Index to Financial Statements

Index to Financial Statements

~~Index~~UNITED toSTATES ~~Financial Statements~~

~~UNITED~~SECURITIES ~~STATES~~AND EXCHANGE COMMISSION

~~SECURITIES~~Washington, ~~AND~~D.C. ~~EXCHANGE~~20549 ~~COMMISSION~~

~~Washington,~~FORM ~~D.C.~~10-K ~~20549~~

~~FORM~~FOR ~~10-K~~ANNUAL AND TRANSITION REPORTS

~~FOR~~PURSUANT ~~ANNUAL~~TO ~~AND~~SECTIONS ~~TRANSITION~~13 ~~REPORTS~~OR 15(D) OF THE

~~PURSUANT~~SECURITIES TOEXCHANGE ~~SECTIONS~~ACT ~~13 OR 15(D)~~ OF ~~THE~~1934

~~SECURITIES~~(Mark ~~EXCHANGE~~One) ~~ACT OF 1934~~

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

xFor ~~ANNUAL~~the ~~REPORT~~fiscal ~~PURSUANT~~year TOended ~~SECTION~~September 30, 132006 ~~OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For~~¨ ~~the~~TRANSITION ~~fiscal~~REPORT ~~year~~PURSUANT ~~ended~~TO ~~September~~SECTION ~~30,~~13 ~~2004~~OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨For ~~TRANSITION~~the ~~REPORT~~transition ~~PURSUANT~~period ~~TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~from to

~~For~~Commission ~~the~~File ~~transition~~Number ~~period~~0-23946 ~~from to~~

~~Commission~~PEDIATRIC ~~File~~SERVICES ~~Number~~OF ~~0-23946~~AMERICA, INC.

~~PEDIATRIC~~(Exact ~~SERVICES~~name OFof ~~AMERICA,~~registrant ~~INC.~~as specified in its charter)

(Exact name of registrant as specified in its charter)

Delaware

58-1873345

(State or other jurisdiction

of incorporation or organization)

(IRS Employer

Identification Number)

Delaware		58-1873345
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

310 Technology Parkway Norcross, Georgia 30092-2929

~~310~~(Address ~~Technology Parkway~~of ~~Norcross,~~principal ~~Georgia~~executive ~~30092-2929~~offices) (Zip Code)

(~~Address of principal executive offices~~770) ~~(Zip~~441-1580 ~~Code)~~

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

~~Registrant’s~~Securities ~~telephone~~registered ~~number,~~pursuant ~~including~~to ~~area~~Section 12(b) of ~~code~~the Act:

~~Securities~~Common ~~registered~~Stock ~~pursuant~~$.01 topar ~~Section~~value ~~12(b) of the Act:~~

~~None~~Common Stock Purchase Rights

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

~~Common~~None ~~Stock $.01 par value~~

~~Common~~Indicate ~~Stock~~by ~~Purchase~~check ~~Rights~~mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark ~~whether~~if the registrant: ~~(1)~~is ~~has~~not ~~filed all reports~~ required to befile ~~filed~~reports pursuant byto Section 13 or Section 15(d) of the ~~Securities~~ ~~Exchange~~ Act ~~of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days~~. Yes x¨ No ¨x

Indicate by check mark ifwhether each ~~disclosure~~registrant: of(1) has ~~delinquent~~filed ~~filers~~all ~~pursuant~~reports required to ~~Item 405~~be offiled ~~Regulation~~by ~~S-K~~Section 13 isor ~~not~~15(d) ~~contained~~of ~~herein,~~the ~~and~~Securities ~~will~~Exchange ~~not~~Act beof ~~contained,~~1934 toduring the ~~best~~preceding of12 ~~the~~months ~~registrant’s~~(or ~~knowledge,~~for insuch ~~definitive~~shorter ~~proxy~~period orthat ~~information~~the ~~statements~~registrant ~~incorporated~~was byrequired ~~reference~~to infile ~~Part~~such reports), ~~III~~and of(2) has ~~this~~been ~~Annual~~subject ~~Report~~to onsuch ~~Form~~filing ~~10-K~~requirements orfor ~~any amendment~~the topast ~~this~~90 ~~Form 10-K~~days. Yes x No ¨

Indicate by check mark ~~whether~~if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s isknowledge, anin ~~accelerated~~definitive ~~filer~~proxy ~~(as~~or ~~defined~~information statements incorporated by reference in ~~Exchange~~Part ~~Act~~III ~~Rule 12b~~of this Form 10-2)K or any amendment to this Form 10-K. ~~Yes~~ x ~~No ¨~~

~~The~~Indicate ~~aggregate market value of voting stock held~~ by ~~non-affiliates~~check ofmark whether the registrant onis ~~March~~a 31large accelerated filer, ~~2004~~an ~~based~~accelerated onfiler or a ~~closing price~~non-accelerated ~~of $13~~filer.69 ~~per~~See ~~share,~~definition ~~was~~of “accelerated ~~$77,783,732.~~filer Asand oflarge ~~December~~accelerated 7,filer” ~~2004,~~in ~~the~~Rule ~~number~~12b-2 of ~~shares of~~ the ~~registrant’s~~Exchange ~~Common Stock outstanding was 7,145,521 shares~~Act.

~~DOCUMENTS~~Large ~~INCORPORATED~~accelerated BYfiler ¨ Accelerated ~~REFERENCE~~filer x Non-accelerated filer ¨

~~Certain~~Indicate ~~information~~by ~~contained~~check inmark whether the registrant’s ~~Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on January 19, 2005~~ is ~~incorporated~~a ~~herein~~shell bycompany ~~reference~~(as defined in ~~Part~~Rule ~~III~~12b-2 of ~~this~~the ~~Annual~~Exchange ~~Report on Form 10-K~~Act). Yes ¨ No x

The aggregate market value of voting stock held by non-affiliates of the registrant on March 31, 2006 based on a closing price of $14.05 per share was $60,307,995. As of December 1, 2006, the number of shares of the registrant’s Common Stock outstanding was 7,538,763 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the registrant’s Proxy Statement for the 2007 Annual Meeting of Stockholders to be held on February 6, 2007 is incorporated herein by reference in Part III of this Annual Report on Form 10-K.

~~Index~~PEDIATRIC toSERVICES ~~Financial~~OF ~~Statements~~AMERICA, INC.

~~PEDIATRIC~~ANNUAL ~~SERVICES~~REPORT OFON ~~AMERICA,~~FORM ~~INC.~~10-K

~~ANNUAL~~For ~~REPORT~~the ONFiscal ~~FORM~~Year ~~10-K~~Ended September 30, 2006

~~For~~ TABLE ~~the~~OF ~~Fiscal~~CONTENTS ~~Year Ended September 30, 2004~~

TABLE OF CONTENTS


Item Number		Page Number
	PART I
1.	Business	3

1A.	Risk Factors	16

2.	Properties	21

3.	Legal Proceedings	21

4.	Submission of Matters to a Vote of Security Holders	21

4A.	Executive Officers of the Registrant	21

	PART II

5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23

6.	Selected Financial Data	24

7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

7A.	Quantitative and Qualitative Disclosures about Market Risk	38

8.	Financial Statements and Supplementary Data	38

9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	38

9A.	Controls and Procedures	38

9B.	Other Information	39

	PART III

10.	Directors and Executive Officers of the Registrant	40

11.	Executive Compensation	40

12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	40

13.	Certain Relationships and Related Transactions	41

14.	Principal Accountant Fees and Services	41

	PART IV
15.	Exhibits and Financial Statement Schedules	42

SIGNATURES		45

INDEX TO FINANCIAL STATEMENTS		46

INDEX TO FINANCIAL STATEMENT SCHEDULE		80

INDEX TO EXHIBITS		82

ItemNumber		PageNumber
	PART I
1.	Business	3
2.	Properties	21
3.	Legal Proceedings	21
4.	Submission of Matters to a Vote of Security Holders	21
4(A).	Executive Officers of the Registrant	22
	PART II
5.	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	23
6.	Selected Financial Data	24
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
7(A).	Quantitative and Qualitative Disclosures about Market Risk	36
8.	Financial Statements and Supplementary Data	37
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	37
9(A).	Controls and Procedures	37
9(B).	Other Information	37
	PART III
10.	Directors and Executive Officers of the Registrant	38
11.	Executive Compensation	38
12.	Security Ownership of Certain Beneficial Owners and Management	38
13.	Certain Relationships and Related Transactions	38
14.	Principal Accountant Fees and Services	38
	PART IV
15.	Exhibits and Financial Statement Schedules	39
SIGNATURES		41
INDEX TO FINANCIAL STATEMENTS		43
INDEX TO FINANCIAL STATEMENT SCHEDULE		67
INDEX TO EXHIBITS		69

~~Index~~PART toI ~~Financial Statements~~

~~PART~~ITEM I1. BUSINESS

~~ITEM~~Forward-Looking 1.Statements ~~BUSINESS~~

~~Forward~~This Annual Report on Form 10-~~Looking~~K ~~Statements~~contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to future financial performance of our company. When used in this Form 10-K, the words “may,” “targets,” “goal,” “could,” “should,” “would,” “believe,” “feel,” “expects,” “anticipate,” “estimate,” “intend,” “plan,” “potential” and similar expressions may be indicative of forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control. We caution that various factors, including the factors described below and elsewhere in this report, including those set forth in Item 1A under the caption “Risk Factors”, as well as those discussed in our other filings with the Securities and Exchange Commission, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf. The following are among the important factors that could cause actual results to differ materially from the results discussed herein:

~~This~~• ~~Annual Report on Form 10-K contains certain forward-looking statements (as such term is defined in~~ the ~~Private Securities Litigation Reform Act of 1995) relating to future~~ financial ~~performance~~implications of ~~our company. When used in this Form 10-K,~~ the ~~words~~sale “may,” “targets,” “goal,” “could,” “should,” “would,” “believe,” “feel,” “expects,” “anticipate,” “estimate,” “intend,” “plan,” “potential” and similar expressions may be indicative of ~~forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond~~ our ~~control.~~ WePharmacy ~~caution that various factors, including the factors described below~~ and ~~elsewhere~~RTES in this report, including those set forth in Item 1 under the caption “Risk Factors”, as well as those discussed in our other filings with the Securities and Exchange Commission, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf. The following are among the important factors that could cause actual results to differ materially from the results discussed herein: businesses;

• ~~changes~~our inanticipated ~~reimbursement~~uses ~~rates~~of orthe ~~policies~~proceeds from the sale of our Pharmacy and RTES businesses;

• ~~payor~~changes ~~relationships~~in reimbursement rates or policies;

• ~~changes~~payor in health care regulations, including changes resulting from the recently enacted Medicare Prescription Drug Act of 2003 (“MMA”) and the Health Insurance Portability and Accountability Act (“HIPAA”)relationships;

• ~~the~~changes ~~ability~~in tohealthcare ~~collect~~regulations, ~~for~~including ~~equipment~~changes ~~sold~~resulting orfrom ~~rented~~the Health Insurance Portability and Accountability Act (“HIPAA”);

•

the ability to assimilate and manage previously acquired field operations;

•

the ability to collect accounts receivable for products and services we provide, including receivables related to acquired businesses and receivables under appeal;

•

the ability to comply with and respond to billing requirements issues, including those related to our billing and collection system;

•

reduced state funding levels and nursing hours authorized by Medicaid programs;

•

adverse litigation results;

•

competitive factors;

• ability to hire and retain qualified ~~health~~healthcare ~~care~~ professionals;

•

the availability and cost of medical malpractice, workers’ compensation and employee medical benefit insurance;

•

changes in industry practices; and

•

general economic condition and industry trends.

Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of an unanticipated event. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

The following discussion should be read in conjunction with our audited consolidated financial statements included in this Annual Report on Form 10-K.

General

We are a leading provider of home ~~health~~healthcare ~~care~~ and related services for medically fragile and chronically ill infants and children. Management believes we are the nation’s largest focused pediatric home ~~health~~healthcare care provider. We provide children’s health care services through a network of over 120 branch offices, including satellite offices and new branch offices, located in 21 states through three reportable segments: (i) Private Duty

~~Index~~ provider. toWe ~~Financial~~provide ~~Statements~~children’s healthcare services through a network of over 50 branch offices, including satellite offices and new branch offices, located in 18 states through two reportable segments: (i) Private Duty Nursing, or PDN and (ii) Prescribed Pediatric Extended Care, or PPEC services.

~~Nursing~~On ~~and~~August 25, ~~Prescribed~~2006, ~~Pediatric~~the ~~Extended~~Company ~~Care,~~entered orinto ~~PPEC~~an ~~services,~~Agreement ~~(ii)~~for ~~Specialty~~the ~~Pharmacy~~sale ~~and~~of ~~Infusion~~substantially all of the assets of its Respiratory Therapy ~~Services,~~Equipment and Services (~~iii~~“RTES”) ~~Respiratory~~business ~~Therapy~~to Lincare, Inc. For further discussion see Item 7 - “Management’s Discussion and ~~Home~~ ~~Medical~~Analysis ~~Equipment~~of Financial Condition and ~~Services,~~Results orof ~~RTES~~Operations.”

Our products and services are designed to provide a high quality, lower cost alternative to prolonged hospitalization for medically fragile and chronically ill children. We provide a broad range of pediatric ~~health~~healthcare ~~care~~ services ~~and equipment~~, including nursing, ~~respiratory~~ ~~therapy, rental and sale of home medical equipment, pharmaceutical services and infusion therapy services. In addition, we provide~~ rehabilitation and therapy services in our PPEC day treatment centers for medically fragile and chronically ill children, well care services and special needs educational services for pediatric patients. We also provide case management services in order to assist the family and patient by coordinating the provision of services between the insurer or other payor, the physician, the hospital and other ~~health~~healthcare ~~care~~ providers. ~~As a complement to our pediatric respiratory and infusion therapy services, we also provide respiratory and infusion therapy and related services for adults.~~

Industry Overview

We estimate that the U.S. market for pediatric home ~~health~~healthcare ~~care~~ exceeds $5 billion. The current market for pediatric home ~~health~~healthcare ~~care~~ products and services is heavily fragmented., ~~This~~and ~~market~~ is typically served by a large number of small entities that operate on a local or regional basis and typically provide a limited range of ~~health~~healthcare ~~care~~ products and services. This market is also served by a small number of national home ~~health~~healthcare ~~care~~ companies that service the pediatric market as part of a broader product and service offering. Because of the high degree of specialization and the broad scope of products and services required for effective treatment of pediatric patients, we believe that there are significant growth opportunities for a national provider ~~offering a broad range of health care products and services~~ focused on ~~the~~ home-based pediatric ~~patient~~patients.

The ~~pediatric~~ pediatric home ~~health~~healthcare ~~care~~ market is distinct in a number of respects. Pediatric patients tend to require a higher acuity of care due to their age and the severity of their medical conditions, and consequently they generally have a relatively long length of treatment, often measured in years rather than weeks or months. Pediatric illnesses and conditions include bronchopulmonary dysplasia, digestive and absorptive diseases, congenital heart defects and other cardiovascular disorders, cancer, ~~cerebral~~ cerebral palsy, ~~cystic fibrosis,~~ obstructive and restrictive pulmonary disease, ~~endocrinology disorders, hemophilia,~~ orthopedic conditions and post surgical needs. In many instances, pediatric patients have multiple disorders.

Home care for pediatric patients, like home care generally, is often preferred over institutional care by patients and their parents or other care givers, as well as by payors. Patients and parents prefer home care due to the ability to care for the child in a nurturing environment with family involvement. Home care also minimizes the risk of cross-infection, eliminates privacy and safety concerns and permits a more gradual and consequently more event-free transition of care-giving from the ~~health~~healthcare ~~care~~ professional to the family. Payors prefer home care because it is typically more cost effective than institutional care.

Third- party reimbursement for pediatric home ~~care~~ healthcare is provided by private health insurance and governmental payors, primarily state Medicaid programs. Because of the special needs of pediatric patients, the acuity of care and the skill levels of the individual nurses or therapists providing the care, the rates charged for pediatric ~~health~~healthcare ~~care~~ services, particularly pediatric nursing services, are generally higher than adult rates. In addition, due to the high medical acuity of pediatric patients and the large variations in patient conditions and treatment protocols, pediatric home ~~health~~healthcare ~~care~~ is typically not reimbursed on a capitated basis.

Unlike geriatric home care patients, who typically receive maintenance care, pediatric home care patients are often treated interventionally, using technologically advanced medical equipment such as ventilators, oxygen delivery systems, feeding pumps, nebulizers, sleep apnea monitors and other respiratory equipment. ~~Also, pediatric patients often require home infusion therapy for the delivery of pharmaceuticals, especially for the treatment of hemophilia, cystic fibrosis and endocrinological disorders.~~

~~Index~~Due to ~~Financial~~the ~~Statements~~specialized care required to treat pediatric illnesses and conditions, home nursing care is most effectively delivered to pediatric patients by nurses with experience in either a neonatal intensive care unit (“NICU”) or pediatric intensive care unit (“PICU”) or equivalent experience. These specialized healthcare professionals are experienced in treating medically fragile children and administering required medications and other therapies. Pediatric patients typically require home nursing in shifts, in which nursing care is delivered eight to twenty-four hours per day, in contrast to home nursing care for geriatric patients, in which nursing care is typically provided on a short duration “visiting nurse” basis.

~~Due~~Like topediatric ~~the~~patients, ~~specialized~~young ~~care~~adult ~~required~~home tocare ~~treat~~patients, ~~pediatric~~who ~~illnesses~~range ~~and~~in ~~conditions,~~age ~~home~~from ~~nursing~~19 ~~care~~to ~~is most~~64 ~~effectively~~years, ~~delivered~~often torequire ~~pediatric~~long-term ~~patients~~care from byprivate duty nurses. ~~with~~Young ~~experience~~adult inpatients ~~neonatal~~suffer ~~intensive~~from ~~care~~such ~~unit~~disorders ~~(“NICU”),~~as ~~pediatric~~muscular ~~intensive~~dystrophy, ~~care~~cardiovascular ~~unit~~disorders ~~(“PICU”)~~and ~~or equivalent experience~~cancer. ~~These~~Many ~~specialized~~young ~~health~~adult ~~care~~patients ~~professionals~~suffer ~~are experienced~~injury inand ~~treating~~significant ~~medically~~disabilities ~~fragile~~from ~~children~~accidents ~~and~~or ~~administering~~other ~~required~~forms ~~medications~~of ~~and~~trauma. ~~other~~Many of ~~therapies.~~these ~~Pediatric~~disorders ~~patients~~and ~~typically~~illnesses require ~~home~~lifelong ~~nursing~~treatment. ~~in shifts~~Frequently, ina ~~which~~young ~~nursing~~adult ~~care~~patient isreceives ~~delivered~~home ~~eight~~care toas ~~twenty-four~~a ~~hours~~continuation ~~per~~of ~~day,~~a ~~in contrast~~pediatric to home ~~nursing~~ care ~~for~~treatment ~~geriatric~~regimen. ~~patients,~~A inlarge ~~which~~percentage ~~nursing~~of ~~care~~young isadult ~~typically~~patients ~~provided~~are oncovered aby ~~short~~private ~~duration~~health insurance, ~~“visiting~~with ~~nurse”~~the ~~basis~~remainder covered by Medicaid.

~~Like pediatric patients, young adult home care patients, who range in age from 19 to 64 years, often require long-term care from private duty nurses.~~Competition Young adult patients suffer from such disorders as muscular dystrophy, cystic fibrosis, hemophilia, cardiovascular disorders and cancer. Many young adult patients suffer injury and significant disabilities from accidents or other forms of trauma. Many of these disorders and illnesses require lifelong treatment. Frequently, a young adult patient receives home care as a continuation of a pediatric home care treatment regimen. A large percentage of young adult patients are covered by private health insurance, with the remainder covered by Medicaid.

~~Geriatric~~The ~~patients~~markets ~~(those~~for ~~patients~~our ~~age~~healthcare 65services ~~years~~are ~~old~~highly competitive and ~~older)~~are ~~generally~~divided ~~have~~among ~~shorter~~a ~~periods~~large number of ~~service~~providers, ~~and~~some ~~shorter~~of ~~periods~~which ofare ~~daily~~national ~~care.~~providers, ~~Many~~but ~~geriatric~~most ~~patients~~of ~~suffer~~which ~~from~~are ~~emphysema~~either regional or local providers. In addition to competing with other ~~pulmonary~~home ~~disorders~~healthcare ~~requiring~~companies ~~oxygen~~focusing ~~therapy~~ on aproviding products ~~continuous~~and ~~basis.~~services ~~Geriatric~~to pediatric patients, we compete with ~~more~~several ~~acute~~large ~~conditions~~national ~~are~~home ~~more~~healthcare ~~likely~~companies tothat, ~~receive~~while ~~care~~not infocusing anprimarily ~~institutional~~on ~~setting~~the pediatric patient, provide pediatric home healthcare services as part of a broader service offering. ~~Most~~Certain ~~geriatric~~of ~~patients~~our ~~are~~competitors ~~covered~~and bypotential ~~Medicare~~competitors ~~for~~have ~~all~~significantly greater financial, technical, sales and marketing resources than we have and may, in certain locations, possess licenses or ~~part~~certificates ofthat ~~their~~permit ~~health~~them ~~care~~to ~~needs~~provide services that we cannot currently provide.

~~Competition~~In addition to our traditional competitors, other types of healthcare providers, including hospitals, physician groups and other home health agencies, have entered, and may continue to enter, our business. Among the barriers to entry that may exist in the home health industry are the requirements to acquire certificates of need, respiratory licenses, clinical accreditations, managed care contracts, clinical reputation, established local market relationships with physicians and discharge planners, pediatric trained nurses, and patient referrals.

~~The~~There ~~markets~~can ~~for~~be ~~our health care services are highly competitive and are divided among a large number of providers, some of~~no ~~which~~assurance ~~are~~that national providers, but most of which are either regional or local providers. In addition to competing with other home health care companies focusing on providing products and services to pediatric patients, we ~~compete~~will ~~with~~not ~~several~~encounter ~~large national~~increased ~~home~~competition ~~health~~in ~~care~~the ~~companies~~future that, ~~while~~could ~~not~~limit ~~focusing~~our ~~primarily~~ability onto ~~the~~maintain ~~pediatric~~or ~~patient,~~increase ~~provide pediatric home health care services as part of a broader service offering. Certain of~~ our ~~competitors~~business and ~~potential~~adversely ~~competitors~~affect ~~have significantly~~our ~~greater~~operating ~~financial, technical, sales and marketing resources than we have and may, in certain locations, possess licenses or certificates that permit them to provide services that we cannot currently provide~~results.

InBusiness ~~addition~~Strategy to our traditional competitors, other types of health care providers, including hospitals, physician groups and other home health agencies, have entered, and may continue to enter, our business. Among the barriers to entry that may exist in the home health industry are the requirements to acquire certificates of need, pharmacy licenses, respiratory licenses, clinical accreditations, managed care contracts, clinical reputation, established local market relationships with physicians and discharge planners, and patient referrals.

~~There~~We ~~can~~provide bea nohigh ~~assurance~~quality, ~~that~~lower wecost ~~will~~alternative ~~not~~to ~~encounter~~prolonged ~~increased~~hospitalization ~~competition~~for medically fragile and chronically ill children in need of Private Duty ~~the~~Nursing ~~future~~(PDN) ~~that~~or ~~could~~Prescribed ~~limit~~Pediatric ~~our~~Extended Care (PPEC) services. We obtain patient referrals primarily based on quality of care and service, reputation with referring healthcare professionals, ability to develop and maintain orcontacts ~~increase~~with referral sources and price of services. We believe that our ~~business~~specialization ~~and~~in ~~adversely~~pediatric ~~affect~~home healthcare, as well as our ~~operating~~coordinated ~~results~~care approach to home healthcare services, broadens our appeal to local healthcare professionals and to managed care organizations. We believe executing the following strategies will allow us to be the provider of choice in the markets we serve.

~~Business~~Strategic ~~Strategy~~Review. During fiscal year 2006, we completed a number of actions implementing the recommendations of our 2005 Strategic Review. We completed the sale of selected assets of the Pharmacy business and substantially all of the assets of the RTES business (see Item 7). With portions of the proceeds from these sales, we intend to aggressively pursue an acquisition and start-up strategy of pediatric private duty nursing businesses. As we seek to increase our existing market density, our focus will be on those states that place the highest value on our services, particularly those where we already have a presence.

We5 provide a high quality, lower cost alternative to prolonged hospitalization for medically fragile and chronically ill children. We obtain patient referrals primarily based on quality of care and service, reputation with referring health care professionals, ability to develop and maintain contacts with referral sources and price of services. We believe that our specialization in pediatric home health care, as well as our coordinated care approach to home health care services, broadens our appeal to local health care professionals and to managed care organizations. We believe executing the following strategies will allow us to be the provider of choice in the markets we serve:

Focus on Pediatric Services. Pediatric health care services are generally recognized as a distinct specialty within the health care industry. We have significant experience and expertise in children’s health care,

~~Index~~Focus on Pediatric Services. Pediatric healthcare services are generally recognized as a distinct specialty within the healthcare industry. We have significant experience and expertise in children’s healthcare, particularly with respect to ~~Financial~~medically ~~Statements~~fragile children and chronically ill infants and children who are dependent on sophisticated medical technology and nursing care. We believe that our pediatric focus and expertise differentiates us from other providers in that we are able to address a wide array of disease states and conditions. This capability appeals to state Medicaid programs focused on serving target populations as well as national managed care providers with diverse geographical needs. Demonstration of these improved clinical outcomes is the basis for the “pediatric premium” we attempt to negotiate into our pricing and future expansion of our care continuum from patient discharge through private duty nursing and PPEC services, where available.

~~particularly~~Provide ~~with~~High ~~respect~~Quality, toCost-Effective ~~medically~~Care. We ~~fragile~~emphasize ~~children~~quality ~~and~~throughout ~~chronically~~our ~~ill~~organization with ~~infants~~respect ~~and~~to ~~children~~the ~~who~~provision ~~are~~of ~~dependent~~services ~~on sophisticated medical technology~~ and ~~nursing~~ ~~care.~~the Wehiring ~~believe that our pediatric focus~~ and ~~expertise~~training ~~differentiates~~of usclinical ~~from~~personnel. ~~other~~Moreover, ~~providers~~we inbelieve that weour ~~are~~ability ~~able~~ to ~~address~~coordinate and deliver a wide ~~array~~range of ~~disease~~services ~~states~~within ~~and~~our ~~conditions.~~core ~~This~~competencies ~~capability~~in ~~appeals~~a tonon-institutional ~~state~~setting, ~~Medicaid programs focused on~~and ~~serving~~our ~~target~~experience ~~populations~~and asexpertise ~~well~~in ascaring ~~national managed care providers with diverse geographical needs. Demonstration of these synergies is the basis~~ for ~~the~~medically ~~“pediatric~~fragile ~~premium”~~and wechronically ~~attempt~~ill toinfants ~~negotiate into our pricing~~ and ~~future~~children, ~~expansion of~~result ~~our~~in ~~care~~superior ~~continuum from patient discharge through private duty nursing~~ and ~~PPEC~~cost-effective ~~services~~medical ~~where available~~outcomes.

~~Provide~~Increased ~~High~~Managed ~~Quality, Cost-Effective~~ Care Penetration. We ~~emphasize~~continue ~~quality throughout our organization with respect~~ to ~~the~~pursue ~~provision of services and the hiring and training of clinical personnel. Moreover, we believe that our ability to coordinate and deliver~~ a ~~wide~~managed ~~range~~care ofmarketing ~~services~~strategy ~~within~~which ~~our~~focuses ~~core~~on ~~competencies in a non-institutional setting, and our experience and expertise in~~select ~~caring~~markets ~~for~~with ~~medically~~unfulfilled ~~fragile~~market ~~and~~share ~~chronically~~potential. ~~ill~~Our ~~infants~~regional ~~and~~managed ~~children,~~care ~~result~~sales inpersonnel ~~superior~~work ~~and~~directly ~~cost-effective~~with ~~medical~~location ~~outcomes~~directors asto ~~demonstrated~~increase ~~through~~local ~~our~~market ~~quality~~share. ~~assurance~~Initiatives ~~and~~include: ~~compliance programs.~~

~~Add~~• ~~Complementary~~identification ~~Products and Services in Existing Markets. In a majority~~ of our markets, we provide only one or two of our three core product and service offerings. We seek to add complementary core products and services in certain existing markets with favorable demographics, licensure requirements and reimbursement opportunities. We believe that this will enable us to achieve the ~~degree~~dominant oflocal ~~density~~market ~~necessary~~managed tocare ~~leverage~~companies ~~our capabilities~~ and ~~impact~~their ~~payors~~provider and referral sources to maximize our profit and growth potential. Based upon experience in markets where we have more than one of our core products and services, we believe that significant competitive advantages may be realized, resulting in expanded market share and improved overall operating margins in these markets. networks;

~~Increased~~• ~~Managed~~coordination ~~Care Penetration. We~~of ~~continue to pursue a managed care~~ marketing ~~strategy~~and ~~which~~contracting focuses on select markets with unfulfilled market share potential. Our regional managed care sales personnel work directly with branch office directors to increase local market share. Initiatives include: efforts;

• ~~identification~~development ofand ~~the~~expansion ~~dominant~~of ~~local~~relationships ~~market~~with ~~managed~~key ~~care~~referral ~~companies and their provider networks~~sources;

• ~~coordination~~evaluation ofand ~~marketing~~qualification ~~and~~of ~~contracting~~patient ~~efforts~~intakes;

• ~~development~~effective ~~and~~coordination ~~expansion of relationships~~ with ~~key~~local ~~referral~~market ~~sources~~Medicaid programs; and

• ~~evaluation~~pricing ~~and~~strategies ~~qualification~~that ofenable ~~patient~~us ~~intakes;~~to receive rate increases at prescribed intervals.

•Clinical Outcomes. We believe that our ability to quantify the efficacy of the clinical outcomes of our patients will be increasingly important to our ability to negotiate a “pediatric premium” into our future pricing. During fiscal year 2006 we began to compile clinical data from a number of our patients. While the data compiled to date are immature and ~~effective~~not ~~coordination~~yet ~~with~~statistically ~~local~~reliable, ~~market~~preliminary ~~Medicaid~~analysis ~~programs~~indicates that the expected ‘value proposition’ of our services appears to be validated.

~~Funding~~Reimbursement ofLobbying. During ~~these~~fiscal ~~initiatives~~year ~~will~~2006, bewe ~~prioritized~~intensified ~~using~~ our ~~sources~~efforts ofto ~~liquidity~~lobby ~~articulated~~for increased ~~under~~Medicaid reimbursement rates from several states in which we operate. In South Carolina, we received an increase for the ~~“Liquidity~~second consecutive state fiscal year and ~~Capital~~believe ~~Resources”~~that we are well positioned for future increases as well. In Florida ~~sub-section~~we ofhave ~~Item~~expanded 7our -lobbying ~~Management~~program, applied for ‘Transitional Grants’s ~~Discussion~~under a Medicaid program designed to demonstrate the cost effectiveness of homecare, raised our profile with key decision makers in both the executive and ~~Analysis~~legislative branches of ~~Financial~~the ~~Condition~~state government and ~~Results~~began a media outreach program to raise local community awareness. In Louisiana we have secured higher reimbursement rates on a temporary basis and, with the support of ~~Operations~~the Medicaid Program Director, begun discussions with key legislative decision makers for a permanent rate increase. In North Carolina, an increase in PDN reimbursement rates was granted and we continue to advocate for permanent funding for our pilot PPEC program.

6Business Development. Our business development efforts are focused on locating and acquiring Private Duty Nursing businesses in those states with favorable Medicaid reimbursement rates and adequate pediatric populations. Our first priority is to increase density and market share in those states where we currently operate and have demonstrated competence in billing and collecting for services provided. We will also evaluate opportunities in the states where we do not currently operate and assess the potential to use acquired operations as a platform upon which we can expand our service area through start up operations.

Funding of these initiatives will be prioritized using our sources of liquidity articulated under the “Liquidity and Capital Resources” sub-section of Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

~~Index~~Products, toServices ~~Financial~~and ~~Statements~~Operations

Products, ~~Services~~ and ~~Operations~~Services

~~Products~~We provide a broad range of healthcare services and ~~Services~~products principally for children and, to a lesser extent, young adult patients. We define pediatric as age eighteen and younger with the remainder defined as adult. Patients who began service with us as children and are still on service upon attaining the age of eighteen are classified as adults. The following table summarizes both products and services from continuing operations based upon estimated percentages of net billings of each major category for the periods indicated.

We provide a broad range of healthcare services and products principally for children and, to a lesser extent, young adults and geriatric patients. We define pediatric as age eighteen and younger with the remainder defined as adult. Some of the patients who began service with us as children and reached the age of eighteen will subsequently be classified as an adult. The following table summarizes both products and services based upon estimated percentages of net billings of each major category for the periods indicated.


	2006		2005		2004
	% Total		% Total		% Total
Pediatric Home Health Care
Nursing	79.6	%	80.2	%	81.2	%
PPEC	9.2	%	9.3	%	8.0	%

Total Pediatric Home Health Care	88.8	%	89.5	%	89.2	%

Adult Home Health Care
Nursing	11.2	%	10.5	%	10.8	%

Total Adult Home Health Care	11.2	%	10.5	%	10.8	%

Total	100.0	%	100.0	%	100.0	%

	Year Ended September 30,
	2004	2003	2002
	% Total	% Total	% Total
Pediatric Home Health Care
Nursing and PPEC	40.8%	43.1%	45.3%
Respiratory Therapy Equipment and Services	8.2%	8.4%	9.1%
Pharmacy	29.1%	25.7%	23.5%
Total Pediatric Home Health Care	78.1%	77.2%	77.9%
Adult Home Health Care
Nursing	4.6%	5.0%	5.8%
Respiratory Therapy Equipment and Services	8.9%	9.7%	9.8%
Pharmacy	8.4%	8.1%	6.5%
Total Adult Home Health Care	21.9%	22.8%	22.1%
Total	100.0%	100.0%	100.0%

The following are the estimated percentages of our net revenue from continuing operations attributable to reimbursement from various payors for the healthcare services we currently provide, for the periods presented:

Pediatric Health Care Services


	Year Ended September 30,
Payor	2006		2005
Commercial Insurance and Other Private Payors	36	%	35	%
Medicaid and Other State Programs	64	%	65	%
Medicare and Other Federal Programs*	—		—

Total	100	%	100	%

~~Pediatric~~* ~~Nursing Services. Our~~less ~~pediatric~~than nursing services consist primarily of private duty home nursing care for pediatric patients with illnesses and conditions such as bronchopulmonary dysplasia, digestive and absorptive diseases, congenital heart defects and other cardiovascular disorders, cancer, cerebral palsy, cystic fibrosis, obstructive and restrictive pulmonary disease (e.g., bronchitis and asthma), endocrinology disorders, hemophilia, orthopedic conditions and post surgical needs. Pediatric home nursing care typically begins upon the patient’s discharge from the hospital. Under a prescription or care plan developed by the patient’s physician, our nurses and therapists monitor the condition of the child, administer medications and treatment regimens, provide enteral and other forms of tube feeding, monitor and maintain ventilators, oxygen and other home medical equipment, monitor and administer pain management, provide daily care, including baths, hygiene and skin care, conduct physical and other forms of prescribed therapy, and coordinate other forms of medical care necessary for the child. 1%

~~Home~~Pediatric ~~nursing~~Nursing ~~care~~Services. Our ispediatric ~~often~~nursing ~~provided~~services upconsist toprimarily 24of ~~hours~~private ~~per~~duty ~~day~~home nursing care for ~~extended~~pediatric ~~periods~~patients ofwith ~~time.~~illnesses Weand ~~estimate~~conditions ~~that~~such ~~our~~as bronchopulmonary ~~pediatric~~dysplasia, ~~patients~~digestive ~~require~~and ~~private~~absorptive ~~duty nursing~~diseases, ~~care~~congenital ~~for~~heart andefects ~~average~~and ofother ~~eight~~cardiovascular ~~months~~disorders, ~~with~~cancer, ~~length~~cerebral ofpalsy, ~~daily~~obstructive ~~care~~and ~~averaging~~restrictive ~~approximately~~pulmonary ~~ten~~disease ~~hours~~(e.g., ~~Our~~bronchitis ~~nurses~~and ~~emphasize~~asthma), ~~education~~orthopedic ofconditions and ~~the~~post ~~caregivers~~surgical ofneeds. ~~the~~Pediatric ~~child~~home tonursing ~~maximize~~care ~~the~~typically ~~independence~~begins ofupon the ~~child~~patient’s ~~and~~discharge from the ~~family~~hospital. ~~Through~~Under ~~this~~a ~~educational process,~~prescription ~~the~~or ~~length of daily private duty~~ care ~~can~~plan bedeveloped ~~modified~~by as the ~~child~~patient’s ~~condition~~physician, ~~improves~~our ornurses ~~stabilizes~~ and therapists monitor the ~~parents~~condition of orthe ~~caregivers~~child, ~~assume~~administer amedications ~~more~~and ~~active~~treatment ~~role~~regimens, inprovide ~~the~~enteral ~~care~~and ofother ~~the~~forms ~~child.~~of ~~Depending~~tube onfeeding, ~~the~~monitor ~~condition~~and ofmaintain ~~the~~ventilators, ~~child~~oxygen and ~~the orders~~other ofhome ~~the~~medical ~~attending physician~~equipment, wemonitor ~~may~~and ~~continue~~administer topain management, provide ~~nursing~~daily ~~visits~~care, including ~~respiratory~~baths, ~~therapy~~hygiene and ~~other~~skin ~~medical~~care, ~~equipment~~conduct physical and ~~pharmaceutical~~other ~~services~~forms ~~after~~of weprescribed ~~discontinue~~therapy, ~~private~~and ~~duty~~coordinate ~~nursing~~other forms of medical care necessary for the child.

WeHome ~~have~~nursing ~~approximately~~care ~~3,100~~is ~~registered~~often orprovided ~~licensed~~up ~~pediatric~~to ~~nurses~~24 onhours per day for extended periods of time. We estimate that our pediatric ~~active~~patients require private duty nursing ~~registries~~care for an average of eight months with length of daily care averaging approximately ten hours. ~~Due~~Our nurses emphasize education of the caregivers of the child to maximize the ~~special~~independence ~~needs~~of the child and ~~acuity~~the family. Through this educational process, the length of daily private duty care ofcan ~~pediatric~~be ~~patients,~~modified ~~generally,~~as wethe ~~require~~child’s ~~that~~condition ~~our~~improves ~~nurses~~or ~~have~~stabilizes ~~training~~and ~~with~~the ~~pediatric~~parents ~~patients~~or caregivers assume a more active role in the care of the child. ~~Most~~Depending on the condition of ~~our~~the ~~nurses~~child ~~have~~and ~~expanded~~the ~~pediatric~~orders ~~experience,~~of ~~such~~the asattending ~~NICU~~physician, ~~PICU~~we ~~or equivalent~~may ~~experience~~continue to provide nursing visits after we discontinue private duty nursing care.

