were no material commitments for capital expenditures during the quarter ended June 30, 2003, and no material commitments are anticipated in the near future. 26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET/PRICE RISK We are exposed to market risk in the normal course of business operations. We face competition and must offer our products and services at prices the market will bear. Management believes that we are well positioned with our mix of products and services to take advantage of future price increases for these products and services. However, should the prices for our products or services decline, this could adversely affect our future profitability and competitiveness. INTEREST RATE RISK Our debt portfolio as of June 30, 2003 is composed entirely of fixed and variable rate debt denominated in United States currency. Changes in interest rates have different impacts on the fixed and variable rate portions of our debt portfolio. A change in interest rate on the variable portion of the debt portfolio impacts the interest incurred and cash flows but does not impact the net financial instrument position. If interest rates significantly increase, we could incur additional interest expenses, which would negatively affect its cash flow and future profitability. ITEM 4. CONTROLS AND PROCEDURES We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rule 13a-14 under supervision and with the participation of management, including our Chief Executive Officer, Chief Operating Officer and Chief Accounting Officer, within 90 days of filing this report. Based upon that evaluation, our Chief Executive Officer, Chief Operating Officer and Chief Accounting Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. The design of any future system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions regardless of how remote. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. As discussed in greater detail in Part I, Note 2 above, on the Petition Date, we and five of our domestic, wholly owned subsidiaries, Chartwell, CCS, CCG, Resource and Trestle, filed voluntary petitions in the Bankruptcy Court under Chapter 11 of the Bankruptcy Code. The reorganization cases are being jointly administered under the caption "In re Med Diversified, Inc., et al., Case No. 8-02-88564." On November 8, 2002, TLCS along with nineteen of TLCS' subsidiaries filed voluntary petitions in the Bankruptcy Court under the Bankruptcy Code. The reorganization cases are being jointly administered under the caption "In re Tender Loving Care Health Care Services, Inc., et al., Case No. 8-02-88020." All of the entities continue to operate their businesses as debtors-in-possession, subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court, while a plan of reorganization is formulated. At this time, it is not possible to predict the outcome of the Chapter 11 cases or their effect on our business. In connection with our filing for bankruptcy protection, all of the litigation noted below, if it was not settled prior to the filing for bankruptcy, has been automatically stayed under bankruptcy law, meaning, where we are a defendant, that no adverse party may take any action in the context of such litigation unless such party obtains relief from the automatic stay. Where we are the plaintiff, we may pursue such litigation at our option. Except as described below, none of such pending litigation, in our opinion, could have a material adverse impact on our consolidated financial condition, results of operations or businesses. We are subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably to us. We have established accruals for matters that are probable and reasonably estimable. 27 Management believes that any liability that may ultimately result from the resolution of these matters in excess of amounts provided will not have a material adverse effect on our financial position, results of operations or cash flows. We, and certain related parties, have been and continue to be involved in litigation regarding certain of our acquisitions and strategic relationships, material and non-material. Where we are a party to such material litigation, a description of such litigation is set forth below. In our Annual Report on Form 10-K for the fiscal year ended March 31, 2003, we reported on our pending legal proceedings. The following section updates that disclosure to the extent that developments in those proceedings have occurred since our Annual Report. ASHE WAHBA On April 17, 2002, Ashe Wahba ("Wahba") filed a demand for arbitration with the American Arbitration Association ("AAA") against the Company (AAA No. 11 160 01346 2). Prior to his termination in April 2002, Wahba served as Chartwell's President of International Business. Wahba alleges that we breached the severance and signing compensation provisions of his Executive Employment Agreement (the "Employment Agreement"), dated August 18, 2001. The Employment Agreement called for arbitration for disagreements arising out of or relating to the Employment Agreement. Wahba seeks an award of salary compensation, compensation for stock options, attorneys' fees and administrative costs. Though we have taken part in settlement discussions with Wahba, no settlement has been reached. We continue to disagree with Wahba's interpretation of the Employment Agreement. Due to our filing for bankruptcy protection, this matter was subject to the automatic stay under the Bankruptcy Code. However, on February 4, 2003, Wahba filed a motion with the Bankruptcy Court to modify the stay and allow the arbitration to proceed. The Bankruptcy Court granted such motion. Therefore, this matter will proceed in arbitration. Any award, however, will merely liquidate the amount of Wahba's claim, which will remain subject to the automatic stay and whatever treatment ultimately will be afforded the unsecured creditors under our plan of reorganization. A conference regarding potential