~~Index~~We have approximately 3,334 registered or licensed pediatric nurses on our active nursing registries. Due to ~~Financial~~the ~~Statements~~special needs and acuity of care of pediatric patients generally, we require that our nurses have training with pediatric patients. Most of our nurses have expanded pediatric experience, such as NICU, PICU or equivalent experience.

~~Prior~~Prescribed toPediatric ~~the~~Extended ~~discharge~~Care (“PPEC”). Our ofPPEC acenters ~~medically~~provide, ~~fragile~~among ~~child~~other ~~from~~services, ~~the~~daily ~~hospital~~medical care and physical, ~~referral~~occupational ~~sources~~and ~~generally~~other ~~make arrangements~~forms of therapy for ~~nursing~~medically ~~services~~fragile ~~before~~and ~~making~~chronically ~~arrangements~~ill ~~for~~children. ~~other~~The ~~health~~children ~~care~~receive ~~services~~nursing supervision ~~such~~and/or asphysical, ~~equipment~~occupational orand ~~infusion.~~other ~~Consequently,~~therapies in a ~~high~~setting ~~quality~~that facilitates their socialization and ~~well-trained~~education. ~~nursing~~The ~~service~~children ~~can~~generally ~~help~~spend ~~market~~between ~~our~~20 ~~other~~to ~~pediatric~~40 ~~product~~hours ~~lines~~per ~~and~~week ~~services~~at the center according to their individual plan of ~~based~~treatment. onWe ~~patient~~currently ~~needs~~operate seven PPEC centers in Florida, Georgia and North Carolina.

~~Prescribed~~Operations Pediatric Extended Care (“PPEC”). Our PPEC centers provide, among other services, daily medical care and physical, occupational and other forms of therapy for medically fragile and chronically ill children. The children receive nursing supervision and/or physical, occupational and other therapies in a setting that allows for socialization and education of the children. The children generally spend between 20 to 40 hours per week at the center according to their individual plan of treatment. We currently operate 9 PPEC centers in Florida, Georgia and North Carolina.

~~Pediatric Respiratory Therapy~~Recruiting, ~~Equipment~~Training and ~~Services~~Retention (“RTES”). We provide respiratory therapy equipment services to pediatric patients in the home. The services include: (i) the rental, sale, delivery and setup in accordance with physician prescriptions of ~~equipment,~~Professional ~~such~~Staff as ventilators, oxygen concentrators, liquid oxygen systems, high pressure oxygen cylinders, apnea monitors and nebulizers, (ii) periodic evaluation and maintenance of the equipment and (iii) delivery and setup of disposable supplies necessary for the operation of the equipment. Our branch offices provide rental of home medical equipment as well as mail order programs for the provision of a broad range of home health care supplies. We provide these services to patients with a variety of conditions, including obstructive and restrictive pulmonary diseases, neurologically related respiratory problems, cystic fibrosis, congenital heart defects and cancer. We utilize skilled registered respiratory therapists, certified respiratory therapy technicians, and other qualified health professionals to provide these services. We also provide training to patients and their families in equipment use and service through emergency on-call technicians. In addition, we provide rental, sale and service of home medical equipment and respiratory therapy services to adult and pediatric patients with a focus on high-tech products including ventilators, oxygen concentrators, liquid oxygen systems, continuous positive airway pressure devices (“CPAP”), bi-level respiratory assist devices (“Bi-PAP”), and oximetry and apnea monitors. These services are provided to patients upon their discharge from the hospital as well as after our nursing services are no longer required.

~~Specialty~~Our ~~Pharmacy~~pediatric ~~and~~services ~~Infusion~~are ~~Therapy~~generally ~~Services~~provided ~~(“Pharmacy”). We~~by ~~provide~~skilled ~~pharmaceutical~~pediatric ~~products~~nurses and ~~services~~skilled ~~for our~~respiratory ~~patients~~therapists. inNurses ~~the~~typically ~~home~~have pediatric, NICU, PICU or ~~physician’s~~equivalent ~~office.~~experience, ~~Pharmacy~~a ~~services~~nursing ~~include~~license ~~clinical~~and ~~drug~~current ~~management,~~CPR certification. ~~patient~~Each ~~counseling,~~nurse ~~compliance~~must ~~monitoring,~~pass ~~side~~a ~~effect~~written ~~management~~pediatric competency and medication exam, ~~educational~~provide ~~information~~employment references and ~~reimbursement~~submit ~~services~~to ~~for~~a ~~complex~~comprehensive ~~drug~~multi-jurisdictional ~~regimens~~background check. Therapists generally have a minimum of one year prior ~~Specialty~~experience ~~pharmacy~~and ~~provides~~current ~~self-injectable~~CPR ~~biotech~~certification, ~~medications~~and ~~for~~must ~~chronic~~provide ~~diseases~~employment ~~while~~references ~~infusion~~as ~~therapy~~well. ~~involves~~Under ~~the~~our ~~intravenous~~pediatric ~~administration~~nursing oftraining ~~nutrients~~program, ~~antibiotics~~nurses ~~and~~are ~~other~~required ~~medications.~~to ~~The~~attend ~~number~~an oforientation ~~therapies~~program ~~that~~where ~~can~~they beare ~~administered safely~~trained in ~~the~~aspects of home ~~has~~healthcare, ~~increased~~such as ~~significantly~~equipment inuse, ~~recent~~that ~~years~~differ ~~because~~from ofinstitutionally ~~technological~~provided ~~innovations~~healthcare. inIf ~~infusion~~qualified, ~~equipment~~nurses ~~and~~receive ~~advances~~additional training in ~~drug~~the ~~therapy.~~use ~~Consequently,~~of aventilators ~~broad~~and ~~range~~other ofhome ~~drug~~respiratory ~~therapies~~equipment. ~~are~~We ~~now~~require ~~considered~~our ~~safe~~nurses ~~and~~to ~~effective~~attend ~~for~~continuing ~~treatment~~education sessions on insafety ~~the~~and techniques in home healthcare. ~~These~~Further, ~~in-home~~to ~~therapies~~assist ~~reduce~~in the ~~need~~retention ~~for~~of ~~emergency~~qualified ~~room visits~~personnel, ~~decrease~~we ~~the~~offer ~~number~~our ofnurses ~~days~~periodic ~~patients~~continuing ~~stay~~education courses and professional seminars on various topics in ~~the~~home ~~hospital~~healthcare. ~~and~~As ~~are~~of ~~generally~~September 30, 2006, ~~preferred~~we byhad ~~patients~~approximately 3,388 ~~their~~licensed ~~families~~or ~~and~~credentialed ~~caregivers~~nurses, astherapists, ~~well~~and aspharmacists ~~referring~~on ~~physicians~~our staff and ~~payors~~ active registries.

WeTo provide a ~~range~~qualified, ofreliable ~~pharmacy~~nursing and ~~infusion~~therapy ~~therapies, including~~services ~~hemophilia therapy~~staff, ~~antibiotic~~we ~~and~~continuously ~~other~~recruit ~~anti-infective~~registered ~~therapies~~nurses, ~~total~~licensed ~~parenteral~~practical ~~nutrition therapy~~nurses, ~~pain~~home ~~management~~health aides ~~therapy,~~and ~~growth~~technical ~~hormone therapy~~specialists, ~~immunomodular therapy~~ and ~~chemotherapy.~~offer Wetraining ~~also~~and ~~provide~~other ~~specialty~~programs ~~infusion therapies intended~~ to ~~meet~~encourage ~~the~~retention ~~needs~~ of ~~patients~~these ~~with~~professionals. aWe ~~variety~~recruit ofprimarily ~~serious~~through ~~infections~~internet ~~such as osteomyelitis~~websites, ~~bacterial endocarditis~~advertising, ~~cellulitis,~~employment ~~septic arthritis~~fairs, ~~wound~~direct ~~infections,~~mail ~~recurrent~~and ~~infections~~employee ~~associated~~referral ~~with~~programs ~~the~~that ~~kidney~~use rewards and ~~urinary~~other ~~tract,~~benefit ~~and~~programs ~~AIDS. In~~to ~~addition,~~encourage wenew ~~provide~~employee ~~drug~~referrals ~~therapies~~by toexisting ~~terminally~~employees. orThe ~~chronically~~healthcare ~~ill~~industry ~~patients~~in ~~suffering~~total ~~from~~and ~~acute~~the orhome ~~chronic~~health ~~pain~~industry more acutely, ~~patients~~have ~~with~~been ~~impaired~~experiencing ordifficulties ~~altered~~in ~~digestive~~recruiting ~~tracts~~qualified nurses due primarily to ~~gastrointestinal~~lack ~~illness,~~of ~~patients~~enrollment ~~suffering~~in ~~from~~nurse ~~various~~training ~~types~~programs ~~of cancer,~~and ~~patients~~alternate ~~requiring~~career ~~treatment~~opportunities for ~~congestive~~experienced ~~heart~~nurses. ~~failure~~As ~~and~~a ~~patients~~result, ~~with~~we ~~chronic~~have ~~conditions~~nine ~~such~~nurse asrecruiting ~~hemophilia,~~specialists ~~cystic~~on ~~fibrosis,~~staff ~~juvenile~~that ~~rheumatoid~~direct ~~arthritis,~~local ~~multiple~~nurse ~~sclerosis,~~recruiting ~~and~~efforts ~~endocrinology~~to ~~disorders.~~maximize ~~Our specialty infusion~~their ~~therapy~~effectiveness ~~services~~and ~~are~~potentially ~~provided~~increase bythe ~~our~~number ~~staff~~ of ~~licensed~~hours ~~pharmacists~~staffed. ~~and~~Furthermore, ~~administered~~current byindications ~~our~~suggest ~~nursing~~that ~~staff.~~the Wesupply ~~currently~~of ~~support~~licensed ~~the~~qualified ~~home~~nurses ~~infusion~~will ~~therapy~~continue ~~market~~to ~~through~~decline ~~our~~in ~~pharmacy~~the ~~locations~~foreseeable future.

8Growth Team

Late in fiscal year 2006 we made the decision to create a “Growth Team” whose charter is to focus on identifying potential new markets for us to begin start-up operations and managing the start-up process including: licensure, site location, hiring of a branch manager, establishing referral relationships and obtaining initial clinical accreditation. In addition, the Growth Team, in cooperation with the Business Development organization, will be responsible for the operational integration of newly acquired branch offices.

Quality Assurance

We have an established quality assurance program for the implementation and monitoring of our service standards. Our quality assurance program includes audits, surveys, assessments and evaluations as well as other

~~Index~~ measures designed to ~~Financial~~ensure ~~Statements~~compliance with the documentation and operating procedures required by federal, state and local law, as well as our internal standards. Our Compliance Officer oversees the results of these quality assurance audits and implements changes where necessary.

We ~~also~~and ~~operate~~all aof ~~mail~~our ~~order~~branch ~~medication~~offices ~~service~~are ~~that~~fully ~~provides~~accredited ~~physician~~by ~~prescribed~~the ~~unit~~Community ~~dose~~Health ~~medications to~~Accreditation ~~respiratory~~Program ~~therapy~~or ~~patients~~CHAP. WeCHAP ~~offer~~is ~~our~~a ~~patients~~national ~~medication~~leader in athe accreditation ~~premixed~~of ~~unit~~community-based ~~dose~~organizations, ~~form~~has asa ~~well~~keen asunderstanding ~~professional~~of ~~clinical~~the ~~support~~home health industry and ~~claims~~is ~~processing.~~a Werecognized ~~employ~~accreditation ~~licensed~~body ~~pharmacists~~by topayors. ~~assist~~CHAP ~~with~~is ~~our~~an ~~unit~~independent ~~dose~~subsidiary ~~medication~~of ~~services~~the ~~business~~National League for Nursing.

~~Young~~Case ~~Adult~~Administration ~~and Geriatric Health Care Services~~

WePrior ~~generally~~to ~~offer~~providing ~~young adult patients health care equipment and pharmacy~~ services ~~similar~~ to ~~those~~a ~~provided~~patient, towe ~~pediatric~~coordinate ~~patients.~~with ~~Our~~the patient’s ~~young adult patients are generally being treated for disorders such as muscular dystrophy~~physicians, ~~cystic~~third ~~fibrosis,~~party ~~hemophilia~~payors, ~~cardiovascular~~case ~~disorders~~managers and ~~cancer, as well as serious disabilities from accidents and~~ other ~~forms~~referral ~~of trauma involving spinal cord or other injuries~~sources. ~~Few~~To ofprovide ~~these~~better ~~patients~~quality ~~require private duty nursing~~ services. ~~Frequently,~~to ~~our~~select ~~young~~high ~~adult~~acuity patients, ~~receive~~we ~~home~~have ~~care~~developed asand aimplemented ~~continuation~~case ofmanagement ~~a pediatric~~and ~~home~~clinical ~~care~~coordination ~~treatment regimen~~functions.

~~Our~~Case ~~geriatric~~Management. We ~~home~~employ ~~care~~case ~~patients~~managers ~~generally~~to ~~require~~ensure the ~~lowest~~cost-effective ~~acuity~~delivery of ~~care~~high ~~and~~quality ~~have~~care ~~shorter~~to ~~periods~~many of ~~service~~our ~~and~~highest ~~shorter~~acuity ~~periods~~patients ofcovered ~~daily~~by ~~care~~commercial ~~than~~insurance. ~~either~~We ~~our~~assign ~~pediatric~~a orcase ~~young~~manager ~~adult~~to ~~patients.~~review ~~Few~~the ofpatient’s ~~these~~insurance ~~patients~~status ~~receive~~to ~~private~~determine ~~duty~~coverage ~~nursing~~and ~~services~~relevant reimbursement criteria. ~~Most~~The ofcase ~~these patients~~manager ~~receive~~contacts ~~maintenance~~the ~~care~~relevant ~~for~~third ~~end-of-life~~party ~~conditions~~payors ~~such~~to asnegotiate ~~emphysema~~the orservices ~~other~~that ~~pulmonary~~will ~~disorders,~~be ~~cardiac~~covered ~~diseases~~ and ~~renal~~the ~~diseases~~applicable rates. ~~Services~~The ~~are~~case ~~provided~~manager ~~during~~then ~~short~~communicates ~~home~~with ~~visits~~our bybilling ~~respiratory~~and ~~therapists~~collection ordepartment ~~technicians.~~to ~~Although~~assist ~~some~~in ofaccurate ~~our~~billing. ~~geriatric~~The ~~home~~case ~~care~~manager ~~patients~~also ~~receive~~assists ~~higher~~in ~~acuity~~resolving ~~intervention~~disputes ~~care,~~that ~~these~~may ~~services~~arise ~~are~~between ~~more~~us ~~likely~~and tothird beparty ~~provided in an institutional setting~~payors.

~~Operations~~Clinical Coordination. We assign a clinical coordinator to higher acuity patients, typically before the patient is discharged from the hospital. The clinical coordinator works with the physician, case manager or other referral source to arrange all home healthcare services needed by the patient.

~~Recruiting,~~Sales ~~Training~~ and ~~Retention~~Marketing ~~of Professional Staff~~

~~Our~~We ~~pediatric~~obtain ~~services~~patient ~~are~~referrals ~~generally~~primarily ~~provided~~from bycase ~~skilled~~managers, ~~pediatric~~neonatologists, ~~nurses~~pediatricians, ~~and~~pulmonologists, ~~skilled~~internists ~~respiratory~~and ~~therapists.~~other ~~Nurses typically have pediatric~~physicians, ~~NICU,~~hospital discharge ~~PICU or equivalent experience~~planners, acommunity-based ~~nursing~~healthcare ~~license~~institutions and ~~current~~social ~~CPR~~service ~~certification~~agencies. ~~Each~~We ~~nurse~~market ~~must~~our ~~pass~~services ato ~~written~~these ~~pediatric~~referral ~~competency~~sources ~~and~~through ~~medication~~our ~~exam~~managed ~~and~~care ~~provide~~marketing ~~employment~~personnel, ~~references.~~branch ~~Therapists~~office ~~generally~~personnel ~~have~~and ~~a minimum~~various ofmedia ~~one~~formats. ~~year~~The ~~prior~~branch office ~~experience~~directors ~~and~~coordinate ~~current~~the ~~CPR~~various ~~certification,~~sales and ~~must~~marketing ~~provide~~activities ~~employment~~at ~~references~~the asbranch ~~well~~office level. ~~Under~~Branch ~~our~~office ~~pediatric~~directors ~~nursing~~generally ~~training~~have ~~program,~~a ~~nurses~~clinical ~~are~~background ~~required~~as toregistered ~~attend~~nurses anand/or ~~orientation~~therapists ~~program~~and, ~~where~~as such, they are ~~trained~~able into ~~aspects~~describe and ofpromote ~~home~~our ~~health~~services ~~care,~~to ~~such~~referral assources. ~~equipment~~The ~~use,~~branch ~~that~~office ~~differ~~directors ~~from~~attempt ~~institutionally~~to ~~provided~~cultivate ~~health~~relationships ~~care.~~with Iftheir ~~qualified,~~local ~~nurses~~referral ~~receive~~sources ~~additional~~through ~~training~~quality inservice, ~~the~~personal ~~use~~contacts ~~of ventilators~~ and ~~other~~education ~~home~~about ~~respiratory~~the ~~equipment.~~appropriate Werole ~~require~~and ~~our~~benefits ~~nurses~~of ~~to attend~~our ~~continuing~~services ~~education sessions on safety and techniques~~ in ~~home health care. Further, to assist in~~ the ~~retention~~treatment of ~~qualified~~patients. ~~personnel,~~We wefocus ~~offer~~ our ~~nurses~~healthcare ~~periodic~~marketing ~~continuing~~efforts ~~education~~on ~~courses~~patients ~~and~~with ~~professional~~private ~~seminars~~insurance onand ~~various~~governmental ~~topics~~payors. inDue ~~home health~~to ~~care.~~the Asnature of ~~September~~our 30business, ~~2004,~~many weof ~~had~~our ~~approximately~~patients ~~3,200~~rely ~~licensed~~on orMedicare ~~credentialed nurses, therapists,~~ and ~~pharmacists~~Medicaid onfor ~~our~~health ~~staff and active registries~~coverage.

ToWe ~~provide~~also apromote ~~qualified,~~referrals ~~reliable~~by ~~nursing~~seeking ~~and~~to ~~therapy~~arrange ~~services~~preferred provider ~~staff,~~contracts wewith ~~continuously~~managed ~~recruit~~care ~~registered~~companies. ~~nurses,~~We ~~licensed practical~~have ~~nurses,~~established ~~respiratory~~preferred ~~therapists,~~provider ~~licensed~~arrangements ~~pharmacists,~~that ~~home~~are ~~health~~both ~~aids~~national and ~~technical~~regional ~~specialists,~~in ~~and~~scope. ~~offer~~The ~~training~~contracts ~~and~~typically ~~other~~designate ~~programs~~us toas ~~encourage~~a ~~retention~~preferred provider of ~~these~~certain ~~professionals.~~services Wein ~~recruit~~select ~~primarily~~areas ~~through~~but ~~internet websites,~~do ~~advertising,~~not ~~employment~~establish ~~fairs,~~an ~~direct~~exclusive ~~mail~~relationship. ~~and~~The ~~employee~~preferred ~~referral~~provider ~~programs~~contracts ~~that~~typically ~~use~~set ~~rewards~~forth ~~and~~a ~~other~~range ~~benefit~~of ~~programs~~services tothat ~~encourage~~we ~~new~~may ~~employee~~provide ~~referrals by existing employees. The health care industry in total~~ and the ~~home~~applicable ~~health~~rates ~~industry~~for ~~more acutely,~~such ~~have~~services. ~~been~~The ~~experiencing~~contracts ~~difficulties~~also inspecify ~~recruiting~~required ~~qualified~~billing ~~nurses~~and ~~due~~claims ~~primarily~~procedures, record tomaintenance ~~career~~policies ~~shortages~~ and ~~lack~~other ofrequirements. ~~enrollment~~We inhave ~~nurse~~not ~~training~~entered ~~programs.~~into Asany acontracts ~~result,~~with wehealth ~~have~~maintenance ~~eight~~organizations ~~nurse~~or ~~recruiting~~other ~~specialists~~third onparty ~~staff~~payors that ~~provide~~require ~~support~~ services to ~~local~~be ~~nurse~~rendered ~~recruiting~~on ~~efforts~~a torisk ~~maximize~~sharing ~~their~~or ~~effectiveness.~~capitated ~~Furthermore, current indications suggest that the supply of licensed qualified nurses will continue to decline in the foreseeable future~~basis.

~~Quality~~We ~~Assurance~~believe that CHAP accreditation of our offices is an important factor in our sales and marketing efforts. We also believe that our focus on pediatric healthcare services, combined with management’s experience in rendering these services, provide us with a significant sales and marketing advantage.

We9 have an established quality assurance program for the implementation and monitoring of service standards. Our quality assurance program includes audits, surveys, assessments and evaluations as well as other

~~Index~~Billing toand ~~Financial~~Collection ~~Statements~~

We derive substantially all of our net revenue from patients who have a third party (insurance company or government) who ~~measures~~either ~~designed~~has contractually agreed to ~~ensure~~pay ~~compliance~~the ~~with~~patient’s account or is obligated to pay based on the ~~documentation~~patient’s participation in its program (i.e. Medicare or Medicaid). Net revenues from Medicaid and ~~operating~~Medicare ~~procedures~~are ~~required~~generally based on reimbursement of the reasonable direct and indirect costs of providing services to program participants. Revenues are recorded based on estimated net realizable amounts to be received for products or services rendered during the period. The Company’s accounting system is programmed to calculate the expected reimbursement to be received on a patient-by-patient ~~federal,~~basis ~~state~~based on the type of payor and ~~local~~the ~~law,~~contractual asterms ~~well~~of the payor or pre-negotiated reimbursement rates. The Company’s accounting system is updated as ~~our~~changes ~~internal~~occur to reimbursement rates. The current reimbursement environment is complex, involving multiple payors with differing coverage and reimbursement policies. In certain situations, the services ~~standards~~and products are recorded separately. ~~Our~~In ~~Compliance~~other ~~Officer~~situations, ~~oversees~~the services and products are billed and reimbursed on a per diem or contract basis whereby the ~~results~~insurance ofcarrier pays us one combined amount for treatment. Because the reimbursement arrangements in these ~~quality~~situations ~~assurance~~are ~~audits~~based on a per diem or contract amounts, we do not maintain records that provide a breakdown between the service and ~~implements~~product ~~changes~~components. ~~where~~Substantially ~~necessary~~all of our revenue is fee for service.

WeOur ~~and~~corporate ~~all~~reimbursement ofspecialists ~~our~~work closely with the branch offices and ~~are~~the ~~fully~~payors. ~~accredited~~Each byspecialist is responsible for ensuring the ~~Community~~adequacy ~~Health~~of ~~Accreditation~~the ~~Program~~documentation, orsubmitting ~~CHAP~~the documentation and claims to third party payors and expediting payment. ~~CHAP~~In ismost acases ~~national~~the ~~leader~~third inparty payor will not pay the entire bill and ~~accreditation~~the ofpatient ~~community~~becomes responsible for the portion not paid by the third party (i.e. co-~~based~~payment ~~organizations,~~or deductible). Once the insurance company or other third party has apaid ~~keen~~its ~~understanding~~portion of such patient’s bill, the ~~home~~patient ~~health~~becomes ~~industry~~responsible ~~and~~for isthe remainder of the bill. After payment has been received from the respective third party, a ~~recognized~~patient ~~accreditation~~receives ~~body~~monthly bystatements ~~payors~~from the Company. ~~CHAP~~The ~~offers~~Company ~~“real~~assesses ~~world”~~collectability monthly of all its patients’ accounts receivable based ~~survey~~on historical ~~processes~~experience and emerging trends. Management of accounts receivable, ~~standards~~through effective billing, collection and ~~expectations.~~reimbursement ~~CHAP~~procedures, is ~~an independent~~critical ~~subsidiary~~to the financial success of ~~the~~healthcare ~~National~~service ~~League~~providers ~~for~~due ~~Nursing~~to lengthy reimbursement periods. Any significant delay in reimbursement could have a material adverse effect on our financial condition.

~~Case~~Due ~~Administration~~to the nature of the healthcare industry and the reimbursement environment in which we operate, certain estimates are required to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will need to be revised or updated, with the changes recorded in subsequent periods as additional information becomes available to us. Specifically, the complexity of many third party billing arrangements and the uncertainty of reimbursement amounts for services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or settlement of account review.

~~Prior~~The tofollowing ~~providing services~~table tosummarizes aour ~~patient,~~days wesales ~~coordinate~~outstanding ~~with~~from ~~the~~continuing ~~patient’s~~operations ~~physicians,~~as ~~third-party~~of ~~payors,~~the ~~case~~dates ~~managers~~indicated: ~~and other referral sources. To provide better quality services, we have developed and implemented case management and clinical coordination functions.~~

Case Management. We employ case managers to ensure the cost-effective delivery of high quality care to many of our highest acuity patients covered by commercial insurance. We assign a case manager to review the patient’s insurance status to determine coverage and relevant reimbursement criteria. The case manager contacts the relevant third-party payors to negotiate the services that will be covered and the applicable rates. The case manager then communicates with our billing and collection department to assist in accurate billing. The case manager also assists in resolving disputes that may arise between us and third-party payors.


	September 30,
	2006	2005
Days sales outstanding (calculated on year to date revenue)	54	48

~~Clinical~~We ~~Coordination~~acquired Melmedica Children’s Healthcare, Inc. We ~~assign~~on aJune 2, ~~clinical~~2006 ~~coordinator~~(See to“Management’s ~~higher~~Discussion ~~acuity~~and ~~patients,~~Analysis ~~typically~~of ~~before~~Financial ~~the~~Condition ~~patient~~and ~~is discharged~~Results ~~from~~of ~~the~~Operations” ~~hospital~~for further discussion). The ~~clinical~~process ~~coordinator~~of ~~works~~working with the ~~physician,~~States ~~case~~of ~~manager~~Illinois orand ~~other~~Indiana to ~~referral~~obtain ~~source~~the provider numbers and have the authorizations appropriately tied to ~~arrange~~them ~~all~~is ~~home~~taking ~~health~~longer ~~care~~than ~~services~~previously ~~needed~~anticipated. byThis delay in billing has added approximately seven days to our days sales outstanding. We anticipate resolving these issues and receiving payments on these claims during the ~~patient~~second quarter of fiscal year 2007.

~~Sales~~In ~~and~~December, ~~Marketing~~2005 we received notice of a claim from one commercial payor primarily relating to our discontinued pharmacy operations. The payor claims overpayments of approximately $1.1 million. We have

We10 obtain patient referrals primarily from case managers, neonatologists, pediatricians, pulmonologists, internists and other physicians, hospital discharge planners, community-based health care institutions and social service agencies. We market our services to these referral sources through our managed care marketing personnel, sales and marketing personnel, branch office personnel and various media formats. The branch office directors coordinate the various sales and marketing activities at the branch office level. Branch office directors generally have a clinical background as registered nurses and/or therapists and, as such, they are able to describe and promote our services to referral sources. The branch office directors attempt to cultivate relationships with their local referral sources through quality service, personal contacts and education about the appropriate role and benefits of our services in the treatment of patients.

We also promote referrals by seeking to arrange preferred provider contracts with managed care companies. We have established preferred provider arrangements that are both national and regional in scope. The contracts typically designate us as a preferred provider of certain services in select areas but do not establish an exclusive relationship. The preferred provider contracts typically set forth a range of services that we may provide and the applicable rates for such services. The contracts also specify required billing and claims procedures, record maintenance policies and other requirements. We have not entered into any contracts with health maintenance organizations or other third-party payors that require services to be rendered on a risk sharing or capitated basis.

We believe that CHAP accreditation of our offices is an important factor in our sales and marketing efforts. We also believe that our focus on pediatric health care services, combined with management’s experience in rendering these services, provide us with a significant sales and marketing advantage.

~~Index~~ reviewed tothe ~~Financial~~basis ~~Statements~~for the claim and believe it is substantially without merit. We have submitted our response and are working towards resolution of these issues. At this time, we believe we are adequately reserved; however, there can be no assurance that ultimate resolution will not have a material adverse effect upon our future financial results. As of September 30, 2006, we had no material claims, disputes or unsettled matters with third party payors except as disclosed above, nor were there any material pending settlements with third party payors.

~~Billing~~We have developed a methodology to record the estimated net revenue as a result of the inherent time lag between certain patient treatments and ~~Collection~~input of the related information into our billing and collection system. This methodology measures relative changes in the time and overall activity level at each branch office location and aggregates these measurements to estimate the impact to consolidated net revenue. The estimated net revenue from the inherent time lag was approximately 0.4%, 0.5% and 0.4% of net revenue for fiscal years ended 2006, 2005 and 2004, respectively. Any unforeseen volatility to either the time or activity level at specific branch offices has the potential to significantly impact the estimate.

WeIn ~~derive~~other ~~substantially~~select ~~all~~cases, ofpatient ~~our~~treatments ~~net~~may ~~revenue~~cease ~~from~~for ~~commercial~~a ~~third-party~~number ~~and~~of ~~selected~~reasons ~~private~~including ~~payors~~re-hospitalizations, ~~Medicare~~changes ~~and Medicaid.~~in ~~The~~treatment ~~current~~needs ~~reimbursement~~or ~~environment is complex~~death, ~~involving~~and ~~multiple~~a ~~payors~~time lag ~~with~~may ~~differing~~exist ~~coverage~~before ~~and~~this ~~reimbursement~~information ~~policies.~~is ~~Management~~reflected ofin ~~accounts~~our ~~receivable, through effective~~ billing, ~~collection~~ and ~~reimbursement~~collection ~~procedures,~~system. ~~is critical~~We tohave ~~the~~developed ~~financial~~a ~~success~~methodology ofwhich ~~health~~measures ~~care~~the ~~service~~historical ~~providers~~experience ~~due~~of toall ~~lengthy~~patient ~~reimbursement~~net ~~periods.~~revenue ~~Any~~adjustments ~~significant~~over ~~delay in reimbursement could have~~ a ~~material~~rolling ~~adverse~~four ~~effect~~quarters onand ~~our~~applies ~~financial~~this methodology ~~condition.~~to ~~Our~~reduce ~~corporate~~net ~~reimbursement~~revenues ~~specialists work~~recognized ~~closely~~in ~~with~~ the ~~branch~~current ~~offices~~period. ~~and~~Included ~~the~~in ~~payors.~~this ~~Each~~calculation ~~specialist~~ is ~~responsible for ensuring~~ the ~~adequacy~~reversal of ~~the~~revenue ~~documentation,~~for ~~submitting~~patients ~~the~~without ~~documentation and claims to third-party payors and expediting payment~~authorizations.

Branch Office Network

We currently provide our ~~health~~healthcare ~~care~~ services through a network of over ~~120~~ 50 branch offices, including satellite offices and new branch offices, located in 2118 states. We seek to address local market needs through our branch office network. Each branch office conducts local marketing efforts, recruits personnel and coordinates patient care. We believe that the business of providing ~~health care~~ healthcare services is local in nature and is most effective if each branch office is proactive ~~and/or~~in ~~reactive~~meeting ~~to and meets~~ the needs of the local community. While allowing our branch office managers sufficient autonomy to address local needs, we provide our branch office managers support and direction from the Corporate office including, training, comprehensive policies and procedures, ~~and~~ standardized operating systems and related controls. In addition, our local market staff routinely collaborates with the appropriate community and regulatory authorities onto ~~our~~advocate ~~behalf~~for ~~and~~the ~~that~~needs of ~~our~~pediatric patients and the value proposition of the services we provide. For financial reporting purposes, our branch offices are aggregated into ~~three~~two reportable segments based on their predominant line of net revenue in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

Corporate Compliance ~~Program~~

Our corporate compliance program continues to focus its efforts in the areas of fraud and abuse, auditing and monitoring of regulatory compliance, training of our employees and providing support and guidance for employees as they strive to comply with the rules, regulations and policies governing or applying to us and our operations. The Compliance Officer reports directly to the Chairman of the Audit Committee of our Board of Directors. The Compliance Department has conducted audits in the areas of billing, payroll, and medical documentation at selected branch offices throughout our company. The Compliance Department ~~has~~performs ~~been~~annual ~~active~~ in-services ~~establishing~~on ~~several~~compliance ~~training~~matters ~~programs relating to proper documentation,~~ and ~~has~~newly ~~provided~~hired ~~in-service~~employees ~~training~~are ~~regarding~~trained ~~corporate~~as ~~compliance~~part toof ~~substantially~~their ~~all employees~~orientation. The Compliance Department has also been instrumental in the development and implementation of our compliance efforts at the branch office level. In addition, we have established a toll-free Compliance Hotline to assist in our commitment to ethical conduct throughout our company. The telephone number is (800) 408-4442. All employees, vendors, contractors and agents are encouraged to use this confidential means of communication to report any compliance issues.

~~Investor~~11 ~~Relations~~

We maintain an Investor Relations Department that seeks to facilitate effective communication between us and our shareholders within the limitations of applicable regulations. We also engage an outside investor relations firm to assist in raising our visibility to the investing public, including institutional investors and brokerage firms. The Investor Relations Department is also charged with the implementation of our corporate governance guidelines as they relate to the investing public.

Management Information Systems

Our business depends in part upon our ability to input, store, retrieve, process and manage billing and collection information for each patient. Our internally developed “Encore” system provides substantially all of

~~Index~~The Compliance Department actively maintains all required licenses and payor enrollment applications through a centralized process. A database of all necessary enrollment information is maintained to ~~Financial~~ensure ~~Statements~~timely renewal of all licenses and payor enrollment applications.

~~our~~Investor ~~locations~~Relations with immediate access to patient, contract, and payor information and supports substantially all necessary billing, cash posting, and collection services. We continue to make improvements in billing functionality to comply with payor contract requirements. We plan to continue extending electronic billing and funds transfer capabilities to more payors. We continue to invest in upgrades to our technical infrastructure to maximize information system reliability, data integrity and disaster recoverability. There can be no assurance that our information systems will continue to perform as expected, or that further development will not be required. Failure of our management information systems to perform as expected could have a material adverse effect on our business, financial condition and results of operations.

~~Internal~~We ~~Audit~~maintain an Investor Relations Department that seeks to facilitate effective communication between us and our shareholders within the limitations of applicable regulations. We also engage an outside investor relations firm to assist in raising our visibility to the investing public, including institutional investors and brokerage firms. The Investor Relations Department is also charged with the implementation and administration of our corporate governance guidelines as they relate to the investing public.

WeManagement ~~maintain~~Information anSystems internal audit function that reports directly to the Audit Committee of the Board of Directors. The primary role of the internal audit function is to execute the branch office audit program, designed and approved by the Audit Committee. Ongoing risk assessments are performed to indicate which branch offices are to be selected for transaction and process control tests.

Our ~~internal~~business ~~audit~~depends ~~department~~in ispart ~~also~~upon ~~leading~~our ability to input, store, retrieve, process and manage billing and collection information for each patient. Our internally developed “Encore” system provides substantially all of our ~~Sarbanes-Oxley~~locations ~~Section~~with ~~404~~immediate ~~compliance~~access ~~project~~to patient, contract, and payor information and supports substantially all necessary billing, cash posting, and collection services. We continue ~~are~~to ~~required~~make improvements in billing functionality to comply with ~~Sarbanes-Oxley~~payor ~~Section~~contract ~~404~~requirements. asWe ofplan ~~September~~to ~~30,~~continue ~~2005.~~expanding Weelectronic ~~have~~billing ~~retained~~and ~~consultants~~funds transfer capabilities to ~~assist~~more payors. We continue to invest in ~~the~~upgrades ~~documentation~~to our technical ~~and~~infrastructure ~~testing~~to ofmaximize ~~our~~information ~~internal~~system ~~controls~~reliability, data integrity and ~~procedures~~disaster recoverability. There can be no assurance that

~~Reimbursement~~our information systems will continue to perform as expected, or that further development will not be required. Failure of our management information systems to perform as expected could have a material adverse effect on our business, financial condition and results of operations.

WeInternal ~~focus our health care~~Audit ~~marketing efforts on patients with private insurance and governmental payors. Due to the nature of our business, many of our patients rely on Medicare and Medicaid for health coverage.~~

~~The~~During ~~following~~fiscal ~~are~~2006, ~~the~~we ~~estimated~~outsourced ~~percentages~~substantially all of our internal audit function to our ~~net~~existing ~~revenue~~Sarbanes-Oxley ~~from~~Act Section 404 consultants who have extensive knowledge of our operations, ~~attributable~~systems toand ~~reimbursement~~controls. ~~from~~As ~~various payors~~part ~~for~~of ~~the~~their ~~health~~branch ~~care~~office ~~services~~testing, wekey ~~currently~~controls ~~provide~~over business processes were tested. In addition, ~~for~~a significant component of the ~~periods~~audits ~~presented:~~performed by the Compliance Department relate to testing of internal controls.

	Year EndedSeptember 30,
Payor	2004	2003
Commercial Insurance and Other Private Payors	53%	52%
Medicaid and Other State Programs	40%	40%
Medicare and Other Federal Programs	7%	8%
Total	100%	100%

Laws and Regulations

~~During~~General. Our ~~the~~business ~~past decade,~~is ~~federal~~subject ~~and~~to ~~state~~extensive ~~governments~~ and ~~private~~frequently ~~payors~~changing ~~have~~state ~~taken~~and ~~extensive~~federal ~~steps~~regulation. ~~intended~~State tolaws ~~contain~~(including certificates ~~or reduce the costs~~ of ~~health~~need ~~care.~~and ~~These~~licensure ~~steps~~requirements ~~have included, among others, reduced reimbursement rates, changes~~ in ~~and~~certain ~~reduction~~states) ofregulate ~~services covered,~~several ~~increased~~aspects ~~prospective, concurrent and retrospective utilization review~~ of ~~services,~~our ~~negotiated~~business ~~prospective~~including orhome ~~discounted~~health ~~contract pricing~~ and ~~adoption~~pediatric ofday atreatment ~~competitive bid approach to service contracts~~centers. ~~Cost~~We ~~containment~~also ~~efforts~~ are ~~expected~~ subject to ~~continue~~certain instate ~~the~~laws ~~future.~~prohibiting ~~Home~~the ~~health~~payment ~~care,~~of ~~which~~remuneration for ispatient ~~usually~~or ~~less~~business ~~costly~~referrals ~~than~~and ~~hospital-based~~the ~~care,~~provision ~~generally has benefited from certain~~ of ~~these~~services ~~cost~~where ~~containment~~a ~~efforts.~~financial Asrelationship ~~expenditures~~exists onbetween ~~home~~a ~~health~~referring ~~care~~person ~~services~~or ~~have~~entity ~~grown,~~and ~~however,~~the ~~initiatives aimed~~entity atproviding ~~reducing~~ the ~~cost~~service. ofFederal ~~health~~laws ~~care~~governing ~~delivery~~our inactivities ~~non-institutional~~include ~~settings~~regulation ~~have~~under ~~increased.~~the Medicare ~~Many~~and ~~state~~ Medicaid programs, inrelating ~~an effort~~ to, ~~contain~~among ~~the~~other ~~cost~~things, ofcertification ~~health care and in light~~ of ~~state~~home ~~budgetary~~health ~~constraints,~~agencies ~~have reduced their payment rates~~ and ~~have narrowed the scope of covered services~~reimbursement. ~~Likewise,~~Federal ~~the~~fraud ~~federal government, through legislation~~ and ~~regulation,~~abuse ~~has~~laws ~~acted~~prohibit ~~repeatedly~~or ~~to limit expenditures for health care~~restrict, ~~including~~among ~~home~~other ~~health services~~things, ~~respiratory~~the ~~and~~payment ~~home medical equipment. See “Management Discussion and Analysis~~ of ~~Financial~~remuneration ~~Condition~~to ~~and~~parties ~~Results of Operations.” A significant change~~ in ~~coverage or~~ a ~~reduction~~position into influence ~~payment~~or ~~rates~~cause ~~for~~ the ~~types~~referral of ~~services~~patients weor ~~provide~~business, ~~could~~as ~~have~~well aas ~~material~~the ~~adverse effect~~filing ~~upon~~of ~~our~~false ~~business~~claims.

12Changes in or new interpretations of these laws could have an adverse effect on our methods and costs of doing business. Further, failure by us to comply with such laws could adversely affect our ability to continue to provide, or receive reimbursement for, our services, and also could subject the Company and our officers and employees to civil and criminal penalties. There can be no assurance that we will not encounter regulatory impediments that could adversely affect our ability to open new branch offices or to expand the services currently provided by our existing branch offices.

Medicare and Medicaid Regulations. As a provider of services under the Medicare and Medicaid programs (the “Programs”), we are subject to federal and state laws and regulations governing reimbursement

~~Index~~ procedures and practices. These laws include the Medicare and Medicaid fraud and abuse statutes and regulations which, among other provisions, prohibit the payment or receipt of any form of remuneration in return for referring business or patients to ~~Financial~~providers ~~Statements~~for which payments are made by a governmental healthcare program. Violation of these laws may result in civil and criminal penalties, including substantial fines, loss of the right to participate in the Programs and imprisonment of responsible individuals. In addition, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) expanded the Government’s fraud and abuse enforcement powers. Among other provisions, HIPAA expands the Government’s authority to prosecute fraud and abuse beyond Medicare and Medicaid to all payors; makes exclusion from the Programs mandatory for a minimum of five years for any felony conviction relating to fraud; requires that organizations contracting with another organization or individual take steps to be informed as to whether the organization or individual is excluded from Medicare and Medicaid participation; and enhances civil penalties by increasing the amount of fines permitted. These laws also include a prohibition on referrals contained in the Omnibus Budget Reconciliation Act of 1989 (“Stark I”), which prohibits referrals by physicians to clinical laboratories where the physician has a financial interest, and further prohibitions contained in the Omnibus Budget Reconciliation Act of 1993 (“Stark II”), which prohibits such referrals for a more extensive range of services, including home health and durable medical equipment. Various federal and state laws impose civil and criminal penalties against participants in the Programs who make false claims for payment for services or otherwise engage in false billing practices.

~~Laws~~Many state laws prohibit the payment or receipt or the offer of anything of value in return for, or to induce, a referral for healthcare goods or services. In addition, there are several other statutes that, although they do not explicitly address payments for referrals, could be interpreted as prohibiting the practice. While similar in many respects to the federal laws, these state laws vary from state to state, are often vague and ~~Regulations~~have sometimes been interpreted inconsistently by courts and regulatory agencies. Private insurers and various state enforcement agencies have also increased their scrutiny of healthcare providers’ practices and claims, including in the home health sector.

~~General. Our~~In ~~business~~recent isyears, ~~subject~~enforcement toof ~~extensive~~federal ~~and~~fraud ~~frequently changing state~~ and ~~federal~~abuse ~~regulation.~~laws, ~~State~~as ~~laws~~well ~~regulate several~~as ~~aspects~~regulatory ofscrutiny ~~our~~in ~~business~~general, ~~including~~has ~~home~~increasingly ~~health,~~focused ~~durable~~on ~~medical~~the ~~equipment~~home healthcare ~~(“DME”),~~industry. ~~oxygen~~For ~~services~~example, ~~and~~the ~~home~~government ~~infusion~~has ~~therapy~~implemented ~~services~~Operation ~~(including~~Restore ~~certificates~~Trust, ofa ~~need~~federal ~~and~~investigative ~~licensure~~initiative ~~requirements~~focused inon ~~certain~~home ~~states)~~health, ~~and~~home ~~dispensing, distributing~~medical equipment and ~~compounding~~skilled ofnursing ~~prescription~~facility ~~products~~providers. WeOperation ~~also~~Restore ~~are~~Trust ~~subject~~is tonow operational ~~certain~~in every state, ~~laws~~and ~~prohibiting~~millions ~~the~~of ~~payment~~dollars ofin ~~remuneration~~funds ~~for~~fraudulently ~~patient~~obtained orby ~~business~~providers ~~referrals~~have ~~and~~been ~~the~~recovered. ~~provision~~The ofGovernment ~~services~~also ~~where~~has aimplemented ~~financial~~“wedge” ~~relationship~~audits, ~~exists~~which ~~between~~involve a ~~referring~~ ~~person~~review orof ~~entity~~a ~~and~~small ~~the~~sample ~~entity~~of ~~providing~~patient ~~the~~records ~~service.~~to identify ~~Federal~~non-compliance ~~laws~~and ~~governing~~project ~~our~~an ~~activities~~error ~~include~~rate ~~regulation~~for ofall ~~pharmacy~~claims ~~operations~~in ~~and~~a ~~regulation~~discrete ~~under~~period. ~~the~~Periodic ~~Medicare~~ and ~~Medicaid~~random ~~programs~~audits ~~relating~~by ~~to,~~intermediaries ~~among~~or ~~other~~by ~~things,~~state ~~certification of~~Medicaid ~~home health~~ agencies ~~and~~may ~~reimbursement.~~result ~~Federal~~in ~~fraud~~delays ~~and~~in ~~abuse~~receipt ~~laws prohibit~~ or ~~restrict,~~adjustments ~~among~~to ~~other things,~~ the ~~payment~~amounts of ~~remuneration~~reimbursement toreceived under ~~parties in a position to influence or cause~~ the ~~referral~~Medicare, ofMedicaid ~~patients~~ or ~~business,~~Medicaid asWaiver ~~well as the filing of false claims~~Programs.

~~Changes~~There incan orbe ~~new~~no ~~interpretations~~assurance ofthat ~~these laws~~we ~~could~~will ~~have~~not anbecome ~~adverse~~the ~~effect~~subject onof ~~our~~a ~~methods~~regulatory ~~and~~or ~~costs~~other ofinvestigation ~~doing~~or ~~business.~~proceeding ~~Further,~~or ~~failure~~that byour usinterpretations toof ~~comply~~applicable ~~with~~healthcare ~~such~~ laws ~~could~~and ~~adversely~~regulations ~~affect~~will ~~our~~not ~~ability~~be tochallenged. ~~continue~~The todefense ~~provide,~~of orany ~~receive reimbursement for, our equipment and services, and~~such ~~also~~challenge could ~~subject~~result ~~the~~in ~~Company~~substantial ~~and~~cost ~~our~~to ~~officers~~us, ~~and~~diversion ~~employees~~of tomanagement’s ~~civil~~time and ~~criminal~~attention, ~~penalties.~~and ~~There can be no assurance that we will not encounter regulatory impediments that~~ could ~~adversely~~have ~~affect~~a ~~our~~material ~~ability~~adverse toeffect ~~open~~on ~~new branch offices or to expand the services currently provided at~~ our ~~existing branch offices~~company.

~~Medicare~~For ~~and Medicaid Regulations. As~~ a ~~provider~~discussion of ~~services under~~ the ~~Medicare~~impact ~~and~~of ~~Medicaid~~recent ~~programs~~changes ~~(the “Programs”), we are subject~~ to ~~federal and state laws and regulations governing reimbursement procedures and practices. These laws include the~~ Medicare and Medicaid ~~fraud and abuse statutes and~~ regulations ~~which,~~please ~~among~~refer ~~other provisions, prohibit the payment or receipt of any form of remuneration in return for referring business or patients~~ to ~~providers~~“Recent ~~for~~Developments” which payments are made by a governmental health care program. Violation of these laws may result in civil and criminal penalties, including substantial fines, loss of the right to participate in the Programs and imprisonment. Inunder ~~addition, the Health Insurance Portability and Accountability Act of 1996 (~~Item 7—“~~HIPAA”) expanded the Government~~Management’s ~~fraud~~Discussion and ~~abuse~~Analysis enforcement powers. Among other provisions, HIPAA expands the Government’s authority to prosecute fraud and abuse beyond Medicare and Medicaid to all payors; makes exclusion from the Medicare and Medicaid programs mandatory for a minimum of ~~five~~Financial ~~(5)~~Condition years for any felony conviction relating to fraud; requires that organizations contracting with another organization or individual take steps to be informed as to whether the organization or individual is excluded from Medicare and ~~Medicaid~~Results ~~participation; and enhances civil penalties by increasing the amount~~ of ~~fines permitted. These laws also include a prohibition on referrals contained in the Omnibus Budget Reconciliation Act of 1989 (“Stark I~~Operations”), which prohibits referrals by physicians to clinical laboratories where the physician has a financial interest, and further prohibitions contained in the Omnibus Budget Reconciliation Act of 1993 (“Stark II”), which prohibits such referrals for a more extensive range of services, including home health and durable medical equipment. ~~Various federal and state laws impose civil and criminal penalties against participants in the Programs who make false claims for payment for services or otherwise engage in false billing practices.~~

~~Many~~Regulation ~~state~~of ~~laws~~Certain ~~prohibit~~Transactions. The ~~the~~Social ~~payment~~Security orAct, ~~receipt~~as oramended ~~the~~by ~~offer~~HIPAA, ofprovides ~~anything~~for ofthe ~~value~~mandatory inexclusion ~~return~~of providers ~~for,~~and orrelated topersons ~~induce,~~from aparticipation ~~referral~~in ~~for~~the ~~health~~Programs ~~care~~if ~~goods~~the individual or ~~services.~~ Inentity ~~addition,~~has ~~there~~been ~~are~~convicted ~~several~~of ~~other~~a ~~statutes~~criminal ~~that,~~offense ~~although~~related ~~they~~to dothe ~~not~~delivery ~~explicitly~~of ~~address~~an ~~payments~~item ~~for~~or ~~referrals,~~service ~~could~~under bethe ~~interpreted~~Programs asor ~~prohibiting~~relating ~~the~~to ~~practice.~~neglect ~~While~~or ~~similar~~abuse inof ~~many~~patients. Further, ~~respects~~individuals toor ~~the~~entities ~~federal~~may ~~laws~~be, ~~these~~but ~~state~~are ~~laws~~not ~~vary from~~required ~~state~~ to ~~state~~be, ~~are~~excluded ~~often~~from ~~vague~~the ~~and~~Programs ~~have~~in ~~sometimes~~circumstances ~~been~~including, ~~interpreted~~but ~~inconsistently~~not bylimited ~~courts~~to, ~~and~~convictions ~~regulatory~~relating ~~agencies.~~to ~~Private~~fraud; ~~insurers~~obstruction ~~and~~of ~~various~~an ~~state~~investigation ~~enforcement~~of ~~agencies~~a ~~have~~controlled ~~also~~substance; ~~increased~~license revocation ~~their~~or ~~scrutiny~~suspension; offiling ~~health~~claims ~~care~~for ~~providers’ practices~~excessive ~~and~~charges ~~claims,~~or ~~particularly~~unnecessary inservices ~~the~~or ~~home~~failure ~~health~~to ~~and~~furnish ~~home~~medically ~~medical~~necessary ~~equipment~~services; ~~sectors.~~or ownership or

In13 recent years, enforcement of federal fraud and abuse laws, as well as regulatory scrutiny in general, has increasingly focused on the home health care industry. For example, the government has implemented Operation Restore Trust, a federal investigative initiative focused on home health, home medical equipment and skilled

~~Index~~ control by an individual who has been excluded from the Programs, against whom a civil monetary penalty related to ~~Financial~~the ~~Statements~~Programs has been assessed, or who has been convicted of a crime described in this section. The illegal remuneration provisions of the Social Security Act make it a felony to solicit, receive, offer to pay, or pay any kickback, bribe, or rebate in return for referring a patient for any item or service, or in return for purchasing, leasing or ordering any good, service or item, for which payment may be made under the Programs. Other provisions in HIPAA proscribe false statements in billing and in meeting reporting requirements and in representations made with respect to the conditions or operations of providers. A violation of the illegal remuneration statute is a felony and may result in the imposition of criminal penalties, including imprisonment for up to five years and/or a fine of up to $25,000. Further, a civil action to exclude a provider from participation in the Programs could occur. There are also other civil and criminal statutes applicable to the industry, such as those governing false billings and the new healthcare/services offenses contained in HIPAA, including healthcare/services fraud, theft or embezzlement, false statements and obstruction of criminal investigation of offenses. The first criminal conviction and sentencing for a violation of the HIPAA privacy rules occurred in November 2004. Criminal sanctions for these new healthcare criminal offenses can be severe, including imprisonment for up to twenty years.

~~nursing~~Legal ~~facility providers~~Compliance. We ~~Operation~~maintain ~~Restore~~a ~~Trust~~compliance isprogram ~~now~~designed ~~operational~~to minimize the likelihood that we would engage in ~~every~~conduct ~~state,~~or enter into contracts in violation of the fraud and ~~millions~~abuse laws. Contracts of ~~dollars~~the intypes ~~funds~~subject ~~fraudulently~~to ~~obtained~~these laws are reviewed and approved by ~~providers~~the managed care and/or legal departments. We also maintain various educational programs designed to keep our managers updated and informed on developments with respect to the fraud and abuse laws and to remind all employees of our policy of strict compliance in this area. We have ~~been~~established ~~recovered~~a toll-free Compliance Hotline to assist in our commitment to ethical conduct throughout our company. The ~~Government~~Deficit ~~also~~Reduction ~~has~~act ~~implemented~~of 2005 (“~~wedge~~DRA”) ~~audits,~~imposes ~~which~~certain ~~involve~~specific acompliance ~~review~~obligations ofon athe ~~small~~company. ~~sample~~Under ofthe ~~patient~~DRA, ~~records~~we are required by January 1, 2007 to implement ~~identify~~policies ~~non-compliance~~which educate our employees, agents and ~~project~~contractors anregarding ~~error~~state ~~rate~~and ~~for~~federal ~~all~~false claims acts, whistleblower protection for plaintiffs in aqui ~~discrete~~tam ~~period.~~actions ~~Periodic~~and our policies and procedures for detecting fraud and abuse. While we ~~random~~believe ~~audits~~our byoperations ~~intermediaries~~comply orwith byapplicable ~~state~~laws ~~Medicaid~~and ~~agencies~~regulations, ~~may~~we ~~result~~cannot inprovide ~~delays~~any inassurance ~~receipt~~that further administrative or ~~adjustments~~judicial tointerpretations ~~the~~of ~~amounts~~existing laws or legislative enactment of ~~reimbursement~~new ~~received~~laws ~~under~~will ~~the~~not ~~Medicare,~~have ~~Medicaid~~a ormaterial ~~Medicaid~~adverse ~~Waiver~~effect on ~~Programs~~our business.

~~There~~Medicare Certification. Federal ~~can~~regulations begoverning nothe ~~assurance~~Medicare ~~that~~program weare ~~will~~also ~~not~~applicable ~~become~~to ~~the~~our ~~subject~~company. ofRegulations afor ~~regulatory or~~Medicare ~~other~~reimbursement ~~investigation~~include oran ~~proceeding~~annual orreview ~~that our interpretations~~ of ~~applicable~~healthcare ~~health~~operations ~~care~~and ~~laws~~personnel and ~~regulations~~provide criteria ~~will~~for ~~not~~coverage beand ~~challenged~~reimbursement. ~~The~~We ~~defense~~are ofMedicare ~~any~~certified ~~such~~to ~~challenge~~provide ~~could~~nursing ~~result~~services in ~~substantial~~thirteen ~~cost to us~~states, ~~diversion~~as ~~of management’s time and attention, and could have a materially adverse effect on our company~~required.

~~For~~Permits aand ~~discussion~~Licensure. Many ofstates ~~the~~require ~~impact~~licensure of ~~recent~~companies ~~changes~~providing tohome ~~Medicare~~healthcare services and ~~Medicaid~~other ~~regulations~~products ~~please~~and services ~~refer~~of tothe ~~Recent~~type ~~Developments~~offered ~~under~~by ~~Item~~our 7company. ~~-Management’s~~We ~~Discussion~~are ~~and~~currently ~~Analysis~~licensed ofas ~~Financial~~a ~~Condition~~home ~~and~~health ~~Results~~agency in twelve states and ~~Operations~~a home care agency in five states.

~~Regulation~~Certificates of ~~Certain Transactions~~Need. ~~The Social~~A ~~Security~~number ~~Act,~~of asstates ~~amended~~require bycompanies ~~HIPAA,~~providing ~~provides~~home ~~for~~healthcare ~~the~~services ~~mandatory exclusion of providers~~ and ~~related~~other ~~persons~~services ~~from~~of ~~participation in~~ the ~~Programs~~type offered ifby ~~the~~us ~~individual~~to orhave ~~entity has been convicted of~~ a ~~criminal~~certificate ~~offense related to the delivery~~ of ~~an item~~need orissued ~~service~~by ~~under~~ the ~~Programs~~state’s orhealth ~~relating~~planning toagency. ~~neglect~~Certificates ~~or abuse~~ of ~~patients.~~need ~~Further, individuals or entities may be, but~~ are ~~not~~often ~~required~~difficult to ~~be,~~obtain ~~excluded~~and ~~from the Programs~~ in ~~circumstances~~many ~~including,~~instances ~~but~~are not ~~limited~~obtainable ~~to,~~at ~~convictions~~all ~~relating~~because ~~to fraud; obstruction of~~ an ~~investigation~~area ofis adetermined ~~controlled substance; license revocation or suspension; filing claims for excessive charges or unnecessary services or failure~~ to ~~furnish~~be ~~medically~~adequately ~~necessary services; or ownership or control~~ served by ~~an individual~~existing ~~who~~providers ~~has been excluded from the Programs, against whom a civil monetary penalty related to the Programs has been assessed,~~ or ~~who~~for ~~has~~other ~~been~~reasons. ~~convicted~~If ofwe acommence ~~crime~~operations ~~described~~ in ~~this section. The illegal remuneration provisions of the Social Security Act make it~~ a ~~felony to solicit~~state, ~~receive, offer to pay,~~ or ~~pay~~expand ~~any~~our ~~kickback,~~operations ~~bribe, or rebate~~ in ~~return for referring~~ a ~~patient~~state ~~for~~where ~~any~~we ~~item~~are orcurrently ~~service~~operating, orand inthose ~~return~~operations ~~for~~require ~~purchasing,~~a ~~leasing~~certificate orof ~~ordering any good~~need, ~~service~~we orwill ~~item, for which payment may~~ be ~~made~~required ~~under~~to ~~the~~obtain ~~Programs.~~such certificates ~~Other~~of ~~provisions~~need ~~in HIPAA proscribe false statements in billing and in meeting reporting requirements and in representations made~~ with respect to ~~the~~those ~~conditions or~~ operations ~~of providers~~. AWe ~~violation~~currently ofhave ~~the illegal~~certificates ~~remuneration statute is a felony and may result in the imposition~~ of ~~criminal~~need ~~penalties, including imprisonment for up to five (5) years and/or a fine of up to $25,000. Further, a civil action to exclude a provider from participation~~ in ~~the Programs~~four ~~could occur~~states. There ~~are~~can ~~also~~be ~~other~~no ~~civil~~assurance ~~and~~that ~~criminal~~we ~~statutes~~will ~~applicable~~be able to ~~the~~obtain ~~industry,~~other ~~such~~required ascertificates ~~those~~of ~~governing~~need ~~false billings~~ and ~~the new health care/services offenses contained in HIPAA~~, ~~including~~if ~~health~~so ~~care/services fraud~~required, ~~theft~~we ~~or embezzlement,~~will ~~false~~incur ~~statements~~expenses ~~and obstruction of criminal investigation of offenses. The first criminal conviction and sentencing for a violation of the HIPAA privacy rules occurred~~ in ~~November 2004. Criminal sanctions for these new health care~~ ~~criminal~~connection ~~offenses~~with ~~can~~attempting beto ~~severe,~~obtain ~~including~~such ~~imprisonment~~certificates ~~for~~of ~~up to twenty (20) years~~need.

~~Legal Compliance~~HIPAA. WeHIPAA’s ~~maintain~~administrative asimplification ~~compliance~~rules ~~program~~mandate ~~designed to minimize the likelihood~~ that wehealthcare ~~would~~providers ~~engage~~who in conduct orstandard ~~enter~~transactions ~~into~~electronically, ~~contracts~~payors ~~in violation of the fraud~~ and ~~abuse~~clearinghouses, ~~laws. Contracts~~enact ofmeasures ~~the types subject~~ to ~~these~~protect ~~laws~~personally identifiable ~~are~~health ~~reviewed~~information ~~and approved by~~ (the ~~managed~~“Privacy ~~care~~Rules”), ~~and/or~~use ~~legal~~standard ~~departments.~~electronic Wetransaction ~~also maintain various educational programs designed to keep our managers updated~~ and ~~informed~~code onsets ~~developments with respect to~~ (the ~~fraud~~ ~~and~~“Standard ~~abuse~~Transactions ~~laws~~Rules”) and toensure ~~remind~~the ~~all~~security ~~employees~~ of ~~our~~health ~~policy~~information ~~of strict compliance~~ in ~~this~~electronic ~~area.~~form We(the ~~have established a toll-free Compliance Hotline to assist in our commitment to ethical conduct throughout our company. While we believe our~~“Security operations comply with applicable laws and regulations, we, however, cannot provide any assurance that further administrative or judicial interpretations of existing laws or legislative enactment of new laws will not have a materially adverse effect on our businessRules”).

~~Medicare Certification. Federal~~14 regulations governing the Medicare program are also applicable to our company. Regulations for Medicare reimbursement include an annual review of health care operations and personnel and provide criteria for coverage and reimbursement. We are Medicare certified to provide nursing services in thirteen (13) states, as required.

~~Index~~ Multiple sets of regulations, each with its own compliance date, have been issued to ~~Financial~~implement ~~Statements~~the different administrative simplification requirements. We have appointed a privacy officer and a security officer.

~~Permits~~During ~~and~~the ~~Licensure. Many~~fourth ~~states~~quarter ~~require~~of ~~licensure~~fiscal of2006, ~~companies~~we ~~providing pharmacy~~had ~~services,~~an ~~home~~incident ~~health~~whereby ~~care~~a ~~services,~~Company ~~home~~laptop ~~infusion~~computer ~~therapy~~containing ~~products~~patient ~~and~~personal ~~services~~health ~~and~~information ~~other~~(PHI) ~~products~~was stolen and ~~services~~exposed ofto potential misuse. We believe that we took appropriate measures to investigate the ~~type~~incident, ~~offered~~mitigate byany ~~our~~potential ~~company~~damages and have strengthened existing controls and procedures. We ~~are~~received ~~currently~~notice ~~licensed~~on asSeptember 26, a2006 ~~home~~from ~~health~~the ~~agency~~United inStates ~~twelve~~Department of Health and Human Services’ (12HHS) ~~states,~~Office aof ~~home~~Civil Rights ~~care~~alleging ~~agency~~ that we were not in ~~five~~compliance ~~(5)~~with ~~states~~the ~~and~~Federal aStandards ~~pharmacy~~for inPrivacy ~~nine~~of ~~(9)~~Individually ~~states~~Identifiable Health Information. We ~~also~~responded ~~provide~~to ~~unit~~the ~~dose~~notice ~~medications~~and bybelieve ~~mail~~that ~~order~~the toultimate ~~various~~resolution ~~states~~will not have a material adverse effect on our business, financial condition and results of operations.

~~Certificates of Need. A number of states require companies providing home health care services, home infusion therapy and~~Environmental ~~other~~Matters services of the type offered by us to have a certificate of need issued by the state’s health planning agency. Certificates of need are often difficult to obtain and in many instances are not obtainable at all (because an area is determined to be adequately served by existing providers or for other reasons). If we commence operations in a state, or expand our operations in a state where we are currently operating, and those operations require a certificate of need, we will be required to obtain such certificates of need with respect to those operations. We currently have certificates of need in five (5) states. There can be no assurance that we will be able to obtain other required certificates of need and, if so required, we will incur expenses in connection with attempting to obtain such certificates of need.

~~HIPAA. HIPAA’s~~Medical ~~administrative~~facilities ~~simplification~~are ~~rules~~subject ~~mandate~~to ~~that~~a ~~all~~wide variety of federal, state and local environmental and occupational health ~~care~~and ~~providers,~~safety ~~payors~~laws and ~~clearinghouses (collectively~~regulations, ~~“Covered~~such ~~Entities”)~~as air and water quality control requirements, ~~enact~~waste ~~measures~~management torequirements ~~protect~~and ~~personally~~requirements ~~identifiable~~for ~~health~~training ~~information~~employees (in the ~~“Privacy~~proper ~~Rules”)~~handling and management of hazardous materials and wastes. Our typical branch office facility operations include, but are not limited to, the handling, use, ~~standard~~storage, ~~electronic~~transportation, ~~transaction~~disposal and/or ~~code~~discharge ~~sets~~of ~~(the~~hazardous, ~~“Electronic~~toxic, ~~Transactions~~infectious, ~~Rules”)~~flammable and other ~~ensure~~hazardous ~~the~~materials, ~~electronic~~waste, ~~security~~pollutants ofor ~~health~~contaminants. ~~information~~These (activities may result in injury to individuals or damage to property or the ~~“Security~~environment ~~Rules”)~~and may result in legal liability damages, injunctions, fines, penalties or other governmental agency actions. ~~Multiple~~We ~~sets~~are not aware of ~~regulations~~any pending or threatened claim, ~~each~~investigation ~~with~~or ~~its~~enforcement ~~own~~action ~~compliance~~regarding ~~date~~environmental issues, ~~have~~which, ~~been~~if ~~issued~~determined adversely to ~~clarify~~us, ~~and~~could ~~implement~~have ~~the~~a ~~different~~material ~~sets~~adverse ofeffect ~~rules~~upon our capital expenditures, financial condition, or competitive position.

~~The~~15 compliance dates for the Privacy Rules and the Electronic Transactions Rules have already been reached. The compliance date for the Electronic Transactions Rules, which mandate that Covered Entities, including our company, transmit claims and certain related healthcare information in standardized formats and data sets, was October 16, 2003. We were materially compliant by that date. The compliance date for the Security Rules is April 21, 2005 and we expect to be materially compliant with the rules by that date.

The full effect of HIPAA’s rules is not yet known, in part because compliance with the Security Rules is not mandated until April 21, 2005, and also because further amendment of the regulations is likely. We have formed a committee to coordinate the implementation of the HIPAA regulations, have appointed a privacy officer and a security officer, and have established a timeline for full implementation of the guidelines by the mandated compliance deadlines. Nevertheless, there can be no assurance that these and other changes will not materially and adversely affect our business and financial condition.

Employees

As of September 30, 2004, our health care and related services operations employed, or had on registry, approximately 3,200 licensed or credentialed nurses, therapists and pharmacists, and approximately 1,100 full-time employees and 200 part-time employees. We believe that our relationship with our employees is good.

Environmental Matters

Medical facilities are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations, such as air and water quality control requirements, waste management requirements and requirements for training employees in the proper handling and management of hazardous materials and wastes. Our typical branch office facility operations include, but are not limited to, the handling, use, storage, transportation, disposal and/or discharge of hazardous, toxic, infectious, flammable and other hazardous materials, waste, pollutants or contaminants. These activities may result in injury to individuals or damage to property or the environment and may result in legal liability damages, injunctions, fines, penalties or other governmental agency actions. We are not aware of any pending or threatened claim, investigation or enforcement action regarding environmental issues, which, if determined adversely to us, would have a material adverse effect upon our capital expenditures, earnings, or competitive position.

~~Index~~ ITEM 1A. RISK toFACTORS ~~Financial Statements~~

~~RISK~~You ~~FACTORS~~should carefully consider the following risk factors, as well as other information contained in or incorporated by reference in this Annual Report on Form 10-K. The risks and uncertainties described below are those that we currently believe may materially affect our company. Other risks and uncertainties that we do not presently consider to be material or of which we are not presently aware may become important factors that affect our company in the future. If any of the risks discussed below actually occur, our business, financial condition, operating results, or cash flows could be materially adversely affected.

~~You~~Risks ~~should~~Related carefully consider the following risk factors, as well as other information contained in or incorporated by reference in this Annual Report on Form 10-K. The risks and uncertainties described below are those that we currently believe may materially affect our company. Other risks and uncertainties that we do not presently consider to ~~be material or of which we are not presently aware may become important factors that affect~~ our ~~company~~Business ~~in the future. If any of the risks discussed below actually occur, our business, financial condition, operating results, or cash flows could be materially adversely affected.~~

~~Risks~~Changes ~~Related~~in toreimbursement rates or policies, including legislative and regulatory actions, could adversely affect our ~~Business~~revenues or profitability.

~~Changes~~The profitability of our business depends on payment and reimbursement from governmental and non-governmental third party payors. Federal and state governments as well as commercial third party and selected private payors have taken and continue to take extensive steps intended to contain or reduce the costs of healthcare. These steps have included, among others, reductions in reimbursement rates, changes in services covered, increased utilization review of services, negotiated prospective or ~~policies~~discounted contract pricing, ~~including~~and ~~legislative~~adoption of a competitive bid approach to service contracts. Cost containment efforts are expected to continue in the future. We cannot assure you that payments under state or federal governmental programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to these programs. Although home healthcare, which is generally less costly than hospital-based care, has benefited from many of these cost containment efforts, as expenditures in the home healthcare market continue to grow, governmental and ~~regulatory~~private payor initiatives aimed at reducing the cost of healthcare delivery at non-hospital sites are increasing. Many state Medicaid programs, in an effort to contain the ~~actions~~cost of healthcare and in light of state budgetary constraints, ~~may~~have reduced their payment rates and have anarrowed ~~material~~the ~~adverse~~scope ~~effect~~of oncovered services. Initiatives have been implemented in the past and such initiatives are expected to continue in the future. There can be no assurance that these initiatives will not materially and adversely affect our revenues from these sources and, consequently, our results of operations. In addition, we cannot assure you that the services that we provide and the facilities that we operate will meet or ~~profitability~~continue to meet the requirements for participation in these programs.

~~The~~Our ~~profitability of our~~ business ~~depends~~may onsuffer ~~payment~~if ~~and~~we ~~reimbursement~~lose ~~from~~relationships ~~governmental~~with ~~and non-governmental third-party~~ payors. Federal and state governments as well as commercial third-party and selected private payors have taken and continue to take extensive steps intended to contain or reduce the costs of health care. These steps have included, among others, reductions in reimbursement rates, changes in services covered, increased utilization review of services, negotiated prospective or discounted contract pricing and adoption of a competitive bid approach to service contracts. Cost containment efforts are expected to continue in the future. We cannot assure you that payments under state or federal governmental programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to these programs. Although home health care, which is generally less costly than hospital-based care, has benefited from many of these cost containment efforts, as expenditures in the home health care market continue to grow, governmental and private payor initiatives aimed at reducing the cost of health care delivery at non-hospital sites are increasing. Many state Medicaid programs, in an effort to contain the cost of health care and in light of state budgetary constraints, have reduced their payment rates and have narrowed the scope of covered services. Initiatives have been implemented in the past and such initiatives are expected to continue in the future. There can be no assurance that these initiatives will not materially and adversely affect our revenues from these sources and, consequently, our results of operations. In addition, we cannot assure you that the services that we provide and the facilities that we operate will meet or continue to meet the requirements for participation in these programs.

~~Our~~We ~~business~~are ~~may~~highly ~~suffer~~dependent ifon reimbursement from non-governmental payors. From time to time, payors with whom we ~~lose~~have relationships ~~with~~require ~~payors~~that we and our competitors bid to keep their business, and there can be no assurance that we will be retained or that our margins will not be adversely affected when that happens. The loss of a payor relationship or an adverse change in the financial condition of a payor could result in the loss of a significant number of patients and/or the write-off of accounts receivables, which could have a material adverse effect on our business, financial condition and results of operations.

WeFederal ~~are~~and ~~highly~~state ~~dependent~~laws onthat ~~reimbursement~~protect ~~from~~the ~~non-governmental~~privacy ~~payors.~~of ~~From time~~patient tohealth ~~time~~information, ~~payors~~such ~~with~~as HIPAA, ~~whom~~may weincrease ~~have relationships require that we and~~ our ~~competitors bid to keep their business~~costs, ~~and~~result ~~there can be no assurance that we will be retained or that our margins will not be adversely affected when that happens. The loss of a payor relationship or an adverse change~~ in ~~the~~delays ~~financial condition of a payor could result~~ in ~~the~~reimbursement ~~loss of a significant number of patients~~ and~~/or~~ ~~the~~limit ~~write-off of accounts receivables, which could have a material adverse effect on~~ our ~~business,~~ ~~financial~~ability ~~condition~~to collect and ~~results~~use ofthat ~~operations~~information.

~~The~~See ~~Medicare Prescription~~Item 1 ~~Drug~~“Laws ~~Improvement~~ and ~~Modernization Act of 2003 and its related regulations may reduce amounts reimbursable for our products~~Regulations”.

~~See~~We ~~“Management’s~~may ~~Discussion~~not ~~and~~be ~~Analysis~~able ofto ~~Financial~~collect ~~Condition~~reimbursements for our products and ~~Results~~services offrom ~~Operations”~~third ~~below~~party payors in a timely manner.

16We are responsible for submitting reimbursement requests to third party payors and collecting the reimbursements, and assume the financial risks relating to uncollectible and delayed reimbursements. In the

~~Index~~ current healthcare environment, we may experience difficulties in collecting reimbursements because third party payors may seek to ~~Financial~~reduce, ~~Statements~~by appeal or otherwise, or delay reimbursements to which we are entitled for products and services that we have provided. Our business may be affected by delays in reimbursement from when we provide products and services to when we receive the reimbursement or payment for these products and services. Working capital management, including prompt and diligent billing and collection, is an important factor in our results of operation and liquidity. We cannot assure you that trends in the industry will not further extend the collection period and adversely impact our working capital or that our working capital management procedures will successfully mitigate this risk.

~~Federal~~Our ~~and~~business ~~state~~is ~~laws~~highly ~~that~~regulated ~~protect~~— ~~the~~extensive ~~privacy~~or offrequent ~~patient~~changes ~~health information, such as HIPAA, may increase our costs, result~~ in ~~delays~~regulations incould ~~reimbursement~~adversely ~~and~~affect ~~limit~~ our ~~ability to collect and use that information~~business.

~~See~~Our ~~“Management’s~~business ~~Discussion~~is subject to extensive and ~~Analysis~~frequently changing ofstate ~~Financial~~and ~~Condition~~federal regulation. We are required to comply with complex laws and ~~Results~~regulations ofat ~~Operations”~~the ~~below.~~federal, state and local government levels relating to, among other things:

We• ~~may~~billing ~~not be able to collect reimbursements~~ for ~~our products and~~ services ~~from third-party payors in a timely manner.~~ ;

We• ~~are responsible~~relationships ~~for~~with ~~submitting~~physicians ~~reimbursement requests to third-party payors~~ and ~~collecting~~other ~~the~~federal reimbursements, and assume the financial risks relating to uncollectible and delayed reimbursements. In the current health care environment, we may experience difficulties in collecting reimbursements because third-party payors may seek to reduce, by appeal or otherwise, or delay reimbursements to which we are entitled for products and services that we have provided. Our business may be characterized by delays in reimbursement from when we provide products and services to when we receive the reimbursement or payment for these products and services. This timing delay may cause working capital shortages from time to time. As a result, working capital management, including prompt and diligent billing and collection, is an important factor in our results of operation and liquidity. We cannot assure you that trends in the industry will not further extend the collection period and adversely impact our working capital or that our working capital management procedures will successfully mitigate this risk. sources;

~~Our~~• ~~business~~adequacy isand ~~subject~~medical tonecessity ~~reimbursement risks due to difficulties in the implementation~~ of ~~the~~medical ~~Georgia Medicaid Multi Health Network system.~~ care;

~~See~~• ~~“Management’s~~adequacy ~~Discussion and Analysis~~ of ~~Financial~~documentation ~~Condition and Results~~ of ~~Operations”~~services ~~below.~~ provided;

~~Our~~• ~~business~~quality isof ~~highly~~medical ~~regulated~~equipment —and ~~extensive or frequent changes in regulations could adversely affect our business.~~ services;

~~Our business~~• isqualifications ~~subject~~of tomedical ~~extensive~~ and ~~frequently~~support ~~changing state and federal regulation. We are required to comply with complex laws and regulations at the federal, state and local government levels relating to, among other things:~~ personnel;

• ~~billing~~confidentiality, ~~for~~maintenance ~~services~~and security issues associated with health-related information and medical records;

• ~~relationships with physicians and other federal sources~~licensure;

• ~~adequacy~~operating policies and ~~medical necessity of medical care~~procedures; and

• ~~adequacy~~addition of ~~documentation~~facilities ofand services ~~provided;~~(including certificates of need).

•New ~~quality~~laws ofand ~~medical~~regulations ~~equipment~~are enacted from time to time to regulate new and existing services; and products in the home healthcare industry. Because many of these laws and regulations are relatively new and are complex, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. Changes in the law or new interpretations of existing laws also could have an adverse effect on our methods and costs of doing business.

•Failure ~~qualifications~~to ofcomply ~~medical~~with ~~and~~applicable ~~support~~regulations ~~personnel;~~may subject us to fines, penalties or exclusion from participation in government programs.