settlement of this matter was held on August 15, 2003. The parties agreed to have another conference in the near future. ADDUS HEALTHCARE On or about April 24, 2002, we filed a complaint against Addus Healthcare, Inc. ("Addus"), and its major shareholders, W. Andrew Wright, Mark S. Heaney, Courtney E. Panzer, and James A. Wright (Med Diversified, Inc. v. Addus Healthcare, Inc., et al., U.S. District Court, Central District of California, Case No. CV 02-3911 AHM (JTLX)). We contend that Addus has been unable to perform its obligations under a certain stock purchase agreement relating to our acquisition of Addus. We allege that Addus breached the warranties and representations it gave regarding its financial condition, and Addus has been unable to obtain the consent of necessary third parties to assign some relevant contracts. We believe that Addus has breached the agreement in other ways, as well. Additionally, we allege that the Defendants have misappropriated our deposit. The complaint demands the imposition of a constructive trust for the converted funds and an injunction against the Defendants' disposing of or liquidating the $7.5 million deposit. Our complaint further alleges fraud on behalf of the Defendants, stating that they never intended to complete the transaction but planned to use the pendency of the transaction to obtain concessions from us. Additionally, there is a claim for breach of contract. We seek compensatory damages of approximately $10 million per claim, plus punitive damages, along with the equitable relief previously described and attorneys' fees. Addus has filed a counterclaim against us, alleging that we (1) fraudulently induced them to enter into the agreement, (2) negligently misrepresented certain aspects of our business, (3) breached the terms of the agreement by not closing the transaction and not having available funds to close the transaction, and (4) breached certain other confidentiality agreements. Addus has sought compensatory damages in excess of $4 million, a declaratory judgment that it is entitled to retain the $7.5 million deposit, for general and special damages. We dispute these claims vigorously and believe they are without merit. On July 9, 2002, we filed a reply to the counterclaim. This matter has been transferred to the Northern District of Illinois. On October 11, 2002, we filed an Amended Complaint. We received Addus' answer to that complaint. A status conference was held on July 25, 2003. We intend to continue pursuing this litigation. UNIVERSITY AFFILIATES In January 2002, we filed a Complaint against University Affiliates IPA ("UAIPA") and its president, Sam Romeo, who at the time was also a member of our board of directors, for breach of contract, fraud and, as to Mr. Romeo, breach of fiduciary duty arising out of a May 2, 2000 agreement between UAIPA and us (Med Diversified, Inc. v. University Affiliates IPA a/k/a Univ. Affiliates Med Grp.; Sam J.W. Romeo, M.D. a/k/a Sam Romeo; Doe Defendants, Superior Court of the State of California, County of Los Angeles, Case No. BC 266500). Under the agreement, during the quarter ended June 2000, we advanced $2 million to UAIPA for 28 the purpose of creating a joint venture intended to combine UAIPA's supposed healthcare management expertise with Internet healthcare management systems in an effort to develop new business opportunities. As of the filing of the suit, the companies had not proceeded with the joint venture. According to the original agreement, if a formal joint venture agreement were not entered into between UAIPA and us by July 1, 2000, UAIPA would guarantee payment of $2.5 million to us on or before July 1, 2001. The $2.5 million has not been paid. We seek payment of this amount, plus any profits from the business opportunities that were to be transferred to the joint venture, and punitive damages. On March 4, 2002, UAIPA served a cross-complaint against us, Sanga E-Health, LLC, TSI Technologies, LLC, Mitchell Stein and John F. Andrews ("Andrews"), alleging breach of various contracts, breach of the implied covenant of good faith and fair dealing, declaratory relief, promissory estoppel, fraud, negligent misrepresentation, unjust enrichment, quantum meruit, conversion, money had and received, breach of fiduciary duty, interference with prospective business advantage and unfair business practices, seeking damages in the aggregate of approximately $11 million plus punitive damages. The court denied our motion to compel arbitration on May 8, 2002. We subsequently filed a cross-complaint against UAIPA and Sam Romeo regarding their failure to adhere to the May 2, 2000 agreement. No trial date has been set and UAIPA is currently in bankruptcy proceedings. Due to our filing for bankruptcy protection and UAIPA's bankruptcy proceedings, this matter was subject to the automatic stay in both cases. On June 16, 2003, the Bankruptcy Court has entered an order settling this litigation without payment by any party. NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., NATIONAL PREMIER FINANCIAL SERVICES, INC., NPF VI, INC., NPF X, INC., NPF XII, INC., NPF CAPITAL, INC. On May 30, 2003, we, along with Chartwell, CCG, CCS, and Resource, filed a lawsuit against NCFE and five legal designees of NCFE in the Bankruptcy Court (Med Diversified, Inc.; Chartwell Diversified Services, Inc.; Chartwell Care Givers, Inc.; Chartwell Community Services, Inc.; and Resource Pharmacy, Inc. v. National Century Financial Enterprises Inc.; National Premier Financial Services, Inc.; NPF, VI, Inc.; NPF X, Inc.; NPF XII, Inc.; NPF Capital, Inc., United States Bankruptcy Court for the Eastern District of New York, Adversary Proceeding No. 1-03-01320). We contend that the defendants engaged in a course of conduct, whereby they fraudulently promised attractive returns to investors. We believe that the defendants diverted investments and concealed the scheme by fraudulently manipulating