•As ~~confidentiality~~part of the extensive federal and state regulation of our business, ~~maintenance~~we are subject to audits, examinations and ~~security~~investigations ~~issues~~by ~~associated~~or at the direction of governmental investigatory and oversight agencies. Failure by us to comply with ~~health-related~~applicable ~~information~~laws and ~~medical~~regulations ~~records;~~could adversely affect our ability to continue to provide, or receive reimbursement for, our products and services and also could subject us and our officers to civil and criminal penalties. Such investigations and suits could result in significant financial sanctions or exclusion from participation in Medicare, Medicaid and other federal and state healthcare programs. Recently, enforcement of federal fraud and abuse laws and regulatory scrutiny generally, have increasingly focused on the home healthcare industry. There can be no assurance that we will not become the subject of a regulatory or other investigation or proceeding or that we will not encounter regulatory impediments that could adversely affect our ability to open new branch offices and to expand the services currently provided at our existing branch offices. There can be no assurance that current or future government regulation will not have an adverse effect upon our business.

•17 ~~licensure;~~

• operating policies and procedures;

• addition of facilities and services (including certificates of need); and

• pharmacy operations.

New laws and regulations are enacted from time to time to regulate new and existing services and products in the home health care industry. Because many of these laws and regulations are relatively new and are

~~Index~~We todepend ~~Financial~~on ~~Statements~~the efforts of healthcare professionals, the loss of whose services could adversely affect our business.

We are highly dependent upon our staff of ~~complex,~~professional wenurses doand ~~not~~therapists. ~~always~~Competition ~~have~~for healthcare professionals who possess the ~~benefit~~skills, ofexperience ~~significant~~and ~~regulatory~~licenses ornecessary ~~judicial~~to ~~interpretation~~meet the requirements of ~~these~~our ~~laws~~patients is strong, and ~~regulations~~salaries and benefit costs relating to these professionals have risen. ~~Changes~~The inloss of key personnel or the ~~law~~inability to attract, retain or ~~new interpretations~~motivate sufficient numbers of ~~existing~~qualified ~~laws~~healthcare ~~also~~professionals could adversely affect our business. Future changes to the supply and demand for certain healthcare professionals could have ana material adverse effect on our ~~methods~~profitability and ~~costs~~on our ability to maintain or increase our patient base at certain or all of ~~doing~~our ~~business~~branch offices. An inability to continue to increase the number of professionals we recruit and retain would adversely affect our potential for growth. The cost of attracting healthcare professionals and providing them with attractive benefit packages may be higher than anticipated and, as a result, our profitability could decline. Moreover, if we are unable to attract and retain these professionals, the quality of our services may decline and, as a result, we could lose patients.

~~Failure~~We torely ~~comply~~on ~~with~~a ~~applicable~~few ~~regulations~~key ~~will~~executives ~~subject~~and usother toemployees ~~fines,~~whose ~~penalties~~absence or ~~expulsion~~loss ~~from~~could ~~participation~~adversely inaffect ~~government~~our ~~programs~~business.

AsWe ~~part~~depend ofon ~~the~~a ~~extensive~~few ~~federal~~key ~~and state regulation of our business~~executives, ~~we are subject to audits, examinations~~ and ~~investigations~~ ~~by or at~~ the ~~direction~~loss of ~~governmental~~their ~~investigatory~~services ~~and oversight agencies. Failure by us to comply with applicable laws and regulations~~ could materially adversely affect our ~~ability~~company. toWe ~~continue~~do tonot ~~provide,~~maintain or“key ~~receive~~person” ~~reimbursement~~life ~~for,~~insurance ~~our products~~policies ~~and~~on ~~services~~any ~~and~~of ~~also~~those ~~could~~executives. ~~subject~~We usmust ~~and~~be ~~our~~able ~~officers~~ to ~~civil~~attract and ~~criminal~~retain ~~penalties.~~other ~~Such~~qualified, ~~investigations~~essential ~~and~~employees ~~suits~~for ~~could~~our ~~result in significant financial sanctions or exclusion from participation in Medicare~~technical, ~~Medicaid~~operating and ~~other federal~~ ~~and~~professional ~~state health care programs~~staff. ~~Recently,~~If ~~enforcement of federal fraud and abuse laws, and regulatory scrutiny generally, have increasingly focused on the home health care industry. There can be no assurance that~~ we ~~will~~are ~~not~~unable ~~become the subject of a regulatory or other investigation or proceeding or that we will not encounter regulatory impediments that could adversely affect our ability~~ to ~~open~~attract ~~new branch offices~~ and toretain ~~expand~~these ~~the~~essential ~~services~~employees, ~~currently provided at~~ our ~~existing~~business ~~branch~~could ~~offices. There can~~ be ~~no assurance that current or future government regulation will not have an adverse effect upon our business~~harmed.

We ~~are~~participate ~~highly~~in ~~dependent on our relationship with~~ a ~~limited~~highly ~~number~~competitive ofmarket ~~biopharmaceutical suppliers~~ and ~~the~~competitive ~~loss~~pressures ofmay ~~any~~result ofin ~~these~~a ~~relationships~~decrease ~~could~~in ~~significantly impact~~ our ~~ability~~revenues toand ~~sustain or grow our revenues~~profitability.

~~A substantial~~The ~~majority~~markets offor our ~~product~~healthcare ~~for~~services ~~our~~are ~~Pharmacy~~highly ~~segment~~competitive isand ~~purchased~~are divided ~~from~~among a ~~few~~large ~~biopharmaceutical~~number ~~suppliers.~~of ~~Any~~providers, ~~termination~~some of which are national providers, but most of which are either regional or ~~adverse~~local ~~adjustment~~providers. In addition to ~~any~~competing ofwith ~~these~~other ~~relationships~~home ~~could~~healthcare ~~have~~companies afocusing ~~material~~on ~~adverse~~providing ~~effect~~services to pediatric patients, we compete with several large national home healthcare companies that, while not focusing primarily on the pediatric patient, provide pediatric home healthcare services as part of a ~~significant~~broader ~~portion~~service offering. Certain of our ~~business,~~competitors and potential competitors have significantly greater financial, ~~condition~~technical and ~~results~~marketing/sales resources than we have and may, in certain locations, possess licenses or certificates of ~~operations~~need that permit them to provide services that we cannot currently provide. The competitors also may undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to existing and potential employees and clients. Increased competition in the future from existing competitors or new entrants may limit our ability to maintain or increase our market share. There can be no assurance that we will not encounter increased competition in the future that could limit our ability to maintain or increase our business and could adversely affect our operating results.

Our business involves ~~could~~a bemajor ~~harmed~~risk ifof ~~the~~lawsuits ~~supply~~for ofproduct ~~any~~and ofmalpractice ~~the~~liability, ~~products~~which our insurance may not be adequate to cover, that wecould ~~distribute~~increase ~~becomes~~the ~~scarce~~risk of our business.

~~The~~See ~~biopharmaceutical~~“Management’s ~~industry~~Discussion isand ~~susceptible~~Analysis ~~to product shortages. The availability~~ of ~~some~~Financial ofCondition ~~the products that we distribute, such as hemophilia factor~~ and ~~growth~~Results ~~hormone, have been constrained from time to time. There was also an industry wide recombinant factor VIII product shortage that existed for some time, as a result~~ of ~~the manufacturers being unable to increase production to meet rising global demand~~Operations”. ~~If these products, or any of the other drugs that we distribute, are in short supply for long periods of time, our business could be harmed.~~

WeOur ~~depend~~invested oncash ~~the~~balances ~~efforts of health care professionals, the loss of whose services~~ could ~~adversely~~suffer ~~affect~~unexpected ~~our~~losses ~~business~~in value.

We ~~are~~have ~~highly~~invested ~~dependent upon our staff of professional nurses, respiratory therapists and pharmacists. Competition for health care professionals who possess~~ the ~~skills,~~retained ~~experience~~proceeds ~~and~~from ~~licenses necessary to meet~~ the ~~requirements~~sale of ~~our~~the ~~patients~~Pharmacy ~~is strong,~~ and ~~salaries and benefit costs relating to these professionals have~~ ~~risen.~~RTES ~~The~~businesses ~~loss~~in ofaccordance ~~key~~with ~~personnel or~~ the ~~inability~~terms ~~to attract, retain or motivate sufficient numbers~~ of ~~qualified health care professionals could adversely affect~~ our ~~business.~~Investment ~~Future~~Policy ~~changes~~which tohas ~~the~~been ~~supply~~approved ~~and~~by demand for certain health care professionals could have a material adverse effect on our profitability and on our ability to maintain or increase our patient base at certain or all of our branch offices. An inability to continue to increase the ~~number~~Board of ~~professionals we recruit would adversely affect our potential for growth~~Directors. ~~The~~This ~~cost~~policy ofprovides ~~attracting~~prescribed ~~health~~parameters ~~care~~that ~~professionals~~place ~~and~~higher ~~providing~~priority ~~them~~on ~~with~~principal ~~attractive~~preservation ~~benefit packages may be higher~~ than ~~anticipated and, as a result, our profitability could decline~~yield. ~~Moreover~~Nevertheless, if we ~~are~~significant ~~unable~~unforeseen tomarket ~~attract~~disruptions ~~and~~were ~~retain~~to ~~these professionals~~occur, the ~~quality~~potential offor ~~our~~losses ~~services may decline and, as a result, we~~ could ~~lose patients~~exist.

~~Index~~Our business involves a major risk of workers’ compensation claims and losses, which our insurance may not be adequate or able to ~~Financial~~cover, ~~Statements~~that could increase the risk of our business.

WeAs ~~rely~~a onresult of operating in the home healthcare industry, our business entails an inherent risk of claims, losses and potential lawsuits alleging employee accidents which are likely to occur in a ~~few~~patient’s ~~key~~home. As ~~executives~~such, these incidents are typically un-witnessed and ~~other~~require ~~employees~~proactive ~~whose~~claims ~~absence~~adjustment orstrategies ~~loss~~to ~~could~~minimize ~~adversely~~expected ~~affect~~losses ~~our~~and ~~business~~mitigate exposure to fraudulent claims. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

WeOur ~~depend~~potential oninability ato ~~few~~react effectively ~~key~~to ~~executives,~~changes ~~and~~in the ~~loss~~healthcare ~~of their~~industry ~~services~~ could ~~materially~~ adversely affect our ~~company. We do not maintain “key person” life insurance policies on any of those executives. We must be able to attract and retain other qualified, essential employees for our technical,~~ operating ~~and professional staff~~results. ~~If we are unable to attract and retain these essential employees, our business could be harmed.~~

WeIn ~~participate~~recent years, the healthcare industry has undergone significant change driven by various efforts to reduce costs, including efforts at national healthcare reform, trends toward managed care, limits in aMedicaid ~~highly~~coverage ~~competitive~~and ~~market~~reimbursement levels, consolidation of healthcare distribution companies and ~~competitive~~collective purchasing arrangements by office-based healthcare practitioners. The impact of third party pricing pressures ~~may~~and ~~result~~low barriers to entry has dramatically reduced profit margins for healthcare providers. Continued growth in amanaged ~~decrease~~care and capitated plans has pressured healthcare providers to find ways of becoming more cost competitive. This has also led to consolidation of healthcare providers in our ~~revenues~~market areas. Our inability to react effectively to these and ~~profitability~~other changes in the healthcare industry could adversely affect our operating results. We cannot predict whether any healthcare reform efforts will be enacted and what effect any such reforms may have on us or our customers and suppliers.

~~The~~Our ~~markets~~operations ~~for~~could ~~our~~be ~~health~~disrupted ~~care~~if services are highly competitive and are divided among a large number of providers, some of which are national providers, but most of which are either regional or local providers. In addition to competing with other home health care companies focusing on providing services to pediatric patients, we compete with several large national home health care companies that, while not focusing primarily on the pediatric patient, provide pediatric home health care services as part of a broader service offering. Certain of our ~~competitors and~~management ~~potential~~information ~~competitors~~systems ~~have significantly greater financial~~fail, ~~technical~~causing and marketing/sales resources than we have and may, in certain locations, possess licenses or certificates that permit them to provide services that we cannot currently provide. The competitors also may undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to existing and potential employees and clients. Increased competition in the future from existing competitors or new entrants may limit our ability to maintain or increase our market share. There can be no assurance that we will not encounter increased ~~competition~~expenses ~~in the future that could limit our ability to maintain or increase our business~~ and ~~could~~loss ~~adversely~~of ~~affect our operating results~~information.

Our business depends in part upon our ability to input, store, retrieve, ~~involves~~process aand ~~major~~manage ~~risk~~billing ofand ~~lawsuits~~collection information for ~~product~~each patient. Our internally developed system provides substantially all of our locations with immediate access to patient, contract, and ~~malpractice~~payor ~~liability~~information and supports substantially all necessary billing, ~~which~~cash posting, and collection services. We continue to make improvements in billing functionality to comply with payor contract requirements. We also continue to invest in upgrades to our ~~insurance~~technical ~~may~~infrastructure ~~not~~to maximize information system reliability, data integrity and disaster recoverability. There can be ~~adequate~~no assurance that our information systems will continue to ~~cover~~perform as expected, or that ~~could~~further ~~increase~~development ~~the~~will ~~risk~~not be required. Failure of our management information systems to perform as expected could have a material adverse effect on our business, financial condition and results of operations.

~~See~~Our ~~“Management’s~~business ~~Discussion~~could ~~and~~be ~~Analysis~~affected ofif ~~Financial~~we ~~Condition~~are ~~and~~unable ~~Results~~to deploy the proceeds from the sale of ~~Operations”~~our ~~below~~Pharmacy & RTES business.

Our ~~business~~growth ~~involves~~depends ain ~~major~~part ~~risk~~on ofour ~~workers’~~ability ~~compensation~~to ~~claims~~successfully ~~and~~start-up ~~losses,~~new ~~which~~locations, ~~our~~any ~~insurance~~delays ~~may~~in ~~not~~obtaining bethe ~~adequate~~necessary licenses and surveys would impede progress. Our growth is also dependent upon our ability to ~~cover~~identify, ~~that~~acquire ~~could~~and ~~increase~~integrate PDN businesses in compliance with all applicable federal and state regulations. To replace the ~~risk~~earnings stream of the Pharmacy and RTES businesses within the desired time frame, we anticipate a combination of successful start-up’s and acquisitions. Failure to do so could have a material adverse effect on our financial ~~business~~condition and results of operations.

As19 a result of operating in the home health care industry, our business entails an inherent risk of claims, losses and potential lawsuits alleging employee accidents which are likely to occur in a patient’s home. As such, these incidents are typically un-witnessed and require proactive adjustment strategies to minimize expected losses and mitigate exposure to fraudulent claims. See “Recent Developments” below.

Our potential inability to react effectively to changes in the health care industry could adversely affect our operating results.

In recent years, the health care industry has undergone significant change driven by various efforts to reduce costs, including efforts at national health care reform, trends toward managed care, limits in Medicare coverage and reimbursement levels, consolidation of health care distribution companies and collective purchasing arrangements by office-based health care practitioners. The impact of third-party pricing pressures and low barriers to entry has dramatically reduced profit margins for health care providers. Continued growth in managed care and capitated plans has pressured health care providers to find ways of becoming more cost competitive. This has also led to consolidation of health care providers in our market areas. Our inability to react effectively to these and other changes in the health care industry could adversely affect our operating results. We cannot predict whether any health care reform efforts will be enacted and what effect any such reforms may have on us or our customers and suppliers.

~~Index~~Risk Relating to ~~Financial~~our ~~Statements~~Common Stock

~~Our~~The ~~operations~~market ~~could~~price beof ~~disrupted~~our ifCommon ~~our~~Stock ~~management~~may ~~information~~experience ~~systems~~substantial ~~fail,~~fluctuations ~~causing~~for ~~increased~~reasons ~~expenses~~over ~~and~~which ~~loss of~~we ~~information.~~have little or no control.

~~Our~~The ~~business~~stock ~~depends~~price ~~in part upon our ability to input, store, retrieve, process~~ and ~~manage~~the ~~billing~~number ~~and collection information for each patient. Our internally developed system provides substantially all~~ of ~~our~~shares ~~locations~~traded ~~with immediate access to patient, contract, and payor information~~of ~~and~~companies ~~supports~~in ~~substantially~~the ~~all~~healthcare ~~necessary billing, cash posting,~~ and ~~collection~~health services. Weindustry ~~continue~~experience toperiods ~~make~~of ~~improvements~~significant ~~in billing functionality to comply with payor contract requirements~~volatility. WeBoth ~~also~~company-specific ~~continue~~and toindustry-wide ~~invest~~developments inmay ~~upgrades~~cause tothis ~~our technical infrastructure to maximize information system reliability, data integrity and disaster recoverability~~volatility. ~~There~~The ~~can~~market beprice noof ~~assurance that~~ our ~~information~~common ~~systems~~stock ~~will~~could continue to ~~perform~~fluctuate up ~~as expected,~~ or ~~that~~down ~~further~~substantially ~~development~~based ~~will~~on ~~not~~a bevariety ~~required. Failure~~ of ~~our management information systems to perform as expected could have a material adverse effect on our business~~factors, ~~financial~~including ~~condition~~the ~~and~~following: ~~results of operations.~~

~~Risk~~• ~~Relating~~sales of stock by large shareholders for reasons unrelated to our ~~Common~~performance ~~Stock~~or future prospects;

~~The~~• ~~market~~future ~~price~~announcements ofconcerning us, our ~~Common~~competitors, ~~Stock~~the ~~may~~payors ~~experience~~with ~~substantial~~whom ~~fluctuations for reasons over which~~ we have ~~little~~relationships or nothe ~~control.~~healthcare market;

~~The~~• ~~stock~~changes ~~price and the number of shares traded of companies~~ in ~~the~~operating ~~health care~~results ~~and~~from ~~health~~quarter ~~services industry experience periods of significant volatility. Both company-specific and industry-wide developments may cause this volatility. The market price of our common stock could continue~~ to ~~fluctuate up or down substantially based on a variety of factors, including the following:~~ quarter;

• ~~future~~sales ~~announcements~~of ~~concerning~~stock ~~us,~~by ~~our competitors, the payors with whom we have relationships or the health care market~~insiders;

• changes in ~~operating~~government ~~results from quarter to quarter~~regulations;

• ~~sales~~news ofreports ~~stock~~relating byto ~~insiders~~trends in our markets;

• ~~changes~~acquisitions and financings in ~~government~~our ~~regulations~~industry; and

• ~~news~~overall ~~reports~~volatility ~~relating~~of tothe ~~trends~~stock ~~in our markets;~~market.

•Furthermore, ~~acquisitions~~stock ~~and~~prices ~~financings~~for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in our ~~industry;~~results of operations and general economic, political and market conditions, may adversely affect the market price of our Common Stock.

•Because ~~overall~~we ~~volatility~~have ofpaid no dividends on our Common Stock, you will only be able to benefit from holding our stock if the stock ~~market~~price increases.

~~Furthermore,~~We ~~stock~~have ~~prices~~paid ~~for~~no ~~many~~dividends ~~companies~~on ~~fluctuate~~our ~~widely~~Common ~~for~~Stock. ~~reasons~~We anticipate that ~~may~~we bewill retain ~~unrelated~~all toof ~~their~~our ~~operating~~future ~~results.~~earnings, ~~These~~if ~~fluctuations~~any, ~~coupled with~~and ~~changes~~cash inproceeds ~~our~~from ~~results~~the sale of ~~operations~~the Pharmacy and ~~general~~RTES ~~economic,~~businesses ~~political~~for use in the operation and ~~market~~expansion ~~conditions,~~of ~~may~~our ~~adversely~~core ~~affect~~businesses. ~~the~~You ~~market~~will ~~price~~only ofbe able to benefit from holding our ~~Common~~stock ~~Stock~~if the stock price increases.

~~Because~~Our westockholder ~~have~~rights ~~paid~~plan, nocertificate ~~dividends~~of ~~on our Common Stock~~incorporation, bylaws ~~you~~and ~~will~~Delaware ~~only~~law becontain ~~able~~provisions tothat ~~benefit~~could ~~from~~discourage ~~holding~~a ~~our~~change ~~stock~~in ~~if the stock price increases~~control.

We have ~~paid~~a nostockholder ~~dividends~~rights onplan ~~our~~that ~~Common~~may ~~Stock~~have the effect of discouraging unsolicited takeover proposals. WeThe ~~anticipate~~rights issued under the plan would cause substantial dilution to a person or group that weattempts ~~will~~to ~~retain~~acquire ~~all~~us ofon terms not approved in advance by our ~~future~~Board ~~earnings,~~of ifDirectors. ~~any~~In addition to our stockholder rights plan, ~~for~~some ~~use~~provisions inof ~~the~~our ~~operation~~Amended and ~~expansion~~Restated Certificate of Incorporation and Amended and Restated Bylaws as well as Delaware law may be deemed to have an anti-takeover effect or may delay or make more difficult an acquisition or change in control not approved by our ~~business.~~Board ~~Moreover~~of Directors, wewhether ~~are~~by ~~prohibited~~means ~~from~~of ~~declaring~~a ~~dividends~~tender ~~without~~offer, open market purchase, a proxy contest or otherwise. These provisions could have the ~~consent~~effect of ~~our~~discouraging ~~lenders~~third ~~under~~parties ~~our~~from ~~credit~~making ~~agreement.~~proposals ~~Therefore~~involving an acquisition or change in control, ~~you~~although ~~are~~such ~~not~~a ~~likely~~proposal, toif made, might be considered desirable by a majority of our stockholders. These provisions ~~receive~~may ~~dividends~~also inhave the ~~foreseeable~~effect ~~future,~~of ~~and~~making ~~you~~it ~~will~~more ~~only~~difficult befor ~~able~~third parties to ~~benefit~~cause ~~from~~the ~~holding~~replacement of our ~~stock~~current ifmanagement without the ~~stock~~concurrence ~~price~~of ~~increases~~our Board of Directors.

~~Our~~Available ~~stockholder~~Information ~~rights plan, certificate of incorporation, bylaws and Delaware law contain provisions that could discourage a change in control.~~

WeOur ~~have~~principal aexecutive ~~stockholder~~offices ~~rights~~are ~~plan~~located ~~that~~at ~~may~~310 ~~have~~Technology ~~the~~Parkway, ~~effect~~Norcross, ofGeorgia ~~discouraging unsolicited takeover proposals~~30092. ~~The~~Our ~~rights~~main ~~issued~~telephone ~~under~~number ~~the~~is ~~plan would cause substantial dilution to a person or group that attempts to acquire us~~ (770) 441-1580.

~~Index~~A copy of this Annual Report on Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to ~~Financial~~such ~~Statements~~reports are available free of charge, on the Internet at the Company’s website, www.psahealthcare.com, as soon as practical after we file such reports with, or furnish such reports to, the SEC. The reference to our website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this report. Our reports are also available free of charge by mail upon written request to the Company’s Secretary at the address listed above.

~~on terms not approved in advance by our Board of Directors.~~ In addition, towe ~~our~~have ~~stockholder~~posted ~~rights~~the ~~plan,~~charters ~~some~~for ~~provisions of~~ our ~~Amended~~Audit ~~and~~Committee, ~~Restated Certificate~~Compensation ofCommittee ~~Incorporation~~ and ~~Amended~~Nominating/Corporate ~~and~~Governance ~~Restated~~Committee, ~~Bylaws~~ as well as ~~Delaware law may be deemed to have an anti-takeover effect or may delay or make more difficult an acquisition or change in control not approved by~~ our ~~Board~~Code of ~~Directors, whether~~Ethics byand ~~means~~Business ~~of a tender offer~~Conduct, ~~open~~on ~~market~~our ~~purchase, a proxy contest or otherwise~~website. ~~These~~We ~~provisions~~will ~~could~~provide ~~have~~a ~~the~~copy ~~effect~~ of ~~discouraging third parties from making proposals involving an acquisition or change in control, although such a~~these ~~proposal,~~documents ifto ~~made, might be considered desirable by a majority of our~~ stockholders. ~~These~~upon ~~provisions may also have the effect of making it more difficult for third parties to cause the replacement of our current management without the concurrence of our Board of Directors~~request.

~~Available~~ ITEM 2. PROPERTIES ~~Information~~

Our principal executive offices are located atin ~~310~~Norcross, ~~Technology~~Georgia ~~Parkway~~and consist of approximately 60,000 square feet of office space. The lease term on the facility expires in 2013. Our healthcare operations include over ~~Norcross~~50 branch offices, ~~Georgia~~including ~~30092~~satellite offices and new branch offices, located in 18 states. ~~Our~~Branch ~~main~~offices ~~telephone~~typically ~~number~~are located in office parks or complexes and average approximately 2,500 square feet. Generally, each healthcare facility is ~~(770)~~a combination ~~441-1580~~warehouse and office. Lease terms on branch offices are generally three years or less. Lease terms on PPEC centers tend to be for seven to ten years to fully amortize required improvements. We believe that our current facilities are suitable for and adequate to support the level of our present operations.

A copy of this Annual Report on Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports are available free of charge, on the Internet at the Company’s website ~~www~~ITEM 3.~~psakids.com~~ LEGAL asPROCEEDINGS soon as reasonably practicable after we file such reports with, or furnish such reports to, the SEC. The reference to our website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this report. Our reports are also available free of charge by mail upon written request to the Company’s Secretary at the address listed above.

InWe ~~addition,~~are weparty ~~have~~to ~~posted~~routine legal proceedings arising out of the ~~charters~~normal ~~for~~course ~~our~~of ~~Audit~~business. ~~Committee, Compensation~~Although ~~Committee~~it ~~and~~is ~~Nominating/Corporate~~not ~~Governance~~possible ~~Committee,~~to aspredict ~~well~~with ascertainty ~~our~~the ~~Code~~outcome of ~~Ethics~~these ~~and~~unresolved ~~Business~~legal ~~Conduct~~actions or the range of possible loss, onwe ~~our~~believe ~~website.~~that Wenone of these actions, individually or in the aggregate, will ~~provide~~have a ~~copy~~material ofadverse ~~these~~effect ~~documents~~on toour ~~stockholders~~financial ~~upon~~condition ~~request~~or results of operations.

ITEM 2 4. SUBMISSION ~~PROPERTIES~~OF MATTERS TO A VOTE OF SECURITY HOLDERS

~~Our~~During ~~principal~~the ~~executive~~fourth ~~offices~~quarter ~~are located in Norcross, Georgia and consist~~ of ~~approximately 60,000 square feet of office space. The lease term on~~ the ~~facility~~ ~~expires~~fiscal inyear ~~2008.~~ended ~~Our health care operations include over 120 branch offices~~September 30, ~~including satellite offices and new branch offices~~2006, ~~located~~no inmatter 21was ~~states.~~submitted ~~Branch~~to ~~offices typically are located in office parks or complexes and average approximately 2,500 square feet. Generally, each health care facility is~~ a ~~combination~~vote ~~warehouse~~of ~~and office. Lease terms on branch offices are generally three years or less. Lease terms on PPEC centers tend to be for seven to ten years to fully amortize required improvements. We believe that~~ our ~~current~~stockholders ~~facilities~~through ~~are suitable for and adequate to support~~ the ~~level~~ solicitation of ~~our~~proxies ~~present~~or ~~operations~~otherwise.

ITEM 3 4 (A). EXECUTIVE ~~LEGAL~~OFFICERS ~~PROCEEDINGS~~OF THE REGISTRANT

WeSet ~~are~~forth ~~party~~below, toin ~~routine~~accordance ~~legal~~with ~~proceedings~~General ~~arising~~Instruction ~~out~~G(3) of ~~the~~Form ~~normal~~10-K ~~course~~and ofInstruction ~~business.~~3 ~~Although~~to itItem 401(b) isof ~~not~~Regulation ~~possible~~S-K, tois ~~predict~~certain ~~with~~information regarding ~~certainty~~ the ~~outcome~~ executive officers of ~~these~~our ~~unresolved~~company ~~legal~~including ~~actions~~their orages as of the ~~range~~date of ~~possible~~this ~~loss~~Annual Report on Form 10-K, wetheir ~~believe~~principal ~~that~~occupations ~~none~~for ofat ~~these~~least ~~actions~~the past five years, ~~individually~~the oryear in ~~the~~which ~~aggregate,~~each ~~will~~was ~~have~~elected aand ~~material~~any ~~adverse~~directorships ~~effect~~held onby them ~~our~~in ~~financial~~other ~~condition~~public orcompanies. ~~results~~Unless otherwise indicted, the information set forth herein is as of ~~operations~~September 30, 2006.

~~ITEM~~Daniel 4J. ~~SUBMISSION~~Kohl OF(50) is ~~MATTERS~~our TOPresident Aand ~~VOTE~~Chief OFExecutive ~~SECURITY~~Officer. ~~HOLDERS~~Immediately prior to joining PSA in 2004, Mr. Kohl was a de facto Executive in Residence for Warburg Pincus. In addition, he had consulted for various other private equity and venture capital firms. From 2001-2002 he served as the CEO of Sonus Corp. where he directed all business activities for the hearing aid distributor. Prior to Sonus Corp., Mr. Kohl was the President and Chief Executive Officer of 21ST Century Communications from 1999 to 2000. Mr. Kohl also served as President and CEO of Housecall Medical Resources, Inc. from 1997-1999 and as Vice President of Equifax Health Information Services from 1993-1997. Currently, Mr. Kohl is a board member for The Citadel Foundation.

~~During~~21 ~~the fourth quarter of fiscal year ended September 30, 2004, no matter was submitted to a vote of our stockholders through the solicitation of proxies or otherwise.~~

~~Index~~James toM. McNeill (48) is the Senior Vice President, Chief Financial ~~Statements~~Officer, Secretary and Treasurer of our company. Mr McNeill joined us in 1996 as Chief Accounting Officer and was appointed to his current position in April, 1999. Prior to joining our company, Mr. McNeill was employed in a senior financial management position from 1991 to 1995 with Golden Peanut Company, an agribusiness company. In addition, Mr. McNeill has worked in a variety of financial analysis and reporting positions with General Electric Company, Harris Corporation and Scientific-Atlanta Corporation.

~~ITEM 4 (A). EXECUTIVE~~There ~~OFFICERS~~are OFno ~~THE~~family ~~REGISTRANT~~relationships among our directors or executive officers.

~~Set~~22 forth below, in accordance with General Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, is certain information regarding the executive officers of our company including their ages as of the date of this Annual Report on Form 10-K, their principal occupations for at least the past five years, the year in which each was elected and any directorships held by them in other public companies.

Edward K. Wissing (67) is Chairman of the Board of our company and also serves as CEO and President effective August 9, 2004. Mr. Wissing is a former CEO and director of American HomePatient, Inc., a national provider of home health care products and services. Under Mr. Wissing’s leadership, American HomePatient grew from 20 operating locations in 1992 to over 300 locations by the end of 1997, with over $400 million in revenues at his retirement in May 1998. Prior to his employment with American HomePatient, Mr. Wissing held several senior executive positions in health care related firms, including Becton Dickinson, Sandoz/Rhone Poulenc and Glasrock HomeHealth. He has maintained a very active role in the home health care industry and has twice chaired the Health Industry Distributor’s Association, or HIDA. Mr. Wissing has also served as chairman of HIDA’s Educational Foundation. He currently serves on several other health care company boards including Psychiatric Solutions, Inc. and Christiana Care Health Initiatives.

James M. McNeill (46) joined our company in 1996. Mr. McNeill has been Senior Vice President, Chief Financial Officer, Secretary and Treasurer of our company since April, 1999. Mr. McNeill also served as our Chief Accounting Officer from July, 1997 to April, 1999. Prior to joining our company, Mr. McNeill was employed in a senior financial management position from 1991 to 1995 with Golden Peanut Co., an agribusiness company. In addition, Mr. McNeill has worked in a variety of financial analysis and reporting positions with General Electric Company, Harris Corporation and Scientific-Atlanta Corporation.

~~Index~~PART toII ~~Financial Statements~~

~~PART~~ITEM II5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

~~ITEM~~Approximate 5.Number ~~MARKET~~of ~~FOR~~Holders ~~REGISTRANT’S~~of ~~COMMON~~Common ~~EQUITY~~Stock ~~AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES~~

~~Approximate~~At ~~Number~~September 30, of2006, ~~Holders~~there were approximately 64 shareholders of record ~~Common~~and ~~Stock~~an estimated 1,800 beneficial owners holding our stock in nominee or “street” name.

AtDividends ~~September 30, 2004, there were approximately 79 shareholders of record and an estimated 1,800 beneficial owners holding our stock in nominee or “street” name.~~

~~Dividends~~We have paid no dividends on our Common Stock. We intend to retain any future earnings and cash proceeds from asset sales to finance the growth and development of our business.

WePrice ~~have~~Range ~~paid no~~of ~~dividends on our~~ Common Stock. ~~We intend to retain any future earnings to finance the growth and development of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.~~

~~Price~~Our ~~Range~~Common ofStock currently trades on the Nasdaq National Market under the Symbol “PSAI”. The following table sets forth the quarterly high and low sale prices for our Common Stock for the periods indicated through September 30, 2006.

Our Common Stock currently trades on the Nasdaq National Market under the Symbol “PSAI”. The following table sets forth the quarterly high and low sale prices for our Common Stock for the periods indicated through September 30, 2004.


	High		Low
2006
First Quarter	$	17.40	$	13.60
Second Quarter	$	15.52	$	12.30
Third Quarter	$	14.50	$	12.14
Fourth Quarter	$	13.50	$	11.75

2005
First Quarter	$	12.95	$	7.40
Second Quarter	$	12.70	$	10.66
Third Quarter	$	14.25	$	11.90
Fourth Quarter	$	14.00	$	9.71

	High		Low
2004
First Quarter	$	9.99	$	7.75
Second Quarter	$	14.24	$	9.56
Third Quarter	$	16.20	$	11.65
Fourth Quarter	$	12.62	$	6.23
2003
First Quarter	$	7.24	$	5.25
Second Quarter	$	7.50	$	4.88
Third Quarter	$	6.79	$	4.50
Fourth Quarter	$	9.75	$	6.11

Issuer Purchase of Equity Securities

~~Equity~~We ~~Compensation~~did ~~Plan~~not repurchase any of our shares of ~~Information~~Common Stock during the year ended September 30, 2006.

~~Information~~23 in tabular form relating to securities authorized for issuance under our equity compensation plans is set forth under the caption “Equity Compensation Plan Information” in our 2005 Proxy Statement and is incorporated herein by reference.

Issuer Purchase of Equity Securities

We did not repurchase any of our shares of Common Stock during the quarter ended September 30, 2004.

~~Index~~ITEM to6. ~~Financial~~SELECTED ~~Statements~~FINANCIAL DATA

~~ITEM 6.~~ SELECTED CONSOLIDATED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA


	Year ended September 30,
	2006			2005			2004			2003			2002
	(in thousands, except per share data)
Statement of operations data (1) (2) (3) (4):
Net revenue	$	119,360		$	114,146		$	106,713		$	101,941		$	99,313
Costs of goods and services (exclusive of depreciation shown separately below)		72,560			68,195			63,660			61,068			60,228
Other operating costs and expenses
Salaries, wages and benefits		19,927			19,537			19,028			18,393			17,259
Business insurance		4,766			4,165			4,910			4,406			2,370
Overhead		7,571			6,983			7,206			6,049			6,053

Other operating costs and expenses		32,264			30,685			31,144			28,848			25,682
Corporate, general and administrative
Salaries, wages and benefits		14,211			14,128			15,768			13,838			13,351
Business insurance		255			208			148			319			284
Professional services		3,816			4,476			2,804			2,125			1,783
Overhead		2,781			2,880			2,942			2,749			2,848

Corporate, general and administrative		21,063			21,692			21,662			19,031			18,266
Provision for doubtful accounts		126			679			1,095			195			337
Provision for insurance recoveries		2,431			-			-			-			-
Depreciation and amortization		1,032			997			956			1,312			1,280

Operating loss		(10,116	)		(8,102	)		(11,804	)		(8,513	)		(6,480	)
Interest income		2,248			212			139			138			167
Interest expense		(564	)		(2,481	)		(2,378	)		(2,429	)		(2,766	)
(Loss) gain on early extinguishment of debt		(837	)		-			-			100			417
Other income		54			65			6			56			-

Loss from continuing operations before income tax benefit		(9,215	)		(10,306	)		(14,037	)		(10,648	)		(8,662	)
Income tax benefit		(3,019	)		(4,726	)		(5,347	)		(3,934	)		(12,801	)

(Loss) income from continuing operations		(6,196	)		(5,580	)		(8,690	)		(6,714	)		4,139
Discontinued operations:
Income from discontinued operations, net of tax		5,603			11,246			12,702			11,841			9,561
Gain on disposal of discontinued operations, net of tax		24,718			-			-			-			361

Net income	$	24,125		$	5,666		$	4,012		$	5,127		$	14,061

Denominator share data:
Denominator for basic income per share-weighted average shares		7,413			7,203			6,948			6,861			6,791
Effect of dilutive securities:
Stock options														359

Denominator for diluted income per share-weighted average shares		7,413			7,203			6,948			6,861			7,150

Income per share data:
Basic net income per share data:
(Loss) income from continuing operations	$	(0.84	)	$	(0.77	)	$	(1.25	)	$	(0.98	)	$	0.61
Discontinued operations:
Income from discontinued operations, net of tax		0.76			1.56			1.83			1.73			1.41
Gain on disposal of discontinued operations, net of tax		3.33			-			-			-			0.05

Net income	$	3.25		$	0.79		$	0.58		$	0.75		$	2.07

Diluted net income per share data:
(Loss) income from continuing operations	$	(0.84	)	$	(0.77	)	$	(1.25	)	$	(0.98	)	$	0.58
Discontinued operations:
Income from discontinued operations, net of tax		0.76			1.56			1.83			1.73			1.34
Gain on disposal of discontinued operations, net of tax		3.33			-			-			-			0.05

Net income	$	3.25		$	0.79		$	0.58		$	0.75		$	1.97

Balance sheet data:
Working capital	$	83,887		$	75,931		$	66,569		$	58,967		$	55,740
Total assets		136,319			128,339			128,560			117,763			104,428
Long-term obligations, net of current portion		-			20,350			20,350			20,460			24,642
Total stockholders’ equity		101,432			73,569			66,452			61,063			55,774

	Year ended September 30,
	2004			2003			2002			2001			2000
	(in thousands, except per share data)
Statement of operations data (1) (2):
Net revenue	$	239,774		$	215,592		$	197,459		$	184,090		$	186,366
Costs of goods and services		135,236			117,945			106,709			98,904			102,624
Other operating costs and expenses
Salaries, wages and benefits		42,705			40,144			38,426			33,938			33,888
Business insurance		7,532			7,065			4,795			4,322			3,966
Overhead		16,587			15,293			14,325			13,302			13,388
Other operating costs and expenses		66,824			62,502			57,546			51,562			51,242
Corporate, general and administrative
Salaries, wages and benefits		15,768			13,838			13,351			12,978			13,071
Business insurance		148			319			284			277			270
Professional services		2,804			2,125			1,783			1,973			2,325
Overhead		2,942			2,749			2,848			2,793			2,885
Corporate, general and administrative		21,662			19,031			18,266			18,021			18,551
Provision for doubtful accounts		3,652			1,475			1,930			2,866			6,382
Depreciation and amortization		3,716			4,054			4,069			7,272			8,050
Operating income (loss)		8,684			10,585			8,939			5,465			(483	)
Interest income		139			138			167			607			575
Interest expense		(2,378	)		(2,429	)		(2,766	)		(4,013	)		(7,609	)
Gain on early extinguishment of debt		-			100			417			3,396			10,299
Other income		5			56			-			32			61
Income from continuing operations before income tax expense (benefit)		6,450			8,450			6,757			5,487			2,843
Income tax expense (benefit)		2,438			3,323			(6,943	)		-			-
Income from continuing operations		4,012			5,127			13,700			5,487			2,843
Gain on disposal of discontinued operations, net of tax		-			-			361			-			25,802
Net income	$	4,012		$	5,127		$	14,061		$	5,487		$	28,645
Denominator share data:
Denominator for basic income per share-weighted average shares		6,948			6,861			6,791			6,683			6,655
Effect of dilutive securities:
Stock options		426			235			359			252			-
Denominator for diluted income per share-weighted average shares		7,374			7,096			7,150			6,935			6,655
Income per share data:
Basic net income per share data:
Income from continuing operations	$	0.58		$	0.75		$	2.02		$	0.82		$	0.43
Gain on disposal of discontinued operations, net of tax		-			-			0.05			-			3.87
Net income	$	0.58		$	0.75		$	2.07		$	0.82		$	4.30
Diluted net income per share data:
Income from continuing operations	$	0.54		$	0.72		$	1.92		$	0.79		$	0.43
Gain on disposal of discontinued operations, net of tax		-			-			0.05			-			3.87
Net income	$	0.54		$	0.72		$	1.97		$	0.79		$	4.30
Balance sheet data:
Working capital	$	42,730		$	35,429		$	31,337		$	30,559		$	34,339
Total assets		127,082			116,727			102,068			97,298			105,593
Long-term obligations, net of current portion		20,385			20,515			24,642			32,377			45,489
Total stockholders’ equity		66,452			61,063			55,774			41,150			35,531

1) All amounts have been restated to reflect our pharmacy business, sold in fiscal 2006, as a discontinued operation.

12) All amounts have been restated to reflect our ~~paramedical~~ ~~testing~~RTES business, ~~Paramedical Services of America Inc., sold in fiscal 2000,~~ as a discontinued operation.

23) ~~Earnings~~All ~~reflect~~amounts ~~the~~have ~~adoption~~been ~~of Financial~~restated ~~Accounting~~to ~~Standards~~reflect ~~Board~~our ~~Statement~~paramedical ~~No.~~testing ~~142~~business, inParamedical ~~fiscal~~Services ~~year 2002, prohibiting the amortization~~ of ~~goodwill~~America ~~and~~Inc., ~~intangibles~~sold ~~with~~in ~~indefinite~~fiscal ~~useful~~2000, ~~lives.~~as a

24discontinued operation.

4) Earnings reflect the adoption of Financial Accounting Standards Board Statement No. 142, in fiscal year 2002, prohibiting the amortization of goodwill and intangibles with indefinite useful lives.

~~Index~~ITEM to7. ~~Financial~~MANAGEMENT’S ~~Statements~~DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~ITEM~~The 7.following ~~MANAGEMENT’S~~discussion ~~DISCUSSION~~should ~~AND~~be ~~ANALYSIS~~read OFin ~~FINANCIAL~~conjunction ~~CONDITION~~with ~~AND~~the ~~RESULTS~~Selected OFConsolidated ~~OPERATIONS~~Financial Data and the audited Consolidated Financial Statements of our company included in this report.

~~The~~EXECUTIVE ~~following~~SUMMARY ~~discussion should be read in conjunction with the Selected Consolidated Financial Data and the audited Consolidated Financial Statements of our company included in this report.~~

~~EXECUTIVE~~Recent Developments ~~SUMMARY~~

~~Recent~~Home Healthcare Industry ~~Developments~~Events & Updates

~~Home~~The ~~Healthcare~~Deficit ~~Industry~~Reduction ~~Events~~Act &of ~~Updates~~2005 (“DRA”), which was signed into law on February 8, 2006, will have a significant impact on the services we provide in a number of ways, including:

~~Historically,~~With ~~Medicare~~respect ~~reimbursement for covered drugs has been limited~~ to 95Medicaid ~~percent~~services: of the published average wholesale price (“AWP”) for the drug. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”) establishes new payment limits and procedures for drugs reimbursed under Medicare Part B, including drugs used in inhalation therapy. The final rule, as the MMA requires, provides that Medicare beneficiaries will be reimbursed at a rate of 106 percent of the volume-weighted average selling price (the “ASP”). In addition, providers of inhalation therapy, including our company, will receive a dispensing fee for supplying inhalation therapy. The 2005 dispensing fee will be $57 for thirty (30) days of therapy or $80 for ninety (90) days. Within the Pharmacy segment, we are assessing the impact of these changes to our unit dose respiratory products to determine the viability of our long term profitability. While the long term impact of the MMA reforms cannot yet be determined because the recently promulgated regulations are transitional in nature, these and other changes may have a material adverse effect on our operations and financial results. For fiscal year 2005, the impact of these regulations to the approximately 31% of our net revenue that is derived from the Medicare program is expected to substantially reduce our profitability in the Pharmacy segment. There can be no assurance that we will not face increased margin pressures from subsequent reimbursement changes beyond 2005.

A• ~~number~~Expanding ofaccess other pilots and demonstrations are mandated by the MMA, signaling the likelihood of continued re-design of certain aspects of the Medicare program. While the more immediately visible changes mandated by the MMA relate to ~~extension~~home ~~of the Medicare benefit to prescription drug coverage, other aspects may impact the operations~~ and ~~profitability of health care providers, including our company. Among other things, the MMA mandates a phased~~community-inbased ~~competitive~~services ~~bidding process for Medicare procurement of certain durable medical equipment (DME), commencing in the ten (10) largest Metropolitan Statistical Areas (MSAs) in 2007, followed~~ by ~~the~~establishing ~~next~~them ~~eighty~~as ~~(80)~~an ~~largest~~optional ~~MSAs~~Medicaid inbenefit 2009. Moreover, the Secretary of the United States Department of Health & Human Services has the authority to apply competitive bidding nationally for the highest cost, highest volume items and services and those items and services that ~~the~~would ~~Secretary~~not ~~determines~~require ~~to have the “largest savings potential.” There will also be at least~~ a ~~five~~waiver ~~(5) year freeze in the Consumer Price Index update~~ for ~~reimbursement~~individuals ~~rates~~whose ~~for~~income ~~DME~~does ~~where competitive bidding prices are~~ not ~~applicable.~~exceed In150% ~~addition,~~of ~~commencing in 2005, reimbursement for certain items and services (e.g., oxygen and oxygen equipment) that are not subject to competitive bidding will be capped at~~ the ~~2002~~federal ~~rate~~poverty orlevel ~~the~~ (“~~Median Federal Employee Health Plan Price~~FPL” ~~established in 2002, whichever is lower~~). We are analyzing the impact of these reimbursement changes to our RTES segment and plan to address the proposed reductions by altering our business model with changes such as reducing costs, growing revenue through our managed care marketing strategies and looking for additional ways to improve productivity. For fiscal year 2005, the impact of these regulations to the approximately 38% of our net revenue that is derived from the Medicare program will be to reduce our profitability in the RTES segment. There can be no assurance that we will not face increased margin pressures from subsequent reimbursement changes beyond 2005.

~~Under~~• ~~the~~Creating ~~MMA,~~a ~~there~~new ~~are~~optional ~~major~~Medicaid ~~changes~~eligibility ingroup ~~the Medicare payment rates~~ for ~~hemophilia~~children ~~products~~with ~~beginning~~disabilities inunder ~~2005.~~the ~~Currently,~~age ~~Medicare reimburses for blood clotting factor at 95 percent~~ of ~~AWP.~~19 ~~Effective~~who ~~January~~meet ~~1, 2005, we will be paid for blood clotting factor based on~~ the ~~new~~severity ~~ASP~~of ~~methodology.~~disability Werequired ~~expect~~under ~~that~~ the ~~resulting~~Supplemental ~~payment~~Security ~~rates~~Income ~~will~~(“SSI”) beprogram ~~lower~~without ~~than~~regard ~~the~~to ~~current~~any ~~rates~~income ~~for~~or ~~these~~asset ~~products.~~requirements ~~In addition,~~that ~~the~~apply ~~Centers~~under ~~for~~SSI ~~Medicare~~where &family ~~Medicaid~~income ~~Services~~does ~~(“CMS”)~~not ~~will~~exceed ~~make~~300% aof ~~separate payment to~~ the ~~entity that provides blood clotting factor to a~~ FPL.

25• Establishing Family to Family Health Information Centers to provide information and assistance to help families of children with special health care needs navigate the system of care and make decisions about the needs and available support mechanisms for their children. The DRA increases funding for this initiative under Title V of the Social Security Act.

•

Authorizing the Department of Health and Human Services’ Secretary (HHS Secretary) to conduct a demonstration project in states to increase the use of home and community-based services instead of institutions. States awarded a demonstration project will receive 90% of the costs of home and community-based long-term care services (under a HCBS waiver and/or the State Plan) for 12 months following a demonstration participant’s transition from an institution into the community.

The DRA also provides resources for CMS to establish the Medicaid Integrity program (“MIP”). Historically, the states have been primarily responsible for addressing Medicaid fraud and abuse. With the MIP, CMS will be more involved in detecting and preventing Medicaid fraud and abuse. Among other things, CMS will engage contractors to conduct audits, identify overpayments and educate providers on payment integrity. The DRA further provides incentives to states to enact their own false claims acts. It is likely that a number of states, including those where we operate, will enact such legislation in the near future. While we believe that our operations comply with Medicaid billing requirements, there can be no assurance that the added scrutiny resulting from the DRA will not have an adverse impact on our operations and financial results.

The DRA also adds certain mandatory provisions to the company’s compliance program. Specifically, by January 1, 2007 the company must have implemented written policies educating its employees, agents and contractors regarding federal and state false claims acts, whistleblower protections for plaintiffs in qui tam actions and the company’s policies and procedures for detecting fraud and abuse. While the company expects to be in compliance by the deadline, there can be no assurance that this education requirement, together with the MIP, will not result in an increase in frivolous investigations or suits against the company.

~~Index~~Also under the DRA, beginning July 1, 2006 states are required to ~~Financial~~obtain ~~Statements~~proper documentation of citizenship for Medicaid recipients. Previously, eligible immigrants were required to provide proof of their immigration status, but U.S. citizens only had to declare their citizenship. Although this provision does not change the eligibility criteria, the additional requirement may delay coverage for some individuals and will result in denials for individuals who are unable to provide the documentation. Similar enhanced documentation requirements have been implemented in some states, including certain states where we provide Medicaid reimbursed services. There can be no assurance that these changes will not have an adverse impact on our operations and financial results.

~~Medicare~~CMS ~~beneficiary~~has ~~for~~also ~~items~~implemented ~~and services related to~~ the ~~furnishing~~Payment ofError ~~such~~Rate ~~products.~~Measurement ~~The amount of this separate payment is capped so that the total of~~program ~~the ASP payment rate and the separate payment amount cannot exceed 95 percent of AWP~~(“PERM”). ItUnder isPERM, ~~possible~~CMS ~~that the proposed separate payment amount~~ will bereview ~~inadequate~~Medicaid fee-for ~~the~~ -service ~~level~~and ~~requirements~~Medicaid ofmanaged ~~the~~care ~~Medicare~~to ~~beneficiary~~determine ~~with~~national ~~hemophilia.~~and ~~While our current census of Medicare beneficiary hemophilia patients is quite low, the potential for select~~ state-specific ~~Medicaid~~error ~~programs to adopt changes to their payment~~ rates ~~based upon Medicare changes exists. Such changes could result in a payment amount that would be inadequate~~ for ~~the~~payments ~~required~~under ~~service level~~Medicaid. WeGroups ~~are analyzing the impact~~ of ~~these~~states ~~reimbursement~~will ~~changes~~begin toparticipation ~~our~~in ~~Pharmacy~~PERM ~~segment~~beginning ~~and~~in ~~plan to address the proposed reductions by altering our business model with changes such as reducing~~2007. ~~costs,~~The ~~growing~~list ~~revenue~~of ~~through~~states ~~our managed care marketing strategies and looking for additional ways~~ to ~~improve productivity. There can~~ be noaudited ~~assurance~~in ~~that~~2007 weincludes ~~will~~states ~~not~~where ~~face~~the ~~increased~~company ~~margin~~has ~~pressures~~significant ~~from reimbursement changes~~operations.

AsMany ~~previously~~of ~~described in our prior SEC filings, Georgia Medicaid’s contractor (~~the ~~“Contractor”)~~states ~~missed~~in ~~the~~which ~~original~~we ~~implementation~~operate ~~date~~are ofevaluating ~~October 1, 2002~~ and ~~delayed~~implementing ~~the~~program ~~“go~~reforms ~~live”~~that ~~date~~could ~~until~~impact ~~April~~patient 1,eligibility ~~2003~~and ~~for~~increase ~~its~~managed ~~new Multi Health Network system (“MHN”). Georgia Medicaid is an~~care ~~important~~administration ~~customer~~ of ~~ours and represents approximately 6% of our annual billed revenue~~benefits. ~~Some~~To ofdate, ~~the continuing problems~~ we ~~are~~have ~~trying~~not toexperienced ~~resolve~~any ~~with~~reimbursement ~~Georgia~~rate ~~Medicaid~~reductions ~~include:~~in ~~correcting~~those ~~conflicts~~certain ~~between~~states ~~provider~~that ~~numbers,~~have ~~categories~~adopted ofthese ~~service, membership identification, units of measure, authorized duration of service and corresponding procedure codes within its authorization module~~changes. ~~Given~~In ~~the~~an ~~State’s~~effort ~~apparent unwillingness~~ to ~~agree~~monitor toand ahave ~~timely~~an ~~settlement~~impact on athese ~~large~~legislative ~~number of claims from our RTES segment~~issues, we ~~are~~have ~~working~~engaged consultants ~~with~~in ~~external~~selected ~~legal~~markets ~~counsel on the range of alternatives available~~ to usdirectly ~~including~~present ~~initiating~~our ~~legal~~cost ~~action.~~saving ~~Given~~strategies ~~the significance~~ and ~~complexity~~related ofrate ~~these~~requests ~~issues, we deemed it necessary~~ to ~~significantly increase our provision for doubtful accounts in~~ the ~~twelve~~Medicaid ~~months ended September 30, 2004 as compared to the twelve months ended September 30, 2003~~programs.

~~While~~Company ~~certain~~Events & ~~states~~Updates are realizing relief from prior revenue shortfalls and some are reporting surpluses, concern over a reduction in the future level of Federal Medical Assistance Percentages dampens the likelihood that these limitations will be abated at any time in the near future. In an effort to impact these legislative issues, we have engaged consultants in selected markets to directly present our cost saving strategies and related rate requests to the Medicaid programs. Beginning in fiscal 2005, we received a rate increase for our Private Duty Nursing services from two states. In addition, our local market staff routinely collaborates with the appropriate community and regulatory authorities on our behalf as well as our patients.

AsPrior ~~discussed~~to ~~previously~~October 1, ~~under~~2005, ~~the~~we ~~Laws~~accounted ~~and~~for ~~Regulations~~our ~~section~~stock ~~above,~~option ~~the~~plans ~~HIPAA~~under ~~standard~~the ~~transaction~~recognition inand ~~data~~measurement ~~set~~provisions ~~rules~~of ~~mandate~~Accounting ~~that~~Principles ~~Covered Entities,~~Board ~~including~~Opinion ~~our company~~No. 25, ~~transmit~~“Accounting ~~claims~~for ~~and~~Stock ~~certain~~Issued ~~related~~to ~~healthcare~~Employees” ~~information~~(APB in25), ~~standardized formats~~ and ~~data~~related ~~sets.~~Interpretations, ~~Compliance~~as ~~was~~permitted ~~required~~by onSFAS ~~October 16~~No. 123, ~~2003,~~“Accounting ~~but~~for ~~many~~Stock-Based ~~payors,~~Compensation”. ~~including~~No ~~most~~stock-based ~~state~~compensation ~~Medicaid~~cost ~~agencies,~~was ~~were~~recognized in ~~not~~the inStatement ~~compliance~~of ~~by that~~Operations ~~date.~~for Tothe ~~date,~~twelve ~~many~~months ~~Medicaid~~ended ~~agencies~~September 30, ~~are~~2005 ~~running~~and ~~dual~~2004, ~~systems~~as toall ~~accommodate~~options ~~HIPAA~~granted ~~compliant~~under ~~transactions~~those asplans ~~well~~had asan ~~non-compliant~~exercise ~~transactions.~~price ~~Some~~equal ~~states,~~to ~~however,~~the ~~are~~market ~~running~~value ~~only~~of ~~HIPAA~~the ~~compliant~~underlying ~~systems~~common ~~and~~stock ~~other~~on ~~states~~the ~~are~~date ~~not~~of ~~yet~~grant. ~~HIPAA~~Effective ~~compliant.~~October 1, ~~There~~2005, iswe ~~uncertainty~~adopted asthe tofair ~~when~~value ~~those~~recognition ~~states~~provisions ~~using~~of ~~dual~~SFAS ~~systems~~No. 123(R), ~~will~~“Share-Based ~~discontinue~~Payment”, ~~their~~using ~~non-HIPAA~~the ~~compliant~~modified ~~systems~~prospective-transition method. ~~These~~Under ~~uncertainties~~the ~~surrounding~~transition ~~claims~~method, ~~processing~~compensation ascost arecognized ~~result~~in ofthe twelve ~~HIPAA’s~~months ~~standard~~ended ~~transaction~~September 30, ~~and~~2006 ~~code~~includes: ~~set~~(a) compensation ~~rules, which~~cost ~~uncertainties~~for ~~are~~all ~~outside~~share-based ~~our~~payments ~~control~~granted prior to, ~~have~~but ~~resulted~~not inyet ~~delayed~~vested ~~reimbursement~~as byof ~~some~~October 1, ~~payors~~2005, ~~including~~based ~~Medicaid~~on ~~agencies.~~the ~~These~~grant ~~delays~~date ~~were~~fair avalue ~~contributing~~estimated ~~factor~~in toaccordance with the original ~~delayed~~provisions ~~cash~~of ~~collections~~Statement 123, and ~~resulting~~(b) compensation ~~increase~~cost infor ~~allowance~~all ~~for~~share-based ~~doubtful accounts~~payments ingranted ~~the~~subsequent ~~twelve~~to ~~months~~October 1, ~~ended~~2005 ~~September~~based ~~30,~~on ~~2004.~~the Wegrant-date ~~expect~~fair ~~that~~value ~~the~~estimated ~~impact~~in toaccordance ~~our~~with ~~cash~~the ~~collections~~provisions ~~from~~of ~~non-HIPAA~~Statement ~~compliant~~123(R). ~~payors~~Results for ~~should~~prior ~~continue~~periods tohave ~~decline~~not inbeen ~~fiscal~~restated ~~2005~~(See Note 1).

~~Company~~On November 11, ~~Events~~2005, &in ~~Updates~~connection with the sale of the Pharmacy Business, we terminated our credit agreement with General Electric Capital Corporation. The credit agreement, consisting of $10.0 million revolving credit facility and $10.0 million acquisition credit facility had remained unused. We recorded the write-off of approximately $0.3 million in related deferred financing and termination fees in the twelve months ended September 30, 2006.

~~During~~On November 18, 2005, we completed the ~~fourth~~sale ~~quarter~~of selected assets of ~~fiscal~~our Pharmacy ~~2004~~business to Accredo Health Group, ~~Edward~~Inc., Ka wholly-owned subsidiary of Medco Health Solutions, Inc. ~~Wissing~~The aggregate purchase price was $72.3 million. We recorded the gain of approximately $24.7 million, ~~Chairman~~net of approximately $15.8 million for income taxes. As part of the ~~Board~~transaction, ~~assumed~~the parties executed a transition services agreement that provided for the ~~role~~collection of ~~Chief~~outstanding ~~Executive~~accounts receivable for a period of 180 days and order fulfillment, billing services and related ~~Officer~~accounting ~~following~~services ~~the~~for ~~retirement~~a period of ~~Joseph~~120 D.days ~~Sansone~~after closing. ~~Our~~As ~~new~~of ~~Chief~~September 30, ~~Executive Officer~~2006, ~~Daniel~~we J.had ~~Kohl~~satisfied all performance criteria under the transition services agreement; however, isas ~~expected~~we continue to ~~begin~~receive ~~employment~~payments ~~December~~on ~~15,~~the ~~2004~~sold accounts receivable we will remit these funds to Accredo.

26On December 30, 2005, in connection with the sale of the Pharmacy Business, we redeemed in full our 10% Senior Subordinated Notes due 2008 in the amount of $20.4 million. We recorded the write-off of approximately $0.5 million in related deferred financing fees and call premium in the twelve months ended September 30, 2006.

~~Index~~On January 17, 2006, the Company was notified by Cigna Healthcare that effective May 1, 2006 it had entered into an exclusive contractual arrangement with Apria Healthcare Group for the provision of a wide range of services to ~~Financial~~respiratory ~~Statements~~therapy and durable medical equipment patients. As a result of this agreement, we no longer provide services to a number of patients particularly in the North Carolina and Colorado markets. Based on an analysis of billed net revenue for the trailing twelve months ended December 31, 2005, we estimated the impact to our discontinued RTES segment would have been a reduction of net revenue of approximately $2.3 million. As of September 30, 2006, substantially all patients have been transitioned.

~~During~~On ~~December~~June 2, ~~2004~~2006, ~~the~~we ~~Board~~acquired select assets of ~~Directors~~Melmedica ~~determined~~Children’s ~~that~~Healthcare, itInc. isfor a purchase price of $1.6 million in cash. Under the ~~mutual~~terms ~~best~~of ~~interest~~the Asset Purchase Agreement, Melmedica will retain all of the ~~Company~~ ~~and~~business ~~our~~accounts ~~shareholders~~receivable toarising ~~request~~from sales generated prior to the ~~withdrawal~~closing of ~~our~~the Stransaction. Melmedica is a multi-3site ~~Registration~~pediatric ~~Statement~~private ~~filed~~duty nursing ~~with~~business operating in the ~~Securities~~Illinois and ~~Exchange~~Indiana ~~Commission~~markets. ~~relating~~We tointegrated asome ~~proposed~~of ~~public~~Melmedica’s ~~offering~~Illinois ofoperations ~~2,550,000~~into ~~shares~~our ofexisting ~~our~~nursing ~~Common~~operations ~~Stock~~in the Chicago area. The ~~Registration~~purchase ~~Statement~~price ~~had~~has been allocated to identifiable intangible ~~not~~assets ~~become~~consisting ~~effective~~principally ~~and~~of ~~consequently~~noncompete noagreements ~~securities~~of ~~were~~$0.1 ~~sold~~million ~~under~~and ~~the~~goodwill ~~Registration~~of ~~Statement~~$1.4 million. The ~~related~~remaining ~~costs~~purchase ~~for~~price was allocated to fixed assets based on the ~~Registration~~fair ~~Statement~~value of ~~approximately~~those fixed assets. Effective with the adoption of SFAS No. 142, the purchase price allocation to $01.34 million of goodwill is not being amortized but is being amortized and deducted for tax purposes. The purchase method of accounting was ~~recorded~~used to record this acquisition and the results of operations of the acquired company are included in the ~~fourth~~accompanying ~~quarter~~consolidated statements of ~~fiscal~~operations ~~2004~~from the date of the acquisition.

OnDuring ~~January~~the ~~27,~~second ~~2004~~half of fiscal 2006, we ~~entered~~implemented ~~into~~ a ~~Credit~~program ~~Agreement~~to approach our private duty nursing managed care payors with ~~General~~a ~~Electric~~request to increase ~~Capital~~reimbursement ~~Corporation~~rates. ~~(See~~In ~~“Liquidity~~many cases we have not had a rate increase for a number of years and ~~Capital~~have ~~Resources”~~incurred significant increases in nurse wage rates during that period.) In select cases, we have negotiated and finalized rate increases, many of which become effective at the start of our fiscal year 2007. Negotiations are on-going with a number of other payors and we are hopeful we will achieve some level of rate increase in most cases.

~~During~~On ~~fiscal~~August 25, ~~year 2004~~2006, ~~the~~our ~~Audit~~Board ~~Committee received an assessment report~~ of ~~the~~Directors ~~internal audit function from a national accounting firm. In subsequent discussions with management, the Audit Committee~~ approved a plan ofto ~~reorganization of~~sell ~~the~~substantially ~~internal~~all ~~audit~~of ~~function~~the ~~which~~assets ~~incorporates~~of anour ~~enterprise~~RTES ~~approach~~business to ~~risk~~Lincare, ~~management~~Inc. ~~Specific~~Our ~~changes~~balance ~~included:~~sheet ~~incorporation~~has ofbeen ~~clinical,~~reclassified ~~operational,~~to ~~compliance,~~reflect ~~risk~~these ~~management,~~assets ~~financial~~as ~~and~~“Held ~~the~~for ~~Sarbanes-Oxley~~Sale” ~~Act’s~~and ~~Section~~those ~~404~~financial ~~test procedures~~results ~~into~~have ~~the~~been ~~audit~~classified ~~program.~~as ~~Other~~discontinued ~~recommendations~~operations ~~included~~in ~~follow-up~~the Statement ~~procedures~~of ~~necessary~~Operations tofor ~~resolve~~all ~~issues~~periods ~~identified during audits~~presented.

~~Risk~~On November 6, ~~Management~~2006, we completed the sale of substantially all of the assets of our RTES business to Lincare, Inc. The aggregate purchase price was $35.2 million of which $30.0 million was received at closing. The remainder of the purchase price is due upon the satisfaction of certain criteria, including the successful transition of certain patients and the collection of accounts receivable outstanding at closing.

WeEarly ~~have~~in ~~spent~~fiscal ~~significant~~2006, ~~time~~our ~~and~~former ~~resources~~worker’s tocompensation ~~move~~insurance ~~towards~~carrier, aAtlantic ~~fully~~Mutual, ~~implemented~~received ~~Enterprise~~a ~~Risk~~downgrade ~~Management~~in ~~Model.~~its AM ~~This~~Best ~~approach~~financial rating to ~~risk~~a ~~management emphasizes~~B-. ~~assessment~~On ofAugust 21, ~~risk~~2006, ~~from~~Standard & aPoor’s ~~broader~~downgraded ~~perspective~~Atlantic’s ~~and~~surplus ~~relies~~note ~~upon~~rating ~~significant~~to ~~employee~~D ~~education~~from ~~initiatives~~CCC ~~and~~following ~~awareness~~Atlantic’s ofnonpayment ~~a variety~~ of ~~risk~~interest ~~exposures.~~that ~~Our~~was ~~full~~due ~~time~~on ~~risk manager~~August 15, ~~who possesses extensive homecare and occupational medicine~~2006. ~~experience~~Subsequently, ~~has~~Atlantic ~~strengthened~~Mutual ~~the~~requested ~~initial~~a ~~incident~~voluntary ~~reporting~~withdrawal ~~and~~of ~~investigation~~its ~~process.~~AM WeBest ~~are~~rating. ~~beginning~~While towe ~~see~~believe ~~evidence~~ that ~~these~~our ~~process~~collateral ~~refinements~~remains ~~are positively influencing claim adjustment activities and ultimately~~secure, the ~~actuarial~~potential ~~estimates~~for ~~of loss history. Our Risk Committee, which is comprised of members of~~ the ~~Compliance,~~carrier ~~Legal, Human Resources, Internal Audit and Risk Management Departments, continues~~ to ~~monitor~~default ~~incident~~on ~~reporting and~~ claim ~~adjustment~~payments ~~activity,~~due ~~review~~in ~~existing~~the ~~patient census~~ordinary ~~and~~course ~~discharge~~has ~~high-risk cases where legally permissible~~increased. ~~Our~~Based upon ~~Risk~~information ~~Committee~~available ~~employs~~to adate, ~~multi-functional~~we ~~approach~~believe tothe ~~its~~insurance ~~decision~~carrier ~~making~~will ~~process.~~not Webe ~~continue~~able to ~~educate~~meet ~~branch~~its ~~office~~obligations ~~staff~~and onwe ~~risk~~have ~~management~~established ~~procedures~~an ~~including~~allowance ~~appropriate nurse~~of ~~staffing decisions~~$2.4 Inmillion ~~addition,~~on ~~our~~the ~~third~~full ~~party~~value ~~actuary~~of ~~analyzes our medical malpractice loss history and quantifies liability recognition under~~ the ~~policy~~insurance ~~terms.~~recoveries ~~Under~~receivable ~~our~~at ~~medical malpractice policy~~September 30, ~~if our loss experience worsens it could have a material adverse effect on our financial results and liquidity position~~2006.

~~Operations~~During the fourth quarter of fiscal 2006, we had an incident whereby a Company laptop computer containing patient personal health information (PHI) was stolen and exposed to potential misuse. We believe that we took appropriate measures to investigate the incident, mitigate any potential damages and have strengthened existing controls and procedures. We received notice on September 26, 2006 from the United States Department of Health and Human Services’ (HHS) Office of Civil Rights alleging that we were not in compliance with the Federal Standards for Privacy of Individually Identifiable Health Information. We responded to the notice and believe that the ultimate resolution will not have a material adverse effect on our business, financial condition and results of operations.

~~We have~~27 ~~three reportable segments: (i) Nursing and PPEC, (ii) Pharmacy and (iii) RTES (see Notes to Consolidated Financial Statements—Note 12).~~

In the Nursing and PPEC segment, we continue to see pressures on both reimbursement levels and wage rates in key markets. During fiscal 2004, we experienced a more dramatic reduction in authorized levels of services from key Medicaid states, which were partially offset by continued progress in PPEC start-up operations. This trend in reduced authorized levels of care for specific patients is a growing obstacle to this segment’s future contribution margin expansion. In order to address this trend, we have expanded our nurse recruiting and retention program to include more local market recruiting staff. In addition, we have expanded our nurse visit programs in selected markets to respond to specific payor requests and reimbursement agreements. A renewed focus on same store revenue growth is being undertaken. This initiative includes improving the alignment and establishing financial incentives for our local market sales and marketing resources to maximize the potential of existing managed care contracts by “pulling” patient referrals through these relationships.

In the Pharmacy segment, we continue to experience a decline in gross margin rates across many of our key product offerings. For instance, within the hemophilia factor product, clinical changes in a patient’s condition can dictate rapid changes to the specific type and amount of drugs provided. These alternative drugs may have

~~Index~~Risk toManagement ~~Financial Statements~~

We have spent significant time and resources to move towards a fully implemented Enterprise Risk Management Model. This ~~relatively~~approach ~~higher~~to ~~acquisition~~risk ~~costs~~management emphasizes assessment of risk from a broader perspective and ~~lower~~relies ~~reimbursement~~upon ~~levels~~significant ~~based~~employee oneducation ~~the~~initiatives ~~payor~~and awareness of a variety of risk exposures. ~~Given~~Our ~~the~~full ~~expanded~~time risk manager, ~~though~~who ~~increasingly~~possesses ~~concentrated~~extensive homecare ~~census~~and occupational medicine experience, ~~changes of~~has ~~this~~strengthened ~~type~~the ~~expose~~initial incident reporting and investigation process and actively monitors claim adjustment activities. Our Risk Committee, which is comprised of members of the ~~Pharmacy~~Compliance, ~~segment~~Legal, Human ~~revenue~~Resources, Finance and ~~contribution~~Risk ~~margin~~Management Departments, continues to ~~significant~~monitor ~~volatility~~incident reporting and claim adjustment activity, review existing patient census and discharge high-risk cases where legally permissible. ~~Payor~~Our ~~initiated~~Risk ~~reductions~~Committee employs a multi-functional approach to ~~reimbursement~~its ~~levels~~decision ~~with~~making noprocess. ~~corresponding~~We ~~reduction~~continue to ~~acquisition~~educate ~~costs~~branch ~~pose~~office astaff ~~significant~~on ~~threat~~risk tomanagement ~~future contribution~~procedures ~~margin~~including ~~levels~~appropriate nurse staffing decisions. InWe ~~response~~intend to ~~these~~expand ~~changing~~our ~~market~~risk ~~conditions~~management westaff ~~have~~in ~~undertaken~~fiscal a2007 ~~series~~and intensify ofour ~~initiatives~~efforts ~~including~~to ~~recruiting~~pro-actively ~~for~~identify ahigh ~~National~~risk ~~Hemophilia~~patients ~~Director~~and tonurses, ~~coordinate~~reinforce appropriate boundaries of care, strengthen our ~~existing~~data ~~programs~~collection efforts during incident reporting and ~~provide~~continue ~~dedicated~~to ~~focus~~aggressively onengage the third party ~~expansion~~administrator in the claim adjustment process. In addition, weour ~~have~~third ~~increased~~party ~~development~~actuary ofanalyzes ~~marketing~~our ~~materials~~medical ~~which~~malpractice ~~highlight~~loss ~~our~~history ~~clinical~~ and ~~service~~quantifies ~~expertise~~liability asrecognition ~~integral~~under ~~components~~the ofpolicy terms. Under our ~~pharmacy~~medical ~~programs~~malpractice policy, aswe ~~well~~have asa ~~exploring~~$1.0 million ~~potential~~per ~~business~~year, ~~relationships~~per claim, self-insured retention, with ~~hemophilia treatment~~an ~~centers~~aggregate toself-insured ~~manage~~retention ~~their~~limit ~~patient~~of ~~populations~~$8.0 million and ~~on-going~~an ~~refinement~~annual aggregate coverage limit of ~~operational~~$15.0 ~~best~~million. ~~practices~~If toour ~~assure~~loss ~~maximized~~experience ~~clinical~~worsens, ~~compliance~~it could have a material adverse effect on our financial results and ~~efficiency~~liquidity position.

~~In the RTES segment, we continue to invest in and expand our sales and marketing program. We are focusing our sales and~~Operations marketing efforts upon the higher activity respiratory patients to leverage our clinical competencies and more actively manage the core product mix. As a result, we have begun to see increases in target referrals from managed care payors in select markets. However, we have experienced an increased rate of replacement for several equipment items in our core rental fleet. These increasing capital expenditures reflect growing market acceptance of improved versions of these core products. Many of those items have become smaller and more portable and are increasingly requested by patients and referring physicians. These items have higher acquisition costs and to date, reimbursement levels have not increased. In addition, we are experiencing decreased reimbursement for certain disposable and supply items, as well as the elimination of reimbursement for other select items (see “Home Healthcare Industry Events & Updates” above for additional discussion). In order to address the continued margin pressures on our RTES segment, we have implemented a Product Review Committee to standardize product selections, aggregate product volumes, and source through a reduced number of vendors and maximize purchasing power. As we seek to fill the vacant Divisional Vice President position, execution of these initiatives will be critical to achieving the desired objectives.

~~Source~~We &have ~~Availability~~two ofreportable ~~Clinical~~segments: ~~Personnel~~(i) Nursing and (ii) PPEC (see “Notes to Consolidated Financial Statements”—Note 13).

~~During~~In the 13Nursing ~~weeks~~segment, ~~ending~~we ~~September~~are ~~25,~~focused ~~2004,~~on increasing our ~~case~~staffed hours ~~staffed~~and ~~increased~~reimbursement rates to ~~approximately~~drive ~~763,000~~revenue asgrowth. ~~compared~~We tobelieve ~~755,000~~our innurse ~~the~~recruiting 13strategy ~~weeks~~with ~~ended~~its ~~June 26,~~focus ~~2004.~~upon Weweekly ~~continue~~staffed tohours ~~aggressively~~targets, ~~compete~~ for each ~~nurses~~branch tooffice, ~~staff~~as ~~hours~~well ~~ordered,~~as ~~retain~~our ~~nurses~~incentive ~~with~~programs ~~select~~to ~~wage~~reward ~~and~~achievement ~~benefit~~of ~~improvements~~these ~~and~~targets ~~implement~~best ~~employee~~positions ~~satisfaction~~us ~~initiatives~~to achieve our growth objectives. We have ~~made~~also ~~additional~~instituted ~~investments~~a invariety ~~eight~~of new ~~local~~programs ~~market nurse recruiters~~ to ~~help~~monetarily ~~reduce~~reward ~~unstaffed~~our ~~hours.~~nurses Weto ~~believe~~increase ~~that~~the ~~case~~number of hours ~~staffed~~that isthey ~~the~~work ~~most~~for ~~appropriate measurement of nursing activity~~us. ToWe ~~date,~~continue weto ~~have~~experience ~~seen~~wage ~~inconsistent~~pressures ~~results~~ in aselect ~~number of~~ markets ~~and~~which ~~will~~have ~~continue~~contributed to ~~assess~~continued ~~and~~gross ~~respond accordingly.~~margin Werate ~~anticipate~~erosion. ~~that~~Our ~~over~~branch ~~time,~~office ~~our~~directors’ ~~nurse~~focus ~~scheduling~~is ~~system,~~upon ~~SHINE,~~increasing ~~will help to improve both un-staffed hours and~~ gross margin ~~levels;~~dollars ~~however,~~which ~~there~~will improve ~~can~~the bebranch nooffice ~~assurance~~contribution ~~that this will occur~~margin.

28In the PPEC segment, we continue to be pleased with the financial results of our Georgia centers. Our census has continued to grow, community acceptance of our business model has expanded and feedback from state officials is positive. In North Carolina our pilot project continues to demonstrate the desired outcomes and we are in discussions with the appropriate agency managers to secure a permanent source of funding. In Florida, a rate increase for PPEC services of approximately 10% to the daily reimbursement was implemented on July 1, 2006. We expect this to improve our operating margins and enable us to more effectively compete for clinical staff. Unfortunately, conditions in the Orlando and Jacksonville markets, in particular long standing barriers in patient eligibility and authorized levels of service, have resulted in ongoing losses at this center. As a result, the Company closed the Orlando and Jacksonville centers in the third and fourth quarter of fiscal 2006, respectively. We are continuing to monitor center profitability in our other Florida centers.

Source & Availability of Clinical Personnel

We believe that case hours staffed is the most appropriate measurement of nursing activity. During the 13 weeks ending September 30, 2006, our case hours staffed increased 36,000, or 4% to approximately 873,000 as compared to 837,000 in the 13 weeks ended July 1, 2006. We continue to aggressively compete for nurses to staff hours ordered, retain nurses with select wage and benefit improvements and implement employee satisfaction initiatives. We have made investments in nine local market nurse recruiters to help reduce unstaffed hours.