the use of new investments. We believe that the defendants used us as an instrumentality to further this fraudulent conduct, harming our estates. We also bring causes of action under theories of unjust enrichment and fraud. There are certain claims against us arising from transfers of funds from the Defendants to us, including the Defendants' purported secured and unsecured loans, purchases of receivables and other advances. We seek to recharacterize these claims as equity interests, and to the extent that such claims are recharacterized as equity interests, we seek to subordinate those interests to those of the other equity holders. Further, we seek the turnover of overfunded reserves and accrued subservicing fees by certain of the Defendants and recovery for breach of certain sales and subservicing agreements between the Defendants and us. We also seek recovery for the Defendants' breach of commitments in connection with a bond initiative sponsored by PIBL, as well as breach of the preferred provider agreement, entered into between NCFE and us in February 2000. We also seek recovery of fraudulent transfers. The defendants' answer on responsive pleadings was due on August 8, 2003 and was filed on such date. This adversary proceeding is in its initial stages, with a pretrial conference set before the Bankruptcy Court on August 15, 2003. STEPHEN SAVITSKY, DAVID SAVITSKY, DALE R. CLIFT On May 16, 2003 we, along with TLCS, filed a lawsuit against Stephen Savitsky ("S. Savitsky"), David Savitsky ("D. Savitsky"), and Dale R. Clift ("Clift") in the Bankruptcy Court (Med Diversified, Inc.; Tender Loving Care Health Care Services, Inc. v. Stephen Savitsky; David Savitsky; Dale R. Clift, United States Bankruptcy Court for the Eastern District of New York, Adversary Proceeding No. 03-8244). Up until October 28, 2002, S. Savitsky served as Chief Executive Officer of TLCS. From October 28, 2002 until his resignation on November 6, 2002, S. Savitsky served as Executive Vice President of TLCS. Up until or shortly after October 28, 2002, D. Savitsky served as Vice Chairman of Governmental Affairs for TLCS. Up until February 27, 2002, Clift served as President and Chief Operating Officer of TLCS. We and TLCS made certain transfers and conveyances to S. Savitsky, D. Savitsky and Clift during the course of their employment with TLCS. We and TLCS seek to avoid and recover those transfers as preferential payments under the Bankruptcy Code. We and TLCS also seek to avoid and recover those funds under the theories of fraudulent transfers, fraudulent conveyances, and unjust enrichment. The defendants' answers were due on June 30, 2003 and were filed on such date. Discovery is proceeding in this matter. 29 ITEM 2. CHANGES IN SECURITIES. During the three months ended June 30, 2003, we did not engage in any transactions involving the issuance of unregistered shares of our common stock or any other secutiries. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. The Med Debtors made their Chapter 11 filings on November 27, 2002. As a result of the filings, no principal or interest payments have been or will be made on certain indebtedness incurred by the Med Debtors prior to November 27, 2002, until a plan of reorganization defining the payment terms has been approved by the Bankruptcy Court. Additional information regarding the Med Debtors' Chapter 11 filings is set forth elsewhere in this Form 10-Q, including Notes 1 and 3 to the Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. TLCS and nineteen of its subsidiaries made their Chapter 11 filings on November 8, 2002. As a result of the filings, no principal or interest payments have been or will be made on certain indebtedness incurred by the Med Debtors prior to November 8, 2002, until a plan of reorganization defining the payment terms has been approved by the Bankruptcy Court. Additional information regarding the Med Debtors' Chapter 11 filings is set forth elsewhere in this Form 10-Q, including Notes 1 and 3 to the Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBIT INDEX

~~Common~~EXHIBIT ~~Stockholders:~~NO. ~~For:~~DESCRIPTION ~~Withhold:~~31.1 ~~Frank~~Certification Ppursuant to 18 U.S.C. ~~Magliochetti~~Section 1350, Jras adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 ~~94,566,190~~Certification ~~3,607,149~~pursuant ~~John~~to F18 U.S.C. ~~Andrews~~Section 951350,~~041,103~~ ~~3,132,231~~as ~~Donald~~adopted Hpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 ~~Ayers~~Certification ~~86,151,094~~pursuant ~~12,022,240~~to ~~Gregory~~18 JU.S.C. ~~Simms~~Section 951350,~~238,179~~ as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2~~,935,160~~ ~~Richard~~Certification Jpursuant to 18 U.S.C. ~~Boudreau~~Section 951350,~~238,179~~ ~~2,935,160~~as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) REPORTS ON FORM 8-K We filed a Form 8-K, dated May 20, 2003, reporting under Item 9 that on May 19, 2003, management appeared in the Bankruptcy Court and made an oral presentation that updated the Bankruptcy Court on our activities and performance since filing for bankruptcy protection. 30 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. Med Diversified, Inc. By: /s/ Frank P. Magliochetti, Jr. ------------------------------- Frank P. Magliochetti, Jr. Chairman and Chief Executive Officer (Principal Executive Officer) Date: August 14, 2003 By: /s/ James A. Shanahan, III --------------------------------- James A. Shanahan, III Vice President of Finance and Accounting and Corporate Controller (Principal Financial and Accounting Officer) Date: August 14, 2003 31

For Against Abstain Common Stockholders 97,837,182 295,671 40,481

Exhibit Number Description of Document ------- ----------------------- 10.1 Debtor-In-Possession Master Purchase and Sale Agreement with Sun Capital dated December 24, 2002 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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