~~Index~~CRITICAL toACCOUNTING ~~Financial~~POLICIES ~~Statements~~

~~CRITICAL~~Net ~~ACCOUNTING~~Revenue ~~POLICIES~~

~~Net~~We ~~Revenue~~derive substantially all of our net revenue from patients who have a third party (insurance company or government) who either has contractually agreed to pay the patient’s account or is obligated to pay based on the patient’s participation in its program (i.e. Medicare or Medicaid). Revenues are recorded based on estimated net realizable amounts to be received for products or services rendered during the period. The Company’s accounting system is programmed to calculate the expected reimbursement to be received on a patient-by-patient basis based on the type of payor and the contractual terms of the payor or pre-negotiated reimbursement rates. The Company’s accounting system is updated as changes occur to reimbursement rates. In certain situations, the services and products are recorded separately. In other situations, the services and products are billed and reimbursed on a per diem or contract basis whereby the insurance carrier pays us one combined amount for treatment. Because the reimbursement arrangements in these situations are based on a per diem or contract amounts, we do not maintain records that provide a breakdown between the service and product components. Substantially all of our revenue is fee for service.

Due to the nature of the ~~health~~healthcare ~~care~~ industry and the reimbursement environment in which we operate, certain estimates are required to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will need to be revised or updated, with the changes recorded in subsequent periods as additional information becomes available to us. Specifically, the complexity of many third- party billing arrangements and the uncertainty of reimbursement amounts for services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or ~~account~~settlement ~~review. As~~ of ~~September~~account 30, 2004, we had no material claims, disputes or unsettled matters with third-party payors, nor were there any material pending settlements with third-party payors except as disclosed under the “Recent Developments” section abovereview.

~~Net~~In ~~revenue~~December ~~represents the estimated net realizable amounts from patients~~2005, ~~third-party~~we ~~payors~~received ~~and~~notice ~~others~~of ~~for~~a ~~patient~~claim ~~services~~from ~~rendered~~one ~~and~~commercial ~~products provided.~~payor ~~Such~~primarily ~~net~~relating ~~revenue is recognized as the treatment plan is administered~~ to ~~the~~our ~~patient~~discontinued ~~and~~pharmacy ~~recorded~~operations. atThe ~~amounts~~payor ~~estimated~~claims tooverpayments beof ~~received~~approximately ~~under~~$1.1 ~~reimbursement arrangements with payors~~million. ~~Net~~We ~~revenues~~have toreviewed ~~be reimbursed by contracts with third-party~~the ~~payors~~basis ~~are~~for ~~recorded~~the atclaim anand ~~amount~~believe toit beis ~~realized~~substantially ~~under~~without ~~these contractual arrangements~~merit. ~~Net~~We ~~revenues~~have ~~from~~submitted ~~Medicaid~~our response and ~~Medicare~~ are ~~generally~~working ~~based~~towards onresolution ~~reimbursement~~ of ~~the~~these ~~reasonable direct and indirect costs of providing services to program participants~~issues. InAt ~~certain~~this ~~situations~~time, ~~the~~we ~~services~~believe ~~and~~we ~~products~~ are ~~recorded~~adequately ~~separately.~~reserved; ~~In other situations~~however, ~~the~~there ~~services~~can ~~and~~be ~~products~~no ~~are~~assurance ~~billed~~that ultimate ~~and~~resolution ~~reimbursed~~will onnot have a ~~per~~material ~~diem~~adverse oreffect ~~contract~~upon ~~basis~~our ~~whereby~~future ~~the~~financial ~~insurance~~results. ~~carrier~~As ~~pays~~of usSeptember 30, ~~one~~2006, ~~combined amount~~we ~~for~~had ~~treatment.~~no ~~Because~~material ~~the~~claims, ~~reimbursement~~disputes ~~arrangements~~or inunsettled ~~these~~matters ~~situations~~with ~~are~~third ~~based~~party onpayors aexcept ~~per~~as ~~diem~~disclosed ~~or contract amount~~above, wenor dowere ~~not~~there any ~~maintain~~material ~~records~~pending ~~that~~settlements ~~provide~~with athird ~~breakdown~~party ~~between the service and product components~~payors.

We have developed a methodology to record the estimated net revenue as a result of the inherent time lag between certain RTES patient treatments and input of the related information into our billing and collection system. This methodology measures relative changes in the time and overall activity level at each branch office location and aggregates these measurements to estimate the impact to consolidated net revenue. The estimated net revenue from the inherent time lag was approximately 0.34%, 0.5% and 0.54% of net revenue for fiscal years ended ~~2004~~2006, ~~2003~~2005 and ~~2002~~2004, respectively. Any unforeseen volatility to either the time or activity level at specific branch offices has the potential to significantly impact the estimate.

In other select cases, patient treatments may cease for a number of reasons including re-hospitalizations, changes in treatment needs, or death, and a time lag may exist before this information is reflected in our billing and collection system. We have developed a methodology which measures the historical experience of all patient net revenue adjustments over ~~recent~~a ~~time~~rolling ~~periods~~four quarters and applies this methodology to reduce net revenues recognized in the current period. Included in this calculation is the reversal of revenue for patients without authorizations.

~~Allowance~~29 ~~for Doubtful Accounts~~

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

~~Index~~Allowance tofor ~~Financial~~Doubtful ~~Statements~~Accounts

~~Goodwill~~In determining the adequacy of the allowance and ~~Other~~related ~~Acquired~~provision ~~Intangible~~for doubtful ~~Assets~~accounts, we have developed a process that combines detailed analysis of historical collections and write-off activity with a detailed review of existing account balances meeting certain criteria and their likelihood of being collected at the amounts recorded. Co-payments are captured under the private pay category and a higher reserve percentage is applied to these balances based on historical collection patterns. This detailed review involves both the assigned Corporate Reimbursement department personnel and the respective branch office location personnel assessing each patient claim that falls within prescribed age and amount criteria. These assessments are aggregated and compared to the results of the detailed analysis of historical collections to provide additional support to management in making the estimate of the allowance for doubtful accounts. Inherent in this estimate is the risk that it will need to be revised or updated, with the changes recorded in subsequent periods, as additional information becomes available to management.

~~Beginning~~The infollowing ~~fiscal~~table ~~2002,~~provides ~~the~~a ~~Statement~~comparison of ~~Financial~~approximate ~~Accounting~~percentages ~~Standards (“SFAS”) No. 142 eliminated goodwill amortization from the consolidated statements~~ of ~~operations~~our ~~and~~aging ~~required an evaluation~~ of ~~goodwill~~net ~~for~~accounts ~~impairment~~receivable on(net ~~an annual basis, and more frequently if circumstances indicate a possible impairment. We perform our annual impairment test in the fourth quarter~~ of ~~each~~credit ~~fiscal~~balances) ~~year~~by ~~and~~payor ~~more~~for frequently if circumstances indicate a possible impairment. For these evaluations, we are using an implied fair value approach, which uses a discounted cash flow analysis and other valuation methodologies. These evaluations use many assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related to future earnings and comparable companies capital structure and earnings power. For fiscal 2004, we completed the ~~impairment~~years ~~test~~ended ~~and, at~~ September 30, ~~2004,~~2006 ~~there~~and ~~was~~2005: ~~no resulting impairment. Subsequent impairments, if any, would be classified as operating expenses.~~

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


September 30, 2006

	0-120 days		121-180 days		181-240 days		241-365 days		>365 days		Total
Commercial and contract insurance	32.9	%	2.1	%	1.1	%	0.6	%	-1.6	%	35.1	%
Medicaid	35.1	%	1.3	%	0.8	%	1.5	%	0.7	%	39.4	%
Medicare	0.6	%	0.0	%	0.0	%	0.0	%	0.0	%	0.6	%
Private pay	0.7	%	0.1	%	0.1	%	0.2	%	0.0	%	1.1	%
Unbilled	23.8	%	0.0	%	0.0	%	0.0	%	0.0	%	23.8	%

Total net accounts receivable	93.1	%	3.5	%	2.0	%	2.3	%	-0.9	%	100.0	%

September 30, 2005

	0-120 days		121-180 days		181-240 days		241-365 days		>365 days		Total
Commercial and contract insurance	33.3	%	1.9	%	1.2	%	1.0	%	0.3	%	37.7	%
Medicaid	35.7	%	2.2	%	0.9	%	1.0	%	1.1	%	40.9	%
Medicare	0.8	%	0.4	%	0.1	%	0.0	%	0.0	%	1.3	%
Private pay	1.0	%	0.3	%	0.2	%	0.2	%	0.2	%	1.9	%
Unbilled	18.2	%	0.0	%	0.0	%	0.0	%	0.0	%	18.2	%

Total net accounts receivable	89.0	%	4.8	%	2.4	%	2.2	%	1.6	%	100.0	%

~~Accrued~~Goodwill ~~Insurance~~and Other Acquired Intangible Assets

~~Our~~Beginning ~~insurance~~in ~~broker~~fiscal 2002, ~~retains~~ the ~~services~~Statement of anFinancial ~~independent~~Accounting ~~actuary~~Standards ~~to prepare~~(“SFAS”) anNo. 142 ~~actuarial~~eliminated ~~analysis~~goodwill ofamortization ~~our~~from ~~development~~the consolidated statements of ~~reported~~operations and ~~incurred~~required ~~but~~an ~~not~~evaluation ~~reported~~of ~~claims~~goodwill for ~~workers’~~impairment ~~compensation,~~on ~~medical~~an ~~malpractice~~annual basis, and ~~employee~~more frequently ~~benefit~~if ~~plans~~circumstances indicate a possible impairment. ~~These~~We ~~estimates~~perform ~~are~~our ~~updated~~annual asimpairment ~~determined~~test ~~necessary~~in ~~based~~the onfourth ~~recent claims~~quarter ~~history~~of each fiscal year and ~~other~~more ~~events.~~frequently ~~Inherent~~if incircumstances ~~these~~indicate ~~estimates~~a ispossible ~~the~~impairment. ~~risk~~For ~~that~~these ~~they~~evaluations, ~~will~~we ~~need~~are tousing bean implied ~~revised~~fair orvalue ~~updated~~approach, ~~with~~which ~~the~~uses ~~changes~~a ~~recorded~~discounted cash flow analysis and other valuation methodologies. These evaluations use many assumptions and estimates in ~~subsequent~~determining ~~periods,~~an asimpairment ~~additional~~loss, ~~information~~including ~~becomes~~certain ~~available~~assumptions toand ~~us.~~estimates ~~Accrued~~related ~~workers’~~to ~~compensation~~future earnings and ~~medical~~comparable ~~malpractice~~companies ~~losses~~capital ~~have~~structure ~~been~~and ~~discounted~~earnings atpower. 6%There was no resulting impairment.

The sale of the RTES business was determined to be a “triggering event” requiring us to perform a second impairment test as of September 30, 2006 (See Note 15). As a result of this test, there was no resulting impairment. Subsequent impairments, if any, would be classified as operating expenses.

~~Index~~The sale of the Pharmacy business was determined to ~~Financial~~be ~~Statements~~a “triggering event” requiring us to perform a second impairment test as of September 30, 2005 (See Note 2). As a result of this test, there was no resulting impairment. Subsequent impairments, if any, would be classified as operating expenses.

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

~~The~~Accrued ~~following~~Insurance ~~table sets forth, for the periods indicated, the percentage of net revenue for continuing operations represented by the following items:~~

	Year Ended September 30,
	2004		2003		2002
Net Revenue	100.0	%	100.0	%	100.0	%
Costs of goods and services	56.4		54.7		54.0
Other operating costs and expenses
Salaries, wages and benefits	17.8		18.6		19.5
Business insurance	3.1		3.3		2.4
Overhead	6.9		7.1		7.3
Other operating costs and expenses	27.8		29.0		29.2
Corporate, general and administrative
Salaries, wages and benefits	6.6		6.4		6.8
Business insurance	0.1		0.1		0.1
Professional services	1.2		1.0		0.9
Overhead	1.2		1.3		1.4
Corporate, general and administrative	9.1		8.8		9.2
Provision for doubtful accounts	1.5		0.7		1.0
Depreciation and amortization	1.6		1.9		2.1
Operating income	3.6		4.9		4.5
Other income	-		-		-
Gain on early extinguishment of debt	-		-		0.2
Interest income	0.1		0.1		0.1
Interest expense	(1.0	)	(1.1	)	(1.4	)
Income from continuing operations, before income tax expense (benefit)	2.7	%	3.9	%	3.4	%

We retain the services of an independent actuary to prepare an actuarial analysis of our development of incurred but not reported claims for workers’ compensation, medical malpractice and employee benefit plans. These estimates are updated quarterly based on recent claims history and other events. Inherent in these estimates is the risk that they will need to be revised or updated, with the changes recorded in subsequent periods, as additional information becomes available to us.

~~Fiscal~~Early ~~2004~~in ~~Compared~~fiscal 2006, our former worker’s compensation insurance carrier, Atlantic Mutual received a downgrade in its AM Best financial rating to ~~Fiscal~~a ~~2003~~B-. On August 21, 2006, Standard & Poor’s downgraded Atlantic’s surplus note rating to D from CCC following Atlantic’s nonpayment of interest that was due on August 15, 2006. Subsequently, Atlantic Mutual requested a voluntary withdrawal of its AM Best rating. While we believe that our collateral remains secure, the potential for the carrier to default on the payment of claims due in the ordinary course has increased. Based upon information available to date, we believe the insurance carrier will not be able to meet its obligations and we have established an allowance of $2.4 million on the full value of the insurance recoveries receivable at September 30, 2006.

~~Net~~Stock ~~revenue~~Option ~~increased~~Expense $24.2 million, or 11%, to $239.8 million in fiscal 2004 from $215.6 million in fiscal 2003. For the Nursing and PPEC segment, net revenue increased $4.8, or 5%, to $106.7 million in fiscal 2004 from $101.9 million in 2003. Of this growth, $1.4 million was primarily attributable to increased PPEC revenue at start-up locations which opened in fiscal 2003. Of the $3.4 million increase in nursing net revenue, $1.7 million is primarily attributable to the full year impact of the Advanced Healthcare acquisition finalized in the second quarter of fiscal 2003. Pharmacy segment net revenue increased $17.0 million, or 26%, to $83.6 million in fiscal 2004 from $66.6 million in fiscal 2003. Of this growth, $12.4 million was attributable to increased census and average usage of hemophilia factor. RTES segment net revenue increased $2.4 million, or 5%, to $49.4 million in fiscal 2004 from $47.0 million in fiscal 2003. This growth was driven by our high tech products including ventilator, oximeter and apnea monitor rentals. In fiscal 2004, we derived approximately 53% of our net revenue from commercial insurers and other private payors, 40% from Medicaid and 7% from Medicare.

~~Costs~~Prior ofto ~~goods~~October 1, ~~and~~2005, ~~services~~we ~~consist~~accounted ~~primarily~~for ofour ~~branch~~stock ~~office~~option ~~nursing~~plans ~~compensation~~under the recognition and ~~benefits,~~measurement ~~medical~~provisions ~~equipment~~of Accounting Principles Board Opinion No. 25, ~~pharmaceuticals~~“Accounting for Stock Issued to Employees” (APB 25), and related ~~supplies~~Interpretations, as permitted by SFAS No. 123, “Accounting for ~~Costs~~Stock-Based Compensation”. No stock based compensation cost was recognized in the statement of ~~goods~~operations ~~and~~for ~~services~~the ~~increased~~years ~~$17.3~~ended ~~million~~September 30, or2005 ~~15%~~and 2004, toas ~~$135.2~~all ~~million~~options ingranted ~~fiscal~~under ~~2004~~those ~~from~~plans ~~$117.9~~had ~~million~~an inexercise ~~fiscal~~price ~~2003.~~equal ~~Costs~~to the market value of ~~goods~~the ~~and~~underlying ~~services~~common stock on the date of grant. Effective October 1, 2005, we adopted the ~~Nursing~~fair ~~and~~value ~~PPEC~~recognition ~~segment~~provisions ~~increased~~of ~~$2.6~~SFAS ~~million~~No. 123(R), or“Share-Based 4%Payment”, tousing ~~$63~~the modified prospective transition method.7 Under ~~million~~this transition method, compensation cost recognized in ~~fiscal 2004~~the ~~from~~year ~~$61.~~ended September 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of October 1, ~~million~~2005, based on the grant date fair value estimated in ~~fiscal~~accordance ~~2003.~~with ~~Costs~~the original provisions of ~~goods~~Statement 123, and ~~services~~(b) compensation ascost afor ~~percentage~~all ofshare-based ~~the~~payments ~~Nursing~~granted ~~and~~subsequent ~~PPEC~~to ~~segment~~October 1, ~~net~~2005 ~~revenue~~based ~~was~~on ~~unchanged~~the atgrant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated.

31The fair value of the options awarded under Statement 123(R) is estimated on the date of grant using the Black-Scholes-Merton option pricing formula. Expected volatilities are based on historical volatility of our stock and other factors. We use historical option exercise and employee termination dates to estimate the expected term. The expected term represents the period of time that options granted are expected to be outstanding. We perform these calculations separately for each plan because the participants exhibit different behavior. The risk free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. We have elected to use the straightline method to recognize compensation expense under Statement 123(R).

~~Index~~RESULTS toOF ~~Financial~~OPERATIONS ~~Statements~~

~~60%~~The infollowing ~~fiscal~~table ~~2004~~sets ~~compared~~forth, tofor ~~fiscal 2003. For~~ the ~~Pharmacy~~periods ~~segment~~indicated, cost of goods and services increased $13.4 million, or 30%, to $57.8 million in fiscal 2004 from $44.4 million in fiscal 2003. Pharmacy segment costs of goods and services as a percentage of net revenue increased to 69% in fiscal 2004 from 67% in fiscal 2003. The increase was primarily attributable to increased hemophilia factor deliveries which has a wide range of reimbursement amounts based on the specific payor and increased seasonal Synagis deliveries which has lower product level gross margins in fiscal 2004 as compared to fiscal 2003. For the RTES segment, cost of goods and services increased $1.3 million, or 10%, to $13.7 million in fiscal 2004 from $12.4 million in fiscal 2003. Costs of goods and services as a percentage of net revenue ~~increased~~for tocontinuing ~~28% in fiscal 2004 from 26% in fiscal 2003. We are~~operations ~~experiencing~~represented ~~decreased~~by ~~reimbursement for certain disposable and supply items as well as~~ the ~~elimination~~following ~~of reimbursement for other select~~ items.:

Other operating costs and expenses include branch office administrative and marketing compensation and benefits, allocated business insurance costs, facility and overhead costs. Other operating costs and expenses increased $4.3 million, or 7%, to $66.8 million in fiscal 2004 from $62.5 million in fiscal 2003. In the Nursing and PPEC segment, other operating costs and expenses increased $2.9 million, or 10%, to $31.8 million in fiscal 2004 from $28.9 million in fiscal 2003. As a percentage of net revenue, the Nursing and PPEC segment costs were 30% in fiscal 2004 as compared to 28% in fiscal 2003. This increase consists of: additional allocated business insurance costs, additional auto mileage reimbursements and additional facility costs for increased data bandwidth on our wide area network to improve location connectivity. In the Pharmacy segment, other operating costs and expenses remained relatively constant at $11.3 million in fiscal 2004 as compared to fiscal 2003. As a percentage of net revenue these costs declined to 13% in fiscal 2004 from 17% in fiscal 2003. In the RTES segment, other operating costs and expenses increased $1.4 million, or 6%, to $23.7 million in fiscal 2004 from $22.3 million in fiscal 2003. As a percentage of net revenue these costs increased to 48% in fiscal 2004 as compared to 47% in fiscal 2003. Primarily, the increase relates to administrative salaries in select locations to meet certain contract service level and regulatory requirements.


	Year Ended September 30,
	2006		2005		2004
Net Revenue	100.0	%	100.0	%	100.0	%
Costs of goods and services (exclusive of depreciation shown separately below)	60.8		59.7		59.7
Other operating costs and expenses
Salaries, wages and benefits	16.7		17.1		17.8
Business insurance	4.0		3.6		4.6
Overhead	6.3		6.1		6.8

Other operating costs and expenses	27.0		26.8		29.2
Corporate, general and administrative
Salaries, wages and benefits	11.9		12.4		14.8
Business insurance	0.2		0.2		0.1
Professional services	3.2		3.9		2.6
Overhead	2.3		2.5		2.8

Corporate, general and administrative	17.6		19.0		20.3
Provision for doubtful accounts	0.1		0.6		1.0
Provision for insurance recoveries	2.0		-		-
Depreciation and amortization	0.9		0.9		0.9

Operating loss	(8.4	)	(7.0	)	(11.1	)
Other income	-		0.1		-
Loss on early extinguishment of debt	(0.7	)	-		-
Interest income	1.9		0.2		0.1
Interest expense	(0.5	)	(2.2	)	(2.2	)

Loss from continuing operations, before income tax benefit	(7.7	)	(8.9	)	(13.2	)
Income tax benefit	(2.5	)	(4.1	)	(5.0	)

Loss from continuing operations	(5.2	)%	(4.8	)%	(8.2	)%

~~Corporate,~~Fiscal ~~general~~2006 ~~and~~Compared ~~administrative costs increased $2.6 million, or 14%,~~ to ~~$21.7~~Fiscal ~~million in fiscal 2004 from $19.0 million in fiscal 2003. The~~2005 increase primarily relates to the separation costs of $1.9 million recorded in fiscal 2004 for the retirement of the former CEO and other senior management changes. Salary expense adjusted for the CEO separation costs was relatively consistent while incentive bonus accruals declined. Professional services costs increased approximately $0.7 million primarily attributable to accounting, legal, and Board of Director Fees. As a percentage of net revenue, corporate, general and administrative costs remained relatively constant at 9% in fiscal 2004 as compared to fiscal 2003.

~~Provision~~Net ~~for~~revenue ~~doubtful accounts~~ increased $25.2 million, or ~~148~~5%, to $3119.7 4 million in fiscal ~~2004~~2006 from $1114.51 million in fiscal ~~2003~~2005. ~~Cash~~For ~~collections~~the asNursing asegment, ~~percentage of~~ net revenue ~~were~~increased ~~99%~~$4.9 ~~in fiscal 2004 and 2003~~million, ~~respectively.~~ Asor ~~a percentage of net revenue~~5%, ~~provision for doubtful accounts increased~~ to 1$108.5%4 million in fiscal ~~2004~~2006 asfrom ~~compared to 0~~$103.7%5 million in fiscal ~~2003~~2005. ~~The~~Of ~~primary~~the ~~factors~~$4.9 ~~for~~million ~~management’s~~increase, ~~decision~~$2.9 tomillion ~~increase~~was attributable to the ~~provision~~Melmedica ~~for~~acquisition. ~~doubtful~~PPEC ~~accounts~~net ~~was the~~revenue ~~lack~~increased of$0.3 ~~demonstrated~~million, ~~progress~~or by3%, ~~Georgia~~to ~~Medicaid~~$11.0 million in ~~resolving~~fiscal ~~the~~2006 ~~issues~~from ~~with~~$10.6 ~~the~~million ~~MHN~~in ~~system~~fiscal ~~and~~2005. ~~related~~In ~~support~~fiscal ~~systems~~2006, ~~and~~we ~~the~~derived ~~impact~~approximately ~~that~~36% ~~the implementation~~ of ~~the~~our ~~HIPAA~~net ~~regulations~~revenue ~~continues~~from tocommercial ~~have~~insurers and onother ~~some~~private ~~of our~~ payors ~~(see~~and ~~“Recent Developments”~~64% ~~above)~~from Medicaid.

~~Depreciation~~Costs ~~and~~of ~~amortization~~goods ~~decreased~~and services consist primarily of branch office nursing and therapist compensation and benefits, medical equipment and related supplies. Costs of goods and services increased $04.34 million, or 86%, to $372.76 million in fiscal ~~2004~~2006 asfrom ~~compared~~$68.2 tomillion in fiscal 2005. Costs of goods and services of the Nursing segment increased $4.14 million, or 6%, to $72.0 million in fiscal ~~2003~~2006 from $67.6 ~~The~~million ~~decrease~~in ~~was~~fiscal ~~primarily~~2005. ~~attributable~~Costs toof ~~our~~goods ~~financial~~and ~~system~~services ~~reaching~~as ~~the~~a ~~end~~percentage of ~~its~~the ~~depreciable~~Nursing ~~life~~segment net revenue increased to 66% in ~~the~~fiscal ~~fourth~~2006 ~~quarter~~from of65% in fiscal ~~2003~~2005. For the PPEC segment, ~~which~~ ~~was~~cost ~~partially~~of ~~offset~~goods byand ~~increased~~services ~~capital~~remained ~~expenditures~~relatively ~~during~~constant ~~fiscal~~at ~~2004~~$0.6 inmillion ~~the~~or ~~RTES~~6% of segment revenue in fiscal 2006 as compared to fiscal 2005.

~~Interest~~32 expense was essentially unchanged at $2.4 million in fiscal 2004 as compared to fiscal 2003. Our average debt outstanding decreased $2.7 million as we completed a transaction to repurchase a portion of our 10% Senior Subordinated Notes due 2008 (the “Notes”) in fiscal 2003.

Income tax expense decreased $0.9 million, or 27%, to $2.4 million in fiscal 2004 from $3.3 million in fiscal 2003.

~~Index~~Other operating costs and expenses include branch office administrative and marketing compensation and benefits, allocated business insurance costs, facility and overhead costs. Other operating costs and expenses increased $1.6 million, or 5%, to ~~Financial~~$32.3 ~~Statements~~million in fiscal 2006 from $30.7 million in fiscal 2005. In the Nursing segment, other operating costs and expenses increased $1.2 million, or 5%, to $24.2 million in fiscal 2006 from $23.0 million in fiscal 2005. As a percentage of net revenue, the Nursing segment costs remained relatively constant at 22% in fiscal 2006 as compared to fiscal 2005. The increase includes a $0.3 million increase in nurse recruiting costs. In the PPEC segment, other operating costs and expenses increased $0.4 million, or 5%, to $8.1 million in fiscal 2006 from $7.7 million in fiscal 2005. As a percentage of net revenue these costs increased to 74% in fiscal 2006 from 73% in fiscal 2005.

~~Fiscal~~Corporate, ~~2003~~general ~~Compared~~and administrative costs decreased $0.6 million, or 3% to ~~Fiscal~~$21.1 ~~2002~~million in fiscal 2006 from $21.7 million in fiscal 2005. Administrative salaries, wages and benefits increased approximately $0.1 million; however, this included approximately $1.3 million for compensation costs for employee stock options recorded in fiscal 2006 relating to the adoption of FAS 123(R). Professional service costs declined $0.7 million primarily as a result of reduced SOX 404 costs in the second year of compliance. As a percentage of net revenue, corporate, general and administrative costs decreased to 18% in fiscal 2006 from 19% in fiscal 2005.

~~Net~~Provision ~~revenue~~for ~~increased~~doubtful ~~$18.1~~accounts ~~million,~~decreased ~~or 9%, to~~ $~~215~~0.6 million ~~in fiscal 2003 from $197.5 million in fiscal 2002. For the Nursing and PPEC segment net revenue increased $2.6 million~~, or 381%, to $~~101~~0.9 1 million in fiscal ~~2003~~2006 from $99.3 million in fiscal 2002. Net revenue growth was constrained by a number of factors, including continued reductions in the authorized hours from various state Medicaid programs and the ability to recruit and retain qualified pediatric nurses. These negative impacts were offset by the acquisition of pediatric private duty nursing facilities in Pennsylvania with net revenue estimated at $5.0 ~~million in fiscal 2003 and the growth in the PPEC start-up locations~~. ~~Pharmacy net revenue increased $11.9 million, or 22%, to $66.6 million in fiscal 2003 from $54.~~7 million in fiscal ~~2002~~2005. Increased hemophilia factor deliveries were the primary reason for the growth. RTES net revenue increased $3.6 million, or 8%, to $47.0 million in fiscal 2003 from $43.4 million in fiscal 2002. The majority of the net revenue growth was attributable to increased patient census across all core products and services. In fiscal 2003, we derived approximately 52% of our net revenue from commercial insurers and other private payors, 40% from Medicaid and 8% from Medicare.

~~Costs~~Provision offor ~~goods~~insurance ~~and~~recoveries ~~services consists primarily of branch office nursing compensation and benefits, medical equipment, pharmaceuticals and related supplies. Costs of goods and services~~ increased $~~11.~~2 ~~million, or 11%, to $117~~.94 million ~~in fiscal 2003 from $106.7 million in fiscal 2002. Costs of goods and services of the Nursing and PPEC segment increased $0.8 million~~, or 1100%, to $~~61.1 million in fiscal 2003 from $60.~~2 ~~million in fiscal 2002~~. Costs of goods and services as a percentage of the Nursing and PPEC segment net revenue declined to 59.9% in fiscal 2003 from 60.6% in fiscal 2002. The decline was primarily attributable to select Medicaid and managed care payor price increases as well as improved utilization of benefited nurse positions. The Pharmacy segment cost of goods and services increased $9.6 million, or 28%, to $44.4 million in fiscal ~~2003~~ ~~from~~2006 ~~$34.8 million in fiscal 2002. Pharmacy costs of goods and services as a percentage of net revenue increased to 66.7% in fiscal 2003~~ from 63.7% in fiscal 2002. This increase is primarily attributable to increased product acquisition costs and decreased reimbursement on select hemophilia factor products. The RTES segment cost of goods and services increased $0.80 million, ~~or 7%, to $12.4 million~~ in fiscal ~~2003~~2005 ~~from~~(See ~~$11.6~~“Liquidity ~~million in fiscal 2002. Costs of goods~~ and ~~services~~Capital asResources” ~~a percentage~~below offor ~~net~~further ~~revenue decreased to 26~~discussion).5% ~~in fiscal 2003 from 26.8% in fiscal 2002. This decrease is primarily attributable to lower consumption of disposals and supplies.~~

~~Other~~Depreciation ~~operating costs~~ and ~~expenses~~amortization ~~include~~remained ~~branch~~relatively ~~office~~constant ~~administrative~~at ~~and marketing compensation and benefits, allocated business insurance costs, facility and overhead costs. Other operating costs and expenses increased~~ $51.0 million, ~~or 9%, to $62.5 million~~ in ~~fiscal 2003 from $57.5 million in fiscal 2002. In the Nursing and PPEC segment, other operating costs and~~ ~~expenses increased $3.2 million, or 12%, to $28.9 million in~~ fiscal ~~2003~~2006 ~~from~~as ~~$25.7~~compared ~~million in fiscal 2002. As a percentage of net revenue, the Nursing and PPEC segment costs increased~~ to ~~28.3% in~~ fiscal ~~2003 from 25~~2005.9% in fiscal 2002. The primary factors include increased allocated business insurance costs and increased facility costs from start up operations. In the Pharmacy segment, other operating costs and expenses increased $1.4 million, or 14%, to $11.3 million in fiscal 2003 from $9.9 million in fiscal 2002. This increase is primarily attributable to increased facility costs and increased administrative and marketing compensation. As a percentage of net revenue these costs declined to 17.0% in fiscal 2003 from 18.2% in fiscal 2002. In the RTES segment, other operating costs and expenses increased $0.4 million, or 2%, to $22.3 million in fiscal 2003 from $21.9 million in fiscal 2002. As a percentage of net revenue these costs decreased to 47.4% in fiscal 2003 from 50.5% in fiscal 2002.

~~Corporate,~~Interest ~~general and administrative costs~~income increased $02.80 million, or 4962%, to $192.02 million in fiscal ~~2003~~2006, ~~from~~as compared to $180.32 million in fiscal ~~2002.~~2005 ~~The~~(See ~~increase~~“Liquidity ~~relates primarily to increased managed care marketing personnel~~ and ~~increased~~Capital ~~professional~~Resources” ~~service~~below ~~costs.~~for Asfurther ~~a percentage of net revenue, corporate, general and administrative costs decreased to 8~~discussion).8% ~~in fiscal 2003 from 9.2% in fiscal 2002.~~

~~Provision~~Interest ~~for~~expense ~~doubtful accounts~~ decreased $01.59 million, or 2477%, to $10.56 million in fiscal ~~2003~~2006 from $12.95 million in fiscal ~~2002~~2005. ~~Cash collections as a~~(See ~~percentage~~“Liquidity ofand ~~net~~Capital ~~revenue~~Resources” ~~were~~below ~~99% and 100%~~ for ~~fiscal~~further ~~2003 and 2002, respectively~~discussion). ~~We remain satisfied with cash collections and the accounts receivable aging.~~

33Income tax benefit for continuing operations decreased $1.7 million, or 36%, to a benefit of $3.0 million in fiscal 2006 from a benefit of $4.7 million in fiscal 2005 (See Note 8 for further discussion).

Fiscal 2005 Compared to Fiscal 2004

Net revenue increased $7.4 million, or 7%, to $114.1 million in fiscal 2005 from $106.7 million in fiscal 2004. For the Nursing segment, net revenue increased $5.3 million, or 5%, to $103.5 million in fiscal 2005 from $98.2 million in 2004. Of this growth, $2.7 million was attributable to our southern branch offices and $1.4 million to our western branch offices. For the PPEC segment, net revenue increased $2.1 million, or 25%, to $10.6 million in fiscal 2005 from $8.5 million in fiscal 2004. Of this growth, $1.1 million was primarily attributable to increased PPEC revenue at our Macon start-up location which opened in late fiscal 2004. In fiscal 2005, we derived approximately 35% of our net revenue from commercial insurers and other private payors and 65% from Medicaid.

Costs of goods and services consist primarily of branch office nursing compensation and benefits, medical equipment, pharmaceuticals and related supplies. Costs of goods and services increased $4.5 million, or 7%, to $68.2 million in fiscal 2005 from $63.7 million in fiscal 2004. Costs of goods and services of the Nursing segment increased $4.3 million, or 7%, to $67.6 million in fiscal 2005 from $63.2 million in fiscal 2004. Costs of goods and services as a percentage of the Nursing segment net revenue increased to 65% in fiscal 2005 compared

~~Index~~ to 64% in fiscal 2004. For the PPEC segment, cost of goods and services increased $0.2 million, or 47%, to ~~Financial~~$0.6 ~~Statements~~million in fiscal 2005 from $0.4 million in fiscal 2004. PPEC segment costs of goods and services as a percentage of net revenue increased to 6% in fiscal 2005 from 5% in fiscal 2004.

~~Depreciation~~Other operating costs and ~~amortization~~expenses ~~remained~~include ~~relatively~~branch ~~unchanged~~office atadministrative and marketing compensation and benefits, allocated business insurance costs, facility and overhead costs. Other operating costs and expenses decreased $40.5 million, or 1%, to $30.7 million in fiscal ~~2003~~2005 from $31.1 million in fiscal 2004. In the Nursing segment, other operating costs and expenses decreased $1.1 million, or 4%, to $23.0 million in fiscal 2005 from $24.0 million in fiscal 2004. As a percentage of net revenue, the Nursing segment costs were 22% in fiscal 2005 as compared to 24% in fiscal 2004. The decrease consists primarily of reduced allocated business insurance costs. In the PPEC segment, other operating costs and expenses increased $0.6 million, or 9%, to $7.7 million in fiscal ~~2002~~2005 from $7.1 million in fiscal 2004. As a percentage of net revenue, ~~depreciation~~these ~~and~~costs ~~amortization~~declined ~~remained~~to ~~relatively~~73% ~~constant~~in atfiscal ~~approximately~~2005 2from 84% in fiscal 2004.

~~Interest~~Corporate, ~~expense~~general ~~decreased~~and administrative costs remained relatively constant at $021.37 million, orin ~~12%,~~fiscal 2005 as compared to fiscal 2004. Professional services costs increased approximately $21.47 million in fiscal ~~2003~~2005 ~~from~~primarily attributable to increased SOX 404 costs, audit fees, legal expenses related to the sale of the Pharmacy business and interim CEO cost. These increases were offset by the separation costs of $21.89 million recorded in fiscal ~~2002.~~2004 ~~Our~~for ~~average~~the ~~debt~~retirement ~~outstanding~~of ~~decreased $3~~the former CEO and other senior management changes.5 ~~million~~As asa percentage weof ~~completed~~net ~~several~~revenue, ~~transactions~~corporate, general and administrative costs decreased to ~~repurchase~~19% ain ~~portion~~fiscal of2005 ~~the~~from ~~Notes~~20% in fiscal 2004.

~~Income~~Provision ~~tax~~for ~~expense~~doubtful ofaccounts decreased $30.34 million, ~~was~~or ~~recorded~~38%, ~~in fiscal 2003 as compared~~ to ~~a net tax benefit of~~ $60.7 million in fiscal ~~2002.~~2005 ~~The~~from ~~net~~$1.1 ~~tax~~million ~~benefit~~ in fiscal ~~2002 was primarily due to the full reversal of the valuation allowance~~2004.

~~LIQUIDITY~~Depreciation ~~AND~~and ~~CAPITAL~~amortization ~~RESOURCES~~remained relatively constant at $1.0 million in fiscal 2005 as compared to fiscal 2004.

~~Operations~~Interest expense increased $0.1 million, or 4%, to $2.5 million in fiscal 2005 from $2.4 million in fiscal 2004. Our average debt outstanding remained constant.

OnIncome ~~January~~tax ~~27,~~benefit ~~2004,~~from wecontinuing ~~entered~~operations ~~into~~decreased ~~a credit agreement with General Electric Capital Corporation (“Credit Agreement”)~~$0.6 ~~Subject~~million, toor ~~the terms and conditions of the Credit Agreement~~12%, ~~the~~to ~~Lender made available~~ a ~~credit~~benefit ~~facility consisting~~ of a $104.07 million ~~revolving line of credit and a $10.0 million line of credit for acquisitions. Availability~~ in ~~both~~fiscal ~~components~~2005 isfrom ~~subject to~~ a ~~borrowing~~benefit ~~base calculation against our accounts receivable. Borrowings under the revolving line~~ of ~~credit bear interest at LIBOR plus 3~~$5.~~00%~~3 ~~or the Index Rate plus 1.50%. Borrowings~~million ~~under~~in ~~the~~fiscal ~~acquisition~~2004 ~~line~~(See ofNote ~~credit~~8 ~~bear interest at LIBOR plus 3.50% or the Index Rate plus 2.00%. The Credit Agreement provides~~ for ~~unused~~further ~~line fees of 0~~discussion).~~50%~~ for the revolving line of credit and 0.75% for the acquisition line of credit. The Credit Agreement contains several financial and non-financial covenants including, but not limited to, certain leverage, coverage, DSO and maximum capital expenditures requirements.

OnLIQUIDITY ~~May~~AND ~~12,~~CAPITAL ~~2004,~~RESOURCES ~~we amended the Credit Agreement to clarify a definition and increase the maximum capital expenditures covenant. We have made no borrowings under the Credit Agreement since its inception.~~

Cash collections as a percentage of net revenue for the three months ended September 30, 2004 and 2003 was 103%. While we anticipate that we will continue to achieve our cash collection targets, there can be noOperations ~~assurance that disruptions to cash flow will not occur.~~

WeOn November 11, 2005, we terminated our credit ~~continue~~agreement towith ~~experience~~General ~~difficulties~~Electric inCapital ~~collecting~~Corporation. ~~cash~~The ~~from~~credit ~~Georgia~~agreement, ~~Medicaid~~consisting of $10.0 million revolving credit facility and ~~non~~$10.0 million acquisition credit had remained unused. We recorded the write-~~HIPAA~~off ~~compliant~~of ~~payors~~approximately $0.3 ~~(See~~million ~~“Recent~~in related ~~Developments”~~deferred ~~above~~financing and termination fees in fiscal 2006.)

~~For~~On ~~the fiscal year ended September~~ December 30, ~~2004~~2005, we ~~purchased~~redeemed ~~medical~~in ~~equipment~~full tothe ~~service~~remainder ~~existing~~of ~~patients~~our ~~and~~10% ~~made~~Senior ~~routine~~Subordinated ~~purchases~~Notes ofdue ~~computer~~2008 ~~equipment to~~of ~~maintain~~$20.4 ~~and upgrade our technology infrastructure~~million. We ~~anticipate~~recorded ~~future~~the ~~capital~~write-off ~~expenditures for maintenance, support and enhancements~~ of ~~existing~~approximately ~~technology,~~$0.5 ~~continued~~million ~~investments~~ in ~~new~~related ~~start~~deferred upfinancing ~~locations~~fees and ~~continued~~call ~~durable~~premium ~~medical~~in ~~equipment~~fiscal ~~purchases~~2006. ~~We anticipate funding these capital expenditures with cash flow from operations.~~

~~HIPAA’s~~During ~~standard~~fiscal ~~transaction~~2006, a new incentive program aimed at collecting older receivable balances was successfully implemented resulting in ~~data~~record ~~set~~cash ~~rules~~receipts ~~mandate~~on ~~that~~accounts ~~Covered~~older ~~Entities,~~than ~~including~~120 ~~our~~days. ~~company,~~These ~~transmit~~collections ~~claims~~significantly improved the accounts receivable aging and ~~certain~~reduced ~~related~~the ~~healthcare~~allowance for doubtful ~~information~~accounts. inWhile ~~standardized~~we ~~formats~~anticipate ~~and~~that ~~data~~we ~~sets.~~will ~~(See~~continue ~~“Recent~~to ~~Developments”~~achieve ~~above~~our cash collection targets, there can be no assurance that disruptions to cash flow will not occur.)

~~For~~34 ~~fiscal 2004, we had a current income tax expense of $2.6 million and a deferred income tax benefit of $0.2 million resulting in a total income tax expense of $2.4 million.~~

Risk Management

~~Index~~For fiscal 2006, we purchased medical equipment to ~~Financial~~service ~~Statements~~existing patients and made routine purchases of computer equipment to maintain and upgrade our technology infrastructure. We anticipate future capital expenditures for maintenance, support and enhancements of existing information technology and continued investments in new start up locations. We anticipate some capital expenditures early in fiscal 2007 to satisfy our contractual obligations of the sale of the RTES business. We anticipate funding all capital expenditures with cash on hand and cash flow from operations.

~~respectively.~~For ~~This~~fiscal ~~cash~~2006, ~~requirement~~we ishad ~~estimated~~a tocurrent beincome ~~$2.6~~tax ~~million~~expense ~~for~~of ~~fiscal 2004 and~~ $217.69 million ~~for~~and ~~fiscal 2003, which is reduced by the monthly loss~~a ~~fund~~deferred ~~payments.~~income ~~The~~tax ~~net~~benefit ~~balance~~of ~~at September 30, 2004 and 2003 was~~ $~~3.3 million and $~~1.64 million, ~~respectively.~~resulting The insurance carrier has the right to increase this cash requirement at the end of each fiscal year if the claim experience is greater than anticipated, but to date has not indicated the need to do so. The policy for fiscal 2005 will be funded in a ~~similar~~total ~~manner~~income ~~with~~tax ~~the~~expense ~~cash~~of ~~requirement estimated to be~~ $116.04 million.

We ~~have~~evaluate ~~secured~~our ~~surety~~deferred ~~bonds~~tax ofassets $2quarterly to determine whether it is more likely than not that the deferred tax assets will be realized.5 ~~million~~We tohave applied ~~satisfy~~a ~~our~~valuation ~~workers~~allowance on certain State NOL’ ~~compensation~~s ~~program~~and ~~requirements~~State ~~for~~tax ~~our~~credits ~~former~~where ~~insurance~~we ~~carrier.~~have Asdetermined ofwe ~~September~~will ~~30,~~not ~~2004,~~be ~~the~~able ~~surety~~to ~~bonds~~utilize ~~were~~the ~~collateralized~~NOL bybefore $2its expiration.3 ~~million~~The ~~cash~~use ~~posted~~of the remaining State NOL’s and credits is subject to athe ~~third~~successful completion ~~party~~of ~~escrow~~our ~~account~~strategic plan which includes generating future taxable income.

~~During~~Asset ~~November~~Sales 2004, we began the renewal process of our employee medical benefit plans. With the advice and consent of our risk broker, we determined it to be advantageous to continue to use a self insured model instead of a guaranteed minimum premium model. Preliminary claim history for calendar 2004 is positive and calendar 2005 pricing is within market inflation estimates. This plan ultimately exposes us to greater risk, although the self-insured model’s stop loss, aggregate loss and tail liability features provide sufficient protection such that it is more likely than not that we will realize cost savings, as compared to the guaranteed minimum premium model coverage. In addition, the self-insured model carrier’s medical and disease management capabilities along with its pharmacy formulary protocols and wellness care programs should enable us to deliver to our employees a more effective and competitive plan. We recognize that the features of our medical benefit plan are important to the recruiting and retention of clinical and administrative staff and we are committed to offering a plan that is fully competitive with those offered by other home care providers.

~~As a result of operating in the health care industry, our business entails an inherent risk of lawsuits alleging malpractice, product liability or related~~On ~~legal issues~~November 18, ~~which can involve large claims and significant defense costs. From time to time~~2005, we ~~are~~completed ~~subject to such suits arising in~~ the ~~ordinary~~sale ~~course~~ of ~~business.~~selected Weassets ~~currently~~of ~~maintain~~our ~~professional~~Pharmacy ~~and~~business ~~commercial liability insurance intended~~ to ~~cover~~ ~~such~~Accredo ~~claims.~~Health ~~As of September 30~~Group, ~~2004~~Inc., ~~this insurance coverage is provided under~~ a ~~“claims~~wholly-~~made”~~owned ~~policy~~subsidiary ~~which provides, subject to the terms and conditions~~ of ~~the~~Medco ~~policy~~Health Solutions, coverage for certain types of claims made against us during the term of the policy and does not provide coverage for losses occurring during the terms of the policy for which a claim is made subsequent to the termination of the policyInc. ~~Should~~The ~~the~~aggregate ~~policy~~purchase ~~not~~price bewas ~~renewed or replaced with equivalent insurance, claims based on occurrences during its term but asserted subsequently would be uninsured~~$72.3 ~~There~~million ~~can~~(See beNote ~~no assurance that the coverage limits of our insurance policy will be adequate~~2).

On ~~October 1~~November 6, ~~2004~~2006, we completed ~~our~~the ~~annual~~sale ~~renewal~~ of substantially ~~our~~all ~~risk~~of ~~management~~the ~~program~~assets ~~and~~of ~~implemented several changes. We renewed~~ our ~~insurance~~RTES ~~program~~business ~~for~~to ~~medical malpractice~~Lincare, ~~commercial~~Inc. ~~and~~The ~~general~~aggregate ~~liability~~purchase ~~coverage~~price ~~with~~was ~~Arch~~$35.2 ~~Specialty~~million ~~Insurance~~in ~~Company,~~cash ~~rated~~of A-which ~~by AM Best Company~~$30.0 ~~Per~~million ~~claim~~was ~~deductible~~received ~~limits remained~~ at $1closing.0 ~~million~~The ~~with~~remainder anof ~~aggregate~~the ~~retention~~purchase ~~of $8.0~~price ~~million~~is ~~and~~due anupon ~~annual~~the ~~aggregate~~satisfaction ~~limit~~ of ~~$15.0~~certain criteria, ~~million.~~including ~~The~~the ~~premiums~~successful ~~increased~~transition ~~16%~~of ~~for~~certain ~~fiscal~~patients ~~2005~~and asthe ~~compared~~collection toof ~~fiscal~~outstanding ~~2004~~accounts receivable at closing.

InAsset ~~addition,~~Purchases we are subject to accident claims arising out of the normal operation of our fleet of vans and small trucks, and we maintain insurance intended to cover such claims. A successful claim against us in excess of our insurance coverage could have an material adverse effect upon our business. Claims against us, regardless of their merits or eventual outcome, also may have an material adverse effect upon our reputation and business.

WeOn ~~are~~June 2, ~~from time to time~~2006, ~~subject~~we toacquired ~~lawsuits~~select ~~arising~~assets inof ~~the~~Melmedica ~~ordinary~~Children’s ~~course of business~~Healthcare, ~~some of which may allege damages which would not be covered under our existing insurance policies~~Inc. ~~There~~for ~~can~~a bepurchase noprice ~~assurance that settlement~~ of ~~these~~$1.6 ~~lawsuits~~million ~~will~~in ~~not have~~cash. a(See ~~material~~Note ~~adverse effect on our operations and financial results~~5).

~~Capital~~Risk ~~Resources~~Management

~~The~~Our ~~Indenture~~previous ~~under~~workers’ ~~which~~compensation insurance carrier, rated A by AM Best ~~the~~Company, ~~Notes~~required ~~were~~a ~~issued~~twelve ~~allows~~month usestimated loss reserve to ~~repurchase~~be funded entirely with cash each fiscal year, which is reduced by the ~~Notes~~monthly atloss ~~our~~fund ~~discretion~~payments. ~~All~~The ~~bids~~policy tofor ~~repurchase~~fiscal ~~have~~2006 ~~been~~was ~~based~~underwritten ~~upon~~by Charter Oak Fire Insurance, a ~~number~~subsidiary of St. ~~factors~~Paul ~~including~~Travelers rated A+ by AM Best Company and was funded in a similar manner with a cash ~~availability~~requirement of $2.2 million. The net balance at September 30, ~~interest~~2006 ~~rates~~and on2005 was $4.5 million and $3.4 million, respectively. The insurance carriers have the right to increase this cash requirement at the end of each fiscal year if the claim experience is greater than anticipated, but to date have not indicated the need to do so.

35We have secured surety bonds of $1.4 million to satisfy our workers’ compensation program requirements for our former insurance carrier. As of September 30, 2006, the surety bonds were collateralized by $1.2 million cash posted to a third party escrow account. Early in fiscal 2006, our former worker’s compensation insurance carrier, Atlantic Mutual, received a downgrade in its AM Best financial rating to a B-. On August 21, 2006, Standard & Poor’s downgraded Atlantic Mutual’s surplus note rating to D from CCC following Atlantic Mutual’s nonpayment of interest that was due on August 15, 2006. Subsequently, Atlantic Mutual requested a voluntary withdrawal of its AM Best rating. While we believe that our collateral remains secure, the potential for the carrier to not pay claims in the ordinary course has increased. Based upon information available to date, we believe the insurance carrier will not be able to meet its obligations and we have established an allowance of $2.4 million on the full value of the insurance recoveries at September 30, 2006.

~~Index~~On January 1, 2006, we renewed our self-insured employee medical benefit plans; we made minor design changes to ~~Financial~~our ~~Statements~~benefit plans and analyzed the impact of the removal of the employees who transitioned to Accredo Health Group, Inc. as part of the sale of the Pharmacy business. Our claim experience during fiscal 2006 improved as compared to the prior fiscal year. As part of our 2007 renewal process, we will analyze the impact of the sale of the RTES business and determine whether we need to make future design changes.

~~invested~~As ~~cash~~a result of operating in the healthcare industry, ~~other~~our ~~capital~~business ~~investment~~entails ~~alternatives~~an inherent risk of lawsuits alleging malpractice, product liability or related legal issues, which can involve large claims and ~~relative~~significant ~~ask~~defense ~~prices~~costs. ~~quoted~~From bytime to time, we are subject to such suits arising in the ~~market~~ordinary ~~maker~~course of business. ~~Each~~We ~~decision~~currently maintain professional and commercial liability insurance intended to ~~repurchase~~cover such claims. As of September 30, 2006, this insurance coverage is provided under a “claims-made” policy which provides, subject to the ~~Notes~~terms ~~has~~and ~~been~~conditions of the policy, coverage for certain ~~arrived~~types atof ~~independently~~claims ~~using~~made against us during the ~~above~~term ~~criteria~~of ~~and~~the wepolicy doand does not ~~have~~provide coverage for losses occurring during the terms of the policy for which a ~~formal~~claim ~~plan~~is inmade ~~place~~subsequent to ~~repurchase~~the termination of the ~~Notes~~policy. Should the policy not be renewed or replaced with equivalent insurance, claims based on occurrences during its term but asserted subsequently would be uninsured. There can be no assurance that the coverage limits of our insurance policy will be adequate.

WeOn ~~currently~~October 1, ~~believe~~2006, ~~that~~we completed our ~~liquidity~~annual ~~position~~renewal ~~will~~of beour ~~adequate~~risk management toprogram. ~~satisfy~~We renewed our ~~working~~insurance ~~capital~~program ~~requirements~~for medical malpractice, ~~professional~~commercial and ~~commercial~~general liability ~~insurance~~ ~~loss~~coverage ~~funding,~~with ~~workers’~~Arch ~~compensation~~Specialty ~~collateral~~Insurance ~~requirements~~Company, ~~and~~rated ~~income~~A- ~~tax~~by ~~payments~~AM Best Company. ~~Our~~The ~~current~~per ~~source~~claim ofself-insured ~~liquidity~~retention isamount ~~cash~~remained onat ~~hand,~~$1.0 million ~~cash~~with ~~flow~~an ~~from~~annual ~~operations~~aggregate self-insured retention amount of $8.0 million and ~~the~~an ~~Credit~~annual ~~Agreement~~aggregate coverage limit of $15.0 million. We ~~are~~renewed ~~exposed~~our toworkers’ ~~fluctuations~~compensation inpolicy ~~cash~~with Charter Oak Fire Insurance, a subsidiary of St. Paul ~~collection~~Travelers, ~~results~~rated A+ by AM Best Company, with the per claim deductible remaining at $0.35 million.

~~CONTINGENT~~In ~~LIABILITIES~~addition, ~~AND~~we ~~COMMITMENTS~~are subject to accident claims arising out of the normal operation of our fleet of vans and small trucks, and we maintain insurance intended to cover such claims. A successful claim against us in excess of our insurance coverage could have a material adverse effect upon our business. Claims against us, regardless of their merits or eventual outcome, also may have a material adverse effect upon our reputation and business.

~~Our~~We ~~former~~are subject ~~workers’~~to ~~compensation~~claims ~~carrier~~and ~~requires~~lawsuits arising in the ~~estimated~~ ~~loss~~ordinary ~~reserve~~course of business. Based upon information available to date, management believes it has provided adequate reserves if needed for any unfavorable settlements; however, there can be ~~secured~~no byassurance that ~~surety~~the ~~bonds~~ultimate ~~(see~~resolution ~~“Liquidity~~of ~~and~~such ~~Capital~~current ~~Resources”)~~pending legal proceedings would not have a material adverse effect on our financial results.

~~On October 1, 2004, we completed our annual renewal of our risk management programs and implemented several changes (see “Liquidity and~~ Capital Resources~~”).~~

~~During~~We have invested the ~~quarter~~retained ~~ended~~proceeds ~~September~~from ~~30,~~the ~~2004,~~ sale of the Pharmacy business and we ~~received~~intend ato ~~favorable~~invest ~~determination~~the retained proceeds from the ~~Administrative~~sale ~~Law~~of ~~Judge~~our ~~regarding~~RTES business in accordance with the ~~Medicare~~terms ~~audit~~of ~~appeal~~our ~~previously~~Investment ~~discussed~~Policy inwhich ~~our~~has ~~prior~~been ~~SEC~~approved ~~filings~~by the Board of Directors. ~~The~~This ~~settlement~~policy ~~reached~~provides ~~resolved~~for ~~this~~the ~~matter~~establishment of short-term, highly liquid investments within ~~our~~prescribed ~~estimated~~parameters. ~~liability~~Some of $0these investments have maturities which range from 7 days to approximately 40 days.36 ~~million~~In accordance with FASB 115, the purchase and redemption of these particular securities are classified as investing activities in the consolidated statements of cash ~~(see~~flows. ~~Note~~As ~~10)~~of the balance sheet date, all funds were held in a money market fund and classified as a cash equivalent on the consolidated balance sheet. The dividends and interest earned from some of these securities are not subject to Federal income taxes and will result in a permanent difference between book and tax income.

We ~~have~~currently ~~entered~~believe ~~into~~that ~~employment~~our ~~agreements~~liquidity ~~with certain~~position ~~employees~~will ~~which~~be ~~provide,~~adequate ~~among~~to ~~other~~satisfy ~~things,~~our ~~salary~~working capital requirements, ~~benefits~~professional and ~~perquisites,~~commercial asliability ~~well~~insurance asloss ~~additional~~funding, workers’ compensation ~~for~~collateral requirements, ~~certain~~income ~~changes~~tax inpayments ~~control~~and orpotential aacquisitions ~~failure~~and tostart-up ~~comply~~branch ~~with~~offices. ~~any~~Our ~~material~~current ~~terms~~sources of ~~the~~liquidity ~~agreements.~~are Wecash ~~have~~on ahand ~~Non-Qualified Deferred~~and ~~Compensation~~cash ~~Plan~~flow ~~for~~from ~~certain of our employees~~operations. ~~The~~We ~~deferred~~are ~~compensation~~exposed ~~liability~~to asfluctuations ofin ~~September~~cash ~~30,~~collection ~~2004 was approximately $2~~results.0 ~~million.~~

~~The~~36 ~~following table represents a schedule of our contractual obligations and commitments as of September 30, 2004:~~

	Payments Due by Period (In thousands)
	Total		Less Than 1 Year		1-3 Years		3-5 Years		After 5 Years
Contractual Obligations:
Long-term debt
Subordinated Notes	$	20,350	$	-	$	-	$	20,350	$	-
Other notes payable		192		157		35		-		-
Operating leases		13,985		4,551		6,231		1,982		1,221
	$	34,527	$	4,708	$	6,266	$	22,332	$	1,221

Variation in Quarterly Operating Results

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

ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We face a number of market risk exposures including risks related to cash and cash equivalents, accounts receivable and interest rates. Cash and cash equivalents are held primarily in one financial institution. We

~~Index~~CONTINGENT toLIABILITIES ~~Financial~~AND ~~Statements~~COMMITMENTS

~~perform~~Our ~~periodic~~former ~~evaluations~~workers’ ofcompensation ~~the~~carrier ~~relative~~requires ~~credit~~the ~~standing~~estimated ~~of this financial institution. The concentration of credit risk with respect to accounts~~loss ~~receivable,~~fund ~~which are primarily health care industry related, represent a risk~~ to usbe ~~given~~secured ~~the~~by ~~current~~surety ~~environment in the health care industry~~bonds. The ~~risk~~carrier isreceived ~~somewhat~~a ~~limited~~downgrade ~~due~~in toits ~~the~~Standard ~~large number of payors including Medicare~~ and ~~Medicaid,~~Poors ~~insurance companies,~~rating ~~individuals~~on ~~and~~its ~~the~~surplus ~~diversity~~notes ofafter ~~geographic~~they ~~locations~~failed ~~in which we operate. However, we have substantial geographic density in the eastern United States, which we believe exposes us~~ to ~~payor~~make ~~initiated~~a ~~reimbursement~~scheduled ~~changes~~interest payment. InThe ~~addition,~~carrier ~~we are~~subsequently ~~exposed~~requested ~~to risk for~~ a ~~substantial~~voluntary ~~amount~~withdrawal of ~~accounts~~their ~~receivable~~AM Best ~~for~~rating a(see ~~small~~“Liquidity ~~number of hemophilia factor patients~~ and ~~disruptions~~Capital toResources” ~~cash~~for ~~collections~~a ~~due~~more todetailed ~~the inability of some payors to process claims~~discussion).

~~Our~~On ~~Notes~~October 1, ~~issued in 1998~~2006, ~~have~~we acompleted ~~fixed~~our ~~coupon~~annual ~~rate~~renewal of ~~10%. The fair value of~~ our ~~Notes~~risk ismanagement ~~subject~~programs ~~to change as a result of changes in market prices or interest rates. We estimate potential changes in the fair value of interest rate sensitive financial instruments based on the hypothetical increase~~ (orsee ~~decrease)~~“Liquidity in interest rates. Our use of this methodology to quantify the market risk of such instruments should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions. The quantitative information about market risk is necessarily limited because it does not take into account other factors such as our financial performance and ~~credit~~Capital ~~ratings~~Resources”).

~~Based~~The onCompany areceived ~~hypothetical~~notification ~~immediate 150 basis point increase in interest rates at September 30, 2004 and 2003, the market value~~ of ~~our Notes would be reduced by approximately $0.8 million and $1.0 million, respectively. Conversely,~~ a ~~150~~claim ~~basis~~from ~~point~~one ~~decrease~~commercial inpayor ~~interest~~primarily ~~rates~~relating ~~would~~to ~~result in a net increase in the market value of~~ our ~~Notes~~discontinued ~~outstanding at September 30, 2004 and 2003 of~~Pharmacy ~~approximately~~operation ~~$0.9~~(see ~~million~~Note ~~and $1~~11).0 ~~million, respectively.~~

~~ITEM~~We 8have entered into employment agreements with certain employees which provide, among other things, salary, benefits and perquisites, as well as additional compensation, for certain changes in control or a failure to comply with any material terms of the agreements. ~~FINANCIAL~~We ~~STATEMENTS~~have ~~AND~~a Non-Qualified ~~SUPPLEMENTARY~~Deferred ~~DATA~~Compensation Plan for certain of our employees. The deferred compensation liability as of September 30, 2006 and 2005 was approximately $1.4 million and $1.6 million, respectively. On April 6, 2006, we adopted a Long-Term Incentive Compensation Plan (“LTIP”) for the Senior Management team. Under the LTIP, cash awards may be granted based upon the achievement of certain Performance Goals which are established at the outset of each three year Performance Period. The LTIP will become the primary component of our long term compensation strategies and the future use of existing equity compensation programs is expected to decline.

~~Our~~The ~~consolidated~~following ~~financial~~table ~~statements~~represents ~~and~~a ~~supplemental~~ schedule ~~and the related notes as~~ of ~~September~~our ~~30,~~contractual ~~2004~~obligations and ~~2003,~~commitments ~~and~~as ~~for each~~ of ~~the three years in the period ended~~ September 30, ~~2004, together with the independent registered public accounting firm’s report are set forth on pages 43 - 68 of this Annual Report on Form 10-K.~~ 2006:

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


	Payments Due by Period (In thousands)
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Contractual Obligations:
Operating leases-continuing operations	$	8,539	$	1,970	$	4,347	$	2,222	$	-
Operating leases-discontinued operations		2,702		979		1,608		115		-

	$	11,241	$	2,949	$	5,955	$	2,337	$	-

~~During~~Variation ~~the~~in ~~past~~Quarterly ~~two fiscal years and the period from October 1, 2004 to the date hereof, we have not changed our independent~~Operating ~~registered~~Results ~~public accounting firm, and there have been no reportable disagreements with our auditors regarding accounting principles or practices or financial disclosure matters.~~

~~ITEM~~Our ~~9(A)~~quarterly results may vary significantly depending primarily on factors such as re-hospitalizations of patients, seasonality, the timing of new branch office openings, acquisitions of businesses, public school calendars and pricing pressures due to legislative and regulatory initiatives to contain healthcare costs. ~~CONTROLS~~Because ~~AND~~of ~~PROCEDURES~~these factors, our operating results for any particular quarter may not be indicative of the results for the full fiscal year.

~~(a)~~37 Evaluation of disclosure controls and procedures. Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that our disclosure controls and procedures are adequate and effective in timely alerting them to material information relating to our company (including our consolidated subsidiaries) required to be included in our periodic SEC filings.

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

ITEM 9(B). OTHER INFORMATION.

None.

~~Index~~ITEM to7A. ~~Financial~~QUANTITATIVE ~~Statements~~AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We face a number of market risk exposures including risks related to cash and cash equivalents, accounts receivable and interest rates. Cash and cash ~~PART~~equivalents ~~III~~are held in a limited number of financial institutions and with institutional investors. We perform periodic evaluations of the relative financial positions and credit standings of these financial intermediaries. As part of our corporate cash management program, we are investing the retained proceeds from the sale of the Pharmacy and RTES businesses in accordance with established investment policies. We have invested in a portfolio of highly liquid investment grade securities which are managed for us by institutional investors. The concentration of credit risk with respect to accounts receivable, which are primarily healthcare industry related, represent a risk to us given the current environment in the healthcare industry. The risk is somewhat limited due to the large number of payors including Medicare and Medicaid, insurance companies, individuals and the diversity of geographic locations in which we operate. However, we have substantial geographic density in the eastern United States, which we believe exposes us to payor initiated reimbursement changes.

~~ITEM~~Our Notes, issued in 1998 and redeemed in full during the first quarter of fiscal 2006, had a fixed coupon rate of 10%. ~~DIRECTORS~~The ~~AND~~fair ~~EXECUTIVE~~value ~~OFFICERS~~of OFour ~~THE~~Notes ~~REGISTRANT~~were subject to change as a result of changes in market prices or interest rates. We estimated potential changes in the fair value of interest rate sensitive financial instruments based on the hypothetical increase (or decrease) in interest rates. Our use of this methodology to quantify the market risk of such instruments should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions. The quantitative information about market risk is necessarily limited because it does not take into account other factors such as our financial performance and credit ratings.

~~Information~~Based ~~relating~~on ~~to our Board of Directors set forth under the captions “Proposal 1—Election of Directors—Nominees for Election as~~a ~~Directors~~hypothetical atimmediate ~~the~~150 ~~2005~~basis ~~Annual~~point ~~Meeting”~~increase ~~and “Proposal 1—Election of Directors—Continuing Directors”~~ in ~~our~~interest ~~Proxy~~rates ~~Statement~~at ~~for~~September 30, ~~our~~ 2005 ~~Annual Meeting of Stockholders (“2005 Proxy Statement”) is incorporated herein by reference. Information relating to our executive officers is~~, ~~pursuant to Instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K, set forth at Part I, Item 4(A) of this Annual Report on Form 10-K under~~ the ~~caption~~ ~~“Executive~~market ~~Officers~~value of ~~the~~our ~~Registrant.”~~Notes ~~Information~~would ~~regarding~~be ~~compliance~~reduced by ~~our~~approximately ~~directors~~$0.6 ~~and~~million. ~~executive~~Conversely, ~~officers~~a ~~and~~150 ~~owners~~basis ofpoint ~~more~~decrease ~~than~~in ~~ten~~interest ~~percent~~rates ofwould ~~our~~result ~~Common~~in ~~Stock with the reporting requirements of Section 16(~~a~~) of the~~ ~~Securities~~net ~~Exchange~~increase ~~Act~~in ~~of 1934, as amended, set forth under~~ the ~~caption~~market ~~“Section~~value ~~16(a)~~ of ~~the Securities Exchange Act Beneficial Ownership Reporting Compliance” in the 2005 Proxy Statement is incorporated herein by reference. Information relating to~~ our ~~financial~~Notes ~~expert~~outstanding ~~serving~~at ~~on our Audit Committee (Item 401(h) of Regulation S-K)~~September 30, ~~and~~2005 ~~compliance with Section 16(a)~~ of ~~the~~approximately ~~Exchange~~$0.6 ~~Act (Item 405 of Regulation S-K), is set forth under the caption “Committees of the Board” in our 2005 Proxy Statement and is incorporated herein by reference~~million.

~~Code of~~ITEM ~~Ethics~~8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

WeOur ~~have~~consolidated ~~adopted~~financial astatements ~~Code~~and ofsupplemental ~~Ethics~~schedule and ~~Business Conduct,~~the ~~which~~related ~~applies~~notes toas ~~all~~ of ~~our employees~~September 30, ~~officers~~2006 and ~~directors.~~2005, ~~Our Code of Ethics~~ and ~~Business~~for ~~Conduct~~each ~~meets~~of the ~~requirements of a “code of ethics” as defined by Item 406 of Regulation S-K, and applies to our Chief Executive~~three ~~Officer~~years ~~and~~in ~~Chief Financial Officer (who is~~ the ~~principal~~period ~~financial~~ended ~~and principal accounting officer)~~September 30, ~~as well as all other employees~~2006, astogether ~~indicated~~with ~~above. Our Code of Ethics and Business Conduct also meets~~ the ~~requirements~~report of aindependent ~~code~~registered ofpublic ~~ethics~~accounting firm and ~~business~~ ~~conduct~~report ~~under the Nasdaq listing standards. Our Code~~ of ~~Ethics~~independent ~~and~~registered ~~Business~~public ~~Conduct~~accounting isfirm ~~available~~ on ~~our~~management’s ~~website~~assessment atand ~~www.psakids.com under~~ the ~~heading~~effectiveness ~~“Investor~~of internal ~~Relations.”~~control Weover ~~will~~financial ~~also~~reporting, ~~provide~~are aset ~~copy~~forth ofon ~~the~~pages ~~Code~~46-81 of ~~Ethics and~~this ~~Business~~Annual ~~Conduct~~Report toon ~~stockholders~~Form ~~at no charge upon written request~~10-K.

ITEM 119. ~~EXECUTIVE~~CHANGES ~~COMPENSATION~~IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

~~Information~~During ~~relating~~the topast ~~management~~two ~~compensation~~fiscal ~~set~~years ~~forth~~and ~~under~~ the ~~captions~~period ~~“Proposal~~from October 1~~—Election~~, of2006 ~~Directors—Directors Compensation”,~~to ~~“Executive~~the ~~Compensation”~~date ~~and~~hereof, ~~“Stock~~we ~~Performance~~have ~~Graph”~~not inchanged our independent ~~2005~~registered ~~Proxy~~public ~~Statement~~accounting ~~is incorporated herein by reference~~firm, ~~except~~and ~~for~~there ~~the~~have ~~information~~been ~~set~~no ~~forth~~reportable indisagreements ~~the~~with ~~section~~our ~~entitled~~auditors ~~“Executive Compensation—Report~~regarding ofaccounting ~~the~~principles ~~Compensation~~or ~~Committee~~practices ofor ~~the~~financial ~~Board~~disclosure ~~of Directors on Executive Compensation” which specifically is not so incorporated by reference~~matters.

ITEM 129A. ~~SECURITY~~CONTROLS ~~OWNERSHIP OF CERTAIN BENEFICIAL OWNERS~~ AND ~~MANAGEMENT~~PROCEDURES.

~~Information~~Management’s ~~regarding~~annual ~~ownership~~report ofon ~~our~~internal $0control over financial reporting.01 Section 404 ~~par~~of ~~value~~the ~~Common~~Sarbanes-Oxley ~~Stock~~Act byof 2002 ~~certain~~requires ~~persons~~management to include in this Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal control over financial reporting, as ~~set~~well ~~forth~~as ~~under~~an attestation report from our independent registered public accounting firm on management’s assessment of the ~~caption~~effectiveness ~~“Stock~~of ~~Ownership”~~our ininternal control over financial reporting. Management’s annual report on internal control over financial reporting and the related attestation report from our ~~2005~~independent ~~Proxy~~registered ~~Statement~~public isaccounting firm are located in Item 8 herein and are incorporated herein by reference.

~~ITEM~~38 ~~13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS~~

Information regarding certain relationships and transactions between our company and certain of our affiliates as set forth under the caption “Certain Relationships and Related Transactions” in our 2005 Proxy Statement is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding principal accountant fees and services between us and our independent registered public accounting firm, Ernst & Young LLP is set forth under the caption “Principal Accountant Fees and Services” in our 2005 Proxy Statement and is incorporated herein by reference.

~~Index~~Evaluation of disclosure controls and procedures. Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that our disclosure controls and procedures are adequate and effective in timely alerting them to ~~Financial~~material ~~Statements~~information relating to our company (including our consolidated subsidiaries) required to be included in our periodic SEC filings.

Changes in internal controls over ~~PART~~financial IVreporting. There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 159B. ~~EXHIBITS~~OTHER ~~AND FINANCIAL STATEMENT SCHEDULES~~INFORMATION.

~~(a) Documents Filed as Part of this Report~~None.

~~(1)~~39 ~~Financial Statements~~

Our consolidated financial statements and the related report of independent auditors which are required to be filed as part of this Report are included in this Annual Report on Form 10-K. These consolidated financial statements are as follows:

• Consolidated Balance Sheets as of September 30, 2004 and 2003.

• Consolidated Statements of Operations for the years ended September 30, 2004, 2003 and 2002.

• Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2004, 2003 and 2002.

• Consolidated Statements of Cash Flows for the years ended September 30, 2004, 2003 and 2002.

• Notes to Consolidated Financial Statements.

(2) Financial Statement Schedules

The financial statement schedule referred to in Item 8 is described in the “Index to Financial Statement Schedule” included in this Report on page 67. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not significant under the related instructions or are inapplicable and therefore have been omitted.

(3) Exhibits

See (b) below.

(b) Exhibits

The following exhibits are filed with or incorporated by reference in this Report. Where such filing is made by incorporation by reference to a previously filed registration statement or report, such registration statement or report is identified in parentheses. We will furnish any exhibit at no charge upon request to Pediatric Services of America, Inc., 310 Technology Parkway, Norcross, Georgia 30092-2929.

2.0		Shareholder Rights Plan dated September 22, 1998 (incorporated by reference to the Company’s Registration Statement on Form 8-A filed October 13, 1998).
2.1		Rights Agreement dated September 22, 1998, by and between Mellon Shareholder Services, LLC and the Company (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, dated September 22, 1998).
3.1		Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Registration No. 33-77880) filed on May 31, 1994).
3.4		Certificate of Correction to Certificate of Amendment of the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 1997).
3.5		Amended and Restated Bylaws of the Company, adopted September 22, 1998 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated September 22, 1998).
4.1		Indenture dated as of April 16, 1998, relating to the $75 million 10% Senior Subordinated Notes due 2008, Series A (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-4 filed on May 6, 1998).
10.1		Credit Agreement by and among the Company, its Subsidiaries and General Electric Capital Corporation, dated January 27, 2004 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2003).

~~Index~~PART toIII ~~Financial Statements~~

10.2	First Amendment to Credit Agreement by and among the Company, its Subsidiaries and General Electric Corporation, dated May 12, 2004 (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
10.9	Executive Compensation Plans and Arrangements:
	(e)	Pediatric Services of America, Inc. 401(k) Savings Plan (incorporated by reference to Exhibit 10.8 of the Company’s Registration Statement of Form S-1 filed on May 31, 1994).
	(f)	Pediatric Services of America, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.8(f) of the Company’s Annual Report Form 10-K for the fiscal year ended September 30, 1995).
	(t)	Pediatric Services of America, Inc. Amended and Restated Stock Option Plan, effective November 28, 2002 (incorporated by reference to Exhibit 10.9(t) of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002).
	(u)	Pediatric Services of America, Inc. Amended and Restated Directors’ Stock Option Plan, effective November 28, 2002 (incorporated by referenced to Exhibit 10.9(u) of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002).
	(v)	Amendment No. 1 to the Pediatric Services of America, Inc. Employee Stock Purchase Plan, dated February 1, 2002 (incorporated by reference to Exhibit 10.9(v) of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002).
	(w)	Amended and Restated Employment Agreement, dated November 7, 2002 between the Company and Joseph D. Sansone (incorporated by reference to Exhibit 10.9(w) of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002).
	(x)	Amended and Restated Employment Agreement, dated November 7, 2002 between the Company and James M. McNeill (incorporated by reference to Exhibit 10.9(x) of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002).
	(z)	Non-Qualified Deferred Compensation Plan, effective January 1, 2004 (incorporated by reference to Exhibit 10.9(z) of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
	(aa)	Amendment No. 2 to the Company’s Amended and Restated Stock Option Plan, datedDecember 3, 2003 (incorporated by reference to Exhibit 10.9(aa) of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
	(bb)	Amendment No. 2 to the Company’s Amended and Restated Directors Stock Option Plan, dated December 3, 2003 (incorporated by reference to Exhibit 10.9(bb) of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
	(cc)	Amendment No. 3 to the Company’s Amended and Restated Stock Option Plan, adopted August 17, 2004, filed herewith.
	(dd)	Separation Agreement by and between the Company and Joseph D. Sansone, effective August 24, 2004, filed herewith.
	(ee)	Employment Agreement by and between the Company and Edward K. Wissing, effective August 9, 2004, filed herewith.
	(ff)	Employment Agreement by and between the Company and Daniel J. Kohl, effective December 15, 2004, filed herewith.
21	Subsidiaries of the Company, filed herewith.
23	Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP, filed herewith.
24	Powers of Attorney, filed herewith.
31.1	Rule 13a – 14(a)/15d – 14(a) Certification (CEO), filed herewith.
31.2	Rule 13a – 14(a)/15d – 14(a) Certification (CFO), filed herewith.
32.1	Section 1350 Certification (CEO), filed herewith.
32.2	Section 1350 Certification (CFO), filed herewith.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

40Information relating to our Board of Directors set forth under the captions “Proposal 1—Election of Directors—Nominees for Election as Directors at the 2007 Annual Meeting” and “Proposal 1—Election of Directors—Continuing Directors” in our Proxy Statement for our 2007 Annual Meeting of Stockholders (“2007 Proxy Statement”) is incorporated herein by reference. Information relating to our executive officers is, pursuant to Instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K, set forth at Part I, Item 4(A) of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant.” Information regarding compliance by our directors and executive officers and owners of more than ten percent of our Common Stock with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, set forth under the caption “Section 16(a) of the Securities Exchange Act Beneficial Ownership Reporting Compliance” in the 2007 Proxy Statement is incorporated herein by reference. Information relating to our financial expert serving on our Audit Committee (Item 401(h) of Regulation S-K), and compliance with Section 16(a) of the Exchange Act (Item 405 of Regulation S-K), is set forth under the caption “Committees of the Board” in our 2007 Proxy Statement and is incorporated herein by reference.

Code of Ethics

We have adopted a Code of Ethics and Business Conduct, which applies to all of our employees, officers and directors. Our Code of Ethics and Business Conduct meets the requirements of a “code of ethics” as defined by Item 406 of Regulation S-K, and applies to our Chief Executive Officer and Chief Financial Officer (who is the principal financial and principal accounting officer), as well as all other employees, as indicated above. Our Code of Ethics and Business Conduct also meets the requirements of a code of ethics and business conduct under the Nasdaq listing standards. Our Code of Ethics and Business Conduct is available on our website at www.psahealthcare.com under the heading “Investor Relations.” We will also provide a copy of the Code of Ethics and Business Conduct to stockholders at no charge upon written request.

ITEM 11. EXECUTIVE COMPENSATION

Information relating to management compensation set forth under the captions “Proposal 1—Election of Directors—Directors Compensation”, “Executive Compensation” and “Stock Performance Graph” in our 2007 Proxy Statement is incorporated herein by reference, except for the information set forth in the section entitled “Executive Compensation—Report of the Compensation Committee of the Board of Directors on Executive Compensation” which specifically is not so incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding ownership of our $0.01 par value Common Stock by certain persons as set forth under the caption “Stock Ownership” in our 2007 Proxy Statement is incorporated herein by reference.

Equity Compensation Plan Information

Information in tabular form relating to securities authorized for issuance under our equity compensation plans is set forth under the caption “Equity Compensation Plan Information” in our 2007 Proxy Statement and is incorporated herein by reference.

~~Index~~ ITEM 13. CERTAIN toRELATIONSHIPS ~~Financial~~AND ~~Statements~~RELATED TRANSACTIONS

Information regarding certain relationships and transactions between our company and certain of our affiliates as set forth under the caption ~~SIGNATURES~~“Certain Relationships and Related Transactions” in our 2007 Proxy Statement is incorporated herein by reference.

~~Pursuant to the~~ ~~requirements~~ITEM 14. PRINCIPAL ofACCOUNTANT ~~Section~~FEES 13AND orSERVICES ~~15(d) 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.~~

~~PEDIATRIC~~Information ~~SERVICES~~regarding OFprincipal ~~AMERICA,~~accountant ~~INC.~~fees ~~(Registrant)~~and ~~By:~~services ~~/S/~~between ~~EDWARD~~us K.and ~~WISSING~~our ~~Edward~~independent K.registered ~~Wissing~~public ~~Chairman~~accounting offirm, Ernst & Young LLP is set forth under the ~~Board,~~caption ~~President~~“Principal Accountant Fees and ~~Chief~~Services” ~~Executive~~in ~~Officer~~our 2007 Proxy Statement and is incorporated herein by reference.

~~Pursuant~~41 ~~to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities set forth on December 14, 2004.~~

Signature	Title	Date
/s/ EDWARD K. WISSING Edward K. Wissing	Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)	December 14, 2004
/s/ JAMES M. MCNEILL James M. McNeill	Senior Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)	December 14, 2004
* Michael J. Finn	Director	December 14, 2004
* Robert P. Pinkas	Director	December 14, 2004
* Michael E. Axelrod	Director	December 14, 2004
* Susan J. Kelley	Director	December 14, 2004
* David Crane	Director	December 14, 2004

*By:		/s/ JAMES M. MCNEILL				December 14, 2004
		James M. McNeill (Attorney in Fact)

~~Index~~PART toIV ~~Financial Statements~~

~~[THIS~~ ITEM 15. EXHIBITS ~~PAGE~~AND ~~INTENTIONALLY~~FINANCIAL ~~LEFT~~STATEMENT ~~BLANK]~~SCHEDULES

42(a) Documents Filed as Part of this Report.

(1)

Financial Statements

•

Consolidated Balance Sheets as of September 30, 2006 and 2005.

•

Consolidated Statements of Operations for the years ended September 30, 2006, 2005 and 2004.

•

Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2006, 2005 and 2004.

•

Consolidated Statements of Cash Flows for the years ended September 30, 2006, 2005 and 2004.

•

Notes to Consolidated Financial Statements.

(2)

Financial Statement Schedules

The financial statement schedule referred to in Item 8 is described in the “Index to Financial Statement Schedule” included in this Report on page 80. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not significant under the related instructions or are inapplicable and therefore have been omitted.

(3)

Exhibits

See (b) below.

(b) Exhibits


2.0		Shareholder Rights Plan dated September 22, 1998 (incorporated by reference to the Company’s Registration Statement on Form 8-A filed October 13, 1998).

2.1		Rights Agreement dated September 22, 1998, by and between Mellon Shareholder Services, LLC and the Company (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, dated September 22, 1998).

3.1		Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Registration No. 33-77880) filed on May 31, 1994).

3.4		Certificate of Correction to Certificate of Amendment of the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10- Q for the quarter ended December 31, 1997).


3.2	Amended and Restated Bylaws of the Company, adopted May 3, 2005 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated May 3, 2005).

10.1	Asset Purchase Agreement, dated August 25, 2006, as amended September 29, 2006, October 30, 2006 and November 6, 2006 by and among Lincare, Inc., the Company and certain Company affiliates named therein filed herewith.

10.1(a)	First Side Letter, dated August 25, 2006, as amended September 29, 2006, October 30, 2006 and November 6, 2006, by and among Lincare, Inc., the Company and certain affiliates named therein, filed and herewith.

10.1(b)	Second Side Letter, dated November 6, 2006, by and among Lincare, Inc., the Company and certain affiliates named therein and filed herewith.

10.2	Asset Purchase Agreement, dated May 9, 2006, by and between Pediatric Services of America, Inc., a Georgia corporation and Melmedica Children’s Healthcare, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).

10.3	Asset Purchase Agreement, dated October 7, 2005, by and among Accredo Health Group, Inc., the Company and certain Company affiliates named therein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 10-K dated October 7, 2005).

10.9	Executive Compensation Plans and Arrangements:

	(e)	Pediatric Services of America, Inc. 401(k) Savings Plan (incorporated by reference to Exhibit 10.8 of the Company’s Registration Statement of Form S-1 filed on May 31, 1994).

	(f)	Pediatric Services of America, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.8(f) of the Company’s Annual Report Form 10-K for the fiscal year ended September 30, 1995).

	(t)	Pediatric Services of America, Inc. Amended and Restated Stock Option Plan, effective November 28, 2002 (incorporated by reference to Exhibit 10.9(t) of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002).

	(u)	Pediatric Services of America, Inc. Amended and Restated Directors’ Stock Option Plan including Amendment No. 1, effective November 28, 2002 (incorporated by referenced to Exhibit 10.9(u) of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002).

	(v)	Amendment No. 1 to the Pediatric Services of America, Inc. Employee Stock Purchase Plan, dated February 1, 2002 (incorporated by reference to Exhibit 10.9(v) of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002).

	(x)	Amended and Restated Employment Agreement, dated November 7, 2002 between the Company and James M. McNeill (incorporated by reference to Exhibit 10.9(x) of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002).

	(aa)	Amendment No. 2 to the Company’s Amended and Restated Stock Option Plan, dated December 3, 2003 (incorporated by reference to Exhibit 10.9(aa) of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).

	(bb)	Amendment No. 2 to the Company’s Amended and Restated Directors Stock Option Plan, dated December 3, 2003 (incorporated by reference to Exhibit 10.9(bb) of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).

	(cc)	Amendment No. 3 to the Company’s Amended and Restated Stock Option Plan, adopted August 17, 2004 (incorporated by reference to Exhibit 10.9(cc) of the Company’s Annual Report on Form 10-K for fiscal year ended September 30, 2004).

	(ff)	Employment Agreement by and between the Company and Daniel J. Kohl, effective December 15, 2004 (incorporated by reference to Exhibit 10.9(ff) of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004).

~~PEDIATRIC~~43 ~~SERVICES OF AMERICA, INC.~~

INDEX TO FINANCIAL STATEMENTS

		Page No.
Consolidated Balance Sheets		44
Consolidated Statements of Operations		46
Consolidated Statements of Stockholders’ Equity		47
Consolidated Statements of Cash Flows		48
Notes to Consolidated Financial Statements		49
Report of Independent Registered Public Accounting Firm		66

/s/ JAMES M. MCNEILL

December 12, 2006

James M. McNeill

(Attorney in Fact)


	(hh)	Second Amendment to Employment Agreement by an between the Company and James M. McNeill, dated July 29, 2005 (incorporated by reference to Exhibit 10.9(hh) of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).

	(ii)	First Amendment to Employment Agreement by and between the Company and Daniel J. Kohl, dated July 29, 2005 (incorporated by reference to Exhibit 10.9(gg) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).

	(jj)	Pediatric Services of America, Inc., Long Term Incentive Plan, adopted and approved April 6, 2006 (effective October 1, 2005) (incorporated by reference to Exhibit 10.9(jj) to the Company’s Current Report on Form 8-K dated April 6, 2006).

	(kk)	Amended and Restated Non-qualified Deferred Compensation Plan, adopted and approved May 3, 2006 (effective January 1, 2006) (incorporated by reference to Exhibit 10.9(kk) to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).

21	Subsidiaries of the Company, filed herewith.

23	Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP, filed herewith.

24	Powers of Attorney, filed herewith.

31.1	Rule 13a – 14(a)/15d – 14(a) Certification (CEO), filed herewith.

31.2	Rule 13a – 14(a)/15d – 14(a) Certification (CFO), filed herewith.

32.1	Section 1350 Certification (CEO), filed herewith.

32.2	Section 1350 Certification (CFO), filed herewith.

~~PEDIATRIC~~44 ~~SERVICES OF AMERICA, INC.~~

CONSOLIDATED BALANCE SHEETS

	September 30,
	2004			2003
ASSETS
Current Assets:
Cash and cash equivalents	$	8,159,313		$	9,170,678
Accounts receivable, less allowances for doubtful accounts of $4,840,000 and $3,900,000, respectively		40,403,331			37,043,383
Prepaid expenses		1,102,023			991,454
Deferred income taxes		6,557,315			4,778,144
Workers’ compensation loss fund		3,326,570			1,632,616
Inventory		2,892,623			2,723,658
Insurance recoveries		3,472,980			2,227,408
Other current assets		629,619			326,711
Total current assets		66,543,774			58,894,052
Property and equipment:
Home care equipment held for rental		32,438,669			30,009,185
Furniture and fixtures		12,199,736			11,401,752
Vehicles		504,615			700,249
Leasehold improvements		2,391,708			1,960,926
		47,534,728			44,072,112
Accumulated depreciation and amortization		(38,076,273	)		(36,343,169	)
		9,458,455			7,728,943
Other assets:
Goodwill, less accumulated amortization of approximately $9,613,000		36,539,761			36,539,761
Certificates of need, less accumulated amortization of approximately $627,000 and $604,000, respectively		45,876			68,815
Deferred financing fees, less accumulated amortization of approximately $594,000 and $709,000, respectively		777,188			631,568
Noncompete agreements, less accumulated amortization of approximately $1,220,000 and $1,181,000, respectively		60,333			99,000
Deferred income taxes		1,301,077			2,916,141
Workers’ compensation bond collateral		2,311,394			2,779,427
Insurance cash surrender value and recoveries		9,741,966			6,778,439
Other		302,400			290,545
		51,079,995			50,103,696
Total assets	$	127,082,224		$	116,726,691

See accompanying notes.

~~Index~~ SIGNATURES ~~to Financial Statements~~

~~PEDIATRIC~~Pursuant ~~SERVICES~~to OFthe requirements ~~AMERICA~~of Section 13 or 15(d) of the Securities Exchange Act of 1934, ~~INC~~the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

~~CONSOLIDATED~~PEDIATRIC ~~BALANCE~~SERVICES ~~SHEETS—~~OF AMERICA, INC. (~~Continued~~Registrant) By: /s/ DANIEL J. KOHL Daniel J. Kohl President and Chief Executive Officer

	September 30,
	2004		2003
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,671,587	$	6,045,050
Accrued compensation		6,028,909		5,137,517
Income taxes payable		280,741		1,381,868
Accrued insurance		6,935,152		5,799,272
Refunds payable		1,489,118		1,176,410
Accrued interest		998,450		950,879
Other accrued liabilities		2,452,652		2,062,311
Deferred revenue		800,506		733,235
Current maturities of long-term obligations		156,508		178,335
Total current liabilities		23,813,623		23,464,877
Long-term accrued insurance		14,045,908		10,301,763
Deferred compensation		2,385,794		1,382,173
Long-term obligations, net of current maturities		20,385,221		20,514,686
Total Liabilities		60,630,546		55,663,499
Redeemable preferred stock, $.01 par value, 2,000,000 shares authorized, no shares issued and outstanding		-		-
Stockholders’ equity:
Common stock, $.01 par value, 80,000,000 shares authorized 7,031,162 and 6,878,504 shares issued and outstanding in 2004 and 2003, respectively		70,312		68,785
Additional paid-in capital		50,621,154		49,246,615
Retained earnings		15,760,212		11,747,792
Total stockholders’ equity		66,451,678		61,063,192
Total liabilities and stockholders’ equity	$	127,082,224	$	116,726,691

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities set forth on December 12, 2006.

See accompanying notes.


Signature	Title	Date

/s/ DANIEL J. KOHL Daniel J. Kohl	President and Chief Executive Officer (Principal Executive Officer)	December 12, 2006

/s/ JAMES M. MCNEILL James M. McNeill	Senior Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)	December 12, 2006

* Edward K. Wissing	Chairman of the Board	December 12, 2006

* Michael J. Finn	Director	December 12, 2006

* Robert P. Pinkas	Director	December 12, 2006

* Michael E. Axelrod	Director	December 12, 2006

* Phyllis Yale	Director	December 12, 2006

* David Crane	Director	December 12, 2006

~~Index~~ PEDIATRIC toSERVICES ~~Financial~~OF ~~Statements~~AMERICA, INC.

~~PEDIATRIC~~INDEX ~~SERVICES~~TO OFFINANCIAL ~~AMERICA,~~STATEMENTS ~~INC.~~

CONSOLIDATED STATEMENTS OF OPERATIONS


		Page No.
Management’s Annual Report on Internal Control Over Financial Reporting		47

Consolidated Balance Sheets		48

Consolidated Statements of Operations		50

Consolidated Statements of Stockholders’ Equity		51

Consolidated Statements of Cash Flows		52

Notes to Consolidated Financial Statements		53

Report of Independent Registered Public Accounting Firm		78

Report of Independent Registered Public Accounting Firm On Management’s Assessment and the Effectiveness of Internal Control Over Financial Reporting		79

	Year ended September 30,
	2004			2003			2002
Net revenue	$	239,773,673		$	215,592,491		$	197,459,323
Costs and expenses:
Costs of goods and services		135,236,038			117,944,599			106,708,718
Other operating costs and expenses
Salaries, wages and benefits		42,705,234			40,144,551			38,426,407
Business insurance		7,531,805			7,065,339			4,795,169
Overhead		16,586,600			15,292,657			14,325,293
Other operating costs and expenses		66,823,639			62,502,547			57,546,869
Corporate, general and administrative
Salaries, wages and benefits		15,767,636			13,838,286			13,350,943
Business insurance		147,962			318,721			284,006
Professional services		2,804,109			2,124,597			1,782,728
Overhead		2,941,957			2,748,959			2,848,333
Corporate, general and administrative		21,661,664			19,030,563			18,266,010
Provision for doubtful accounts		3,652,011			1,475,355			1,929,672
Depreciation and amortization		3,716,227			4,054,350			4,068,939
Total costs and expenses		231,089,579			205,007,414			188,520,208
Operating income		8,684,094			10,585,077			8,939,115
Other income		5,600			56,256			-
Gain on early extinguishment of debt		-			99,670			417,117
Interest income		139,148			138,074			166,980
Interest expense		(2,378,036	)		(2,429,324	)		(2,765,893	)
Income from continuing operations, before income tax expense (benefit)		6,450,806			8,449,753			6,757,319
Income tax expense (benefit)		2,438,386			3,323,288			(6,942,721	)
Income from continuing operations		4,012,420			5,126,465			13,700,040
Discontinued operations:
Gain on disposal of discontinued operations, net of tax		-			-			360,831
Net income	$	4,012,420		$	5,126,465		$	14,060,871
Basic net income per share data:
Income from continuing operations	$	0.58		$	0.75		$	2.02
Gain on disposal of discontinued operations, net of tax		-			-			0.05
Net income	$	0.58		$	0.75		$	2.07
Diluted net income per share data:
Income from continuing operations	$	0.54		$	0.72		$	1.92
Gain on disposal of discontinued operations, net of tax		-			-			0.05
Net income	$	0.54		$	0.72		$	1.97
Weighted average shares outstanding:
Basic		6,948,254			6,860,901			6,790,862
Diluted		7,374,197			7,096,303			7,150,051

See accompanying notes.

~~Index~~ MANAGEMENT’S toANNUAL ~~Financial~~REPORT ~~Statements~~ON

~~PEDIATRIC~~INTERNAL ~~SERVICES~~CONTROL OFOVER ~~AMERICA,~~FINANCIAL ~~INC.~~REPORTING

~~CONSOLIDATED~~Management ~~STATEMENTS~~of OFPediatric ~~STOCKHOLDERS’~~Services ~~EQUITY~~of America, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

	CommonStock			AdditionalPaid-inCapital			RetainedEarnings(Deficit)			TotalStockholders’Equity
Balance at October 1, 2001	$	67,113		$	48,493,011		$	(7,410,258	)	$	41,149,866
139,857 shares of common stock issued through exercise of stock options		1,398			452,379			-			453,777
12,841 shares of retired treasury stock		(128	)		(102,600	)		(29,286	)		(132,014	)
Disqualifying disposition of stock options		-			162,028			-			162,028
Nonqualified stock options		-			79,243			-			79,243
Net income (1)		-			-			14,060,871			14,060,871
Balance at September 30, 2002		68,383			49,084,061			6,621,327			55,773,771
40,232 shares of common stock issued through exercise of stock options		402			124,490			-			124,892
Disqualifying disposition of stock options		-			38,064			-			38,064
Net income (1)		-			-			5,126,465			5,126,465
Balance at September 30, 2003		68,785			49,246,615			11,747,792			61,063,192
152,658 shares of common stock issued through exercise of stock options		1,527			662,803			-			664,330
Disqualifying disposition of stock options		-			342,693			-			342,693
Nonqualified stock options		-			10,032			-			10,032
Compensation expense		-			359,011			-			359,011
Net income (1)		-			-			4,012,420			4,012,420
Balance at September 30, 2004	$	70,312		$	50,621,154		$	15,760,212		$	66,451,678

•

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

~~(1)~~• ~~Comprehensive~~provide ~~net~~reasonable ~~income~~assurance isthat ~~the~~transactions ~~same~~are recorded as ~~reported~~necessary ~~net~~to ~~income.~~permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

~~See~~• ~~accompanying~~provide ~~notes.~~reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

47Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of September 30, 2006.

The Company’s independent registered public accounting firm has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting, which report appears herein.

~~Index~~ PEDIATRIC toSERVICES ~~Financial~~OF ~~Statements~~AMERICA, INC.

~~PEDIATRIC~~CONSOLIDATED ~~SERVICES~~BALANCE OFSHEETS ~~AMERICA, INC.~~

CONSOLIDATED STATEMENTS OF CASH FLOWS


	September 30,
	2006			2005
ASSETS
Current Assets:
Cash and cash equivalents	$	48,847,514		$	19,036,512
Accounts receivable, less allowances for doubtful accounts of approximately $541,000 and $710,000 respectively		17,704,662			14,941,333
Prepaid expenses		944,446			1,105,838
Income taxes receivable		875,246			548,822
Deferred income taxes		7,184,837			6,895,448
Workers' compensation loss fund		4,528,970			3,424,411
Insurance recoveries, less allowances for insurance recoveries of approximately $1,327,000 at September 30, 2006		618,789			1,376,497
Other current assets		169,666			154,988
Assets held for sale		24,384,670			52,173,341

Total current assets		105,258,800			99,657,190

Property and equipment:
Home care equipment held for rental		72,901			367,303
Furniture and fixtures		9,911,658			11,327,377
Leasehold improvements		2,494,540			2,441,385

		12,479,099			14,136,065
Accumulated depreciation and amortization		(9,605,335	)		(11,426,176	)

		2,873,764			2,709,889
Other assets:
Goodwill, less accumulated amortization of approximately $3,721,000		20,019,530			18,610,578
Certificates of need, less accumulated amortization of approximately $672,000 and $650,000, respectively		-			22,938
Deferred financing fees, less accumulated amortization of approximately $836,000 at September 30, 2005		-			535,190
Noncompete agreements, less accumulated amortization of approximately $868,000 and $938,000, respectively		127,333			21,666
Deferred income taxes		2,065,579			905,537
Workers’ compensation bond collateral		1,261,954			1,525,466
Insurance cash surrender value and recoveries, less allowance for insurance recoveries of approximately $1,104,000 at September 30, 2006		4,454,032			4,121,576
Other		257,789			229,070

		28,186,217			25,972,021

Total assets	$	136,318,781		$	128,339,100

	Year ended September 30,
	2004			2003			2002
Operating activities:
Income from continuing operations	$	4,012,420		$	5,126,465		$	13,700,040
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		3,716,227			4,054,350			4,068,939
Provision for doubtful accounts		3,652,011			1,475,355			1,929,672
Amortization of deferred financing fees		185,700			85,154			110,500
Gain on early extinguishment of debt		-			(99,670	)		(417,117	)
Loss on retirement of equipment		-			332,815			-
Deferred income taxes		(164,107	)		1,145,274			(6,011,613	)
Disqualifying disposition of stock options		342,693			38,064			162,028
Nonqualified stock options		10,032			-			79,243
Compensation expense		359,011			-			-
Changes in operating assets and liabilities, net of effects from acquisition:
Accounts receivable		(7,011,959	)		(6,157,791	)		(2,177,681	)
Prepaid expenses		(110,569	)		(48,482	)		(49,884	)
Inventory		(168,965	)		588,288			1,395,909
Other assets		(397,180	)		(157,144	)		(151,129	)
Workers’ compensation loss fund		(1,693,954	)		(1,632,616	)		-
Workers’ compensation bond collateral		468,033			(928,696	)		(1,850,731	)
Accounts payable		(1,373,463	)		820,900			(396,627	)
Income taxes		(1,101,127	)		1,823,107			(1,160,214	)
Accrued insurance, liabilities, refunds and interest		3,383,830			2,291,648			(818,653	)
Net cash provided by operating activities		4,108,633			8,757,021			8,412,682
Investing activities:
Purchases of property and equipment		(5,259,375	)		(2,603,654	)		(4,129,204	)
Acquisition of business		-			(3,781,238	)		(1,398,376	)
Net cash used in investing activities		(5,259,375	)		(6,384,892	)		(5,527,580	)
Financing activities:
Principal payments and extinguishment of long-term debt		(193,633	)		(4,019,939	)		(7,476,755	)
Deferred financing fees		(331,320	)		(295,979	)		-
Proceeds from exercise of stock options		664,330			124,892			321,763
Net cash provided by (used in) financing activities		139,377			(4,191,026	)		(7,154,992	)
Decrease in cash and cash equivalents		(1,011,365	)		(1,818,897	)		(4,269,890	)
Cash and cash equivalents at beginning of year		9,170,678			10,989,575			15,259,465
Cash and cash equivalents at end of year	$	8,159,313		$	9,170,678		$	10,989,575
Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,344,811		$	2,706,217		$	3,167,998

See accompanying notes.

~~See~~48 ~~accompanying notes.~~

~~Index~~PEDIATRIC toSERVICES ~~Financial~~OF ~~Statements~~AMERICA, INC.

~~PEDIATRIC~~CONSOLIDATED ~~SERVICES~~BALANCE OFSHEETS—(Continued) ~~AMERICA, INC.~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	September 30,
	2006		2005
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	3,038,922	$	6,032,263
Accrued compensation		5,262,036		5,738,310
Accrued insurance		6,897,386		5,365,586
Refunds payable		2,116,440		2,648,007
Accrued interest		42,000		985,124
Professional service liabilities		865,620		743,312
Additional rent payable		1,484,137		811,689
Transition services		357,467		-
Other accrued liabilities		405,688		371,372
Deferred revenue		902,351		794,399
Held for sale liabilities		-		235,697

Total current liabilities		21,372,047		23,725,759

Long-term accrued insurance		12,375,458		9,584,434
Long-term income taxes payable		88,000		88,000
Deferred compensation		1,051,011		1,022,215
Long-term obligations, net of current maturities		-		20,350,000


Total liabilities		34,886,516		54,770,408

Redeemable preferred stock, $.01 par value, 2,000,000 shares authorized, no shares issued and outstanding		-		-

Stockholders’ equity:
Common stock, $.01 par value, 80,000,000 shares authorized 7,532,813 and 7,261,888 shares issued and outstanding in 2006 and 2005, respectively		75,328		72,619
Additional paid-in capital		55,804,609		52,069,599
Retained earnings		45,552,328		21,426,474

Total stockholders’ equity		101,432,265		73,568,692

Total liabilities and stockholders’ equity	$	136,318,781	$	128,339,100

1See accompanying notes. ~~Summary of Significant Accounting Policies~~

~~Description~~49 ~~of Business~~

We provide a broad range of pediatric health care services, and equipment including nursing, respiratory therapy, rental and sale of durable medical equipment, pharmaceutical services and infusion therapy services. In addition, we provide pediatric rehabilitation services, day treatment centers for medically fragile and chronically ill children and pediatric well care and immunization services. We also provide case management services in order to assist the family and patient by coordinating the provision of services between the insurer or other payor, the physician, the hospital and other health care providers. Our services are designed to provide a high quality, lower cost alternative to prolonged hospitalization for medically fragile children. As a complement to our pediatric respiratory and infusion therapy services, we also provide respiratory and infusion therapy and related services for adults. For financial reporting purposes, our branch offices are aggregated into three reportable segments based on their predominant line of net revenue in accordance with the Statement of Financial Accounting Standards No. 131 “Disclosures about Segments of an Enterprise and Related Information” (See Note 12).

Consolidation

The consolidated financial statements include the accounts of Pediatric Services of America, Inc. (“PSA”) and our wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

Concentration of Credit Risk

Our principal financial instruments subject to potential concentration of credit risk are cash and cash equivalents and accounts receivable. Cash and cash equivalents are held primarily in one financial institution. We perform periodic evaluations of the relative credit standing of this financial institution. The concentration of credit risk with respect to accounts receivable, which are primarily health care industry related, represent a risk to us given the current health care environment. The risk is somewhat limited due to the large number of payors including Medicaid and Medicare, insurance companies and individuals, and the diversity of geographic locations in which we operate. However, we have substantial geographic density in the eastern United States, which we believe exposes us to payor initiated reimbursement changes. In addition, we are exposed to risk for a substantial amount of accounts receivable for a small number of hemophilia factor patients and disruptions to cash collections due to the inability of some payors to process claims.

Cash and Cash Equivalents

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Deposits with banks are federally insured in limited amounts.

~~Index~~ PEDIATRIC toSERVICES ~~Financial~~OF ~~Statements~~AMERICA, INC.

~~PEDIATRIC~~CONSOLIDATED ~~SERVICES~~STATEMENTS OF ~~AMERICA,~~OPERATIONS ~~INC.~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Year ended September 30,
	2006			2005			2004
Net revenue	$	119,360,284		$	114,146,490		$	106,713,026
Costs and expenses:
Costs of goods and services (exclusive of depreciation shown separately below)		72,559,628			68,195,282			63,659,776
Other operating costs and expenses
Salaries, wages and benefits		19,926,932			19,536,928			19,027,752
Business insurance		4,765,965			4,164,638			4,909,931
Overhead		7,570,821			6,982,919			7,205,509

Other operating costs and expenses		32,263,718			30,684,485			31,143,192
Corporate, general and administrative
Salaries, wages and benefits		14,211,357			14,128,327			15,767,636
Business insurance		254,984			207,980			147,962
Professional services		3,816,461			4,476,035			2,804,109
Overhead		2,781,180			2,879,768			2,941,957

Corporate, general and administrative		21,063,982			21,692,110			21,661,664
Provision for doubtful accounts		125,916			679,081			1,094,991
Provision for insurance recoveries		2,430,679			-			-
Depreciation and amortization		1,031,890			996,932			956,214

Total costs and expenses		129,475,813			122,247,890			118,515,837

Operating loss		(10,115,529	)		(8,101,400	)		(11,802,811	)
Other income		53,857			65,000			5,600
Loss on early extinguishment of debt		(837,178	)		-			-
Interest income		2,248,428			211,689			139,148
Interest expense		(564,169	)		(2,480,501	)		(2,378,036	)

Loss from continuing operations, before income tax benefit		(9,214,591	)		(10,305,212	)		(14,036,099	)
Income tax benefit		(3,019,490	)		(4,725,666	)		(5,346,638	)

Loss from continuing operations		(6,195,101	)		(5,579,546	)		(8,689,461	)
Discontinued operations:
Income from discontinued operations, net of tax		5,602,775			11,245,808			12,701,881
Gain on sale of discontinued operations, net of tax		24,718,180			-			-

Net income	$	24,125,854		$	5,666,262		$	4,012,420

Basic net income per share data:
Loss from continuing operations	$	(0.84	)	$	(0.77	)	$	(1.25	)
Income from discontinued operations, net of tax		0.76			1.56			1.83
Gain on sale of discontinued operations, net of tax		3.33			-			-

Net income	$	3.25		$	0.79		$	0.58

Diluted net income per share data:
Loss from continuing operations	$	(0.84	)	$	(0.77	)	$	(1.25	)
Income from discontinued operations, net of tax		0.76			1.56			1.83
Gain on sale of discontinued operations, net of tax		3.33			-			-

Net income	$	3.25		$	0.79		$	0.58

Weighted average shares outstanding:
Basic		7,413,478			7,202,973			6,948,254

Diluted		7,413,478			7,202,973			6,948,254

~~Summary~~See ofaccompanying notes. ~~Significant Accounting Policies—continued~~

~~Accounts~~50 ~~Receivable~~

Accounts receivable are recorded based upon the amount of net revenue expected to be reimbursed by private and third party payors. Interest income is not recorded on trade accounts receivable. Accounts receivable include approximately $7.0 million and $7.2 million for which services have been rendered but the amounts were unbilled as of September 30, 2004 and 2003, respectively. Such unbilled amounts are primarily a result of the time required to process bills for services rendered.

Allowance for Doubtful Accounts

Workers’ Compensation Loss Fund

Our workers’ compensation insurance carrier, rated A by AM Best Company, required a twelve month estimated loss reserve to be funded entirely with cash over the first ten months of fiscal 2004 and fiscal 2003, respectively. This cash requirement is estimated to be $2.6 million for fiscal 2004 and $2.6 million for fiscal 2003, which is reduced by the monthly loss fund payments. The net balance at September 30, 2004 and 2003 was $3.3 million and $1.6 million, respectively. The insurance carrier has the right to increase this cash requirement at the end of each fiscal year if the claim experience is greater than anticipated, but to date has not indicated the need to do so. The policy for fiscal 2005 will be funded in a similar manner with the cash requirement estimated to be $1.0 million.

Inventory

The inventory is stated at the lower of cost (first-in, first-out method) or market and consists primarily of pharmaceuticals.

Property and Equipment

Property and equipment are stated at cost and are depreciated on the straight-line method over the related asset’s estimated useful life, generally three to ten years. Depreciation expense was approximately $3.6 million, $3.9 million and $3.9 million for the years ended September 30, 2004, 2003 and 2002, respectively.

Identifiable Intangible Assets

Beginning in fiscal 2002, the Statement of Financial Accounting Standards (“SFAS”) No. 142 eliminated goodwill amortization from the consolidated statements of operations and required an evaluation of goodwill for impairment on an annual basis, and more frequently if circumstances indicate a possible impairment. We perform our annual impairment test in the fourth quarter of each fiscal year. For these evaluations, we are using an implied fair value approach, which uses a discounted cash flow analysis and other valuation methodologies.

~~Index~~ PEDIATRIC toSERVICES ~~Financial~~OF ~~Statements~~AMERICA, INC.

~~PEDIATRIC~~CONSOLIDATED ~~SERVICES~~STATEMENTS OF ~~AMERICA,~~STOCKHOLDERS’ ~~INC.~~EQUITY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Common Stock		Additional Paid-in Capital		Retained Earnings		Total Stockholders’ Equity
Balance at October 1, 2003	$	68,785	$	49,246,615	$	11,747,792	$	61,063,192
152,658 shares of common stock issued through exercise of stock options		1,527		662,803		-		664,330
Disqualifying disposition of stock options		-		342,693		-		342,693
Nonqualified stock options		-		10,032		-		10,032
Compensation expense		-		359,011		-		359,011
Net income (1)		-		-		4,012,420		4,012,420

Balance at September 30, 2004		70,312		50,621,154		15,760,212		66,451,678
230,726 shares of common stock issued through exercise of stock options		2,307		1,054,640		-		1,056,947
Disqualifying disposition of stock options		-		263,557		-		263,557
Nonqualified stock options		-		130,248		-		130,248
Net income (1)		-		-		5,666,262		5,666,262

Balance at September 30, 2005		72,619		52,069,599		21,426,474		73,568,692
270,925 shares of common stock issued through exercise of stock options		2,709		1,739,731		-		1,742,440
Disqualifying disposition of stock options		-		359,858		-		359,858
Nonqualified stock options		-		349,340		-		349,340
Incentive stock option expense		-		378,857		-		378,857
Nonqualified stock option expense		-		907,224		-		907,224
Net income (1)		-		-		24,125,854		24,125,854

Balance at September 30, 2006	$	75,328	$	55,804,609	$	45,552,328	$	101,432,265

~~Summary~~(1) ofComprehensive ~~Significant~~net ~~Accounting~~income ~~Policies—continued~~is the same as reported net income.

~~These~~See ~~evaluations~~accompanying use many assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related to future earnings and comparable companies’ capital structure and earnings powernotes. ~~For fiscal 2004, we completed the impairment test and, at September 30, 2004, there was no resulting impairment. Subsequent impairments, if any, would be classified as operating expense.~~

~~Intangible~~51 assets that meet certain criteria will qualify for recording on the consolidated balance sheet and will continue to be amortized in the consolidated statements of operations. Such intangible assets will be subject to a periodic impairment test based on estimated fair value.

Amortization expense on identifiable intangible assets was approximately $0.1 million, $0.2 million and $0.1 million for the years ended September 30, 2004, 2003 and 2002, respectively. Estimated amortization expense of identifiable intangible assets for each of the fiscal years ending September 30, is presented below:

	For The Year EndingSeptember 30,
2005	$	148,000
2006	$	129,000
2007	$	88,000
2008	$	86,000
2009	$	86,000

Workers’ Compensation Bond Collateral

We have secured surety bonds of $2.5 million to satisfy our workers’ compensation program requirements for our former insurance carrier. As of September 30, 2004, the surety bonds were collateralized by $2.3 million cash posted to a third party escrow account. Material changes to the fiscal 2004 workers’ compensation policy included the deductible increasing from $0.25 million to $0.35 million.

Other Assets

Certificates of need are certificates that allow us to actively provide home care services in the states of North Carolina, New Jersey, Tennessee, Washington and Georgia. The certificates of need are being amortized over their useful lives, which is generally twenty years.

The cost of non-compete agreements with former owners of acquired businesses is amortized over the respective lives of each agreement, which range from three to five years.

Accrued Insurance/Insurance Recoveries

Our insurance broker retains the services of an independent actuary to prepare an actuarial analysis of our development of reported and incurred but not reported claims for workers’ compensation, medical malpractice and employee medical benefit plans. These estimates are updated as determined necessary based on recent claims history and other events. Inherent in these estimates is the risk that they will need to be revised or updated, with the changes recorded in subsequent periods, as additional information becomes available to management. Accrued workers’ compensation and medical malpractice losses have been discounted at 6%. Under the guidance of the Emerging Issues Task Force No. 03-8, “Accounting for Claims-Made Insurance and Retroactive Insurance Contracts by the Insured Entity,” we have determined that we should follow FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts.” Under Interpretation 39, offsetting of liabilities for claims

~~Index~~ PEDIATRIC toSERVICES ~~Financial~~OF ~~Statements~~AMERICA, INC.

~~PEDIATRIC~~CONSOLIDATED ~~SERVICES~~STATEMENTS OF ~~AMERICA,~~CASH ~~INC.~~FLOWS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Year ended September 30,
	2006			2005			2004
Operating activities:
Net income	$	24,125,854		$	5,666,262		$	4,012,420
Less income from discontinued operations, net of income tax expense		(5,602,775	)		(11,245,808	)		(12,701,881	)
Less gain from sale of discontinued operations, net of income tax expense		(24,718,180	)		-			-

Loss from continuing operations, net of income tax benefit		(6,195,101	)		(5,579,546	)		(8,689,461	)
Adjustments to reconcile loss from continuing operations to net cash (used in) provided by operating activities:
Depreciation and amortization		1,031,890			996,932			956,214
Provision for doubtful accounts		125,916			679,081			1,094,991
Provision for insurance recoveries		2,430,679			-			-
Amortization of deferred financing fees		37,247			241,998			185,700
Loss on early extinguishment of debt		837,178			-			-
Incentive stock option expense		378,857			-			-
Nonqualified stock option expense		907,224			-			-
Deferred income taxes		(1,449,431	)		57,407			(164,107	)
Compensation expense		-			-			359,011
Changes in operating assets and liabilities, net of effects from acquisition:
Accounts receivable		(2,889,247	)		1,238,124			(2,416,939	)
Prepaid expenses		161,392			(227,228	)		(60,582	)
Other assets		(109,204	)		359,715			(470,344	)
Workers’ compensation loss fund		(1,104,559	)		(97,841	)		(1,693,954	)
Workers’ compensation bond collateral		263,512			785,928			468,033
Accounts payable		(3,002,666	)		1,360,676			(1,373,463	)
Income taxes		(326,425	)		(741,563	)		(1,101,127	)
Accrued compensation, insurance, liabilities, refunds, interest professional services and additional rent payable		1,303,963			(648,800	)		3,485,566

Net cash used in operating activities of continuing operations		(7,598,775	)		(1,575,117	)		(9,420,462	)
Net cash (used in) provided by operating activities of discontinued operations		(10,470,415	)		15,715,801			13,176,370

Net cash (used in) provided by operating activities		(18,069,190	)		14,140,684			3,755,908
Investing activities:
Purchases of property and equipment		(986,356	)		(950,727	)		(1,004,336	)
Acquisition of business		(1,597,667	)		-			-
Proceeds from sale of discontinued operations		72,250,000			-			-
Purchases of available for sale securities		(66,575,000	)		-			-
Sales of available for sale securities		66,575,000			-			-

Net cash provided by (used in) investing activities of continuing operations		69,665,977			(950,727	)		(1,004,336	)
Net cash used in investing activities of discontinued operations		(3,541,749	)		(3,607,002	)		(4,255,039	)

Filing Compare · PEDIATRIC SERVICES OF AMERICA INC